UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended: June 30, 2006
or
|
|
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from
to
Commission File Number: 0-8641
SELECTIVE INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
|
|
|
New Jersey
|
|
22-2168890
|
|
|
|
(State or Other Jurisdiction of Incorporation or Organization)
|
|
(I.R.S. Employer Identification No.)
|
|
|
|
40 Wantage Avenue
|
|
|
Branchville, New Jersey
|
|
07890
|
|
|
|
(Address of Principal Executive Offices)
|
|
(Zip Code)
|
(973) 948-3000
(Registrants Telephone Number,
Including Area Code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such report), and (2) has been subject
to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated file
þ
Accelerated file
o
Non-accelerated filer
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
o
No
þ
As of June 30, 2006, there were 29,172,974 shares of common stock, par value $2.00, outstanding.
SELECTIVE INSURANCE GROUP, INC.
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SELECTIVE INSURANCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
(in thousands, except share amounts)
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
Fixed maturity securities, held-to-maturity at amortized cost
(fair value: $12,758 - 2006; $13,881 - 2005)
|
|
$
|
12,461
|
|
|
|
13,423
|
|
Fixed maturity securities, available-for-sale at fair value
(amortized cost: $2,676,599 - 2006; $2,627,549 - 2005)
|
|
|
2,650,241
|
|
|
|
2,653,839
|
|
Equity securities, available-for-sale at fair value
(cost of: $206,716 - 2006; $183,349 - 2005)
|
|
|
349,122
|
|
|
|
338,783
|
|
Short-term investments (at cost which approximates fair value)
|
|
|
145,564
|
|
|
|
176,525
|
|
Alternative investments
|
|
|
83,088
|
|
|
|
62,975
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
3,240,476
|
|
|
|
3,245,545
|
|
Cash
|
|
|
1,147
|
|
|
|
2,983
|
|
Interest and dividends due or accrued
|
|
|
32,013
|
|
|
|
32,579
|
|
Premiums receivable, net of allowance for uncollectible
accounts of: $3,179 - 2006; $3,908 - 2005
|
|
|
544,040
|
|
|
|
465,210
|
|
Other trade receivables, net of allowance for uncollectible
accounts of: $274 - 2006; $176 - 2005
|
|
|
16,519
|
|
|
|
16,553
|
|
Reinsurance recoverable on paid losses and loss expenses
|
|
|
4,901
|
|
|
|
4,549
|
|
Reinsurance recoverable on unpaid losses and loss expenses
|
|
|
200,891
|
|
|
|
218,248
|
|
Prepaid reinsurance premiums (Note 5)
|
|
|
61,772
|
|
|
|
67,157
|
|
Current federal income tax
|
|
|
1,238
|
|
|
|
|
|
Deferred federal income tax
|
|
|
22,540
|
|
|
|
|
|
Property and Equipment at cost, net of accumulated
depreciation and amortization of: $100,404 - 2006; $94,730 - 2005
|
|
|
56,662
|
|
|
|
53,194
|
|
Deferred policy acquisition costs
|
|
|
226,900
|
|
|
|
204,832
|
|
Goodwill
|
|
|
33,637
|
|
|
|
33,637
|
|
Other assets
|
|
|
46,890
|
|
|
|
49,128
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,489,626
|
|
|
|
4,393,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Reserve for losses
|
|
$
|
1,879,925
|
|
|
|
1,799,746
|
|
Reserve for loss expenses
|
|
|
306,953
|
|
|
|
284,303
|
|
Unearned premiums
|
|
|
829,778
|
|
|
|
752,465
|
|
Senior convertible notes
|
|
|
57,413
|
|
|
|
115,937
|
|
Notes payable
|
|
|
204,411
|
|
|
|
222,697
|
|
Current federal income tax
|
|
|
|
|
|
|
2,293
|
|
Deferred federal income tax
|
|
|
|
|
|
|
5,663
|
|
Commissions payable
|
|
|
63,045
|
|
|
|
73,872
|
|
Accrued salaries and benefits
|
|
|
60,589
|
|
|
|
68,024
|
|
Other liabilities
|
|
|
83,629
|
|
|
|
87,491
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,485,743
|
|
|
|
3,412,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Preferred stock of $0 par value per share:
|
|
|
|
|
|
|
|
|
Authorized shares: 5,000,000; no shares issued or outstanding
Common stock of $2 par value per share:
|
|
|
|
|
|
|
|
|
Authorized shares: 180,000,000
|
|
|
|
|
|
|
|
|
Issued: 45,624,492 - 2006; 43,271,273 - 2005
|
|
|
91,249
|
|
|
|
86,543
|
|
Additional paid-in capital
|
|
|
229,832
|
|
|
|
158,180
|
|
Retained earnings
|
|
|
917,014
|
|
|
|
847,687
|
|
Accumulated other comprehensive income
|
|
|
75,431
|
|
|
|
118,121
|
|
Treasury stock at cost (shares: 16,451,518 - 2006; shares: 14,977,176 - 2005)
|
|
|
(309,643
|
)
|
|
|
(229,407
|
)
|
|
|
|
|
|
|
|
Total stockholders equity (Note 11)
|
|
|
1,003,883
|
|
|
|
981,124
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
4,489,626
|
|
|
|
4,393,615
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
1
SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
|
Six Months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(in thousands, except per share amounts)
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
395,621
|
|
|
|
369,621
|
|
|
$
|
827,610
|
|
|
|
766,399
|
|
Net increase in unearned premiums and prepaid reinsurance premiums
|
|
|
(20,866
|
)
|
|
|
(19,169
|
)
|
|
|
(82,698
|
)
|
|
|
(73,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
|
374,755
|
|
|
|
350,452
|
|
|
|
744,912
|
|
|
|
693,192
|
|
Net investment income earned
|
|
|
37,390
|
|
|
|
32,747
|
|
|
|
73,392
|
|
|
|
65,109
|
|
Net realized gains
|
|
|
14,487
|
|
|
|
559
|
|
|
|
21,854
|
|
|
|
5,157
|
|
Diversified Insurance Services revenue
|
|
|
27,550
|
|
|
|
24,481
|
|
|
|
54,827
|
|
|
|
47,966
|
|
Other income
|
|
|
1,279
|
|
|
|
904
|
|
|
|
3,142
|
|
|
|
1,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
455,461
|
|
|
|
409,143
|
|
|
|
898,127
|
|
|
|
813,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses incurred
|
|
|
198,919
|
|
|
|
184,169
|
|
|
|
390,282
|
|
|
|
361,924
|
|
Loss expenses incurred
|
|
|
42,644
|
|
|
|
41,625
|
|
|
|
84,981
|
|
|
|
82,307
|
|
Policy acquisition costs
|
|
|
119,443
|
|
|
|
109,485
|
|
|
|
234,921
|
|
|
|
216,320
|
|
Dividends to policyholders
|
|
|
1,090
|
|
|
|
1,094
|
|
|
|
2,298
|
|
|
|
2,342
|
|
Interest expense
|
|
|
4,905
|
|
|
|
4,288
|
|
|
|
10,423
|
|
|
|
8,665
|
|
Diversified Insurance Services expenses
|
|
|
23,399
|
|
|
|
20,774
|
|
|
|
47,145
|
|
|
|
42,042
|
|
Other expenses
|
|
|
7,762
|
|
|
|
5,735
|
|
|
|
16,505
|
|
|
|
9,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
398,162
|
|
|
|
367,170
|
|
|
|
786,555
|
|
|
|
722,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, before federal income tax
|
|
|
57,299
|
|
|
|
41,973
|
|
|
|
111,572
|
|
|
|
90,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
18,115
|
|
|
|
14,459
|
|
|
|
34,813
|
|
|
|
26,693
|
|
Deferred
|
|
|
(2,812
|
)
|
|
|
(3,453
|
)
|
|
|
(5,216
|
)
|
|
|
(2,255
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total federal income tax expense
|
|
|
15,303
|
|
|
|
11,006
|
|
|
|
29,597
|
|
|
|
24,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
41,996
|
|
|
|
30,967
|
|
|
|
81,975
|
|
|
|
65,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax of $598 for Second
Quarter 2005; and $920 for Six Months 2005
|
|
|
|
|
|
|
1,111
|
|
|
|
|
|
|
|
1,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before cumulative effect of change in accounting principle
|
|
|
41,996
|
|
|
|
32,078
|
|
|
|
81,975
|
|
|
|
67,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in accounting principle, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
41,996
|
|
|
|
32,078
|
|
|
|
81,975
|
|
|
|
68,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income from continuing operations
|
|
$
|
1.53
|
|
|
|
1.14
|
|
|
|
3.01
|
|
|
|
2.43
|
|
Basic net income from discontinued operations
|
|
|
|
|
|
|
0.04
|
|
|
|
|
|
|
|
0.06
|
|
Basic cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income
|
|
$
|
1.53
|
|
|
|
1.18
|
|
|
|
3.01
|
|
|
|
2.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income from continuing operations
|
|
$
|
1.36
|
|
|
|
0.99
|
|
|
|
2.64
|
|
|
|
2.10
|
|
Diluted net income from discontinued operations
|
|
|
|
|
|
|
0.03
|
|
|
|
|
|
|
|
0.05
|
|
Diluted cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income
|
|
$
|
1.36
|
|
|
|
1.02
|
|
|
|
2.64
|
|
|
|
2.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends to stockholders
|
|
$
|
.22
|
|
|
|
0.19
|
|
|
|
.44
|
|
|
|
0.38
|
|
2
SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
($ in thousands, except per share amounts)
|
|
2006
|
|
|
2005
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
86,543
|
|
|
|
|
|
|
|
84,936
|
|
|
|
|
|
Dividend reinvestment plan
(shares: 15,948 - 2006; 16,119 - 2005)
|
|
|
32
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
Convertible subordinated debentures
(shares: 1,999,564 - 2006; 35,024 - 2005)
|
|
|
3,999
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
Stock purchase and compensation plans
(shares: 337,707 - 2006; 557,542 - 2005)
|
|
|
675
|
|
|
|
|
|
|
|
1,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
|
91,249
|
|
|
|
|
|
|
|
86,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
158,180
|
|
|
|
|
|
|
|
142,292
|
|
|
|
|
|
Dividend reinvestment plan
|
|
|
841
|
|
|
|
|
|
|
|
702
|
|
|
|
|
|
Convertible subordinated debentures
|
|
|
53,356
|
|
|
|
|
|
|
|
178
|
|
|
|
|
|
Stock purchase and compensation plans
|
|
|
17,455
|
|
|
|
|
|
|
|
1,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
|
229,832
|
|
|
|
|
|
|
|
144,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
847,687
|
|
|
|
|
|
|
|
721,483
|
|
|
|
|
|
Net income
|
|
|
81,975
|
|
|
|
81,975
|
|
|
|
68,179
|
|
|
|
68,179
|
|
Cash dividends to stockholders ($0.44 per share - 2006;
$0.38 per share - 2005)
|
|
|
(12,648
|
)
|
|
|
|
|
|
|
(10,745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
|
917,014
|
|
|
|
|
|
|
|
778,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
118,121
|
|
|
|
|
|
|
|
154,536
|
|
|
|
|
|
Other comprehensive loss, decrease in net unrealized
gains on available-for-sale securities, net of deferred income
tax effect of: $(22,987) - 2006; $(4,157) - 2005
|
|
|
(42,690
|
)
|
|
|
(42,690
|
)
|
|
|
(7,720
|
)
|
|
|
(7,720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
|
75,431
|
|
|
|
|
|
|
|
146,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
39,285
|
|
|
|
|
|
|
|
60,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
(229,407
|
)
|
|
|
|
|
|
|
(206,522
|
)
|
|
|
|
|
Acquisition of treasury stock
(shares: 1,474,342 - 2006; 162,121 - 2005)
|
|
|
(80,236
|
)
|
|
|
|
|
|
|
(7,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
|
(309,643
|
)
|
|
|
|
|
|
|
(214,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned stock compensation and notes receivable from stock sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
|
|
|
|
|
|
|
|
(14,707
|
)
|
|
|
|
|
Reclassification of unearned stock compensation
|
|
|
|
|
|
|
|
|
|
|
14,641
|
|
|
|
|
|
Amortization of deferred compensation expense and
amounts received on notes
|
|
|
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
1,003,883
|
|
|
|
|
|
|
|
942,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selective Insurance Group, Inc. also has authorized, but not issued, 5,000,000 shares of preferred
stock without par value of which 300,000 shares have been designated Series A junior preferred
stock without par value.
The accompanying notes are an integral part of these unaudited interim consolidated financial
statements.
3
SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
|
|
|
|
|
|
|
|
|
|
|
Six Months ended
|
|
|
|
June 30,
|
|
(in thousands)
|
|
2006
|
|
|
2005
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
81,975
|
|
|
|
68,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
12,315
|
|
|
|
10,256
|
|
Stock compensation expense
|
|
|
7,890
|
|
|
|
6,209
|
|
Net realized gains
|
|
|
(21,854
|
)
|
|
|
(5,157
|
)
|
Deferred tax
|
|
|
(5,216
|
)
|
|
|
(2,255
|
)
|
Debt conversion expense
|
|
|
2,117
|
|
|
|
|
|
Cumulative effect of change in accounting principle, net of tax
|
|
|
|
|
|
|
(495
|
)
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase in reserves for losses and loss expenses, net of reinsurance recoverable
on unpaid losses and loss expenses
|
|
|
120,186
|
|
|
|
114,551
|
|
Increase in unearned premiums, net of prepaid reinsurance and advance premiums
|
|
|
82,632
|
|
|
|
73,341
|
|
Decrease in net federal income tax payable
|
|
|
(3,531
|
)
|
|
|
(10,859
|
)
|
Increase in premiums receivable
|
|
|
(78,830
|
)
|
|
|
(86,090
|
)
|
Decrease (increase) in other trade receivables
|
|
|
34
|
|
|
|
(8,520
|
)
|
Increase in deferred policy acquisition costs
|
|
|
(22,068
|
)
|
|
|
(15,715
|
)
|
Increase (decrease) in interest and dividends due or accrued
|
|
|
566
|
|
|
|
(1,523
|
)
|
Increase in reinsurance recoverable on paid losses and loss expenses
|
|
|
(352
|
)
|
|
|
(784
|
)
|
(Decrease) increase in accrued salaries and benefits
|
|
|
(7,435
|
)
|
|
|
4,889
|
|
Decrease in accrued insurance expenses
|
|
|
(14,806
|
)
|
|
|
(12,691
|
)
|
Other-net
|
|
|
(672
|
)
|
|
|
(15,570
|
)
|
|
|
|
|
|
|
|
Net adjustments
|
|
|
70,976
|
|
|
|
49,587
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
152,951
|
|
|
|
117,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
Purchase of fixed maturity securities, available-for-sale
|
|
|
(428,868
|
)
|
|
|
(287,411
|
)
|
Purchase of equity securities, available-for-sale
|
|
|
(58,882
|
)
|
|
|
(21,800
|
)
|
Purchase of alternative investments
|
|
|
(19,082
|
)
|
|
|
(5,809
|
)
|
Net proceeds from sale of subsidiary
|
|
|
376
|
|
|
|
|
|
Sale of fixed maturity securities, available-for-sale
|
|
|
264,340
|
|
|
|
74,796
|
|
Redemption and maturities of fixed maturity securities, held-to-maturity
|
|
|
972
|
|
|
|
10,710
|
|
Redemption and maturities of fixed maturity securities, available-for-sale
|
|
|
105,537
|
|
|
|
81,543
|
|
Sale of equity securities, available-for-sale
|
|
|
61,329
|
|
|
|
20,345
|
|
Proceeds from alternative investments
|
|
|
274
|
|
|
|
5,006
|
|
Purchase of property and equipment
|
|
|
(9,558
|
)
|
|
|
(4,135
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(83,562
|
)
|
|
|
(126,755
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Dividends to stockholders
|
|
|
(11,422
|
)
|
|
|
(9,587
|
)
|
Acquisition of treasury stock
|
|
|
(80,236
|
)
|
|
|
(7,752
|
)
|
Principal payment of notes payable
|
|
|
(18,300
|
)
|
|
|
(6,000
|
)
|
Net proceeds from stock purchase and compensation plans
|
|
|
6,581
|
|
|
|
6,348
|
|
Cash retained for tax deductibility of the increase in value of equity instruments
|
|
|
3,308
|
|
|
|
2,509
|
|
Cash paid in connection with debt conversion
|
|
|
(2,117
|
)
|
|
|
|
|
Proceeds received on notes receivable from stock sales
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
Net cash (used in) financing activities
|
|
|
(102,186
|
)
|
|
|
(14,416
|
)
|
|
|
|
|
|
|
|
Net (decrease) increase in short-term investments and cash
|
|
|
(32,797
|
)
|
|
|
(23,405
|
)
|
Short-term investments and cash at beginning of year
|
|
|
179,508
|
|
|
|
98,657
|
|
|
|
|
|
|
|
|
Short-term investments and cash at end of period
|
|
$
|
146,711
|
|
|
|
75,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flows Information
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
10,834
|
|
|
|
8,639
|
|
Federal income tax
|
|
|
35,035
|
|
|
|
35,962
|
|
Non-cash financing activity:
|
|
|
|
|
|
|
|
|
Conversion of convertible subordinated debentures
|
|
|
58,534
|
|
|
|
248
|
|
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
4
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Organization
Selective Insurance Group, Inc. and its subsidiaries, (Selective) offers property and casualty
insurance products and diversified insurance services and products through its various
subsidiaries. Selective was incorporated in New Jersey in 1977 and its principal offices are
located in Branchville, New Jersey. Selectives common stock is publicly traded on the NASDAQ
Global Select Market
Ò
under the symbol, SIGI.
Selective classifies its business into three operating segments:
|
|
|
Insurance Operations, which sells property and casualty insurance products and services
primarily in 20 states in the Eastern and Midwestern United States, and has at least one
company licensed to do business in each of the 50 states;
|
|
|
|
|
Investments; and
|
|
|
|
|
Diversified Insurance Services, which provides human resource administration outsourcing
products and services, and federal flood insurance administrative services.
|
NOTE 2. Basis of Presentation
These interim unaudited consolidated financial statements (Financial Statements) include the
accounts of Selective and its subsidiaries, and have been prepared in conformity with (i)
accounting principles generally accepted in the United States of America (GAAP) and (ii) the
rules and regulations of the United States Securities and Exchange Commission (SEC) regarding
interim financial reporting. The preparation of the Financial Statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported financial statement
balances, as well as the disclosure of contingent assets and liabilities. Actual results could
differ from those estimates. All significant intercompany accounts and transactions between
Selective and its subsidiaries are eliminated in consolidation.
These Financial Statements reflect all adjustments that, in the opinion of management, are normal,
recurring and necessary for a fair presentation of Selectives results of operations and financial
condition. These Financial Statements cover the second quarters ended June 30, 2006 (Second
Quarter 2006) and June 30, 2005 (Second Quarter 2005) and the six month periods ended June 30,
2006 (Six Months 2006) and June 30, 2005 (Six Months 2005). These Financial Statements do not
include all of the information and disclosures required by GAAP and the SEC for audited financial
statements. Results of operations for any interim period are not necessarily indicative of results
for a full year. Consequently, these Financial Statements should be read in conjunction with the
consolidated financial statements contained in Selectives Annual Report on Form 10-K for the year
ended December 31, 2005 (2005 Annual Report).
NOTE 3. Reclassifications
Certain amounts in Selectives prior years Financial Statements and related footnotes have been
reclassified as a result of the sale of CHN Solutions (Alta Services LLC and Consumer Health
Network Plus, LLC). Such reclassifications had no effect on Selectives net income or
stockholders equity.
NOTE 4. Adoption of Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued FAS 123R, which requires
that compensation expense be measured on the income statement for all share-based payments
(including employee stock options) at grant date fair value of the equity instruments. Selectives
January 1, 2005 adoption of this accounting pronouncement resulted in an after-tax cumulative
effect of change in accounting principle benefit of $0.5 million due to the requirement to estimate
the impact of expected forfeitures at the grant date in First Quarter 2005.
5
NOTE 5. Reinsurance
The following table contains a listing of direct, assumed and ceded reinsurance amounts by income
statement caption. For more information concerning reinsurance, refer to Note 5, Reinsurance in
Item 8. Financial Statements and Supplementary Data in Selectives 2005 Annual Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited,
|
|
|
Unaudited,
|
|
|
|
Quarter ended
|
|
|
Six Months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
($ in thousands)
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
433,145
|
|
|
|
403,445
|
|
|
$
|
885,444
|
|
|
|
830,261
|
|
Assumed
|
|
|
5,563
|
|
|
|
7,364
|
|
|
|
11,052
|
|
|
|
13,256
|
|
Ceded
|
|
|
(43,087
|
)
|
|
|
(41,188
|
)
|
|
|
(68,886
|
)
|
|
|
(77,118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
395,621
|
|
|
|
369,621
|
|
|
$
|
827,610
|
|
|
|
766,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
403,196
|
|
|
|
377,867
|
|
|
$
|
799,745
|
|
|
|
747,428
|
|
Assumed
|
|
|
9,720
|
|
|
|
10,625
|
|
|
|
19,438
|
|
|
|
19,827
|
|
Ceded
|
|
|
(38,161
|
)
|
|
|
(38,040
|
)
|
|
|
(74,271
|
)
|
|
|
(74,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
374,755
|
|
|
|
350,452
|
|
|
$
|
744,912
|
|
|
|
693,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses incurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
255,565
|
|
|
|
241,180
|
|
|
$
|
492,845
|
|
|
|
471,067
|
|
Assumed
|
|
|
7,964
|
|
|
|
9,524
|
|
|
|
15,464
|
|
|
|
17,256
|
|
Ceded
|
|
|
(21,966
|
)
|
|
|
(24,910
|
)
|
|
|
(33,046
|
)
|
|
|
(44,092
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
241,563
|
|
|
|
225,794
|
|
|
$
|
475,263
|
|
|
|
444,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded written premiums decreased in the Six Months 2006 compared to the Six Months
2005, primarily due to the termination of the New Jersey Homeowners Property 75% Quota Share
treaty (Quota Share Treaty) effective January 1, 2006. For a more detailed discussion of
Selectives reinsurance program, refer to the Property Reinsurance section included in
Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations of Selectives 2005 Annual Report. In Six Months 2005, ceded written premiums
were $9.7 million and ceded earned premiums were $10.1 million for the Quota Share Treaty.
The Quota Share Treaty termination was effective as of January 1, 2006 and there is no
prospective coverage for 2006. Consequently in 2006, Selective received a return of premium
of $11.3 million previously ceded to this treaty and still unearned as of December 31, 2005.
The overall effect of the termination of this treaty was to reduce ceded written premiums
by $21.0 million for Six Months 2006 compared to Six Months 2005 and ceded earned premiums
by $10.1 million for Six Months 2006 compared to Six Months 2005. These reductions were
partially offset by increases in flood premium written of $11.9 million for Six Months 2006
compared to Six Months 2005 and increases in flood premium earned of $8.8 million for Six
Months 2006 compared to Six Months 2005. Flood premium and losses are 100% ceded to the
National Flood Insurance Program. These ceded premiums and losses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited,
|
|
Unaudited,
|
|
|
Quarter ended
|
|
Six Months ended
|
|
|
June 30,
|
|
June 30,
|
($ in thousands)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Ceded premiums written
|
|
$
|
(30,867
|
)
|
|
|
(24,105
|
)
|
|
$
|
(56,146
|
)
|
|
|
(44,269
|
)
|
Ceded premiums earned
|
|
|
(25,469
|
)
|
|
|
(20,739
|
)
|
|
|
(49,364
|
)
|
|
|
(40,522
|
)
|
Ceded losses and loss expenses incurred
|
|
|
(12,848
|
)
|
|
|
(17,640
|
)
|
|
|
(18,222
|
)
|
|
|
(25,250
|
)
|
6
NOTE 6. Segment Information
Selective has classified its operations into three segments, the disaggregated results of which are
reported to and used by senior management to manage Selectives operations:
|
|
|
Insurance Operations (commercial lines and personal lines), which are
evaluated based on statutory underwriting results (net premiums earned, incurred losses
and loss expenses, policyholders dividends, policy acquisition costs, and other
underwriting expenses) and statutory combined ratios;
|
|
|
|
|
Investments, which are evaluated based on net investment income and net
realized gains and losses; and
|
|
|
|
|
Diversified Insurance Services (federal flood insurance administrative
services and human resource administration outsourcing), which, because they are not
dependent on insurance underwriting cycles, are evaluated based on several measures
including, but not limited to, the results of operations in accordance with GAAP, with a
focus on return on revenue (net income divided by revenues).
|
The Insurance Operations and Diversified Insurance Services segments share a common marketing or
distribution system and create new opportunities for independent insurance agents to bring
value-added services and products to their customers. Selectives commercial and personal lines
property and casualty insurance products, flood insurance, and human resource administration
outsourcing products are principally sold through independent insurance agents.
Selective and its subsidiaries also provide services to each other in the normal course of
business. These transactions, which are eliminated in all consolidated statements, totaled $5.0
million in Second Quarter 2006 and $9.8 million in Six Months 2006 compared with $7.3 million in
Second Quarter 2005 and $14.1 in Six Months 2005. These transactions were eliminated in all
consolidated statements. In computing the results of each segment, Selective does not make
adjustments for interest expense, net general corporate expenses, or federal income taxes.
Selective also does not maintain separate investment portfolios for the segments and, therefore,
does not allocate assets to the segments.
7
The following presents revenues from continuing operations (net investment income and net realized
gains on investments in the case of the Investments segment) and pre-tax income from continuing
operations for the individual segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited,
|
|
|
Unaudited,
|
|
Revenue by segment
|
|
Quarter ended
|
|
|
Six Months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
($ in thousands)
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Insurance Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial automobile net premiums earned
|
|
$
|
80,054
|
|
|
|
78,499
|
|
|
|
160,565
|
|
|
|
156,148
|
|
Workers compensation net premiums earned
|
|
|
77,508
|
|
|
|
73,829
|
|
|
|
153,309
|
|
|
|
143,082
|
|
General liability net premiums earned
|
|
|
101,966
|
|
|
|
88,993
|
|
|
|
201,056
|
|
|
|
175,009
|
|
Commercial property net premiums earned
|
|
|
45,044
|
|
|
|
41,173
|
|
|
|
89,434
|
|
|
|
81,383
|
|
Business owners policy net premiums earned
|
|
|
11,792
|
|
|
|
11,547
|
|
|
|
23,583
|
|
|
|
23,468
|
|
Bonds net premiums earned
|
|
|
4,365
|
|
|
|
3,973
|
|
|
|
8,283
|
|
|
|
7,835
|
|
Other net premiums earned
|
|
|
180
|
|
|
|
199
|
|
|
|
360
|
|
|
|
414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial lines net premiums earned
|
|
|
320,909
|
|
|
|
298,213
|
|
|
|
636,590
|
|
|
|
587,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal automobile net premiums earned
|
|
|
37,274
|
|
|
|
41,480
|
|
|
|
75,350
|
|
|
|
84,471
|
|
Homeowners net premiums earned
|
|
|
14,696
|
|
|
|
9,234
|
|
|
|
29,223
|
|
|
|
18,283
|
|
Other net premiums earned
|
|
|
1,876
|
|
|
|
1,525
|
|
|
|
3,749
|
|
|
|
3,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personal lines net premiums earned
|
|
|
53,846
|
|
|
|
52,239
|
|
|
|
108,322
|
|
|
|
105,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous income
|
|
|
1,279
|
|
|
|
841
|
|
|
|
3,139
|
|
|
|
1,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance operations revenues
|
|
|
376,034
|
|
|
|
351,293
|
|
|
|
748,051
|
|
|
|
694,873
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
37,390
|
|
|
|
32,747
|
|
|
|
73,392
|
|
|
|
65,109
|
|
Net realized gain on investments
|
|
|
14,487
|
|
|
|
559
|
|
|
|
21,854
|
|
|
|
5,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment revenues
|
|
|
51,877
|
|
|
|
33,306
|
|
|
|
95,246
|
|
|
|
70,266
|
|
Diversified Insurance Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Human resource administration outsourcing
|
|
|
15,750
|
|
|
|
14,956
|
|
|
|
32,901
|
|
|
|
30,563
|
|
Flood insurance
|
|
|
10,543
|
|
|
|
8,477
|
|
|
|
19,464
|
|
|
|
15,369
|
|
Other
|
|
|
1,257
|
|
|
|
1,048
|
|
|
|
2,462
|
|
|
|
2,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diversified insurance services revenues
|
|
|
27,550
|
|
|
|
24,481
|
|
|
|
54,827
|
|
|
|
47,966
|
|
Total all segments
|
|
|
455,461
|
|
|
|
409,080
|
|
|
|
898,124
|
|
|
|
813,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
63
|
|
|
|
3
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
455,461
|
|
|
|
409,143
|
|
|
|
898,127
|
|
|
|
813,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited,
|
|
|
Unaudited,
|
|
Income from continuing operations before federal income tax
|
|
Quarter ended
|
|
|
Six Months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
($ in thousands)
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Insurance Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial lines underwriting
|
|
$
|
13,273
|
|
|
|
20,163
|
|
|
|
36,069
|
|
|
|
33,699
|
|
Personal lines underwriting
|
|
|
(201
|
)
|
|
|
(6,196
|
)
|
|
|
(2,055
|
)
|
|
|
(3,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income, before federal income tax
|
|
|
13,072
|
|
|
|
13,967
|
|
|
|
34,014
|
|
|
|
30,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
37,390
|
|
|
|
32,747
|
|
|
|
73,392
|
|
|
|
65,109
|
|
Net realized gain on investments
|
|
|
14,487
|
|
|
|
559
|
|
|
|
21,854
|
|
|
|
5,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income, before federal income tax
|
|
|
51,877
|
|
|
|
33,306
|
|
|
|
95,246
|
|
|
|
70,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified Insurance Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before federal income tax
|
|
|
4,151
|
|
|
|
3,707
|
|
|
|
7,682
|
|
|
|
5,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total all segments
|
|
|
69,100
|
|
|
|
50,980
|
|
|
|
136,942
|
|
|
|
106,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(4,905
|
)
|
|
|
(4,288
|
)
|
|
|
(10,423
|
)
|
|
|
(8,665
|
)
|
General corporate expenses
|
|
|
(6,896
|
)
|
|
|
(4,719
|
)
|
|
|
(14,947
|
)
|
|
|
(7,724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before federal income tax
|
|
$
|
57,299
|
|
|
|
41,973
|
|
|
|
111,572
|
|
|
|
90,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
NOTE 7. Indebtedness
Between May 3 and 4, 2006, Selective separately negotiated two private transactions under Section
3(a)(9) of the Securities Act of 1933 through which it exchanged a total of 153,961 of its Senior
Convertible Notes due 2032, representing approximately $58.5 million of the $115.9 million carrying
value outstanding at the time of conversion for 1,998,152 shares of Selective common stock, and
cash. Selective incurred additional expense of $2.1 million, which represents the incremental
consideration in connection with the transactions, and charged the unamortized debt costs of $1.5
million to Stockholders Equity.
NOTE 8. Discontinued Operations
In December 2005, Selective sold its 100% ownership interest in CHN Solutions (Alta Services LLC
and Consumer Health Network Plus, LLC), which had historically been reported as part of the
Managed Care component of the Diversified Insurance Services segment, for $16.4 million, which
produced an after-tax loss of $2.6 million. Selective has reclassified prior period amounts on the
interim unaudited consolidated statements of income to present the operating results of CHN
Solutions as a discontinued operation.
Operating results from discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
Unaudited
|
|
|
Quarter ended
|
|
Six Months ended
|
($ in thousands)
|
|
June 30, 2005
|
|
June 30, 2005
|
|
Net revenue
|
|
$
|
5,216
|
|
|
|
9,483
|
|
Pre-tax profit
|
|
|
1,709
|
|
|
|
2,628
|
|
After-tax profit
|
|
|
1,111
|
|
|
|
1,708
|
|
Intercompany transactions related to the discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
Unaudited
|
|
|
Quarter ended
|
|
Six Months ended
|
($ in thousands)
|
|
June 30, 2005
|
|
June 30, 2005
|
|
Net revenue
|
|
$
|
2,425
|
|
|
|
4,732
|
|
Pre-tax profit
|
|
|
131
|
|
|
|
260
|
|
After-tax profit
|
|
|
85
|
|
|
|
169
|
|
NOTE 9. Retirement Plans
The following tables show the costs of the Retirement Income Plan for Selective Insurance Company
of America (Retirement Income Plan) and the retirement life insurance component (Retirement Life
Plan) of the Welfare Benefits Plan for Employees of Selective Insurance Company of America. For
more information concerning these plans, refer to Note 14, Retirement Plans in Item 8. Financial
Statements and Supplementary Data in Selectives 2005 Annual Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Income Plan
|
|
|
Postretirement Plan
|
|
|
|
Unaudited,
|
|
|
Unaudited,
|
|
|
|
Quarter ended June 30,
|
|
|
Quarter ended June 30,
|
|
($ in thousands)
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Components of Net Periodic Benefit Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
1,761
|
|
|
|
1,798
|
|
|
|
91
|
|
|
|
99
|
|
Interest cost
|
|
|
2,016
|
|
|
|
1,854
|
|
|
|
102
|
|
|
|
94
|
|
Expected return on plan assets
|
|
|
(2,406
|
)
|
|
|
(2,252
|
)
|
|
|
|
|
|
|
|
|
Amortization of unrecognized prior service cost
|
|
|
37
|
|
|
|
37
|
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Amortization of unrecognized net loss
|
|
|
415
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic cost
|
|
$
|
1,823
|
|
|
|
1,725
|
|
|
|
185
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Expense Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.50
|
%
|
|
|
5.75
|
|
|
|
5.50
|
%
|
|
|
5.75
|
|
Expected return on plan assets
|
|
|
8.00
|
%
|
|
|
8.00
|
|
|
|
|
%
|
|
|
|
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
4.00
|
|
|
|
4.00
|
%
|
|
|
4.00
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement Income Plan
|
|
|
Postretirement Plan
|
|
|
|
Unaudited,
|
|
|
Unaudited,
|
|
|
|
Six Months ended June 30,
|
|
|
Six Months ended June 30,
|
|
($ in thousands)
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Components of Net Periodic Benefit Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
3,521
|
|
|
|
3,596
|
|
|
|
183
|
|
|
|
199
|
|
Interest cost
|
|
|
4,032
|
|
|
|
3,708
|
|
|
|
205
|
|
|
|
189
|
|
Expected return on plan assets
|
|
|
(4,812
|
)
|
|
|
(4,505
|
)
|
|
|
|
|
|
|
|
|
Amortization of unrecognized prior service cost
|
|
|
75
|
|
|
|
75
|
|
|
|
(16
|
)
|
|
|
(16
|
)
|
Amortization of unrecognized net loss
|
|
|
830
|
|
|
|
576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic cost
|
|
$
|
3,646
|
|
|
|
3,450
|
|
|
|
372
|
|
|
|
372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Expense Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.50
|
%
|
|
|
5.75
|
|
|
|
5.50
|
%
|
|
|
5.75
|
|
Expected return on plan assets
|
|
|
8.00
|
%
|
|
|
8.00
|
|
|
|
|
%
|
|
|
|
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
4.00
|
|
|
|
4.00
|
%
|
|
|
4.00
|
|
NOTE 10. Comprehensive Income
The components of comprehensive income, both gross and net of tax, for Second Quarter 2006 and
Second Quarter 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2006
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Gross
|
|
|
Tax
|
|
|
Net
|
|
|
Net income
|
|
$
|
57,299
|
|
|
|
15,303
|
|
|
|
41,996
|
|
|
|
|
|
|
|
|
|
|
|
Components of other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses during the period
|
|
|
(31,851
|
)
|
|
|
(11,148
|
)
|
|
|
(20,703
|
)
|
Reclassification adjustment
|
|
|
(14,487
|
)
|
|
|
(5,071
|
)
|
|
|
(9,416
|
)
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
(46,338
|
)
|
|
|
(16,219
|
)
|
|
|
(30,119
|
)
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
10,961
|
|
|
|
(916
|
)
|
|
|
11,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2005
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Gross
|
|
|
Tax
|
|
|
Net
|
|
|
Net income
|
|
$
|
43,682
|
|
|
|
11,604
|
|
|
|
32,078
|
|
|
|
|
|
|
|
|
|
|
|
Components of other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains during the period
|
|
|
36,463
|
|
|
|
12,762
|
|
|
|
23,701
|
|
Reclassification adjustment
|
|
|
(518
|
)
|
|
|
(181
|
)
|
|
|
(337
|
)
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
35,945
|
|
|
|
12,581
|
|
|
|
23,364
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
79,627
|
|
|
|
24,185
|
|
|
|
55,442
|
|
|
|
|
|
|
|
|
|
|
|
The components of comprehensive income, both gross and net of tax, for Six Months 2006 and Six
Months 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months 2006
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Gross
|
|
|
Tax
|
|
|
Net
|
|
|
Net income
|
|
$
|
111,572
|
|
|
|
29,597
|
|
|
|
81,975
|
|
|
|
|
|
|
|
|
|
|
|
Components of other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses during the period
|
|
|
(43,823
|
)
|
|
|
(15,338
|
)
|
|
|
(28,485
|
)
|
Reclassification adjustment
|
|
|
(21,854
|
)
|
|
|
(7,649
|
)
|
|
|
(14,205
|
)
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
(65,677
|
)
|
|
|
(22,987
|
)
|
|
|
(42,690
|
)
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
45,895
|
|
|
|
6,610
|
|
|
|
39,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months 2005
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Gross
|
|
|
Tax
|
|
|
Net
|
|
|
Net income
|
|
$
|
93,803
|
|
|
|
25,624
|
|
|
|
68,179
|
|
|
|
|
|
|
|
|
|
|
|
Components of other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses during the period
|
|
|
(6,765
|
)
|
|
|
(2,367
|
)
|
|
|
(4,398
|
)
|
Reclassification adjustment
|
|
|
(5,111
|
)
|
|
|
(1,789
|
)
|
|
|
(3,322
|
)
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
(11,876
|
)
|
|
|
(4,156
|
)
|
|
|
(7,720
|
)
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
81,927
|
|
|
|
21,468
|
|
|
|
60,459
|
|
|
|
|
|
|
|
|
|
|
|
10
NOTE 11. Stockholders Equity
Effective April 26, 2005, the Board of Directors approved a plan to repurchase up to 5 million
shares of Selective common stock through April 26, 2007. During Second Quarter 2006, Selective
repurchased approximately 422,000 shares under the plan at a total cost of $22.6 million. During
Six Months 2006, Selective repurchased approximately 1,373,500 shares at a cost of $74.7 million.
As of June 30, 2006, there are 3.3 million shares remaining under the authorization. During Second
Quarter 2005 and Six Months 2005, Selective repurchased approximately 70,000 shares at a cost of
$3.3 million.
NOTE 12. Commitments and Contingencies
Alternative investments, as shown on the consolidated balance sheet, were $83.1 million as of June
30, 2006 and $63.0 million as of December 31, 2005. At December 31, 2005, Selective had additional
commitments pursuant to these alternative investments of up to $64.5 million, of which $4.1 million
was paid during Second Quarter 2006 and $9.7 million during Six Months 2006. At June 30, 2006,
Selective has commitments that expire at various dates through 2017 of up to $91.5 million pursuant
to these alternative investments. There is no certainty that any such additional investment
pursuant to the commitments will be required.
NOTE 13. Litigation
In the ordinary course of conducting business, Selective and its subsidiaries are named as
defendants in various legal proceedings. Some of these lawsuits attempt to establish liability
under insurance contracts issued by our insurance subsidiaries. Plaintiffs in these lawsuits are
seeking money damages that, in some cases, are extra-contractual in nature or they are seeking to
have the court direct the activities of Selectives operations in certain ways. Although the
ultimate outcome of these matters is not presently determinable, Selective does not believe that
the total amounts that it will ultimately have to pay, if any, in all of these lawsuits in the
aggregate will have a material adverse effect on its financial condition, results of operations, or
liquidity.
NOTE 14. Subsequent Event
Selective has revolving lines of credit with State Street Corporation of $20.0 million and Wachovia
Bank of $25.0 million. As of June 30, 2006, neither line had an outstanding balance. In June 2006,
the terms of these lines of credit were extended to August 25, 2006 and August 22, 2006,
respectively. Selective is currently negotiating a potential new syndicated line of credit that is
expected to close prior to the expiration of the extended terms of the existing lines of credit.
11
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
In this Quarterly Report on Form 10-Q, Selective and its management discuss and make statements
regarding their intentions, beliefs, current expectations, and projections regarding Selectives
future operations and performance. Such statements are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements
are often identified by words such as anticipates, believes, expects, will, should and
intends and their negatives. Selective and its management caution prospective investors that
such forward-looking statements are not guarantees of future performance. Risks and uncertainties
are inherent in Selectives future performance. Factors that could cause actual results to differ
materially from those indicated by such forward-looking statements include, but are not limited to,
those discussed under Item 1A. Risk Factors in Selectives 2005 Annual Report. These risk
factors may not be exhaustive. We operate in a continually changing business environment, and new
risk factors emerge from time-to-time. We can neither predict such new risk factors nor can we
assess the impact, if any, of such new risk factors on our businesses or the extent to which any
factor or combination of factors may cause actual results to differ materially from those expressed
or implied in any forward-looking statements in this report. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this report might not occur.
Selective and its management make forward-looking statements based on currently available
information and assume no obligation to update these statements due to changes in underlying
factors, new information, future developments, or otherwise.
Introduction
Selective Insurance Group, Inc., (Selective, we, or our) offers property and casualty
insurance products and diversified insurance services through its various subsidiaries. Selective
classifies its businesses into three operating segments: (i) Insurance Operations, (ii)
Investments, and (iii) Diversified Insurance Services.
The purpose of the Managements Discussion and Analysis (MD&A) is to provide an understanding of
the consolidated results of operations and financial condition and known trends and uncertainties
that may have a material impact in future periods. Consequently, investors should read the MD&A in
conjunction with Selectives consolidated financial statements in Selectives 2005 Annual Report.
For reading ease, we have written the MD&A in the first person plural.
In the MD&A, we will discuss and analyze the following:
|
|
Critical Accounting Policies and Estimates;
|
|
|
Highlights of Results for Second Quarter 2006 and Six Months 2006;
|
|
|
Results of Operations and Related Information by Segment;
|
|
|
Financial Condition, Liquidity, and Capital Resources;
|
|
|
Federal Income Taxes; and
|
|
|
Adoption of Accounting Pronouncements.
|
Critical Accounting Policies and Estimates
These unaudited interim consolidated financial statements include amounts based on informed
estimates and judgments of management for those transactions that are not yet complete. Such
estimates and judgments affect the reported amounts in the financial statements. Those estimates
and judgments that were most critical to the preparation of the financial statements involved the
following: (i) reserves for losses and loss expenses; (ii) deferred policy acquisition costs;
(iii) pension and postretirement benefit plan actuarial assumptions; and (iv) other-than-temporary
investment impairments. These estimates and judgments require the use of assumptions about matters
that are highly uncertain and therefore are subject to change as facts and circumstances develop.
If different estimates and judgments had been applied, materially different amounts might have been
reported in the financial statements. Our 2005 Annual Report provides a discussion of each of
these critical accounting estimates on pages 30 through 35. Additional information regarding our
accounting policy for reserves for loss and loss expenses follows.
12
Reserves for Losses and Loss Expenses
Significant periods of time can elapse between the occurrence of an insured loss, the reporting of
the loss to the insurer, and the insurers payment of that loss. To recognize liabilities for
unpaid losses and loss expenses, insurers establish reserves as balance sheet liabilities
representing estimates of amounts needed to pay reported and unreported net losses and loss
expenses. As of June 30, 2006, we had accrued $2.0 billion of loss and loss expense reserves, net
of reinsurance, compared to $1.9 billion at December 31, 2005. During Six Months 2006, we
experienced slight favorable prior year development in our loss and loss expense reserves of
approximately $1 million. This development was driven by approximately $8 million of favorable
development for commercial automobile and was partially offset by reserve increases of
approximately $3 million and $4 million for workers compensation and general liability,
respectively.
Major trends by line of business creating additional loss and loss expense reserve uncertainty
The Insurance Subsidiaries are multi-state, multi-line property and casualty insurance companies
and, as such, are subject to reserve uncertainty stemming from a variety of sources. These
uncertainties are considered at each step in the process of establishing loss and loss expense
reserves. However, as market conditions change, certain trends are identified that management
believes create an additional amount of uncertainty. A discussion of recent trends, by line of
business, that we have recognized follows.
Workers Compensation
With $714.7 million, or 36% of our total recorded reserves, net of reinsurance, at June 30, 2006,
workers compensation is the our largest reserved line of business. In addition to the
uncertainties associated with actuarial assumptions and methodologies, workers compensation is the
line of business that is most susceptible to unexpected changes in the cost of medical services
because of the length of time over which medical services are provided and the unpredictability of
medical cost inflation. In 2005, management identified sufficient evidence of greater than
expected increases in our workers compensation medical costs. The higher than anticipated increase
in medical costs in 2005 could be a relatively short-term anomaly, in which case our historical
patterns would be the best basis for future projections. If higher trends continue on a longer
term, our historical patterns will be less meaningful in predicting future loss costs and could
result in significant adverse reserve development.
General Liability
At June 30, 2006, our general liability line of business had recorded reserves, net of reinsurance
of $655.9 million, which represented 33% of our total net reserves. In recent years, this line of
business has experienced adverse development mainly due to completed operations coverage under
policies issued to contractors and higher than expected legal expenses. At this time, we have not
identified any recent trends that would create additional significant reserve uncertainty for this
line of business.
Commercial Automobile
At June 30, 2006, our commercial automobile line of business had recorded reserves, net of
reinsurance, of $301.2 million, which represented 15% of our total net reserves. This line of
business has experienced favorable loss development in recent years driven by a downward trend in
large claims. The number of large claims has a high degree of volatility from year-to-year and,
therefore, requires a longer period before we would respond to this type of information when
establishing reserves. In recent years, we have experienced lower than expected severity in this
line of business. We believe this result is driven by trends that are positively affecting the
commercial auto insurance market in general, as well as by Selective-specific initiatives, such as:
(i) the increase in lower hazard auto business as a percentage of our overall commercial auto book
of business, (ii) a re-underwriting of our newest operating region, and (iii) a more proactive
approach to loss prevention. If this lower trend in large claims continues, additional favorable
reserve development is possible.
Personal Automobile
At June 30, 2006, our personal automobile line of business had recorded reserves, net of
reinsurance, of $196.2 million, which represented 10% of our total net reserves. The majority of
this business is written in the State of New Jersey, where the judicial and regulatory environment
has been subject to significant changes over the past few decades. The most recent change occurred
in June 2005, when the New Jersey Supreme Court ruled that the serious life impact standard does
not apply to the Automobile Insurance Cost Reduction Acts limitation on lawsuit threshold. This
recent judicial decision has increased the amount of
uncertainty surrounding our personal auto reserves, as much of the historical information used to
make assumptions has been rendered less effective as a basis for projecting future results.
13
Other Lines of Business
At June 30, 2006, no other individual line of business had recorded reserves of more than $50
million, net of reinsurance. At this time, we have not identified any recent trends that would
create additional significant reserve uncertainty for these other lines of business.
In light of the many uncertainties associated with establishing the estimates and making the
assumptions necessary to establish reserve levels, we review our reserve estimates on a regular
basis and make adjustments in the period that the need for such adjustment is determined. These
reviews could result in the identification of information and trends that would require us to
increase some reserves and/or decrease other reserves for prior periods and could also lead to
additional increases in loss and loss adjustment expense reserves, which could materially adversely
affect our results of operations, equity, business, insurer financial strength and debt ratings.
Highlights of Second Quarter 2006 and Six Months 2006 Results
Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
|
|
Unaudited
|
|
|
|
|
Quarter ended
|
|
Change
|
|
Six Months ended
|
|
Change
|
|
|
June 30,
|
|
% or
|
|
June 30,
|
|
% or
|
($ in thousands, except per share amounts)
|
|
2006
|
|
2005
|
|
Points
|
|
2006
|
|
2005
|
|
Points
|
|
Revenues
|
|
$
|
455,461
|
|
|
|
409,143
|
|
|
|
11
|
%
|
|
$
|
898,127
|
|
|
|
813,182
|
|
|
|
10
|
%
|
Net income before cumulative effect
of change in accounting principle
|
|
|
41,996
|
|
|
|
32,078
|
|
|
|
31
|
|
|
|
81,975
|
|
|
|
67,684
|
|
|
|
21
|
|
Net income
|
|
|
41,996
|
|
|
|
32,078
|
|
|
|
31
|
|
|
|
81,975
|
|
|
|
68,179
|
|
|
|
20
|
|
Diluted net income before cumulative
effect of change in accounting principle per share
|
|
|
1.36
|
|
|
|
1.02
|
|
|
|
33
|
|
|
|
2.64
|
|
|
|
2.15
|
|
|
|
23
|
|
Diluted net income per share
|
|
|
1.36
|
|
|
|
1.02
|
|
|
|
33
|
|
|
|
2.64
|
|
|
|
2.17
|
|
|
|
22
|
|
Diluted weighted-average outstanding shares
|
|
|
31,237
|
|
|
|
32,172
|
|
|
|
(3
|
)%
|
|
|
31,593
|
|
|
|
32,225
|
|
|
|
(2
|
)%
|
GAAP combined ratio
|
|
|
96.5
|
%
|
|
|
96.0
|
|
|
|
0.5
|
pts
|
|
|
95.4
|
|
|
|
95.6
|
|
|
|
(0.2
|
)pts
|
Statutory combined ratio
|
|
|
95.6
|
%
|
|
|
94.9
|
|
|
|
0.7
|
|
|
|
94.3
|
|
|
|
94.2
|
|
|
|
0.1
|
|
Annualized return on average equity
|
|
|
17.1
|
%
|
|
|
14.0
|
|
|
|
3.1
|
pts
|
|
|
16.5
|
|
|
|
14.9
|
|
|
|
1.6
|
pts
|
|
|
Revenues increased by 11% in Second Quarter 2006 compared to Second Quarter 2005 and
10% in Six Months 2006 compared to Six Months 2005 primarily due to net premiums earned
(NPE) growth of 7% in Second Quarter 2006 and Six Months 2006 as compared to Second Quarter
2005 and Six Months 2005. Increases in NPE are attributed to the following:
|
|
o
|
|
Direct voluntary new business written of $79.9 million in Second Quarter
2006 compared to $79.0 million in Second Quarter 2005; and $160.7 million in Six
Months 2006 compared to $147.3 million in Six Months 2005;
|
|
|
o
|
|
Commercial Lines renewal retention, which increased slightly from 77% in
Second Quarter 2005 to 78% in Second Quarter 2006 and remained constant at 79% for
Six Months 2006 and Six Months 2005; and
|
|
|
o
|
|
Commercial Lines renewal premium price increases, including exposure,
that averaged 2.2% in Second Quarter 2006 down from 3.1% in Second Quarter 2005, and
2.8% in Six Months 2006 down from 4.6% in Six Months 2005.
|
The above items were partially offset by increased competition in the New Jersey personal
automobile market, which resulted in a decrease in rates of 1.1% for Second Quarter 2006
compared to Second Quarter 2005 and a decrease in rates of
3.9% for Six Months 2006 as compared to Six Months 2005. As of June 30, 2006, the number of
cars we insured decreased 7% as compared to June 30, 2005. Net premiums earned for our New
Jersey personal automobile business were $25.8 million for Second Quarter 2006 as compared to
$29.8 million for Second Quarter 2005 and $52.4 million for Six Months 2006 as compared to $61.2
million for Six Months 2005.
|
|
Additional items contributing to the revenue increases were the following:
|
|
o
|
|
Net investment income earned increased $4.6 million or 14% in Second
Quarter 2006 compared to Second Quarter 2005, and increased $8.3 million or 13% in
Six Months 2006 compared to Six Month 2005;
|
|
§
|
|
The increase in investment income is primarily attributable to higher
interest rates coupled with a higher investment asset base resulting from the
following: (i) strong operating cash flows of $559.8 million since December
31, 2004, and (ii) our $100.0 million debt offering in the fourth quarter of
2005, partially offset by treasury stock purchases of 1,708,696 shares at a
total cost of $91.1 million since December 31, 2004;
|
14
|
o
|
|
Net realized gains before tax of $14.5 million in Second Quarter 2006
compared to $0.6 million in Second Quarter 2005, and $21.9 million in net realized
gains in Six Months 2006 compared to $5.2 million in Six Months 2005; and
|
|
|
o
|
|
Diversified Insurance Services revenue increased $3.1 million or 13% in
Second Quarter 2006 compared to Second Quarter 2005, and increased $6.9 million or
14% in Six Months 2006 compared to Six Months 2005.
|
|
|
Net income increased by 31% in Second Quarter 2006 and 20% in Six Months 2006 compared to
Second Quarter 2005 and Six Months 2005 primarily due to:
|
|
o
|
|
Commercial Lines underwriting and pricing improvements over the last few
years and strong new business growth offset by increased catastrophe losses in
Second Quarter 2006 of $2.2 million after tax and Six Months 2006 of $3.7 million
after tax compared to Second Quarter 2005 and Six Months 2005;
|
|
|
o
|
|
After-tax investment income, which increased $3.9 million, or 15%, for
Second Quarter 2006 as compared to Second Quarter 2005 and $7.4 million, or 15% for
Six Months 2006 as compared to Six Months 2005 resulting from the higher investment
asset base discussed above; and
|
|
|
o
|
|
After-tax net realized gains, which increased $9.1 million for Second
Quarter 2006 as compared to Second Quarter 2005 and $10.9 million for Six Months
2006 as compared to Six Months 2005, resulting from the sale of certain long-term
equity investments.
|
Results of Operations and Related Information by Segment
Insurance Operations
Our Insurance Operations segment derives substantially all of its revenues from insurance policy
premiums. We predominantly write annual policies, of which the associated premiums are defined as
net premiums written (NPW). NPW is recognized as revenue as net premiums earned (NPE) ratably
over the life of the insurance policy. Expenses fall into three categories: (i) losses associated
with claims and various loss expenses incurred for adjusting claims; (ii) expenses related to the
issuance of insurance policies, such as agent commissions, premium taxes, and other underwriting
expenses, including employee compensation and benefits; and (iii) policyholder dividends.
Our insurance subsidiaries (Insurance Subsidiaries) are regulated by each of the states in which
they do business. They are required to file financial statements with such states prepared in
accordance with accounting principles prescribed by, or permitted by, the Insurance Subsidiarys
state of domicile (Statutory Accounting Principles or SAP). SAP have been promulgated by the
National Association of Insurance Commissioners (NAIC) and adopted by the various states. We
evaluate the performance of our Insurance Subsidiaries in accordance with SAP. Incentive-based
compensation to independent agents and employees is based on SAP results and our rating agencies
use SAP information to evaluate our performance as well as for industry comparative purposes.
The underwriting performance of insurance companies is measured under SAP by four different ratios:
|
i.
|
|
Loss and loss expense ratio, which is calculated by dividing incurred loss and loss
expenses by NPE;
|
|
|
ii.
|
|
Underwriting expense ratio, which is calculated by dividing all expenses related to
the issuance of insurance policies by NPW;
|
|
|
iii.
|
|
Dividend ratio, which is calculated by dividing policyholder dividends by NPE; and
|
|
|
iv.
|
|
Combined ratio, which is the sum of the loss and loss expense ratio, the underwriting
expense ratio, and the dividend ratio.
|
A statutory combined ratio under 100% generally indicates that an insurance company is generating
an underwriting profit and a statutory combined ratio over 100% generally indicates that an
insurance company is generating an underwriting loss. The statutory combined ratio does not
reflect investment income, federal income taxes, or other non-operating income or expense.
15
SAP differs in many ways from GAAP, under which we are required to report our financial results to
the SEC, but the most notable differences impacting our reported net income are as follows:
|
|
|
Under SAP, underwriting expenses are recognized when incurred; whereas under GAAP,
underwriting expenses are deferred and amortized over the life of the policy;
|
|
|
|
|
Under SAP, the underwriting expense ratio is calculated using NPW as the denominator;
whereas NPE is used as the denominator under GAAP; and
|
|
|
|
|
Under SAP, the results of our flood line of business are included in our Insurance
Operations segment, whereas under GAAP, these results are included within our Diversified
Insurance Services segment.
|
We primarily use SAP information to monitor and manage our results of operations. We believe that
providing SAP financial information for our Insurance Operations segment helps our investors,
agents, and customers better evaluate the underwriting success of our insurance business.
Summary of Insurance Operations
All Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
|
|
|
Unaudited
|
|
|
|
|
|
|
Quarter ended
|
|
|
Change
|
|
|
Six Months ended
|
|
|
Change
|
|
|
|
June 30,
|
|
|
% or
|
|
|
June 30,
|
|
|
% or
|
|
($ in thousands)
|
|
2006
|
|
|
2005
|
|
|
Points
|
|
|
2006
|
|
|
2005
|
|
|
Points
|
|
|
GAAP Insurance Operations Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPW
|
|
$
|
395,621
|
|
|
|
369,621
|
|
|
|
7
|
%
|
|
|
827,610
|
|
|
|
766,399
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPE
|
|
|
374,755
|
|
|
|
350,452
|
|
|
|
7
|
|
|
|
744,912
|
|
|
|
693,192
|
|
|
|
7
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses incurred
|
|
|
241,563
|
|
|
|
225,794
|
|
|
|
7
|
|
|
|
475,263
|
|
|
|
444,231
|
|
|
|
7
|
|
Net underwriting expenses incurred
|
|
|
119,030
|
|
|
|
109,597
|
|
|
|
9
|
|
|
|
233,337
|
|
|
|
216,006
|
|
|
|
8
|
|
Dividends to policyholders
|
|
|
1,090
|
|
|
|
1,094
|
|
|
|
|
|
|
|
2,298
|
|
|
|
2,342
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income
|
|
$
|
13,072
|
|
|
|
13,967
|
|
|
|
(6
|
)%
|
|
|
34,014
|
|
|
|
30,613
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
|
64.5
|
%
|
|
|
64.4
|
|
|
|
0.1
|
pts
|
|
|
63.8
|
%
|
|
|
64.1
|
|
|
|
(0.3
|
)pts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting expense ratio
|
|
|
31.7
|
%
|
|
|
31.3
|
|
|
|
0.4
|
|
|
|
31.3
|
%
|
|
|
31.2
|
|
|
|
0.1
|
|
Dividends to policyholders ratio
|
|
|
0.3
|
%
|
|
|
0.3
|
|
|
|
|
|
|
|
0.3
|
%
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
96.5
|
%
|
|
|
96.0
|
|
|
|
0.5
|
|
|
|
95.4
|
%
|
|
|
95.6
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory Ratios:
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
|
64.1
|
%
|
|
|
63.9
|
|
|
|
0.2
|
|
|
|
63.5
|
%
|
|
|
64.0
|
|
|
|
(0.5
|
)
|
Underwriting expense ratio
|
|
|
31.2
|
%
|
|
|
30.7
|
|
|
|
0.5
|
|
|
|
30.5
|
%
|
|
|
29.9
|
|
|
|
0.6
|
|
Dividends to policyholders ratio
|
|
|
0.3
|
%
|
|
|
0.3
|
|
|
|
|
|
|
|
0.3
|
%
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
95.6
|
%
|
|
|
94.9
|
|
|
|
0.7
|
pts
|
|
|
94.3
|
%
|
|
|
94.2
|
|
|
|
0.1
|
pts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
The statutory ratios include the flood line of business, which is included in the
Diversified Insurance Services Segment on a GAAP basis and therefore excluded from the GAAP ratios.
The total Statutory Combined Ratio excluding flood is 96.2% for Second Quarter 2006 and 94.8% for
Six Months 2006 compared to 95.5% for Second Quarter 2005 and 94.6% for Six Months 2005.
|
|
o
|
|
Direct voluntary new business written of $79.9 million in Second Quarter
2006 compared to $79.0 million in Second Quarter 2005; and $160.7 million in Six
Months 2006 compared to $147.3 million in Six Months 2005.
|
|
|
o
|
|
Commercial Lines renewal retention increased slightly in Second Quarter
2006 compared to Second Quarter 2005 and remained level in Six Months 2006 compared
to Six Months 2005.
|
|
|
o
|
|
Commercial Lines renewal premium price increases, including exposure,
that averaged 2.2% in Second Quarter 2006 and 2.8% in Six Months 2006 compared to
3.1% in Second Quarter 2005 and 4.6% in Six Months 2005.
|
These increases were partially offset by a 1.1% decrease in New Jersey personal
automobile rates resulting from increased competition for Second Quarter 2006 as compared
to Second Quarter 2005 and a decrease in rates of 3.9% for Six Months 2006 as compared to
Six Months 2005. As of June 30, 2006, the number of cars we insured decreased 7% as
compared to June 30, 2005. Net premiums written for our New Jersey personal automobile
business were $25.5 million for Second Quarter 2006 as compared to $27.5 million for
Second Quarter 2005 and $50.7 million for Six Months 2006 as compared to $55.5 million
for Six Months 2005.
16
Insurance Operations Outlook
In 2005, according to the Insurance Information Institute, the property and casualty insurance
industry incurred a record $60 billion in catastrophe losses on more than 3.3 million claims and
recorded a statutory combined ratio of 100.9%. The reinsurance industry, however, bore the brunt
of these losses with a statutory combined ratio of 129%. Consequently, reinsurance premiums have
increased in 2006. The growth in our book of business, along with the hardening of the reinsurance
market as a result of recent catastrophic losses, and changes in reinsurers models of catastrophic
risk have led to higher property catastrophe costs in 2006 compared to 2005. In addition to higher
property catastrophe reinsurance costs, we also anticipate continued pricing pressure in the
primary market in 2006, which is evidenced by Commercial Lines renewal price increases, including
exposure, of 2.2%, for Second Quarter 2006 compared to 3.1% for Second Quarter 2005. Renewal
price increases, including exposure, were 2.8% for Six Months 2006 compared to 4.6% for Six Months
2005. The continuance of this competitive pricing environment on commercial lines will exert
pressure on the future profitability of this book of business. Barring excessive catastrophe
losses, we are anticipating achieving an underwriting profit for a third consecutive year in 2006.
In Second Quarter 2006, our commercial lines net premiums written growth of 7%, was more than three
times the A.M. Best industry estimated growth rate for 2006.
We anticipate our profitability in 2006 will continue to be driven by our field strategy, which we
consider to be a key competitive advantage that allows us to maneuver more favorably through
challenging market conditions. This field strategy allows us to grow our new business with our
agencies. The strategic initiatives we are implementing to increase the effectiveness of our field
strategy are as follows:
|
|
|
Market Planning.
Through business demographic and geographic analysis, this strategy:
(i) identifies underserved markets in existing territories; (ii) identifies other areas for
potential organic growth that may require additional agent appointments or field
underwriter deployment; and (iii) enhances our ability to replicate success across
different markets;
|
|
|
|
|
Knowledge Management.
We are accumulating and organizing existing underwriting data to
enhance underwriting and pricing decisions; and
|
|
|
|
|
Workers Compensation.
This strategy includes six key underwriting initiatives that focus
on predictive modeling, premium leakage, premium audit procedures, and other operational
improvements.
|
Terrorism continues to remain an overall industry concern. Terrorism coverage is mandatory for all
workers compensation primary policies. In addition, out of the twenty primary states in which we
write insurance business, ten require coverage for fire following an act of terrorism under
commercial property policies. The two-year extension of the Terrorism Risk Insurance Act of 2002
(TRIA) that was approved by Congress on December 22, 2005, will serve to mitigate our exposure in
the event of a large-scale terrorist attack; however, our deductible is substantial at $160 million
in 2006. We continue to monitor concentrations of risk and have purchased a separate terrorism
treaty to supplement our protection to this unknown exposure.
Technology also continues to play a critical role in our success. Our leading edge agency
integration technology, xSelerate, is creating new business opportunities by allowing for the
automated movement of key underwriting data from an agents management system to our systems. This
technology allows for seamless quoting and rating capabilities, which is an example of why we are
ranked so highly by our agents for ease of doing business. We have begun to implement MATRIX,
our personal auto knowledge-based rating model, which will support our pricing redesign for our
automobile business in an effort to increase our competitive position.
On April 19, 2006, A.M. Best reaffirmed the A+ (Superior) financial strength rating for our
insurance subsidiaries for the 45
th
consecutive year. In support of the rating, A.M.
Best cited our solid capitalization, historically favorable operating performance and strong
regional presence within the small commercial lines business segment. As less than 9% of personal
and commercial lines carriers attain an A+ rating, this is a competitive advantage that reinforces
our agents decision to make us their carrier of choice. On July 25, 2006, Standard and Poors
Insurance Rating Services (S&P) raised our financial strength rating to A+ from A, citing our
strong operating performance, strong operating company capitalization, and good financial
flexibility.
17
We recently formed a new company, Selective Auto Insurance Company of New Jersey (SAICNJ), which
is domiciled in the State of New Jersey. This company currently is not rated, but began writing
business on July 1, 2006. Upon approval of certain regulatory filings with the domiciliary
regulators of our Insurance Subsidiaries, we expect A.M. Best to give SAICNJ the same rating as the
other insurance subsidiaries.
Review of Underwriting Results by Line of Business
Commercial Lines Results
Commercial Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
|
|
|
Unaudited
|
|
|
|
|
|
|
Quarter ended
|
|
|
Change
|
|
|
Six Months ended
|
|
|
Change
|
|
|
|
June 30,
|
|
|
% or
|
|
|
June 30,
|
|
|
% or
|
|
($ in thousands)
|
|
2006
|
|
|
2005
|
|
|
Points
|
|
|
2006
|
|
|
2005
|
|
|
Points
|
|
|
GAAP Insurance Operations Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPW
|
|
$
|
340,722
|
|
|
|
317,489
|
|
|
|
7
|
%
|
|
|
711,363
|
|
|
|
665,657
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPE
|
|
|
320,909
|
|
|
|
298,213
|
|
|
|
8
|
|
|
|
636,590
|
|
|
|
587,339
|
|
|
|
8
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses incurred
|
|
|
204,065
|
|
|
|
182,283
|
|
|
|
12
|
|
|
|
400,044
|
|
|
|
363,220
|
|
|
|
10
|
|
Net underwriting expenses incurred
|
|
|
102,481
|
|
|
|
94,673
|
|
|
|
8
|
|
|
|
198,179
|
|
|
|
188,078
|
|
|
|
5
|
|
Dividends to policyholders
|
|
|
1,090
|
|
|
|
1,094
|
|
|
|
|
|
|
|
2,298
|
|
|
|
2,342
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income
|
|
$
|
13,273
|
|
|
|
20,163
|
|
|
|
(34
|
)%
|
|
|
36,069
|
|
|
|
33,699
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
|
63.6
|
%
|
|
|
61.1
|
|
|
|
2.5
|
pts
|
|
|
62.8
|
%
|
|
|
61.8
|
|
|
|
1.0
|
pts
|
Underwriting expense ratio
|
|
|
32.0
|
%
|
|
|
31.7
|
|
|
|
0.3
|
|
|
|
31.1
|
%
|
|
|
32.0
|
|
|
|
(0.9
|
)
|
Dividends to policyholders ratio
|
|
|
0.3
|
%
|
|
|
0.4
|
|
|
|
(0.1
|
)
|
|
|
0.4
|
%
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
95.9
|
%
|
|
|
93.2
|
|
|
|
2.7
|
|
|
|
94.3
|
%
|
|
|
94.2
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
|
63.4
|
%
|
|
|
60.6
|
|
|
|
2.8
|
|
|
|
62.6
|
%
|
|
|
61.9
|
|
|
|
0.7
|
|
Underwriting expense ratio
|
|
|
31.7
|
%
|
|
|
31.4
|
|
|
|
0.3
|
|
|
|
30.6
|
%
|
|
|
30.3
|
|
|
|
0.3
|
|
Dividends to policyholders ratio
|
|
|
0.3
|
%
|
|
|
0.4
|
|
|
|
(0.1
|
)
|
|
|
0.4
|
%
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
95.4
|
%
|
|
|
92.4
|
|
|
|
3.0
|
pts
|
|
|
93.6
|
%
|
|
|
92.6
|
|
|
|
1.0
|
pts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increases in NPW and NPE were the result of:
|
|
o
|
|
Direct voluntary new business written of $71.1 million for Second Quarter
2006, a 3% increase compared to $69.2 million in direct voluntary new business
written in Second Quarter 2005; and $142.9 million in direct voluntary new business
written in Six Months 2006, a 10% increase when compared to $130.4 million for Six
Months 2005;
|
|
|
o
|
|
Year-on-year renewal retention increased slightly for Second Quarter 2006
and remained level for Six Months 2006; and
|
|
|
o
|
|
Renewal premium price increases, including exposure, that averaged 2.2%
for Second Quarter 2006 and 2.8% for Six Months 2006 compared to 3.1% for Second
Quarter 2005 and 4.6% for Six Months 2005.
|
|
|
|
The increase in the GAAP combined ratio is attributable to increases in catastrophe
losses incurred primarily in Commercial Property for Second Quarter 2006 and Six Months
2006 compared to Second Quarter 2005 and Six Months 2005.
|
General Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
|
|
Unaudited
|
|
|
|
|
Quarter ended
|
|
Change
|
|
Six Months ended
|
|
Change
|
|
|
June 30,
|
|
% or
|
|
June 30,
|
|
% or
|
($ in thousands)
|
|
2006
|
|
2005
|
|
Points
|
|
2006
|
|
2005
|
|
Points
|
|
Statutory NPW
|
|
$
|
109,945
|
|
|
|
97,800
|
|
|
|
12
|
%
|
|
|
227,620
|
|
|
|
201,960
|
|
|
|
13
|
%
|
Statutory NPE
|
|
|
101,967
|
|
|
|
88,994
|
|
|
|
15
|
|
|
|
201,056
|
|
|
|
175,009
|
|
|
|
15
|
|
Statutory combined ratio
|
|
|
94.3
|
%
|
|
|
96.0
|
|
|
|
(1.7
|
)pts
|
|
|
94.1
|
%
|
|
|
95.5
|
|
|
|
(1.4
|
)pts
|
% of total statutory commercial NPW
|
|
|
32
|
%
|
|
|
31
|
|
|
|
|
|
|
|
32
|
%
|
|
|
30
|
|
|
|
|
|
18
The profitability in this line of business reflects our long-term improvement strategy
incorporating the following: (i) focusing our contractor growth on business segments with lower
completed operations exposures; (ii) requiring subcontractors to carry equal insurance limits, up
to $1.0 million, to those carried by the general contractors; (iii) placing mold limitations or
exclusions on most policies; and (iv) requiring that our insured be named on any potential
subcontractors policy as an additional insured on a primary and noncontributory basis. The policy
count on this line of business increased 9% as of June 30, 2006 as compared to June 30, 2005.
Workers Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
|
|
Unaudited
|
|
|
|
|
Quarter ended
|
|
Change
|
|
Six Months ended
|
|
Change
|
|
|
June 30,
|
|
% or
|
|
June 30,
|
|
% or
|
($ in thousands)
|
|
2006
|
|
2005
|
|
Points
|
|
2006
|
|
2005
|
|
Points
|
|
Statutory NPW
|
|
$
|
84,103
|
|
|
|
78,272
|
|
|
|
7
|
%
|
|
|
177,998
|
|
|
|
169,317
|
|
|
|
5
|
%
|
Statutory NPE
|
|
|
77,519
|
|
|
|
73,839
|
|
|
|
5
|
|
|
|
153,335
|
|
|
|
143,103
|
|
|
|
7
|
|
Statutory combined ratio
|
|
|
111.0
|
%
|
|
|
115.7
|
|
|
|
(4.7
|
)pts
|
|
|
110.6
|
%
|
|
|
112.2
|
|
|
|
(1.6
|
)pts
|
% of total statutory commercial NPW
|
|
|
25
|
%
|
|
|
24
|
|
|
|
|
|
|
|
25
|
%
|
|
|
25
|
|
|
|
|
|
Statutory net premiums written for our workers compensation line of business increased 7% for
Second Quarter 2006 compared to Second Quarter 2005 and increased 5% for Six Months 2006 compared
to Six Months 2005. Contributing to these increases were renewal price increases, including
exposure, of 8.0% for Second Quarter 2006 and 8.1% for Six Months 2006. Loss trends for this line
of business remained relatively flat for the twelve-month period ended June 30, 2006.
We continue to execute on our multi-faceted workers compensation strategy aimed at reducing the
statutory combined ratio by seven points over the next two years. One facet of this strategy is to
rank our operating states in tiers and target the most preferred states to achieve profitability.
Workers compensation direct new business premium increased 20% for Second Quarter 2006 as compared
to Second Quarter 2005 and 32% for Six Months 2006 as compared to Six Months 2005. Growth in our
targeted states represents 76% of our new business for Second Quarter 2006.
Another facet of our workers compensation strategy is predictive modeling. The first predictive
model for workers compensation was introduced in Second Quarter 2006 which provides us tools to
focus on accounts that could be unprofitable and re-underwrite the workers compensation book more
efficiently. For example, we have identified that account size is predictive of profitability. We
are pursuing strategies to grow the types of accounts that we have identified to be the most
profitable. As of June 30, 2006, policy counts on this total line of business increased 5% when
compared to June 30, 2005. We are also looking at premiums written to ensure that they are
reflective of the proper classes and payrolls for our workers compensation exposure.
The statutory combined ratio improved 4.7 points from Second Quarter 2006 compared to Second
Quarter 2005, and improved 1.6 points Six Months 2006 compared to Six Months 2005. While our
performance in this line reflects substantial progress, we do not expect that our future progress
towards a seven point reduction will be as dramatic each quarter.
19
Commercial Automobile
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
|
|
Unaudited
|
|
|
|
|
Quarter ended
|
|
Change
|
|
Six Months ended
|
|
Change
|
|
|
June 30,
|
|
% or
|
|
June 30,
|
|
% or
|
($ in thousands)
|
|
2006
|
|
2005
|
|
Points
|
|
2006
|
|
2005
|
|
Points
|
|
Statutory NPW
|
|
$
|
81,726
|
|
|
|
81,453
|
|
|
|
|
%
|
|
|
173,770
|
|
|
|
171,915
|
|
|
|
1
|
%
|
Statutory NPE
|
|
|
80,054
|
|
|
|
78,499
|
|
|
|
2
|
|
|
|
160,565
|
|
|
|
156,148
|
|
|
|
3
|
|
Statutory combined ratio
|
|
|
88.2
|
%
|
|
|
83.7
|
|
|
|
4.5
|
pts
|
|
|
85.2
|
%
|
|
|
84.4
|
|
|
|
0.8
|
pts
|
% of total statutory commercial NPW
|
|
|
24
|
%
|
|
|
26
|
|
|
|
|
|
|
|
24
|
%
|
|
|
26
|
|
|
|
|
|
Continued strong performance in this line is the result of underwriting and pricing
improvements over the last several years. As we continue to write accounts and grow this book of
business, we have implemented granular rate decreases to remain competitive in the current
marketplace. The policy count on this line of business increased 6% as of June 30, 2006 as
compared to June 30, 2005 and renewal price decreased 0.6% in Six Months 2006, compared to a 2.0%
increase in Six Months 2005.
Commercial Property
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
|
|
Unaudited
|
|
|
|
|
Quarter ended
|
|
Change
|
|
Six Months ended
|
|
Change
|
|
|
June 30,
|
|
% or
|
|
June 30,
|
|
% or
|
($ in thousands)
|
|
2006
|
|
2005
|
|
Points
|
|
2006
|
|
2005
|
|
Points
|
|
Statutory NPW
|
|
$
|
47,109
|
|
|
|
43,481
|
|
|
|
8
|
%
|
|
|
96,327
|
|
|
|
89,246
|
|
|
|
8
|
%
|
Statutory NPE
|
|
|
45,044
|
|
|
|
41,172
|
|
|
|
9
|
|
|
|
89,434
|
|
|
|
81,383
|
|
|
|
10
|
|
Statutory combined ratio
|
|
|
85.6
|
%
|
|
|
62.4
|
|
|
|
23.2
|
pts
|
|
|
82.7
|
%
|
|
|
69.7
|
|
|
|
13.0
|
pts
|
% of total statutory commercial NPW
|
|
|
14
|
%
|
|
|
14
|
|
|
|
|
|
|
|
14
|
%
|
|
|
14
|
|
|
|
|
|
The statutory combined ratio of our commercial property results was 85.6% for Second Quarter
2006 and 82.7% for Six Months 2006, compared to 62.4% for Second Quarter 2005 and 69.7% for Six
Months 2005. Contributing to the increases in the statutory combined ratios for the current
periods are catastrophe losses of $2.8 million, or 6.2 points, in Second Quarter 2006 compared to
$0.3 million, or 0.8 points, in Second Quarter 2005 and $5.3 million, or 5.9 points, in Six Months
2006 compared to $0.3 million, or 0.4 points, in Six Months 2005. In addition, large property
losses in 2005 were unusually low compared to the more normalized trend we are experiencing this
year. Despite the increased losses this year, 2006 results continue to be strong as this line of
business is benefiting from underwriting improvements over the past five years, including better
insurance-to-value estimates across our book of business, a shift to risks of better construction
quality and newer buildings, and an overall focus on low-to-medium hazard property exposures. The
policy count on this line of business increased 6% as of June 30, 2006 as compared to June 30,
2005.
Business Owners Policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
|
|
Unaudited
|
|
|
|
|
Quarter ended
|
|
Change
|
|
Six Months ended
|
|
Change
|
|
|
June 30,
|
|
% or
|
|
June 30,
|
|
% or
|
($ in thousands)
|
|
2006
|
|
2005
|
|
Points
|
|
2006
|
|
2005
|
|
Points
|
|
Statutory NPW
|
|
$
|
12,661
|
|
|
|
11,518
|
|
|
|
10
|
%
|
|
|
25,422
|
|
|
|
23,563
|
|
|
|
8
|
%
|
Statutory NPE
|
|
|
11,997
|
|
|
|
11,550
|
|
|
|
4
|
|
|
|
23,791
|
|
|
|
23,476
|
|
|
|
1
|
|
Statutory combined ratio
|
|
|
99.4
|
%
|
|
|
90.7
|
|
|
|
8.7
|
pts
|
|
|
91.3
|
%
|
|
|
98.2
|
|
|
|
(6.9
|
)pts
|
% of total statutory commercial NPW
|
|
|
4
|
%
|
|
|
4
|
|
|
|
|
|
|
|
4
|
%
|
|
|
4
|
|
|
|
|
|
Statutory net premiums written for Second Quarter 2006 increased 10% compared to Second
Quarter 2005 and increased 8% for Six Months 2006 compared to 2005. The statutory combined ratio
for our BOP line of business improved almost 7 points for Six Months 2006 compared to Six Months
2005, despite an 8.7 point increase in the statutory combined ratio in Second Quarter 2006 versus
Second Quarter 2005. The statutory combined ratios were impacted by catastrophe losses of 4.2
points in Second Quarter 2006 as compared to 2.0 points in Second Quarter 2005 and 1.7 points in
Six Months 2006 compared to 2.3 points in Six Months 2005. The Second Quarter 2006 results also
include increased loss severity as compared to Second Quarter 2005.
20
The policy count on this line
of business increased 12% as of June 30, 2006 compared to June 30, 2005. This line has achieved
its third consecutive quarter of a combined ratio under 100%. This improvement is the result of
our completed BOP correction plan that included pricing and underwriting actions focused on
eliminating certain consistently unprofitable classes of business and growing more profitable
segments. With our BOP correction plan completed and our BOP rewrite in place in all of our
states, we are beginning to see our new business increase. Direct new business for Six Months 2006
was up 24% as compared to Six Months 2005.
Bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
|
|
Unaudited
|
|
|
|
|
Quarter ended
|
|
Change
|
|
Six Months ended
|
|
Change
|
|
|
June 30,
|
|
% or
|
|
June 30,
|
|
% or
|
($ in thousands)
|
|
2006
|
|
2005
|
|
Points
|
|
2006
|
|
2005
|
|
Points
|
|
Statutory NPW
|
|
$
|
4,947
|
|
|
|
4,591
|
|
|
|
8
|
%
|
|
|
9,306
|
|
|
|
8,807
|
|
|
|
6
|
%
|
Statutory NPE
|
|
|
4,370
|
|
|
|
3,983
|
|
|
|
10
|
|
|
|
8,296
|
|
|
|
7,855
|
|
|
|
6
|
|
Statutory combined ratio
|
|
|
82.1
|
%
|
|
|
73.1
|
|
|
|
9.0
|
pts
|
|
|
84.0
|
%
|
|
|
75.0
|
|
|
|
9.0
|
pts
|
% of total statutory commercial NPW
|
|
|
1
|
%
|
|
|
1
|
|
|
|
|
|
|
|
1
|
%
|
|
|
1
|
|
|
|
|
|
Profitability in this line of business is driven by enhancements to the bond underwriting
process, including the successful rollout of our automated bond system in 2005. Results for Second
Quarter 2006 and Six Months 2006 compared to Second Quarter 2005 and Six Months 2005 were
negatively impacted by ceded reinstatement premiums, which added 0.6 points to the statutory
combined ratio for Second Quarter 2006 and 4.0 points for Six Months 2006. These ceded
reinstatement premiums became necessary as a result of loss activity that exceeded our expectations
in number and severity.
Commercial Lines Outlook
A major factor in the ongoing performance of our Commercial Lines business is the state of pricing
in the marketplace. There is increased pressure to reduce prices in order to maintain or build
market share, which has led to modestly negative overall price trends. Exclusive of other company
initiatives to enhance profitability, these pricing trends combined with increasing loss trends
would increase future combined ratios. We focus our efforts on the following three commercial line
market segments:
|
|
|
Small business accounts;
|
|
|
|
|
Middle market business; and
|
|
|
|
|
Large business accounts.
|
With a company-wide average account size of about $11,000, the bulk of our business is in the small
to middle market, which historically has been less price sensitive. Our small market business can
be written through our Internet-based One & Done systems automatic underwriting template. For
Second Quarter 2006, we averaged $190,000 premiums written per work day through this system.
Nearly 95% of our agents are using One & Done and we are experiencing broad-based growth in many
segments. At June 30, 2006, there were 335 eligible classes of business in One & Done, which we
expect to increase to 375 by year end.
Selectives strong field force, particularly our agency management specialists (AMSs), continue
to drive growth in the middle market. For us, middle market accounts range from about $10,000 in
premium up to $250,000. Seven AMSs were added in 2006 bringing the total to 82. Based on
annualized six month numbers for 2006, each AMS will generate about $2.5 million in middle market
commercial new business.
We have seen the greatest level of price competition in our large account sector, which we write
through our Selective Risk Managers (SRM). SRM handles accounts with policy premium in excess of
$250,000, or $150,000 for a single line of business. SRM business accounts for approximately 11%
of our premium volume.
While we expect a continued trend in competitive pricing for our large accounts, we also anticipate
some level of pricing pressure for all of our market segments over the course of the year.
21
Personal Lines Results
Personal Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
|
|
|
Unaudited
|
|
|
|
|
|
|
Quarter ended
|
|
|
Change
|
|
|
Six Months ended
|
|
|
Change
|
|
|
|
June 30,
|
|
|
% or
|
|
|
June 30,
|
|
|
% or
|
|
($ in thousands)
|
|
2006
|
|
|
2005
|
|
|
Points
|
|
|
2006
|
|
|
2005
|
|
|
Points
|
|
|
GAAP Insurance Operations Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPW
|
|
$
|
54,899
|
|
|
|
52,132
|
|
|
|
5
|
%
|
|
|
116,247
|
|
|
|
100,742
|
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPE
|
|
|
53,846
|
|
|
|
52,239
|
|
|
|
3
|
|
|
|
108,322
|
|
|
|
105,853
|
|
|
|
2
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss expenses incurred
|
|
|
37,498
|
|
|
|
43,511
|
|
|
|
(14
|
)
|
|
|
75,219
|
|
|
|
81,011
|
|
|
|
(7
|
)
|
Net underwriting expenses incurred
|
|
|
16,549
|
|
|
|
14,924
|
|
|
|
11
|
|
|
|
35,158
|
|
|
|
27,928
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income (loss)
|
|
$
|
(201
|
)
|
|
|
(6,196
|
)
|
|
|
97
|
%
|
|
|
(2,055
|
)
|
|
|
(3,086
|
)
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
|
69.6
|
%
|
|
|
83.3
|
|
|
|
(13.7
|
)pts
|
|
|
69.4
|
%
|
|
|
76.5
|
|
|
|
(7.1
|
)pts
|
Underwriting expense ratio
|
|
|
30.8
|
%
|
|
|
28.6
|
|
|
|
2.2
|
|
|
|
32.5
|
%
|
|
|
26.4
|
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
100.4
|
%
|
|
|
111.9
|
|
|
|
(11.5
|
)
|
|
|
101.9
|
%
|
|
|
102.9
|
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory Ratios:
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
|
69.1
|
%
|
|
|
82.1
|
|
|
|
(13.0
|
)
|
|
|
69.0
|
%
|
|
|
75.7
|
|
|
|
(6.7
|
)
|
Underwriting expense ratio
|
|
|
27.5
|
%
|
|
|
26.9
|
|
|
|
0.6
|
|
|
|
29.3
|
%
|
|
|
26.9
|
|
|
|
2.4
|
|
Combined ratio
|
|
|
96.6
|
%
|
|
|
109.0
|
|
|
|
(12.4
|
)pts
|
|
|
98.3
|
%
|
|
|
102.6
|
|
|
|
(4.3
|
)pts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
The statutory ratios include the flood line of business, which is included in the
Diversified Insurance Services Segment on a GAAP basis and therefore excluded from the GAAP ratios.
The total Personal Lines Statutory Combined Ratio excluding flood is 101.1% for Second Quarter 2006
and 102.4% for Six Months 2006 compared to 113.1% for Second Quarter 2005 and 106.0% for Six Months
2005.
|
The increase in NPW for personal lines business reflects the impact of the termination of the
New Jersey Homeowners Property 75% Quota Share Treaty (Quota Share Treaty) on January 1, 2006.
Excluding the impact of this treaty, NPW for this line would have decreased 5% for Second Quarter
2006 compared to Second Quarter 2005 as well as for Six Months 2006 compared to Six Months 2005.
This decrease is the result of increased competition in the New Jersey personal automobile market.
This increased competition, mainly from direct insurance writers that have entered the marketplace,
resulted in a decrease in personal auto policy rates of 1.1% for Second Quarter 2006 as compared to
Second Quarter 2005 and a decrease in personal auto policy rates of 3.9% for Six Months 2006 as
compared to Six Months 2005. As of June 30, 2006, the number of cars we insure decreased 7%
compared to June 30, 2005. Partially offsetting the impact of the increased competition was a 6%
increase in direct premiums written in our homeowners line of business for both the Second Quarter
2006 and Six Month 2006 periods as compared to the prior year.
Personal Automobile
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
|
|
Unaudited
|
|
|
|
|
Quarter ended
|
|
Change
|
|
Six Months ended
|
|
Change
|
|
|
June 30,
|
|
% or
|
|
June 30,
|
|
% or
|
($ in thousands)
|
|
2006
|
|
2005
|
|
Points
|
|
2006
|
|
2005
|
|
Points
|
|
Statutory NPW
|
|
$
|
37,254
|
|
|
|
39,968
|
|
|
|
(7
|
)%
|
|
|
73,310
|
|
|
|
79,150
|
|
|
|
(7
|
)%
|
Statutory NPE
|
|
|
37,274
|
|
|
|
41,481
|
|
|
|
(10
|
)%
|
|
|
75,350
|
|
|
|
84,471
|
|
|
|
(11
|
)%
|
Statutory combined ratio
|
|
|
102.2
|
%
|
|
|
118.1
|
|
|
|
(15.9
|
)pts
|
|
|
102.2
|
%
|
|
|
108.5
|
|
|
|
(6.3
|
)pts
|
% of total statutory
personal NPW
|
|
|
68
|
%
|
|
|
77
|
|
|
|
|
|
|
|
63
|
%
|
|
|
79
|
|
|
|
|
|
The statutory combined ratio for Second Quarter 2006 compared to Second Quarter 2005 decreased
almost 16 points, and decreased 6.3 points for Six Months 2006 compared to Six Months 2005. The
Second Quarter 2005 and Six Months 2005 results for this line of business were significantly
impacted by our reserving actions taken in light of a New Jersey Supreme Court decision in 2005.
This decision eliminated the application of the serious life impact standard to personal automobile
cases under the verbal tort threshold of New Jerseys Automobile Insurance Cost Reduction Act
(AICRA) and resulted in an increase to our reserves of $13.0 million. The implementation of
AICRA, combined with our rating and tiering actions, had enabled us to achieve profitability in the
New Jersey personal automobile line of business over the two years previous to the Supreme Court
ruling. However, factoring higher expected claim costs into our New Jersey personal automobile
excess profits calculation resulted in the elimination of an excess profits reserve of $5.5 million
in Second Quarter 2005. The $7.5 million net impact of these reserving actions increased the
personal automobile statutory combined ratio by 18.0 points for
22
Second Quarter 2005 and 8.9 points
for Six Months 2005. Excluding the impact of these reserving actions, the statutory combined ratio
increased 2.1 points for Second Quarter 2006 compared to Second Quarter 2005 and 2.6 points for Six
Months 2006 compared to Six Months 2005. This increase in the statutory combined ratios, as well
as the decreases in NPW and NPE, are the result of the highly competitive nature of the New Jersey
personal automobile market, which contains many new market entrants, including well-capitalized
national carriers. This increased competition, coupled with our rating plans that were not
competitive due to a historically restrictive regulatory environment, has led to overall pricing
pressure in the Personal Automobile line of business. We have addressed this issue through the
implementation of our MATRIX program, as discussed in the Personal Lines Outlook below.
Homeowners
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
|
|
Unaudited
|
|
|
|
|
Quarter ended
|
|
Change
|
|
Six Months ended
|
|
Change
|
|
|
June 30,
|
|
% or
|
|
June 30,
|
|
% or
|
($ in thousands)
|
|
2006
|
|
2005
|
|
Points
|
|
2006
|
|
2005
|
|
Points
|
|
Statutory NPW
|
|
$
|
16,146
|
|
|
|
10,567
|
|
|
|
53
|
%
|
|
|
39,668
|
|
|
|
18,463
|
|
|
|
115
|
%
|
Statutory NPE
|
|
|
14,696
|
|
|
|
9,234
|
|
|
|
59
|
%
|
|
|
29,223
|
|
|
|
18,283
|
|
|
|
60
|
%
|
Statutory combined ratio
|
|
|
99.3
|
%
|
|
|
94.8
|
|
|
|
4.5
|
pts
|
|
|
102.5
|
%
|
|
|
97.0
|
|
|
|
5.5
|
pts
|
% of total statutory
personal NPW
|
|
|
29
|
%
|
|
|
20
|
|
|
|
|
|
|
|
34
|
%
|
|
|
18
|
|
|
|
|
|
Statutory NPW for Second Quarter 2006 as compared to Second Quarter 2005 increased as a result
of the termination of the Quota Share Treaty on January 1, 2006. The termination resulted in a
return of ceded premium in the first quarter of 2006 as well as the retention of homeowners
business that had previously been ceded. An increase in direct premiums written of 6% for Second
Quarter 2006 and Six Months 2006 as compared to the same periods in 2005, also contributed to the
increase in statutory net premiums written in 2006.
The Second Quarter 2006 statutory combined ratio of 99.3% was negatively impacted by 10.9 points of
catastrophe losses, while the Second Quarter 2005 ratio of 94.8% included only 1.4 points in
catastrophe losses. For Six Months 2006, the statutory combined ratio of 102.5% contained 8.0
points of catastrophe losses, while the Six Months 2005 ratio of 97.0% contained only 1.7 points of
catastrophe losses.
Personal Lines Outlook
Personal Lines comprise nearly half of all U.S. property and casualty premiums and 47% of these
personal line premiums are generated in our 20 primary operating states. Independent agents
control about 35% of the total personal lines market share and we believe they will continue to be
a factor in the personal lines marketplace. Our strategy is designed to differentiate Selective
from the other companies that compete in the agency channel through market consistency, breadth of
appetite, mitigation of potential catastrophic risk exposure, and ease of doing business. To
improve our competitive position in the overall personal lines markets in each of our primary
operating states, we have taken the following strategic steps:
|
|
|
Management Restructure: We have realigned the Personal Lines management roles to place
a greater emphasis on product management, marketing, and project management.
|
|
|
|
|
Pricing Design: Our pricing redesign for our automobile business will be implemented
in all of our personal lines states in 2006, beginning with New Jersey. We have begun to
implement MATRIX, our personal auto knowledge-based rating model. We will be implementing
a new pricing structure for our homeowners business in mid-to-late 2007. MATRIX will
provide increased pricing flexibility and will allow us to successfully underwrite a
greater share of our agents personal auto business.
|
|
|
|
|
Technology: With the rollout of SelectPlus, our personal lines automated underwriting
system, over 80 percent of our agents are inputting data directly into the system for new
business and almost 50 percent are issuing endorsements through the system. We expect to
introduce xSelerate for use in our Personal Lines business in the third quarter of 2006,
which will allow seamless integration of our system with our agents management systems.
|
|
|
|
|
Service Center: We opened our Personal Lines Service Center in Second Quarter 2006 for
a pilot group of New Jersey agents. This service center will allow us to assume certain
policyholder service duties from our agents so that they may concentrate on sales and
improved service to larger, more complex, business. The rollout of the center to other
Personal Lines states is expected to occur in 2007. We believe the Personal Lines Service
Center will be a selling point for new business opportunities with agents.
|
23
Reinsurance
We have successfully completed negotiations of our July 1, 2006 excess of loss treaties with
highlights as follows:
Property Excess of Loss
|
|
|
The treaty was renewed with the same limit of $23.0 million in excess of a $2.0 million
retention.
|
|
|
|
|
Terrorism (excluding nuclear biological, radiological or chemical events, which are
covered under our Terrorism treaty of $45.0 million excess $15.0 million in the aggregate)
and per occurrence aggregate limits of $46.5 million reflect a moderate reduction in the
upper layer aggregate limits from the expiring $54.0 million.
|
|
|
|
|
The estimated ceded premium is $8.7 million, a reduction from the expiring $9.1 million ceded premium.
|
Casualty Excess of Loss
|
|
|
The treaty structure remained unchanged. Continuing provisions include:
|
|
o
|
|
The Workers Compensation Only treaty renewed with a $3.0 million excess $2.0 million cover.
|
|
|
o
|
|
The Casualty All In treaty, which covers all of our casualty business,
including workers compensation, renewed with a $45.0 million excess of $5.0 million
cover.
|
|
|
|
The overall estimated premium of $14.1 million as compared to the $13.5 million premium
in the expiring treaty reflects fluctuations in the rate and an expected increase in the
subject premium.
|
|
|
|
|
Annual aggregate terrorism limits of $115.0 million for both treaties renewed without
changes; nuclear, biological, chemical and radiological losses continue to be excluded,
with coverage for these risks provided by our Terrorism treaty.
|
Property Catastrophe Excess of Loss
During May 2006, Risk Management Solutions Inc. (RMS), one of the leaders in catastrophe
modeling, launched a new version of its US Hurricane model. RMS v.6.0 now provides results on
both a stochastic five-year view and the traditional, longer-term historic view. RMS v.6.0
was influenced by RMSs analysis of the 2004 and 2005 hurricane seasons, as well as a prospective
view that hurricane activity in the Atlantic Basin will be above historical averages in the short
to medium term (five years). As a result of these model changes, previously modeled portfolios
industry-wide generated significant increases in projected loss amounts. Consequently, effective
June 15, 2006, we placed an additional $30 million of coverage on top of our existing $220 million
in excess of $20 million program (with 5% co-participation in all layers). The combined program
provides $237.5 million of coverage, net of co-participation, in excess of $20 million retention
per occurrence and aggregate annual limits of $475.0 million. The following table presents RMS
v.6.0 modeled hurricane losses based on Selectives property portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Stochastic Basis
|
|
Historic Basis
|
|
|
Gross
|
|
|
|
|
|
Net Losses
|
|
Gross
|
|
|
|
|
|
Net Losses
|
Occurrence Exceedence
|
|
Losses RMS
|
|
Net
|
|
as a percent
|
|
Losses RMS
|
|
Net
|
|
as a percent
|
Probability
|
|
v.6.0
|
|
Losses
1
|
|
of Equity
2
|
|
v.6.0
|
|
Losses
1
|
|
of Equity
2
|
|
4.00% (1 in 25 year event )
|
|
$
|
55,384
|
|
|
$
|
16,812
|
|
|
|
2
|
%
|
|
$
|
39,485
|
|
|
$
|
15,227
|
|
|
|
2
|
%
|
2.00% (1 in 50 year event)
|
|
$
|
105,936
|
|
|
$
|
20,324
|
|
|
|
2
|
%
|
|
$
|
79,965
|
|
|
$
|
18,560
|
|
|
|
2
|
%
|
1.00% (1 in 100 year event)
|
|
$
|
193,392
|
|
|
$
|
25,239
|
|
|
|
3
|
%
|
|
$
|
151,680
|
|
|
$
|
22,940
|
|
|
|
2
|
%
|
0.40% (1 in 250 year event)
|
|
$
|
389,913
|
|
|
$
|
107,605
|
|
|
|
11
|
%
|
|
$
|
322,380
|
|
|
$
|
63,709
|
|
|
|
6
|
%
|
|
|
|
1
|
|
Net losses are after-tax losses net of catastrophe reinsurance including
reinstatement premium.
|
|
2
|
|
Equity as of 6/30/06.
|
Our current catastrophe program provides protection for a 1 in 150 year event, or an event with
0.7% probability according to the RMS v.6.0 stochastic model, and for a 1 in 200 year event, or an
event with 0.5% probability according to RMS v.6.0 historic model. The new layer increased the
cost of our catastrophe excess of loss program by $1.4 million.
24
Investments
Our investment philosophy includes certain return and risk objectives for our fixed maturity and
equity portfolios. The primary return objective of the fixed maturity portfolio is to maximize
after-tax investment yield and income while balancing certain risk objectives, with a secondary
objective of meeting or exceeding a weighted-average benchmark of public fixed income indices. The
return objective of the equity portfolio is to exceed a weighted-average benchmark of public equity
indices. The risk objectives for all portfolios are to ensure investments are being structured
with a focus on: (i) asset diversification, (ii) investment quality, (iii) liquidity, (iv)
consideration of taxes, and (v) preservation of capital. Managing investment risk by adhering to
these objectives is intended to protect the interests of our stockholders and the policyholders of
our Insurance Subsidiaries, and enhance our financial strength and underwriting capacity. The
following table presents the Moodys Investor Service and Standard & Poors ratings of our fixed
maturity portfolio, which demonstrates the quality of our investment portfolio:
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
|
June 30,
|
|
December 31,
|
Rating
|
|
2006
|
|
2005
|
|
Aaa/AAA
|
|
|
71
|
%
|
|
|
68
|
%
|
Aa/AA
|
|
|
19
|
%
|
|
|
19
|
%
|
A/A
|
|
|
8
|
%
|
|
|
10
|
%
|
Baa/BBB
|
|
|
2
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Our fixed maturity investments represent 82% of total invested assets. We continue to invest
our fixed maturity portfolio primarily in intermediate-term securities to manage overall interest
rate risk. The average duration of the fixed maturity portfolio, excluding short-term investments,
was 4.1 years at June 30, 2006 compared to 4.4 years at June 30, 2005. The current duration of our
fixed maturities is within our historical range and is monitored and managed to maximize yield and
mitigate interest rate risk. To provide liquidity, while maintaining consistent performance, fixed
maturity investments are laddered so that some issues are always approaching maturity and provide
a source of predictable cash flow in the ordinary course of business.
Summary of Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
|
|
Unaudited
|
|
|
|
|
Quarter ended
|
|
Change
|
|
Six Months ended
|
|
Change
|
|
|
June 30,
|
|
% or
|
|
June 30,
|
|
% or
|
($ in thousands)
|
|
2006
|
|
2005
|
|
Points
|
|
2006
|
|
2005
|
|
Points
|
|
Net investment income before tax
|
|
$
|
37,390
|
|
|
|
32,747
|
|
|
|
14
|
%
|
|
$
|
73,392
|
|
|
|
65,109
|
|
|
|
13
|
%
|
Net investment income after tax
|
|
|
29,098
|
|
|
|
25,230
|
|
|
|
15
|
|
|
|
57,276
|
|
|
|
49,893
|
|
|
|
15
|
|
Total invested assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,240,476
|
|
|
|
2,960,847
|
|
|
|
9
|
|
Effective tax rate
|
|
|
22.2
|
%
|
|
|
23.0
|
|
|
|
(0.8
|
)pts
|
|
|
22.0
|
%
|
|
|
23.4
|
|
|
|
(1.4
|
)pts
|
Annual after-tax yield on
investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5
|
|
|
|
3.4
|
|
|
|
0.1
|
|
The increases in net investment income, before taxes were primarily the result of increased
invested assets in fixed maturity securities, short-term investments, and alternative investments
driven by substantial increases in investable cash flows of $460.4 million for full year 2005,
which included proceeds of $100 million from the November 2005 debt offering, and $41.6 million of
investable cash flows in Six Months 2006. This increase was partially offset by our use of a
portion of our short-term investments to fund treasury stock purchases of 335,264 shares for
approximately $16.3 million for full year 2005 and 421,532 shares for approximately $22.6 million
for Second Quarter 2006 and 1,373,432 shares for approximately $74.7 million in Six Months 2006.
25
Realized Gains and Losses
Realized gains and losses are determined on the basis of the cost of specific investments sold or
written-down, and are credited or charged to income. Our Investments segment included net realized
gains before tax of $14.5 million in Second Quarter 2006 compared to $0.6 million of net realized
gains in Second Quarter 2005, and $21.9 million in net realized gains in Six Months 2006 compared
to $5.2 million in realized gains in Six Months 2005. The majority of the increase in net realized
gains for both the Second Quarter 2006 and Six Months 2006 reflects the sale of certain long-term
equity investments as part of a sector and portfolio reallocation effort. There were no
write-downs in Second Quarter 2006 or Six Months 2006. Net realized gains include impairment
charges from one write-down for other than temporary declines in fair value of $1.2 million for
Second Quarter 2005 and Six Months 2005. We maintain a high quality and liquid investment
portfolio and the sale of the securities that resulted in net realized gains did not change the
overall liquidity of the investment portfolio. Our philosophy for sales of securities generally is
to reduce our exposure to securities and sectors when economic evaluations or the fundamentals for
that security or sector have deteriorated and/or for tax planning purposes. We generally have a
long investment time horizon and our turnover is low, which has resulted in many securities
accumulating large unrealized gains. Purchases and sales are made with the intent of maximizing
future investment returns, while providing liquidity to meet future claims obligations.
The following table summarizes our net realized gains by investment type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
|
Quarter ended
|
|
|
Quarter ended
|
|
|
Six Months ended
|
|
|
Six Months ended
|
|
($ in thousands)
|
|
June 30, 2006
|
|
|
June 30, 2005
|
|
|
June 30, 2006
|
|
|
June 30, 2005
|
|
|
Held-to-maturity fixed maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
$
|
|
|
|
|
41
|
|
|
|
|
|
|
|
46
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale fixed maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
|
1,392
|
|
|
|
185
|
|
|
|
1,908
|
|
|
|
376
|
|
Losses
|
|
|
(4,111
|
)
|
|
|
(1,166
|
)
|
|
|
(5,868
|
)
|
|
|
(1,943
|
)
|
Available-for-sale equity
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
|
19,010
|
|
|
|
3,365
|
|
|
|
27,906
|
|
|
|
8,661
|
|
Losses
|
|
|
(1,804
|
)
|
|
|
(1,866
|
)
|
|
|
(2,092
|
)
|
|
|
(1,983
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized gains
|
|
$
|
14,487
|
|
|
|
559
|
|
|
|
21,854
|
|
|
|
5,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The securities sold in Second Quarter 2006 and 2005 have not diminished the overall liquidity
of our portfolio because of the high quality and active market for our investment portfolio. Our
liquidity requirements in the past have been met by operating cash flow from our Insurance
Operations and Diversified Insurance Services segments and the issuance of debt and equity
securities. We expect our liquidity requirements in the future to be met by these sources of funds
or, if necessary, borrowings from our credit facilities. For a further discussion of our liquidity
requirements, refer to the Financial Condition, Liquidity and Capital Resources section below.
26
We realized gains and losses from the sale of available-for-sale debt and equity securities during
Second Quarter and Six Months 2006 and Second Quarter and Six Months 2005. The following tables
present the period of time that securities sold at a loss were continuously in an unrealized loss
position prior to sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period of time in an
|
|
Unaudited
|
|
|
Unaudited
|
|
unrealized loss position
|
|
Quarter ended
|
|
|
Quarter ended
|
|
($ in millions)
|
|
June 30, 2006
|
|
|
June 30, 2005
|
|
|
|
Fair
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
Value on
|
|
|
Realized
|
|
|
Value on
|
|
|
Realized
|
|
|
|
Sale Date
|
|
|
Loss
|
|
|
Sale Date
|
|
|
Loss
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 6 months
|
|
$
|
59.0
|
|
|
|
1.0
|
|
|
|
7.1
|
|
|
|
0.1
|
|
7 12 months
|
|
|
50.7
|
|
|
|
2.1
|
|
|
|
14.9
|
|
|
|
0.2
|
|
Greater than 12 months
|
|
|
10.6
|
|
|
|
0.7
|
|
|
|
12.4
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
120.3
|
|
|
|
3.8
|
|
|
|
34.4
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 6 months
|
|
|
5.4
|
|
|
|
1.2
|
|
|
|
2.1
|
|
|
|
0.7
|
|
7 12 months
|
|
|
1.6
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
Greater than 12 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
7.0
|
|
|
|
1.8
|
|
|
|
2.1
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
127.3
|
|
|
|
5.6
|
|
|
|
36.5
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period of time in an
|
|
Unaudited
|
|
|
Unaudited
|
|
unrealized loss position
|
|
Six Months ended
|
|
|
Six Months ended
|
|
($ in millions)
|
|
June 30, 2006
|
|
|
June 30, 2005
|
|
|
|
Fair
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
Value on
|
|
|
Realized
|
|
|
Value on
|
|
|
Realized
|
|
|
|
Sale Date
|
|
|
Loss
|
|
|
Sale Date
|
|
|
Loss
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 6 months
|
|
$
|
93.8
|
|
|
|
1.5
|
|
|
|
29.8
|
|
|
|
0.5
|
|
7 12 months
|
|
|
66.0
|
|
|
|
2.4
|
|
|
|
14.9
|
|
|
|
0.2
|
|
Greater than 12 months
|
|
|
24.3
|
|
|
|
1.1
|
|
|
|
18.2
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
184.1
|
|
|
|
5.0
|
|
|
|
62.9
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 6 months
|
|
|
8.0
|
|
|
|
1.4
|
|
|
|
2.7
|
|
|
|
0.8
|
|
7 12 months
|
|
|
2.4
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
Greater than 12 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
10.4
|
|
|
|
2.1
|
|
|
|
2.7
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
194.5
|
|
|
|
7.1
|
|
|
|
65.6
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These securities were sold despite the fact that they were in a loss position. The decision
to sell these securities was due to: (i) heightened credit risk during the period that the
individual security was sold; (ii) the decision to reduce our exposure to certain issuers,
industries, or sectors in light of changing economic conditions; or (iii) tax purposes.
27
Unrealized Losses
The following table summarizes the aggregate fair value and gross pre-tax unrealized loss recorded
in our accumulated other comprehensive income, by asset class and by length of time, for all
available-for-sale securities that have continuously been in an unrealized loss position as of June
30, 2006 and December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period of time in an unrealized loss
|
|
Unaudited
|
|
|
|
|
Position
|
|
June 30, 2006
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Gross
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
($ in millions)
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 6 months
|
|
$
|
890.2
|
|
|
|
12.3
|
|
|
|
962.7
|
|
|
|
8.0
|
|
7 12 months
|
|
|
854.8
|
|
|
|
22.4
|
|
|
|
164.8
|
|
|
|
3.0
|
|
Greater than 12 months
|
|
|
241.9
|
|
|
|
7.4
|
|
|
|
124.1
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
1,986.9
|
|
|
|
42.1
|
|
|
|
1,251.6
|
|
|
|
14.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 6 months
|
|
|
37.4
|
|
|
|
2.0
|
|
|
|
7.4
|
|
|
|
0.4
|
|
7 12 months
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
2.0
|
|
|
|
0.1
|
|
Greater than 12 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
37.7
|
|
|
|
2.1
|
|
|
|
9.4
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,024.6
|
|
|
|
44.2
|
|
|
|
1,261.0
|
|
|
|
14.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten-year U.S. Treasury yields rose .75 basis points in Six Months 2006 to 5.14%, which
contributed to our increase in unrealized losses during the corresponding period. Our assessment
of a decline in value includes current judgment as to the financial position and future prospects
of the entity that issued the investment security. Broad changes in the overall market or interest
rate environment generally will not lead to a write-down.
The following table presents information regarding our available-for-sale fixed maturities that
were in an unrealized loss position at June 30, 2006 by contractual maturity:
|
|
|
|
|
|
|
|
|
Contractual Maturities
|
|
Amortized
|
|
|
Fair
|
|
($ in millions)
|
|
Cost
|
|
|
Value
|
|
|
One year or less
|
|
$
|
94.4
|
|
|
|
93.8
|
|
Due after one year through five years
|
|
|
848.4
|
|
|
|
832.5
|
|
Due after five years through ten years
|
|
|
1,000.3
|
|
|
|
976.3
|
|
Due after ten years through fifteen years
|
|
|
85.9
|
|
|
|
84.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,029.0
|
|
|
|
1,986.9
|
|
|
|
|
|
|
|
|
Investments Outlook
The financial markets continued to be volatile in Second Quarter 2006. The Federal Reserve
increased the Federal Funds rate twice in 25 basis point increments to 5.25% to combat perceived
inflationary pressures. Economic indicators for the U.S. economy continue to be strong, but growth
estimates are coming down. Additionally, global liquidity is having a major impact on the U.S.
economy and weaker consumer spending is expected. U.S. interest yield curve action during the
second quarter was impacted by monetary policy uncertainty and inflation concerns related spiking
energy costs. Ten-year U.S. Treasury yields reached 5.14% at the end of Second Quarter 2006, up
from 4.39% at year-end 2005. In light of these market conditions, we believe that pre-tax
investment income in our fixed maturity portfolio will continue to grow as a result of strong cash
flow from Insurance Operations and the rise in interest rates. Our overall portfolio yield is
beginning to increase as older bonds mature and are replaced by higher yielding bonds. To manage
our interest rate risk, we aim to keep portfolio duration stable and to maintain a well-laddered
maturity structure for our fixed maturity portfolio.
The equity markets are facing the fear that a slowdown in the housing sector will dampen consumer
spending, and concern that a rising Federal Funds rate will lead to a protracted economic slowdown
and hence lower stock valuations and prices. In addition, the on-going political instability in
the Middle East, with the resultant effect on world oil prices, will continue to impact stock
valuations. With regard to our equity portfolio, we are committed to pursuing opportunities in
industries with favorable fundamentals and will continue to reduce exposure to those stocks or
sectors with less favorable fundamentals and valuations. Additionally, our alternative investment
portfolio has performed well over the past few years, and as a result, we are looking to modestly
grow this investment class as a percentage of our overall portfolio, which should contribute to
lowering our overall portfolio risk given that these investments have a low correlation to other
investment asset classes.
28
Diversified Insurance Services Segment
In December 2005, we sold our 100% ownership in CHN Solutions (Alta Services LLC and Consumer
Health Network Plus, LLC), which had historically been reported as part of the managed care
component of the Diversified Insurance Services segment, for $16.4 million, resulting in an
after-tax net loss of $2.6 million. For further information regarding this divestiture, see Note 8
in Item 1. Financial Statements of this Quarterly Report on Form 10-Q.
The Diversified Insurance Services operations consist of two core functions: human resource
administration outsourcing (HR Outsourcing) and flood insurance. We believe these operations are
within markets that continue to offer opportunity for growth. During Second Quarter 2006, these
operations provided a contribution of $0.09 per diluted share compared to $0.08 per diluted share
in Second Quarter 2005, and $0.16 per diluted share compared to $0.12 per diluted share for the
comparable six month periods. Contributions from the Diversified Insurance Services segment,
particularly the Flood business, continue to provide a level of mitigation to the adverse impact
that catastrophe losses have on our Insurance Operations segment. We measure the performance of
these operations based on several measures, including, but not limited to, results of operations in
accordance with GAAP, with a focus on return on revenue (net income divided by revenues). The
results for this segments continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
|
|
Unaudited
|
|
|
|
|
Quarter ended
|
|
|
|
|
|
Six Months ended
|
|
|
|
|
June 30,
|
|
% Change
|
|
June 30,
|
|
% Change
|
($ in thousands)
|
|
2006
|
|
2005
|
|
or Points
|
|
2006
|
|
2005
|
|
or Points
|
|
HR Outsourcing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
15,751
|
|
|
|
14,956
|
|
|
|
5
|
%
|
|
$
|
32,901
|
|
|
|
30,563
|
|
|
|
8
|
%
|
Pre-tax profit
|
|
|
1,075
|
|
|
|
1,040
|
|
|
|
3
|
|
|
|
1,867
|
|
|
|
1,523
|
|
|
|
23
|
|
Flood Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
10,543
|
|
|
|
8,477
|
|
|
|
24
|
|
|
|
19,464
|
|
|
|
15,369
|
|
|
|
27
|
|
Pre-tax profit
|
|
|
2,430
|
|
|
|
2,161
|
|
|
|
12
|
|
|
|
4,650
|
|
|
|
3,481
|
|
|
|
34
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
1,256
|
|
|
|
1,048
|
|
|
|
20
|
|
|
|
2,462
|
|
|
|
2,034
|
|
|
|
21
|
|
Pre-tax profit
|
|
|
646
|
|
|
|
506
|
|
|
|
28
|
|
|
|
1,165
|
|
|
|
920
|
|
|
|
27
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
27,550
|
|
|
|
24,481
|
|
|
|
13
|
|
|
|
54,827
|
|
|
|
47,966
|
|
|
|
14
|
|
Pre-tax profit
|
|
|
4,151
|
|
|
|
3,707
|
|
|
|
12
|
|
|
|
7,682
|
|
|
|
5,924
|
|
|
|
30
|
|
After-tax profit
|
|
|
2,754
|
|
|
|
2,461
|
|
|
|
12
|
|
|
|
5,113
|
|
|
|
3,928
|
|
|
|
30
|
|
After-tax return
on revenue
|
|
|
10.0
|
%
|
|
|
10.1
|
|
|
|
(0.1
|
)pts
|
|
|
9.3
|
%
|
|
|
8.2
|
|
|
|
1.1
|
pts
|
HR Outsourcing
|
|
|
Profitability improvements in our HR Outsourcing business in Second Quarter 2006
compared to Second Quarter 2005 are mainly due to (i) increased average administration
fee per worksite employee to $651 for Six Months 2006 compared to $639 for Six Months
2005; (ii) higher margins, particularly on our workers compensation business; and (iii)
an increase in our number of worksite lives, as described below.
|
|
|
|
|
As of June 30, 2006, our worksite lives were up 10% to 26,268 compared to 23,885 as
of June 30, 2005. To improve sales, during the first quarter of 2006 we unveiled a new
marketing strategy and a new agent commission
structure for our basic human resources outsourcing product, which we refer to as our
employer protection program (EPP). The EPP is designed to assist business owners in
managing the risk of employee-related liabilities.
|
29
Flood Insurance
Pre-tax profit increased as a result of the following:
|
|
|
An increase in flood premium in force of 24%. In force premium was $103.9 million
on approximately 244,000 policies at June 30, 2006, compared to in force premium of
$84.1 million on approximately 198,000 policies at June 30, 2005; and
|
|
|
|
|
Increases in the pre-tax marketing bonus from the National Flood Insurance Program
(NFIP) of 71% to $0.6 million in Second Quarter 2006 compared to Second Quarter 2005
and 136% to $1.6 million in Six Months 2006 compared to Six Months 2005. These
increases were offset by a decrease in the fee paid to us by the NFIP effective for the
fiscal year beginning on October 1, 2005 from 31.2% to 30.8%.
|
Diversified Insurance Services Outlook
Our HR Outsourcing products offer an additional potential agency revenue stream for our independent
agents. In Second Quarter 2006 we continued to reposition the human resource outsourcing products
as the EPP, which assists business owners in managing the risk of employee-related liabilities.
Agent training regarding the EPP is currently underway and based on initial positive feedback, we
expect to recognize some synergies created from this product in 2006.
Our ability to provide flood insurance is a significant component of our Diversified Insurance
Services strategy. Information provided by the Federal Emergency Management Agency (FEMA) in
2004 indicated that total flood insurance premium written was approximately $2 billion. In 2005,
the destruction caused by the active hurricane season stressed the NFIP with flood losses currently
estimated by FEMA to be in excess of $20 billion. We continue to monitor developments with the
NFIP regarding its ability to pay claims in the event of another large-scale disaster. Congress
controls the Federal agencys funding authority, which topped out after Hurricane Katrina, and is
again nearing maximum capacity. At this point, it is uncertain what impact, if any, this will have
on our flood operations. In May 2006, the Senate Banking Committee approved its flood reform bill,
with no amendments or reductions to the expense reimbursement rate, currently at 30.8%. Any future
reductions of this rate could adversely affect our results of operations for this business.
Financial Condition, Liquidity and Capital Resources
Capital resources and liquidity represent our overall financial strength and our ability to
generate cash flows from business operations, borrow funds at competitive rates, and raise new
capital to meet operating and growth needs.
Liquidity
Liquidity is a measure of our ability to generate sufficient cash flows to meet the short and
long-term cash requirements of our business operations. Our cash and short-term investments (cash
equivalent(s)) position at June 30, 2006 was $146.7 million compared to $179.5 million at December
31, 2005. Our sources of cash consist of dividends from our subsidiaries, the issuance of debt and
equity securities, as well as the sale of our common stock under our employee and agent stock
purchase plans. Our ability to receive dividends from our subsidiaries, however, is restricted.
Dividends from our Insurance Subsidiaries to the parent company are subject to the approval and/or
review of the insurance regulators in the respective domiciliary states of the Insurance
Subsidiaries under insurance holding company acts, and are generally payable only from earned
surplus as reported in the statutory annual statements of those subsidiaries as of the preceding
December 31. Based on the 2005 unaudited statutory financial statements, the Insurance
Subsidiaries are permitted to pay to us, in 2006, ordinary dividends in the aggregate amount of
approximately $120.6 million, of which $30.0 million has been paid through June 30, 2006. For
additional information regarding dividends restrictions, refer to Note 7 Indebtedness and Note 8,
Stockholders Equity of the Notes to Consolidated Financial Statements, included in Item 8.
Financial Statements and Supplementary Data of our 2005 Annual Report.
Our Insurance Subsidiaries generate cash flows primarily from insurance float. Float is money that
an insurance company holds for a limited time. In an insurance operation, float arises because
premiums are collected before losses are paid. This interval can extend over many years. During
that time, the insurer invests the money and generates investment income. The duration of the
fixed maturity portfolio is 4.1 years as of June 30, 2006, while the liabilities of our Insurance
Subsidiaries have a duration of approximately 2.9 years. To provide liquidity while maintaining
consistent performance, we ladder our fixed maturity investments so that some issues are always
approaching maturity and provide a source of predictable cash flow for claim payments during the
ordinary course of business. In addition, the Insurance Subsidiaries purchase reinsurance coverage
for protection against any significantly large claims or catastrophes that may occur during the
year. As of June 30, 2006 and December 31, 2005, our consolidated investments portfolio was $3.2
billion.
30
Selective has revolving lines of credit with State Street Corporation of $20.0 million and Wachovia
Bank of $25.0 million. As of June 30, 2006, neither line had an outstanding balance. In June 2006,
the terms of these lines of credit were extended to August 25, 2006 and August 22, 2006,
respectively. Selective is currently negotiating a potential new syndicated line of credit that is
expected to close prior to the expiration of the extended terms of the existing lines of credit.
Selective HR Solutions (SHRS), our HR Outsourcing business, generates cash flows from their
operations. Dividends from SHRS to the parent company are restricted by the operating needs of
this entity as well as professional employer organization licensing requirements to maintain a
current ratio of at least 1:1. SHRS provided dividends to the parent company of $1.8 million in
Six Months 2006 and $1.9 million in Six Months 2005.
Dividends on shares of our common stock are declared and paid at the discretion of our Board of
Directors based on our operating results, financial condition, capital requirements, contractual
restrictions, and other relevant factors. Our ability to declare dividends is restricted by
covenants contained in the notes payable that we issued on May 4, 2000 (the 2000 Senior Notes).
All such covenants were met during Second Quarter 2006 and 2005. For further information regarding
our notes payable, see Note 7 of the Notes to Consolidated Financial Statements, entitled,
Indebtedness, included in Item 8. Financial Statements and Supplementary Data of our 2005
Annual Report. At June 30, 2006, the amount available for dividends to holders of our common
stock, in accordance with our restrictions of the 2000 Senior Notes, was $366.7 million. Our
ability to continue to pay dividends to our stockholders is also dependent in large part on the
dividend paying ability of our Insurance Subsidiaries and the subsidiaries in our Diversified
Insurance Services segment to pay dividends to the parent company. Restrictions on the ability of
our subsidiaries, particularly the Insurance Subsidiaries, to declare and pay dividends to the
parent company could materially affect our ability to pay principal and interest on indebtedness
and dividends on common stock.
Our liquidity requirements in the past have been met by dividends from our subsidiaries as well as
the issuance of debt and equity securities. The Insurance Subsidiary liquidity requirements have
historically been met by cash receipts from operations, consisting of insurance premiums and
investment income. These cash receipts have historically provided more than sufficient funds to
pay losses, operating expenses, and dividends to the parent company. In the future, we expect our
liquidity requirements, as well as the liquidity requirements of our subsidiaries, to be met by
these sources of funds.
Capital Resources
Capital resources provide protection for policyholders, furnish the financial strength to support
the business of underwriting insurance risks, and facilitate continued business growth. At June
30, 2006, we had stockholders equity of $1,003.9 million and total debt of $262.6 million. In
addition, we have an irrevocable trust valued at $30.3 million to provide for the repayment of
notes having maturities in 2007 and 2008.
As active capital managers, we continually monitor our cash requirements as well as the amount of
capital resources that we maintain at the holding company and operating subsidiary levels. As part
of our long-term capital strategy, we strive to maintain a 25% debt-to-capital ratio and a premiums
to surplus ratio sufficient to maintain an A+ (Superior) financial strength A.M. Best Rating for
our Insurance Subsidiaries. On April 19, 2006, A.M. Best reaffirmed the A+ (Superior) financial
strength rating of our Insurance Subsidiaries for the 45
th
consecutive year. On July
25, 2006, Standard and Poors Insurance Rating Services (S&P) raised our financial strength
rating to A+ from A, citing our strong operating performance, strong operating company
capitalization, and good financial flexibility. Based on our analysis and market conditions, we
may take a variety of actions including, but not limited to, contributing capital to subsidiaries
in our Insurance Operations and Diversified Insurance Services segments, issuing additional debt
and/or equity securities, repurchasing shares of our common stock, or increasing stockholders
dividends. For Six Months 2006, we repurchased approximately 1,373,500 shares of our common stock
under our authorized repurchase program for a total cost of $74.7 million. These repurchases were
predominately funded by the proceeds from our $100 million bond offering in November 2005.
31
Additionally, our cash requirements include principal and interest payments on senior convertible
notes, various notes payable and convertible subordinated debentures, dividends to stockholders,
and payment of claims and other operating expenses, income taxes, the purchase of investments, and
other expenses. Our operating obligations and cash outflows include the following: claim
settlements; agents commissions; labor costs; premium taxes; general and administrative expenses;
investment purchases; and capital expenditures. For further details regarding our cash
requirements refer to the section below titled Contractual Obligations and Contingent Liabilities
and Commitments.
Off-Balance Sheet Arrangements
At June 30, 2006 and December 31, 2005, we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, we
are not exposed to any financing, liquidity, market or credit risk that could arise if we had
engaged in such relationships.
Contractual Obligations and Contingent Liabilities and Commitments
Our future cash payments associated with loss and loss expense reserves, and contractual
obligations pursuant to operating leases for office space and equipment, senior convertible notes,
convertible subordinated debentures and notes payable have not materially changed since December
31, 2005. Interest payments due under contractual obligations related to our outstanding debt
were as follows as of December 31, 2005:
|
|
|
|
|
Total:
|
|
$340.6 million
|
Less than one year:
|
|
$ 20.9 million
|
One to three years:
|
|
$ 37.4 million
|
Three to five years:
|
|
$ 27.8 million
|
More than five years:
|
|
$254.5 million
|
We expect to have the capacity to repay and/or refinance these obligations as they come due.
Selective has revolving lines of credit with State Street Corporation of $20.0 million and Wachovia
Bank of $25.0 million. As of June 30, 2006, neither line had an outstanding balance. In June 2006,
the terms of these lines of credit were extended to August 25, 2006 and August 22, 2006,
respectively. Selective is currently negotiating a potential new syndicated line of credit that is
expected to close prior to the expiration of the extended terms of the existing lines of credit.
At June 30, 2006, we had additional alternative investment commitments of up to $91.5 million; but
there is no certainty that any such additional investment will be required. We have issued no
material guarantees on behalf of others and have no trading activities involving non-exchange
traded contracts accounted for at fair value. We have no material transactions with related
parties other than those disclosed in Note 17 of the Notes to Consolidated Financial Statements,
included in Item 8. Financial Statements and Supplementary Data, of our 2005 Annual Report.
Federal Income Taxes
Total federal income tax expense increased $4.3 million for Second Quarter 2006 to $15.3 million
and $5.2 million for Six Months 2006 to $29.6 million, compared to Second Quarter and Six Months
2005. The increase was attributable to higher pre-tax income driven by increased investment income
and realized gains in our Investments segment as well as increased profitability in our Insurance
Operations segment. Our effective tax rate differs from the federal corporate rate of 35%
primarily as a result of tax-advantaged investment income. The effective tax rate from continuing operations for Second
Quarter 2006 was 26.7%, compared with 26.2% for Second Quarter 2005 and 26.5% for Six Months 2006
compared to 27.0% for Six Months 2005.
32
Adoption of Accounting Pronouncement
In June 2005, the NAIC Property and Casualty Reinsurance Study Group (Study Group) approved
enhanced disclosure requirements for insurers that utilize reinsurance with limited risk transfer
features, also known as finite reinsurance. These enhanced disclosure requirements have had no
impact on us, as we only use traditional forms of reinsurance and do not use finite risk
reinsurance. The Study Group also approved a standard reinsurance attestation supplement to be
signed by an insurers Chief Executive Officer and Chief Financial Officer attesting that there are
no side agreements and that the reporting entity complies with all of the requirements set forth in
Statements of Statutory Accounting Principles No. 62, Property and Casualty Reinsurance for all
contracts entered into, renewed, or amended on or after January 1, 1994. Selective filed these
attestations with the NAIC and the Insurance Subsidiaries domiciliary states for the first time on
March 1, 2006 for its 2005 annual statutory filings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the information about market risk set forth in Selectives
2005 Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange
Act)), as of the end of the period covered by this report. Based on such evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end of such period,
our disclosure controls and procedures are: (i) effective in recording, processing, summarizing,
and reporting information on a timely basis that we are required to disclose in the reports that we
file or submit under the Exchange Act; and (ii) effective in ensuring that information that we are
required to disclose in the reports that we file or submit under the Exchange Act is accumulated
and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure. No changes in
our internal control over financial reporting (as such term is defined in Rule 13a-15(f) of the
Exchange Act) occurred during Second Quarter 2006 that materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
33
PART II OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table below sets forth information regarding purchases made by, or on behalf of,
Selective, of Selective Insurance Group, Inc. common stock during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
Maximum Number
|
|
|
Total Number of
|
|
Average
|
|
Shares Purchased
|
|
of Shares that May Yet
|
|
|
Shares
|
|
Price Paid
|
|
as Part of Publicly
|
|
Be Purchased Under the
|
Period
|
|
Purchased
1
|
|
per Share
|
|
Announced Program
|
|
Announced Program
2
|
April 1 30, 2006
|
|
|
5,354
|
|
|
|
51.33
|
|
|
|
|
|
|
|
3,712,836
|
|
May 1 31, 2006
|
|
|
336,666
|
|
|
|
53.40
|
|
|
|
322,392
|
|
|
|
3,390,444
|
|
June 1 30, 2006
|
|
|
99,894
|
|
|
|
54.58
|
|
|
|
99,140
|
|
|
|
3,291,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
441,914
|
|
|
|
53.64
|
|
|
|
421,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
During Second Quarter 2006, 11,426 shares were purchased
from employees in connection with the vesting of
restricted stock and 8,956 shares were purchased from
employees in connection with stock option exercises. All
of these repurchases were made in connection with
satisfying tax withholding obligations with respect to
those employees. These shares were not purchased as part
of the publicly announced program. The shares were
purchased at the average of the high and low prices of
Selectives common stock on the dates of the purchases.
|
|
2
|
|
On April 26, 2005, the Board of Directors authorized a
stock repurchase program of up to 5.0 million shares,
which is scheduled to expire on April 26, 2007. During
Second Quarter 2006, 421,532 shares were repurchased,
leaving 3,291,304 shares remaining to be purchased under
the authorized program.
|
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Selective Insurance Group Inc.s 2006 Annual Meeting of Stockholders was held on April 26, 2006.
The results of the voting, which was conducted in person and by proxy, were included in Item 4
Submission of Matters to a Vote of Security Holders on Form 10-Q for the period ended March 31,
2006.
ITEM 5. OTHER INFORMATION
(a)(1)
Entry into Material Definitive Agreements
On August 1, 2006, Selective entered into employment agreements with the following senior
executives (individually, Executive and collectively, Executives):
|
|
|
Jamie Ochiltree, III, Senior Executive Vice President, Insurance Operations;
|
|
|
|
|
Richard F. Connell, Senior Executive Vice President and Chief Information Officer;
|
|
|
|
|
Kerry Guthrie, Executive Vice President and Chief Investment Officer;
|
|
|
|
|
Dale A. Thatcher, Executive Vice President, Chief Financial Officer and Treasurer; and
|
|
|
|
|
Ronald J. Zaleski, Executive Vice President and Chief Actuary.
|
The Salary and Employee Benefits Committee (the Committee) of Selectives Board of Directors
approved the form of the employment agreement to be entered into between Selective and various
senior executives as determined by the Committee from time-to-time (the Employment Agreement).
The Employment Agreement replaces eleven-year old employment agreement and termination agreement
forms that Selective and one of its subsidiaries had developed and entered into with certain
executives, as described in (a)(2) below (collectively, the Prior Agreements). The Employment
Agreement corrects inconsistencies between the Prior Agreements and changes certain terms in those
agreements to align them with current practices at peer companies, including decreasing the
potential amount of severance in a change of control and increasing the potential amount of
severance in a termination not for cause. In developing the Employment Agreement, the Committee
worked with and accepted the recommendations of both the Committees independent compensation
consultants and outside counsel.
The significant terms of the Employment Agreements are as follows and are qualified in their
entirety by reference to the copies of the Employment Agreement with each of the Executives, which
are filed as Exhibits 10.6 to 10.10 to this Quarterly Report on Form 10-Q:
34
|
|
|
|
|
|
|
Term
|
|
Three (3) years, automatically renewed for additional one (1) year periods unless terminated by
either party with written notice.
|
|
|
|
|
|
Compensation
|
|
Annual salary determined by the Committee.
1
|
|
|
|
|
Benefits
|
|
Eligible to participate in incentive compensation plan, stock plan, 401(k) plan, defined benefit
pension plan and any other stock option, stock appreciation right, stock bonus, pension, group
insurance, retirement, profit sharing, medical, disability, accident, life insurance, relocation
plan or policy, or any other plan, program, policy or arrangement of Selective intended to
benefit the employees of Selective generally.
|
|
|
|
|
|
Vacation and
Reimbursements
|
|
Vacation time and reimbursements for ordinary travel and entertainment expenses in accordance
with Selectives policies.
|
|
|
|
|
|
Perquisites
|
|
Suitable offices, secretarial and other services, and other perquisites to which other executives
of Selective are generally entitled.
|
|
|
|
|
|
Severance and
Benefits on Termination
without Change in Control
|
|
For Cause or Resignation by Executive other than for Good Reason (each term as defined
in the Employment Agreement)
: Salary and benefits accrued through termination date.
|
|
|
|
|
|
|
Death or Disability
: Multiple of: (i) Executives salary, plus (ii) average of three
(3) most recent annual cash incentive payments; provided that any such severance payments
be reduced by life or disability insurance payments under policies with respect to which
Company paid premiums.
2
|
|
|
|
|
|
|
|
Without Cause by Company, Relocation of Office over Fifty (50) Miles (without Executives consent), Resignation for Good Reason by Executive
:
|
|
|
|
|
|
|
|
o Multiple of: (i) Executives salary, plus (ii) average of three (3) most recent annual
cash incentive payments.
2
|
|
|
|
|
|
|
|
o Medical, dental, vision, disability and life insurance coverages in effect for Executive
and dependents until the earlier of twenty-four (24) months following termination or
commencement of equivalent benefits from a new employer.
|
|
|
|
|
|
|
|
Stock Awards: Except for termination for Cause or resignation by the Executive other
than for Good Reason, immediate vesting and possible extended exercise period for any
previously granted stock options, stock appreciation rights, restricted stock and stock
bonuses.
|
|
|
|
|
|
Severance and Benefits on
Termination after Change
in Control
|
|
For termination without Cause or by Executive with Good Reason within two (2) years following a
Change in Control (as defined in the Employment Agreement), Executive is entitled to:
|
|
|
Severance payment equal to the greater of a multiple of (i) Executives salary plus
target annual cash incentive payment; or (ii) Executives salary plus the average of
Executives three (3) immediately prior annual cash incentive payments.
3
|
|
|
|
|
|
|
|
Medical, dental, vision, disability and life insurance coverages in effect for Executive
and dependents until the earlier of three (3) years following termination or commencement
of equivalent benefits from a new employer.
|
|
|
|
|
|
|
|
Stock Awards, same as above.
|
|
|
|
|
|
|
|
Tax Gross-Up Payment, if necessary, to offset any excise tax imposed on Executive for
such payments or benefits.
|
|
|
|
|
|
Release; Confidentiality
|
|
Receipt of severance payments and benefits conditioned upon:
|
|
|
|
|
and Non-Solicitation
|
|
|
|
|
|
|
|
|
o Entry into release of claims; and
|
|
|
|
|
|
|
|
o
No disclosure of confidential or proprietary information or solicitation of employees to
leave Selective for a period of two (2) years following the termination of the
Employment Agreement.
|
|
|
|
|
|
|
|
1
|
|
On January 30, 2006, the Committee established the annual salaries for the
Executives, some of whom were Named Executive Officers in Selectives 2005 and 2006 Definitive
Proxy Statements and whose compensation was disclosed in Selectives Current Report on Form 8-K
filed on February 3, 2006. The annual salaries are as follows: Mr. Ochiltree, $430,000; Mr.
Connell, $380,000; Mr. Guthrie, $352,000; Mr. Thatcher, $350,000; and Mr. Zaleski, $353,000.
|
|
2
|
|
Multiple is 1.75 for Senior Executive Vice Presidents and 1.5 for Executive
Vice Presidents.
|
|
3
|
|
Multiple is 2.5 for Senior Executive Vice Presidents and 2 for Executive
Vice Presidents.
|
35
(2)
Termination of Material Definitive Agreements
.
Upon entry into the new Employment Agreements, the existing employment agreements between Messrs.
Ochiltree, Connell, and Thatcher and one of Selectives subsidiaries, Selective Insurance Company
of America (SICA), were terminated. The agreement entered into between Mr. Ochiltree and SICA on
October 21, 1995 was most recently amended on May 1, 2004. Pursuant to the terms of the agreement,
Mr. Ochiltree received an annual salary of not less than $374,000. The agreement entered into
between Mr. Connell and SICA on August 8, 2000 was most recently amended on March 1, 2003.
Pursuant to the terms of the agreement, Mr. Connell received an annual salary of not less than
$300,000. The agreement entered into between Mr. Thatcher and SICA on May 5, 2000, was most
recently amended on March 1, 2003. Pursuant to the terms of the agreement, Mr. Thatcher received
an annual salary of not less than $235,000. If any of these Executives were not re-elected to
their current position, or were terminated without cause, they would be entitled to receive
severance pay equal to their salary and certain benefits in effect at the time of their termination
of employment for a period of two (2) years after the date of such termination, payable in monthly
installments. If any of these Executives were terminated for cause, they were entitled to receive
that portion of their salary earned to the date of their termination and the benefits accrued to
them under certain employee benefit plans to the date of such termination, to the extent that such
benefits may be payable to them under the provisions of such plans in effect on the date of the
termination of their employment. Selective guaranteed SICAs performance of all its obligations
under the employment agreements.
Upon entry into the new Employment Agreements, the existing termination agreements between Messrs.
Ochiltree, Connell, and Thatcher and SICA also were terminated. Pursuant to the termination
agreements, payments were to be made under certain circumstances following a Change in Control (as
defined in the agreements) of Selective. Each of these agreements was automatically renewable for
successive one-year terms, unless prior written notice of non-renewal was given. Each agreement
provided that, in the event of a Change in Control of Selective, SICA would continue to employ the
Executive in the capacities in which he was serving immediately prior to the Change in Control for
a period of three (3) years, commencing on the date on which the Change in Control shall have
occurred, which term will be automatically renewed for successive one-year periods unless prior
written notice is given. Each agreement provided that if the Executives employment was terminated
as set forth in the agreement after a Change in Control, other than (i) due to the Executives
death or retirement, (ii) by SICA for Cause or Disability (as defined in the agreement), or (iii)
by the Executive other than for Good Reason (as defined in the agreement), the Executive would be
entitled to receive earned but unpaid base salary through the date of termination, as well as any
incentive compensation benefits or awards that have been accrued, earned, or become payable but
which have not been paid, and as severance pay in lieu of any further salary for periods subsequent
to the date of termination, an amount in cash equal to his annualized includible compensation for
the base period (as defined in Section 280G(d)(1) of the Internal Revenue Code), multiplied by a
factor of 2.99, provided that if any of the payments or benefits provided for in the agreement,
together with any other payments or benefits that the Executive had the right to receive would
constitute a parachute payment (as defined in Section 280G(b) of the Internal Revenue Code),
Selective would pay to the Executive on a net after-tax basis the greater of (i) the payments and
benefits due to the Executive reduced in order of priority and amount as the Executive elected, to
the largest amount as would result in no portion of such payments being subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code or (ii) payments and benefits due to the
Executive, plus an amount in cash equal to (x) the amount of such excess parachute payments
multiplied by (y) twenty (20%) percent. Selective guaranteed SICAs performance of all its
obligations under the termination agreements.
36
ITEM 6. EXHIBITS
(a) Exhibits:
|
|
|
Exhibit No.
|
|
|
* 10.1
|
|
Tenth Amendment, dated June 23, 2006, effective through August 22, 2006, to the
$25,000,000 Line of Credit Agreement dated October 22, 1999, between Wachovia Bank,
National Association and Selective Insurance Group, Inc. and Selective Insurance Company
of America.
|
|
|
|
* 10.2
|
|
Amendment, dated June 9, 2006, to the Promissory Note of $20,000,000 Line of Credit with
State Street Bank and Trust Company with respect to Selective Insurance Company of
America and Selective Insurance Group, Inc.
|
|
|
|
* 10.3
|
|
Amendment to the Selective Insurance Group, Inc. Stock Option Plan for Directors,
effective as of July 26, 2006.
|
|
|
|
* 10.4
|
|
Amendment to the Selective Insurance Stock Option Plan II, effective as of July 26, 2006.
|
|
|
|
* 10.5
|
|
Amendment to the Selective Insurance Stock Option Plan III, effective as of July 26, 2006.
|
|
|
|
* 10.6
|
|
Employment Agreement between Selective Insurance Group, Inc. and Jamie Ochiltree, III,
dated as of August 1, 2006.
|
|
|
|
* 10.7
|
|
Employment Agreement between Selective Insurance Group, Inc. and Richard F. Connell,
dated as of August 1, 2006.
|
|
|
|
* 10.8
|
|
Employment Agreement between Selective Insurance Group, Inc. and Kerry Guthrie, dated as
of August 1, 2006.
|
|
|
|
* 10.9
|
|
Employment Agreement between Selective Insurance Group, Inc. and Dale A. Thatcher, dated
as of August 1, 2006.
|
|
|
|
* 10.10
|
|
Employment Agreement between Selective Insurance Group, Inc. and Ronald J. Zaleski, dated
as of August 1, 2006.
|
|
|
|
* 11
|
|
Statement Re: Computation of Per Share Earnings.
|
|
|
|
* 31.1
|
|
Rule 13a-14(a) Certification of the Chief Executive Officer of Selective Insurance Group,
Inc. (Section 302 of the Sarbanes-Oxley Act of 2002).
|
|
|
|
* 31.2
|
|
Rule 13a-14(a) Certification of the Chief Financial Officer of Selective Insurance Group,
Inc. (Section 302 of the Sarbanes-Oxley Act of 2002).
|
|
|
|
* 32.1
|
|
Certification of Chief Executive Officer of Selective Insurance Group, Inc. pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
* 32.2
|
|
Certification of Chief Financial Officer of Selective Insurance Group, Inc. pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
SELECTIVE INSURANCE GROUP, INC.
|
|
|
Registrant
|
|
|
|
|
|
By: /s/ Gregory E. Murphy
|
|
August 4, 2006
|
|
|
|
Chairman of the Board, President and Chief Executive Officer
|
|
|
|
|
|
By: /s/ Dale A. Thatcher
|
|
August 4, 2006
|
|
|
|
Executive Vice President, Chief Financial Officer and Treasurer
|
|
|
38
Exhibit 10.6
EMPLOYMENT AGREEMENT
This Employment Agreement, (the
Agreement
) is made as of the 1
st
day of August,
2006, between
Selective Insurance Group, Inc.
, a New Jersey corporation with a principal place of
business at 40 Wantage Avenue, Branchville, New Jersey 07890 (the
Company
) and
Jamie Ochiltree,
III
, a Pennsylvania resident with a mailing address of Post Office Box 328, Dingmans Ferry, PA
18328-0328 (the
Executive
).
SECTION 1.
DEFINITIONS
.
1.1.
Definitions
.
For purposes of this Agreement, the following terms shall have the
meanings set forth below:
Accounting Firm
has the meaning given to such term in Section 3.6(b) hereof.
Agreement
has the meaning given to such term in the Preamble hereto.
Board
means the Board of Directors of the Company.
Cause
means any one or more of the following:
(i) the Executive shall have been convicted by a court of competent jurisdiction of,
or pleaded guilty or nolo contendere to, any felony under, or within the meaning of,
applicable United States federal or state law;
(ii) the Executive shall have breached in any respect any one or more of the material
provisions of this Agreement, including, without limitation, any failure to comply with the
Code of Conduct, and, to the extent such breach may be cured, such breach shall have
continued for a period of thirty (30) days after written notice by the Chief Executive
Officer to the Executive specifying such breach; or
(iii) the Executive shall have engaged in acts of insubordination, gross negligence or
willful misconduct in the performance of the Executives duties and obligations to the
Company.
For purposes of clauses (ii) and (iii) of this definition of Cause, no act, or failure to act, on
the part of the Executive shall be considered grounds for Cause under such clauses if such act,
or such failure to act, was done or omitted to be done based upon authority or express direction
given by the Chief Executive Officer or based upon the advice of counsel for the Company.
Change in Control
means the occurrence of an event of a nature that would be required to be
reported in response to Item 5.01 of a Current Report on Form 8-K, as in effect on the date
thereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act;
provided, however
, that a
Change in Control shall, in any event, conclusively be deemed to have occurred upon the first to
occur of any one of the following events:
(i) The acquisition by any person or group (as such terms are used in Sections
13(d)(3) and 14(d)(2) of the Securities Exchange Act or any successor provisions to either
of the foregoing), including, without limitation, any current shareholder or shareholders
of the Company, of securities of the Company resulting in such person or group being a
beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act) of
twenty-five percent (25%) or more of any class of Voting Securities of the Company;
(ii) The acquisition by any person or group (as such terms are used in Sections
13(d)(3) and 14(d)(2) of the Securities Exchange Act or any successor provisions to either
of the foregoing), including, without limitation, any current shareholder or shareholders
of the Company, of securities of the Company resulting in such person or group being a
beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act) of twenty
percent (20%) or more, but less than twenty-five percent (25%), of any class of Voting
Securities of the Company, if the Board adopts a resolution that such acquisition
constitutes a Change in Control;
(iii) The sale or disposition of more than fifty percent (50%) of the Companys assets
on a consolidated basis, as shown in the Companys then most recent audited consolidated
balance sheet;
(iv) The reorganization, recapitalization, merger, consolidation or other business
combination involving the Company the result of which is the ownership by the shareholders
of the Company of less than eighty percent (80%) of those Voting Securities of the
resulting or acquiring Person having the power to vote in the elections of the board of
directors of such Person; or
(v) A change in the membership in the Board which, taken in conjunction with any other
prior or concurrent changes, results in twenty percent (20%) or more of the Boards
membership being persons not nominated by the Companys management or the Board as set
forth in the Companys then most recent proxy statement, excluding changes resulting from
substitutions by the Board because of retirement or death of a director or directors,
removal of a director or directors by the Board or resignation of a director or directors
due to demonstrated disability or incapacity.
(vi) Anything in this definition of Change in Control to the contrary notwithstanding,
no Change in Control shall be deemed to have occurred for purposes of this Agreement by
virtue of any transaction which results in the Executive, or a group of Persons which
includes the Executive, acquiring, directly or indirectly, Voting Securities of the
Company.
Code
means the Internal Revenue Code of 1986, as amended from time to time.
Code of Conduct
has the meaning given to such term in Section 2.3(a) hereof.
Commencement Date
has the meaning given to such term in Section 2.2 hereof.
- 2 -
Company
has the meaning given to such term in the Preamble hereto and includes any Person
which shall succeed to or assume the obligations of the Company hereunder pursuant to Section 5.6
hereof.
Determination
has the meaning given to such term in Section 3.6(b) hereof.
Disability
means the Executives physical injury or physical or mental illness which causes
him to be absent from his duties with the Company on a full-time basis for a continuous period in
excess of the greater of: (i) the period of disability constituting permanent disability as
specified under the Companys long-term disability insurance coverage applicable to the Executive
at the time of the determination of the existence of a disability (or, if such determination is
made after the occurrence of a Change in Control, as specified under the long-term disability
insurance coverage applicable to the Executive prior to a Change in Control) or (ii) 180 days,
unless within thirty (30) days after a Notice of Termination is thereafter given the Executive
shall have returned to the full-time performance of his duties.
Early Termination
has the meaning given to such term in Section 3.2 hereof.
Excise Tax
has the meaning given to such term in Section 3.6(a) hereof.
Executive
has the meaning given to such term in the Preamble hereto.
Extended Benefit Period
has the meaning given to such term in Section 3.3(c) hereof.
Good Reason
means the occurrence of any one or more of the following:
(i) any reduction in the Executives Salary below the annualized rate in effect on the
date preceding the date on which a Change in Control shall have occurred unless such
reduction is implemented for the senior executive staff generally; provided, however, that
such reduction shall constitute Good Reason even if implemented for senior executive staff
generally if such reduction occurs within two years after a Change in Control;
(ii) (A) a failure by the Company to continue in effect benefits that are comparable
in the aggregate to the benefits the Executive receives under the Plans in which the
Executive participates, other than as a result of the normal expiration of any such Plan as
to other eligible employees in accordance with its terms as in effect on the date preceding
the date on which a Change in Control shall have occurred, or (B) the taking of any action,
or the failure to act, by the Company which would adversely affect the Executives
continued participation in any of such Plans on at least as favorable a basis to him as was
the case on the date preceding the date on which a Change in Control shall have occurred or
which would materially reduce the Executives benefits in the future under any such Plans,
unless, in any of the cases described in sub-clauses (A) and (B) of this clause (ii), such
failure to continue in effect, taking of any action or failure to act affects all
participants of such Plan generally;
- 3 -
(iii) without the Executives express prior written consent, the assignment to the
Executive of any duties inconsistent with his positions, duties, responsibilities and
status with the Company immediately prior to a Change in Control, or any material
diminution in the Executives responsibilities as an executive of the Company as compared
with those he had as an executive of the Company immediately prior to a Change in Control,
or any change in the Executives titles or office as in effect immediately prior to a
Change in Control, or any removal of the Executive from, any of such positions, except in
connection with the termination of the Executives employment for Cause, Disability or
Retirement or as a result of the Executives death, or by his termination of his employment
other than for Good Reason;
(iv) without the Executives express prior written consent, the imposition of a
requirement by the Company that the Executive be based at any location in excess of fifty
(50) miles from the location of the Executives office on the date preceding the date on
which a Change in Control shall have occurred;
(v) without the Executives express prior written consent, any reduction in the number
of paid vacation days to which the Executive was entitled as of the date preceding the date
on which a Change in Control shall have occurred;
(vi) the failure by the Company to obtain from any Person with which it may merge or
consolidate or to which it may sell all or substantially all of its assets, the agreement
of such Person as set forth in the proviso in Section 5.6 hereof;
provided
that
such merger, consolidation or sale constitutes a Change in Control;
(vii) subsequent to a Change in Control, any purported termination of the Executives
employment which is not effected pursuant to a Notice of Termination given in accordance
with Section 3.2 hereof; or
(viii) within two years after a Change in Control shall have occurred, any material
breach by the Company of any of the terms and conditions of this Agreement or any Plans
referred to in clause (ii) of this definition of Good Reason to which the Executive is
entitled to receive benefits thereunder, provided, to the extent such breach may be cured,
such breach shall have continued for a period of thirty (30) days after written notice of
the Company specifying such breach.
Gross-Up Payment
has the meaning given to such term in Section 3.6(a) hereof.
Notice of Termination
means a written notice which shall (i) indicate the specific
termination provision in this Agreement relied upon, (ii) set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executives employment under
the provision so indicated and, (iii) specify the date of termination in accordance with this
Agreement (other than for a termination for Cause).
Overpayments
has the meaning given to such term in Section 3.6(c) hereof.
- 4 -
Person
means an individual, partnership, corporation, association, limited liability
company, trust, joint venture, unincorporated organization, and any government, governmental
department or agency or political subdivision thereof.
Plans
has the meaning given to such term in Section 2.4(b) hereof.
Rabbi Trust
has the meaning given to such term in Section 3.4(d) hereof.
Release
has the meaning given to such term in Section 3.5 hereof.
Restrictive Covenants
has the meaning given to such term in Section 3.5 hereof.
Retirement
means a termination of the Executives employment by the Company or the Executive
(i) at such age as shall be established by the Board for mandatory or normal retirement of Company
executives in general (which age shall be, if the determination of Retirement is made after the
occurrence of a Change in Control, the age established by the Board prior to a Change in Control),
which shall not be less than age 65, or (ii) at any other retirement age set by mutual agreement of
the Company and the Executive and approved by the Board.
Salary
has the meaning given to such term in Section 2.4(a) hereof.
Section 409A Tax
has the meaning given to such term in Section 3.7 hereof.
Securities Exchange Act
means the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder.
Term
has the meaning given to such term in Section 2.2 hereof.
Termination Date
means (i) if the Executives employment is to be terminated by the Company
for Disability, thirty (30) days after a Notice of Termination is given;
provided
that the
Executive shall not have returned to the performance of the Executives duties on a full-time basis
during such thirty (30) day period; and (ii) if the Executives employment is to be terminated by
either the Company or the Executive for any other reason, the date on which a Notice of Termination
is given.
Total Payments
has the meaning given to such term in Section 3.6(a) hereof.
Triggering Event
has the meaning given to such term in Section 3.4(d) hereof.
Trustee
has the meaning given to such term in Section 3.4(d) hereof.
Underpayments
has the meaning given to such term in Section 3.6(c) hereof.
Voting Securities
means, with respect to a specified Person, any security of such Person
that has, or may have upon an event of default or in respect to any transaction, a right to vote on
any matter upon which the holder of any class of common stock of such Person would have a right to
vote.
- 5 -
1.2.
Terms Generally
. Unless the context of this Agreement requires otherwise, words
importing the singular number shall include the plural and vice versa, and any pronoun shall
include the corresponding masculine, feminine and neuter forms.
1.3.
Cross-References
. Unless otherwise specified, references in this Agreement to
any Paragraph or Section are references to such Paragraph or Section of this Agreement.
SECTION 2.
EMPLOYMENT AND COMPENSATION
. The following terms and conditions will
govern the Executives employment with the Company throughout the Term.
2.1.
Employment
. The Company hereby employs the Executive, and the Executive hereby
accepts employment with the Company, on the terms and conditions set forth herein.
2.2.
Term
. The term of employment of the Executive under this Agreement shall
commence as of the date hereof (the
Commencement Date
) and, subject to Section 3.1 hereof, shall
terminate three (3) year(s) after the Commencement Date, and shall automatically be extended for
additional one (1) year periods thereafter (any such renewal periods, together with the initial
three (3) year period, being referred to as the
Term
) unless terminated by either party by
written notice to the other party.
2.3.
Duties
.
(a)
The Executive agrees to serve as Senior Executive Vice President of
the Company during the Term. In such capacity, the Executive shall have the responsibilities and
duties customary for such office(s) and such other executive responsibilities and duties as are
assigned by the Chief Executive Officer which are consistent with the Executives position(s). The
Executive agrees to devote substantially all his business time, attention and services to the
business and affairs of the Company and its subsidiaries and to perform his duties to the best of
his ability. At all times during the performance of this Agreement, the Executive will adhere to
the Code of Conduct of the Company (the
Code of Conduct
) that has been or may hereafter be
established and communicated by the Company to the Executive for the conduct of the position or
positions held by the Executive. The Executive may not accept directorships on the board of
directors of for-profit corporations without the prior written consent of the Chief Executive
Officer of the Company. The Executive may accept directorships on the board of directors of
not-for-profit corporations without the Chief Executive Officers prior, written consent so long as
(a) such directorships do not interfere with Executives ability to carry out his responsibilities
under this Agreement, and (b) Executive promptly notifies the Chief Executive Officer in writing of
the fact that he has accepted such a non-profit directorship.
(b)
If the Company or the Executive elects not to renew the Term pursuant to Section 2.2,
the Executive shall continue to be employed under this Agreement until the expiration of the
then current Term (unless earlier terminated pursuant to Section 3.1 hereof), shall cooperate
fully with the Chief Executive Officer and shall perform such duties not inconsistent with the
provisions hereof as he shall be assigned by the Chief Executive Officer.
- 6 -
2.4.
Compensation
.
(a)
Salary
. For all services rendered by the Executive under this Agreement, the
Company shall pay the Executive a salary during the Term at a rate of not less than FOUR
HUNDRED THIRTY THOUSAND DOLLARS ($430,000) per year, which may be increased but not decreased
unless decreased for the senior executive staff generally (the
Salary
), payable in
installments in accordance with the Companys policy from time to time in effect for payment of
salary to executives. The Salary shall be reviewed no less than annually by the Chief
Executive Officer and nothing contained herein shall prevent the Board from at any time
increasing the Salary or other benefits herein provided to be paid or provided to the Executive
or from providing additional or contingent benefits to the Executive as it deems appropriate.
(b)
Benefits
. During the Term, the Company shall permit the Executive to
participate in or receive benefits under the Selective Insurance Group, Inc. 2005 Omnibus Stock
Plan, the Selective Insurance Group, Inc. Cash Incentive Plan, the Selective Insurance
Retirement Savings Plan, the Retirement Income Plan For Selective Insurance Company of America,
as amended, the Selective Insurance Company of America Deferred Compensation Plan, the
Selective Insurance Supplemental Pension Plan and any other incentive compensation, stock
option, stock appreciation right, stock bonus, pension, group insurance, retirement, profit
sharing, medical, disability, accident, life insurance plan, relocation plan or policy, or any
other plan, program, policy or arrangement of the Company intended to benefit the employees of
the Company generally, if any, in accordance with the respective provisions thereof, from time
to time in effect (collectively, the
Plans
).
(c)
Vacations and Reimbursements
. During the Term, the Executive shall be
entitled to vacation time off and reimbursements for ordinary and necessary travel and
entertainment expenses in accordance with the Companys policies on such matters from time to
time in effect.
(d)
Perquisites
. During the Term, the Company shall provide the Executive with
suitable offices, secretarial and other services, and other perquisites to which other
executives of the Company generally are (or become) entitled, to the extent as are suitable to
the character of the Executives position with the Company, subject to such specific limits on
such perquisites as may from time to time be imposed by the Board and the Chief Executive
Officer.
SECTION 3.
TERMINATION AND SEVERANCE
.
3.1.
Termination
. The Executives employment hereunder shall commence on the
Commencement Date and continue until the expiration of the Term, except that the employment of the
Executive hereunder shall earlier terminate:
(a)
Death
. Upon the Executives death.
(b)
Disability
. At the option of the Company, upon the Disability of the
Executive.
- 7 -
(c)
For Cause
. At the option of the Company, for Cause.
(d)
Resignation
. At any time at the option of the Executive, by resignation
(other than a resignation for Good Reason).
(e)
Without Cause
. At any time at the option of the Company, without Cause;
provided
, that a termination of the Executives employment hereunder by the Company
based on Retirement, death, or Disability shall not be deemed to be a termination without
Cause.
(f)
Relocation
. At the option of the Executive at any time prior to a Change in
Control, if the Company imposes a requirement without the consent of the Executive that the
Executive be based at a location in excess of fifty (50) miles from the location of the
Executives office on the Commencement Date.
(g)
For Good Reason
. At any time at the option of the Executive within two (2)
years following the occurrence of a Change in Control, for Good Reason.
3.2.
Procedure For Termination
. Any termination of the Executives employment by the
Company or by the Executive prior to the expiration of the Term (an
Early Termination
) shall be
communicated by delivery of a Notice of Termination to the other party hereto given in accordance
with Section 5.13 hereof. Any Early Termination shall become effective as of the applicable
Termination Date.
3.3.
Rights and Remedies on Termination
. The Executive will be entitled to receive
the payments and benefits specified below if there is an Early Termination.
(a)
Accrued Salary
. If the Executives employment is terminated pursuant to any
of the Paragraphs set forth in Section 3.1 hereof, then the Executive (or his legal
representative, as applicable) shall only be entitled to receive his accrued and unpaid Salary
through the Termination Date.
(b)
Severance Payments
.
(i) If the Executives employment is terminated pursuant to Paragraphs (a) or (b) in
Section 3.1 hereof, then the Executive (or his legal representative, as applicable) shall
be entitled to receive a severance payment from the Company in an aggregate amount equal to
the product of (A) 1.75
times
(B) the Executives Salary
plus
an amount
equal to the average of the three most recent annual cash incentive payments (each an
ACIP) made to the Executive;
provided
that any such severance payment shall be
reduced by the amount of payments the Executive receives under any life or disability
insurance policies with respect to which the premiums were paid by the Company.
(ii) If the Executives employment is terminated pursuant to Paragraph (e) or (f) in
Section 3.1 hereof, then the Executive shall be entitled to receive a severance payment
from the Company in an aggregate amount equal to the product of (A) 1.75
- 8 -
times
(B) the Executives Salary
plus
an amount equal to the average
of the three most recent ACIP payments made to the Executive.
(iii) The severance payment required to be paid by the Company to the Executive
pursuant to Paragraph (b)(i) or (b)(ii) above, shall, subject to Section 3.7, be paid in
equal monthly installments over the twelve (12) month period following the Termination
Date.
(c)
Severance Benefits
.
(i) If the Executives employment is terminated pursuant to any of the Paragraphs set
forth in Section 3.1 hereof, then the Executive (or his legal representative, as
applicable) shall be entitled to receive the benefits which the Executive has accrued or
earned or which have become payable under the Plans as of the Termination Date, but which
have not yet been paid to the Executive. Payment of any such benefits shall be made in
accordance with the terms of such Plans.
(ii) If the Executives employment is terminated pursuant to Paragraph (e) or (f) in
Section 3.1 hereof, then the Company shall, subject to Section 3.7, maintain in full force
and effect for the continued benefit of the Executive and his dependents for a period
terminating on the earlier of (A) twenty-one (21) months following the applicable
Termination Date, or (B) the commencement date of equivalent benefits from a new employer,
(any such period being referred to as the applicable
Extended Benefit Period
) all insured
and self-insured medical, dental, vision, disability and life insurance employee benefit
Plans in which the Executive was entitled to participate immediately prior to the
Termination Date;
provided
that the Executives continued participation is not
barred under the general terms and provisions of such Plans. Notwithstanding the
foregoing, the Executive shall continue to participate in such Plans during the Extended
Benefit Period only to the extent that such Plans remain in effect for other executives of
the Company from time to time during the Extended Benefit Period and subject to the terms
of such Plans, including any modifications and amendments thereto following the Termination
Date. In the event that the Executives participation in any such Plan is barred by its
terms, the Company shall arrange, at its sole cost and expense, to have issued for the
benefit of the Executive and his dependents during the Extended Benefit Period individual
policies of insurance providing benefits substantially similar (on an after-tax basis) to
those which the Executive otherwise would have been entitled to receive under such Plans
pursuant to this Paragraph (c)(ii). Executive shall be responsible for making any required
contributions to the cost of such coverage, on an after-tax basis, at the rate which
Executive was obligated to pay immediately prior to the Termination Date. If, at the end
of the applicable Extended Benefit Period, the Executive has not previously received or is
not receiving equivalent benefits from a new employer, or is not otherwise receiving such
benefits, the Company shall arrange to enable the Executive to convert his and his
dependents coverage under such Plans to individual policies or programs upon the same
terms as employees of the Company may apply for such conversions upon termination of
employment. In no event shall the
- 9 -
Companys obligation to provide disability benefits hereunder be reduced as a result
of any individual disability policy purchased by the Executive.
(d)
Rights Under Plans
. If the Executives employment is terminated pursuant to
Paragraphs (a), (b), (e), or (f) in Section 3.1 hereof, the Executive shall be entitled to the
benefits of any stock options, stock appreciation rights, restricted stock grants, stock
bonuses or other benefits theretofore granted by the Company to the Executive under any Plan,
whether or not provided for in any agreement with the Company;
provided
,
however
, that (i) all unvested stock options, stock appreciation rights, restricted
stock grants, stock bonuses, long-term incentives and similar benefits shall be deemed to be
vested in full on the Termination Date, notwithstanding any provision to the contrary or any
provision requiring any act or acts by the Executive in any agreement with the Company or any
Plan; (ii) to the extent that any such stock options, stock appreciation rights, restricted
stock grants, stock bonuses, long-term incentives or similar benefits shall require by its
terms the exercise thereof by the Executive, the last date to exercise the same shall,
notwithstanding any provision to the contrary in any agreement or any Plan, be the earlier of
(A) the later to occur of the fifteenth day of the third month following the date at which, or
the December 31 of the calendar year in which, any such stock options, stock appreciation
rights, restricted stock grants, stock bonuses, long-term incentives or similar benefits would
otherwise have expired if not extended, or (B) the original expiration date had the Executives
employment not so terminated; and (iii) if the vesting or exercise pursuant hereto of any such
stock options, stock appreciation rights, restricted stock grants, stock bonuses, long-term
incentives or similar benefits shall have the effect of subjecting the Executive to liability
under Section 16(b) of the Securities Exchange Act or any similar provision of law, the vesting
date thereof shall be deemed to be the first day after the Termination Date on which such
vesting may occur without subjecting the Executive to such liability.
(e)
No Double Dipping.
(i) The severance payments and severance benefits the Executive may be entitled to
receive pursuant to this Section 3.3 shall be in lieu of any of the payments and benefits
the Executive may be entitled to receive pursuant to any other agreement, plan or
arrangement providing for the payment of severance payments or benefits.
(ii) The Executive expressly disclaims any interest he may have in the Selective
Insurance Company of America Severance Plan.
3.4.
Rights and Remedies on Termination After Change in Control
. The Executive will
be entitled to receive the severance payments and severance benefits specified below in the event
there shall occur a termination of the Executives employment pursuant to Paragraph (e) or (g) of
Section 3.1 hereof within two (2) years following the occurrence of a Change in Control. The
severance payments and benefits the Executive may be entitled to receive pursuant to this Section
3.4 shall be in addition to, and not in lieu of, any of the payments and benefits the Executive may
be entitled to receive pursuant to Section 3.3 hereof, unless expressly so stated to be in lieu of
such benefits and/or payments.
- 10 -
(a)
Severance Payments
. The Executive shall be entitled to receive a severance
payment from the Company in an aggregate amount equal to the product of (i) 2.5; and (ii) the
greater of:
(1) the sum of the Executives Salary
plus
the Executives
target ACIP in effect as of the Termination Date, or
(2) the sum of the Executives Salary in effect as of the Termination
Date plus the Executives average ACIP for the three calendar years prior
to the calendar year in which the Termination Date occurs.
Such payment shall be made, subject to Section 3.7, thirty (30) business days following the
Termination Date, provided that the Executive has executed and delivered a Release pursuant to
Section 3.5 hereof
and
such Release has become effective and irrevocable. The severance
payment required to be paid by the Company to the Executive pursuant to this Section 3.4(a) shall
be in lieu of, and not in addition to, any other severance payments required to be paid by the
Company to the Executive.
(b)
Severance Benefits
. Subject to Section 3.7, the Company shall maintain in full
force and effect, for the continued benefit of the Executive and his dependents for a period
terminating on the earlier of: (i) thirty (30) months after the Termination Date or (ii) the
commencement date of equivalent benefits from a new employer (the
CIC Extended Benefit Period
),
all insured and self insured medical, dental, vision, disability and life insurance employee
welfare benefit plans in which the Executive was entitled to participate immediately prior to the
Termination Date;
provided
that the Executives continued participation is not barred under
the general terms and provisions of such Plans. Notwithstanding the foregoing, the Executive shall
continue to participate in such Plans during the CIC Extended Benefit Period only to the extent
that such Plans remain in effect for other executives of the Company from time to time during the
CIC Extended Benefit Period and subject to the terms of such Plans, including any modifications and
amendments thereto following the Termination Date. In the event that the Executives participation
in any such Plan is barred by its terms, the Company, at its sole cost and expense, shall arrange
to have issued for the benefit of the Executive and his dependents individual policies of insurance
providing benefits substantially similar (on an after-tax basis) to those which the Executive
otherwise would have been entitled to receive under such Plans pursuant to this Paragraph (b).
Executive shall be responsible for making any required contributions to the cost of such coverage,
on an after-tax basis, at the rate which Executive was obligated to pay immediately prior to the
Termination Date. Notwithstanding the foregoing, if the provision of self-insured health coverage
(if any) during the third year after the Termination Date is deemed to be deferred compensation
under Section 409A of the Code, the Company shall pay the Executive an amount equal to Eleven
Thousand Five Hundred Seventy Two Dollars ($11,572.00) in lieu of such obligation. If, at the end
of the applicable CIC Extended Benefit Period, the Executive has not previously received or is not
receiving equivalent benefits from a new employer, or is not otherwise receiving such benefits, the
Company shall arrange to enable the Executive to convert his and his dependents coverage under
such Plans to individual policies or programs upon the same
- 11 -
terms as employees of the Company may apply for such conversions upon termination of
employment. The severance benefits required to be provided by the Company to the Executive
pursuant to this Paragraph (b) shall be in lieu of, and not in addition to, any severance benefits
required to be provided to the Executive pursuant to Section 3.3(c)(ii) hereof. In no event shall
the Companys obligation to provide disability benefits hereunder be reduced as a result of any
individual disability policy purchased by the Executive.
(c)
Rights Under Plans
. The Executive shall be entitled to the benefits of any stock
options, stock appreciation rights, restricted stock grants, stock bonuses or other benefits
theretofore granted by the Company to the Executive under any Plan, whether or not provided for in
any agreement with the Company;
provided
,
however
, that (i) all unvested stock
options, stock appreciation rights, restricted stock grants, stock bonuses, long-term incentives
and similar benefits shall be deemed to be vested in full on the Termination Date, notwithstanding
any provision to the contrary or any provision requiring any act or acts by the Executive in any
agreement with the Company or any Plan; (ii) to the extent that any such stock options, stock
appreciation rights, restricted stock grants, stock bonuses, long-term incentives or similar
benefits shall require by its terms the exercise thereof by the Executive, the last date to
exercise the same shall, notwithstanding any provision to the contrary in any agreement or any
Plan, be the earlier of (A) the later to occur of the fifteenth day of the third month following
the date at which, or the December 31 of the calendar year in which, any such stock options, stock
appreciation rights, restricted stock grants, stock bonuses, long-term incentives or similar
benefits would otherwise have expired if not extended or (B) the original expiration date had the
Executives employment not so terminated; and (iii) if the vesting or exercise pursuant hereto of
any such stock options, stock appreciation rights, restricted stock grants, stock bonuses,
long-term incentives or similar benefits shall have the effect of subjecting the Executive to
liability under Section 16(b) of the Securities Exchange Act or any similar provision of law, the
vesting date thereof shall be deemed to be the first day after the Termination Date on which such
vesting may occur without subjecting the Executive to such liability.
(d)
Rabbi Trust
. The Company shall maintain a trust intended to be a grantor trust
within the meaning of subpart E, Part I, subchapter J, chapter 1, subtitle A of the Code (the
Rabbi Trust
). Coincident with the occurrence of a Change in Control, the Company shall promptly
deliver to a bank as trustee of the Rabbi Trust (the
Trustee
), an amount of cash or certificates
of deposit, treasury bills or irrevocable letters of credit adequate to fully fund the payment
obligations of the Company under this Section 3.4. The Company and Trustee shall enter into a
trust agreement that shall provide that barring the insolvency of the Company, amounts payable to
the Executive under this Section 3.4 (subject to Section 3.7) shall be paid by the Trustee to the
Executive five (5) days after written demand therefor by the Executive to the Trustee, with a copy
to the Company, certifying that such amounts are due and payable under this Section 3.4 because the
Executives employment has been terminated pursuant to Paragraph (e) or (g) in Section 3.1 hereof
at a time which is within two (2) years following the occurrence of a Change in Control (a
Triggering Event
). Such trust agreement shall also provide that if the Company shall, prior to
payment by the Trustee, object in writing to the Trustee, with a copy to the Executive, as to the
payment of any amounts demanded by the Executive under this Section 3.4, certifying that such
amounts are not due and payable to the Executive because a
- 12 -
Triggering Event has not occurred, such dispute shall be resolved by binding arbitration as
set forth in Section 5.8 hereof.
3.5.
Conditions to Severance Payments and Benefits
. The Executives right to receive
the severance payments and benefits pursuant to Sections 3.3 and 3.4 hereof, is expressly
conditioned upon (a) receipt by the Company of a written release (a
Release
) executed by the
Executive in the form of
Exhibit A
hereto, and the expiration of the revocation period described
therein without such Release having been revoked, and (b) the compliance by the Executive with the
covenants, terms or provisions of Sections 4.1 and 4.2 hereof (the
Restrictive Covenants
). If
the Executive shall fail to deliver a Release in accordance with the terms of this Section 3.5 or
shall breach any of the Restrictive Covenants, the Companys obligation to make the severance
payments and to provide the severance benefits pursuant to Sections 3.3 and 3.4 hereof shall
immediately and irrevocably terminate.
3.6.
Tax Effect of Payments
.
(a)
Gross-Up Payment
. In the event that it is determined that any payment,
distribution or other benefit of any type to or for the Executives benefit made by the Company, by
any of its affiliates, by any Person who acquires ownership or effective control of the Company or
ownership of a substantial portion of the Companys assets (within the meaning of Section 280G of
the Code and the regulations thereunder) or by any affiliate of such Person, whether paid or
payable or distributed or distributable or otherwise made available pursuant to the terms of this
Agreement or otherwise (the
Total Payments
), would be subject to the excise tax imposed by
Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise
tax, together with any such interest or penalties, are collectively referred to as the
Excise
Tax
), then the Executive shall be entitled to receive an additional payment (a
Gross-Up Payment
)
in an amount such that after payment by the Executive of all taxes imposed upon the Gross-Up
Payment, including any Excise Tax, the Executive retains an amount of the Gross-Up Payment equal to
the Excise Tax imposed on the Total Payments.
(b)
Determination by Accountant
. All mathematical determinations and all
determinations of whether any of the Total Payments are parachute payments (within the meaning of
Section 280G of the Code) that are required to be made under this Section, including all
determinations of whether a Gross-Up Payment is required, of the amount of such Gross-Up Payment
and of amounts relevant to the last sentence of this Section (collectively, the
Determination
),
shall be made by an independent accounting firm acceptable to each of the parties hereto, or, if no
firm is acceptable to both parties hereto, each of the Executive and the Company shall select an
accounting firm acceptable to it, and such accounting firms shall together designate an independent
accounting firm,
provided
,
however
, that any accounting firm so designated shall
not have been previously retained by either party for a period of a least two (2) years subsequent
to the applicable Termination Date. Any independent accounting firm selected by the Executive and
the Company or designated pursuant to this Paragraph (b) shall be referred to herein as the
Accounting Firm
. Subject to Section 3.6(c) and Section 3.7, if a Gross-Up Payment is determined
to be payable, it shall be paid by the Company to the Executive within five (5) days after such
Determination is delivered to
- 13 -
the Company. Subject to Section 3.6(c), any Determination by the Accounting Firm shall be
binding upon the Company and Executive, absent manifest error. All of the costs and expenses of
the Accounting Firm shall be borne by the Company.
(c)
Underpayments and Overpayments
. As a result of uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder,
it is possible that Gross-Up Payments not made by the Company should have been made
(
Underpayments
) or that Gross-Up Payments will have been made by the Company which should not
have been made (
Overpayments
). In either event, the Accounting Firm shall determine the amount
of the Underpayment or Overpayment that has occurred. In the case of an Underpayment, the amount
of such Underpayment shall promptly be paid by the Company to or for the Executives benefit. In
the case of an Overpayment, the Executive shall, at the direction and expense of the Company, take
such steps as are reasonably necessary (including the filing of returns and claims for refund),
follow reasonable instructions from, and procedures established by, the Company and otherwise
reasonably cooperate with the Company to correct such Overpayment;
provided
,
however
, that (i) the Executive shall in no event be obligated to return to the Company an
amount greater than the net after-tax portion of the Overpayment that the Executive has retained or
has received as a refund or has received the benefit of from the applicable taxing authorities and
(ii) this provision shall be interpreted in a manner consistent with the intent of this Section,
which is to make the Executive whole, on an after-tax basis, for the application of the Excise Tax,
it being understood that the correction of an Overpayment may result in the Executives repaying to
the Company an amount which is less than the Overpayment. Anything herein to the contrary
notwithstanding, in the event of a final determination as to the liability for the Excise Tax
applicable to the Total Payments such determination shall be the basis for determining whether
there have been Underpayments or Overpayments pursuant to this Section 3.6. For this purpose, a
final determination shall mean a final agreement reached with the Internal Revenue Service or a
final determination by a court with jurisdiction from which there is no appeal, in either case,
concluded in accordance with the provisions of this Paragraph (c).
(d)
Application of Section 409A
.
Notwithstanding anything contained in this Section
3.6, no portion of the Gross-Up Payment shall be paid to the Executive so as to cause the Executive
to be subject to tax under Section 409A of the Code. In particular, if necessary to avoid taxation
under Code Section 409A, the Gross-Up Payment shall be paid to Executive in a lump sum at the same
date that severance payments are paid to the Executive pursuant to Section 3.4(a). If the amount
of the Gross-Up Payment cannot be fully determined pursuant to Section 3.6(b) by such date, the
Company shall pay to the Executive on such date an estimate of the Gross-Up Payment, as determined
by the Accounting Firm, and shall pay the remainder (or the Executive shall reimburse the Company
the difference) 30 days thereafter.
3.7.
Section 409A Tax
. Notwithstanding anything herein to the contrary, to the extent
any payment or provision of benefits under this Agreement upon the Executives separation from
service is subject to Section 409A of the Code, no such payment shall be made, and Executive shall
be responsible for the full cost of such benefits, for six (6) months following the Executives
separation from service if the Executive is a specified
- 14 -
employee. On the expiration of such six (6) month period, any payments delayed, and an
amount sufficient to reimburse the Executive for the cost of benefits met by the Executive, during
such period shall be aggregated (the
Make-Up Amount
) and paid in full to the Executive, and any
succeeding payments and benefits shall continue as scheduled hereunder. The Company shall credit
the Make-Up Amount with interest at no less than the interest rate it pays for short-term borrowed
funds, such interest to accrue from the date on which payments would have been made, or benefits
would have been provided, by the Company to the Executive absent the six month delay. The terms
separation from service and specified employee shall have the meanings set forth under Section
409A and the regulations and rulings issued thereunder. Furthermore, the Company shall not be
required to make, and the Executive shall not be required to receive, any severance or other
payment or benefit under Sections 3.3, 3.4 or 3.6 hereof if the making of such payment or the
provision of such benefit or the receipt thereof shall result in a tax to the Executive arising
under Section 409A of the Code (a
Section 409A Tax
). In the event the Company cannot make a
payment or provide a benefit under Sections 3.3, 3.4 or 3.6 hereof, or if the Executive cannot
receive any such payment or benefit, in accordance with the terms of such Sections, without the
Executive incurring a Section 409A Tax, then the Company and the Executive shall work together in
good faith to agree on an alternative payment schedule or an alternative benefit of comparable
economic value acceptable to both parties (and to amend this Agreement, where necessary or
desirable) such that the Executive does not incur a Section 409A Tax or the Executive incurs the
least amount of Section 409A Tax as is possible under the circumstances. If a satisfactory
alternative payment schedule or benefit cannot be agreed to by the later to occur of (i) the
originally scheduled payment, distribution or benefit date and (ii) six months following the date
of the Executives separation from service, the Company shall provide such payment, distribution
or benefit to the Executive (
409A Amount
) on the originally scheduled date for such payment,
distribution or benefit together with an additional payment (a
409A Payment
) in an amount such
that after payment by the Executive of all taxes imposed on the 409A Payment (excluding any Excise
Tax to which payment to the Executive is made pursuant to Section 3.6(a)), the Executive retains an
amount of the 409A Payment equal to any taxes (including taxes, penalties and interest under
Section 409A) on the 409A Amount.
SECTION 4.
RESTRICTIVE COVENANTS
.
4.1.
Confidentiality
. The Executive agrees that he will not, either during the Term
or at any time after the expiration or termination of the Term, disclose to any other Person any
confidential or proprietary information of the Company or its subsidiaries, except for (a)
disclosures to directors, officers, key employees, independent accountants and counsel of the
Company and its subsidiaries as may be necessary or appropriate in the performance of the
Executives duties hereunder, (b) disclosures which do not have a material adverse effect on the
business or operations of the Company and its subsidiaries, taken as a whole, (c) disclosures which
the Executive is required to make by law or by any court, arbitrator or administrative or
legislative body (including any committee thereof) with apparent jurisdiction to order the
Executive to disclose or make accessible any information, (d) disclosures with respect to any other
litigation, arbitration or mediation involving this Agreement, and (e) disclosures of any such
confidential or proprietary information that is, at the time of such disclosure, generally known to
and available for use by the public otherwise
- 15 -
than by the Executives wrongful act or omission. The Executive agrees not to take with him
upon leaving the employ of the Company any document or paper relating to any confidential
information or trade secret of the Company and its subsidiaries, except that Executive shall be
entitled to retain (i) papers and other materials of a personal nature, including but limited to,
photographs, correspondence, personal diaries, calendars and Rolodexes (so long as such Rolodexes
do not contain the Companys only copy of business contact information), personal files and phone
books, (ii) information showing his compensation or relating to his reimbursement of expenses,
(iii) information that he reasonably believes may be needed for tax purposes, and (iv) copies of
plans, programs and agreements relating to his employment, or termination thereof, with the
Company.
4.2.
Non-Solicitation of Employees
. The Executive agrees that, except in the course
of performing his duties hereunder, he will not, either during the Term and for a period of two (2)
years after the expiration or termination of the Term, directly or indirectly, solicit or induce or
attempt to solicit or induce or cause any of the employees of the Company or the Companys
subsidiaries to leave the employ of the Company or of such subsidiaries.
SECTION 5.
MISCELLANEOUS PROVISIONS
.
5.1.
No Mitigation; Offsets
. The Executive shall not be required to mitigate damages
or the amount of any payment provided for under this Agreement by seeking other employment or
otherwise and no future income earned by the Executive from employment or otherwise shall in any
way reduce or offset any payments due to the Executive hereunder. Assuming a payment or otherwise
is due Executive under this Agreement, the Company may offset against any amount due Executive
under this Agreement only those amounts due Company in respect of any undisputed, liquidated
obligation of Executive to the Company.
5.2.
Governing Law
. The provisions of this Agreement will be construed and
interpreted under the laws of the State of New Jersey, without regard to principles of conflicts of
law.
5.3.
Injunctive Relief and Additional Remedy
. The Executive acknowledges that the
injury that would be suffered by the Company as a result of a breach of the provisions of Sections
4.1 and 4.2 hereof would be irreparable and that an award of monetary damages to the Company for
such a breach would be an inadequate remedy. Consequently, the Company will have the right, in
addition to any other rights it may have, to obtain injunctive relief to restrain any breach or
threatened breach or otherwise to specifically enforce any provision of this Agreement, and the
Company will not be obligated to post bond or other security in seeking such relief. Each of the
parties hereby irrevocably submits to the exclusive jurisdiction of the federal and state courts of
the State of New Jersey for the purpose of injunctive relief.
5.4.
Representations and Warranties by Executive
. The Executive represents and
warrants to the best of his knowledge that the execution and delivery by the Executive of this
Agreement do not, and the performance by the Executive of the Executives obligations
hereunder will not, with or without the giving of notice or the passage of time, or both: (a)
- 16 -
violate any judgment, writ, injunction, or order of any court, arbitrator or governmental agency
applicable to the Executive or (b) conflict with, result in the breach of any provisions of or the
termination of, or constitute a default under, any agreement to which the Executive is a party or
by which the Executive is or may be bound.
5.5.
Waiver
. The rights and remedies of the parties to this Agreement are cumulative
and not alternative. Neither the failure nor any delay by either party in exercising any right,
power, or privilege under this Agreement will operate as a waiver of such right, power, or
privilege, and no single or partial exercise of any such right, power, or privilege will preclude
any other or further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law, (a) no waiver that
may be given by a party will be applicable except in the specific instance for which it is given;
and (b) no notice to or demand on one party will be deemed to be a waiver of any obligation of such
party or of the right of the party giving such notice or demand to take further action without
notice or demand as provided in this Agreement.
5.6.
Assignment
. No right or benefit under this Agreement shall be assigned,
transferred, pledged or encumbered (a) by the Executive except by a beneficiary designation made by
will or the laws of descent and distribution or (b) by the Company except that the Company may
assign this Agreement and all of its rights hereunder to any Person with which it may merge or
consolidate or to which it may sell all or substantially all of its assets;
provided
that
such Person shall, by agreement in form and substance satisfactory to the Executive, expressly
assume and agree to perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such merger, consolidation or sale had taken place.
Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the
Company and each of its successors and assigns, and the Executive, his heirs, legal representatives
and any beneficiary or beneficiaries designated hereunder.
5.7.
Entire Agreement; Amendments
. This Agreement contains the entire agreement
between the parties with respect to the subject matter hereof and supersedes all prior agreements
and understandings, oral or written, between the parties hereto with respect to the subject matter
hereof. This Agreement may not be amended orally, but only by an agreement in writing signed by
the parties hereto.
5.8.
Arbitration
. Any dispute which may arise between the Executive and the Company
with respect to the construction, interpretation or application of any of the terms, provisions,
covenants or conditions of this Agreement or any claim arising from or relating to this Agreement
will be submitted to final and binding arbitration by three (3) arbitrators in Newark, New Jersey,
under the expedited rules of the American Arbitration Association then obtaining. One such
arbitrator shall be selected by each of the Company and the Executive, and the two arbitrators so
selected shall select the third arbitrator. Selection of all three arbitrators shall be made
within thirty (30) days after the date the dispute arose. The written decision of the arbitrators
shall be rendered within ninety (90) days after selection of the third arbitrator. The decision of
the arbitrators shall be final and binding on the Company and the Executive and may be entered by
either party in any New Jersey federal or state court having jurisdiction.
- 17 -
5.9.
Legal Costs
. The Company shall pay any reasonable attorneys fees and costs
incurred by the Executive in connection with any dispute regarding this Agreement so long as
Executives claim(s) or defense(s) in such action are asserted in the good faith belief that they
are not frivolous. The Company shall pay any such fees and costs promptly following its receipt of
written requests therefor, which requests shall be made no more frequently than once per calendar
month. The Company shall bear all legal costs and expenses incurred in the event the Company should
contest or dispute the characterization of any amounts paid pursuant to this Agreement as being
nondeductible under Section 280G of the Code or subject to imposition of an excise tax under
Section 4999 of the Code, including, without limitation, the reasonable costs and expenses of any
counsel selected by the Executive to represent him in connection with such a matter.
5.10.
Severability
. In the case that any one or more of the provisions contained in
this Agreement shall, for any reason, be held invalid or unenforceable, the other provisions of
this Agreement shall remain in full force and effect. Any provision of this Agreement held invalid
or unenforceable only in part or degree shall remain in full force and effect to the extent not
held invalid or unenforceable.
5.11.
Counterparts; Facsimile
. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this Agreement and all of
which, when taken together, will be deemed to constitute one and the same agreement. This
Agreement may be executed via facsimile.
5.12.
Headings; Interpretation
. The various headings contained herein are for
reference purposes only and do not limit or otherwise affect any of the provisions of this
Agreement. It is the intent of the parties that this Agreement not be construed more strictly with
regard to one party than with regard to any other party.
5.13.
Notices
.
(a)
All notices, requests, demands and other communications required
or permitted under this Agreement shall be in writing and sent as follows:
If to the Company, to:
Selective Insurance Group, Inc.
40 Wantage Avenue
Branchville, New Jersey 07890
Attn: General Counsel
Fax: (973) 948-0282
- 18 -
If to the Executive, to:
Jamie Ochiltree, III
Post Office Box 328
Dingmans Ferry, PA 18328-0328
(b)
All notices and other communications required or permitted under this Agreement which
are addressed as provided in Paragraph (a) of this Section 5.13, (i) if delivered personally
against proper receipt shall be effective upon delivery, (ii) if sent by facsimile transmission
(with evidence supplied by the sender of the facsimiles receipt at a facsimile number
designated for receipt by the other party hereunder, which other party shall be obligated to
provide such a facsimile number) shall be effective upon dispatch, and (iii) if sent (A) by
certified or registered mail with postage prepaid or (B) by Federal Express or similar courier
service with courier fees paid by the sender, shall be effective upon receipt. The parties
hereto may from time to time change their respective addresses and/or facsimile numbers for the
purpose of notices to that party by a similar notice specifying a new address and/or facsimile
number, but no such change shall be deemed to have been given unless it is sent and received in
accordance with this Section 5.13.
5.14.
Withholding
. All amounts payable by the Company to the Executive hereunder
(including, but not limited to, the Salary or any amounts payable pursuant to Sections 3.3 and/or
3.4 hereof) shall be reduced prior to the delivery of such payment to the Executive by an amount
sufficient to satisfy any applicable federal, state, local or other withholding tax requirements.
- 19 -
IN WITNESS WHEREOF, the Company and Executive have executed this Agreement as of the
Commencement Date.
|
|
|
|
|
|
|
|
|
SELECTIVE INSURANCE GROUP, INC.
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Gregory E. Murphy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gregory E. Murphy
|
|
|
|
|
|
|
Its Chairman, President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
EXECUTIVE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Jamie Ochiltree, III
|
|
|
|
|
|
|
|
|
|
|
|
Jamie Ochiltree, III
|
|
|
- 20 -
EXHIBIT A
FORM OF RELEASE
Reference is hereby made to the Employment Agreement, dated as of ___, 200___(the
Employment
Agreement
), by and between ___(the
Executive
) and
Selective Insurance Group, Inc., a New Jersey corporation (the
Company
). Capitalized
terms used but not defined herein shall have the meanings specified in the Employment Agreement.
Pursuant to the terms of the Employment Agreement and in consideration of the payments to be
made to the Executive by the Company, which Executive acknowledges are in excess of what Executive
would otherwise be entitled to receive, the Executive hereby releases and forever discharges and
holds the Company and its subsidiaries (collectively, the
Company
Parties
and
each a
Company
Party
), and the respective officers, directors, employees,
partners, stockholders, members, agents, affiliates, successors and assigns and insurers of each
Company Party, and any legal and personal representatives of each of the foregoing, harmless from
all claims or suits, of any nature whatsoever (whether known or unknown), past, present or future,
including those arising from the law, being directly or indirectly related to the Executives
employment by or the termination of such employment by any Company Party, including, without
limiting the foregoing, any claims for notice, pay in lieu of notice, wrongful dismissal, severance
pay, bonus, overtime pay, incentive compensation, interest or vacation pay for the Executives
service as an officer or director to any Company Party through the date hereof. The Executive also
hereby agrees not to file a lawsuit asserting any such claims. This release (this
Release
) includes, but is not limited to, claims growing out of any legal restriction on
any Company Partys right to terminate its employees and claims or rights under federal, state, and
local laws prohibiting employment discrimination (including, but not limited to, claims or rights
under Title VII of the Civil Rights Act of 1964, as amended by the Civil Rights Act of 1991, the
Americans with Disabilities Act, the Family and Medical Leave Act, the Fair Labor Standards Act,
the Uniformed Services Employment and Reemployment Rights Act, the Employee Retirement Income
Security Act, the Equal Pay Act, the Age Discrimination in Employment Act of 1967, as amended by
the Older Workers Benefit Protection Act of 1990, and the laws of the State of New Jersey against
discrimination, or any other federal or state statutes prohibiting discrimination on the basis of
age, sex, race, color, handicap, religion, national origin, and sexual orientation, or any other
federal, state or local employment law, regulation or other requirement) which arose before the
date this Release is signed, excepting only claims in the nature of workers compensation, claims
for vested benefits, and claims to enforce this agreement. The Executive acknowledges that because
this Release contains a release of claims and is an important legal document, he has been advised
to consult with counsel before executing it, that he may take up to [twenty-one (21)]
1
[forty-five (45)]
2
days to decide
|
|
|
1
|
|
Delete brackets and use text enclosed
therewith if 45 days is not otherwise required by Section 7(f)(1)(F) of the Age
Discrimination in Employment Act and/or 29 C.F.R. Part 1625. If 45 days is so
required, delete bracketed text in its entirety.
|
- 21 -
whether to execute it, and that he may revoke this Release by delivering or mailing a signed
notice of revocation to the Company at its offices within seven (7) days after executing it. If
Executive executes this Release and does not subsequently revoke the release within seven (7) days
after executing it, then this Release shall take effect as a legally binding agreement between
Executive and the Company.
If Executive does not deliver to the Company an original signed copy of this Release by
___, or if Executive signs and revokes this Release within seven (7) days as set forth
above, the Company will assume that Executive rejects the Release and Executive will not receive
the payments referred to herein.
The Executive acknowledges that there is a risk that after signing this Release he may
discover losses or claims that are released under this Release, but that are presently unknown to
him. The Executive assumes this risk and understands that this Release shall apply to any such
losses and claims.
The Executive understands that this Release includes a full and final release covering all
known and unknown, injuries, debts, claims or damages which have arisen or may have arisen from
Executives employment by or the termination of such employment by any Company party. The
Executive acknowledges that by accepting the benefits and payments set forth in the Employment
Agreement, he assumes and waives the risks that the facts and the law may be other than as he
believes.
Notwithstanding the foregoing, this Release does not release, and the Executive continues to
be entitled to, (i) any rights to exculpation or indemnification that the Executive has under
contract or law with respect to his service as an officer or director of any Company Party and (ii)
receive the payments to be made to him by the Company pursuant to Section 3.3 and/or 3.4 of the
Employment Agreement (including any plan, agreement or other arrangement that is referenced in or
the subject of the applicable Section), subject to the conditions set forth in Section 3.5 of the
Employment Agreement, (iii) any right the Executive may have to obtain contribution as permitted by
law in the event of entry of judgment against him as a result of any act or failure to act for
which he and any Company party are jointly liable, and (iv) any claim in respect of any insurance
policy with any Company party entered into outside of the employment relationship.
This Release constitutes the release referenced in Section 3.5 of the Employment Agreement.
The undersigned Executive, having had the time to reflect, freely accepts and agrees to the
above Release. The Executive acknowledges and agrees that no Company representative has made any
representation to or agreement with the Executive relating to this Release which is not contained
in the express terms of this Release. The Executive acknowledges and agrees that the execution and
delivery of this Release is based upon the
|
|
|
2
|
|
Delete brackets and use text enclosed
therewith if 45 days is required by Section 7(f)(1)(F) of the Age
Discrimination in Employment Act and/or 29 C.F.R. Part 1625. If 45 days is not
so required, delete bracketed text in its entirety.
|
- 22 -
Executives independent review of this Release, and the Executive hereby expressly waives any
and all claims or defenses by the Executive against the enforcement of this Release which are based
upon allegations or representations, projections, estimates, understandings or agreements by the
Company or any of its representatives or any assumptions by the Executive that are not contained in
the express terms of this Release.
- 23 -
[Attach disclosures required by the Older Workers Benefit Protection Act, if required]
- 24 -
Exhibit 10.7
EMPLOYMENT AGREEMENT
This Employment Agreement, (the
Agreement
) is made as of the 1st day of August, 2006,
between
Selective Insurance Group, Inc.
, a New Jersey corporation with a principal place of
business at 40 Wantage Avenue, Branchville, New Jersey 07890 (the
Company
) and
Richard F.
Connell
, an individual residing at 505 5
th
Street, Milford, PA 18337 (the
Executive
).
SECTION 1.
DEFINITIONS
.
1.1.
Definitions
.
For purposes of this Agreement, the following terms shall have the
meanings set forth below:
Accounting Firm
has the meaning given to such term in Section 3.6(b) hereof.
Agreement
has the meaning given to such term in the Preamble hereto.
Board
means the Board of Directors of the Company.
Cause
means any one or more of the following:
(i) the Executive shall have been convicted by a court of competent jurisdiction of,
or pleaded guilty or nolo contendere to, any felony under, or within the meaning of,
applicable United States federal or state law;
(ii) the Executive shall have breached in any respect any one or more of the material
provisions of this Agreement, including, without limitation, any failure to comply with the
Code of Conduct, and, to the extent such breach may be cured, such breach shall have
continued for a period of thirty (30) days after written notice by the Chief Executive
Officer to the Executive specifying such breach; or
(iii) the Executive shall have engaged in acts of insubordination, gross negligence or
willful misconduct in the performance of the Executives duties and obligations to the
Company.
For purposes of clauses (ii) and (iii) of this definition of Cause, no act, or failure to act, on
the part of the Executive shall be considered grounds for Cause under such clauses if such act,
or such failure to act, was done or omitted to be done based upon authority or express direction
given by the Chief Executive Officer or based upon the advice of counsel for the Company.
Change in Control
means the occurrence of an event of a nature that would be required to be
reported in response to Item 5.01 of a Current Report on Form 8-K, as in effect on the date
thereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act;
provided, however
, that a
Change in Control shall, in any event, conclusively be deemed to have occurred upon the first to
occur of any one of the following events:
(i) The acquisition by any person or group (as such terms are used in Sections
13(d)(3) and 14(d)(2) of the Securities Exchange Act or any successor provisions to either
of the foregoing), including, without limitation, any current shareholder or shareholders
of the Company, of securities of the Company resulting in such person or group being a
beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act) of
twenty-five percent (25%) or more of any class of Voting Securities of the Company;
(ii) The acquisition by any person or group (as such terms are used in Sections
13(d)(3) and 14(d)(2) of the Securities Exchange Act or any successor provisions to either
of the foregoing), including, without limitation, any current shareholder or shareholders
of the Company, of securities of the Company resulting in such person or group being a
beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act) of twenty
percent (20%) or more, but less than twenty-five percent (25%), of any class of Voting
Securities of the Company, if the Board adopts a resolution that such acquisition
constitutes a Change in Control;
(iii) The sale or disposition of more than fifty percent (50%) of the Companys assets
on a consolidated basis, as shown in the Companys then most recent audited consolidated
balance sheet;
(iv) The reorganization, recapitalization, merger, consolidation or other business
combination involving the Company the result of which is the ownership by the shareholders
of the Company of less than eighty percent (80%) of those Voting Securities of the
resulting or acquiring Person having the power to vote in the elections of the board of
directors of such Person; or
(v) A change in the membership in the Board which, taken in conjunction with any other
prior or concurrent changes, results in twenty percent (20%) or more of the Boards
membership being persons not nominated by the Companys management or the Board as set
forth in the Companys then most recent proxy statement, excluding changes resulting from
substitutions by the Board because of retirement or death of a director or directors,
removal of a director or directors by the Board or resignation of a director or directors
due to demonstrated disability or incapacity.
(vi) Anything in this definition of Change in Control to the contrary notwithstanding,
no Change in Control shall be deemed to have occurred for purposes of this Agreement by
virtue of any transaction which results in the Executive, or a group of Persons which
includes the Executive, acquiring, directly or indirectly, Voting Securities of the
Company.
Code
means the Internal Revenue Code of 1986, as amended from time to time.
Code of Conduct
has the meaning given to such term in Section 2.3(a) hereof.
Commencement Date
has the meaning given to such term in Section 2.2 hereof.
- 2 -
Company
has the meaning given to such term in the Preamble hereto and includes any Person
which shall succeed to or assume the obligations of the Company hereunder pursuant to Section 5.6
hereof.
Determination
has the meaning given to such term in Section 3.6(b) hereof.
Disability
means the Executives physical injury or physical or mental illness which causes
him to be absent from his duties with the Company on a full-time basis for a continuous period in
excess of the greater of: (i) the period of disability constituting permanent disability as
specified under the Companys long-term disability insurance coverage applicable to the Executive
at the time of the determination of the existence of a disability (or, if such determination is
made after the occurrence of a Change in Control, as specified under the long-term disability
insurance coverage applicable to the Executive prior to a Change in Control) or (ii) 180 days,
unless within thirty (30) days after a Notice of Termination is thereafter given the Executive
shall have returned to the full-time performance of his duties.
Early Termination
has the meaning given to such term in Section 3.2 hereof.
Excise Tax
has the meaning given to such term in Section 3.6(a) hereof.
Executive
has the meaning given to such term in the Preamble hereto.
Extended Benefit Period
has the meaning given to such term in Section 3.3(c) hereof.
Good Reason
means the occurrence of any one or more of the following:
(i) any reduction in the Executives Salary below the annualized rate in effect on the
date preceding the date on which a Change in Control shall have occurred, unless such
reduction is implemented for the senior executive staff generally; provided, however, that
such reduction shall constitute Good Reason even if implemented for senior executive staff
generally if such reduction occurs within two years after a Change in Control;
(ii) (A) a failure by the Company to continue in effect benefits that are comparable
in the aggregate to the benefits the Executive receives under the Plans in which the
Executive participates, other than as a result of the normal expiration of any such Plan as
to other eligible employees in accordance with its terms as in effect on the date preceding
the date on which a Change in Control shall have occurred, or (B) the taking of any action,
or the failure to act, by the Company which would adversely affect the Executives
continued participation in any of such Plans on at least as favorable a basis to him as was
the case on the date preceding the date on which a Change in Control shall have occurred or
which would materially reduce the Executives benefits in the future under any such Plans,
unless, in any of the cases described in sub-clauses (A) and (B) of this clause (ii), such
failure to continue in effect, taking of any action or failure to act affects all
participants of such Plan generally;
- 3 -
(iii) without the Executives express prior written consent, the assignment to the
Executive of any duties inconsistent with his positions, duties, responsibilities and
status with the Company immediately prior to a Change in Control, or any material
diminution in the Executives responsibilities as an executive of the Company as compared
with those he had as an executive of the Company immediately prior to a Change in Control,
or any change in the Executives titles or office as in effect immediately prior to a
Change in Control, or any removal of the Executive from, any of such positions, except in
connection with the termination of the Executives employment for Cause, Disability or
Retirement or as a result of the Executives death, or by his termination of his employment
other than for Good Reason;
(iv) without the Executives express prior written consent, the imposition of a
requirement by the Company that the Executive be based at any location in excess of fifty
(50) miles from the location of the Executives office on the date preceding the date on
which a Change in Control shall have occurred;
(v) without the Executives express prior written consent, any reduction in the number
of paid vacation days to which the Executive was entitled as of the date preceding the date
on which a Change in Control shall have occurred;
(vi) the failure by the Company to obtain from any Person with which it may merge or
consolidate or to which it may sell all or substantially all of its assets, the agreement
of such Person as set forth in the proviso in Section 5.6 hereof;
provided
that
such merger, consolidation or sale constitutes a Change in Control;
(vii) subsequent to a Change in Control, any purported termination of the Executives
employment which is not effected pursuant to a Notice of Termination given in accordance
with Section 3.2 hereof; or
(viii) within two years after a Change in Control shall have occurred, any material
breach by the Company of any of the terms and conditions of this Agreement or any Plans
referred to in clause (ii) of this definition of Good Reason to which the Executive is
entitled to receive benefits thereunder, provided, to the extent such breach may be cured,
such breach shall have continued for a period of thirty (30) days after written notice of
the Company specifying such breach.
Gross-Up Payment
has the meaning given to such term in Section 3.6(a) hereof.
Notice of Termination
means a written notice which shall (i) indicate the specific
termination provision in this Agreement relied upon, (ii) set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executives employment under
the provision so indicated and, (iii) specify the date of termination in accordance with this
Agreement (other than for a termination for Cause).
Overpayments
has the meaning given to such term in Section 3.6(c) hereof.
- 4 -
Person
means an individual, partnership, corporation, association, limited liability
company, trust, joint venture, unincorporated organization, and any government, governmental
department or agency or political subdivision thereof.
Plans
has the meaning given to such term in Section 2.4(b) hereof.
Rabbi Trust
has the meaning given to such term in Section 3.4(d) hereof.
Release
has the meaning given to such term in Section 3.5 hereof.
Restrictive Covenants
has the meaning given to such term in Section 3.5 hereof.
Retirement
means a termination of the Executives employment by the Company or the Executive
(i) at such age as shall be established by the Board for mandatory or normal retirement of Company
executives in general (which age shall be, if the determination of Retirement is made after the
occurrence of a Change in Control, the age established by the Board prior to a Change in Control),
which shall not be less than age 65, or (ii) at any other retirement age set by mutual agreement of
the Company and the Executive and approved by the Board.
Salary
has the meaning given to such term in Section 2.4(a) hereof.
Section 409A Tax
has the meaning given to such term in Section 3.7 hereof.
Securities Exchange Act
means the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder.
Term
has the meaning given to such term in Section 2.2 hereof.
Termination Date
means (i) if the Executives employment is to be terminated by the Company
for Disability, thirty (30) days after a Notice of Termination is given;
provided
that the
Executive shall not have returned to the performance of the Executives duties on a full-time basis
during such thirty (30) day period; and (ii) if the Executives employment is to be terminated by
either the Company or the Executive for any other reason, the date on which a Notice of Termination
is given.
Total Payments
has the meaning given to such term in Section 3.6(a) hereof.
Triggering Event
has the meaning given to such term in Section 3.4(d) hereof.
Trustee
has the meaning given to such term in Section 3.4(d) hereof.
Underpayments
has the meaning given to such term in Section 3.6(c) hereof.
Voting Securities
means, with respect to a specified Person, any security of such Person
that has, or may have upon an event of default or in respect to any transaction, a right to vote on
any matter upon which the holder of any class of common stock of such Person would have a right to
vote.
- 5 -
1.2.
Terms Generally
. Unless the context of this Agreement requires otherwise, words
importing the singular number shall include the plural and vice versa, and any pronoun shall
include the corresponding masculine, feminine and neuter forms.
1.3.
Cross-References
. Unless otherwise specified, references in this Agreement to
any Paragraph or Section are references to such Paragraph or Section of this Agreement.
SECTION 2.
EMPLOYMENT AND COMPENSATION
. The following terms and conditions will
govern the Executives employment with the Company throughout the Term.
2.1.
Employment
. The Company hereby employs the Executive, and the Executive hereby
accepts employment with the Company, on the terms and conditions set forth herein.
2.2.
Term
. The term of employment of the Executive under this Agreement shall
commence as of the date hereof (the
Commencement Date
) and, subject to Section 3.1 hereof, shall
terminate three (3) year(s) after the Commencement Date, and shall automatically be extended for
additional one (1) year periods thereafter (any such renewal periods, together with the initial
three (3) year period, being referred to as the
Term
) unless terminated by either party by
written notice to the other party.
2.3.
Duties
.
(a)
The Executive agrees to serve as Senior Executive Vice President and
Chief Information Officer of the Company during the Term. In such capacity, the Executive shall
have the responsibilities and duties customary for such office(s) and such other executive
responsibilities and duties as are assigned by the Chief Executive Officer which are consistent
with the Executives position(s). The Executive agrees to devote substantially all his business
time, attention and services to the business and affairs of the Company and its subsidiaries and to
perform his duties to the best of his ability. At all times during the performance of this
Agreement, the Executive will adhere to the Code of Conduct of the Company (the
Code of Conduct
)
that has been or may hereafter be established and communicated by the Company to the Executive for
the conduct of the position or positions held by the Executive. The Executive may not accept
directorships on the board of directors of for-profit corporations without the prior written
consent of the Chief Executive Officer of the Company. The Executive may accept directorships on
the board of directors of not-for-profit corporations without the Chief Executive Officers prior,
written consent so long as (a) such directorships do not interfere with Executives ability to
carry out his responsibilities under this Agreement, and (b) Executive promptly notifies the Chief
Executive Officer in writing of the fact that he has accepted such a non-profit directorship.
(b)
If the Company or the Executive elects not to renew the Term pursuant to Section 2.2,
the Executive shall continue to be employed under this Agreement until the expiration of the
then current Term (unless earlier terminated pursuant to Section 3.1 hereof), shall cooperate
fully with the Chief Executive Officer and shall perform such duties not inconsistent with the
provisions hereof as he shall be assigned by the Chief Executive Officer.
- 6 -
2.4.
Compensation
.
(a)
Salary
. For all services rendered by the Executive under this Agreement, the
Company shall pay the Executive a salary during the Term at a rate of not less than THREE
HUNDRED EIGHTY THOUSAND DOLLARS ($380,000) per year, which may be increased but not decreased
unless decreased for the senior executive staff generally (the
Salary
), payable in
installments in accordance with the Companys policy from time to time in effect for payment of
salary to executives. The Salary shall be reviewed no less than annually by the Chief
Executive Officer and nothing contained herein shall prevent the Board from at any time
increasing the Salary or other benefits herein provided to be paid or provided to the Executive
or from providing additional or contingent benefits to the Executive as it deems appropriate.
(b)
Benefits
. During the Term, the Company shall permit the Executive to
participate in or receive benefits under the Selective Insurance Group, Inc. 2005 Omnibus Stock
Plan, the Selective Insurance Group, Inc. Cash Incentive Plan, the Selective Insurance
Retirement Savings Plan, the Retirement Income Plan For Selective Insurance Company of America,
as amended, the Selective Insurance Company of America Deferred Compensation Plan, the
Selective Insurance Supplemental Pension Plan and any other incentive compensation, stock
option, stock appreciation right, stock bonus, pension, group insurance, retirement, profit
sharing, medical, disability, accident, life insurance plan, relocation plan or policy, or any
other plan, program, policy or arrangement of the Company intended to benefit the employees of
the Company generally, if any, in accordance with the respective provisions thereof, from time
to time in effect (collectively, the
Plans
).
(c)
Vacations and Reimbursements
. During the Term, the Executive shall be
entitled to vacation time off and reimbursements for ordinary and necessary travel and
entertainment expenses in accordance with the Companys policies on such matters from time to
time in effect.
(d)
Perquisites
. During the Term, the Company shall provide the Executive with
suitable offices, secretarial and other services, and other perquisites to which other
executives of the Company generally are (or become) entitled, to the extent as are suitable to
the character of the Executives position with the Company, subject to such specific limits on
such perquisites as may from time to time be imposed by the Board and the Chief Executive
Officer.
SECTION 3.
TERMINATION AND SEVERANCE
.
3.1.
Termination
. The Executives employment hereunder shall commence on the
Commencement Date and continue until the expiration of the Term, except that the employment of the
Executive hereunder shall earlier terminate:
(a)
Death
. Upon the Executives death.
(b)
Disability
. At the option of the Company, upon the Disability of the
Executive.
- 7 -
(c)
For Cause
. At the option of the Company, for Cause.
(d)
Resignation
. At any time at the option of the Executive, by resignation
(other than a resignation for Good Reason).
(e)
Without Cause
. At any time at the option of the Company, without Cause;
provided
, that a termination of the Executives employment hereunder by the Company
based on Retirement, death, or Disability shall not be deemed to be a termination without
Cause.
(f)
Relocation
. At the option of the Executive at any time prior to a Change in
Control, if the Company imposes a requirement without the consent of the Executive that the
Executive be based at a location in excess of fifty (50) miles from the location of the
Executives office on the Commencement Date.
(g)
For Good Reason
. At any time at the option of the Executive within two (2)
years following the occurrence of a Change in Control, for Good Reason.
3.2.
Procedure For Termination
. Any termination of the Executives employment by the
Company or by the Executive prior to the expiration of the Term (an
Early Termination
) shall be
communicated by delivery of a Notice of Termination to the other party hereto given in accordance
with Section 5.13 hereof. Any Early Termination shall become effective as of the applicable
Termination Date.
3.3.
Rights and Remedies on Termination
. The Executive will be entitled to receive
the payments and benefits specified below if there is an Early Termination.
(a)
Accrued Salary
. If the Executives employment is terminated pursuant to any
of the Paragraphs set forth in Section 3.1 hereof, then the Executive (or his legal
representative, as applicable) shall only be entitled to receive his accrued and unpaid Salary
through the Termination Date.
(b)
Severance Payments
.
(i) If the Executives employment is terminated pursuant to Paragraphs (a) or (b) in
Section 3.1 hereof, then the Executive (or his legal representative, as applicable) shall
be entitled to receive a severance payment from the Company in an aggregate amount equal to
the product of (A) 1.75
times
(B) the Executives Salary
plus
an amount
equal to the average of the three most recent annual cash incentive payments (each an
ACIP) made to the Executive;
provided
that any such severance payment shall be
reduced by the amount of payments the Executive receives under any life or disability
insurance policies with respect to which the premiums were paid by the Company.
(ii) If the Executives employment is terminated pursuant to Paragraph (e) or (f) in
Section 3.1 hereof, then the Executive shall be entitled to receive a severance payment
from the Company in an aggregate amount equal to the product of (A) 1.75
- 8 -
times
(B) the Executives Salary
plus
an amount equal to the average
of the three most recent ACIP payments made to the Executive.
(iii) The severance payment required to be paid by the Company to the Executive
pursuant to Paragraph (b)(i) or (b)(ii) above, shall, subject to Section 3.7, be paid in
equal monthly installments over the twelve (12) month period following the Termination
Date.
(c)
Severance Benefits
.
(i) If the Executives employment is terminated pursuant to any of the Paragraphs set
forth in Section 3.1 hereof, then the Executive (or his legal representative, as
applicable) shall be entitled to receive the benefits which the Executive has accrued or
earned or which have become payable under the Plans as of the Termination Date, but which
have not yet been paid to the Executive. Payment of any such benefits shall be made in
accordance with the terms of such Plans.
(ii) If the Executives employment is terminated pursuant to Paragraph (e) or (f) in
Section 3.1 hereof, then the Company shall, subject to Section 3.7, maintain in full force
and effect for the continued benefit of the Executive and his dependents for a period
terminating on the earlier of (A) twenty-one (21) months following the applicable
Termination Date, or (B) the commencement date of equivalent benefits from a new employer,
(any such period being referred to as the applicable
Extended Benefit Period
) all insured
and self-insured medical, dental, vision, disability and life insurance employee benefit
Plans in which the Executive was entitled to participate immediately prior to the
Termination Date;
provided
that the Executives continued participation is not
barred under the general terms and provisions of such Plans. Notwithstanding the
foregoing, the Executive shall continue to participate in such Plans during the Extended
Benefit Period only to the extent that such Plans remain in effect for other executives of
the Company from time to time during the Extended Benefit Period and subject to the terms
of such Plans, including any modifications and amendments thereto following the Termination
Date. In the event that the Executives participation in any such Plan is barred by its
terms, the Company shall arrange, at its sole cost and expense, to have issued for the
benefit of the Executive and his dependents during the Extended Benefit Period individual
policies of insurance providing benefits substantially similar (on an after-tax basis) to
those which the Executive otherwise would have been entitled to receive under such Plans
pursuant to this Paragraph (c)(ii). Executive shall be responsible for making any required
contributions to the cost of such coverage, on an after-tax basis, at the rate which
Executive was obligated to pay immediately prior to the Termination Date. If, at the end
of the applicable Extended Benefit Period, the Executive has not previously received or is
not receiving equivalent benefits from a new employer, or is not otherwise receiving such
benefits, the Company shall arrange to enable the Executive to convert his and his
dependents coverage under such Plans to individual policies or programs upon the same
terms as employees of the Company may apply for such conversions upon termination of
employment. In no event shall the
- 9 -
Companys obligation to provide disability benefits hereunder be reduced as a result
of any individual disability policy purchased by the Executive.
(d)
Rights Under Plans
. If the Executives employment is terminated pursuant to
Paragraphs (a), (b), (e), or (f) in Section 3.1 hereof, the Executive shall be entitled to the
benefits of any stock options, stock appreciation rights, restricted stock grants, stock
bonuses or other benefits theretofore granted by the Company to the Executive under any Plan,
whether or not provided for in any agreement with the Company;
provided
,
however
, that (i) all unvested stock options, stock appreciation rights, restricted
stock grants, stock bonuses, long-term incentives and similar benefits shall be deemed to be
vested in full on the Termination Date, notwithstanding any provision to the contrary or any
provision requiring any act or acts by the Executive in any agreement with the Company or any
Plan; (ii) to the extent that any such stock options, stock appreciation rights, restricted
stock grants, stock bonuses, long-term incentives or similar benefits shall require by its
terms the exercise thereof by the Executive, the last date to exercise the same shall,
notwithstanding any provision to the contrary in any agreement or any Plan, be the earlier of
(A) the later to occur of the fifteenth day of the third month following the date at which, or
the December 31 of the calendar year in which, any such stock options, stock appreciation
rights, restricted stock grants, stock bonuses, long-term incentives or similar benefits would
otherwise have expired if not extended, or (B) the original expiration date had the Executives
employment not so terminated; and (iii) if the vesting or exercise pursuant hereto of any such
stock options, stock appreciation rights, restricted stock grants, stock bonuses, long-term
incentives or similar benefits shall have the effect of subjecting the Executive to liability
under Section 16(b) of the Securities Exchange Act or any similar provision of law, the vesting
date thereof shall be deemed to be the first day after the Termination Date on which such
vesting may occur without subjecting the Executive to such liability.
(e)
No Double Dipping.
(i) The severance payments and severance benefits the Executive may be entitled to
receive pursuant to this Section 3.3 shall be in lieu of any of the payments and benefits
the Executive may be entitled to receive pursuant to any other agreement, plan or
arrangement providing for the payment of severance payments or benefits.
(ii) The Executive expressly disclaims any interest he may have in the Selective
Insurance Company of America Severance Plan.
3.4.
Rights and Remedies on Termination After Change in Control
. The Executive will
be entitled to receive the severance payments and severance benefits specified below in the event
there shall occur a termination of the Executives employment pursuant to Paragraph (e) or (g) of
Section 3.1 hereof within two (2) years following the occurrence of a Change in Control. The
severance payments and benefits the Executive may be entitled to receive pursuant to this Section
3.4 shall be in addition to, and not in lieu of, any of the payments and benefits the Executive may
be entitled to receive pursuant to Section 3.3 hereof, unless expressly so stated to be in lieu of
such benefits and/or payments.
- 10 -
(a)
Severance Payments
. The Executive shall be entitled to receive a severance
payment from the Company in an aggregate amount equal to the product of (i) 2.5; and (ii) the
greater of:
(1) the sum of the Executives Salary
plus
the Executives
target ACIP in effect as of the Termination Date, or
(2) the sum of the Executives Salary in effect as of the Termination
Date plus the Executives average ACIP for the three calendar years prior
to the calendar year in which the Termination Date occurs.
Such payment shall be made, subject to Section 3.7, thirty (30) business days following the
Termination Date, provided that the Executive has executed and delivered a Release pursuant to
Section 3.5 hereof
and
such Release has become effective and irrevocable. The severance
payment required to be paid by the Company to the Executive pursuant to this Section 3.4(a) shall
be in lieu of, and not in addition to, any other severance payments required to be paid by the
Company to the Executive.
(b)
Severance Benefits
. Subject to Section 3.7, the Company shall maintain in full
force and effect, for the continued benefit of the Executive and his dependents for a period
terminating on the earlier of: (i) twenty-four (24) months after the Termination Date or (ii) the
commencement date of equivalent benefits from a new employer (the
CIC Extended Benefit Period
),
all insured and self insured medical, dental, vision, disability and life insurance employee
welfare benefit plans in which the Executive was entitled to participate immediately prior to the
Termination Date;
provided
that the Executives continued participation is not barred under
the general terms and provisions of such Plans. Notwithstanding the foregoing, the Executive shall
continue to participate in such Plans during the CIC Extended Benefit Period only to the extent
that such Plans remain in effect for other executives of the Company from time to time during the
CIC Extended Benefit Period and subject to the terms of such Plans, including any modifications and
amendments thereto following the Termination Date. In the event that the Executives participation
in any such Plan is barred by its terms, the Company, at its sole cost and expense, shall arrange
to have issued for the benefit of the Executive and his dependents individual policies of insurance
providing benefits substantially similar (on an after-tax basis) to those which the Executive
otherwise would have been entitled to receive under such Plans pursuant to this Paragraph (b).
Executive shall be responsible for making any required contributions to the cost of such coverage,
on an after-tax basis, at the rate which Executive was obligated to pay immediately prior to the
Termination Date. If, at the end of the applicable CIC Extended Benefit Period, the Executive has
not previously received or is not receiving equivalent benefits from a new employer, or is not
otherwise receiving such benefits, the Company shall arrange to enable the Executive to convert his
and his dependents coverage under such Plans to individual policies or programs upon the same
terms as employees of the Company may apply for such conversions upon termination of employment.
The severance benefits required to be provided by the Company to the Executive pursuant to this
Paragraph (b) shall be in lieu of, and not in addition to, any severance benefits required to be
provided to the Executive pursuant to Section 3.3(c)(ii)
- 11 -
hereof. In no event shall the Companys obligation to provide disability benefits hereunder
be reduced as a result of any individual disability policy purchased by the Executive.
(c)
Rights Under Plans
. The Executive shall be entitled to the benefits of any stock
options, stock appreciation rights, restricted stock grants, stock bonuses or other benefits
theretofore granted by the Company to the Executive under any Plan, whether or not provided for in
any agreement with the Company;
provided
,
however
, that (i) all unvested stock
options, stock appreciation rights, restricted stock grants, stock bonuses, long-term incentives
and similar benefits shall be deemed to be vested in full on the Termination Date, notwithstanding
any provision to the contrary or any provision requiring any act or acts by the Executive in any
agreement with the Company or any Plan; (ii) to the extent that any such stock options, stock
appreciation rights, restricted stock grants, stock bonuses, long-term incentives or similar
benefits shall require by its terms the exercise thereof by the Executive, the last date to
exercise the same shall, notwithstanding any provision to the contrary in any agreement or any
Plan, be the earlier of (A) the later to occur of the fifteenth day of the third month following
the date at which, or the December 31 of the calendar year in which, any such stock options, stock
appreciation rights, restricted stock grants, stock bonuses, long-term incentives or similar
benefits would otherwise have expired if not extended or (B) the original expiration date had the
Executives employment not so terminated; and (iii) if the vesting or exercise pursuant hereto of
any such stock options, stock appreciation rights, restricted stock grants, stock bonuses,
long-term incentives or similar benefits shall have the effect of subjecting the Executive to
liability under Section 16(b) of the Securities Exchange Act or any similar provision of law, the
vesting date thereof shall be deemed to be the first day after the Termination Date on which such
vesting may occur without subjecting the Executive to such liability.
(d)
Rabbi Trust
. The Company shall maintain a trust intended to be a grantor trust
within the meaning of subpart E, Part I, subchapter J, chapter 1, subtitle A of the Code (the
Rabbi Trust
). Coincident with the occurrence of a Change in Control, the Company shall promptly
deliver to a bank as trustee of the Rabbi Trust (the
Trustee
), an amount of cash or certificates
of deposit, treasury bills or irrevocable letters of credit adequate to fully fund the payment
obligations of the Company under this Section 3.4. The Company and Trustee shall enter into a
trust agreement that shall provide that barring the insolvency of the Company, amounts payable to
the Executive under this Section 3.4 (subject to Section 3.7) shall be paid by the Trustee to the
Executive five (5) days after written demand therefor by the Executive to the Trustee, with a copy
to the Company, certifying that such amounts are due and payable under this Section 3.4 because the
Executives employment has been terminated pursuant to Paragraph (e) or (g) in Section 3.1 hereof
at a time which is within two (2) years following the occurrence of a Change in Control (a
Triggering Event
). Such trust agreement shall also provide that if the Company shall, prior to
payment by the Trustee, object in writing to the Trustee, with a copy to the Executive, as to the
payment of any amounts demanded by the Executive under this Section 3.4, certifying that such
amounts are not due and payable to the Executive because a Triggering Event has not occurred, such
dispute shall be resolved by binding arbitration as set forth in Section 5.8 hereof.
- 12 -
3.5.
Conditions to Severance Payments and Benefits
. The Executives right to receive
the severance payments and benefits pursuant to Sections 3.3 and 3.4 hereof, is expressly
conditioned upon (a) receipt by the Company of a written release (a
Release
) executed by the
Executive in the form of
Exhibit A
hereto, and the expiration of the revocation period described
therein without such Release having been revoked, and (b) the compliance by the Executive with the
covenants, terms or provisions of Sections 4.1 and 4.2 hereof (the
Restrictive Covenants
). If
the Executive shall fail to deliver a Release in accordance with the terms of this Section 3.5 or
shall breach any of the Restrictive Covenants, the Companys obligation to make the severance
payments and to provide the severance benefits pursuant to Sections 3.3 and 3.4 hereof shall
immediately and irrevocably terminate.
3.6.
Tax Effect of Payments
.
(a)
Gross-Up Payment
. In the event that it is determined that any payment,
distribution or other benefit of any type to or for the Executives benefit made by the Company, by
any of its affiliates, by any Person who acquires ownership or effective control of the Company or
ownership of a substantial portion of the Companys assets (within the meaning of Section 280G of
the Code and the regulations thereunder) or by any affiliate of such Person, whether paid or
payable or distributed or distributable or otherwise made available pursuant to the terms of this
Agreement or otherwise (the
Total Payments
), would be subject to the excise tax imposed by
Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise
tax, together with any such interest or penalties, are collectively referred to as the
Excise
Tax
), then the Executive shall be entitled to receive an additional payment (a
Gross-Up Payment
)
in an amount such that after payment by the Executive of all taxes imposed upon the Gross-Up
Payment, including any Excise Tax, the Executive retains an amount of the Gross-Up Payment equal to
the Excise Tax imposed on the Total Payments.
(b)
Determination by Accountant
. All mathematical determinations and all
determinations of whether any of the Total Payments are parachute payments (within the meaning of
Section 280G of the Code) that are required to be made under this Section, including all
determinations of whether a Gross-Up Payment is required, of the amount of such Gross-Up Payment
and of amounts relevant to the last sentence of this Section (collectively, the
Determination
),
shall be made by an independent accounting firm acceptable to each of the parties hereto, or, if no
firm is acceptable to both parties hereto, each of the Executive and the Company shall select an
accounting firm acceptable to it, and such accounting firms shall together designate an independent
accounting firm,
provided
,
however
, that any accounting firm so designated shall
not have been previously retained by either party for a period of a least two (2) years subsequent
to the applicable Termination Date. Any independent accounting firm selected by the Executive and
the Company or designated pursuant to this Paragraph (b) shall be referred to herein as the
Accounting Firm
. Subject to Section 3.6(c) and Section 3.7, if a Gross-Up Payment is determined
to be payable, it shall be paid by the Company to the Executive within five (5) days after such
Determination is delivered to the Company. Subject to Section 3.6(c), any Determination by the
Accounting Firm shall be binding upon the Company and Executive, absent manifest error. All of the
costs and expenses of the Accounting Firm shall be borne by the Company.
- 13 -
(c)
Underpayments and Overpayments
. As a result of uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder,
it is possible that Gross-Up Payments not made by the Company should have been made
(
Underpayments
) or that Gross-Up Payments will have been made by the Company which should not
have been made (
Overpayments
). In either event, the Accounting Firm shall determine the amount
of the Underpayment or Overpayment that has occurred. In the case of an Underpayment, the amount
of such Underpayment shall promptly be paid by the Company to or for the Executives benefit. In
the case of an Overpayment, the Executive shall, at the direction and expense of the Company, take
such steps as are reasonably necessary (including the filing of returns and claims for refund),
follow reasonable instructions from, and procedures established by, the Company and otherwise
reasonably cooperate with the Company to correct such Overpayment;
provided
,
however
, that (i) the Executive shall in no event be obligated to return to the Company an
amount greater than the net after-tax portion of the Overpayment that the Executive has retained or
has received as a refund or has received the benefit of from the applicable taxing authorities and
(ii) this provision shall be interpreted in a manner consistent with the intent of this Section,
which is to make the Executive whole, on an after-tax basis, for the application of the Excise Tax,
it being understood that the correction of an Overpayment may result in the Executives repaying to
the Company an amount which is less than the Overpayment. Anything herein to the contrary
notwithstanding, in the event of a final determination as to the liability for the Excise Tax
applicable to the Total Payments such determination shall be the basis for determining whether
there have been Underpayments or Overpayments pursuant to this Section 3.6. For this purpose, a
final determination shall mean a final agreement reached with the Internal Revenue Service or a
final determination by a court with jurisdiction from which there is no appeal, in either case,
concluded in accordance with the provisions of this Paragraph (c).
(d)
Application of Section 409A
.
Notwithstanding anything contained in this Section
3.6, no portion of the Gross-Up Payment shall be paid to the Executive so as to cause the Executive
to be subject to tax under Section 409A of the Code. In particular, if necessary to avoid taxation
under Code Section 409A, the Gross-Up Payment shall be paid to Executive in a lump sum at the same
date that severance payments are paid to the Executive pursuant to Section 3.4(a). If the amount
of the Gross-Up Payment cannot be fully determined pursuant to Section 3.6(b) by such date, the
Company shall pay to the Executive on such date an estimate of the Gross-Up Payment, as determined
by the Accounting Firm, and shall pay the remainder (or the Executive shall reimburse the Company
the difference) 30 days thereafter.
3.7.
Section 409A Tax
. Notwithstanding anything herein to the contrary, to the extent
any payment or provision of benefits under this Agreement upon the Executives separation from
service is subject to Section 409A of the Code, no such payment shall be made, and Executive shall
be responsible for the full cost of such benefits, for six (6) months following the Executives
separation from service if the Executive is a specified employee. On the expiration of such
six (6) month period, any payments delayed, and an amount sufficient to reimburse the Executive for
the cost of benefits met by the Executive, during such period shall be aggregated (the
Make-Up
Amount
) and paid in full to the Executive, and any succeeding payments and benefits shall continue
as scheduled hereunder.
- 14 -
The Company shall credit the Make-Up Amount with interest at no less than the interest rate it
pays for short-term borrowed funds, such interest to accrue from the date on which payments would
have been made, or benefits would have been provided, by the Company to the Executive absent the
six month delay. The terms separation from service and specified employee shall have the
meanings set forth under Section 409A and the regulations and rulings issued thereunder.
Furthermore, the Company shall not be required to make, and the Executive shall not be required to
receive, any severance or other payment or benefit under Sections 3.3, 3.4 or 3.6 hereof if the
making of such payment or the provision of such benefit or the receipt thereof shall result in a
tax to the Executive arising under Section 409A of the Code (a
Section 409A Tax
). In the event
the Company cannot make a payment or provide a benefit under Sections 3.3, 3.4 or 3.6 hereof, or if
the Executive cannot receive any such payment or benefit, in accordance with the terms of such
Sections, without the Executive incurring a Section 409A Tax, then the Company and the Executive
shall work together in good faith to agree on an alternative payment schedule or an alternative
benefit of comparable economic value acceptable to both parties (and to amend this Agreement, where
necessary or desirable) such that the Executive does not incur a Section 409A Tax or the Executive
incurs the least amount of Section 409A Tax as is possible under the circumstances. If a
satisfactory alternative payment schedule or benefit cannot be agreed to by the later to occur of
(i) the originally scheduled payment, distribution or benefit date and (ii) six months following
the date of the Executives separation from service, the Company shall provide such payment,
distribution or benefit to the Executive (
409A Amount
) on the originally scheduled date for such
payment, distribution or benefit together with an additional payment (a
409A Payment
) in an
amount such that after payment by the Executive of all taxes imposed on the 409A Payment (excluding
any Excise Tax to which payment to the Executive is made pursuant to Section 3.6(a)), the Executive
retains an amount of the 409A Payment equal to any taxes (including taxes, penalties and interest
under Section 409A) on the 409A Amount.
SECTION 4.
RESTRICTIVE COVENANTS
.
4.1.
Confidentiality
. The Executive agrees that he will not, either during the Term
or at any time after the expiration or termination of the Term, disclose to any other Person any
confidential or proprietary information of the Company or its subsidiaries, except for (a)
disclosures to directors, officers, key employees, independent accountants and counsel of the
Company and its subsidiaries as may be necessary or appropriate in the performance of the
Executives duties hereunder, (b) disclosures which do not have a material adverse effect on the
business or operations of the Company and its subsidiaries, taken as a whole, (c) disclosures which
the Executive is required to make by law or by any court, arbitrator or administrative or
legislative body (including any committee thereof) with apparent jurisdiction to order the
Executive to disclose or make accessible any information, (d) disclosures with respect to any other
litigation, arbitration or mediation involving this Agreement, and (e) disclosures of any such
confidential or proprietary information that is, at the time of such disclosure, generally known to
and available for use by the public otherwise than by the Executives wrongful act or omission.
The Executive agrees not to take with him upon leaving the employ of the Company any document or
paper relating to any confidential information or trade secret of the Company and its subsidiaries,
except that Executive shall be entitled to retain (i) papers and other materials of a personal
nature, including but limited
- 15 -
to, photographs, correspondence, personal diaries, calendars and Rolodexes (so long as such
Rolodexes do not contain the Companys only copy of business contact information), personal files
and phone books, (ii) information showing his compensation or relating to his reimbursement of
expenses, (iii) information that he reasonably believes may be needed for tax purposes, and (iv)
copies of plans, programs and agreements relating to his employment, or termination thereof, with
the Company.
4.2.
Non-Solicitation of Employees
. The Executive agrees that, except in the course
of performing his duties hereunder, he will not, either during the Term and for a period of two (2)
years after the expiration or termination of the Term, directly or indirectly, solicit or induce or
attempt to solicit or induce or cause any of the employees of the Company or the Companys
subsidiaries to leave the employ of the Company or of such subsidiaries.
SECTION 5.
MISCELLANEOUS PROVISIONS
.
5.1.
No Mitigation; Offsets
. The Executive shall not be required to mitigate damages
or the amount of any payment provided for under this Agreement by seeking other employment or
otherwise and no future income earned by the Executive from employment or otherwise shall in any
way reduce or offset any payments due to the Executive hereunder. Assuming a payment or otherwise
is due Executive under this Agreement, the Company may offset against any amount due Executive
under this Agreement only those amounts due Company in respect of any undisputed, liquidated
obligation of Executive to the Company.
5.2.
Governing Law
. The provisions of this Agreement will be construed and
interpreted under the laws of the State of New Jersey, without regard to principles of conflicts of
law.
5.3.
Injunctive Relief and Additional Remedy
. The Executive acknowledges that the
injury that would be suffered by the Company as a result of a breach of the provisions of Sections
4.1 and 4.2 hereof would be irreparable and that an award of monetary damages to the Company for
such a breach would be an inadequate remedy. Consequently, the Company will have the right, in
addition to any other rights it may have, to obtain injunctive relief to restrain any breach or
threatened breach or otherwise to specifically enforce any provision of this Agreement, and the
Company will not be obligated to post bond or other security in seeking such relief. Each of the
parties hereby irrevocably submits to the exclusive jurisdiction of the federal and state courts of
the State of New Jersey for the purpose of injunctive relief.
5.4.
Representations and Warranties by Executive
. The Executive represents and
warrants to the best of his knowledge that the execution and delivery by the Executive of this
Agreement do not, and the performance by the Executive of the Executives obligations hereunder
will not, with or without the giving of notice or the passage of time, or both: (a) violate any
judgment, writ, injunction, or order of any court, arbitrator or governmental agency applicable to
the Executive or (b) conflict with, result in the breach of any provisions of or the termination
of, or constitute a default under, any agreement to which the Executive is a party or by which the
Executive is or may be bound.
- 16 -
5.5.
Waiver
. The rights and remedies of the parties to this Agreement are cumulative
and not alternative. Neither the failure nor any delay by either party in exercising any right,
power, or privilege under this Agreement will operate as a waiver of such right, power, or
privilege, and no single or partial exercise of any such right, power, or privilege will preclude
any other or further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law, (a) no waiver that
may be given by a party will be applicable except in the specific instance for which it is given;
and (b) no notice to or demand on one party will be deemed to be a waiver of any obligation of such
party or of the right of the party giving such notice or demand to take further action without
notice or demand as provided in this Agreement.
5.6.
Assignment
. No right or benefit under this Agreement shall be assigned,
transferred, pledged or encumbered (a) by the Executive except by a beneficiary designation made by
will or the laws of descent and distribution or (b) by the Company except that the Company may
assign this Agreement and all of its rights hereunder to any Person with which it may merge or
consolidate or to which it may sell all or substantially all of its assets;
provided
that
such Person shall, by agreement in form and substance satisfactory to the Executive, expressly
assume and agree to perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such merger, consolidation or sale had taken place.
Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the
Company and each of its successors and assigns, and the Executive, his heirs, legal representatives
and any beneficiary or beneficiaries designated hereunder.
5.7.
Entire Agreement; Amendments
. This Agreement contains the entire agreement
between the parties with respect to the subject matter hereof and supersedes all prior agreements
and understandings, oral or written, between the parties hereto with respect to the subject matter
hereof. This Agreement may not be amended orally, but only by an agreement in writing signed by
the parties hereto.
5.8.
Arbitration
. Any dispute which may arise between the Executive and the Company
with respect to the construction, interpretation or application of any of the terms, provisions,
covenants or conditions of this Agreement or any claim arising from or relating to this Agreement
will be submitted to final and binding arbitration by three (3) arbitrators in Newark, New Jersey,
under the expedited rules of the American Arbitration Association then obtaining. One such
arbitrator shall be selected by each of the Company and the Executive, and the two arbitrators so
selected shall select the third arbitrator. Selection of all three arbitrators shall be made
within thirty (30) days after the date the dispute arose. The written decision of the arbitrators
shall be rendered within ninety (90) days after selection of the third arbitrator. The decision of
the arbitrators shall be final and binding on the Company and the Executive and may be entered by
either party in any New Jersey federal or state court having jurisdiction.
5.9.
Legal Costs
. The Company shall pay any reasonable attorneys fees and costs
incurred by the Executive in connection with any dispute regarding this Agreement so long as
Executives claim(s) or defense(s) in such action are asserted in the good faith belief that they
are not frivolous. The Company shall pay any such fees and costs promptly following its receipt of
written requests therefor, which requests shall be made no more
- 17 -
frequently than once per calendar month. The Company shall bear all legal costs and expenses
incurred in the event the Company should contest or dispute the characterization of any amounts
paid pursuant to this Agreement as being nondeductible under Section 280G of the Code or subject to
imposition of an excise tax under Section 4999 of the Code, including, without limitation, the
reasonable costs and expenses of any counsel selected by the Executive to represent him in
connection with such a matter.
5.10.
Severability
. In the case that any one or more of the provisions contained in
this Agreement shall, for any reason, be held invalid or unenforceable, the other provisions of
this Agreement shall remain in full force and effect. Any provision of this Agreement held invalid
or unenforceable only in part or degree shall remain in full force and effect to the extent not
held invalid or unenforceable.
5.11.
Counterparts; Facsimile
. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this Agreement and all of
which, when taken together, will be deemed to constitute one and the same agreement. This
Agreement may be executed via facsimile.
5.12.
Headings; Interpretation
. The various headings contained herein are for
reference purposes only and do not limit or otherwise affect any of the provisions of this
Agreement. It is the intent of the parties that this Agreement not be construed more strictly with
regard to one party than with regard to any other party.
5.13.
Notices
.
(a)
All notices, requests, demands and other communications required
or permitted under this Agreement shall be in writing and sent as follows:
If to the Company, to:
Selective Insurance Group, Inc.
40 Wantage Avenue
Branchville, New Jersey 07890
Attn: General Counsel
Fax: (973) 948-0282
If to the Executive, to:
Richard F. Connell
505 5
th
Street
Milford, PA 18337
(b)
All notices and other communications required or permitted under this Agreement which
are addressed as provided in Paragraph (a) of this Section 5.13, (i) if delivered personally
against proper receipt shall be effective upon delivery, (ii) if sent by facsimile transmission
(with evidence supplied by the sender of the facsimiles receipt at a facsimile number
designated for receipt by the other party hereunder, which other
- 18 -
party shall be obligated to provide such a facsimile number) shall be effective upon
dispatch, and (iii) if sent (A) by certified or registered mail with postage prepaid or (B) by
Federal Express or similar courier service with courier fees paid by the sender, shall be
effective upon receipt. The parties hereto may from time to time change their respective
addresses and/or facsimile numbers for the purpose of notices to that party by a similar notice
specifying a new address and/or facsimile number, but no such change shall be deemed to have
been given unless it is sent and received in accordance with this Section 5.13.
5.14.
Withholding
. All amounts payable by the Company to the Executive hereunder
(including, but not limited to, the Salary or any amounts payable pursuant to Sections 3.3 and/or
3.4 hereof) shall be reduced prior to the delivery of such payment to the Executive by an amount
sufficient to satisfy any applicable federal, state, local or other withholding tax requirements.
- 19 -
IN WITNESS WHEREOF, the Company and Executive have executed this Agreement as of the
Commencement Date.
|
|
|
|
|
|
|
|
|
SELECTIVE INSURANCE GROUP, INC.
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Gregory E. Murphy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gregory E. Murphy
|
|
|
|
|
|
|
Its Chairman, President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
EXECUTIVE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Richard F. Connell
|
|
|
|
|
|
|
|
|
|
|
|
Richard F. Connell
|
|
|
- 20 -
EXHIBIT A
FORM OF RELEASE
Reference is hereby made to the Employment Agreement, dated as of ___, 200___(the
Employment
Agreement
), by and between ___(the
Executive
) and
Selective Insurance Group, Inc., a New Jersey corporation (the
Company
). Capitalized
terms used but not defined herein shall have the meanings specified in the Employment Agreement.
Pursuant to the terms of the Employment Agreement and in consideration of the payments to be
made to the Executive by the Company, which Executive acknowledges are in excess of what Executive
would otherwise be entitled to receive, the Executive hereby releases and forever discharges and
holds the Company and its subsidiaries (collectively, the
Company
Parties
and
each a
Company
Party
), and the respective officers, directors, employees,
partners, stockholders, members, agents, affiliates, successors and assigns and insurers of each
Company Party, and any legal and personal representatives of each of the foregoing, harmless from
all claims or suits, of any nature whatsoever (whether known or unknown), past, present or future,
including those arising from the law, being directly or indirectly related to the Executives
employment by or the termination of such employment by any Company Party, including, without
limiting the foregoing, any claims for notice, pay in lieu of notice, wrongful dismissal, severance
pay, bonus, overtime pay, incentive compensation, interest or vacation pay for the Executives
service as an officer or director to any Company Party through the date hereof. The Executive also
hereby agrees not to file a lawsuit asserting any such claims. This release (this
Release
) includes, but is not limited to, claims growing out of any legal restriction on
any Company Partys right to terminate its employees and claims or rights under federal, state, and
local laws prohibiting employment discrimination (including, but not limited to, claims or rights
under Title VII of the Civil Rights Act of 1964, as amended by the Civil Rights Act of 1991, the
Americans with Disabilities Act, the Family and Medical Leave Act, the Fair Labor Standards Act,
the Uniformed Services Employment and Reemployment Rights Act, the Employee Retirement Income
Security Act, the Equal Pay Act, the Age Discrimination in Employment Act of 1967, as amended by
the Older Workers Benefit Protection Act of 1990, and the laws of the State of New Jersey against
discrimination, or any other federal or state statutes prohibiting discrimination on the basis of
age, sex, race, color, handicap, religion, national origin, and sexual orientation, or any other
federal, state or local employment law, regulation or other requirement) which arose before the
date this Release is signed, excepting only claims in the nature of workers compensation, claims
for vested benefits, and claims to enforce this agreement. The Executive acknowledges that because
this Release contains a release of claims and is an important legal document, he has been advised
to consult with counsel before executing it, that he may take up to [twenty-one (21)]
1
[forty-five (45)]
2
days to decide
|
|
|
1
|
|
Delete brackets and use text enclosed
therewith if 45 days is not otherwise required by Section 7(f)(1)(F) of the Age
Discrimination in Employment Act and/or 29 C.F.R. Part 1625. If 45 days is so
required, delete bracketed text in its entirety.
|
- 21 -
whether to execute it, and that he may revoke this Release by delivering or mailing a signed
notice of revocation to the Company at its offices within seven (7) days after executing it. If
Executive executes this Release and does not subsequently revoke the release within seven (7) days
after executing it, then this Release shall take effect as a legally binding agreement between
Executive and the Company.
If Executive does not deliver to the Company an original signed copy of this Release by
___, or if Executive signs and revokes this Release within seven (7) days as set forth
above, the Company will assume that Executive rejects the Release and Executive will not receive
the payments referred to herein.
The Executive acknowledges that there is a risk that after signing this Release he may
discover losses or claims that are released under this Release, but that are presently unknown to
him. The Executive assumes this risk and understands that this Release shall apply to any such
losses and claims.
The Executive understands that this Release includes a full and final release covering all
known and unknown, injuries, debts, claims or damages which have arisen or may have arisen from
Executives employment by or the termination of such employment by any Company party. The
Executive acknowledges that by accepting the benefits and payments set forth in the Employment
Agreement, he assumes and waives the risks that the facts and the law may be other than as he
believes.
Notwithstanding the foregoing, this Release does not release, and the Executive continues to
be entitled to, (i) any rights to exculpation or indemnification that the Executive has under
contract or law with respect to his service as an officer or director of any Company Party and (ii)
receive the payments to be made to him by the Company pursuant to Section 3.3 and/or 3.4 of the
Employment Agreement (including any plan, agreement or other arrangement that is referenced in or
the subject of the applicable Section), subject to the conditions set forth in Section 3.5 of the
Employment Agreement, (iii) any right the Executive may have to obtain contribution as permitted by
law in the event of entry of judgment against him as a result of any act or failure to act for
which he and any Company party are jointly liable, and (iv) any claim in respect of any insurance
policy with any Company party entered into outside of the employment relationship.
This Release constitutes the release referenced in Section 3.5 of the Employment Agreement.
The undersigned Executive, having had the time to reflect, freely accepts and agrees to the
above Release. The Executive acknowledges and agrees that no Company representative has made any
representation to or agreement with the Executive relating to this Release which is not contained
in the express terms of this Release. The Executive acknowledges and agrees that the execution and
delivery of this Release is based upon the
|
|
|
2
|
|
Delete brackets and use text enclosed
therewith if 45 days is required by Section 7(f)(1)(F) of the Age
Discrimination in Employment Act and/or 29 C.F.R. Part 1625. If 45 days is not
so required, delete bracketed text in its entirety.
|
- 22 -
Executives independent review of this Release, and the Executive hereby expressly waives any
and all claims or defenses by the Executive against the enforcement of this Release which are based
upon allegations or representations, projections, estimates, understandings or agreements by the
Company or any of its representatives or any assumptions by the Executive that are not contained in
the express terms of this Release.
- 23 -
[Attach disclosures required by the Older Workers Benefit Protection Act, if required]
- 24 -
Exhibit 10.8
EMPLOYMENT AGREEMENT
This Employment Agreement, (the
Agreement
) is made as of the 1
st
day of August,
2006, between
Selective Insurance Group, Inc.
, a New Jersey corporation with a principal place of
business at 40 Wantage Avenue, Branchville, New Jersey 07890 (the
Company
) and
Kerry A. Guthrie
,
an individual residing at 21 Prides Crossing, Sparta, NJ 07871 (the
Executive
).
SECTION 1.
DEFINITIONS
.
1.1.
Definitions
.
For purposes of this Agreement, the following terms shall have the
meanings set forth below:
Accounting Firm
has the meaning given to such term in Section 3.6(b) hereof.
Agreement
has the meaning given to such term in the Preamble hereto.
Board
means the Board of Directors of the Company.
Cause
means any one or more of the following:
(i) the Executive shall have been convicted by a court of competent jurisdiction of,
or pleaded guilty or nolo contendere to, any felony under, or within the meaning of,
applicable United States federal or state law;
(ii) the Executive shall have breached in any respect any one or more of the material
provisions of this Agreement, including, without limitation, any failure to comply with the
Code of Conduct, and, to the extent such breach may be cured, such breach shall have
continued for a period of thirty (30) days after written notice by the Chief Executive
Officer to the Executive specifying such breach; or
(iii) the Executive shall have engaged in acts of insubordination, gross negligence or
willful misconduct in the performance of the Executives duties and obligations to the
Company.
For purposes of clauses (ii) and (iii) of this definition of Cause, no act, or failure to act, on
the part of the Executive shall be considered grounds for Cause under such clauses if such act,
or such failure to act, was done or omitted to be done based upon authority or express direction
given by the Chief Executive Officer or based upon the advice of counsel for the Company.
Change in Control
means the occurrence of an event of a nature that would be required to be
reported in response to Item 5.01 of a Current Report on Form 8-K, as in effect on the date
thereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act;
provided, however
, that a
Change in Control shall, in any event, conclusively be deemed to have occurred upon the first to
occur of any one of the following events:
(i) The acquisition by any person or group (as such terms are used in Sections
13(d)(3) and 14(d)(2) of the Securities Exchange Act or any successor provisions to either
of the foregoing), including, without limitation, any current shareholder or shareholders
of the Company, of securities of the Company resulting in such person or group being a
beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act) of
twenty-five percent (25%) or more of any class of Voting Securities of the Company;
(ii) The acquisition by any person or group (as such terms are used in Sections
13(d)(3) and 14(d)(2) of the Securities Exchange Act or any successor provisions to either
of the foregoing), including, without limitation, any current shareholder or shareholders
of the Company, of securities of the Company resulting in such person or group being a
beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act) of twenty
percent (20%) or more, but less than twenty-five percent (25%), of any class of Voting
Securities of the Company, if the Board adopts a resolution that such acquisition
constitutes a Change in Control;
(iii) The sale or disposition of more than fifty percent (50%) of the Companys assets
on a consolidated basis, as shown in the Companys then most recent audited consolidated
balance sheet;
(iv) The reorganization, recapitalization, merger, consolidation or other business
combination involving the Company the result of which is the ownership by the shareholders
of the Company of less than eighty percent (80%) of those Voting Securities of the
resulting or acquiring Person having the power to vote in the elections of the board of
directors of such Person; or
(v) A change in the membership in the Board which, taken in conjunction with any other
prior or concurrent changes, results in twenty percent (20%) or more of the Boards
membership being persons not nominated by the Companys management or the Board as set
forth in the Companys then most recent proxy statement, excluding changes resulting from
substitutions by the Board because of retirement or death of a director or directors,
removal of a director or directors by the Board or resignation of a director or directors
due to demonstrated disability or incapacity.
(vi) Anything in this definition of Change in Control to the contrary notwithstanding,
no Change in Control shall be deemed to have occurred for purposes of this Agreement by
virtue of any transaction which results in the Executive, or a group of Persons which
includes the Executive, acquiring, directly or indirectly, Voting Securities of the
Company.
Code
means the Internal Revenue Code of 1986, as amended from time to time.
Code of Conduct
has the meaning given to such term in Section 2.3(a) hereof.
Commencement Date
has the meaning given to such term in Section 2.2 hereof.
- 2 -
Company
has the meaning given to such term in the Preamble hereto and includes any Person
which shall succeed to or assume the obligations of the Company hereunder pursuant to Section 5.6
hereof.
Determination
has the meaning given to such term in Section 3.6(b) hereof.
Disability
means the Executives physical injury or physical or mental illness which causes
him to be absent from his duties with the Company on a full-time basis for a continuous period in
excess of the greater of: (i) the period of disability constituting permanent disability as
specified under the Companys long-term disability insurance coverage applicable to the Executive
at the time of the determination of the existence of a disability (or, if such determination is
made after the occurrence of a Change in Control, as specified under the long-term disability
insurance coverage applicable to the Executive prior to a Change in Control) or (ii) 180 days,
unless within thirty (30) days after a Notice of Termination is thereafter given the Executive
shall have returned to the full-time performance of his duties.
Early Termination
has the meaning given to such term in Section 3.2 hereof.
Excise Tax
has the meaning given to such term in Section 3.6(a) hereof.
Executive
has the meaning given to such term in the Preamble hereto.
Extended Benefit Period
has the meaning given to such term in Section 3.3(c) hereof.
Good Reason
means the occurrence of any one or more of the following:
(i) any reduction in the Executives Salary below the annualized rate in effect on the
date preceding the date on which a Change in Control shall have occurred unless such
reduction is implemented for the senior executive staff generally, provided; however, that
such reduction shall constitute Good Reason even if implemented for senior executive staff
generally if such reduction occurs within two years after a Change in Control;
(ii) (A) a failure by the Company to continue in effect benefits that are comparable
in the aggregate to the benefits the Executive receives under the Plans in which the
Executive participates, other than as a result of the normal expiration of any such Plan as
to other eligible employees in accordance with its terms as in effect on the date preceding
the date on which a Change in Control shall have occurred, or (B) the taking of any action,
or the failure to act, by the Company which would adversely affect the Executives
continued participation in any of such Plans on at least as favorable a basis to him as was
the case on the date preceding the date on which a Change in Control shall have occurred or
which would materially reduce the Executives benefits in the future under any such Plans,
unless, in any of the cases described in sub-clauses (A) and (B) of this clause (ii), such
failure to continue in effect, taking of any action or failure to act affects all
participants of such Plan generally;
- 3 -
(iii) without the Executives express prior written consent, the assignment to the
Executive of any duties inconsistent with his positions, duties, responsibilities and
status with the Company immediately prior to a Change in Control, or any material
diminution in the Executives responsibilities as an executive of the Company as compared
with those he had as an executive of the Company immediately prior to a Change in Control,
or any change in the Executives titles or office as in effect immediately prior to a
Change in Control, or any removal of the Executive from, any of such positions, except in
connection with the termination of the Executives employment for Cause, Disability or
Retirement or as a result of the Executives death, or by his termination of his employment
other than for Good Reason;
(iv) without the Executives express prior written consent, the imposition of a
requirement by the Company that the Executive be based at any location in excess of fifty
(50) miles from the location of the Executives office on the date preceding the date on
which a Change in Control shall have occurred;
(v) without the Executives express prior written consent, any reduction in the number
of paid vacation days to which the Executive was entitled as of the date preceding the date
on which a Change in Control shall have occurred;
(vi) the failure by the Company to obtain from any Person with which it may merge or
consolidate or to which it may sell all or substantially all of its assets, the agreement
of such Person as set forth in the proviso in Section 5.6 hereof;
provided
that
such merger, consolidation or sale constitutes a Change in Control;
(vii) subsequent to a Change in Control, any purported termination of the Executives
employment which is not effected pursuant to a Notice of Termination given in accordance
with Section 3.2 hereof; or
(viii) within two years after a Change in Control shall have occurred, any material
breach by the Company of any of the terms and conditions of this Agreement or any Plans
referred to in clause (ii) of this definition of Good Reason to which the Executive is
entitled to receive benefits thereunder, provided, to the extent such breach may be cured,
such breach shall have continued for a period of thirty (30) days after written notice of
the Company specifying such breach.
Gross-Up Payment
has the meaning given to such term in Section 3.6(a) hereof.
Notice of Termination
means a written notice which shall (i) indicate the specific
termination provision in this Agreement relied upon, (ii) set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executives employment under
the provision so indicated and, (iii) specify the date of termination in accordance with this
Agreement (other than for a termination for Cause).
Overpayments
has the meaning given to such term in Section 3.6(c) hereof.
- 4 -
Person
means an individual, partnership, corporation, association, limited liability
company, trust, joint venture, unincorporated organization, and any government, governmental
department or agency or political subdivision thereof.
Plans
has the meaning given to such term in Section 2.4(b) hereof.
Rabbi Trust
has the meaning given to such term in Section 3.4(d) hereof.
Release
has the meaning given to such term in Section 3.5 hereof.
Restrictive Covenants
has the meaning given to such term in Section 3.5 hereof.
Retirement
means a termination of the Executives employment by the Company or the Executive
(i) at such age as shall be established by the Board for mandatory or normal retirement of Company
executives in general (which age shall be, if the determination of Retirement is made after the
occurrence of a Change in Control, the age established by the Board prior to a Change in Control),
which shall not be less than age 65, or (ii) at any other retirement age set by mutual agreement of
the Company and the Executive and approved by the Board.
Salary
has the meaning given to such term in Section 2.4(a) hereof.
Section 409A Tax
has the meaning given to such term in Section 3.7 hereof.
Securities Exchange Act
means the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder.
Term
has the meaning given to such term in Section 2.2 hereof.
Termination Date
means (i) if the Executives employment is to be terminated by the Company
for Disability, thirty (30) days after a Notice of Termination is given;
provided
that the
Executive shall not have returned to the performance of the Executives duties on a full-time basis
during such thirty (30) day period; and (ii) if the Executives employment is to be terminated by
either the Company or the Executive for any other reason, the date on which a Notice of Termination
is given.
Total Payments
has the meaning given to such term in Section 3.6(a) hereof.
Triggering Event
has the meaning given to such term in Section 3.4(d) hereof.
Trustee
has the meaning given to such term in Section 3.4(d) hereof.
Underpayments
has the meaning given to such term in Section 3.6(c) hereof.
Voting Securities
means, with respect to a specified Person, any security of such Person
that has, or may have upon an event of default or in respect to any transaction, a right to vote on
any matter upon which the holder of any class of common stock of such Person would have a right to
vote.
- 5 -
1.2.
Terms Generally
. Unless the context of this Agreement requires otherwise, words
importing the singular number shall include the plural and vice versa, and any pronoun shall
include the corresponding masculine, feminine and neuter forms.
1.3.
Cross-References
. Unless otherwise specified, references in this Agreement to
any Paragraph or Section are references to such Paragraph or Section of this Agreement.
SECTION 2.
EMPLOYMENT AND COMPENSATION
. The following terms and conditions will
govern the Executives employment with the Company throughout the Term.
2.1.
Employment
. The Company hereby employs the Executive, and the Executive hereby
accepts employment with the Company, on the terms and conditions set forth herein.
2.2.
Term
. The term of employment of the Executive under this Agreement shall
commence as of the date hereof (the
Commencement Date
) and, subject to Section 3.1 hereof, shall
terminate three (3) year(s) after the Commencement Date, and shall automatically be extended for
additional one (1) year periods thereafter (any such renewal periods, together with the initial
three (3) year period, being referred to as the
Term
) unless terminated by either party by
written notice to the other party.
2.3.
Duties
.
(a)
The Executive agrees to serve as Executive Vice President and Chief
Investment Officer of the Company during the Term. In such capacity, the Executive shall have the
responsibilities and duties customary for such office(s) and such other executive responsibilities
and duties as are assigned by the Chief Executive Officer which are consistent with the Executives
position(s). The Executive agrees to devote substantially all his business time, attention and
services to the business and affairs of the Company and its subsidiaries and to perform his duties
to the best of his ability. At all times during the performance of this Agreement, the Executive
will adhere to the Code of Conduct of the Company (the
Code of Conduct
) that has been or may
hereafter be established and communicated by the Company to the Executive for the conduct of the
position or positions held by the Executive. The Executive may not accept directorships on the
board of directors of for-profit corporations without the prior written consent of the Chief
Executive Officer of the Company. The Executive may accept directorships on the board of directors
of not-for-profit corporations without the Chief Executive Officers prior, written consent so long
as (a) such directorships do not interfere with Executives ability to carry out his
responsibilities under this Agreement, and (b) Executive promptly notifies the Chief Executive
Officer in writing of the fact that he has accepted such a non-profit directorship.
(b)
If the Company or the Executive elects not to renew the Term pursuant to Section 2.2,
the Executive shall continue to be employed under this Agreement until the expiration of the
then current Term (unless earlier terminated pursuant to Section 3.1 hereof), shall cooperate
fully with the Chief Executive Officer and shall perform such duties not inconsistent with the
provisions hereof as he shall be assigned by the Chief Executive Officer.
- 6 -
2.4.
Compensation
.
(a)
Salary
. For all services rendered by the Executive under this Agreement, the
Company shall pay the Executive a salary during the Term at a rate of not less than THREE
HUNDRED FIFTY-TWO THOUSAND DOLLARS ($352,000) per year, which may be increased but not
decreased unless decreased for the senior executive staff generally (the
Salary
), payable in
installments in accordance with the Companys policy from time to time in effect for payment of
salary to executives. The Salary shall be reviewed no less than annually by the Chief
Executive Officer and nothing contained herein shall prevent the Board from at any time
increasing the Salary or other benefits herein provided to be paid or provided to the Executive
or from providing additional or contingent benefits to the Executive as it deems appropriate.
(b)
Benefits
. During the Term, the Company shall permit the Executive to
participate in or receive benefits under the Selective Insurance Group, Inc. 2005 Omnibus Stock
Plan, the Selective Insurance Group, Inc. Cash Incentive Plan, the Selective Insurance
Retirement Savings Plan, the Retirement Income Plan For Selective Insurance Company of America,
as amended, the Selective Insurance Company of America Deferred Compensation Plan, the
Selective Insurance Supplemental Pension Plan and any other incentive compensation, stock
option, stock appreciation right, stock bonus, pension, group insurance, retirement, profit
sharing, medical, disability, accident, life insurance plan, relocation plan or policy, or any
other plan, program, policy or arrangement of the Company intended to benefit the employees of
the Company generally, if any, in accordance with the respective provisions thereof, from time
to time in effect (collectively, the
Plans
).
(c)
Vacations and Reimbursements
. During the Term, the Executive shall be
entitled to vacation time off and reimbursements for ordinary and necessary travel and
entertainment expenses in accordance with the Companys policies on such matters from time to
time in effect.
(d)
Perquisites
. During the Term, the Company shall provide the Executive with
suitable offices, secretarial and other services, and other perquisites to which other
executives of the Company generally are (or become) entitled, to the extent as are suitable to
the character of the Executives position with the Company, subject to such specific limits on
such perquisites as may from time to time be imposed by the Board and the Chief Executive
Officer.
SECTION 3.
TERMINATION AND SEVERANCE
.
3.1.
Termination
. The Executives employment hereunder shall commence on the
Commencement Date and continue until the expiration of the Term, except that the employment of the
Executive hereunder shall earlier terminate:
(a)
Death
. Upon the Executives death.
(b)
Disability
. At the option of the Company, upon the Disability of the
Executive.
- 7 -
(c)
For Cause
. At the option of the Company, for Cause.
(d)
Resignation
. At any time at the option of the Executive, by resignation
(other than a resignation for Good Reason).
(e)
Without Cause
. At any time at the option of the Company, without Cause;
provided
, that a termination of the Executives employment hereunder by the Company
based on Retirement, death, or Disability shall not be deemed to be a termination without
Cause.
(f)
Relocation
. At the option of the Executive at any time prior to a Change in
Control, if the Company imposes a requirement without the consent of the Executive that the
Executive be based at a location in excess of fifty (50) miles from the location of the
Executives office on the Commencement Date.
(g)
For Good Reason
. At any time at the option of the Executive within two (2)
years following the occurrence of a Change in Control, for Good Reason.
3.2.
Procedure For Termination
. Any termination of the Executives employment by the
Company or by the Executive prior to the expiration of the Term (an
Early Termination
) shall be
communicated by delivery of a Notice of Termination to the other party hereto given in accordance
with Section 5.13 hereof. Any Early Termination shall become effective as of the applicable
Termination Date.
3.3.
Rights and Remedies on Termination
. The Executive will be entitled to receive
the payments and benefits specified below if there is an Early Termination.
(a)
Accrued Salary
. If the Executives employment is terminated pursuant to any
of the Paragraphs set forth in Section 3.1 hereof, then the Executive (or his legal
representative, as applicable) shall only be entitled to receive his accrued and unpaid Salary
through the Termination Date.
(b)
Severance Payments
.
(i) If the Executives employment is terminated pursuant to Paragraphs (a) or (b) in
Section 3.1 hereof, then the Executive (or his legal representative, as applicable) shall
be entitled to receive a severance payment from the Company in an aggregate amount equal to
the product of (A) 1.5
times
(B) the Executives Salary
plus
an amount
equal to the average of the three most recent annual cash incentive payments (each an
ACIP) made to the Executive;
provided
that any such severance payment shall be
reduced by the amount of payments the Executive receives under any life or disability
insurance policies with respect to which the premiums were paid by the Company.
(ii) If the Executives employment is terminated pursuant to Paragraph (e) or (f) in
Section 3.1 hereof, then the Executive shall be entitled to receive a severance payment
from the Company in an aggregate amount equal to the product of (A) 1.5
- 8 -
times
(B) the Executives Salary
plus
an amount equal to the average
of the three most recent ACIP payments made to the Executive.
(iii) The severance payment required to be paid by the Company to the Executive
pursuant to Paragraph (b)(i) or (b)(ii) above, shall, subject to Section 3.7, be paid in
equal monthly installments over the twelve (12) month period following the Termination
Date.
(c)
Severance Benefits
.
(i) If the Executives employment is terminated pursuant to any of the Paragraphs set
forth in Section 3.1 hereof, then the Executive (or his legal representative, as
applicable) shall be entitled to receive the benefits which the Executive has accrued or
earned or which have become payable under the Plans as of the Termination Date, but which
have not yet been paid to the Executive. Payment of any such benefits shall be made in
accordance with the terms of such Plans.
(ii) If the Executives employment is terminated pursuant to Paragraph (e) or (f) in
Section 3.1 hereof, then the Company shall, subject to Section 3.7, maintain in full force
and effect for the continued benefit of the Executive and his dependents for a period
terminating on the earlier of (A) eighteen (18) months following the applicable Termination
Date, or (B) the commencement date of equivalent benefits from a new employer, (any such
period being referred to as the applicable
Extended Benefit Period
) all insured and
self-insured medical, dental, vision, disability and life insurance employee benefit Plans
in which the Executive was entitled to participate immediately prior to the Termination
Date;
provided
that the Executives continued participation is not barred under the
general terms and provisions of such Plans. Notwithstanding the foregoing, the Executive
shall continue to participate in such Plans during the Extended Benefit Period only to the
extent that such Plans remain in effect for other executives of the Company from time to
time during the Extended Benefit Period and subject to the terms of such Plans, including
any modifications and amendments thereto following the Termination Date. In the event
that the Executives participation in any such Plan is barred by its terms, the Company
shall arrange, at its sole cost and expense, to have issued for the benefit of the
Executive and his dependents during the Extended Benefit Period individual policies of
insurance providing benefits substantially similar (on an after-tax basis) to those which
the Executive otherwise would have been entitled to receive under such Plans pursuant to
this Paragraph (c)(ii). Executive shall be responsible for making any required
contributions to the cost of such coverage, on an after-tax basis, at the rate which
Executive was obligated to pay immediately prior to the Termination Date. If, at the end
of the applicable Extended Benefit Period, the Executive has not previously received or is
not receiving equivalent benefits from a new employer, or is not otherwise receiving such
benefits, the Company shall arrange to enable the Executive to convert his and his
dependents coverage under such Plans to individual policies or programs upon the same
terms as employees of the Company may apply for such conversions upon termination of
employment. In no event shall the
- 9 -
Companys obligation to provide disability benefits hereunder be reduced as a result
of any individual disability policy purchased by the Executive.
(d)
Rights Under Plans
. If the Executives employment is terminated pursuant to
Paragraphs (a), (b), (e), or (f) in Section 3.1 hereof, the Executive shall be entitled to the
benefits of any stock options, stock appreciation rights, restricted stock grants, stock
bonuses or other benefits theretofore granted by the Company to the Executive under any Plan,
whether or not provided for in any agreement with the Company;
provided
,
however
, that (i) all unvested stock options, stock appreciation rights, restricted
stock grants, stock bonuses, long-term incentives and similar benefits shall be deemed to be
vested in full on the Termination Date, notwithstanding any provision to the contrary or any
provision requiring any act or acts by the Executive in any agreement with the Company or any
Plan; (ii) to the extent that any such stock options, stock appreciation rights, restricted
stock grants, stock bonuses, long-term incentives or similar benefits shall require by its
terms the exercise thereof by the Executive, the last date to exercise the same shall,
notwithstanding any provision to the contrary in any agreement or any Plan, be the earlier of
(A) the later to occur of the fifteenth day of the third month following the date at which, or
the December 31 of the calendar year in which, any such stock options, stock appreciation
rights, restricted stock grants, stock bonuses, long-term incentives or similar benefits would
otherwise have expired if not extended, or (B) the original expiration date had the Executives
employment not so terminated; and (iii) if the vesting or exercise pursuant hereto of any such
stock options, stock appreciation rights, restricted stock grants, stock bonuses, long-term
incentives or similar benefits shall have the effect of subjecting the Executive to liability
under Section 16(b) of the Securities Exchange Act or any similar provision of law, the vesting
date thereof shall be deemed to be the first day after the Termination Date on which such
vesting may occur without subjecting the Executive to such liability.
(e)
No Double Dipping.
(i) The severance payments and severance benefits the Executive may be entitled to
receive pursuant to this Section 3.3 shall be in lieu of any of the payments and benefits
the Executive may be entitled to receive pursuant to any other agreement, plan or
arrangement providing for the payment of severance payments or benefits.
(ii) The Executive expressly disclaims any interest he may have in the Selective
Insurance Company of America Severance Plan.
3.4.
Rights and Remedies on Termination After Change in Control
. The Executive will
be entitled to receive the severance payments and severance benefits specified below in the event
there shall occur a termination of the Executives employment pursuant to Paragraph (e) or (g) of
Section 3.1 hereof within two (2) years following the occurrence of a Change in Control. The
severance payments and benefits the Executive may be entitled to receive pursuant to this Section
3.4 shall be in addition to, and not in lieu of, any of the payments and benefits the Executive may
be entitled to receive pursuant to Section 3.3 hereof, unless expressly so stated to be in lieu of
such benefits and/or payments.
- 10 -
(a)
Severance Payments
. The Executive shall be entitled to receive a severance
payment from the Company in an aggregate amount equal to the product of (i) 2; and (ii) the greater
of:
(1) the sum of the Executives Salary
plus
the Executives
target ACIP in effect as of the Termination Date, or
(2) the sum of the Executives Salary in effect as of the Termination
Date plus the Executives average ACIP for the three calendar years prior
to the calendar year in which the Termination Date occurs.
Such payment shall be made, subject to Section 3.7, thirty (30) business days following the
Termination Date, provided that the Executive has executed and delivered a Release pursuant to
Section 3.5 hereof
and
such Release has become effective and irrevocable. The severance
payment required to be paid by the Company to the Executive pursuant to this Section 3.4(a) shall
be in lieu of, and not in addition to, any other severance payments required to be paid by the
Company to the Executive.
(b)
Severance Benefits
. Subject to Section 3.7, the Company shall maintain in full
force and effect, for the continued benefit of the Executive and his dependents for a period
terminating on the earlier of: (i) twenty-four (24) months after the Termination Date or (ii) the
commencement date of equivalent benefits from a new employer (the
CIC Extended Benefit Period
),
all insured and self insured medical, dental, vision, disability and life insurance employee
welfare benefit plans in which the Executive was entitled to participate immediately prior to the
Termination Date;
provided
that the Executives continued participation is not barred under
the general terms and provisions of such Plans. Notwithstanding the foregoing, the Executive shall
continue to participate in such Plans during the CIC Extended Benefit Period only to the extent
that such Plans remain in effect for other executives of the Company from time to time during the
CIC Extended Benefit Period and subject to the terms of such Plans, including any modifications and
amendments thereto following the Termination Date. In the event that the Executives participation
in any such Plan is barred by its terms, the Company, at its sole cost and expense, shall arrange
to have issued for the benefit of the Executive and his dependents individual policies of insurance
providing benefits substantially similar (on an after-tax basis) to those which the Executive
otherwise would have been entitled to receive under such Plans pursuant to this Paragraph (b).
Executive shall be responsible for making any required contributions to the cost of such coverage,
on an after-tax basis, at the rate which Executive was obligated to pay immediately prior to the
Termination Date. If, at the end of the applicable CIC Extended Benefit Period, the Executive has
not previously received or is not receiving equivalent benefits from a new employer, or is not
otherwise receiving such benefits, the Company shall arrange to enable the Executive to convert his
and his dependents coverage under such Plans to individual policies or programs upon the same
terms as employees of the Company may apply for such conversions upon termination of employment.
The severance benefits required to be provided by the Company to the Executive pursuant to this
Paragraph (b) shall be in lieu of, and not in addition to, any severance benefits required to be
provided to the Executive pursuant to Section 3.3(c)(ii)
- 11 -
hereof. In no event shall the Companys obligation to provide disability benefits hereunder
be reduced as a result of any individual disability policy purchased by the Executive.
(c)
Rights Under Plans
. The Executive shall be entitled to the benefits of any stock
options, stock appreciation rights, restricted stock grants, stock bonuses or other benefits
theretofore granted by the Company to the Executive under any Plan, whether or not provided for in
any agreement with the Company;
provided
,
however
, that (i) all unvested stock
options, stock appreciation rights, restricted stock grants, stock bonuses, long-term incentives
and similar benefits shall be deemed to be vested in full on the Termination Date, notwithstanding
any provision to the contrary or any provision requiring any act or acts by the Executive in any
agreement with the Company or any Plan; (ii) to the extent that any such stock options, stock
appreciation rights, restricted stock grants, stock bonuses, long-term incentives or similar
benefits shall require by its terms the exercise thereof by the Executive, the last date to
exercise the same shall, notwithstanding any provision to the contrary in any agreement or any
Plan, be the earlier of (A) the later to occur of the fifteenth day of the third month following
the date at which, or the December 31 of the calendar year in which, any such stock options, stock
appreciation rights, restricted stock grants, stock bonuses, long-term incentives or similar
benefits would otherwise have expired if not extended or (B) the original expiration date had the
Executives employment not so terminated; and (iii) if the vesting or exercise pursuant hereto of
any such stock options, stock appreciation rights, restricted stock grants, stock bonuses,
long-term incentives or similar benefits shall have the effect of subjecting the Executive to
liability under Section 16(b) of the Securities Exchange Act or any similar provision of law, the
vesting date thereof shall be deemed to be the first day after the Termination Date on which such
vesting may occur without subjecting the Executive to such liability.
(d)
Rabbi Trust
. The Company shall maintain a trust intended to be a grantor trust
within the meaning of subpart E, Part I, subchapter J, chapter 1, subtitle A of the Code (the
Rabbi Trust
). Coincident with the occurrence of a Change in Control, the Company shall promptly
deliver to a bank as trustee of the Rabbi Trust (the
Trustee
), an amount of cash or certificates
of deposit, treasury bills or irrevocable letters of credit adequate to fully fund the payment
obligations of the Company under this Section 3.4. The Company and Trustee shall enter into a
trust agreement that shall provide that barring the insolvency of the Company, amounts payable to
the Executive under this Section 3.4 (subject to Section 3.7) shall be paid by the Trustee to the
Executive five (5) days after written demand therefor by the Executive to the Trustee, with a copy
to the Company, certifying that such amounts are due and payable under this Section 3.4 because the
Executives employment has been terminated pursuant to Paragraph (e) or (g) in Section 3.1 hereof
at a time which is within two (2) years following the occurrence of a Change in Control (a
Triggering Event
). Such trust agreement shall also provide that if the Company shall, prior to
payment by the Trustee, object in writing to the Trustee, with a copy to the Executive, as to the
payment of any amounts demanded by the Executive under this Section 3.4, certifying that such
amounts are not due and payable to the Executive because a Triggering Event has not occurred, such
dispute shall be resolved by binding arbitration as set forth in Section 5.8 hereof.
- 12 -
3.5.
Conditions to Severance Payments and Benefits
. The Executives right to receive
the severance payments and benefits pursuant to Sections 3.3 and 3.4 hereof, is expressly
conditioned upon (a) receipt by the Company of a written release (a
Release
) executed by the
Executive in the form of
Exhibit A
hereto, and the expiration of the revocation period described
therein without such Release having been revoked, and (b) the compliance by the Executive with the
covenants, terms or provisions of Sections 4.1 and 4.2 hereof (the
Restrictive Covenants
). If
the Executive shall fail to deliver a Release in accordance with the terms of this Section 3.5 or
shall breach any of the Restrictive Covenants, the Companys obligation to make the severance
payments and to provide the severance benefits pursuant to Sections 3.3 and 3.4 hereof shall
immediately and irrevocably terminate.
3.6.
Tax Effect of Payments
.
(a)
Gross-Up Payment
. In the event that it is determined that any payment,
distribution or other benefit of any type to or for the Executives benefit made by the Company, by
any of its affiliates, by any Person who acquires ownership or effective control of the Company or
ownership of a substantial portion of the Companys assets (within the meaning of Section 280G of
the Code and the regulations thereunder) or by any affiliate of such Person, whether paid or
payable or distributed or distributable or otherwise made available pursuant to the terms of this
Agreement or otherwise (the
Total Payments
), would be subject to the excise tax imposed by
Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise
tax, together with any such interest or penalties, are collectively referred to as the
Excise
Tax
), then the Executive shall be entitled to receive an additional payment (a
Gross-Up Payment
)
in an amount such that after payment by the Executive of all taxes imposed upon the Gross-Up
Payment, including any Excise Tax, the Executive retains an amount of the Gross-Up Payment equal to
the Excise Tax imposed on the Total Payments.
(b)
Determination by Accountant
. All mathematical determinations and all
determinations of whether any of the Total Payments are parachute payments (within the meaning of
Section 280G of the Code) that are required to be made under this Section, including all
determinations of whether a Gross-Up Payment is required, of the amount of such Gross-Up Payment
and of amounts relevant to the last sentence of this Section (collectively, the
Determination
),
shall be made by an independent accounting firm acceptable to each of the parties hereto, or, if no
firm is acceptable to both parties hereto, each of the Executive and the Company shall select an
accounting firm acceptable to it, and such accounting firms shall together designate an independent
accounting firm,
provided
,
however
, that any accounting firm so designated shall
not have been previously retained by either party for a period of a least two (2) years subsequent
to the applicable Termination Date. Any independent accounting firm selected by the Executive and
the Company or designated pursuant to this Paragraph (b) shall be referred to herein as the
Accounting Firm
. Subject to Section 3.6(c) and Section 3.7, if a Gross-Up Payment is determined
to be payable, it shall be paid by the Company to the Executive within five (5) days after such
Determination is delivered to the Company. Subject to Section 3.6(c), any Determination by the
Accounting Firm shall be binding upon the Company and Executive, absent manifest error. All of the
costs and expenses of the Accounting Firm shall be borne by the Company.
- 13 -
(c)
Underpayments and Overpayments
. As a result of uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder,
it is possible that Gross-Up Payments not made by the Company should have been made
(
Underpayments
) or that Gross-Up Payments will have been made by the Company which should not
have been made (
Overpayments
). In either event, the Accounting Firm shall determine the amount
of the Underpayment or Overpayment that has occurred. In the case of an Underpayment, the amount
of such Underpayment shall promptly be paid by the Company to or for the Executives benefit. In
the case of an Overpayment, the Executive shall, at the direction and expense of the Company, take
such steps as are reasonably necessary (including the filing of returns and claims for refund),
follow reasonable instructions from, and procedures established by, the Company and otherwise
reasonably cooperate with the Company to correct such Overpayment;
provided
,
however
, that (i) the Executive shall in no event be obligated to return to the Company an
amount greater than the net after-tax portion of the Overpayment that the Executive has retained or
has received as a refund or has received the benefit of from the applicable taxing authorities and
(ii) this provision shall be interpreted in a manner consistent with the intent of this Section,
which is to make the Executive whole, on an after-tax basis, for the application of the Excise Tax,
it being understood that the correction of an Overpayment may result in the Executives repaying to
the Company an amount which is less than the Overpayment. Anything herein to the contrary
notwithstanding, in the event of a final determination as to the liability for the Excise Tax
applicable to the Total Payments such determination shall be the basis for determining whether
there have been Underpayments or Overpayments pursuant to this Section 3.6. For this purpose, a
final determination shall mean a final agreement reached with the Internal Revenue Service or a
final determination by a court with jurisdiction from which there is no appeal, in either case,
concluded in accordance with the provisions of this Paragraph (c).
(d)
Application of Section 409A
.
Notwithstanding anything contained in this Section
3.6, no portion of the Gross-Up Payment shall be paid to the Executive so as to cause the Executive
to be subject to tax under Section 409A of the Code. In particular, if necessary to avoid taxation
under Code Section 409A, the Gross-Up Payment shall be paid to Executive in a lump sum at the same
date that severance payments are paid to the Executive pursuant to Section 3.4(a). If the amount
of the Gross-Up Payment cannot be fully determined pursuant to Section 3.6(b) by such date, the
Company shall pay to the Executive on such date an estimate of the Gross-Up Payment, as determined
by the Accounting Firm, and shall pay the remainder (or the Executive shall reimburse the Company
the difference) 30 days thereafter.
3.7.
Section 409A Tax
. Notwithstanding anything herein to the contrary, to the extent
any payment or provision of benefits under this Agreement upon the Executives separation from
service is subject to Section 409A of the Code, no such payment shall be made, and Executive shall
be responsible for the full cost of such benefits, for six (6) months following the Executives
separation from service if the Executive is a specified employee. On the expiration of such
six (6) month period, any payments delayed, and an amount sufficient to reimburse the Executive for
the cost of benefits met by the Executive, during such period shall be aggregated (the
Make-Up
Amount
) and paid in full to the Executive, and any succeeding payments and benefits shall continue
as scheduled hereunder.
- 14 -
The Company shall credit the Make-Up Amount with interest at no less than the interest rate it
pays for short-term borrowed funds, such interest to accrue from the date on which payments would
have been made, or benefits would have been provided, by the Company to the Executive absent the
six month delay. The terms separation from service and specified employee shall have the
meanings set forth under Section 409A and the regulations and rulings issued thereunder.
Furthermore, the Company shall not be required to make, and the Executive shall not be required to
receive, any severance or other payment or benefit under Sections 3.3, 3.4 or 3.6 hereof if the
making of such payment or the provision of such benefit or the receipt thereof shall result in a
tax to the Executive arising under Section 409A of the Code (a
Section 409A Tax
). In the event
the Company cannot make a payment or provide a benefit under Sections 3.3, 3.4 or 3.6 hereof, or if
the Executive cannot receive any such payment or benefit, in accordance with the terms of such
Sections, without the Executive incurring a Section 409A Tax, then the Company and the Executive
shall work together in good faith to agree on an alternative payment schedule or an alternative
benefit of comparable economic value acceptable to both parties (and to amend this Agreement, where
necessary or desirable) such that the Executive does not incur a Section 409A Tax or the Executive
incurs the least amount of Section 409A Tax as is possible under the circumstances. If a
satisfactory alternative payment schedule or benefit cannot be agreed to by the later to occur of
(i) the originally scheduled payment, distribution or benefit date and (ii) six months following
the date of the Executives separation from service, the Company shall provide such payment,
distribution or benefit to the Executive (
409A Amount
) on the originally scheduled date for such
payment, distribution or benefit together with an additional payment (a
409A Payment
) in an
amount such that after payment by the Executive of all taxes imposed on the 409A Payment (excluding
any Excise Tax to which payment to the Executive is made pursuant to Section 3.6(a)), the Executive
retains an amount of the 409A Payment equal to any taxes (including taxes, penalties and interest
under Section 409A) on the 409A Amount.
SECTION 4.
RESTRICTIVE COVENANTS
.
4.1.
Confidentiality
. The Executive agrees that he will not, either during the Term
or at any time after the expiration or termination of the Term, disclose to any other Person any
confidential or proprietary information of the Company or its subsidiaries, except for (a)
disclosures to directors, officers, key employees, independent accountants and counsel of the
Company and its subsidiaries as may be necessary or appropriate in the performance of the
Executives duties hereunder, (b) disclosures which do not have a material adverse effect on the
business or operations of the Company and its subsidiaries, taken as a whole, (c) disclosures which
the Executive is required to make by law or by any court, arbitrator or administrative or
legislative body (including any committee thereof) with apparent jurisdiction to order the
Executive to disclose or make accessible any information, (d) disclosures with respect to any other
litigation, arbitration or mediation involving this Agreement, and (e) disclosures of any such
confidential or proprietary information that is, at the time of such disclosure, generally known to
and available for use by the public otherwise than by the Executives wrongful act or omission.
The Executive agrees not to take with him upon leaving the employ of the Company any document or
paper relating to any confidential information or trade secret of the Company and its subsidiaries,
except that Executive shall be entitled to retain (i) papers and other materials of a personal
nature, including but limited
- 15 -
to, photographs, correspondence, personal diaries, calendars and Rolodexes (so long as such
Rolodexes do not contain the Companys only copy of business contact information), personal files
and phone books, (ii) information showing his compensation or relating to his reimbursement of
expenses, (iii) information that he reasonably believes may be needed for tax purposes, and (iv)
copies of plans, programs and agreements relating to his employment, or termination thereof, with
the Company.
4.2.
Non-Solicitation of Employees
. The Executive agrees that, except in the course
of performing his duties hereunder, he will not, either during the Term and for a period of two (2)
years after the expiration or termination of the Term, directly or indirectly, solicit or induce or
attempt to solicit or induce or cause any of the employees of the Company or the Companys
subsidiaries to leave the employ of the Company or of such subsidiaries.
SECTION 5.
MISCELLANEOUS PROVISIONS
.
5.1.
No Mitigation; Offsets
. The Executive shall not be required to mitigate damages
or the amount of any payment provided for under this Agreement by seeking other employment or
otherwise and no future income earned by the Executive from employment or otherwise shall in any
way reduce or offset any payments due to the Executive hereunder. Assuming a payment or otherwise
is due Executive under this Agreement, the Company may offset against any amount due Executive
under this Agreement only those amounts due Company in respect of any undisputed, liquidated
obligation of Executive to the Company.
5.2.
Governing Law
. The provisions of this Agreement will be construed and
interpreted under the laws of the State of New Jersey, without regard to principles of conflicts of
law.
5.3.
Injunctive Relief and Additional Remedy
. The Executive acknowledges that the
injury that would be suffered by the Company as a result of a breach of the provisions of Sections
4.1 and 4.2 hereof would be irreparable and that an award of monetary damages to the Company for
such a breach would be an inadequate remedy. Consequently, the Company will have the right, in
addition to any other rights it may have, to obtain injunctive relief to restrain any breach or
threatened breach or otherwise to specifically enforce any provision of this Agreement, and the
Company will not be obligated to post bond or other security in seeking such relief. Each of the
parties hereby irrevocably submits to the exclusive jurisdiction of the federal and state courts of
the State of New Jersey for the purpose of injunctive relief.
5.4.
Representations and Warranties by Executive
. The Executive represents and
warrants to the best of his knowledge that the execution and delivery by the Executive of this
Agreement do not, and the performance by the Executive of the Executives obligations hereunder
will not, with or without the giving of notice or the passage of time, or both: (a) violate any
judgment, writ, injunction, or order of any court, arbitrator or governmental agency applicable to
the Executive or (b) conflict with, result in the breach of any provisions of or the termination
of, or constitute a default under, any agreement to which the Executive is a party or by which the
Executive is or may be bound.
- 16 -
5.5.
Waiver
. The rights and remedies of the parties to this Agreement are cumulative
and not alternative. Neither the failure nor any delay by either party in exercising any right,
power, or privilege under this Agreement will operate as a waiver of such right, power, or
privilege, and no single or partial exercise of any such right, power, or privilege will preclude
any other or further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law, (a) no waiver that
may be given by a party will be applicable except in the specific instance for which it is given;
and (b) no notice to or demand on one party will be deemed to be a waiver of any obligation of such
party or of the right of the party giving such notice or demand to take further action without
notice or demand as provided in this Agreement.
5.6.
Assignment
. No right or benefit under this Agreement shall be assigned,
transferred, pledged or encumbered (a) by the Executive except by a beneficiary designation made by
will or the laws of descent and distribution or (b) by the Company except that the Company may
assign this Agreement and all of its rights hereunder to any Person with which it may merge or
consolidate or to which it may sell all or substantially all of its assets;
provided
that
such Person shall, by agreement in form and substance satisfactory to the Executive, expressly
assume and agree to perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such merger, consolidation or sale had taken place.
Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the
Company and each of its successors and assigns, and the Executive, his heirs, legal representatives
and any beneficiary or beneficiaries designated hereunder.
5.7.
Entire Agreement; Amendments
. This Agreement contains the entire agreement
between the parties with respect to the subject matter hereof and supersedes all prior agreements
and understandings, oral or written, between the parties hereto with respect to the subject matter
hereof. This Agreement may not be amended orally, but only by an agreement in writing signed by
the parties hereto.
5.8.
Arbitration
. Any dispute which may arise between the Executive and the Company
with respect to the construction, interpretation or application of any of the terms, provisions,
covenants or conditions of this Agreement or any claim arising from or relating to this Agreement
will be submitted to final and binding arbitration by three (3) arbitrators in Newark, New Jersey,
under the expedited rules of the American Arbitration Association then obtaining. One such
arbitrator shall be selected by each of the Company and the Executive, and the two arbitrators so
selected shall select the third arbitrator. Selection of all three arbitrators shall be made
within thirty (30) days after the date the dispute arose. The written decision of the arbitrators
shall be rendered within ninety (90) days after selection of the third arbitrator. The decision of
the arbitrators shall be final and binding on the Company and the Executive and may be entered by
either party in any New Jersey federal or state court having jurisdiction.
5.9.
Legal Costs
. The Company shall pay any reasonable attorneys fees and costs
incurred by the Executive in connection with any dispute regarding this Agreement so long as
Executives claim(s) or defense(s) in such action are asserted in the good faith belief that they
are not frivolous. The Company shall pay any such fees and costs promptly following its receipt of
written requests therefor, which requests shall be made no more
- 17 -
frequently than once per calendar month. The Company shall bear all legal costs and expenses
incurred in the event the Company should contest or dispute the characterization of any amounts
paid pursuant to this Agreement as being nondeductible under Section 280G of the Code or subject to
imposition of an excise tax under Section 4999 of the Code, including, without limitation, the
reasonable costs and expenses of any counsel selected by the Executive to represent him in
connection with such a matter.
5.10.
Severability
. In the case that any one or more of the provisions contained in
this Agreement shall, for any reason, be held invalid or unenforceable, the other provisions of
this Agreement shall remain in full force and effect. Any provision of this Agreement held invalid
or unenforceable only in part or degree shall remain in full force and effect to the extent not
held invalid or unenforceable.
5.11.
Counterparts; Facsimile
. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this Agreement and all of
which, when taken together, will be deemed to constitute one and the same agreement. This
Agreement may be executed via facsimile.
5.12.
Headings; Interpretation
. The various headings contained herein are for
reference purposes only and do not limit or otherwise affect any of the provisions of this
Agreement. It is the intent of the parties that this Agreement not be construed more strictly with
regard to one party than with regard to any other party.
5.13.
Notices
.
(a)
All notices, requests, demands and other communications required
or permitted under this Agreement shall be in writing and sent as follows:
If to the Company, to:
Selective Insurance Group, Inc.
40 Wantage Avenue
Branchville, New Jersey 07890
Attn: General Counsel
Fax: (973) 948-0282
If to the Executive, to:
Kerry A. Guthrie
21 Prides Crossing
Sparta, NJ 07871
(b)
All notices and other communications required or permitted under this Agreement which
are addressed as provided in Paragraph (a) of this Section 5.13, (i) if delivered personally
against proper receipt shall be effective upon delivery, (ii) if sent by facsimile transmission
(with evidence supplied by the sender of the facsimiles receipt at a facsimile number
designated for receipt by the other party hereunder, which other party shall be obligated to
provide such a facsimile number) shall be effective upon
- 18 -
dispatch, and (iii) if sent (A) by certified or registered mail with postage prepaid or
(B) by Federal Express or similar courier service with courier fees paid by the sender, shall
be effective upon receipt. The parties hereto may from time to time change their respective
addresses and/or facsimile numbers for the purpose of notices to that party by a similar notice
specifying a new address and/or facsimile number, but no such change shall be deemed to have
been given unless it is sent and received in accordance with this Section 5.13.
5.14.
Withholding
. All amounts payable by the Company to the Executive hereunder
(including, but not limited to, the Salary or any amounts payable pursuant to Sections 3.3 and/or
3.4 hereof) shall be reduced prior to the delivery of such payment to the Executive by an amount
sufficient to satisfy any applicable federal, state, local or other withholding tax requirements.
- 19 -
IN WITNESS WHEREOF, the Company and Executive have executed this Agreement as of the
Commencement Date.
|
|
|
|
|
|
|
|
|
SELECTIVE INSURANCE GROUP, INC.
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Gregory E. Murphy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gregory E. Murphy
|
|
|
|
|
|
|
Its Chairman, President, and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
EXECUTIVE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Kerry A. Guthrie
|
|
|
|
|
|
|
|
|
|
|
|
Kerry A. Guthrie
|
|
|
- 20 -
EXHIBIT A
FORM OF RELEASE
Reference is hereby made to the Employment Agreement, dated as of ___, 200___(the
Employment
Agreement
), by and between ___(the
Executive
) and
Selective Insurance Group, Inc., a New Jersey corporation (the
Company
). Capitalized
terms used but not defined herein shall have the meanings specified in the Employment Agreement.
Pursuant to the terms of the Employment Agreement and in consideration of the payments to be
made to the Executive by the Company, which Executive acknowledges are in excess of what Executive
would otherwise be entitled to receive, the Executive hereby releases and forever discharges and
holds the Company and its subsidiaries (collectively, the
Company
Parties
and
each a
Company
Party
), and the respective officers, directors, employees,
partners, stockholders, members, agents, affiliates, successors and assigns and insurers of each
Company Party, and any legal and personal representatives of each of the foregoing, harmless from
all claims or suits, of any nature whatsoever (whether known or unknown), past, present or future,
including those arising from the law, being directly or indirectly related to the Executives
employment by or the termination of such employment by any Company Party, including, without
limiting the foregoing, any claims for notice, pay in lieu of notice, wrongful dismissal, severance
pay, bonus, overtime pay, incentive compensation, interest or vacation pay for the Executives
service as an officer or director to any Company Party through the date hereof. The Executive also
hereby agrees not to file a lawsuit asserting any such claims. This release (this
Release
) includes, but is not limited to, claims growing out of any legal restriction on
any Company Partys right to terminate its employees and claims or rights under federal, state, and
local laws prohibiting employment discrimination (including, but not limited to, claims or rights
under Title VII of the Civil Rights Act of 1964, as amended by the Civil Rights Act of 1991, the
Americans with Disabilities Act, the Family and Medical Leave Act, the Fair Labor Standards Act,
the Uniformed Services Employment and Reemployment Rights Act, the Employee Retirement Income
Security Act, the Equal Pay Act, the Age Discrimination in Employment Act of 1967, as amended by
the Older Workers Benefit Protection Act of 1990, and the laws of the State of New Jersey against
discrimination, or any other federal or state statutes prohibiting discrimination on the basis of
age, sex, race, color, handicap, religion, national origin, and sexual orientation, or any other
federal, state or local employment law, regulation or other requirement) which arose before the
date this Release is signed, excepting only claims in the nature of workers compensation, claims
for vested benefits, and claims to enforce this agreement. The Executive acknowledges that because
this Release contains a release of claims and is an important legal document, he has been advised
to consult with counsel before executing it, that he may take up to [twenty-one (21)]
1
[forty-five (45)]
2
days to decide
|
|
|
1
|
|
Delete brackets and use text enclosed
therewith if 45 days is not otherwise required by Section 7(f)(1)(F) of the Age
Discrimination in Employment Act and/or 29 C.F.R. Part 1625. If 45 days is so
required, delete bracketed text in its entirety.
|
- 21 -
whether to execute it, and that he may revoke this Release by delivering or mailing a signed
notice of revocation to the Company at its offices within seven (7) days after executing it. If
Executive executes this Release and does not subsequently revoke the release within seven (7) days
after executing it, then this Release shall take effect as a legally binding agreement between
Executive and the Company.
If Executive does not deliver to the Company an original signed copy of this Release by
___, or if Executive signs and revokes this Release within seven (7) days as set forth
above, the Company will assume that Executive rejects the Release and Executive will not receive
the payments referred to herein.
The Executive acknowledges that there is a risk that after signing this Release he may
discover losses or claims that are released under this Release, but that are presently unknown to
him. The Executive assumes this risk and understands that this Release shall apply to any such
losses and claims.
The Executive understands that this Release includes a full and final release covering all
known and unknown, injuries, debts, claims or damages which have arisen or may have arisen from
Executives employment by or the termination of such employment by any Company party. The
Executive acknowledges that by accepting the benefits and payments set forth in the Employment
Agreement, he assumes and waives the risks that the facts and the law may be other than as he
believes.
Notwithstanding the foregoing, this Release does not release, and the Executive continues to
be entitled to, (i) any rights to exculpation or indemnification that the Executive has under
contract or law with respect to his service as an officer or director of any Company Party and (ii)
receive the payments to be made to him by the Company pursuant to Section 3.3 and/or 3.4 of the
Employment Agreement (including any plan, agreement or other arrangement that is referenced in or
the subject of the applicable Section), subject to the conditions set forth in Section 3.5 of the
Employment Agreement, (iii) any right the Executive may have to obtain contribution as permitted by
law in the event of entry of judgment against him as a result of any act or failure to act for
which he and any Company party are jointly liable, and (iv) any claim in respect of any insurance
policy with any Company party entered into outside of the employment relationship.
This Release constitutes the release referenced in Section 3.5 of the Employment Agreement.
The undersigned Executive, having had the time to reflect, freely accepts and agrees to the
above Release. The Executive acknowledges and agrees that no Company representative has made any
representation to or agreement with the Executive relating to this Release which is not contained
in the express terms of this Release. The Executive acknowledges and agrees that the execution and
delivery of this Release is based upon the
|
|
|
2
|
|
Delete brackets and use text enclosed
therewith if 45 days is required by Section 7(f)(1)(F) of the Age
Discrimination in Employment Act and/or 29 C.F.R. Part 1625. If 45 days is not
so required, delete bracketed text in its entirety.
|
- 22 -
Executives independent review of this Release, and the Executive hereby expressly waives any
and all claims or defenses by the Executive against the enforcement of this Release which are based
upon allegations or representations, projections, estimates, understandings or agreements by the
Company or any of its representatives or any assumptions by the Executive that are not contained in
the express terms of this Release.
- 23 -
[Attach disclosures required by the Older Workers Benefit Protection Act, if required]
- 24 -
Exhibit 10.9
EMPLOYMENT AGREEMENT
This Employment Agreement, (the
Agreement
) is made as of the 1
st
day of August,
2006, between
Selective Insurance Group, Inc.
, a New Jersey corporation with a principal place of
business at 40 Wantage Avenue, Branchville, New Jersey 07890 (the
Company
) and
Dale A. Thatcher
,
an individual residing at 17 Maria Drive, Sparta, NJ 07871 (the
Executive
).
SECTION 1.
DEFINITIONS
.
1.1.
Definitions
.
For purposes of this Agreement, the following terms shall have the
meanings set forth below:
Accounting Firm
has the meaning given to such term in Section 3.6(b) hereof.
Agreement
has the meaning given to such term in the Preamble hereto.
Board
means the Board of Directors of the Company.
Cause
means any one or more of the following:
(i) the Executive shall have been convicted by a court of competent jurisdiction of,
or pleaded guilty or nolo contendere to, any felony under, or within the meaning of,
applicable United States federal or state law;
(ii) the Executive shall have breached in any respect any one or more of the material
provisions of this Agreement, including, without limitation, any failure to comply with the
Code of Conduct, and, to the extent such breach may be cured, such breach shall have
continued for a period of thirty (30) days after written notice by the Chief Executive
Officer to the Executive specifying such breach; or
(iii) the Executive shall have engaged in acts of insubordination, gross negligence or
willful misconduct in the performance of the Executives duties and obligations to the
Company.
For purposes of clauses (ii) and (iii) of this definition of Cause, no act, or failure to act, on
the part of the Executive shall be considered grounds for Cause under such clauses if such act,
or such failure to act, was done or omitted to be done based upon authority or express direction
given by the Chief Executive Officer or based upon the advice of counsel for the Company.
Change in Control
means the occurrence of an event of a nature that would be required to be
reported in response to Item 5.01 of a Current Report on Form 8-K, as in effect on the date
thereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act;
provided, however
, that a
Change in Control shall, in any event, conclusively be deemed to have occurred upon the first to
occur of any one of the following events:
(i) The acquisition by any person or group (as such terms are used in Sections
13(d)(3) and 14(d)(2) of the Securities Exchange Act or any successor provisions to either
of the foregoing), including, without limitation, any current shareholder or shareholders
of the Company, of securities of the Company resulting in such person or group being a
beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act) of
twenty-five percent (25%) or more of any class of Voting Securities of the Company;
(ii) The acquisition by any person or group (as such terms are used in Sections
13(d)(3) and 14(d)(2) of the Securities Exchange Act or any successor provisions to either
of the foregoing), including, without limitation, any current shareholder or shareholders
of the Company, of securities of the Company resulting in such person or group being a
beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act) of twenty
percent (20%) or more, but less than twenty-five percent (25%), of any class of Voting
Securities of the Company, if the Board adopts a resolution that such acquisition
constitutes a Change in Control;
(iii) The sale or disposition of more than fifty percent (50%) of the Companys assets
on a consolidated basis, as shown in the Companys then most recent audited consolidated
balance sheet;
(iv) The reorganization, recapitalization, merger, consolidation or other business
combination involving the Company the result of which is the ownership by the shareholders
of the Company of less than eighty percent (80%) of those Voting Securities of the
resulting or acquiring Person having the power to vote in the elections of the board of
directors of such Person; or
(v) A change in the membership in the Board which, taken in conjunction with any other
prior or concurrent changes, results in twenty percent (20%) or more of the Boards
membership being persons not nominated by the Companys management or the Board as set
forth in the Companys then most recent proxy statement, excluding changes resulting from
substitutions by the Board because of retirement or death of a director or directors,
removal of a director or directors by the Board or resignation of a director or directors
due to demonstrated disability or incapacity.
(vi) Anything in this definition of Change in Control to the contrary notwithstanding,
no Change in Control shall be deemed to have occurred for purposes of this Agreement by
virtue of any transaction which results in the Executive, or a group of Persons which
includes the Executive, acquiring, directly or indirectly, Voting Securities of the
Company.
Code
means the Internal Revenue Code of 1986, as amended from time to time.
Code of Conduct
has the meaning given to such term in Section 2.3(a) hereof.
Commencement Date
has the meaning given to such term in Section 2.2 hereof.
- 2 -
Company
has the meaning given to such term in the Preamble hereto and includes any Person
which shall succeed to or assume the obligations of the Company hereunder pursuant to Section 5.6
hereof.
Determination
has the meaning given to such term in Section 3.6(b) hereof.
Disability
means the Executives physical injury or physical or mental illness which causes
him to be absent from his duties with the Company on a full-time basis for a continuous period in
excess of the greater of: (i) the period of disability constituting permanent disability as
specified under the Companys long-term disability insurance coverage applicable to the Executive
at the time of the determination of the existence of a disability (or, if such determination is
made after the occurrence of a Change in Control, as specified under the long-term disability
insurance coverage applicable to the Executive prior to a Change in Control) or (ii) 180 days,
unless within thirty (30) days after a Notice of Termination is thereafter given the Executive
shall have returned to the full-time performance of his duties.
Early Termination
has the meaning given to such term in Section 3.2 hereof.
Excise Tax
has the meaning given to such term in Section 3.6(a) hereof.
Executive
has the meaning given to such term in the Preamble hereto.
Extended Benefit Period
has the meaning given to such term in Section 3.3(c) hereof.
Good Reason
means the occurrence of any one or more of the following:
(i) any reduction in the Executives Salary below the annualized rate in effect on the
date preceding the date on which a Change in Control shall have occurred unless such
reduction is implemented for the senior executive staff generally; provided, however, that
such reduction shall constitute Good Reason even if implemented for senior executive staff
generally if such reduction occurs within two years after a Change in Control;
(ii) (A) a failure by the Company to continue in effect benefits that are comparable
in the aggregate to the benefits the Executive receives under the Plans in which the
Executive participates, other than as a result of the normal expiration of any such Plan as
to other eligible employees in accordance with its terms as in effect on the date preceding
the date on which a Change in Control shall have occurred, or (B) the taking of any action,
or the failure to act, by the Company which would adversely affect the Executives
continued participation in any of such Plans on at least as favorable a basis to him as was
the case on the date preceding the date on which a Change in Control shall have occurred or
which would materially reduce the Executives benefits in the future under any such Plans,
unless, in any of the cases described in sub-clauses (A) and (B) of this clause (ii), such
failure to continue in effect, taking of any action or failure to act affects all
participants of such Plan generally;
- 3 -
(iii) without the Executives express prior written consent, the assignment to the
Executive of any duties inconsistent with his positions, duties, responsibilities and
status with the Company immediately prior to a Change in Control, or any material
diminution in the Executives responsibilities as an executive of the Company as compared
with those he had as an executive of the Company immediately prior to a Change in Control,
or any change in the Executives titles or office as in effect immediately prior to a
Change in Control, or any removal of the Executive from, any of such positions, except in
connection with the termination of the Executives employment for Cause, Disability or
Retirement or as a result of the Executives death, or by his termination of his employment
other than for Good Reason;
(iv) without the Executives express prior written consent, the imposition of a
requirement by the Company that the Executive be based at any location in excess of fifty
(50) miles from the location of the Executives office on the date preceding the date on
which a Change in Control shall have occurred;
(v) without the Executives express prior written consent, any reduction in the number
of paid vacation days to which the Executive was entitled as of the date preceding the date
on which a Change in Control shall have occurred;
(vi) the failure by the Company to obtain from any Person with which it may merge or
consolidate or to which it may sell all or substantially all of its assets, the agreement
of such Person as set forth in the proviso in Section 5.6 hereof;
provided
that
such merger, consolidation or sale constitutes a Change in Control;
(vii) subsequent to a Change in Control, any purported termination of the Executives
employment which is not effected pursuant to a Notice of Termination given in accordance
with Section 3.2 hereof; or
(viii) within two years after a Change in Control shall have occurred, any material
breach by the Company of any of the terms and conditions of this Agreement or any Plans
referred to in clause (ii) of this definition of Good Reason to which the Executive is
entitled to receive benefits thereunder, provided, to the extent such breach may be cured,
such breach shall have continued for a period of thirty (30) days after written notice of
the Company specifying such breach.
Gross-Up Payment
has the meaning given to such term in Section 3.6(a) hereof.
Notice of Termination
means a written notice which shall (i) indicate the specific
termination provision in this Agreement relied upon, (ii) set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executives employment under
the provision so indicated and, (iii) specify the date of termination in accordance with this
Agreement (other than for a termination for Cause).
Overpayments
has the meaning given to such term in Section 3.6(c) hereof.
- 4 -
Person
means an individual, partnership, corporation, association, limited liability
company, trust, joint venture, unincorporated organization, and any government, governmental
department or agency or political subdivision thereof.
Plans
has the meaning given to such term in Section 2.4(b) hereof.
Rabbi Trust
has the meaning given to such term in Section 3.4(d) hereof.
Release
has the meaning given to such term in Section 3.5 hereof.
Restrictive Covenants
has the meaning given to such term in Section 3.5 hereof.
Retirement
means a termination of the Executives employment by the Company or the Executive
(i) at such age as shall be established by the Board for mandatory or normal retirement of Company
executives in general (which age shall be, if the determination of Retirement is made after the
occurrence of a Change in Control, the age established by the Board prior to a Change in Control),
which shall not be less than age 65, or (ii) at any other retirement age set by mutual agreement of
the Company and the Executive and approved by the Board.
Salary
has the meaning given to such term in Section 2.4(a) hereof.
Section 409A Tax
has the meaning given to such term in Section 3.7 hereof.
Securities Exchange Act
means the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder.
Term
has the meaning given to such term in Section 2.2 hereof.
Termination Date
means (i) if the Executives employment is to be terminated by the Company
for Disability, thirty (30) days after a Notice of Termination is given;
provided
that the
Executive shall not have returned to the performance of the Executives duties on a full-time basis
during such thirty (30) day period; and (ii) if the Executives employment is to be terminated by
either the Company or the Executive for any other reason, the date on which a Notice of Termination
is given.
Total Payments
has the meaning given to such term in Section 3.6(a) hereof.
Triggering Event
has the meaning given to such term in Section 3.4(d) hereof.
Trustee
has the meaning given to such term in Section 3.4(d) hereof.
Underpayments
has the meaning given to such term in Section 3.6(c) hereof.
Voting Securities
means, with respect to a specified Person, any security of such Person
that has, or may have upon an event of default or in respect to any transaction, a right to vote on
any matter upon which the holder of any class of common stock of such Person would have a right to
vote.
- 5 -
1.2.
Terms Generally
. Unless the context of this Agreement requires otherwise, words
importing the singular number shall include the plural and vice versa, and any pronoun shall
include the corresponding masculine, feminine and neuter forms.
1.3.
Cross-References
. Unless otherwise specified, references in this Agreement to
any Paragraph or Section are references to such Paragraph or Section of this Agreement.
SECTION 2.
EMPLOYMENT AND COMPENSATION
. The following terms and conditions will
govern the Executives employment with the Company throughout the Term.
2.1.
Employment
. The Company hereby employs the Executive, and the Executive hereby
accepts employment with the Company, on the terms and conditions set forth herein.
2.2.
Term
. The term of employment of the Executive under this Agreement shall
commence as of the date hereof (the
Commencement Date
) and, subject to Section 3.1 hereof, shall
terminate three (3) year(s) after the Commencement Date, and shall automatically be extended for
additional one (1) year periods thereafter (any such renewal periods, together with the initial
three (3) year period, being referred to as the
Term
) unless terminated by either party by
written notice to the other party.
2.3.
Duties
.
(a)
The Executive agrees to serve as Executive Vice President, Chief
Financial Officer and Treasurer of the Company during the Term. In such capacity, the Executive
shall have the responsibilities and duties customary for such office(s) and such other executive
responsibilities and duties as are assigned by the Chief Executive Officer which are consistent
with the Executives position(s). The Executive agrees to devote substantially all his business
time, attention and services to the business and affairs of the Company and its subsidiaries and to
perform his duties to the best of his ability. At all times during the performance of this
Agreement, the Executive will adhere to the Code of Conduct of the Company (the
Code of Conduct
)
that has been or may hereafter be established and communicated by the Company to the Executive for
the conduct of the position or positions held by the Executive. The Executive may not accept
directorships on the board of directors of for-profit corporations without the prior written
consent of the Chief Executive Officer of the Company. The Executive may accept directorships on
the board of directors of not-for-profit corporations without the Chief Executive Officers prior,
written consent so long as (a) such directorships do not interfere with Executives ability to
carry out his responsibilities under this Agreement, and (b) Executive promptly notifies the Chief
Executive Officer in writing of the fact that he has accepted such a non-profit directorship.
(b)
If the Company or the Executive elects not to renew the Term pursuant to Section 2.2,
the Executive shall continue to be employed under this Agreement until the expiration of the
then current Term (unless earlier terminated pursuant to Section 3.1 hereof), shall cooperate
fully with the Chief Executive Officer and shall perform such duties not inconsistent with the
provisions hereof as he shall be assigned by the Chief Executive Officer.
- 6 -
2.4.
Compensation
.
(a)
Salary
. For all services rendered by the Executive under this Agreement, the
Company shall pay the Executive a salary during the Term at a rate of not less than THREE
HUNDRED FIFTY THOUSAND DOLLARS ($350,000) per year, which may be increased but not decreased
unless decreased for the senior executive staff generally (the
Salary
), payable in
installments in accordance with the Companys policy from time to time in effect for payment of
salary to executives. The Salary shall be reviewed no less than annually by the Chief
Executive Officer and nothing contained herein shall prevent the Board from at any time
increasing the Salary or other benefits herein provided to be paid or provided to the Executive
or from providing additional or contingent benefits to the Executive as it deems appropriate.
(b)
Benefits
. During the Term, the Company shall permit the Executive to
participate in or receive benefits under the Selective Insurance Group, Inc. 2005 Omnibus Stock
Plan, the Selective Insurance Group, Inc. Cash Incentive Plan, the Selective Insurance
Retirement Savings Plan, the Retirement Income Plan For Selective Insurance Company of America,
as amended, the Selective Insurance Company of America Deferred Compensation Plan, the
Selective Insurance Supplemental Pension Plan and any other incentive compensation, stock
option, stock appreciation right, stock bonus, pension, group insurance, retirement, profit
sharing, medical, disability, accident, life insurance plan, relocation plan or policy, or any
other plan, program, policy or arrangement of the Company intended to benefit the employees of
the Company generally, if any, in accordance with the respective provisions thereof, from time
to time in effect (collectively, the
Plans
).
(c)
Vacations and Reimbursements
. During the Term, the Executive shall be
entitled to vacation time off and reimbursements for ordinary and necessary travel and
entertainment expenses in accordance with the Companys policies on such matters from time to
time in effect.
(d)
Perquisites
. During the Term, the Company shall provide the Executive with
suitable offices, secretarial and other services, and other perquisites to which other
executives of the Company generally are (or become) entitled, to the extent as are suitable to
the character of the Executives position with the Company, subject to such specific limits on
such perquisites as may from time to time be imposed by the Board and the Chief Executive
Officer.
SECTION 3.
TERMINATION AND SEVERANCE
.
3.1.
Termination
. The Executives employment hereunder shall commence on the
Commencement Date and continue until the expiration of the Term, except that the employment of the
Executive hereunder shall earlier terminate:
(a)
Death
. Upon the Executives death.
(b)
Disability
. At the option of the Company, upon the Disability of the
Executive.
- 7 -
(c)
For Cause
. At the option of the Company, for Cause.
(d)
Resignation
. At any time at the option of the Executive, by resignation
(other than a resignation for Good Reason).
(e)
Without Cause
. At any time at the option of the Company, without Cause;
provided
, that a termination of the Executives employment hereunder by the Company
based on Retirement, death, or Disability shall not be deemed to be a termination without
Cause.
(f)
Relocation
. At the option of the Executive at any time prior to a Change in
Control, if the Company imposes a requirement without the consent of the Executive that the
Executive be based at a location in excess of fifty (50) miles from the location of the
Executives office on the Commencement Date.
(g)
For Good Reason
. At any time at the option of the Executive within two (2)
years following the occurrence of a Change in Control, for Good Reason.
3.2.
Procedure For Termination
. Any termination of the Executives employment by the
Company or by the Executive prior to the expiration of the Term (an
Early Termination
) shall be
communicated by delivery of a Notice of Termination to the other party hereto given in accordance
with Section 5.13 hereof. Any Early Termination shall become effective as of the applicable
Termination Date.
3.3.
Rights and Remedies on Termination
. The Executive will be entitled to receive
the payments and benefits specified below if there is an Early Termination.
(a)
Accrued Salary
. If the Executives employment is terminated pursuant to any
of the Paragraphs set forth in Section 3.1 hereof, then the Executive (or his legal
representative, as applicable) shall only be entitled to receive his accrued and unpaid Salary
through the Termination Date.
(b)
Severance Payments
.
(i) If the Executives employment is terminated pursuant to Paragraphs (a) or (b) in
Section 3.1 hereof, then the Executive (or his legal representative, as applicable) shall
be entitled to receive a severance payment from the Company in an aggregate amount equal to
the product of (A) 1.5
times
(B) the Executives Salary
plus
an amount
equal to the average of the three most recent annual cash incentive payments (each an
ACIP) made to the Executive;
provided
that any such severance payment shall be
reduced by the amount of payments the Executive receives under any life or disability
insurance policies with respect to which the premiums were paid by the Company.
(ii) If the Executives employment is terminated pursuant to Paragraph (e) or (f) in
Section 3.1 hereof, then the Executive shall be entitled to receive a severance payment
from the Company in an aggregate amount equal to the product of (A) 1.5
- 8 -
times
(B) the Executives Salary
plus
an amount equal to the average
of the three most recent ACIP payments made to the Executive.
(iii) The severance payment required to be paid by the Company to the Executive
pursuant to Paragraph (b)(i) or (b)(ii) above, shall, subject to Section 3.7, be paid in
equal monthly installments over the twelve (12) month period following the Termination
Date.
(c)
Severance Benefits
.
(i) If the Executives employment is terminated pursuant to any of the Paragraphs set
forth in Section 3.1 hereof, then the Executive (or his legal representative, as
applicable) shall be entitled to receive the benefits which the Executive has accrued or
earned or which have become payable under the Plans as of the Termination Date, but which
have not yet been paid to the Executive. Payment of any such benefits shall be made in
accordance with the terms of such Plans.
(ii) If the Executives employment is terminated pursuant to Paragraph (e) or (f) in
Section 3.1 hereof, then the Company shall, subject to Section 3.7, maintain in full force
and effect for the continued benefit of the Executive and his dependents for a period
terminating on the earlier of (A) eighteen (18) months following the applicable Termination
Date, or (B) the commencement date of equivalent benefits from a new employer, (any such
period being referred to as the applicable
Extended Benefit Period
) all insured and
self-insured medical, dental, vision, disability and life insurance employee benefit Plans
in which the Executive was entitled to participate immediately prior to the Termination
Date;
provided
that the Executives continued participation is not barred under the
general terms and provisions of such Plans. Notwithstanding the foregoing, the Executive
shall continue to participate in such Plans during the Extended Benefit Period only to the
extent that such Plans remain in effect for other executives of the Company from time to
time during the Extended Benefit Period and subject to the terms of such Plans, including
any modifications and amendments thereto following the Termination Date. In the event
that the Executives participation in any such Plan is barred by its terms, the Company
shall arrange, at its sole cost and expense, to have issued for the benefit of the
Executive and his dependents during the Extended Benefit Period individual policies of
insurance providing benefits substantially similar (on an after-tax basis) to those which
the Executive otherwise would have been entitled to receive under such Plans pursuant to
this Paragraph (c)(ii). Executive shall be responsible for making any required
contributions to the cost of such coverage, on an after-tax basis, at the rate which
Executive was obligated to pay immediately prior to the Termination Date. If, at the end
of the applicable Extended Benefit Period, the Executive has not previously received or is
not receiving equivalent benefits from a new employer, or is not otherwise receiving such
benefits, the Company shall arrange to enable the Executive to convert his and his
dependents coverage under such Plans to individual policies or programs upon the same
terms as employees of the Company may apply for such conversions upon termination of
employment. In no event shall the
- 9 -
Companys obligation to provide disability benefits hereunder be reduced as a result of any
individual disability policy purchased by the Executive.
(d)
Rights Under Plans
. If the Executives employment is terminated pursuant to
Paragraphs (a), (b), (e), or (f) in Section 3.1 hereof, the Executive shall be entitled to the
benefits of any stock options, stock appreciation rights, restricted stock grants, stock
bonuses or other benefits theretofore granted by the Company to the Executive under any Plan,
whether or not provided for in any agreement with the Company;
provided
,
however
, that (i) all unvested stock options, stock appreciation rights, restricted
stock grants, stock bonuses, long-term incentives and similar benefits shall be deemed to be
vested in full on the Termination Date, notwithstanding any provision to the contrary or any
provision requiring any act or acts by the Executive in any agreement with the Company or any
Plan; (ii) to the extent that any such stock options, stock appreciation rights, restricted
stock grants, stock bonuses, long-term incentives or similar benefits shall require by its
terms the exercise thereof by the Executive, the last date to exercise the same shall,
notwithstanding any provision to the contrary in any agreement or any Plan, be the earlier of
(A) the later to occur of the fifteenth day of the third month following the date at which, or
the December 31 of the calendar year in which, any such stock options, stock appreciation
rights, restricted stock grants, stock bonuses, long-term incentives or similar benefits would
otherwise have expired if not extended, or (B) the original expiration date had the Executives
employment not so terminated; and (iii) if the vesting or exercise pursuant hereto of any such
stock options, stock appreciation rights, restricted stock grants, stock bonuses, long-term
incentives or similar benefits shall have the effect of subjecting the Executive to liability
under Section 16(b) of the Securities Exchange Act or any similar provision of law, the vesting
date thereof shall be deemed to be the first day after the Termination Date on which such
vesting may occur without subjecting the Executive to such liability.
(e)
No Double Dipping.
(i) The severance payments and severance benefits the Executive may be entitled to
receive pursuant to this Section 3.3 shall be in lieu of any of the payments and benefits
the Executive may be entitled to receive pursuant to any other agreement, plan or
arrangement providing for the payment of severance payments or benefits.
(ii) The Executive expressly disclaims any interest he may have in the Selective
Insurance Company of America Severance Plan.
3.4.
Rights and Remedies on Termination After Change in Control
. The Executive will
be entitled to receive the severance payments and severance benefits specified below in the event
there shall occur a termination of the Executives employment pursuant to Paragraph (e) or (g) of
Section 3.1 hereof within two (2) years following the occurrence of a Change in Control. The
severance payments and benefits the Executive may be entitled to receive pursuant to this Section
3.4 shall be in addition to, and not in lieu of, any of the payments and benefits the Executive may
be entitled to receive pursuant to Section 3.3 hereof, unless expressly so stated to be in lieu of
such benefits and/or payments.
- 10 -
(a)
Severance Payments
. The Executive shall be entitled to receive a severance
payment from the Company in an aggregate amount equal to the product of (i) 2; and (ii) the greater
of:
(1) the sum of the Executives Salary
plus
the Executives
target ACIP in effect as of the Termination Date, or
(2) the sum of the Executives Salary in effect as of the Termination
Date plus the Executives average ACIP for the three calendar years prior
to the calendar year in which the Termination Date occurs.
Such payment shall be made, subject to Section 3.7, thirty (30) business days following the
Termination Date, provided that the Executive has executed and delivered a Release pursuant to
Section 3.5 hereof
and
such Release has become effective and irrevocable. The severance
payment required to be paid by the Company to the Executive pursuant to this Section 3.4(a) shall
be in lieu of, and not in addition to, any other severance payments required to be paid by the
Company to the Executive.
(b)
Severance Benefits
. Subject to Section 3.7, the Company shall maintain in full
force and effect, for the continued benefit of the Executive and his dependents for a period
terminating on the earlier of: (i) twenty-four (24) months after the Termination Date or (ii) the
commencement date of equivalent benefits from a new employer (the
CIC Extended Benefit Period
),
all insured and self insured medical, dental, vision, disability and life insurance employee
welfare benefit plans in which the Executive was entitled to participate immediately prior to the
Termination Date;
provided
that the Executives continued participation is not barred under
the general terms and provisions of such Plans. Notwithstanding the foregoing, the Executive shall
continue to participate in such Plans during the CIC Extended Benefit Period only to the extent
that such Plans remain in effect for other executives of the Company from time to time during the
CIC Extended Benefit Period and subject to the terms of such Plans, including any modifications and
amendments thereto following the Termination Date. In the event that the Executives participation
in any such Plan is barred by its terms, the Company, at its sole cost and expense, shall arrange
to have issued for the benefit of the Executive and his dependents individual policies of insurance
providing benefits substantially similar (on an after-tax basis) to those which the Executive
otherwise would have been entitled to receive under such Plans pursuant to this Paragraph (b).
Executive shall be responsible for making any required contributions to the cost of such coverage,
on an after-tax basis, at the rate which Executive was obligated to pay immediately prior to the
Termination Date. If, at the end of the applicable CIC Extended Benefit Period, the Executive has
not previously received or is not receiving equivalent benefits from a new employer, or is not
otherwise receiving such benefits, the Company shall arrange to enable the Executive to convert his
and his dependents coverage under such Plans to individual policies or programs upon the same
terms as employees of the Company may apply for such conversions upon termination of employment.
The severance benefits required to be provided by the Company to the Executive pursuant to this
Paragraph (b) shall be in lieu of, and not in addition to, any severance benefits required to be
provided to the Executive pursuant to Section 3.3(c)(ii)
- 11 -
hereof. In no event shall the Companys obligation to provide disability benefits hereunder
be reduced as a result of any individual disability policy purchased by the Executive.
(c)
Rights Under Plans
. The Executive shall be entitled to the benefits of any stock
options, stock appreciation rights, restricted stock grants, stock bonuses or other benefits
theretofore granted by the Company to the Executive under any Plan, whether or not provided for in
any agreement with the Company;
provided
,
however
, that (i) all unvested stock
options, stock appreciation rights, restricted stock grants, stock bonuses, long-term incentives
and similar benefits shall be deemed to be vested in full on the Termination Date, notwithstanding
any provision to the contrary or any provision requiring any act or acts by the Executive in any
agreement with the Company or any Plan; (ii) to the extent that any such stock options, stock
appreciation rights, restricted stock grants, stock bonuses, long-term incentives or similar
benefits shall require by its terms the exercise thereof by the Executive, the last date to
exercise the same shall, notwithstanding any provision to the contrary in any agreement or any
Plan, be the earlier of (A) the later to occur of the fifteenth day of the third month following
the date at which, or the December 31 of the calendar year in which, any such stock options, stock
appreciation rights, restricted stock grants, stock bonuses, long-term incentives or similar
benefits would otherwise have expired if not extended or (B) the original expiration date had the
Executives employment not so terminated; and (iii) if the vesting or exercise pursuant hereto of
any such stock options, stock appreciation rights, restricted stock grants, stock bonuses,
long-term incentives or similar benefits shall have the effect of subjecting the Executive to
liability under Section 16(b) of the Securities Exchange Act or any similar provision of law, the
vesting date thereof shall be deemed to be the first day after the Termination Date on which such
vesting may occur without subjecting the Executive to such liability.
(d)
Rabbi Trust
. The Company shall maintain a trust intended to be a grantor trust
within the meaning of subpart E, Part I, subchapter J, chapter 1, subtitle A of the Code (the
Rabbi Trust
). Coincident with the occurrence of a Change in Control, the Company shall promptly
deliver to a bank as trustee of the Rabbi Trust (the
Trustee
), an amount of cash or certificates
of deposit, treasury bills or irrevocable letters of credit adequate to fully fund the payment
obligations of the Company under this Section 3.4. The Company and Trustee shall enter into a
trust agreement that shall provide that barring the insolvency of the Company, amounts payable to
the Executive under this Section 3.4 (subject to Section 3.7) shall be paid by the Trustee to the
Executive five (5) days after written demand therefor by the Executive to the Trustee, with a copy
to the Company, certifying that such amounts are due and payable under this Section 3.4 because the
Executives employment has been terminated pursuant to Paragraph (e) or (g) in Section 3.1 hereof
at a time which is within two (2) years following the occurrence of a Change in Control (a
Triggering Event
). Such trust agreement shall also provide that if the Company shall, prior to
payment by the Trustee, object in writing to the Trustee, with a copy to the Executive, as to the
payment of any amounts demanded by the Executive under this Section 3.4, certifying that such
amounts are not due and payable to the Executive because a Triggering Event has not occurred, such
dispute shall be resolved by binding arbitration as set forth in Section 5.8 hereof.
- 12 -
3.5.
Conditions to Severance Payments and Benefits
. The Executives right to receive
the severance payments and benefits pursuant to Sections 3.3 and 3.4 hereof, is expressly
conditioned upon (a) receipt by the Company of a written release (a
Release
) executed by the
Executive in the form of
Exhibit A
hereto, and the expiration of the revocation period described
therein without such Release having been revoked, and (b) the compliance by the Executive with the
covenants, terms or provisions of Sections 4.1 and 4.2 hereof (the
Restrictive Covenants
). If
the Executive shall fail to deliver a Release in accordance with the terms of this Section 3.5 or
shall breach any of the Restrictive Covenants, the Companys obligation to make the severance
payments and to provide the severance benefits pursuant to Sections 3.3 and 3.4 hereof shall
immediately and irrevocably terminate.
3.6.
Tax Effect of Payments
.
(a)
Gross-Up Payment
. In the event that it is determined that any payment,
distribution or other benefit of any type to or for the Executives benefit made by the Company, by
any of its affiliates, by any Person who acquires ownership or effective control of the Company or
ownership of a substantial portion of the Companys assets (within the meaning of Section 280G of
the Code and the regulations thereunder) or by any affiliate of such Person, whether paid or
payable or distributed or distributable or otherwise made available pursuant to the terms of this
Agreement or otherwise (the
Total Payments
), would be subject to the excise tax imposed by
Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise
tax, together with any such interest or penalties, are collectively referred to as the
Excise
Tax
), then the Executive shall be entitled to receive an additional payment (a
Gross-Up Payment
)
in an amount such that after payment by the Executive of all taxes imposed upon the Gross-Up
Payment, including any Excise Tax, the Executive retains an amount of the Gross-Up Payment equal to
the Excise Tax imposed on the Total Payments.
(b)
Determination by Accountant
. All mathematical determinations and all
determinations of whether any of the Total Payments are parachute payments (within the meaning of
Section 280G of the Code) that are required to be made under this Section, including all
determinations of whether a Gross-Up Payment is required, of the amount of such Gross-Up Payment
and of amounts relevant to the last sentence of this Section (collectively, the
Determination
),
shall be made by an independent accounting firm acceptable to each of the parties hereto, or, if no
firm is acceptable to both parties hereto, each of the Executive and the Company shall select an
accounting firm acceptable to it, and such accounting firms shall together designate an independent
accounting firm,
provided
,
however
, that any accounting firm so designated shall
not have been previously retained by either party for a period of a least two (2) years subsequent
to the applicable Termination Date. Any independent accounting firm selected by the Executive and
the Company or designated pursuant to this Paragraph (b) shall be referred to herein as the
Accounting Firm
. Subject to Section 3.6(c) and Section 3.7, if a Gross-Up Payment is determined
to be payable, it shall be paid by the Company to the Executive within five (5) days after such
Determination is delivered to the Company. Subject to Section 3.6(c), any Determination by the
Accounting Firm shall be binding upon the Company and Executive, absent manifest error. All of the
costs and expenses of the Accounting Firm shall be borne by the Company.
- 13 -
(c)
Underpayments and Overpayments
. As a result of uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder,
it is possible that Gross-Up Payments not made by the Company should have been made
(
Underpayments
) or that Gross-Up Payments will have been made by the Company which should not
have been made (
Overpayments
). In either event, the Accounting Firm shall determine the amount
of the Underpayment or Overpayment that has occurred. In the case of an Underpayment, the amount
of such Underpayment shall promptly be paid by the Company to or for the Executives benefit. In
the case of an Overpayment, the Executive shall, at the direction and expense of the Company, take
such steps as are reasonably necessary (including the filing of returns and claims for refund),
follow reasonable instructions from, and procedures established by, the Company and otherwise
reasonably cooperate with the Company to correct such Overpayment;
provided
,
however
, that (i) the Executive shall in no event be obligated to return to the Company an
amount greater than the net after-tax portion of the Overpayment that the Executive has retained or
has received as a refund or has received the benefit of from the applicable taxing authorities and
(ii) this provision shall be interpreted in a manner consistent with the intent of this Section,
which is to make the Executive whole, on an after-tax basis, for the application of the Excise Tax,
it being understood that the correction of an Overpayment may result in the Executives repaying to
the Company an amount which is less than the Overpayment. Anything herein to the contrary
notwithstanding, in the event of a final determination as to the liability for the Excise Tax
applicable to the Total Payments such determination shall be the basis for determining whether
there have been Underpayments or Overpayments pursuant to this Section 3.6. For this purpose, a
final determination shall mean a final agreement reached with the Internal Revenue Service or a
final determination by a court with jurisdiction from which there is no appeal, in either case,
concluded in accordance with the provisions of this Paragraph (c).
(d)
Application of Section 409A
.
Notwithstanding anything contained in this Section
3.6, no portion of the Gross-Up Payment shall be paid to the Executive so as to cause the Executive
to be subject to tax under Section 409A of the Code. In particular, if necessary to avoid taxation
under Code Section 409A, the Gross-Up Payment shall be paid to Executive in a lump sum at the same
date that severance payments are paid to the Executive pursuant to Section 3.4(a). If the amount
of the Gross-Up Payment cannot be fully determined pursuant to Section 3.6(b) by such date, the
Company shall pay to the Executive on such date an estimate of the Gross-Up Payment, as determined
by the Accounting Firm, and shall pay the remainder (or the Executive shall reimburse the Company
the difference) 30 days thereafter.
3.7.
Section 409A Tax
. Notwithstanding anything herein to the contrary, to the extent
any payment or provision of benefits under this Agreement upon the Executives separation from
service is subject to Section 409A of the Code, no such payment shall be made, and Executive shall
be responsible for the full cost of such benefits, for six (6) months following the Executives
separation from service if the Executive is a specified employee. On the expiration of such
six (6) month period, any payments delayed, and an amount sufficient to reimburse the Executive for
the cost of benefits met by the Executive, during such period shall be aggregated (the
Make-Up
Amount
) and paid in full to the Executive, and any succeeding payments and benefits shall continue
as scheduled hereunder.
- 14 -
The Company shall credit the Make-Up Amount with interest at no less than the interest rate it
pays for short-term borrowed funds, such interest to accrue from the date on which payments would
have been made, or benefits would have been provided, by the Company to the Executive absent the
six month delay. The terms separation from service and specified employee shall have the
meanings set forth under Section 409A and the regulations and rulings issued thereunder.
Furthermore, the Company shall not be required to make, and the Executive shall not be required to
receive, any severance or other payment or benefit under Sections 3.3, 3.4 or 3.6 hereof if the
making of such payment or the provision of such benefit or the receipt thereof shall result in a
tax to the Executive arising under Section 409A of the Code (a
Section 409A Tax
). In the event
the Company cannot make a payment or provide a benefit under Sections 3.3, 3.4 or 3.6 hereof, or if
the Executive cannot receive any such payment or benefit, in accordance with the terms of such
Sections, without the Executive incurring a Section 409A Tax, then the Company and the Executive
shall work together in good faith to agree on an alternative payment schedule or an alternative
benefit of comparable economic value acceptable to both parties (and to amend this Agreement, where
necessary or desirable) such that the Executive does not incur a Section 409A Tax or the Executive
incurs the least amount of Section 409A Tax as is possible under the circumstances. If a
satisfactory alternative payment schedule or benefit cannot be agreed to by the later to occur of
(i) the originally scheduled payment, distribution or benefit date and (ii) six months following
the date of the Executives separation from service, the Company shall provide such payment,
distribution or benefit to the Executive (
409A Amount
) on the originally scheduled date for such
payment, distribution or benefit together with an additional payment (a
409A Payment
) in an
amount such that after payment by the Executive of all taxes imposed on the 409A Payment (excluding
any Excise Tax to which payment to the Executive is made pursuant to Section 3.6(a)), the Executive
retains an amount of the 409A Payment equal to any taxes (including taxes, penalties and interest
under Section 409A) on the 409A Amount.
SECTION 4.
RESTRICTIVE COVENANTS
.
4.1.
Confidentiality
. The Executive agrees that he will not, either during the Term
or at any time after the expiration or termination of the Term, disclose to any other Person any
confidential or proprietary information of the Company or its subsidiaries, except for (a)
disclosures to directors, officers, key employees, independent accountants and counsel of the
Company and its subsidiaries as may be necessary or appropriate in the performance of the
Executives duties hereunder, (b) disclosures which do not have a material adverse effect on the
business or operations of the Company and its subsidiaries, taken as a whole, (c) disclosures which
the Executive is required to make by law or by any court, arbitrator or administrative or
legislative body (including any committee thereof) with apparent jurisdiction to order the
Executive to disclose or make accessible any information, (d) disclosures with respect to any other
litigation, arbitration or mediation involving this Agreement, and (e) disclosures of any such
confidential or proprietary information that is, at the time of such disclosure, generally known to
and available for use by the public otherwise than by the Executives wrongful act or omission.
The Executive agrees not to take with him upon leaving the employ of the Company any document or
paper relating to any confidential information or trade secret of the Company and its subsidiaries,
except that Executive shall be entitled to retain (i) papers and other materials of a personal
nature, including but limited
- 15 -
to, photographs, correspondence, personal diaries, calendars and Rolodexes (so long as such
Rolodexes do not contain the Companys only copy of business contact information), personal files
and phone books, (ii) information showing his compensation or relating to his reimbursement of
expenses, (iii) information that he reasonably believes may be needed for tax purposes, and (iv)
copies of plans, programs and agreements relating to his employment, or termination thereof, with
the Company.
4.2.
Non-Solicitation of Employees
. The Executive agrees that, except in the course
of performing his duties hereunder, he will not, either during the Term and for a period of two (2)
years after the expiration or termination of the Term, directly or indirectly, solicit or induce or
attempt to solicit or induce or cause any of the employees of the Company or the Companys
subsidiaries to leave the employ of the Company or of such subsidiaries.
SECTION 5.
MISCELLANEOUS PROVISIONS
.
5.1.
No Mitigation; Offsets
. The Executive shall not be required to mitigate damages
or the amount of any payment provided for under this Agreement by seeking other employment or
otherwise and no future income earned by the Executive from employment or otherwise shall in any
way reduce or offset any payments due to the Executive hereunder. Assuming a payment or otherwise
is due Executive under this Agreement, the Company may offset against any amount due Executive
under this Agreement only those amounts due Company in respect of any undisputed, liquidated
obligation of Executive to the Company.
5.2.
Governing Law
. The provisions of this Agreement will be construed and
interpreted under the laws of the State of New Jersey, without regard to principles of conflicts of
law.
5.3.
Injunctive Relief and Additional Remedy
. The Executive acknowledges that the
injury that would be suffered by the Company as a result of a breach of the provisions of Sections
4.1 and 4.2 hereof would be irreparable and that an award of monetary damages to the Company for
such a breach would be an inadequate remedy. Consequently, the Company will have the right, in
addition to any other rights it may have, to obtain injunctive relief to restrain any breach or
threatened breach or otherwise to specifically enforce any provision of this Agreement, and the
Company will not be obligated to post bond or other security in seeking such relief. Each of the
parties hereby irrevocably submits to the exclusive jurisdiction of the federal and state courts of
the State of New Jersey for the purpose of injunctive relief.
5.4.
Representations and Warranties by Executive
. The Executive represents and
warrants to the best of his knowledge that the execution and delivery by the Executive of this
Agreement do not, and the performance by the Executive of the Executives obligations hereunder
will not, with or without the giving of notice or the passage of time, or both: (a) violate any
judgment, writ, injunction, or order of any court, arbitrator or governmental agency applicable to
the Executive or (b) conflict with, result in the breach of any provisions of or the termination
of, or constitute a default under, any agreement to which the Executive is a party or by which the
Executive is or may be bound.
- 16 -
5.5.
Waiver
. The rights and remedies of the parties to this Agreement are cumulative
and not alternative. Neither the failure nor any delay by either party in exercising any right,
power, or privilege under this Agreement will operate as a waiver of such right, power, or
privilege, and no single or partial exercise of any such right, power, or privilege will preclude
any other or further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law, (a) no waiver that
may be given by a party will be applicable except in the specific instance for which it is given;
and (b) no notice to or demand on one party will be deemed to be a waiver of any obligation of such
party or of the right of the party giving such notice or demand to take further action without
notice or demand as provided in this Agreement.
5.6.
Assignment
. No right or benefit under this Agreement shall be assigned,
transferred, pledged or encumbered (a) by the Executive except by a beneficiary designation made by
will or the laws of descent and distribution or (b) by the Company except that the Company may
assign this Agreement and all of its rights hereunder to any Person with which it may merge or
consolidate or to which it may sell all or substantially all of its assets;
provided
that
such Person shall, by agreement in form and substance satisfactory to the Executive, expressly
assume and agree to perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such merger, consolidation or sale had taken place.
Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the
Company and each of its successors and assigns, and the Executive, his heirs, legal representatives
and any beneficiary or beneficiaries designated hereunder.
5.7.
Entire Agreement; Amendments
. This Agreement contains the entire agreement
between the parties with respect to the subject matter hereof and supersedes all prior agreements
and understandings, oral or written, between the parties hereto with respect to the subject matter
hereof. This Agreement may not be amended orally, but only by an agreement in writing signed by
the parties hereto.
5.8.
Arbitration
. Any dispute which may arise between the Executive and the Company
with respect to the construction, interpretation or application of any of the terms, provisions,
covenants or conditions of this Agreement or any claim arising from or relating to this Agreement
will be submitted to final and binding arbitration by three (3) arbitrators in Newark, New Jersey,
under the expedited rules of the American Arbitration Association then obtaining. One such
arbitrator shall be selected by each of the Company and the Executive, and the two arbitrators so
selected shall select the third arbitrator. Selection of all three arbitrators shall be made
within thirty (30) days after the date the dispute arose. The written decision of the arbitrators
shall be rendered within ninety (90) days after selection of the third arbitrator. The decision of
the arbitrators shall be final and binding on the Company and the Executive and may be entered by
either party in any New Jersey federal or state court having jurisdiction.
5.9.
Legal Costs
. The Company shall pay any reasonable attorneys fees and costs
incurred by the Executive in connection with any dispute regarding this Agreement so long as
Executives claim(s) or defense(s) in such action are asserted in the good faith belief that they
are not frivolous. The Company shall pay any such fees and costs promptly following its receipt of
written requests therefor, which requests shall be made no more
- 17 -
frequently than once per calendar month. The Company shall bear all legal costs and expenses incurred in the
event the Company should contest or dispute the characterization of any amounts paid pursuant to
this Agreement as being nondeductible under Section 280G of the Code or subject to imposition of an
excise tax under Section 4999 of the Code, including, without limitation, the reasonable costs and
expenses of any counsel selected by the Executive to represent him in connection with such a
matter.
5.10.
Severability
. In the case that any one or more of the provisions contained in
this Agreement shall, for any reason, be held invalid or unenforceable, the other provisions of
this Agreement shall remain in full force and effect. Any provision of this Agreement held invalid
or unenforceable only in part or degree shall remain in full force and effect to the extent not
held invalid or unenforceable.
5.11.
Counterparts; Facsimile
. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this Agreement and all of
which, when taken together, will be deemed to constitute one and the same agreement. This
Agreement may be executed via facsimile.
5.12.
Headings; Interpretation
. The various headings contained herein are for
reference purposes only and do not limit or otherwise affect any of the provisions of this
Agreement. It is the intent of the parties that this Agreement not be construed more strictly with
regard to one party than with regard to any other party.
5.13.
Notices
.
(a)
All notices, requests, demands and other communications required
or permitted under this Agreement shall be in writing and sent as follows:
If to the Company, to:
Selective Insurance Group, Inc.
40 Wantage Avenue
Branchville, New Jersey 07890
Attn: General Counsel
Fax: (973) 948-0282
- 18 -
If to the Executive, to:
Dale A. Thatcher
17 Maria Drive
Sparta, NJ 07871
(b)
All notices and other communications required or permitted under this Agreement which
are addressed as provided in Paragraph (a) of this Section 5.13, (i) if delivered personally
against proper receipt shall be effective upon delivery, (ii) if sent by facsimile transmission
(with evidence supplied by the sender of the facsimiles receipt at a facsimile number
designated for receipt by the other party hereunder, which other party shall be obligated to
provide such a facsimile number) shall be effective upon dispatch, and (iii) if sent (A) by
certified or registered mail with postage prepaid or (B) by Federal Express or similar courier
service with courier fees paid by the sender, shall be effective upon receipt. The parties
hereto may from time to time change their respective addresses and/or facsimile numbers for the
purpose of notices to that party by a similar notice specifying a new address and/or facsimile
number, but no such change shall be deemed to have been given unless it is sent and received in
accordance with this Section 5.13.
5.14.
Withholding
. All amounts payable by the Company to the Executive hereunder
(including, but not limited to, the Salary or any amounts payable pursuant to Sections 3.3 and/or
3.4 hereof) shall be reduced prior to the delivery of such payment to the Executive by an amount
sufficient to satisfy any applicable federal, state, local or other withholding tax requirements.
- 19 -
IN WITNESS WHEREOF, the Company and Executive have executed this Agreement as of the
Commencement Date.
|
|
|
|
|
|
|
|
|
SELECTIVE INSURANCE GROUP, INC.
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Gregory E. Murphy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gregory E. Murphy
|
|
|
|
|
|
|
Its Chairman, President, and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
EXECUTIVE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Dale A. Thatcher
|
|
|
|
|
|
|
|
|
|
|
|
Dale A. Thatcher
|
|
|
- 20 -
EXHIBIT A
FORM OF RELEASE
Reference is hereby made to the Employment Agreement, dated as of ___, 200___(the
Employment
Agreement
), by and between ___(the
Executive
) and
Selective Insurance Group, Inc., a New Jersey corporation (the
Company
). Capitalized
terms used but not defined herein shall have the meanings specified in the Employment Agreement.
Pursuant to the terms of the Employment Agreement and in consideration of the payments to be
made to the Executive by the Company, which Executive acknowledges are in excess of what Executive
would otherwise be entitled to receive, the Executive hereby releases and forever discharges and
holds the Company and its subsidiaries (collectively, the
Company
Parties
and
each a
Company
Party
), and the respective officers, directors, employees,
partners, stockholders, members, agents, affiliates, successors and assigns and insurers of each
Company Party, and any legal and personal representatives of each of the foregoing, harmless from
all claims or suits, of any nature whatsoever (whether known or unknown), past, present or future,
including those arising from the law, being directly or indirectly related to the Executives
employment by or the termination of such employment by any Company Party, including, without
limiting the foregoing, any claims for notice, pay in lieu of notice, wrongful dismissal, severance
pay, bonus, overtime pay, incentive compensation, interest or vacation pay for the Executives
service as an officer or director to any Company Party through the date hereof. The Executive also
hereby agrees not to file a lawsuit asserting any such claims. This release (this
Release
) includes, but is not limited to, claims growing out of any legal restriction on
any Company Partys right to terminate its employees and claims or rights under federal, state, and
local laws prohibiting employment discrimination (including, but not limited to, claims or rights
under Title VII of the Civil Rights Act of 1964, as amended by the Civil Rights Act of 1991, the
Americans with Disabilities Act, the Family and Medical Leave Act, the Fair Labor Standards Act,
the Uniformed Services Employment and Reemployment Rights Act, the Employee Retirement Income
Security Act, the Equal Pay Act, the Age Discrimination in Employment Act of 1967, as amended by
the Older Workers Benefit Protection Act of 1990, and the laws of the State of New Jersey against
discrimination, or any other federal or state statutes prohibiting discrimination on the basis of
age, sex, race, color, handicap, religion, national origin, and sexual orientation, or any other
federal, state or local employment law, regulation or other requirement) which arose before the
date this Release is signed, excepting only claims in the nature of workers compensation, claims
for vested benefits, and claims to enforce this agreement. The Executive acknowledges that because
this Release contains a release of claims and is an important legal document, he has been advised
to consult with counsel before executing it, that he may take up to [twenty-one (21)]
1
[forty-five (45)]
2
days to decide
|
|
|
1
|
|
Delete brackets and use text enclosed
therewith if 45 days is not otherwise required by Section 7(f)(1)(F) of the Age
Discrimination in Employment Act and/or 29 C.F.R. Part 1625. If 45 days is so
required, delete bracketed text in its entirety.
|
- 21 -
whether to execute it, and that he may revoke this Release by delivering or mailing a signed
notice of revocation to the Company at its offices within seven (7) days after executing it. If
Executive executes this Release and does not subsequently revoke the release within seven (7) days
after executing it, then this Release shall take effect as a legally binding agreement between
Executive and the Company.
If Executive does not deliver to the Company an original signed copy of this Release by
___, or if Executive signs and revokes this Release within seven (7) days as set forth
above, the Company will assume that Executive rejects the Release and Executive will not receive
the payments referred to herein.
The Executive acknowledges that there is a risk that after signing this Release he may
discover losses or claims that are released under this Release, but that are presently unknown to
him. The Executive assumes this risk and understands that this Release shall apply to any such
losses and claims.
The Executive understands that this Release includes a full and final release covering all
known and unknown, injuries, debts, claims or damages which have arisen or may have arisen from
Executives employment by or the termination of such employment by any Company party. The
Executive acknowledges that by accepting the benefits and payments set forth in the Employment
Agreement, he assumes and waives the risks that the facts and the law may be other than as he
believes.
Notwithstanding the foregoing, this Release does not release, and the Executive continues to
be entitled to, (i) any rights to exculpation or indemnification that the Executive has under
contract or law with respect to his service as an officer or director of any Company Party and (ii)
receive the payments to be made to him by the Company pursuant to Section 3.3 and/or 3.4 of the
Employment Agreement (including any plan, agreement or other arrangement that is referenced in or
the subject of the applicable Section), subject to the conditions set forth in Section 3.5 of the
Employment Agreement, (iii) any right the Executive may have to obtain contribution as permitted by
law in the event of entry of judgment against him as a result of any act or failure to act for
which he and any Company party are jointly liable, and (iv) any claim in respect of any insurance
policy with any Company party entered into outside of the employment relationship.
This Release constitutes the release referenced in Section 3.5 of the Employment Agreement.
The undersigned Executive, having had the time to reflect, freely accepts and agrees to the
above Release. The Executive acknowledges and agrees that no Company representative has made any
representation to or agreement with the Executive relating to this Release which is not contained
in the express terms of this Release. The Executive acknowledges and agrees that the execution and
delivery of this Release is based upon the
|
|
|
2
|
|
Delete brackets and use text enclosed
therewith if 45 days is required by Section 7(f)(1)(F) of the Age
Discrimination in Employment Act and/or 29 C.F.R. Part 1625. If 45 days is not
so required, delete bracketed text in its entirety.
|
- 22 -
Executives independent review of this Release, and the Executive hereby expressly waives any
and all claims or defenses by the Executive against the enforcement of this Release which are based
upon allegations or representations, projections, estimates, understandings or agreements by the
Company or any of its representatives or any assumptions by the Executive that are not contained in
the express terms of this Release.
- 23 -
[Attach disclosures required by the Older Workers Benefit Protection Act, if required]
- 24 -
Exhibit 10.10
EMPLOYMENT AGREEMENT
This Employment Agreement, (the
Agreement
) is made as of the 1
st
day of August,
2006, between
Selective Insurance Group, Inc.
, a New Jersey corporation with a principal place of
business at 40 Wantage Avenue, Branchville, New Jersey 07890 (the
Company
) and
Ronald J. Zaleski
,
an individual residing at 29 Manor Drive, Andover, NJ 07821 (the
Executive
).
SECTION 1.
DEFINITIONS
.
1.1.
Definitions
.
For purposes of this Agreement, the following terms shall have the
meanings set forth below:
Accounting Firm
has the meaning given to such term in Section 3.6(b) hereof.
Agreement
has the meaning given to such term in the Preamble hereto.
Board
means the Board of Directors of the Company.
Cause
means any one or more of the following:
(i) the Executive shall have been convicted by a court of competent jurisdiction of,
or pleaded guilty or nolo contendere to, any felony under, or within the meaning of,
applicable United States federal or state law;
(ii) the Executive shall have breached in any respect any one or more of the material
provisions of this Agreement, including, without limitation, any failure to comply with the
Code of Conduct, and, to the extent such breach may be cured, such breach shall have
continued for a period of thirty (30) days after written notice by the Chief Executive
Officer to the Executive specifying such breach; or
(iii) the Executive shall have engaged in acts of insubordination, gross negligence or
willful misconduct in the performance of the Executives duties and obligations to the
Company.
For purposes of clauses (ii) and (iii) of this definition of Cause, no act, or failure to act, on
the part of the Executive shall be considered grounds for Cause under such clauses if such act,
or such failure to act, was done or omitted to be done based upon authority or express direction
given by the Chief Executive Officer or based upon the advice of counsel for the Company.
Change in Control
means the occurrence of an event of a nature that would be required to be
reported in response to Item 5.01 of a Current Report on Form 8-K, as in effect on the date
thereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act;
provided, however
, that a
Change in Control shall, in any event, conclusively be deemed to have occurred upon the first to
occur of any one of the following events:
(i) The acquisition by any person or group (as such terms are used in Sections
13(d)(3) and 14(d)(2) of the Securities Exchange Act or any successor provisions to either
of the foregoing), including, without limitation, any current shareholder or shareholders
of the Company, of securities of the Company resulting in such person or group being a
beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act) of
twenty-five percent (25%) or more of any class of Voting Securities of the Company;
(ii) The acquisition by any person or group (as such terms are used in Sections
13(d)(3) and 14(d)(2) of the Securities Exchange Act or any successor provisions to either
of the foregoing), including, without limitation, any current shareholder or shareholders
of the Company, of securities of the Company resulting in such person or group being a
beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act) of twenty
percent (20%) or more, but less than twenty-five percent (25%), of any class of Voting
Securities of the Company, if the Board adopts a resolution that such acquisition
constitutes a Change in Control;
(iii) The sale or disposition of more than fifty percent (50%) of the Companys assets
on a consolidated basis, as shown in the Companys then most recent audited consolidated
balance sheet;
(iv) The reorganization, recapitalization, merger, consolidation or other business
combination involving the Company the result of which is the ownership by the shareholders
of the Company of less than eighty percent (80%) of those Voting Securities of the
resulting or acquiring Person having the power to vote in the elections of the board of
directors of such Person; or
(v) A change in the membership in the Board which, taken in conjunction with any other
prior or concurrent changes, results in twenty percent (20%) or more of the Boards
membership being persons not nominated by the Companys management or the Board as set
forth in the Companys then most recent proxy statement, excluding changes resulting from
substitutions by the Board because of retirement or death of a director or directors,
removal of a director or directors by the Board or resignation of a director or directors
due to demonstrated disability or incapacity.
(vi) Anything in this definition of Change in Control to the contrary notwithstanding,
no Change in Control shall be deemed to have occurred for purposes of this Agreement by
virtue of any transaction which results in the Executive, or a group of Persons which
includes the Executive, acquiring, directly or indirectly, Voting Securities of the
Company.
Code
means the Internal Revenue Code of 1986, as amended from time to time.
Code of Conduct
has the meaning given to such term in Section 2.3(a) hereof.
Commencement Date
has the meaning given to such term in Section 2.2 hereof.
- 2 -
Company
has the meaning given to such term in the Preamble hereto and includes any Person
which shall succeed to or assume the obligations of the Company hereunder pursuant to Section 5.6
hereof.
Determination
has the meaning given to such term in Section 3.6(b) hereof.
Disability
means the Executives physical injury or physical or mental illness which causes
him to be absent from his duties with the Company on a full-time basis for a continuous period in
excess of the greater of: (i) the period of disability constituting permanent disability as
specified under the Companys long-term disability insurance coverage applicable to the Executive
at the time of the determination of the existence of a disability (or, if such determination is
made after the occurrence of a Change in Control, as specified under the long-term disability
insurance coverage applicable to the Executive prior to a Change in Control) or (ii) 180 days,
unless within thirty (30) days after a Notice of Termination is thereafter given the Executive
shall have returned to the full-time performance of his duties.
Early Termination
has the meaning given to such term in Section 3.2 hereof.
Excise Tax
has the meaning given to such term in Section 3.6(a) hereof.
Executive
has the meaning given to such term in the Preamble hereto.
Extended Benefit Period
has the meaning given to such term in Section 3.3(c) hereof.
Good Reason
means the occurrence of any one or more of the following:
(i) any reduction in the Executives Salary below the annualized rate in effect on the
date preceding the date on which a Change in Control shall have occurred unless such
reduction is implemented for the senior executive staff generally, provided, however, that
such reduction shall constitute Good Reason even if implemented for senior executive staff
generally if such reduction occurs within two years after a Change in Control;
(ii) (A) a failure by the Company to continue in effect benefits that are comparable
in the aggregate to the benefits the Executive receives under the Plans in which the
Executive participates, other than as a result of the normal expiration of any such Plan as
to other eligible employees in accordance with its terms as in effect on the date preceding
the date on which a Change in Control shall have occurred, or (B) the taking of any action,
or the failure to act, by the Company which would adversely affect the Executives
continued participation in any of such Plans on at least as favorable a basis to him as was
the case on the date preceding the date on which a Change in Control shall have occurred or
which would materially reduce the Executives benefits in the future under any such Plans,
unless, in any of the cases described in sub-clauses (A) and (B) of this clause (ii), such
failure to continue in effect, taking of any action or failure to act affects all
participants of such Plan generally;
- 3 -
(iii) without the Executives express prior written consent, the assignment to the
Executive of any duties inconsistent with his positions, duties, responsibilities and
status with the Company immediately prior to a Change in Control, or any material
diminution in the Executives responsibilities as an executive of the Company as compared
with those he had as an executive of the Company immediately prior to a Change in Control,
or any change in the Executives titles or office as in effect immediately prior to a
Change in Control, or any removal of the Executive from, any of such positions, except in
connection with the termination of the Executives employment for Cause, Disability or
Retirement or as a result of the Executives death, or by his termination of his employment
other than for Good Reason;
(iv) without the Executives express prior written consent, the imposition of a
requirement by the Company that the Executive be based at any location in excess of fifty
(50) miles from the location of the Executives office on the date preceding the date on
which a Change in Control shall have occurred;
(v) without the Executives express prior written consent, any reduction in the number
of paid vacation days to which the Executive was entitled as of the date preceding the date
on which a Change in Control shall have occurred;
(vi) the failure by the Company to obtain from any Person with which it may merge or
consolidate or to which it may sell all or substantially all of its assets, the agreement
of such Person as set forth in the proviso in Section 5.6 hereof;
provided
that
such merger, consolidation or sale constitutes a Change in Control;
(vii) subsequent to a Change in Control, any purported termination of the Executives
employment which is not effected pursuant to a Notice of Termination given in accordance
with Section 3.2 hereof; or
(viii) within two years after a Change in Control shall have occurred, any material
breach by the Company of any of the terms and conditions of this Agreement or any Plans
referred to in clause (ii) of this definition of Good Reason to which the Executive is
entitled to receive benefits thereunder, provided, to the extent such breach may be cured,
such breach shall have continued for a period of thirty (30) days after written notice of
the Company specifying such breach.
Gross-Up Payment
has the meaning given to such term in Section 3.6(a) hereof.
Notice of Termination
means a written notice which shall (i) indicate the specific
termination provision in this Agreement relied upon, (ii) set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executives employment under
the provision so indicated and, (iii) specify the date of termination in accordance with this
Agreement (other than for a termination for Cause).
Overpayments
has the meaning given to such term in Section 3.6(c) hereof.
- 4 -
Person
means an individual, partnership, corporation, association, limited liability
company, trust, joint venture, unincorporated organization, and any government, governmental
department or agency or political subdivision thereof.
Plans
has the meaning given to such term in Section 2.4(b) hereof.
Rabbi Trust
has the meaning given to such term in Section 3.4(d) hereof.
Release
has the meaning given to such term in Section 3.5 hereof.
Restrictive Covenants
has the meaning given to such term in Section 3.5 hereof.
Retirement
means a termination of the Executives employment by the Company or the Executive
(i) at such age as shall be established by the Board for mandatory or normal retirement of Company
executives in general (which age shall be, if the determination of Retirement is made after the
occurrence of a Change in Control, the age established by the Board prior to a Change in Control),
which shall not be less than age 65, or (ii) at any other retirement age set by mutual agreement of
the Company and the Executive and approved by the Board.
Salary
has the meaning given to such term in Section 2.4(a) hereof.
Section 409A Tax
has the meaning given to such term in Section 3.7 hereof.
Securities Exchange Act
means the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder.
Term
has the meaning given to such term in Section 2.2 hereof.
Termination Date
means (i) if the Executives employment is to be terminated by the Company
for Disability, thirty (30) days after a Notice of Termination is given;
provided
that the
Executive shall not have returned to the performance of the Executives duties on a full-time basis
during such thirty (30) day period; and (ii) if the Executives employment is to be terminated by
either the Company or the Executive for any other reason, the date on which a Notice of Termination
is given.
Total Payments
has the meaning given to such term in Section 3.6(a) hereof.
Triggering Event
has the meaning given to such term in Section 3.4(d) hereof.
Trustee
has the meaning given to such term in Section 3.4(d) hereof.
Underpayments
has the meaning given to such term in Section 3.6(c) hereof.
Voting Securities
means, with respect to a specified Person, any security of such Person
that has, or may have upon an event of default or in respect to any transaction, a right to vote on
any matter upon which the holder of any class of common stock of such Person would have a right to
vote.
- 5 -
1.2.
Terms Generally
. Unless the context of this Agreement requires otherwise, words
importing the singular number shall include the plural and vice versa, and any pronoun shall
include the corresponding masculine, feminine and neuter forms.
1.3.
Cross-References
. Unless otherwise specified, references in this Agreement to
any Paragraph or Section are references to such Paragraph or Section of this Agreement.
SECTION 2.
EMPLOYMENT AND COMPENSATION
. The following terms and conditions will
govern the Executives employment with the Company throughout the Term.
2.1.
Employment
. The Company hereby employs the Executive, and the Executive hereby
accepts employment with the Company, on the terms and conditions set forth herein.
2.2.
Term
. The term of employment of the Executive under this Agreement shall
commence as of the date hereof (the
Commencement Date
) and, subject to Section 3.1 hereof, shall
terminate three (3) year(s) after the Commencement Date, and shall automatically be extended for
additional one (1) year periods thereafter (any such renewal periods, together with the initial
three (3) year period, being referred to as the
Term
) unless terminated by either party by
written notice to the other party.
2.3.
Duties
.
(a)
The Executive agrees to serve as Executive Vice President and Chief
Actuary of the Company during the Term. In such capacity, the Executive shall have the
responsibilities and duties customary for such office(s) and such other executive responsibilities
and duties as are assigned by the Chief Executive Officer which are consistent with the Executives
position(s). The Executive agrees to devote substantially all his business time, attention and
services to the business and affairs of the Company and its subsidiaries and to perform his duties
to the best of his ability. At all times during the performance of this Agreement, the Executive
will adhere to the Code of Conduct of the Company (the
Code of Conduct
) that has been or may
hereafter be established and communicated by the Company to the Executive for the conduct of the
position or positions held by the Executive. The Executive may not accept directorships on the
board of directors of for-profit corporations without the prior written consent of the Chief
Executive Officer of the Company. The Executive may accept directorships on the board of directors
of not-for-profit corporations without the Chief Executive Officers prior, written consent so long
as (a) such directorships do not interfere with Executives ability to carry out his
responsibilities under this Agreement, and (b) Executive promptly notifies the Chief Executive
Officer in writing of the fact that he has accepted such a non-profit directorship.
(b)
If the Company or the Executive elects not to renew the Term pursuant to Section 2.2,
the Executive shall continue to be employed under this Agreement until the expiration of the
then current Term (unless earlier terminated pursuant to Section 3.1 hereof), shall cooperate
fully with the Chief Executive Officer and shall perform such duties not inconsistent with the
provisions hereof as he shall be assigned by the Chief Executive Officer.
- 6 -
2.4.
Compensation
.
(a)
Salary
. For all services rendered by the Executive under this Agreement, the
Company shall pay the Executive a salary during the Term at a rate of not less than THREE
HUNDRED FIFTY-THREE THOUSAND DOLLARS ($353,000) per year, which may be increased but not
decreased unless decreased for the senior executive staff generally (the
Salary
), payable in
installments in accordance with the Companys policy from time to time in effect for payment of
salary to executives. The Salary shall be reviewed no less than annually by the Chief
Executive Officer and nothing contained herein shall prevent the Board from at any time
increasing the Salary or other benefits herein provided to be paid or provided to the Executive
or from providing additional or contingent benefits to the Executive as it deems appropriate.
(b)
Benefits
. During the Term, the Company shall permit the Executive to
participate in or receive benefits under the Selective Insurance Group, Inc. 2005 Omnibus Stock
Plan, the Selective Insurance Group, Inc. Cash Incentive Plan, the Selective Insurance
Retirement Savings Plan, the Retirement Income Plan For Selective Insurance Company of America,
as amended, the Selective Insurance Company of America Deferred Compensation Plan, the
Selective Insurance Supplemental Pension Plan and any other incentive compensation, stock
option, stock appreciation right, stock bonus, pension, group insurance, retirement, profit
sharing, medical, disability, accident, life insurance plan, relocation plan or policy, or any
other plan, program, policy or arrangement of the Company intended to benefit the employees of
the Company generally, if any, in accordance with the respective provisions thereof, from time
to time in effect (collectively, the
Plans
).
(c)
Vacations and Reimbursements
. During the Term, the Executive shall be
entitled to vacation time off and reimbursements for ordinary and necessary travel and
entertainment expenses in accordance with the Companys policies on such matters from time to
time in effect.
(d)
Perquisites
. During the Term, the Company shall provide the Executive with
suitable offices, secretarial and other services, and other perquisites to which other
executives of the Company generally are (or become) entitled, to the extent as are suitable to
the character of the Executives position with the Company, subject to such specific limits on
such perquisites as may from time to time be imposed by the Board and the Chief Executive
Officer.
SECTION 3.
TERMINATION AND SEVERANCE
.
3.1.
Termination
. The Executives employment hereunder shall commence on the
Commencement Date and continue until the expiration of the Term, except that the employment of the
Executive hereunder shall earlier terminate:
(a)
Death
. Upon the Executives death.
(b)
Disability
. At the option of the Company, upon the Disability of the
Executive.
- 7 -
(c)
For Cause
. At the option of the Company, for Cause.
(d)
Resignation
. At any time at the option of the Executive, by resignation
(other than a resignation for Good Reason).
(e)
Without Cause
. At any time at the option of the Company, without Cause;
provided
, that a termination of the Executives employment hereunder by the Company
based on Retirement, death, or Disability shall not be deemed to be a termination without
Cause.
(f)
Relocation
. At the option of the Executive at any time prior to a Change in
Control, if the Company imposes a requirement without the consent of the Executive that the
Executive be based at a location in excess of fifty (50) miles from the location of the
Executives office on the Commencement Date.
(g)
For Good Reason
. At any time at the option of the Executive within two (2)
years following the occurrence of a Change in Control, for Good Reason.
3.2.
Procedure For Termination
. Any termination of the Executives employment by the
Company or by the Executive prior to the expiration of the Term (an
Early Termination
) shall be
communicated by delivery of a Notice of Termination to the other party hereto given in accordance
with Section 5.13 hereof. Any Early Termination shall become effective as of the applicable
Termination Date.
3.3.
Rights and Remedies on Termination
. The Executive will be entitled to receive
the payments and benefits specified below if there is an Early Termination.
(a)
Accrued Salary
. If the Executives employment is terminated pursuant to any
of the Paragraphs set forth in Section 3.1 hereof, then the Executive (or his legal
representative, as applicable) shall only be entitled to receive his accrued and unpaid Salary
through the Termination Date.
(b)
Severance Payments
.
(i) If the Executives employment is terminated pursuant to Paragraphs (a) or (b) in
Section 3.1 hereof, then the Executive (or his legal representative, as applicable) shall
be entitled to receive a severance payment from the Company in an aggregate amount equal to
the product of (A) 1.5
times
(B) the Executives Salary
plus
an amount
equal to the average of the three most recent annual cash incentive payments (each an
ACIP) made to the Executive;
provided
that any such severance payment shall be
reduced by the amount of payments the Executive receives under any life or disability
insurance policies with respect to which the premiums were paid by the Company.
(ii) If the Executives employment is terminated pursuant to Paragraph (e) or (f) in
Section 3.1 hereof, then the Executive shall be entitled to receive a severance payment
from the Company in an aggregate amount equal to the product of (A) 1.5
- 8 -
times
(B) the Executives Salary
plus
an amount equal to the average
of the three most recent ACIP payments made to the Executive.
(iii) The severance payment required to be paid by the Company to the Executive
pursuant to Paragraph (b)(i) or (b)(ii) above, shall, subject to Section 3.7, be paid in
equal monthly installments over the twelve (12) month period following the Termination
Date.
(c)
Severance Benefits
.
(i) If the Executives employment is terminated pursuant to any of the Paragraphs set
forth in Section 3.1 hereof, then the Executive (or his legal representative, as
applicable) shall be entitled to receive the benefits which the Executive has accrued or
earned or which have become payable under the Plans as of the Termination Date, but which
have not yet been paid to the Executive. Payment of any such benefits shall be made in
accordance with the terms of such Plans.
(ii) If the Executives employment is terminated pursuant to Paragraph (e) or (f) in
Section 3.1 hereof, then the Company shall, subject to Section 3.7, maintain in full force
and effect for the continued benefit of the Executive and his dependents for a period
terminating on the earlier of (A) eighteen (18) months following the applicable Termination
Date, or (B) the commencement date of equivalent benefits from a new employer, (any such
period being referred to as the applicable
Extended Benefit Period
) all insured and
self-insured medical, dental, vision, disability and life insurance employee benefit Plans
in which the Executive was entitled to participate immediately prior to the Termination
Date;
provided
that the Executives continued participation is not barred under the
general terms and provisions of such Plans. Notwithstanding the foregoing, the Executive
shall continue to participate in such Plans during the Extended Benefit Period only to the
extent that such Plans remain in effect for other executives of the Company from time to
time during the Extended Benefit Period and subject to the terms of such Plans, including
any modifications and amendments thereto following the Termination Date. In the event
that the Executives participation in any such Plan is barred by its terms, the Company
shall arrange, at its sole cost and expense, to have issued for the benefit of the
Executive and his dependents during the Extended Benefit Period individual policies of
insurance providing benefits substantially similar (on an after-tax basis) to those which
the Executive otherwise would have been entitled to receive under such Plans pursuant to
this Paragraph (c)(ii). Executive shall be responsible for making any required
contributions to the cost of such coverage, on an after-tax basis, at the rate which
Executive was obligated to pay immediately prior to the Termination Date. If, at the end
of the applicable Extended Benefit Period, the Executive has not previously received or is
not receiving equivalent benefits from a new employer, or is not otherwise receiving such
benefits, the Company shall arrange to enable the Executive to convert his and his
dependents coverage under such Plans to individual policies or programs upon the same
terms as employees of the Company may apply for such conversions upon termination of
employment. In no event shall the
- 9 -
Companys obligation to provide disability benefits hereunder be reduced as a result
of any individual disability policy purchased by the Executive.
(d)
Rights Under Plans
. If the Executives employment is terminated pursuant to
Paragraphs (a), (b), (e), or (f) in Section 3.1 hereof, the Executive shall be entitled to the
benefits of any stock options, stock appreciation rights, restricted stock grants, stock
bonuses or other benefits theretofore granted by the Company to the Executive under any Plan,
whether or not provided for in any agreement with the Company;
provided
,
however
, that (i) all unvested stock options, stock appreciation rights, restricted
stock grants, stock bonuses, long-term incentives and similar benefits shall be deemed to be
vested in full on the Termination Date, notwithstanding any provision to the contrary or any
provision requiring any act or acts by the Executive in any agreement with the Company or any
Plan; (ii) to the extent that any such stock options, stock appreciation rights, restricted
stock grants, stock bonuses, long-term incentives or similar benefits shall require by its
terms the exercise thereof by the Executive, the last date to exercise the same shall,
notwithstanding any provision to the contrary in any agreement or any Plan, be the earlier of
(A) the later to occur of the fifteenth day of the third month following the date at which, or
the December 31 of the calendar year in which, any such stock options, stock appreciation
rights, restricted stock grants, stock bonuses, long-term incentives or similar benefits would
otherwise have expired if not extended, or (B) the original expiration date had the Executives
employment not so terminated; and (iii) if the vesting or exercise pursuant hereto of any such
stock options, stock appreciation rights, restricted stock grants, stock bonuses, long-term
incentives or similar benefits shall have the effect of subjecting the Executive to liability
under Section 16(b) of the Securities Exchange Act or any similar provision of law, the vesting
date thereof shall be deemed to be the first day after the Termination Date on which such
vesting may occur without subjecting the Executive to such liability.
(e)
No Double Dipping.
(i) The severance payments and severance benefits the Executive may be entitled to
receive pursuant to this Section 3.3 shall be in lieu of any of the payments and benefits
the Executive may be entitled to receive pursuant to any other agreement, plan or
arrangement providing for the payment of severance payments or benefits.
(ii) The Executive expressly disclaims any interest he may have in the Selective
Insurance Company of America Severance Plan.
3.4.
Rights and Remedies on Termination After Change in Control
. The Executive will
be entitled to receive the severance payments and severance benefits specified below in the event
there shall occur a termination of the Executives employment pursuant to Paragraph (e) or (g) of
Section 3.1 hereof within two (2) years following the occurrence of a Change in Control. The
severance payments and benefits the Executive may be entitled to receive pursuant to this Section
3.4 shall be in addition to, and not in lieu of, any of the payments and benefits the Executive may
be entitled to receive pursuant to Section 3.3 hereof, unless expressly so stated to be in lieu of
such benefits and/or payments.
- 10 -
(a)
Severance Payments
. The Executive shall be entitled to receive a severance
payment from the Company in an aggregate amount equal to the product of (i) 2; and (ii) the greater
of:
(1) the sum of the Executives Salary
plus
the Executives
target ACIP in effect as of the Termination Date, or
(2) the sum of the Executives Salary in effect as of the Termination
Date plus the Executives average ACIP for the three calendar years prior
to the calendar year in which the Termination Date occurs.
Such payment shall be made, subject to Section 3.7, thirty (30) business days following the
Termination Date, provided that the Executive has executed and delivered a Release pursuant to
Section 3.5 hereof
and
such Release has become effective and irrevocable. The severance
payment required to be paid by the Company to the Executive pursuant to this Section 3.4(a) shall
be in lieu of, and not in addition to, any other severance payments required to be paid by the
Company to the Executive.
(b)
Severance Benefits
. Subject to Section 3.7, the Company shall maintain in full
force and effect, for the continued benefit of the Executive and his dependents for a period
terminating on the earlier of: (i) twenty-four (24) months after the Termination Date or (ii) the
commencement date of equivalent benefits from a new employer (the
CIC Extended Benefit Period
),
all insured and self insured medical, dental, vision, disability and life insurance employee
welfare benefit plans in which the Executive was entitled to participate immediately prior to the
Termination Date;
provided
that the Executives continued participation is not barred under
the general terms and provisions of such Plans. Notwithstanding the foregoing, the Executive shall
continue to participate in such Plans during the CIC Extended Benefit Period only to the extent
that such Plans remain in effect for other executives of the Company from time to time during the
CIC Extended Benefit Period and subject to the terms of such Plans, including any modifications and
amendments thereto following the Termination Date. In the event that the Executives participation
in any such Plan is barred by its terms, the Company, at its sole cost and expense, shall arrange
to have issued for the benefit of the Executive and his dependents individual policies of insurance
providing benefits substantially similar (on an after-tax basis) to those which the Executive
otherwise would have been entitled to receive under such Plans pursuant to this Paragraph (b).
Executive shall be responsible for making any required contributions to the cost of such coverage,
on an after-tax basis, at the rate which Executive was obligated to pay immediately prior to the
Termination Date. If, at the end of the applicable CIC Extended Benefit Period, the Executive has
not previously received or is not receiving equivalent benefits from a new employer, or is not
otherwise receiving such benefits, the Company shall arrange to enable the Executive to convert his
and his dependents coverage under such Plans to individual policies or programs upon the same
terms as employees of the Company may apply for such conversions upon termination of employment.
The severance benefits required to be provided by the Company to the Executive pursuant to this
Paragraph (b) shall be in lieu of, and not in addition to, any severance benefits required to be
provided to the Executive pursuant to Section 3.3(c)(ii)
- 11 -
hereof. In no event shall the Companys obligation to provide disability benefits hereunder
be reduced as a result of any individual disability policy purchased by the Executive.
(c)
Rights Under Plans
. The Executive shall be entitled to the benefits of any stock
options, stock appreciation rights, restricted stock grants, stock bonuses or other benefits
theretofore granted by the Company to the Executive under any Plan, whether or not provided for in
any agreement with the Company;
provided
,
however
, that (i) all unvested stock
options, stock appreciation rights, restricted stock grants, stock bonuses, long-term incentives
and similar benefits shall be deemed to be vested in full on the Termination Date, notwithstanding
any provision to the contrary or any provision requiring any act or acts by the Executive in any
agreement with the Company or any Plan; (ii) to the extent that any such stock options, stock
appreciation rights, restricted stock grants, stock bonuses, long-term incentives or similar
benefits shall require by its terms the exercise thereof by the Executive, the last date to
exercise the same shall, notwithstanding any provision to the contrary in any agreement or any
Plan, be the earlier of (A) the later to occur of the fifteenth day of the third month following
the date at which, or the December 31 of the calendar year in which, any such stock options, stock
appreciation rights, restricted stock grants, stock bonuses, long-term incentives or similar
benefits would otherwise have expired if not extended or (B) the original expiration date had the
Executives employment not so terminated; and (iii) if the vesting or exercise pursuant hereto of
any such stock options, stock appreciation rights, restricted stock grants, stock bonuses,
long-term incentives or similar benefits shall have the effect of subjecting the Executive to
liability under Section 16(b) of the Securities Exchange Act or any similar provision of law, the
vesting date thereof shall be deemed to be the first day after the Termination Date on which such
vesting may occur without subjecting the Executive to such liability.
(d)
Rabbi Trust
. The Company shall maintain a trust intended to be a grantor trust
within the meaning of subpart E, Part I, subchapter J, chapter 1, subtitle A of the Code (the
Rabbi Trust
). Coincident with the occurrence of a Change in Control, the Company shall promptly
deliver to a bank as trustee of the Rabbi Trust (the
Trustee
), an amount of cash or certificates
of deposit, treasury bills or irrevocable letters of credit adequate to fully fund the payment
obligations of the Company under this Section 3.4. The Company and Trustee shall enter into a
trust agreement that shall provide that barring the insolvency of the Company, amounts payable to
the Executive under this Section 3.4 (subject to Section 3.7) shall be paid by the Trustee to the
Executive five (5) days after written demand therefor by the Executive to the Trustee, with a copy
to the Company, certifying that such amounts are due and payable under this Section 3.4 because the
Executives employment has been terminated pursuant to Paragraph (e) or (g) in Section 3.1 hereof
at a time which is within two (2) years following the occurrence of a Change in Control (a
Triggering Event
). Such trust agreement shall also provide that if the Company shall, prior to
payment by the Trustee, object in writing to the Trustee, with a copy to the Executive, as to the
payment of any amounts demanded by the Executive under this Section 3.4, certifying that such
amounts are not due and payable to the Executive because a Triggering Event has not occurred, such
dispute shall be resolved by binding arbitration as set forth in Section 5.8 hereof.
- 12 -
3.5.
Conditions to Severance Payments and Benefits
. The Executives right to receive
the severance payments and benefits pursuant to Sections 3.3 and 3.4 hereof, is expressly
conditioned upon (a) receipt by the Company of a written release (a
Release
) executed by the
Executive in the form of
Exhibit A
hereto, and the expiration of the revocation period described
therein without such Release having been revoked, and (b) the compliance by the Executive with the
covenants, terms or provisions of Sections 4.1 and 4.2 hereof (the
Restrictive Covenants
). If
the Executive shall fail to deliver a Release in accordance with the terms of this Section 3.5 or
shall breach any of the Restrictive Covenants, the Companys obligation to make the severance
payments and to provide the severance benefits pursuant to Sections 3.3 and 3.4 hereof shall
immediately and irrevocably terminate.
3.6.
Tax Effect of Payments
.
(a)
Gross-Up Payment
. In the event that it is determined that any payment,
distribution or other benefit of any type to or for the Executives benefit made by the Company, by
any of its affiliates, by any Person who acquires ownership or effective control of the Company or
ownership of a substantial portion of the Companys assets (within the meaning of Section 280G of
the Code and the regulations thereunder) or by any affiliate of such Person, whether paid or
payable or distributed or distributable or otherwise made available pursuant to the terms of this
Agreement or otherwise (the
Total Payments
), would be subject to the excise tax imposed by
Section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise
tax, together with any such interest or penalties, are collectively referred to as the
Excise
Tax
), then the Executive shall be entitled to receive an additional payment (a
Gross-Up Payment
)
in an amount such that after payment by the Executive of all taxes imposed upon the Gross-Up
Payment, including any Excise Tax, the Executive retains an amount of the Gross-Up Payment equal to
the Excise Tax imposed on the Total Payments.
(b)
Determination by Accountant
. All mathematical determinations and all
determinations of whether any of the Total Payments are parachute payments (within the meaning of
Section 280G of the Code) that are required to be made under this Section, including all
determinations of whether a Gross-Up Payment is required, of the amount of such Gross-Up Payment
and of amounts relevant to the last sentence of this Section (collectively, the
Determination
),
shall be made by an independent accounting firm acceptable to each of the parties hereto, or, if no
firm is acceptable to both parties hereto, each of the Executive and the Company shall select an
accounting firm acceptable to it, and such accounting firms shall together designate an independent
accounting firm,
provided
,
however
, that any accounting firm so designated shall
not have been previously retained by either party for a period of a least two (2) years subsequent
to the applicable Termination Date. Any independent accounting firm selected by the Executive and
the Company or designated pursuant to this Paragraph (b) shall be referred to herein as the
Accounting Firm
. Subject to Section 3.6(c) and Section 3.7, if a Gross-Up Payment is determined
to be payable, it shall be paid by the Company to the Executive within five (5) days after such
Determination is delivered to the Company. Subject to Section 3.6(c), any Determination by the
Accounting Firm shall be binding upon the Company and Executive, absent manifest error. All of the
costs and expenses of the Accounting Firm shall be borne by the Company.
- 13 -
(c)
Underpayments and Overpayments
. As a result of uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder,
it is possible that Gross-Up Payments not made by the Company should have been made
(
Underpayments
) or that Gross-Up Payments will have been made by the Company which should not
have been made (
Overpayments
). In either event, the Accounting Firm shall determine the amount
of the Underpayment or Overpayment that has occurred. In the case of an Underpayment, the amount
of such Underpayment shall promptly be paid by the Company to or for the Executives benefit. In
the case of an Overpayment, the Executive shall, at the direction and expense of the Company, take
such steps as are reasonably necessary (including the filing of returns and claims for refund),
follow reasonable instructions from, and procedures established by, the Company and otherwise
reasonably cooperate with the Company to correct such Overpayment;
provided
,
however
, that (i) the Executive shall in no event be obligated to return to the Company an
amount greater than the net after-tax portion of the Overpayment that the Executive has retained or
has received as a refund or has received the benefit of from the applicable taxing authorities and
(ii) this provision shall be interpreted in a manner consistent with the intent of this Section,
which is to make the Executive whole, on an after-tax basis, for the application of the Excise Tax,
it being understood that the correction of an Overpayment may result in the Executives repaying to
the Company an amount which is less than the Overpayment. Anything herein to the contrary
notwithstanding, in the event of a final determination as to the liability for the Excise Tax
applicable to the Total Payments such determination shall be the basis for determining whether
there have been Underpayments or Overpayments pursuant to this Section 3.6. For this purpose, a
final determination shall mean a final agreement reached with the Internal Revenue Service or a
final determination by a court with jurisdiction from which there is no appeal, in either case,
concluded in accordance with the provisions of this Paragraph (c).
(d)
Application of Section 409A
.
Notwithstanding anything contained in this Section
3.6, no portion of the Gross-Up Payment shall be paid to the Executive so as to cause the Executive
to be subject to tax under Section 409A of the Code. In particular, if necessary to avoid taxation
under Code Section 409A, the Gross-Up Payment shall be paid to Executive in a lump sum at the same
date that severance payments are paid to the Executive pursuant to Section 3.4(a). If the amount
of the Gross-Up Payment cannot be fully determined pursuant to Section 3.6(b) by such date, the
Company shall pay to the Executive on such date an estimate of the Gross-Up Payment, as determined
by the Accounting Firm, and shall pay the remainder (or the Executive shall reimburse the Company
the difference) 30 days thereafter.
3.7.
Section 409A Tax
. Notwithstanding anything herein to the contrary, to the extent
any payment or provision of benefits under this Agreement upon the Executives separation from
service is subject to Section 409A of the Code, no such payment shall be made, and Executive shall
be responsible for the full cost of such benefits, for six (6) months following the Executives
separation from service if the Executive is a specified employee. On the expiration of such
six (6) month period, any payments delayed, and an amount sufficient to reimburse the Executive for
the cost of benefits met by the Executive, during such period shall be aggregated (the
Make-Up
Amount
) and paid in full to the Executive, and any succeeding payments and benefits shall continue
as scheduled hereunder.
- 14 -
The Company shall credit the Make-Up Amount with interest at no less than the interest rate it
pays for short-term borrowed funds, such interest to accrue from the date on which payments would
have been made, or benefits would have been provided, by the Company to the Executive absent the
six month delay. The terms separation from service and specified employee shall have the
meanings set forth under Section 409A and the regulations and rulings issued thereunder.
Furthermore, the Company shall not be required to make, and the Executive shall not be required to
receive, any severance or other payment or benefit under Sections 3.3, 3.4 or 3.6 hereof if the
making of such payment or the provision of such benefit or the receipt thereof shall result in a
tax to the Executive arising under Section 409A of the Code (a
Section 409A Tax
). In the event
the Company cannot make a payment or provide a benefit under Sections 3.3, 3.4 or 3.6 hereof, or if
the Executive cannot receive any such payment or benefit, in accordance with the terms of such
Sections, without the Executive incurring a Section 409A Tax, then the Company and the Executive
shall work together in good faith to agree on an alternative payment schedule or an alternative
benefit of comparable economic value acceptable to both parties (and to amend this Agreement, where
necessary or desirable) such that the Executive does not incur a Section 409A Tax or the Executive
incurs the least amount of Section 409A Tax as is possible under the circumstances. If a
satisfactory alternative payment schedule or benefit cannot be agreed to by the later to occur of
(i) the originally scheduled payment, distribution or benefit date and (ii) six months following
the date of the Executives separation from service, the Company shall provide such payment,
distribution or benefit to the Executive (
409A Amount
) on the originally scheduled date for such
payment, distribution or benefit together with an additional payment (a
409A Payment
) in an
amount such that after payment by the Executive of all taxes imposed on the 409A Payment (excluding
any Excise Tax to which payment to the Executive is made pursuant to Section 3.6(a)), the Executive
retains an amount of the 409A Payment equal to any taxes (including taxes, penalties and interest
under Section 409A) on the 409A Amount.
SECTION 4.
RESTRICTIVE COVENANTS
.
4.1.
Confidentiality
. The Executive agrees that he will not, either during the Term
or at any time after the expiration or termination of the Term, disclose to any other Person any
confidential or proprietary information of the Company or its subsidiaries, except for (a)
disclosures to directors, officers, key employees, independent accountants and counsel of the
Company and its subsidiaries as may be necessary or appropriate in the performance of the
Executives duties hereunder, (b) disclosures which do not have a material adverse effect on the
business or operations of the Company and its subsidiaries, taken as a whole, (c) disclosures which
the Executive is required to make by law or by any court, arbitrator or administrative or
legislative body (including any committee thereof) with apparent jurisdiction to order the
Executive to disclose or make accessible any information, (d) disclosures with respect to any other
litigation, arbitration or mediation involving this Agreement, and (e) disclosures of any such
confidential or proprietary information that is, at the time of such disclosure, generally known to
and available for use by the public otherwise than by the Executives wrongful act or omission.
The Executive agrees not to take with him upon leaving the employ of the Company any document or
paper relating to any confidential information or trade secret of the Company and its subsidiaries,
except that Executive shall be entitled to retain (i) papers and other materials of a personal
nature, including but limited
- 15 -
to, photographs, correspondence, personal diaries, calendars and Rolodexes (so long as such
Rolodexes do not contain the Companys only copy of business contact information), personal files
and phone books, (ii) information showing his compensation or relating to his reimbursement of
expenses, (iii) information that he reasonably believes may be needed for tax purposes, and (iv)
copies of plans, programs and agreements relating to his employment, or termination thereof, with
the Company.
4.2.
Non-Solicitation of Employees
. The Executive agrees that, except in the course
of performing his duties hereunder, he will not, either during the Term and for a period of two (2)
years after the expiration or termination of the Term, directly or indirectly, solicit or induce or
attempt to solicit or induce or cause any of the employees of the Company or the Companys
subsidiaries to leave the employ of the Company or of such subsidiaries.
SECTION 5.
MISCELLANEOUS PROVISIONS
.
5.1.
No Mitigation; Offsets
. The Executive shall not be required to mitigate damages
or the amount of any payment provided for under this Agreement by seeking other employment or
otherwise and no future income earned by the Executive from employment or otherwise shall in any
way reduce or offset any payments due to the Executive hereunder. Assuming a payment or otherwise
is due Executive under this Agreement, the Company may offset against any amount due Executive
under this Agreement only those amounts due Company in respect of any undisputed, liquidated
obligation of Executive to the Company.
5.2.
Governing Law
. The provisions of this Agreement will be construed and
interpreted under the laws of the State of New Jersey, without regard to principles of conflicts of
law.
5.3.
Injunctive Relief and Additional Remedy
. The Executive acknowledges that the
injury that would be suffered by the Company as a result of a breach of the provisions of Sections
4.1 and 4.2 hereof would be irreparable and that an award of monetary damages to the Company for
such a breach would be an inadequate remedy. Consequently, the Company will have the right, in
addition to any other rights it may have, to obtain injunctive relief to restrain any breach or
threatened breach or otherwise to specifically enforce any provision of this Agreement, and the
Company will not be obligated to post bond or other security in seeking such relief. Each of the
parties hereby irrevocably submits to the exclusive jurisdiction of the federal and state courts of
the State of New Jersey for the purpose of injunctive relief.
5.4.
Representations and Warranties by Executive
. The Executive represents and
warrants to the best of his knowledge that the execution and delivery by the Executive of this
Agreement do not, and the performance by the Executive of the Executives obligations hereunder
will not, with or without the giving of notice or the passage of time, or both: (a) violate any
judgment, writ, injunction, or order of any court, arbitrator or governmental agency applicable to
the Executive or (b) conflict with, result in the breach of any provisions of or the termination
of, or constitute a default under, any agreement to which the Executive is a party or by which the
Executive is or may be bound.
- 16 -
5.5.
Waiver
. The rights and remedies of the parties to this Agreement are cumulative
and not alternative. Neither the failure nor any delay by either party in exercising any right,
power, or privilege under this Agreement will operate as a waiver of such right, power, or
privilege, and no single or partial exercise of any such right, power, or privilege will preclude
any other or further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law, (a) no waiver that
may be given by a party will be applicable except in the specific instance for which it is given;
and (b) no notice to or demand on one party will be deemed to be a waiver of any obligation of such
party or of the right of the party giving such notice or demand to take further action without
notice or demand as provided in this Agreement.
5.6.
Assignment
. No right or benefit under this Agreement shall be assigned,
transferred, pledged or encumbered (a) by the Executive except by a beneficiary designation made by
will or the laws of descent and distribution or (b) by the Company except that the Company may
assign this Agreement and all of its rights hereunder to any Person with which it may merge or
consolidate or to which it may sell all or substantially all of its assets;
provided
that
such Person shall, by agreement in form and substance satisfactory to the Executive, expressly
assume and agree to perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such merger, consolidation or sale had taken place.
Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the
Company and each of its successors and assigns, and the Executive, his heirs, legal representatives
and any beneficiary or beneficiaries designated hereunder.
5.7.
Entire Agreement; Amendments
. This Agreement contains the entire agreement
between the parties with respect to the subject matter hereof and supersedes all prior agreements
and understandings, oral or written, between the parties hereto with respect to the subject matter
hereof. This Agreement may not be amended orally, but only by an agreement in writing signed by
the parties hereto.
5.8.
Arbitration
. Any dispute which may arise between the Executive and the Company
with respect to the construction, interpretation or application of any of the terms, provisions,
covenants or conditions of this Agreement or any claim arising from or relating to this Agreement
will be submitted to final and binding arbitration by three (3) arbitrators in Newark, New Jersey,
under the expedited rules of the American Arbitration Association then obtaining. One such
arbitrator shall be selected by each of the Company and the Executive, and the two arbitrators so
selected shall select the third arbitrator. Selection of all three arbitrators shall be made
within thirty (30) days after the date the dispute arose. The written decision of the arbitrators
shall be rendered within ninety (90) days after selection of the third arbitrator. The decision of
the arbitrators shall be final and binding on the Company and the Executive and may be entered by
either party in any New Jersey federal or state court having jurisdiction.
5.9.
Legal Costs
. The Company shall pay any reasonable attorneys fees and costs
incurred by the Executive in connection with any dispute regarding this Agreement so long as
Executives claim(s) or defense(s) in such action are asserted in the good faith belief that they
are not frivolous. The Company shall pay any such fees and costs promptly following its receipt of
written requests therefor, which requests shall be made no more
- 17 -
frequently than once per calendar month. The Company shall bear all legal costs and expenses
incurred in the event the Company should contest or dispute the characterization of any amounts
paid pursuant to this Agreement as being nondeductible under Section 280G of the Code or subject to
imposition of an excise tax under Section 4999 of the Code, including, without limitation, the
reasonable costs and expenses of any counsel selected by the Executive to represent him in
connection with such a matter.
5.10.
Severability
. In the case that any one or more of the provisions contained in
this Agreement shall, for any reason, be held invalid or unenforceable, the other provisions of
this Agreement shall remain in full force and effect. Any provision of this Agreement held invalid
or unenforceable only in part or degree shall remain in full force and effect to the extent not
held invalid or unenforceable.
5.11.
Counterparts; Facsimile
. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this Agreement and all of
which, when taken together, will be deemed to constitute one and the same agreement. This
Agreement may be executed via facsimile.
5.12.
Headings; Interpretation
. The various headings contained herein are for
reference purposes only and do not limit or otherwise affect any of the provisions of this
Agreement. It is the intent of the parties that this Agreement not be construed more strictly with
regard to one party than with regard to any other party.
5.13.
Notices
.
(a)
All notices, requests, demands and other communications required
or permitted under this Agreement shall be in writing and sent as follows:
If to the Company, to:
Selective Insurance Group, Inc.
40 Wantage Avenue
Branchville, New Jersey 07890
Attn: General Counsel
Fax: (973) 948-0282
If to the Executive, to:
Ronald J. Zaleski
29 Manor Drive
Andover, NJ 07821
(b)
All notices and other communications required or permitted under this Agreement which
are addressed as provided in Paragraph (a) of this Section 5.13, (i) if delivered personally
against proper receipt shall be effective upon delivery, (ii) if sent by facsimile transmission
(with evidence supplied by the sender of the facsimiles receipt at a facsimile number
designated for receipt by the other party hereunder, which other
- 18 -
party shall be obligated to provide such a facsimile number) shall be effective upon
dispatch, and (iii) if sent (A) by certified or registered mail with postage prepaid or (B) by
Federal Express or similar courier service with courier fees paid by the sender, shall be
effective upon receipt. The parties hereto may from time to time change their respective
addresses and/or facsimile numbers for the purpose of notices to that party by a similar notice
specifying a new address and/or facsimile number, but no such change shall be deemed to have
been given unless it is sent and received in accordance with this Section 5.13.
5.14.
Withholding
. All amounts payable by the Company to the Executive hereunder
(including, but not limited to, the Salary or any amounts payable pursuant to Sections 3.3 and/or
3.4 hereof) shall be reduced prior to the delivery of such payment to the Executive by an amount
sufficient to satisfy any applicable federal, state, local or other withholding tax requirements.
- 19 -
IN WITNESS WHEREOF, the Company and Executive have executed this Agreement as of the
Commencement Date.
|
|
|
|
|
|
|
|
|
SELECTIVE INSURANCE GROUP, INC.
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Gregory E. Murphy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gregory E. Murphy
|
|
|
|
|
|
|
Its Chairman, President, and Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
EXECUTIVE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Ronald J. Zaleski
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ronald J. Zaleski
|
|
|
- 20 -
EXHIBIT A
FORM OF RELEASE
Reference is hereby made to the Employment Agreement, dated as of
, 200___(the
Employment
Agreement
), by and between
(the
Executive
) and
Selective Insurance Group, Inc., a New Jersey corporation (the
Company
). Capitalized
terms used but not defined herein shall have the meanings specified in the Employment Agreement.
Pursuant to the terms of the Employment Agreement and in consideration of the payments to be
made to the Executive by the Company, which Executive acknowledges are in excess of what Executive
would otherwise be entitled to receive, the Executive hereby releases and forever discharges and
holds the Company and its subsidiaries (collectively, the
Company
Parties
and
each a
Company
Party
), and the respective officers, directors, employees,
partners, stockholders, members, agents, affiliates, successors and assigns and insurers of each
Company Party, and any legal and personal representatives of each of the foregoing, harmless from
all claims or suits, of any nature whatsoever (whether known or unknown), past, present or future,
including those arising from the law, being directly or indirectly related to the Executives
employment by or the termination of such employment by any Company Party, including, without
limiting the foregoing, any claims for notice, pay in lieu of notice, wrongful dismissal, severance
pay, bonus, overtime pay, incentive compensation, interest or vacation pay for the Executives
service as an officer or director to any Company Party through the date hereof. The Executive also
hereby agrees not to file a lawsuit asserting any such claims. This release (this
Release
) includes, but is not limited to, claims growing out of any legal restriction on
any Company Partys right to terminate its employees and claims or rights under federal, state, and
local laws prohibiting employment discrimination (including, but not limited to, claims or rights
under Title VII of the Civil Rights Act of 1964, as amended by the Civil Rights Act of 1991, the
Americans with Disabilities Act, the Family and Medical Leave Act, the Fair Labor Standards Act,
the Uniformed Services Employment and Reemployment Rights Act, the Employee Retirement Income
Security Act, the Equal Pay Act, the Age Discrimination in Employment Act of 1967, as amended by
the Older Workers Benefit Protection Act of 1990, and the laws of the State of New Jersey against
discrimination, or any other federal or state statutes prohibiting discrimination on the basis of
age, sex, race, color, handicap, religion, national origin, and sexual orientation, or any other
federal, state or local employment law, regulation or other requirement) which arose before the
date this Release is signed, excepting only claims in the nature of workers compensation, claims
for vested benefits, and claims to enforce this agreement. The Executive acknowledges that because
this Release contains a release of claims and is an important legal document, he has been advised
to consult with counsel before executing it, that he may take up to [twenty-one (21)]
1
[forty-five (45)]
2
days to decide
|
|
|
1
|
|
Delete brackets and use text enclosed
therewith if 45 days is not otherwise required by Section 7(f)(1)(F) of the Age
Discrimination in Employment Act and/or 29 C.F.R. Part 1625. If 45 days is so
required, delete bracketed text in its entirety.
|
- 21 -
whether to execute it, and that he may revoke this Release by delivering or mailing a signed
notice of revocation to the Company at its offices within seven (7) days after executing it. If
Executive executes this Release and does not subsequently revoke the release within seven (7) days
after executing it, then this Release shall take effect as a legally binding agreement between
Executive and the Company.
If Executive does not deliver to the Company an original signed copy of this Release by
, or if Executive signs and revokes this Release within seven (7) days as set forth
above, the Company will assume that Executive rejects the Release and Executive will not receive
the payments referred to herein.
The Executive acknowledges that there is a risk that after signing this Release he may
discover losses or claims that are released under this Release, but that are presently unknown to
him. The Executive assumes this risk and understands that this Release shall apply to any such
losses and claims.
The Executive understands that this Release includes a full and final release covering all
known and unknown, injuries, debts, claims or damages which have arisen or may have arisen from
Executives employment by or the termination of such employment by any Company party. The
Executive acknowledges that by accepting the benefits and payments set forth in the Employment
Agreement, he assumes and waives the risks that the facts and the law may be other than as he
believes.
Notwithstanding the foregoing, this Release does not release, and the Executive continues to
be entitled to, (i) any rights to exculpation or indemnification that the Executive has under
contract or law with respect to his service as an officer or director of any Company Party and (ii)
receive the payments to be made to him by the Company pursuant to Section 3.3 and/or 3.4 of the
Employment Agreement (including any plan, agreement or other arrangement that is referenced in or
the subject of the applicable Section), subject to the conditions set forth in Section 3.5 of the
Employment Agreement, (iii) any right the Executive may have to obtain contribution as permitted by
law in the event of entry of judgment against him as a result of any act or failure to act for
which he and any Company party are jointly liable, and (iv) any claim in respect of any insurance
policy with any Company party entered into outside of the employment relationship.
This Release constitutes the release referenced in Section 3.5 of the Employment Agreement.
The undersigned Executive, having had the time to reflect, freely accepts and agrees to the
above Release. The Executive acknowledges and agrees that no Company representative has made any
representation to or agreement with the Executive relating to this Release which is not contained
in the express terms of this Release. The Executive acknowledges and agrees that the execution and
delivery of this Release is based upon the
|
|
|
2
|
|
Delete brackets and use text enclosed
therewith if 45 days is required by Section 7(f)(1)(F) of the Age
Discrimination in Employment Act and/or 29 C.F.R. Part 1625. If 45 days is not
so required, delete bracketed text in its entirety.
|
- 22 -
Executives independent review of this Release, and the Executive hereby expressly waives any
and all claims or defenses by the Executive against the enforcement of this Release which are based
upon allegations or representations, projections, estimates, understandings or agreements by the
Company or any of its representatives or any assumptions by the Executive that are not contained in
the express terms of this Release.
- 23 -
[Attach disclosures required by the Older Workers Benefit Protection Act, if required]
- 24 -