UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark one)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 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 Office)		(Zip Code)

Registrant’s telephone number, including area code:		(973) 948-3000
Securities registered pursuant to Section 12(b) of the Act:

7.5% Junior Subordinated Notes due September 27, 2066
(Title of class)
Common Stock, par value $2 per share
(Title of class)
Preferred Share Purchase Rights
(Title of class)

Securities registered pursuant to Section 12(g) of the Act:           None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

þ Yes           o No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

o Yes           þ No

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, and (2) has been subject to such filing requirements for the past 90 days.

þ Yes           o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ                     Accelerated filer o                     Non-accelerated filer o

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

o Yes           þ No

The aggregate market value of the voting Common stock held by non-affiliates of the registrant, based on the closing price on the NASDAQ Global Select Market®, was $1,585,015,215 on June 30, 2006.

As of February 13, 2007, the registrant had outstanding 56,995,648 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the 2007 Annual Meeting of Stockholders to be held on April 24, 2007 are incorporated by reference into Part III of this report.

 

 

SELECTIVE INSURANCE GROUP, INC.
Table of Contents

				Page No
PART I.
Item 1.		Business			3
Item 1A.		Risk Factors			21
Item 1B.		Unresolved Staff Comments			28
Item 2.		Properties			28
Item 3.		Legal Proceedings			28
Item 4.		Submission of Matters to a Vote of Security Holders			28
PART II.
Item 5.		Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			29
Item 6.		Selected Financial Data			31
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			33
		Forward-looking Statements			33
		Introduction			33
		Critical Accounting Policies and Estimates			33
		Results of Operations and Related Information by Segment			42
		Financial Condition, Liquidity and Capital Resources			55
		Federal Income Taxes			58
		Adoption of Accounting Pronouncements			59
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			59
Item 8.		Financial Statements and Supplementary Data			61
		Consolidated Balance Sheets as of December 31, 2006 and 2005			62
		Consolidated Statements of Income for the Years Ended December 31, 2006, 2005 and 2004			63
		Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2006, 2005 and 2004			64
		Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004			65
		Notes to Consolidated Financial Statements			66
Item 9.		Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			98
Item 9A.		Controls and Procedures			98
Item 9B.		Other Information			100
PART III.
Item 10.		Directors and Executive Officers of the Registrant			100
Item 11.		Executive Compensation			100
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			100
Item 13.		Certain Relationships and Related Transactions			100
Item 14.		Principal Accountant Fees and Services			100
EX-3.1: RESTATED CERTIFICATE OF INCORPORATION
EX-10.5.D: AMENDMENT TO THE 2005 OMNIBUS STOCK PLAN AMENDMENT
EX-10.15.A: AMENDMENT TO THE STOCK PURCHASE PLAN
EX-18: LETTER REGARDING CHANGE IN ACCOUNTING PRINCIPLE
EX-21: SUBSIDIARIES OF SELECTIVE INSURANCE GROUP INC
EX-23.1: CONSENT OF KPMG LLP
EX-24.1: POWER OF ATTORNEY
EX-24.2: POWER OF ATTORNEY
EX-24.3: POWER OF ATTORNEY
EX-24.4: POWER OF ATTORNEY
EX-24.5: POWER OF ATTORNEY
EX-24.6: POWER OF ATTORNEY
EX-24.7: POWER OF ATTORNEY
EX-24.8: POWER OF ATTORNEY
EX-24.9: POWER OF ATTORNEY
EX-24.10: POWER OF ATTORNEY
EX-24.11: POWER OF ATTORNEY
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION
EX-99.1: GLOSSARY OF TERMS

PART I

Item 1. Business.

Overview

Selective Insurance Group, Inc. through its subsidiaries, (collectively known as “Selective” or the “Company”) offers property and casualty insurance products and diversified insurance products. Selective was incorporated in New Jersey in 1977. Its principal property and casualty insurance subsidiary was organized in New Jersey in 1926. Its main offices are located in Branchville, New Jersey.

Selective classifies its businesses 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.

Financial information about Selective’s three operating segments is contained in this report in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8. “Financial Statements and Supplementary Data,” Note 12 to the consolidated financial statements, “Segment Information.”

Description of Operating Segment Products and Markets

Insurance Operations Segment

Selective’s Insurance Operations sell property and casualty insurance policies. Insurance policies are contracts to cover losses for specified risks in exchange for premiums. Property insurance generally covers the financial consequences of accidental loss to the insured’s property. Property claims are generally reported and settled in a relatively short period of time. Casualty insurance generally covers the financial consequences of bodily injury and/or property damage to a third party as a result of the insured’s negligent acts, omissions, or legal liabilities. Casualty claims often take years to be reported and settled.

Selective’s Insurance Operations segment writes its property and casualty insurance products through seven insurance subsidiaries (“Insurance Subsidiaries”), which are listed on the following table together with their respective ratings by A.M. Best Company, Inc. (“A.M. Best”), and state of domicile by which each is primarily regulated:

Insurance Subsidiaries		A.M. Best Rating 1		Domiciliary State
Selective Insurance Company of America (SICA)		“A+ (Superior)”		New Jersey
Selective Way Insurance Company (SWIC)		“A+ (Superior)”		New Jersey
Selective Insurance Company of South Carolina (SICSC)		“A+ (Superior)”		South Carolina
Selective Insurance Company of the Southeast (SICSE)		“A+ (Superior)”		North Carolina
Selective Insurance Company of New York (SICNY)		“A+ (Superior)”		New York
Selective Insurance Company of New England (SICNE)		“A+ (Superior)”		Maine
Selective Auto Insurance Company of New Jersey (SAICNJ)		“A+ (Superior)”		New Jersey

In 2006, A.M. Best, in its list of “Top Property/Casualty Writers,” ranked Selective the 47^th largest property and casualty group in the United States based on the 2005 combined net premiums written (“NPW”), or premiums for all policies sold, by the Insurance Subsidiaries.

Insurance Operations

Selective’s Insurance Operations segment derives substantially all of its revenues from insurance policy premiums. The Insurance Subsidiaries 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.

Selective’s Insurance Subsidiaries are regulated by each of the states in which they do business. Each Insurance Subsidiary is required to file financial statements with such states, prepared in accordance with accounting principles prescribed by, or permitted by, such Insurance Subsidiary’s 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. Selective evaluates 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:

	1)		Loss and loss expense ratio, which is calculated by dividing incurred loss and loss expenses by NPE;
	2)		Underwriting expense ratio, which is calculated by dividing all expenses related to the issuance of insurance policies by NPW;
	3)		Dividend ratio, which is calculated by dividing policyholder dividends by NPE; and
	4)		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.

SAP differs in many ways from generally accepted accounting principles in the United States of America (“GAAP”), under which Selective is required to report our financial results to the United States Securities and Exchange Commission (“SEC”). 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 Selective’s flood line of business are included in the Insurance Operations segment, whereas under GAAP, these results are included within the Diversified Insurance Services segment.

Selective primarily uses SAP information to monitor and manage its results of operations. Selective believes that providing SAP financial information for the Insurance Operations segment helps its investors, agents, and customers better evaluate the underwriting success of Selective’s insurance business.

Selective believes that only providing a GAAP presentation of financial information for its Insurance Operations segment would make it more difficult for agents, customers, and investors to evaluate Selective’s success or failure in its insurance business.

The following table shows the statutory results of the Insurance Operations segment for the last three completed fiscal years:

		Year Ended December 31,
(in thousands)		2006				2005				2004
Insurance Operations Results
NPW		$	1,540,901				1,462,914				1,368,061
NPE		$	1,504,632				1,421,439				1,321,316
Losses and loss expenses incurred			958,741				902,557				862,621
Net underwriting expenses incurred			482,657				449,569				414,256
Policyholders’ dividends			5,927				5,688				4,275
Underwriting profit (loss)		$	57,307				63,625				40,164
Ratios:
Losses and loss expense ratio			63.7	%			63.5				65.3
Underwriting expense ratio			31.3	%			30.7				30.3
Policyholders’ dividends ratio			0.4	%			0.4				0.3
Combined ratio			95.4	%			94.6				95.9
GAAP Combined ratio 1			96.1	%			95.1				96.9

Selective has consistently produced a lower statutory combined ratio than the property and casualty insurance industry, generally outperforming the industry for the past 10 years by an average of 2.7 points. The table below sets forth a comparison of certain Company and industry statutory ratios:

		Simple
		Average of
		All Periods
		Presented				2006				2005				2004				2003				2002				2001				2000				1999				1998				1997
Selective Ratios: (1)
Loss and loss expense			69.8	%			63.7				63.5				65.3				70.3				72.3				74.3				75.7				74.4				70.2				68.2
Underwriting expense			31.0				31.3				30.7				30.3				30.7				30.3				31.5				31.7				30.5				32.2				31.2
Policyholders’ dividends			0.6				0.4				0.4				0.3				0.5				0.6				0.9				0.9				0.8				0.7				0.7
Statutory combined ratio (2)			101.5				95.4				94.6				95.9				101.5				103.2				106.7				108.2				105.7				103.2				100.1
Growth (decline) in net premiums written			8.4				5.3				6.9				12.0				15.7				13.8				10.5				3.6				8.1				4.4				3.7
Industry Ratios: (1) (3)
Loss and loss expense			76.9				66.9				74.8				73.1				75.1				81.5				88.4				81.5				78.8				76.2				72.8
Underwriting expense			26.3				25.9				25.5				24.9				24.6				25.1				26.5				27.4				27.9				27.7				27.1
Policyholders’ dividends			1.0				0.5				0.5				0.5				0.5				0.6				0.8				1.4				1.3				1.7				1.7
Statutory combined ratio (2)			104.2				93.3				100.8				98.5				100.2				107.3				115.7				110.4				108.1				105.6				101.6
Growth in net premiums written			5.1				2.6				(0.2	)			4.4				9.6				15.1				8.5				4.7				1.9				1.8				2.9
Selective Favorable (Unfavorable) to Industry:
Statutory combined ratio			2.7				(2.1	)			6.2				2.6				(1.3	)			4.1				9.0				2.2				2.4				2.4				1.5
Growth (decline) in net premiums written			3.3				2.7				7.1				7.6				6.1				(1.3	)			2.0				(1.1	)			6.2				2.6				0.8

Lines of Business and Products

Selective’s Insurance Operations segment includes commercial lines (“Commercial Lines”), which markets primarily to businesses and represents approximately 86% of Selective’s NPW; and personal lines (“Personal Lines”), which markets primarily to individuals and represents approximately 14% of NPW.

Commercial Lines

Commercial Lines underwrites general liability, commercial automobile, workers compensation, commercial property, business owners’ policy, and bond risks through traditional insurance and alternative risk management products.

Personal Lines

Personal Lines underwrites and issues insurance policies for personal automobile, homeowners, and other various risks.

Regional Geographic Market Focus

Selective’s Insurance Operations segment primarily focuses its marketing efforts and sells its products and services in the Eastern and Midwestern regions of the United States. This large geographic area diversifies Selective’s exposure to catastrophic risk. The Insurance Operations segment does not conduct any business outside of the United States. The following table shows the principal states in which Selective writes insurance business and the percentage of Selective’s total NPW that such state represents for the last three fiscal years.

		Year Ended December 31,
Net Premiums Written		2006				2005				2004
New Jersey			32.6	%			33.9				36.7
Pennsylvania			14.3				14.4				13.7
New York			11.1				11.2				10.9
Maryland			7.5				7.2				7.0
Virginia			5.9				5.6				5.4
Illinois			3.9				3.8				3.2
North Carolina			3.8				3.8				3.7
Georgia			3.2				3.1				3.0
Indiana			3.1				2.8				2.8
South Carolina			2.5				2.5				2.1
Michigan			1.9				1.8				1.9
Ohio			1.6				1.5				1.6
Connecticut			1.4				1.3				1.1
Delaware			1.3				1.4				1.4
Rhode Island			1.3				1.2				1.1
Minnesota			1.1				1.1				1.0
Wisconsin			1.1				1.1				1.2
Other states 1			2.4				2.3				2.2
Total			100.0	%			100.0				100.0

Independent Insurance Agent Distribution Model

According to the Independent Insurance Agents and Brokers of America (“IIABA”), in 2004, independent insurance agents and brokers write approximately 80% of the commercial property and casualty insurance and approximately 35% of the personal lines insurance business in the United States. Independent agents are a significant force in overall insurance industry premium production, in large part because they represent more than one insurance company and, therefore, can provide insureds with a wider choice of commercial and personal property and casualty insurance products. As a result, Selective is committed to the independent agency distribution channel and focuses its primary strategy on building relationships with well-established, independent insurance agents while carefully monitoring each agent’s profitability, growth, financial stability, staff, and mix of business against plans that Selective develops annually with the agent. In developing annual plans with its independent insurance agents, Selective’s field personnel and management spend considerable time meeting with agencies to: (i) advise them on Company developments; (ii) receive feedback on products and services; (iii) help agents increase market share; and (iv) consolidate more of their business utilizing Selective’s technology advantages.

As of December 31, 2006, Selective’s Insurance Subsidiaries had entered into agency agreements, pursuant to applicable state laws and regulations, with approximately 770 independent insurance agents having approximately 1,600 storefronts, to allow such agents to sell policies written by the Insurance Subsidiaries. Selective pays its independent agents commissions pursuant to calculations and specific percentages stated in the agency agreement. Under the agency agreement, other than as provided by law, agents are not permitted to receive compensation for the business they place with Selective from any insured or applicant for insurance other than Selective. The agency agreement provides for commissions to be paid based on a percentage of the premium written. Selective and its agents also negotiate other compensation arrangements, including supplemental commissions, based on the underwriting results of the business the agent writes with Selective.

Technology and Field Model Business Strategy

Selective uses the trademarks, “High-Tech, High-Touch"™ and “HT ²"™, to describe its business strategy for the Insurance Operations. “High-Tech” signifies the advanced technology that Selective uses to make it easy for: (i) independent insurance agents to transact and process business with Selective; and (ii) customers to access real-time information, manage their accounts and pay their bills through an on-line customer portal that was established in September 2006. “High-Touch”

signifies the close relationships that Selective has with its independent insurance agents and customers as a result of its business model that places underwriters, claims representatives, and safety management representatives in the field near its agents and customers.

Technology

Selective seeks to transact as much of its business as possible through the use of technology and, in recent years, has made significant investments in state-of-the-art information technology platforms, integrated systems, Internet-based applications, and predictive modeling initiatives to: (i) provide its independent agents and customers with access to accurate business information; (ii) provide independent agents the ability to process business transactions from their offices and systems; and (iii) provide underwriters with targeted pricing tools to enhance profitability while growing the business. In 2006, Applied Systems, Inc. presented Selective with the “2006 Interface Leadership and Innovation Award” for promoting efficient communication between insurance carriers and independent agents. Applied Systems is the leading provider of automated solutions for the property and casualty insurance industry. The award was granted based on Selective’s ability to “advance agency-company interface through adoption, support and implementation of initiatives” through its xSELerate^® agency integration technology. Additionally, Selective received the 2006 E-Fusion Award from A.M. Best Co. for innovative, business-focused agency integration technology. This award was granted to Selective for increasing productivity for its independent insurance agents through its xSELerate^® agency integration technology.

Selective manages its information technology projects through a project management office (“PMO”). The PMO is staffed by certified individuals who apply methodologies to: (i) communicate project management standards; (ii) provide project management training and tools; (iii) review project status and cost; and (iv) provide non-technology project management consulting services to the rest of Selective. The PMO meets monthly with Selective’s senior management to review all major projects and report on the status of other projects. The PMO is a factor in the success of Selective’s technology implementation and in ensuring that Selective has a competitive advantage with independent agents, while reducing overall company expenses and increasing overall employee productivity. Selective’s technology operations are located in Branchville, New Jersey; Glastonbury, Connecticut; and Sarasota, Florida.

Field Strategy

To support its independent agents, Selective employs a field underwriting model and a field claims model that are supported by the home office in Branchville, New Jersey, and five regional branch offices (“Region”), which were as follows as of December 31, 2006:

Region		Office Location
Mid-America		Columbus, Ohio
New Jersey		Hamilton, New Jersey
Northeast		Branchville, New Jersey
Pennsylvania		Allentown, Pennsylvania
Southern		Charlotte, North Carolina

Selective also maintains an office in Hunt Valley, Maryland that supports our Selective Risk Managers (“SRM”) operations.

As of December 31, 2006, Selective had:

	•		81 field underwriters within commercial lines, known as agency management specialists (“AMS”). AMSs live and work in the geographic vicinity of Selective’s appointed agents and generally work from offices in their homes. As a result of this close proximity, AMSs are able to build strong relationships with agents through direct and regular interaction.
	•		8 territory managers within Personal Lines that work with AMSs and independent agents to advance Personal Lines production. Territory managers build strong relationships with agents through direct and regular interaction, which better positions them to evaluate new business opportunities.
	•		70 safety management specialists (“SMSs”). SMSs are located in the Regions and are responsible for surveying and assessing insured and prospective risks from a risk/safety standpoint, and for providing ongoing safety management services to certain insureds.
	•		136 field claims adjusters, known as claim management specialists (“CMSs”). Like AMSs, CMSs live in the geographic vicinity of Selective’s appointed agents and generally work from offices in their homes. CMSs, because of their geographic location, are able to conduct on-site inspections of losses and resolve claims faster, more accurately, and with higher levels of customer satisfaction. As a result, CMSs also obtain knowledge about potential exposures that they can share with AMSs.

Underwriting

Selective seeks to price and underwrite a variety of insurance risks and focuses its efforts on four market segments:

	•		Small business accounts, representing 9% of Selective’s commercial lines premium, can be written through Selective’s Internet-based One & Done® system’s automated underwriting templates;
	•		Middle market business accounts with annual premiums up to $250,000, that cannot be underwritten through the One & Done® system, are the primary focus of the AMSs and represent 80% of Selective’s commercial lines premium;
	•		Large business accounts with annual premiums of approximately $250,000 or greater, which represents 11% of Selective’s commercial lines premuim, are underwritten by a specialized commercial lines unit, SRM. Approximately 20% of these accounts employ alternative risk transfer mechanisms such as guaranteed costs, retrospective plans, and self-insured group retention programs, or they are self-insured group accounts that retain a portion of the risk.
	•		Personal Lines.

Selective’s underwriting process requires communication and interaction among:

	•		The independent agents and the AMSs, who identify product and market needs;
	•		Selective’s strategic business units (“SBUs”), located in the home office, which are organized by customer and product type, and develop Selective’s pricing and underwriting guidelines in conjunction with regions;
	•		The Regions, which work with the SBUs to establish annual premium and pricing goals; and
	•		The Actuarial Department, located in the home office, which assists in the determination of rate and pricing levels while also monitoring pricing and profitability.

A distinct advantage of Selective’s field underwriting model is its ability to provide a wide range of front-line safety management services focused on improving the policyholder’s safety and risk management programs. Services that Selective offers include: (i) risk evaluation and improvement surveys intended to evaluate potential exposures and provide solutions for mitigation. Risk improvement efforts for existing customers are designed to improve loss experience and retention through valuable ongoing consultative service; (ii) web-based safety management educational resources, including a large library of coverage-specific safety materials, videos and on-line courses; such as defensive driving and employee educational safety courses; (iii) thermographic infrared surveys aimed at identifying electrical hazards; and (iv) OSHA construction and general industry certification training. Selective’s Safety Management goal is to partner with policyholders to identify and eliminate potential loss exposures.

Selective also has an underwriting service center (“USC”) located in Richmond, Virginia. The USC assists Selective’s agents by servicing small to mid size business customers. During 2006, the USC became available to personal lines business customers of our New Jersey agents with a rollout to Selective’s remaining states during 2007. At the USC, Selective employees, who are licensed agents, respond to customer inquiries about insurance coverage, billing transactions, and other matters. The agent, as consideration for these services, receives a commission that is lower than the standard commission by approximately two points. Selective has found that the USC also provides additional opportunities to increase direct premiums written, as larger agencies seek insurance companies that have service center capabilities. Currently, the USC is servicing commercial lines net premiums written of $70 million and personal lines net premiums written of $26 million. The total $96 million serviced represents 6% of total net premiums written.

Selective analyzes its underwriting profitability by line of business, account, product, agency and other bases. Selective’s goal is to continue to underwrite the risks that it understands well and that, in aggregate, are profitable.

Field Claims Management

Effective, fair, and timely claims management is one of the most important customer services that Selective provides and one of the critical factors in achieving underwriting profitability. Selective’s claims policy emphasizes the maintenance of timely and adequate reserves for claims, and the cost-effective delivery of claims services by controlling losses and loss expenses. CMSs are primarily responsible for investigating and settling claims directly with policyholders and claimants. By promptly and personally investigating claims, CMSs are able to provide personal service and quickly resolve claims. CMSs also provide guidance on the handling of the claim until its final disposition. Selective also believes that by visiting the site of the claim, and meeting face-to-face with the insured or claimant, the settlement will be more accurate. In territories where there is insufficient claim volume to justify the placement of a CMS, or when a particular claim expertise is required, Selective uses independent adjusters to investigate and settle claims.

Selective has a centralized special investigative unit (“SIU”) that investigates potential insurance fraud and abuse, and supports efforts by regulatory bodies and trade associations to curtail the cost of fraud. The SIU adheres to uniform internal procedures to improve detection and takes action on potentially fraudulent claims. It is Selective’s policy to notify the proper authorities of its findings. This policy sends a clear message that Selective will not tolerate fraudulent activity committed against the Company or its customers. The SIU also supervises anti-fraud training for CMSs and other employees, including AMSs.

Selective has a claims service center (“CSC”), co-located with the USC, in Richmond, Virginia. The CSC provides enhanced services to Selective’s policyholders, including immediate claim review, 24 hours a day, seven days a week. The CSC is also designed to reduce the loss settlement time on first-party automobile claims and increase the usage of Selective’s discounts at body shops, glass repair shops, and car rental agencies.

Net Loss and Loss Expense Reserves

Selective establishes loss and loss expense reserves that are estimates of amounts needed to pay claims and related expenses in the future for insured loss events that have already occurred. The process of estimating reserves involves a considerable degree of judgment by management and, as of any given date, is inherently uncertain. See “Critical Accounting Policies and Estimates” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K for a full discussion regarding Selective’s loss reserving process.

The following information presents: (i) Selective’s reserve development over the proceeding ten years; and (ii) a reconciliation of reserves in accordance with SAP to such reserves determined in accordance with GAAP, each as prescribed by Securities Act Industry Guide No. 6.

Section I of the ten-year table shows the estimated liability that was recorded at the end of each of the indicated years for all current and prior accident year unpaid loss and loss expenses. The liability represents the estimated amount of loss and loss expenses for claims that were unpaid at the balance sheet date, including incurred but not reported (“IBNR”) reserves. In accordance with GAAP, the liability for unpaid loss and loss expenses is recorded in the balance sheet gross of the effects of reinsurance with an estimate of reinsurance recoverables arising from reinsurance contracts reported separately as an asset. The net balance represents the estimated amount of unpaid loss and loss expenses outstanding as of the balance sheet date, reduced by estimates of amounts recoverable under reinsurance contracts.

Section II shows the re-estimated amount of the previously recorded net liability as of the end of each succeeding year. Estimates of the liability for unpaid loss and loss expenses are increased or decreased as payments are made and more information regarding individual claims and trends, such as overall frequency and severity patterns, becomes known. Section III shows the cumulative amount of net loss and loss expenses paid relating to recorded liabilities as of the end of each succeeding year. Section IV shows the re-estimated gross liability and re-estimated reinsurance recoverables through December 31, 2006. Section V shows the cumulative net (deficiency)/redundancy representing the aggregate change in the liability from the original balance sheet dates and the re-estimated liability through December 31, 2006.

This table does not present accident or policy year development data, which certain readers may be more accustomed to analyzing. Conditions and trends that have affected development of the reserves in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate redundancies or deficiencies based on this table.

($ in millions)		1996				1997				1998				1999				2000				2001				2002				2003				2004				2005				2006
I.Gross reserves for unpaid losses and loss expenses at December 31		$	1,189.8				1,161.2				1,193.3				1,273.8				1,272.7				1,298.3				1,403.4				1,587.8				1,835.2				2,084.0				2,288.8
Reinsurance recoverable on unpaid losses and loss expenses at December 31		$	(150.2	)			(124.2	)			(140.5	)			(192.0	)			(160.9	)			(166.5	)			(160.4	)			(184.6	)			(218.8	)			(218.2	)			(199.7	)
Net reserves for unpaid losses and loss expenses at December 31		$	1,039.6				1,037.0				1,052.8				1,081.8				1,111.8				1,131.8				1,243.1				1,403.2				1,616.4				1,865.8				2,089.0
II. Net Reserves estimated as of:
One year later		$	1,029.5				1,034.5				1,044.2				1,080.7				1,125.5				1,151.7				1,258.1				1,408.1				1,621.5				1,858.5
Two years later			1,028.1				1,024.8				1,035.9				1,088.2				1,152.7				1,175.8				1,276.3				1,452.3				1,637.3
Three years later			1,020.5				1,014.0				1,033.3				1,115.6				1,181.9				1,210.7				1,344.6				1,491.1
Four years later			1,014.4				998.1				1,040.3				1,134.4				1,220.2				1,290.2				1,371.5
Five years later			1,000.9				997.9				1,049.9				1,156.0				1,278.3				1,306.8
Six years later			1,002.1				1,003.6				1,058.6				1,194.6				1,287.5
Seven years later			1,006.5				1,011.6				1,090.0				1,203.2
Eight years later			1,010.9				1,038.0				1,101.1
Nine years later			1,033.4				1,045.2
Ten years later			1,042.6
Cumulative net Redundancy (deficiency)		$	(3.0	)			(8.2	)			(48.3	)			(121.4	)			(175.7	)			(174.9	)			(128.5	)			(87.8	)			(20.9	)			7.3
III. Cumulative amount of net reserves paid through:
One year later		$	303.6				313.7				328.1				348.2				399.2				377.1				384.0				414.5				422.4				468.6
Two years later			519.6				531.1				537.5				600.3				649.1				627.3				653.3				691.4				729.5
Three years later			674.7				665.5				703.8				767.5				815.3				807.2				836.3				903.7
Four years later			760.8				760.8				797.1				870.8				930.9				926.9				966.2
Five years later			820.0				812.2				856.1				933.6				1,002.4				1,003.3
Six years later			850.9				849.7				892.2				974.6				1,046.3
Seven years later			877.3				875.9				919.2				1,001.1
Eight years later			896.0				894.7				937.1
Nine years later			912.1				908.5
Ten years later			924.2
IV. Re-estimated gross liability		$	1,305.9				1,294.2				1,352.0				1,469.3				1,519.9				1,546.8				1,583.3				1,716.5				1,867.0				2,090.5
Re-estimated Reinsurance Recoverable		$	(263.3	)			(249.0	)			(250.9	)			(266.1	)			(232.3	)			(240.1	)			(211.7	)			(225.5	)			(229.7	)			(232.0	)
Re-estimated net Liability		$	1,042.6				1,045.2				1,101.1				1,203.2				1,287.5				1,306.8				1,371.5				1,491.1				1,637.3				1,858.5
V. Cumulative gross (deficiency)		$	(116.1	)			(133.0	)			(158.7	)			(195.5	)			(247.2	)			(248.5	)			(179.8	)			(128.7	)			(31.8	)			(6.4	)
Cumulative net Redundancy (deficiency)		$	(3.0	)			(8.2	)			(48.3	)			(121.4	)			(175.7	)			(174.9	)			(128.5	)			(87.8	)			(20.9	)			7.3

Note: Some amounts may not foot due to rounding.

The Company experienced favorable development in its loss and loss expense reserves totaling $7.3 million in 2006, which was primarily driven by favorable prior year development in our commercial automobile, workers compensation, and personal automobile lines of business partially offset by adverse development in our general liability line of business. The commercial automobile line of business experienced favorable prior year loss and loss expense reserve development of approximately $15 million, which was primarily driven by lower than expected severity in accident years 2004 and 2005. The workers compensation line of business experienced favorable prior year development of approximately $4 million, which was driven, in part, by savings realized from changing medical and pharmacy networks outside the state of New Jersey and re-contracting our medical bill review services. The personal automobile line of business experienced favorable prior year development of approximately $9 million, due to lower than expected frequency. The general liability line of business experienced adverse prior year loss and loss expense reserve development of approximately $15 million in 2006, which was largely driven by our contractor completed operations business and an increase in reserves for legal expenses. The remaining

lines of business, which collectively contributed approximately $6 million of adverse development, do not individually reflect significant prior year development.

During the course of 2005, we had analyzed certain negative trends in the workers compensation line of business and certain positive trends in the commercial automobile line of business. In the fourth quarter of 2005, we had sufficient evidence accumulated to change management’s best estimate of loss reserves for these lines. Accordingly, workers compensation reserves were increased by approximately $42 million to reflect rising medical cost trends that impacted accident years 2001 and prior. At the same time, commercial automobile reserves were decreased by approximately $48 million, primarily due to ongoing favorable severity trends in the 2002 through 2004 accident years. In addition, the general liability reserves adversely developed by approximately $14 million over the course of the year, which was driven mainly by our contractor completed operations business impacting accident years 2001 and prior, but partially offset by positive development in accident years 2002 through 2004.

In 2005 there was an adverse judicial ruling by the New Jersey Supreme Court, which is discussed in the “Personal Automobile” section of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This adverse judicial ruling led to an increase in reserves of approximately $10 million, of which $6 million represents adverse development from prior years.

The cumulative net deficiencies seen in the years 1998 through 2003 are reflective of the soft market pricing in the industry during that time frame, which hit the lowest levels in 1999. The industry as a whole underestimated reserves and loss trends leading to intense pricing competition. Additionally, during 1999, Selective significantly increased gross and ceded reserves by $37.5 million for prior accident years related to unlimited medical claims ceded to the Unsatisfied Claim and Judgment Fund in the State of New Jersey. Approximately 24% of the cumulative gross deficiency for years 1998 and prior stems from this increase.

As discussed in the “Insurance Operations” section of Item 1. “Business” on this Annual Report on Form 10-K
(“Form 10-K”), there are differences between SAP and GAAP accounting. The following table reconciles losses and loss expense reserves under SAP and GAAP at December 31, as follows:

(in thousands)		2006				2005
Statutory losses and loss expense reserves (1)		$	2,084,012				1,862,360
Provision for uncollectible reinsurance			2,700				3,500
Pension adjustment			2,619				(59	)
Other			(299	)			—
GAAP losses and loss expense reserve — net			2,089,032				1,865,801
Reinsurance recoverable on unpaid losses and loss expenses			199,738				218,248
GAAP losses and loss expense reserves — gross		$	2,288,770				2,084,049

     Environmental Reserves

Reserves established for liability insurance include exposure to environmental claims, both asbestos and non-asbestos. Selective’s exposure to environmental liability is primarily due to: i) policies written prior to the introduction of the absolute pollutions endorsement in the mid-1980’s; and ii) the underground storage tank leaks, mostly from New Jersey homeowners policies in recent years. Selective’s asbestos and non-asbestos environmental claims have arisen primarily from insured exposures in municipal government, small commercial risks, and homeowners policies. The emergence of these claims is slow and highly unpredictable.

“Asbestos claims” are claims presented to us in which bodily injury is alleged to have occurred as a result of exposure to asbestos and/or asbestos-containing products. During the past two decades, the insurance industry has experienced the emergence and development of an increasing number of asbestos claims. At December 31, 2006, asbestos claims constituted 89% of our 2,568 environmental claims compared with 88% of our 2,382 outstanding environmental claims at December 31, 2005.

“Non-asbestos claims” are pollution and environmental claims alleging bodily injury or property damage presented, or expected to be presented to us, other than asbestos claims. These claims primarily include landfills and leaking underground storage tanks. In past years, landfill claims have accounted for a significant portion of Selective’s environmental claim unit’s litigation costs. Over the past few years, Selective has been experiencing adverse development in its homeowners line of business as a result of unfavorable trends in claims for groundwater contamination caused by leakage of certain underground heating oil storage tanks in New Jersey.

Selective refers all environmental claims to its centralized environmental claim unit, which specializes in the claim management of these exposures. Environmental reserves are evaluated on a case-by-case basis. As cases progress, the ability to assess potential liability often improves. Reserves are then adjusted accordingly. In addition, each case is reviewed in light of other factors affecting liability, including judicial interpretation of coverage issues.

IBNR reserve estimation for environmental claims is difficult, because in addition to other factors, there are significant uncertainties associated with critical assumptions in the estimation process, such as average clean-up costs, third-party costs, potentially responsible party shares, allocation of damages, insurer litigation costs, insurer coverage defenses and potential changes to state and federal statutes. Moreover, normal historically-based actuarial approaches are difficult to apply because past environmental claims are not indicative of future potential environmental claims. In addition, while models can be applied, such models can produce significantly different results with small changes in assumptions. As a result, management does not calculate a specific environmental loss range, as it would not be meaningful. Historically, Selective’s environmental claims have been significantly less volatile and uncertain than the commercial lines industry. In part, this is due to the fact that Selective is the primary insurance carrier on the majority of its environmental exposures, thus providing more certainty in its reserve position compared to the insurance marketplace.

Reinsurance

In the ordinary course of their business, the Insurance Subsidiaries reinsure a portion of the risks that they underwrite in order to control exposure to losses and protect capital resources. Reinsurance also permits the Insurance Subsidiaries additional underwriting capacity by permitting them to accept larger risks and underwrite a greater number of risks without a corresponding increase in capital or surplus. For a premium paid by the Insurance Subsidiaries, reinsurers assume a portion of the losses ceded by the Insurance Subsidiaries. Selective uses traditional forms of reinsurance and does not use finite risk reinsurance. Amounts not reinsured are known as retention. The Insurance Subsidiaries use two types of reinsurance to control exposure to losses:

	•		Treaty reinsurance, in which certain types of policies are automatically reinsured without the need for approval by the reinsurer of the individual risks covered; and
	•		Facultative reinsurance, in which an individual insurance policy or a specific risk is reinsured with the prior approval of the reinsurer. Facultative reinsurance is primarily used for policies with limits greater than the limits available under the reinsurance treaties.

In addition to treaty and facultative reinsurance, the Insurance Subsidiaries are partially protected by the Terrorism Risk Insurance Act of 2002, which was modified and extended through December 31, 2007 via the Terrorism Risk Insurance Extension Act of 2005. For further information regarding this legislation, see Item 1A. “Risk Factors” of this Form 10-K.

Reinsurance does not legally discharge an insurer from its liability for the full-face amount of its policies, but it does make the reinsurer liable to the insurer to the extent of the reinsurance ceded. Reinsurance carries counterparty credit risk, which may be mitigated in certain cases by collateral such as letters of credit, trust funds, or funds withheld by the Insurance Subsidiaries. Selective attempts to mitigate the credit risk related to reinsurance by pursuing relationships with companies rated “A-” or higher in most circumstances and/or requiring collateral to secure reinsurance obligations. In addition, Selective employs procedures to continuously review the quality of reinsurance recoverables and reserve for uncollectible reinsurance. Selective also may take actions, such as commutations, in cases of potential reinsurer default. Some of the Insurance Subsidiaries’ reinsurance contracts include provisions that give Selective a contractual right to terminate and/or commute the reinsurers’ portion of the liabilities based on deterioration of the reinsurer’s rating or financial condition.

Reinsurance recoverable balances tend to fluctuate based on the underlying losses incurred by the Insurance Subsidiaries. If a severe catastrophic event occurs, reinsurance recoverable balances may increase significantly. The reinsurance recoverable balances on paid and unpaid claims were 19% of stockholders equity at December 31, 2006 compared to 23% at December 31, 2005. These balances net of available collateral were 15% of stockholders equity at December 31, 2006 compared to 19% at December 31, 2005. Approximately half of the uncollateralized recoverable on paid and unpaid balances at December 31, 2006 and at December 31, 2005 stem from federal or state sponsored pools, which we believe to have minimal default risk. The following are the five largest individual uncollateralized reinsurance recoverables on paid and unpaid balances based on December 31, 2006 amounts:

($ in thousands)						As of: 12/31/06								As of: 12/31/05
						Unsecured								Unsecured
		Ratings:				Recoverable on				% of				Recoverable on Paid
Reinsurer Name		A.M. Best				Paid and Unpaid				Total				and Unpaid				% of Total
NJ Unsatisfied Claim Judgement Fund		State pool				$	65,624				39	%		$	65,636				35	%
Munich Reinsurance America, Inc.			“A”				30,776				18	%			30,966				17	%
National Flood Insurance Program		Federal program					14,823				9	%			40,316				22	%
Hannover Ruckversicherungs AG			“A”				12,161				7	%			8,657				5	%
Swiss Re America Corp.			“A+”				10,740				6	%			11,787				6	%
All Other Reinsurers		various					32,346				21	%			28,641				15	%
Total						$	166,470							$	186,003
% of Shareholders Equity							15	%							19	%

The table below summarizes the significant reinsurance treaties covering the Insurance Subsidiaries.

Treaty		Reinsurance Coverage				Terrorism Coverage
TRIA, Federal Statutory Program		See above for the description of TRIA. 90% of all TRIA certified losses above the retention. Selective’s retention for 2007 is approximately $200 million. Terrorism acts related to the use of nuclear, biological, chemical or radioactive reactions (“NBCR”) weapons are covered by TRIA provided that the Secretary of the Treasury certifies the event.				Current program is set to expire on December 31, 2007. For further information regarding this legislation and our risks concerning terrorism exposure, see Item 1A. “Risk Factors” of this Form 10-K.
Property Excess of Loss		$23 million above a $2 million retention in two layers. Losses other than TRIA certified losses are subject to the following reinstatements and annual aggregate limits:				All NBCR losses are excluded regardless of whether or not they are certified under TRIA. For non-NBCR losses, the treaty distinguishes between acts certified under TRIA and those that are not. The treaty provides annual aggregate limits for TRIA certified (other than NBCR) acts of $24 million for the first layer and $22.5 million for the second layer. Non-certified terrorism losses (other than NBCR) are subject to the normal limits under the treaty.
		•		$8 million in excess of $2 million layer provides unlimited reinstatements, no annual aggregate limit;
		•		$15 million in excess of $10 million layer provides two reinstatements, $45 million in annual aggregate.
Property Catastrophe		95% of $285 million above $40 million retention in three layers:				TRIA losses are excluded from the treaty. In addition, all NBC losses are excluded regardless of whether or not they are certified under TRIA.
		•		95% of losses in excess of $40 million up to $100 million;
		•		95% of losses in excess of $100 million up to $175 million;
		•		95% of losses in excess of $175 million up to $325 million; and
		The treaty provides one reinstatement per layer, $541.5 million in annual aggregate limit, net of Selective’s co-participation.

Treaty		Reinsurance Coverage				Terrorism Coverage
Casualty Excess of Loss		Casualty Excess of Loss program is structured in two treaties: Workers Compensation only working layer treaty and all inclusive Casualty treaty, which provides coverage for all casualty lines including Workers Compensation. Workers Compensation losses have per occurrence coverage of $48 million in excess of $2 million retention and additional coverage of 75% of $40 million in excess of $50 million. All casualty losses have per occurrence coverage of $45 million in excess of $5 million retention and additional coverage of 75% of $40 million in excess of $50 million. Losses other than TRIA certified losses are subject to the following reinstatements and annual aggregate limits:				All NBC losses are excluded regardless of whether or not they are certified under TRIA. For non-NBC losses, the treaty distinguishes between acts certified under TRIA and those that are not. TRIA certified losses (other than NBC) are subject to the following reinstatements and annual aggregate limits: Workers Compensation only working layer of $3 million in excess of $2 million layer provides two reinstatements for TRIA losses, $9 million annual aggregate limit; Casualty treaty:
		Workers Compensation only working layer of $3 million in excess of $2 million layer provides five reinstatements, $18 million annual aggregate limit;				•		$7 million in excess of $5 million layer provides two reinstatements for TRIA losses, $21 million annual aggregate limit;
		Casualty treaty:				•		$9 million in excess of $12 million layer provides two reinstatements for TRIA losses, $27 million annual aggregate limit;
		•		$7 million in excess of $5 million layer provides three reinstatements, $28 million annual aggregate limit;
		•		$9 million in excess of $12 million layer provides two reinstatements, $27 million annual aggregate limit;		•		$9 million in excess of $21 million layer provides one reinstatement for TRIA losses, $18 million annual aggregate limit;
		•		$9 million in excess of $21 million layer provides one reinstatement, $18 million annual aggregate limit; and		•		$20 million in excess of $30 million layer provides one reinstatement for TRIA losses, $40 million annual aggregate limit;
		•		$20 million in excess of $30 million layer provides one reinstatement, $40 million annual aggregate limit.		•		75% of $40 million in excess of $50 million layer provides up to $30 million of coverage net of co-participation with one reinstatement for TRIA losses, $60 million in net annual aggregate limit; and
		•		75% of $40 million in excess of $50 million layer provides up to $30 million of coverage net of co-participation with one reinstatement, $60 million in net annual aggregate limit.		Non-certified terrorism losses (other than NBC) are subject to the normal limits under the treaty.
Surety and Fidelity Excess of Loss		The treaty provides per loss/per principal coverage up to $7.2 million in excess of $1.0 million retention and $0.8 million co-participation. The treaty provides the following reinstatements and annual aggregate limits:				Contract does not provide specific exclusions regarding terrorism losses.
		•		$3 million in excess of $1 million layer provides two reinstatements, $8.1 million annual aggregate limit, net of our co-participation;
		•		$5 million in excess of $4 million layer provides one reinstatement, $9 million annual aggregate limit, net of our co-participation.
Flood		100% reinsurance by the federal government’s National Flood Insurance Program Write Your Own program.				None.

Reinsurance Pooling Agreement

The Insurance Subsidiaries are parties to an inter-company reinsurance pooling agreement (“Pooling Agreement”). The purpose of the Pooling Agreement is to:

	•		Pool or share proportionately the underwriting profit and loss results of property and casualty underwriting operations through reinsurance;
	•		Prevent any Insurance Subsidiary from suffering undue loss;
	•		Reduce administration expenses; and
	•		Permit all of the Insurance Subsidiaries to obtain a uniform rating from A.M. Best.

Under the Pooling Agreement, all of the Insurance Subsidiaries mutually reinsure all insurance risks written by them pursuant to the respective percentage set forth opposite each Insurance Subsidiary’s name on the table below:

Insurance Subsidiary		Respective Percentage
SICA			49.5	%
SWIC			21.0	%
SICSC			9.0	%
SICSE			7.0	%
SICNY			7.0	%
SAICNJ			6.0	%
SICNE			0.5	%

Insurance Regulation

     General

Insurance companies are subject to supervision and regulation in the states in which they are domiciled and transact business. Such supervision and regulation relates to a variety of aspects of an insurance company’s business and financial condition. The primary public purpose of such supervision and regulation is to protect the insurer’s policyholders; not the insurer’s shareholders. The extent of regulation varies, and generally is derived from state statutes that delegate regulatory, supervisory, and administrative authority to state insurance departments. Although the United States government does not directly regulate the insurance industry, federal initiatives from time to time can have an impact on the industry, such as the federal government’s enactment and extension of TRIA.

The Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act (“GLB”), and related regulations govern, among other things, the privacy of consumer financial information. GLB limits disclosure by financial institutions of “nonpublic personal information” about individuals who obtain financial products or services for personal, family, or household purposes. GLB generally applies to disclosures to non-affiliated third parties, but not to disclosures to affiliates. Many states in which Selective operates have adopted laws that are at least as restrictive as GLB. Privacy of consumer financial information is an evolving area of regulation requiring continued monitoring to ensure continued compliance with GLB.

Selective cannot quantify the financial impact it would incur to satisfy revised or additional regulatory requirements that may be imposed in the future.

     State Regulation

The regulatory authority of state insurance departments extends to such matters as insurer solvency standards, insurer and agent licensing, investment restrictions, payment of dividends and distributions, provisions for current losses and future liabilities, deposit of securities for the benefit of policyholders, restrictions on policy terminations, unfair trade practices, and approval of premium rates and policy forms. State insurance departments also conduct periodic examinations of the financial and business affairs of insurers and require insurers to file annual and other periodic reports relating to their financial condition. Regulatory agencies require that premium rates not be excessive, inadequate, or unfairly discriminatory. The Insurance Subsidiaries, consequently, must file all rates for commercial and personal insurance with the insurance department of each state in which they operate.

All states have enacted legislation that regulates insurance holding company systems. Each insurance company in a holding company system is required to register with certain insurance supervisory agencies and furnish information concerning the operations of companies within the holding company system that may materially affect the operations, management, or financial condition of the insurers. Pursuant to these laws, the respective departments may: (i) examine Selective and the Insurance Subsidiaries at any time; (ii) require disclosure or prior approval of material transactions of the Insurance Subsidiaries with any affiliate; and (iii) require prior approval or notice of certain transactions, such as dividends or distributions to Selective Insurance Group, Inc. (the “Parent”) from the Insurance Subsidiary domiciled in that state.

     National Association of Insurance Commissioners (“NAIC”) Guidelines

The Insurance Subsidiaries are subject to statutory accounting principles and reporting formats established by the NAIC. The NAIC also promulgates model insurance laws and regulations relating to the financial and operational regulations of insurance companies, which includes the Insurance Regulatory Information System (“IRIS”). IRIS identifies 11 industry ratios and specifies “usual values” for each ratio. Departure from the usual values on four or more of the ratios can lead to inquiries from individual state insurance departments about certain aspects of the insurer’s business. The Insurance Subsidiaries have consistently met the majority of the IRIS ratio tests.

NAIC model laws and regulations are not usually applicable unless enacted into law or promulgated into regulation by the individual states. The adoption of certain NAIC model laws and regulations is a key aspect of the NAIC Financial Regulations Standards and Accreditation Program, which also sets forth minimum staffing and resource levels for all state insurance departments. All of the Insurance Subsidiaries states of domicile, except New York, are accredited by the NAIC. Examinations conducted by, or along with, accredited states can be accepted by other states. The NAIC intends to create nationwide regulatory network of accredited states.

The NAIC model laws and regulations are also intended to enhance the regulation of insurer solvency. These model laws and regulations contain certain risk-based capital requirements for property and casualty insurance companies designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. Risk-based capital is measured by the four major areas of risk to which property and casualty insurers are exposed: (i) asset risk; (ii) credit risk; (iii) underwriting risk; and (iv) off-balance sheet risk.

Insurers with total adjusted capital that is less than two times their “Authorized Control Level,” as calculated pursuant to the NAIC model laws and regulations, are subject to different levels of regulatory intervention and action. Based upon the unaudited 2006 statutory financial statements for the Insurance Subsidiaries, each Insurance Subsidiary’s total adjusted capital substantially exceeded two times their Authorized Control Level.

Investments Segment

Our investment philosophy includes certain return and risk objectives for our equity and fixed maturity portfolios. The return objective of the equity portfolio is to meet or exceed a weighted-average benchmark of public equity indices. 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 risk objectives for all portfolios are to ensure investments are being structured conservatively, focusing on: (i) asset diversification; (ii) investment quality; (iii) liquidity, particularly to meet the cash obligations of the insurance operations; (iv) consideration of taxes; and (v) preservation of capital. At December 31, 2006, Selective’s investment portfolio consisted of $2,946.9 million (82%) of fixed maturity securities, $307.4 million (9%) of equity securities, $197.0 million (5%) of short-term investments, and $144.8 million (4%) of other investments.

Selective’s fixed maturity portfolio is comprised primarily of highly rated securities with almost 100% rated investment grade. The average rating of its fixed maturity securities is “AA” by Standard & Poors (“S&P”), their second highest credit quality rating. Selective expects to continue to invest primarily in high quality, fixed maturity investments. For further information regarding Selective’s interest rate sensitivity, see Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in this Form 10-K. The average duration of the fixed maturity portfolio, including short-term investments of $197.0 million at December 31, 2006 and $185.1 million at December 31, 2005, was 3.8 years at December 31, 2006 and 4.0 years at December 31, 2005.

Selective’s Investments segment operations are primarily based in Parsippany, New Jersey, while certain segments of the portfolio are managed by external money managers. For additional information about investments, see the sections entitled, “Investments,” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8. “Financial Statements and Supplementary Data,” Note 4 to the consolidated financial statements.

Diversified Insurance Services Segment

Selective’s Diversified Insurance Services segment provides fee-based revenues that contribute to earnings, increase operating cash flow, and help mitigate potential volatility in insurance operating results. The Diversified Insurance Services segment is complementary to Selective’s business model by sharing a common marketing or distribution system and creating new opportunities for independent agents to bring value-added services and products to their customers. In December 2005, Selective divested itself of 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 more information concerning the results of the Diversified Insurance Services segment for the last three fiscal years ended December 31, refer to Note 15, “Discontinued Operations” in Item 8. “Financial Statements and Supplementary Data” on this Form 10-K. The Diversified Insurance Services operation currently has two major components: (i) human resource administration outsourcing; and (ii) flood insurance.

Human Resource Administration Outsourcing

Human resource administration outsourcing (“HR Outsourcing”) products and services are sold by Selective HR Solutions, Inc. and its subsidiaries (“SHRS”), which are headquartered in Sarasota, Florida. SHRS’s customers are small business owners who generally have existing relationships with independent insurance agents. SHRS leverages these relationships by using independent insurance agents as its distribution channel for its products and services in the states where it operates. As a Professional Employer Organization (“PEO”), SHRS enters into agreements with clients that establish a three-party relationship under which SHRS and the client are co-employers of the employees who work at the client’s location (“worksite employees”). As of December 31, 2006, SHRS had approximately 27,000 worksite employees.

Flood Insurance

Selective is a servicing carrier in the “Write-Your-Own” (“WYO”) Program of the United States government’s National Flood Insurance Program (“NFIP”). The WYO Program operates within the context of the NFIP, and is subject to its rules and regulations. The NFIP is administered by the Federal Emergency Management Agency (“FEMA”), which is a component of the Department of Homeland Security. The WYO Program is a cooperative undertaking of the insurance industry and FEMA. The WYO Program allows participating property and casualty insurance companies to write and service the Standard Flood Insurance Policy in their own names, while ceding all of the premiums collected on these policies to the

federal government. The companies receive an expense allowance, or servicing fee, for policies written and claims processed under the program, while the federal government retains responsibility for all underwriting losses. Selective is servicing approximately 274,000 flood policies under the NFIP through over 6,100 independent agents in 50 states and the District of Columbia.

Diversified Insurance Services Regulation

The companies within the Diversified Insurance Services segment are subject to certain laws and regulations. In particular, as a co-employer for some of its clients, SHRS is subject to federal, state, and local laws and regulations relating to labor, tax, employment, employee benefits, and immigration matters. By contracting with its clients and creating a co-employer relationship with the worksite employees, SHRS may be assuming certain contractual and legal obligations and responsibilities of an employer and could incur liability for violations of such laws and regulations, even if it was not actually responsible for the conduct giving rise to such liability. Some states in which SHRS operates have already passed licensing or registration requirements for PEOs. These laws and regulations vary from state to state but generally provide for the monitoring of the fiscal responsibility of PEOs. Currently, many of these laws and regulations do not specifically address the obligations and responsibilities of co-employers. There can be no assurance that SHRS will be able to satisfy new or revised laws and regulations.

Flood insurance is offered through the federal government’s NFIP program, which is managed by the Mitigation Division of FEMA under the U.S. Department of Homeland Security. In 2005, the destruction caused by the active hurricane season stressed the NFIP with unprecedented flood losses that have significantly increased the NFIP’s deficit.

The NFIP currently covers flooding caused by storm surge, wherein water is pushed toward the shore by the force of the winds swirling around a storm. If this federal program is modified in an unfavorable manner, wherein flooding related to storm surge is no longer covered or is required to be covered by our Insurance Operations Homeowners policies, it could have a material adverse effect on Selective’s financial condition, or results of operations, as it relates to Selective’s Flood and/or Homeowners results.

Effective October 1, 2006, the fee paid to us by the NFIP decreased 0.6 points to 30.2% of premiums written. Future reductions in this rate could occur through legislative activity.

Competition

Selective faces significant competition in both the Insurance Operations and Diversified Insurance Services segments.

Property and casualty insurance is highly competitive on the basis of both price and service, and is extensively regulated by state insurance departments. In 2006, Selective was ranked as the 47^th largest property and casualty group in the United States based on the 2005 NPW, by A.M. Best in its list, “Top Property/Casualty Writers.” The Insurance Operations compete with regional insurers, such as Cincinnati Financial, Ohio Casualty, and Harleysville, and national insurance companies, such as Travelers, The Hartford, and Zurich. Selective also competes against direct writers of insurance coverage, primarily in personal lines, such as GEICO and Progressive. Many of these competitors have greater financial, technical, and operating resources than Selective. Purchasers of property and casualty insurance products do not always differentiate between insurance carriers and differences in coverage. The more significant competitive factors for most of Selective’s insurance products are financial ratings, safety management, price, coverage terms, claims service, and technology. In addition, Selective also faces competition within each insurance agency that sells its insurance products as most of the agencies represent more than one insurance company.

With regard to the Diversified Insurance Services segment, during 2006, SHRS was ranked as the 11^th largest Professional Employer Organization in a “Staffing Industry Report” published by Staffing Industry Analysts, Inc., based on 2005 gross revenue. Based on 2005 information, Selective’s Flood line of business is the 7^th largest WYO carrier for the NFIP based on information obtained from Statutory Annual Statements.

Please refer to Item 1A. “Risk Factors,” for a discussion of the factors that could impact Selective’s ability to compete.

Seasonality

Selective’s insurance business experiences modest seasonality with regard to premiums written. Due to the general timing of commercial policy renewals, premiums written are usually highest in January and July and lowest during the fourth quarter of the year. Although the writing of insurance policies experiences modest seasonality, the premiums related to these policies are earned consistently over the period of coverage. Losses and loss expenses incurred tend to remain consistent throughout the year, unless a catastrophe occurs from man-made or weather-related events such as hail, tornadoes, windstorms, hurricanes, and nor’easters.

Customers

No one customer or independent agency accounts for 10% or more of Selective’s total revenue or the revenue of any one of its business segments.

Employees

At December 31, 2006, Selective had approximately 2,100 employees, of which 1,900 worked in the Insurance Operations and Investments segments and 200 worked in the Diversified Insurance Services segment.

Executive Officers of the Registrant

The following table sets forth biographical information about Selective’s Chief Executive Officer, Executive Officers, and senior management, as of March 1, 2007:

Name, Age, Title		Occupation And Background
Gregory E. Murphy, 51 Chairman, President, and		•		Chairman, President, and Chief Executive Officer of Selective, present position since May 2000
Chief Executive Officer		•		President, Chief Executive Officer, and Director of Selective, May 1999 to May 2000
		•		President, Chief Operating Officer, and Director of Selective, 1997 to May 1999
		•		Other senior executive, management, and operational positions at Selective, since 1980
		•		Director, Newton Memorial Hospital Foundation, Inc., since 1999
		•		Director, Insurance Information Institute
		•		Director, American Insurance Association (AIA), 2002 to December 2006
		•		Trustee, the American Institute for CPCU (AICPCU) and the Insurance Institute of America (IIA), since June 2001
		•		Graduate of Boston College (B.S.)
		•		Harvard University (Advanced Management Program)
		•		Certified Public Accountant (New Jersey) (Inactive)
Jamie Ochiltree III, 54		•		Present position since February 2004
Senior Executive Vice		•		Variety of executive positions, Selective, 1994 — February 2004
President, Insurance		•		Miami University (B.A.)
Operations		•		Wharton School (Advanced Management Program)
Richard F. Connell, 61		•		Present position since January 2006
Senior Executive Vice		•		Executive Vice President and Chief Information Officer, August 2000 — January 2006
President and Chief		•		Board member, ACORD, an insurance data standards organization
Information Officer		•		Central Connecticut State University (B.S.)
Kerry A. Guthrie, 49		•		Present position since February 2005
Executive Vice President and Chief Investment Officer		•		Senior Vice President and Chief Investment Officer, Selective, August 2002 — February 2005
		•		Variety of investment positions, Selective, 1996 — 2002
		•		Chartered Financial Analyst
		•		Certified Public Accountant (New Jersey) (Inactive)
		•		Member, New York Society of Security Analysts
		•		Siena College (B.S. Accounting)
		•		Fairleigh Dickinson University (M.B.A. Finance)
Dale A. Thatcher, 45		•		Present position since February 2003
Executive Vice President, Chief Financial Officer and		•		Senior Vice President, Chief Financial Officer and Treasurer, Selective, April 2000 — February 2003
Treasurer		•		Certified Public Accountant (Ohio) (Inactive)
		•		Chartered Property and Casualty Underwriter
		•		Chartered Life Underwriter
		•		Member of the American Institute of Certified Public Accountants
		•		Member of the Ohio Society of Certified Public Accountants
		•		University of Cincinnati (B.B.A. Accounting; M.B.A. Finance)

Name, Age, Title		Occupation And Background
Ronald J. Zaleski, 52		•		Present position since February 2003
Executive Vice President and		•		Senior Vice President and Chief Actuary, Selective, February 2000 — February 2003
Chief Actuary		•		Vice President and Chief Actuary, Selective, September 1999 — February 2000
		•		Fellow of Casualty Actuarial Society
		•		Member of the American Academy of Actuaries
		•		Loyola College (B.A.)
Victor Daley, 63		•		Present position since September 2005
Executive Vice President, Human Resources		•		Executive Vice President, Chief Administrative, and Human Resources Officer for AmerUs Group, September 1995 — October 2004
		•		Providence College (B.S.)
		•		Roosevelt University (M.P.A.)
		•		Harvard University (Advanced Management Program)
Sharon R. Cooper, 45		•		Present position since February 2003.
Senior Vice President and Director of Communications		•		Vice President and Director of Communications, Selective, December 2000 — February 2003
		•		Director of Media Relations, Allstate Insurance, 1996 — December 2000
		•		Member, Society of Chartered Property and Casualty Underwriters
		•		University of Illinois (B.A.)
Michael H. Lanza, 45		•		Present position since July 2004
Senior Vice President,		•		Corporate advisor and legal consultant, April 2003 — July 2004
General Counsel and Corporate Secretary		•		Executive Vice President & Corporate Secretary, QuadraMed Corporation, a publicly-traded healthcare technology company, September 2000 — March 2003
		•		Member, Society of Corporate Secretaries and Corporate Governance Professionals
		•		University of Connecticut (B.A.)
		•		University of Connecticut School of Law (J.D.)

Information regarding Selective’s directors is included in the definitive Proxy Statement for the 2006 Annual Meeting of Stockholders to be held on April 24, 2007 in “Information About Proposal 1, Election of Directors,” and is also incorporated by reference into Part III of this
Form 10-K.

Available Information

Selective files its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and other required information with the SEC. The public may read and copy any materials on file with the SEC at the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site, www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers, including Selective, that file electronically with the SEC.

Selective has a website, www.selective.com, through which its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) are available free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to the SEC.

Item 1A. Risk Factors

Certain risk factors exist that can have a significant impact on Selective’s business, results of operations, and financial condition. The impact of these risk factors could also impact certain actions that Selective takes as part of its long-term capital strategy including, but not limited to, contributing capital to subsidiaries in its Insurance Operations and Diversified Insurance Services segments, issuing additional debt and/or equity securities, repurchasing shares of the Parent’s common stock (“Common Stock”), or increasing stockholders’ dividends. The following list of risk factors is not exhaustive and others may exist. Selective operates in a continually changing business environment, and new risk factors emerge from time to time. Consequently, Selective can neither predict such new risk factors nor assess the impact, if any, they might have on its business in the future.

The property and casualty insurance industry is cyclical.

Historically, the results of the property and casualty insurance industry have experienced significant fluctuations due to high levels of competition, economic conditions, interest rates, and other factors. We have experienced the following fluctuations in Commercial Lines premium pricing, excluding exposure, over the past several years:

	•		During 2006, pure price on Commercial Lines decreased 1.7%;
	•		During 2005, pure price on Commercial Lines remained flat compared to 2004;
	•		From 2001 — 2004, pure price on Commercial Lines was increasing in a range from 4.3% to 12.6%; and
	•		For several years prior to 2001, we experienced decreases in pure price in our Commercial Lines operations.

The industry’s profitability also is affected by unpredictable developments, including:

	•		Natural and man-made disasters;
	•		Fluctuations in interest rates and other changes in the investment environment that affect investment returns;
	•		Inflationary pressures (medical and economic) that affect the size of losses;
	•		Judicial decisions that affect insurers’ liabilities;
	•		Changes in the frequency and severity of losses;
	•		Pricing and availability of reinsurance in the marketplace; and
	•		Weather-related impacts due to the effects of global warming trends.

Catastrophic events

Results of property and casualty insurers are subject to weather and other conditions. While one year may be relatively free of major weather occurrences or other disasters, another year may have numerous such events, causing results to be materially worse than other years. Selective’s Insurance Subsidiaries have experienced catastrophe losses and the Company expects them to experience such losses in the future.

Various natural and man-made events can cause catastrophes, including, but not limited to, hurricanes, tornadoes, windstorms, earthquakes, hail, terrorism, explosions, severe winter weather, and fires. The frequency and severity of these catastrophes are inherently unpredictable. The extent of losses from a catastrophe is determined by the severity of the event and the total amount of insured exposures in the area affected by the event. Although catastrophes can cause losses in a variety of property and casualty lines, most of the catastrophe-related claims of Selective’s Insurance Subsidiaries historically have been related to commercial property and homeowners coverages. Selective’s property and casualty insurance business is concentrated geographically in the Eastern and Midwestern regions of the United States. New Jersey accounts for 33% of the Company’s total net premiums written.

Selective’s Insurance Subsidiaries seek to reduce their exposure to catastrophe losses through the purchase of catastrophe reinsurance. Reinsurance, however, may prove inadequate if:

	•		The modeling software used to analyze the Insurance Subsidiaries’ risk proves inadequate;
	•		A major catastrophic loss exceeds the reinsurance limit or the reinsurers’ financial capacity; or
	•		The frequency of catastrophe losses result in the Insurance Subsidiaries exceeding their one reinstatement.

Acts of terrorism not covered by, or exceeding, reinsurance limits.

On November 26, 2002, the Terrorism Risk Insurance Act of 2002 legislation was signed into law. This legislation was amended in December 2005 to be in effect through December 31, 2007 through the Terrorism Risk Insurance Extension Act of 2005 (collectively, these two acts will be referred to as “TRIA”). TRIA requires sharing the risk of future losses from terrorism between private insurers and the federal government, and is applicable to almost all commercial lines of insurance. Insurance companies with direct commercial insurance exposure in the United States are required to participate in this program. TRIA rescinded all previously approved exclusions for terrorism. Policyholders for non-workers compensation policies have the option to accept or decline the terrorism coverage Selective offers in its policies, or negotiate other terms. In 2006, approximately 90% of Selective’s commercial non-workers compensation policyholders purchased terrorism coverage. The terrorism coverage is mandatory for all workers compensation primary policies. In addition, 50%, or ten of the twenty primary states in which Selective writes commercial property coverage mandate the coverage of fire following an act of terrorism. These provisions apply to new policies written after enactment of TRIA. A terrorism act must be certified by the Secretary of Treasury in order to be covered by TRIA. TRIA limits the certified losses to “international terrorism” defined as an act committed on behalf of any foreign person or foreign interest in which the damage from the event is in excess of $100 million in 2007, and the event was not committed in the course of a war declared by the United States. Each participating insurance company will be responsible for paying out a certain amount in claims (a deductible) before federal assistance becomes available. This deductible, which is equal to approximately $200 million in 2007, is based on a percentage of commercial lines direct earned premiums for lines subject to TRIA from the prior calendar year. For losses above an insurer’s deductible, the federal government will cover 90%, while the insurer contributes 10%. Although the provisions of TRIA will serve to mitigate Selective’s exposure in the event of a large-scale terrorist attack, the Company’s deductible is substantial. In addition, it is uncertain whether TRIA will be extended past its current termination date of December 2007 and, therefore, it may not be a permanent solution. In January 2007, Selective began issuing policies whose effective dates will extend beyond the current expiration date of TRIA. Selective continues to monitor concentrations of risk and has secured additional per occurrence casualty coverage through its reinsurance program effective January 1, 2007 to enhance the Company’s protection against this highly unknown exposure.

Selective’s reserves may not be adequate to cover actual losses and expenses.

Selective is required to maintain loss reserves for its estimated liability for losses and loss expenses associated with reported and unreported insurance claims for each accounting period. From time to time, Selective adjusts reserves and, if the reserves are inadequate, the Company must increase its reserves. An increase in reserves: (i) reduces net income and stockholders’ equity for the period in which the deficiency in reserves is identified, and (ii) could have a material adverse effect on Selective’s results of operations, liquidity, financial condition and financial strength, and debt ratings. Selective’s estimates of reserve amounts are based on facts and circumstances of which it is aware, including its expectations of the ultimate settlement and claim administration expenses, predictions of future events, trends in claims severity and frequency, and other subjective factors. There is no method for precisely estimating the Company’s ultimate liability for settlement of claims. Selective regularly reviews its reserving techniques and its overall amount of reserves. The Company also reviews:

	•		Information regarding each claim for losses;
	•		The Company’s loss history and the industry’s loss history;
	•		Legislative enactments, judicial decisions and legal developments regarding damages;
	•		Changes in political attitudes; and
	•		Trends in general economic conditions, including inflation.

Selective cannot be certain that the reserves it establishes are adequate or will be adequate in the future.

Selective is heavily regulated in the states in which it operates.

Selective is subject to extensive supervision and regulation in the states in which its Insurance Subsidiaries transact insurance business. The primary purpose of insurance regulation is to protect individual policyholders and not shareholders or other investors. Selective’s business can be adversely affected by regulations affecting property and casualty insurance companies. For example, laws and regulations can lead to mandated reductions in rates to levels that Selective does not believe are adequate for the risks it insures. Other laws and regulations limit the Company’s ability to cancel or refuse to renew certain policies and require Selective to offer coverage to all consumers. Changes in laws and regulations, or their interpretations, pertaining to insurance may also have an impact on Selective’s business. Selective’s concentration of business may expose the Company to increased risks of regulatory matters in the states in which the Insurance Subsidiaries write insurance that could be greater than the risks the Company could be exposed to by transacting business in a greater number of geographic markets.

Although the federal government does not directly regulate the insurance industry, federal initiatives, from time to time, can also impact the insurance industry. Proposals intended to control the cost and availability of healthcare services have been debated in the U.S. Congress and state legislatures. Although Selective neither writes health insurance nor assumes any

healthcare risk, rules affecting healthcare services can affect workers compensation, commercial and personal automobile, liability, and other insurance that the Company does write. Selective cannot determine whether, or in what form, healthcare reform legislation may be adopted by the U.S. Congress or any state legislature. Selective also cannot determine the nature and effect, if any, that the adoption of healthcare legislation or regulations, or changing interpretations, at the federal or state level would have on the Company.

Examples of insurance regulatory risks include:

Automobile Insurance Regulation

In 1998, New Jersey instituted an Urban Enterprise Zone (“UEZ”) Program, which requires New Jersey auto insurers to have a market share in certain urban territories that is in proportion to their statewide market share. Due to mandated urban rate caps, the premiums on these UEZ policies are typically insufficient to cover losses. Although the law that imposed these urban rate caps was repealed in 1998, the caps continue to be enforced by the New Jersey Department of Banking and Insurance (“NJDOBI”).

From time to time, legislative proposals are passed and judicial decisions are rendered related to automobile insurance regulation that could adversely affect Selective’s results of operations. For example, in 2005 a New Jersey Supreme Court decision eliminated the application of the serious life impact standard to personal automobile bodily injury liability cases under the verbal tort threshold of New Jersey’s Automobile Insurance Cost Reduction Act. This decision allows claimants to file lawsuits for non-economic damages without proving that the injuries sustained had a serious impact on their lives.

Workers Compensation Insurance Regulation

Because Selective voluntarily writes workers compensation insurance, it is required by state law to support the involuntary market. Insurance companies that underwrite voluntary workers compensation insurance can either directly write involuntary coverage, which is assigned by state regulatory authorities, or participate in a sharing arrangement, where the business is written by a servicing carrier and the profits or losses of that serviced business are shared among the participating insurers. Selective currently participates through a sharing arrangement in all states, except New Jersey, where it currently writes involuntary coverage directly. Historically, workers compensation business has been unprofitable whether written directly or handled through a sharing arrangement. Additionally, Selective is required to provide workers compensation benefits for losses arising from acts of terrorism under its workers compensation policies. The impact of any terrorist act is unpredictable, and the ultimate impact on Selective will depend upon the nature, extent, location, and timing of such an act. Any such impact on Selective could be material.

Homeowners Insurance Regulation

Selective is subject to regulatory provisions that are designed to address potential availability and/or affordability problems in the homeowners property insurance marketplace. Involuntary market mechanisms, such as the New Jersey Insurance Underwriting Association (“New Jersey FAIR Plan”), generally result in assessments to the Company. The New Jersey FAIR Plan writes fire and extended coverage on homeowners for those individuals unable to secure insurance elsewhere. Insurance companies who voluntarily write homeowners insurance in New Jersey are assessed a portion of any deficit from the New Jersey FAIR Plan based on their share of the voluntary market. Similar involuntary plans exist in most other states where Selective operates.

Certain coastal states have instituted, or are considering adopting, legislation or regulation to maintain or increase the availability of property insurance, particularly homeowners insurance, in those states. For example, in Florida, effective January 1, 2008, an insurer writing homeowners insurance in another state, but not in Florida, may not continue to write private passenger automobile insurance in Florida unless such insurer is affiliated with an insurer writing homeowners insurance in Florida. At this time, none of Selective’s Insurance Subsidiaries write private passenger automobile insurance in Florida. Certain other coastal states, including certain states in which Selective’s Insurance Subsidiaries transact homeowners insurance business, are considering legislation requiring that homeowners insurers that write homeowners insurance in any geographic area of a state must write homeowners insurance in all geographic areas of that state. We cannot predict whether any such legislation or regulation will be enacted, and the ultimate impact on Selective will depend upon the specifics of the legislation or regulation and the state or states that adopt any such legislation or regulation.

Flood Insurance Regulation

The federal government’s NFIP program currently covers flooding caused by storm surge where water is pushed toward the shore by the force of the winds swirling around a storm. If this federal program is modified in an unfavorable manner, whereby flooding related to storm surge is no longer covered or is required to be covered by homeowners policies, such modification could have a material adverse effect on Selective’s Flood and/or Homeowners results.

Regulation and Legislation of Agent Compensation

Selective’s Insurance Subsidiaries sell insurance products and services primarily through appointed independent insurance agents. Accordingly, Selective seeks to compensate its agents consistent with market practices and pay commissions and other consideration for business agents place with Selective’s Insurance Subsidiaries. Selective discloses its compensation practices in notices to all policyholders and on Selective’s public website, while referring all specific questions about agent compensation to the agent that placed the business with Selective.

Because Selective’s agents also generally represent several of Selective’s competitors, Selective’s primary marketing strategy is to:

	•		Develop close relationships with each agent by: (i) soliciting their feedback on products and services, (ii) advising them concerning company developments, and (iii) investing significant time with them professionally and socially; and
	•		Develop with each agent, and then carefully monitor, annual goals regarding: (i) types and mix of risks placed with Selective, (ii) amounts of premium or numbers of policies placed with Selective, (iii) customer service levels, and (iv) profitability of business placed with Selective.

At present, Selective believes its agent compensation practices and disclosures meet current legal and regulatory requirements. Over the last two years, however, certain state attorneys general have investigated, and continue to investigate, various alleged anticompetitive practices engaged in by several insurance brokers and national insurance companies that compete with Selective. Some of these investigations, mainly related to insureds that are much larger than Selective’s target customer, have resulted in consent orders under which brokers and several of Selective’s competitors have left uncontested the attorneys general’s allegations that some of their compensation arrangements may have caused certain brokers to clandestinely “steer” clients to specific insurers without sufficient disclosure to the client. The consent orders also have, to one degree or another, banned the use of such compensation arrangements by the offending brokers and insurers in several, but not all, lines of business.

Given the regulatory scrutiny of compensation arrangements with brokers to date, it is possible that compensation arrangements between insurers and independent agents will come under further review and will be the subject of public policy debate and possible legislative reform. Selective monitors these developments but cannot determine the nature or effect, if any, that such a public policy debate or possible legislative reform will have on its agent compensation practices or business.

Risk of Regulatory Changes Adversely Affecting Our Ability to Appropriately Reinsure or Include Reinsurance Costs in Our Rates.

Florida, a state in which Selective does not write homeowners insurance, recently passed legislation (i) changing the funding and operation of the Florida state-sponsored insurer of last resort, Citizens Property Insurance Corporation, and the Florida Hurricane Catastrophe Fund (“FHCF”), which is the Florida state-sponsored reinsurance facility, and (ii) prohibiting residential property insurers from including in rate calculations the additional costs of private reinsurance or loss exposure that duplicates FHCF coverage. In the short-term, such legislative action may increase overall private property reinsurance availability and reduce its costs outside of Florida. Should other states in which Selective writes business enact similar legislation, it is possible that Selective may not be able to include the costs of reinsurance that it deems appropriate in its rates. In such an event, Selective may be forced, if permitted under applicable law, to exit certain markets. If not permitted to exit such markets, Selective may face unfair competitive situations, where state-sponsored insurers implement rate freezes or decreases.

Selective may be adversely impacted by a change in its ratings.

Insurance companies are subject to financial strength ratings produced by external rating agencies, based upon factors relevant to policyholders. Ratings are not recommendations to buy, hold, or sell any of Selective’s securities. Higher ratings generally indicate financial stability and a strong ability to pay claims. A significant downgrade in ratings, from A.M. Best in particular, could: (i) affect our ability to write new business with customers, some of whom are required (under various third party agreements) to maintain insurance with a carrier that maintains a specified minimum rating; (ii) be an event of default under our line of credit; or (iii) make it more expensive for us to access capital markets.

Selective depends on independent insurance agents and other third party service providers.

Selective markets and sells its insurance products through independent, non-exclusive insurance agencies and brokers. Agencies and brokers are not obligated to promote Selective’s insurance products, and they may also sell the insurance products of the Company’s competitors. As a result, Selective’s business depends in part on the marketing and sales efforts

of these agencies and brokers. As the Company diversifies and expands its business geographically, it may need to expand its network of agencies and brokers to successfully market its products. If these agencies and brokers fail to market Selective’s products successfully, its business may be adversely impacted. Also, independent agents may decide to sell their businesses to banks, other insurance agencies, or other businesses. Agents with a Selective appointment may decide to buy other agents. Changes in ownership of agencies or expansion of agencies through acquisition could adversely affect an agency’s ability to control growth and profitability, thereby adversely affecting Selective’s business.

In addition to independent insurance agents, Selective also relies on third party service providers to conduct a portion of its premium audits, safety management services, and claims adjusting services. Selective’s HR Outsourcing business relies on third party service providers for products such as health coverage, flexible spending accounts, and 401(k) savings plans. If these third-party service providers fail to perform their respective services and/or fail to provide their products successfully and/or accurately, Selective’s business may be adversely impacted.

Selective’s ability to reduce its exposure to risks depends on the availability and cost of reinsurance.

Selective transfers its risk exposure to other insurance and reinsurance companies through reinsurance arrangements. Through these arrangements, another insurer assumes a specified portion of the Company’s losses and loss adjustment expenses in exchange for a specified portion of the insurance policy premiums. The availability, amount, and cost of reinsurance depend on market conditions, which may vary significantly. Any decrease in the amount of Selective’s reinsurance will increase its risk of loss.

Selective also faces credit risk with respect to reinsurance. The inability of any of the Company’s reinsurers to meet their financial obligations could materially and adversely affect Selective’s operations, as the Company remains primarily liable to its customers under the policies that it has reinsured.

Selective faces significant competition from other regional and national insurance companies, agents, and self-insurance.

Selective competes with both regional and national property and casualty insurance companies, including those that do not use independent agents and write directly with insureds. Many of these competitors are larger than Selective and have greater financial, technical, and operating resources. Because Selective sells its coverages through independent insurance agents who also are agents of its competitors, the Company faces competition within each of its appointed independent insurance agencies.

The property and casualty insurance industry is highly competitive on the basis of both price and service. If Selective’s competitors price their products more aggressively, the Company’s ability to grow or renew its business as well as its profitability may be adversely impacted. There are many companies competing for the same insurance customers in the geographic areas in which Selective operates. The Internet has also emerged as a significant source of new competition, both from existing competitors and from new competitors. A new form of competition may enter the marketplace as reinsurers may attempt to diversify their insurance risk by writing business in the primary marketplace.

Selective also faces competition, primarily in the commercial insurance market, from entities that self-insure their own risks. Many of Selective’s customers and potential customers are examining the benefits and risks of self-insuring as an alternative to traditional insurance.

A number of new, proposed, or potential legislative or industry developments could further increase competition in the property and casualty insurance industry. These developments include:

	•		The Gramm-Leach-Bliley Act, which could result in increased competition from new entrants to the insurance market, including banks and other financial service companies;
	•		Programs in which state-sponsored entities provide property insurance in catastrophe-prone areas or other alternative market types of coverage; and
	•		Changing practices caused by the Internet, which has led to greater competition in the insurance business and, in some cases, greater expectations for customer service.

New competition from these developments could cause the supply or demand for insurance to change, which could adversely affect Selective’s results of operations and financial condition.

Selective is a holding company, and its subsidiaries may have a limited ability to declare dividends, and thus may not have access to the cash that is needed to meet its cash needs.

Substantially all of Selective’s operations are conducted through its subsidiaries. Restrictions on the ability of the Company’s subsidiaries, particularly the Insurance Subsidiaries, to pay dividends or make other cash payments to the Parent may materially affect its ability to pay principal and interest on its indebtedness and dividends on its Common Stock.

Under the terms of Selective’s debt agreements and financial solvency laws affecting insurers, the Company’s subsidiaries are permitted to incur indebtedness up to certain levels that may restrict or prohibit the making of distributions, the payment of dividends, or the making of loans by the subsidiaries to the Parent. The Company cannot assure that the agreements governing the current and future indebtedness of its subsidiaries will permit such subsidiaries to provide the Parent with sufficient dividends, distributions, or loans to fund its cash needs. Sources of funds for the Insurance Subsidiaries primarily consist of premiums, investment income, and proceeds from sales and redemption of investments. Such funds are applied primarily to payment of claims, insurance operating expenses, income taxes and the purchase of investments, as well as dividends and other payments.

The Insurance Subsidiaries may declare and pay dividends to the Parent only if they are permitted to do so under the insurance regulations of their respective state of domicile. All of the states in which Selective’s Insurance Subsidiaries are domiciled regulate the payment of dividends. Some states, including New Jersey, North Carolina, and South Carolina, require that Selective give notice to the relevant state insurance commissioner prior to its Insurance Subsidiary domiciled in that respective state declaring any dividends and distributions payable to the Parent. During the notice period, the state insurance commissioner may disallow all or part of the proposed dividend upon determination that: (i) the insurer’s surplus is not reasonable in relation to its liabilities and adequate to its financial needs and those of the policyholders, or (ii) in the case of New Jersey, the insurer is otherwise in a hazardous financial condition. In addition, insurance regulators may block dividends or other payments to affiliates that would otherwise be permitted without prior approval upon determination that, because of the financial condition of the insurance subsidiary or otherwise, payment of a dividend or any other payment to an affiliate would be detrimental to an insurance subsidiary’s policyholders or creditors. Selective’s SHRS subsidiary may also declare and pay dividends, which are restricted by the operating needs of this entity as well as a professional employer organization licensing requirement to maintain a current ratio of at least 1:1.

Class action litigation could affect Selective’s business practices and financial results.

Selective’s industries have been the target of class action litigation in areas including the following:

	•		After-market crash parts;
	•		Urban homeowner underwriting practices;
	•		Health maintenance organization practices;
	•		Discounting and payment of personal injury protection claims; and
	•		Shareholder class action suits.

A change in Selective’s market share in New Jersey could adversely impact the results of its private passenger automobile business.

New Jersey insurance regulations require New Jersey auto insurers to involuntarily write private passenger automobile insurance for individuals who are unable to obtain insurance in the voluntary market. These policies are priced according to a separate rating scheme that is established by the assigned risk plan and subject to approval by NJDOBI. The amount of involuntary insurance an insurer must write in New Jersey depends on the insurer’s statewide market share — the greater the market share the more involuntary coverage the insurer is required to write. The underwriting of involuntary personal automobile insurance in New Jersey has been historically unprofitable.

Selective depends on key personnel.

To a large extent, the success of Selective’s businesses is dependent on its ability to attract and retain key employees, in particular its senior officers, key management, sales, information systems, underwriting, claims, HR Outsourcing, and corporate personnel. Competition to attract and retain key personnel is intense. While Selective has employment agreements with a number of key managers, the Company generally does not have employment contracts with its employees and cannot ensure that it will be able to attract and retain key personnel.

Selective’s investments support its operations and provide a significant portion of its revenues and earnings.

Like many other property and casualty insurance companies, Selective depends on income from its investment portfolio for a significant portion of its revenues and earnings. Any significant decline in the Company’s investment income as a result of falling interest rates, decreased dividend payment rates, reduced returns in our other investment portfolio, or general market conditions would have an adverse effect on its results. Fluctuations in interest rates cause inverse fluctuations in the market value of the Company’s debt portfolio. Any significant decline in the market value of its investments, excluding its held-to-maturity investments, would reduce the Company’s stockholders’ equity and its policyholders’ surplus, which could impact the Company’s ability to write additional premiums. In addition, Selective’s notes payable are subject to certain debt-to-capitalization restrictions, which could also be impacted by a significant decline in investment values.

Selective faces risks as a servicing carrier in the “Write-Your-Own” (“WYO”) Program of the United States government’s National Flood Insurance Program (“NFIP”).

Flood insurance is offered through the NFIP, which is managed by the Mitigation Division of FEMA under the U.S. Department of Homeland Security. 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 agency’s funding authority and future limitations in this funding could occur.

Effective October 1, 2006, the fee paid to us by the NFIP decreased 0.6 points to 30.2% of premiums written. Future reductions in this rate could occur through legislative activity.

Selective employs anti-takeover measures that may discourage potential acquirers and could adversely affect the value of its Common Stock.

Selective owns all of the shares of stock of its Insurance Subsidiaries domiciled in the states of New Jersey, New York, North Carolina, South Carolina, and Maine. State insurance laws require prior approval by state insurance departments of any acquisition or control of a domestic insurance company or of any company that controls a domestic insurance company. Any purchase of 10% or more of Selective’s outstanding Common Stock would require prior action by all or some of the insurance commissioners of these states.

Other factors also may discourage, delay, or prevent a change of control of Selective, including, among others, provisions in the Company’s certificate of incorporation (as amended), relating to:

	•		Supermajority voting and fair price to the Company’s business combinations;
	•		Staggered terms for the Company’s directors;
	•		Supermajority voting requirements to amend the foregoing provisions;
	•		The Company’s stockholders’ rights plan; and
	•		The ability of the Company’s board of directors to issue “blank check” preferred stock.

The New Jersey Shareholders’ Protection Act provides that Selective, as a New Jersey corporation, may not engage in business combinations specified in the statute with a shareholder having indirect or direct beneficial ownership of 10% or more of the voting power of the Company’s outstanding stock (an interested shareholder) for a period of five years following the date on which the shareholder became an interested shareholder, unless the business combination is approved by the board of directors of the corporation before the date the shareholder became an interested shareholder. In addition, Selective may not engage at any time in any business combination with any interested shareholder other than: (i) a business combination approved by Selective’s board of directors prior to the shareholder becoming an interested shareholder; (ii) a business combination approved by two-thirds of the Company’s shareholders (other than the interested shareholder); or (iii) a business combination that satisfies certain price criteria. These provisions also could have the effect of depriving Selective stockholders of an opportunity to receive a premium over the prevailing market price if a hostile takeover were attempted and may adversely affect the value of the Company’s Common Stock.

Selective faces risks from technology-related failures.

Selective’s businesses are increasingly dependent on computer and Internet-enabled technology. The Company’s inability to anticipate or manage problems with technology associated with scalability, security, functionality, or reliability could adversely affect its ability to write business and service accounts, and could adversely impact its results of operations and financial condition.

Selective faces risks in the HR Outsourcing business.

The operations of SHRS are affected by numerous federal and state laws and regulations relating to employment matters, benefits plans, and taxes. In performing services for its clients, SHRS assumes some obligations of an employer under these laws and regulations. Regulation in the HR Outsourcing business is constantly evolving, which could result in the modification of laws and regulations from time to time. Selective is unable to predict what additional government initiatives, if any, affecting SHRS’s business may be promulgated in the future. Consequently, the Company is also unable to predict whether SHRS will be able to adapt to new or modified regulatory requirements or obtain necessary licenses and government approvals.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties.

Selective’s main office is located in Branchville, New Jersey, on a site owned by a subsidiary with approximately 114 acres and 315,000 square feet of operational space. Selective leases all of its other facilities. The principal office locations related to Selective’s three business segments are described in the “Field Strategy,” “Investments Segment,” and “Human Resource Administration Outsourcing” sections of Item 1. “Business.” Selective believes that its facilities provide adequate space for its present needs and that additional space, if needed, would be available on reasonable terms.

Item 3. Legal Proceedings.

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 Selective’s Insurance Subsidiaries. Plaintiffs in these lawsuits are seeking money damages that, in some cases, are extra-contractual in nature or they are seeking to have the court direct the activities of Selective’s operations in certain ways.

Although the ultimate outcome of these matters is not presently determinable, Selective does not believe that the total amounts that it will ultimately have to pay, if any, in all of these lawsuits in the aggregate will have a material adverse effect on its financial condition, results of operations, or liquidity.

Item 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of 2006.

PART II

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

(a) Market Information

Selective’s Common Stock is traded on the NASDAQ Global Select Market under the symbol: “SIGI.” The following table sets forth the high and low sales prices, as reported on the NASDAQ Global Select Market, for Selective’s Common Stock for each full quarterly period within the two most recent fiscal years:

		2006								2005
		High				Low				High				Low
First Quarter		$	29.18				26.10				24.50				20.88
Second Quarter			28.23				25.38				25.24				20.95
Third Quarter			28.02				24.89				25.47				23.02
Fourth Quarter			29.10				25.95				29.64				23.53

On February 23, 2007, the closing price of Selective as reported on the NASDAQ Global Select Market was $24.89. All share and per share amounts have been restated to give retroactive effect to the two-for-one stock split distributed on February 20, 2007 to shareholders of record as of February 13, 2007. See Item 8. “Financial Statements and Supplementary Data,” Note 10 for discussion regarding the stock split.

(b) Holders

As of February 13, 2006, there were approximately 2,744 holders of record of Selective’s Common Stock, including beneficial holders whose securities were held in the name of the registered clearing agency or its nominee.

(c) Dividends

Dividends on shares of Selective’s Common Stock are declared and paid at the discretion of the Board of Directors based on Selective’s operating results, financial condition, capital requirements, contractual restrictions, and other relevant factors. The following table provides information on the dividends declared for each quarterly period within Selective’s two most recent fiscal years:

Dividend per share		2006				2005
First Quarter		$	0.11				0.10
Second Quarter		$	0.11				0.10
Third Quarter		$	0.11				0.10
Fourth Quarter		$	0.11				0.11

The Parent’s ability to declare dividends is restricted by covenants contained in senior notes that it issued on May 4, 2000 (“2000 Senior Notes”). See Note 9 to the consolidated financial statements entitled, “Indebtedness.” All such covenants were met during 2006 and 2005. At December 31, 2006, the amount available for dividends to holders of Selective’s common shares under such restrictions was $384.2 million for the 2000 Senior Notes.

Selective’s ability to receive dividends, loans, or advances from its Insurance Subsidiaries is subject to the approval and/or review of the insurance regulators in the respective domiciliary states of the Insurance Subsidiaries. Such approval and review is made under the respective domiciliary states’ insurance holding company act, which generally requires that any transaction between related companies be fair and equitable to the insurance company and its policyholders. Selective does not believe that such restrictions materially limit the ability of the Insurance Subsidiaries to pay dividends to Selective now or in the foreseeable future. Selective currently expects to continue to pay quarterly cash dividends on shares of its Common Stock in the future and has increased the quarterly stock dividend by 9% to $0.12 per share in the first quarter of 2007.

(d) Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information about Selective’s Common Stock authorized for issuance under equity compensation plans as of December 31, 2006:

(a)

(b)

(c)

Number of

securities remaining

Number of

available for

securities to

future issuance under

be issued upon

Weighted-average

equity compensation

exercise of

exercise price of

plans (excluding

outstanding options,

outstanding options,

securities reflected

Plan Category

warrants and rights

warrants and rights

in column (a)

Equity compensation plans approved by security holders

1,250,036

$14.99

6,370,460

(1)

(e) Performance Graph

The following chart, produced by Research Data Group, Inc., depicts Selective’s performance for the period beginning December 31, 2001 and ending December 31, 2006, as measured by total stockholder return on the Company’s Common Stock compared with the total return of the NASDAQ Composite Index and a select group of peer companies.

Notwithstanding anything to the contrary set forth in any of Selective’s previous filings under the Securities Act of 1933 or the Exchange Act that might incorporate future filings made by Selective under those statutes, the preceding performance graph will not be incorporated by reference into any of those prior filings, nor will such graph be incorporated by reference into any future filings made by Selective under those statutes.

(f) Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table provides information regarding Selective’s purchase of its own Common Stock in the fourth quarter of 2006:

										Total Number of				Maximum Number
										Shares Purchased				of Shares that May Yet Be
						Average Price				as Part of Publicly				Purchased Under the
		Total Number of				Paid				Announced Plans				Announced Plans
Period		Shares Purchased1				per Share				or Programs2				or Programs2
October 1-31, 2006			21,128			$	27.90				20,876				5,513,866
November 1-30, 2006			253,886				27.35				239,702				5,274,164
December 1-31, 2006			59,998				27.46				51,400				5,222,764
Total			335,012				27.41				311,978

Item 6. Selected Financial Data.

Eleven-Year Financial Highlights¹

(All presentations are in accordance with
GAAP unless noted otherwise, number of
weighted average shares and dollars in
thousands, except per share amounts)		2006				2005				2004				2003				2002
Net premiums written		$	1,535,961				1,459,474				1,365,148				1,219,159				1,053,487
Net premiums earned			1,499,664				1,418,013				1,318,390				1,133,070				988,268
Net investment income earned			156,802				135,950				120,540				114,748				103,067
Net realized gains (losses)			35,479				14,464				24,587				12,842				3,294
Diversified Insurance Services revenue from continuing operations2,3			110,526				98,711				86,484				70,780				59,399
Total revenues			1,807,867				1,671,012				1,553,624				1,335,056				1,157,553
Underwriting profit (loss)			57,978				69,728				40,768				(25,252	)			(38,743	)
Diversified Insurance Services income (loss) from continuing operations2,3			17,808				14,793				11,921				6,194				3,103
Net income from continuing operations3			163,574				147,452				127,177				64,375				40,310
Total discontinued operations, net of tax3			—				546				1,462				1,969				1,659
Cumulative effect of change in account principle, net of tax			—				495				—				—				—
Net income			163,574				148,493				128,639				66,344				41,969
Comprehensive income			146,054				112,078				134,723				99,362				59,366
Total assets			4,767,705				4,375,625				3,912,411				3,423,925				3,016,335
Notes payable and debentures6			362,602				339,409				264,350				238,621				262,768
Stockholders’ equity			1,077,227				981,124				882,018				749,784				652,102
Statutory premiums to surplus ratio4			1.5				1.6				1.7				1.8				1.9
Statutory combined ratio2,5			95.4				94.6				95.9				101.5				103.2
Combined ratio2,5			96.1				95.1				96.9				102.2				103.9
Yield on investment, before-tax			4.6				4.6				4.7				5.1				5.4
Debt to capitalization			25.2				25.7				23.1				24.1				28.7
Return on average equity			15.9				15.9				15.8				9.5				6.8
Per share data:
Net income from continuing operations3,8:
Basic		$	2.98				2.72				2.38				1.23				0.80
Diluted			2.65				2.33				2.01				1.07				0.74
Net income8:
Basic		$	2.98				2.74				2.41				1.27				0.83
Diluted			2.65				2.35				2.04				1.10				0.77
Dividends to stockholders8		$	0.44				0.40				0.35				0.31				0.30
Stockholders’ equity8		$	18.81				17.34				15.79				13.74				12.26
Price range of Common Stock8:
High		$	29.18				29.64				22.98				16.50				15.74
Low			24.89				20.88				15.86				10.91				9.68
Close			28.65				26.55				22.12				16.18				12.59
Number of weighted average shares8:
Basic			54,986				54,342				53,462				52,262				50,602
Diluted			62,542				64,708				64,756				63,206				55,990