| þ | ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| o | TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| A. | Full title of the plan and the address of the plan, if different from that of the issuer named below: |
| B. | Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: |
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| 4-11 | ||||||||
Supplemental Schedule* |
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| 13 | ||||||||
| 14 | ||||||||
Exhibit 23 – Consent of Independent Registered Public Accounting Firm |
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| EX-23: CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | ||||||||
| * | Schedules required by Form 5500 that are not applicable have been omitted. |
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| 2006 | 2005 | |||||||
Plan Assets: |
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Investments, at fair value (Note 3) |
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Cash and cash equivalents |
$ | — | 10,945 | |||||
Selective Insurance Group, Inc. common stock |
5,415,184 | 5,234,108 | ||||||
Mutual funds |
121,170,595 | 104,905,005 | ||||||
Common trust fund |
17,771,845 | 16,202,723 | ||||||
Participant loans receivable |
2,204,343 | 2,063,907 | ||||||
Total investments at fair value |
146,561,967 | 128,416,688 | ||||||
Employer contribution receivable |
56,014 | — | ||||||
Net assets
available for benefits at fair value |
146,617,981 | 128,416,688 | ||||||
Adjustment from fair value to contract value
for fully benefit-responsive investment contracts |
152,353 | 136,342 | ||||||
Net assets available for plan benefits |
$ | 146,770,334 | 128,553,030 | |||||
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Additions to net assets attributable to: |
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Investment income: |
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Net appreciation in fair value of investments (Note 3) |
$ | 9,980,156 | ||
Dividends |
4,933,670 | |||
Interest |
1,293,769 | |||
Participant loan interest |
136,052 | |||
Net investment income |
16,343,647 | |||
Contributions: |
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Participants |
9,063,377 | |||
Participant rollovers |
1,586,464 | |||
Employer (net of forfeitures of $159,271) |
4,212,397 | |||
Total contributions |
14,862,238 | |||
Total additions |
31,205,885 | |||
Deductions from net assets attributable to: |
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Distributions to participants |
(7,816,600 | ) | ||
Total deductions |
(7,816,600 | ) | ||
Net increase in net assets available for plan benefits, before transfer due to sale of subsidiary |
23,389,285 | |||
Transfer of funds due to sale of subsidiary |
(5,171,981 | ) | ||
Net increase in assets available for plan benefits |
18,217,304 | |||
Net assets available for plan benefits at beginning of year |
128,553,030 | |||
Net assets available for plan benefits at end of year |
$ | 146,770,334 | ||
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| (1) | Plan Description: | |
| The following description of the Selective Insurance Retirement Savings Plan (the “Plan”) is provided for general information purposes only. Participants should refer to the Plan document for more complete information. |
| (a) | General: | ||
| The Plan was originally established effective July 1, 1980 and most recently amended effective January 1, 2007. | |||
| The Plan is a defined contribution retirement savings plan, which covers substantially all regular full-time and part-time employees of Selective Insurance Company of America (the “Company”) who are paid on a United States payroll. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Participants direct the investment of all contributions, including the Company’s contributions, among a variety of available investment options. Eligible employees of the Company may begin participation upon commencement of employment. The Company is the Plan sponsor. T. Rowe Price Retirement Plan Services, Inc. (“T. Rowe Price”) provides recordkeeping services for the Plan. The members of the Salary and Employee Benefits Committee of the Board of Directors of the Company are the Plan trustees. | |||
| In December 2005, Selective Insurance Group, Inc. (“SIGI”) divested itself of its 100% ownership interest in its subsidiaries, Alta Services, LLC and Consumer Health Network Plus, LLC. In connection with this disposition, certain funds were transferred in 2006 to the acquiring entities’ savings plan. | |||
| (b) | Plan Participants Contributions: | ||
| Participants may contribute 2% to 50% of their base pay and annual cash bonus to the plan on a pre-tax and/or after-tax basis, through payroll deductions, which, in the aggregate, may not exceed 50% of their annual base pay. Total pre-tax contributions may not exceed the IRS limit of $15,000 for 2006. Participants age 50 or over may also make additional “catch-up” contributions to their accounts on a pre-tax basis of up to $5,000 for 2006. Highly compensated employees may have their contributions limited further at the discretion of the Plan’s administrator. Participants may also contribute amounts representing eligible rollover distributions from other qualified plans. | |||
| (c) | Company Contributions | ||
| For eligible employees hired on or before December 31, 2005, the Company makes matching contributions in an amount equal to 65 cents per dollar on the first 7% of the base pay contributed by a participant (the “regular matching contribution”). |
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| Effective January 1, 2006, the Plan was amended to include additional enhanced matching contributions and non-elective contributions for otherwise eligible employees who, because of a date of hire after December 31, 2005, are not eligible to participate in the Company’s defined benefit pension plan, the Retirement Income Plan for Selective Insurance Company of America. For those employees, in addition to the regular matching contribution, following one year of service, the Company matches, dollar for dollar, the employee’s contributions up to 2% of the employee’s base pay and makes non-elective contributions to the Plan equal to 2% of the employee’s base pay effective with the first pay period following one year of service. | |||
| For all employees, the Company does not match participants’ catch-up contributions or participant contributions made from annual cash incentive pay. Company matching and non-elective contributions are invested at the direction of the participant. | |||
| (d) | Forfeited Accounts | ||
| Forfeited balances were $310,098 at December 31, 2006 and $221,642 at December 31, 2005. In 2006, forfeited amounts of $159,271 were used to reduce the Company’s contributions. All forfeited amounts are used to reduce the Company contributions made and/or pay administrative expenses of the Plan. | |||
| (e) | Administrative Expenses | ||
| Expenses incurred by the Plan may be paid directly by the Company or through the use of the forfeitures. | |||
| (f) | Participants’ Accounts | ||
| Each participant’s account is credited with the participant’s contributions, the appropriate amount of the Company’s contributions and investment income (or loss) arising out of the funds in which the participant’s account was invested, net of fund expenses. | |||
| (g) | Vesting | ||
| Participants’ contributions and earnings or losses thereon are fully vested at all times. Company contributions and earnings or losses thereon vest in accordance with the following schedules: | |||
| Matching Contributions: |
| Years of Vesting Service | Vesting Percentage | |||
Less than two |
0% | |||
Two but less than three |
20 | |||
Three but less than four |
40 | |||
Four but less than five |
60 | |||
Five but less than six |
80 | |||
Six or more |
100 | |||
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| Non-elective Contributions: |
| Years of Vesting Service | Vesting Percentage | |||
Less than five |
0% | |||
Five or more |
100 | |||
| A participant’s Company contribution account balance becomes 100% vested in the case of death, total and permanent disability, or at age 65, if the employee is still in service at the time. | |||
| The Pension Protection Act of 2006 (the “PPA”) includes requirements concerning an employee’s vesting of non-elective employer contributions to defined contribution plans. The PPA requires that these contributions vest either: (i) at the end of 3 years of service, or (ii) over a graded 6-year vesting schedule. These vesting requirements are applicable to such contributions for plan years beginning after December 31, 2006. The Company is currently evaluating the vesting option to be used for such contributions under the PPA. | |||
| (h) | Withdrawals | ||
| During employment, a participant may make withdrawals of all or certain portions of his or her vested account balance subject to certain restrictions as set forth in the Plan document. Certain withdrawals, such as hardship withdrawals, preclude the participant from making further contributions or withdrawals under the Plan for a period of time. | |||
| (i) | Benefit Payments | ||
| The benefit to which a participant is entitled is provided from the vested portion of a participant’s account. Upon termination of service, if a participant’s vested account balance does not exceed $1,000, the vested value is distributed in the form of a lump-sum payment. If the vested account balance exceeds $1,000, the participant may request a lump-sum payment or may elect to defer distribution until age 65, as set forth in the Plan. Upon a participant’s death, the entire vested account balance is distributed to the participant’s beneficiary in the form of a lump-sum payment. | |||
| (j) | Participant Loans | ||
| Participants may borrow, from their before-tax account or rollover account, a minimum of $1,000 up to a maximum equal to the lesser of (i) $50,000, reduced in certain circumstances for participants with prior loans, or (ii) 50% of their vested account balance. Loans used to purchase a primary residence can be repaid over fifteen years. Loans for all other purposes must be repaid within five years. Principal and interest is repaid through bi-weekly payroll deductions. Interest is determined at the time of the loan at a rate equal to prime plus 1%. | |||
| The Company has identified various operational errors related to participant loans that management does not believe are material and expects will be corrected in 2007. |
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| (2) | Summary of Significant Accounting Policies |
| (a) | Adoption of Accounting Pronouncement | ||
| The provisions of the Financial Accounting Standards Board Staff Position entitled, FSP AAG INV-1, Reporting of Fully Benefit-Responsive Investment Contracts Held by Certain Investment Companies Subject to the AICPA Investment Company Guide and Defined-Contribution Health and Welfare and Pension Plans (the “FSP”) became effective for plan years ending after December 15, 2006. This FSP requires that investment contracts held by a defined contribution plan be reported at fair value. The Plan’s common trust fund (the “Trust”) holds investment contracts that are all deemed to be fully benefit-responsive as of December 31, 2006 and 2005. Although the FSP requires the Trust to be reported at fair value, contract value is the relevant measurement attribute. Contract value is the amount participants would receive if they were to initiate permitted transactions under the terms of the Plan. As required by the FSP, the Statements of Net Assets Available for Plan Benefits presents the fair value of the common trust fund as well the amount necessary to adjust this fair value to contract value. The adoption of this FSP had no impact on the Plan’s net assets available for plan benefits as of December 31, 2006 or 2005. As permitted by the FSP, the Statement of Changes in Net Assets Available for Plan Benefits is prepared on a contract value basis. | |||
| (b) | Basis of Accounting | ||
| The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”). | |||
| (c) | Use of Estimates | ||
| The preparation of the financial statements in conformity with GAAP requires the Plan’s management to (i) make estimates and assumptions that affect the reported amount of assets, liabilities and changes therein and (ii) disclose contingent assets and liabilities. Actual results may differ from such estimates and assumptions. | |||
| (d) | Investment Valuation and Income Recognition | ||
| Investment options under the Plan include SIGI common stock, seventeen mutual funds and one common trust fund. Fair value of the common stock and mutual funds, which are comprised of stocks and bonds, is based on quoted market prices. | |||
| The common trust fund is stated at fair value and adjusted to contract value as reported to the Plan by T. Rowe Price. Contract value represents contributions made under the contract, plus earnings, less participant withdrawals and administrative expenses. Participants may ordinarily direct the withdrawal or transfer of all or a portion of their investment at contract value. |
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| The Trust’s one-year total return was 4.19% for 2006 and 3.95% for 2005. The thirty-day effective yield, also known as the crediting interest rate, was 4.29% at December 31, 2006 and 4.05% at December 31, 2005. Both the one-year total return and the thirty-day effective yield for 2006 and 2005 are net of the annual trustee fee of 0.45%. The crediting interest rate is calculated on a daily basis. There are no reserves against contract value for credit risk of the contract issuer or otherwise. | |||
| The existence of certain conditions can limit the Trust’s ability to transact at contract value with the issuers of its investment contracts. Specifically, any event outside the normal operation of the Trust that causes a withdrawal from an investment contract may result in a negative market value adjustment with respect to such withdrawal. Examples of such events include, but are not limited to, partial or complete legal termination of the Trust or a unitholder, tax disqualification of the Trust or a unitholder, and certain Trust amendments if issuers’ consent is not obtained. As of December 31, 2006, the occurrence of an event outside the normal operation of the Trust that would cause a withdrawal from an investment contract is not considered to be probable. To the extent a unitholder suffers a tax disqualification or legal termination event, under normal circumstances it is anticipated that liquid assets would be available to satisfy the redemption of such unitholder’s interest in the Trust without the need to access investment contracts. | |||
| Participant loans are valued at cost, which approximates fair value. | |||
| Purchases and sales of securities are recorded on a trade date basis. Dividends are recorded on the ex-dividend date. Interest income is recorded when earned. | |||
| (e) | Risk and Uncertainties | ||
| The Plan offers a number of investment options, including investment in SIGI’s common stock, mutual funds and a common trust fund. Investment securities, in general, are exposed to various risks, such as interest rate, credit and overall market volatility risk. It is reasonable to expect that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances. | |||
| The Plan’s exposure to a concentration of credit risk is limited by the diversification of investments across nineteen participant-directed fund elections. Additionally, the investments within each participant-directed fund election are further diversified into varied financial instruments, with the exception of investments in SIGI common stock. Investment decisions are made, and the resulting risks are borne, exclusively by the Plan participant who made such decisions. | |||
| (f) | Payment of Benefits | ||
| Benefits are recorded when paid. |
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| (3) | Investments |
| The following investments represent 5% or more of the Plan’s net assets: |
| 2006 | 2005 | |||||||
T. Rowe Price Trust Company Funds: |
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Equity Income Fund 1,126,897 and 1,117,361 shares, respectively |
$ | 33,299,797 | 28,961,995 | |||||
Small-Cap Value Fund 546,170 and 544,117 shares, respectively |
22,507,655 | 20,083,359 | ||||||
Stable Value Common Trust Fund 17,924,198 and 16,339,065 shares, respectively |
17,924,198 | * | 16,339,065 | * | ||||
Mid-Cap Growth Fund 308,364 and 283,443 shares, respectively |
16,556,051 | 15,345,589 | ||||||
New Income Fund 1,000,186 and 963,727 shares, respectively |
8,921,655 | 8,644,630 | ||||||
International Stock Fund 467,734 shares and 424,041 shares, respectively |
7,871,963 | 6,271,568 | ||||||
| * | The fair value of the fund has been adjusted to contract value. |
| 2006 | ||||
Mutual Funds |
$ | 9,552,904 | ||
Selective Insurance Group, Inc. common stock |
427,252 | |||
| $ | 9,980,156 | |||
| (4) | Plan Termination | |
| Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, participants would become 100% vested in their Company contributions. |
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| (5) | Federal Income Tax Status | |
| The Internal Revenue Service (“IRS”) has determined and informed the Company by a letter dated December 13, 2002, that the Plan and related Trust are designed in accordance with applicable sections of the Internal Revenue Code (“IRC”). Although the Plan has been amended since receiving the determination letter, the Plan’s administrator and the Plan’s tax counsel believe that the Plan is designed and is currently being operated in compliance with the applicable requirements of the IRC. | ||
| During 2007, the Company discovered an operational failure affecting the Plan relating to the crediting of year-end employer matching contribution “true-up” payments to certain participants’ accounts during the Plan years ended 1997 through 2005. The Company has not yet finalized its review of the matter, however, the amount of any additional employer matching contribution payments, together with any deemed investment income on such contributions, is not expected to be material to the Plan or the Company. The Company is concluding its review following which it will commence the implementation of any necessary adjustments to participants’ accounts and seek Internal Revenue Service approval of the Company’s proposed method of correction. The Company shall bear the cost of the correction including payment of corrective contributions to participants’ accounts, as well as any other fees, penalties or expenses associated with the correction. | ||
| (6) | Party-in-Interest Transactions | |
| Certain investments of the Plan are shares of mutual funds and a common trust fund, which are administered by T. Rowe Price, the recordkeeper of the Plan, and T. Rowe Price Trust Company, Inc., the custodian of the Plan. These investments represent $119,523,836, or 81%, of total net assets. Certain Plan investments are shares of common stock issued by SIGI. The Company, a wholly-owned subsidiary of SIGI, is the Plan sponsor. Therefore, these transactions qualify as party-in-interest transactions. |
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| (7) | Reconciliation of Financial Statements to Form 5500 | |
| The following is a reconciliation of the financial statements to IRS Form 5500: |
| 2006 | 2005 | |||||||
Net assets available for plan benefits
per the financial statements |
$ | 146,770,334 | 128,553,030 | |||||
Less: Adjustment from fair market value for fully
benefit-responsive investment contracts |
(152,353 | ) | — | |||||
Less: Participant Loans Receivable |
— | (9,518 | ) | |||||
Net assets per Form 5500 |
$ | 146,617,981 | 128,543,512 | |||||
| 2006 | ||||||||
Net investment income per the financial statements |
$ | 16,343,647 | ||||||
Less: Adjustment from fair market value for fully benefit-responsive investment contracts |
(152,353 | ) | ||||||
Net investment income per Form 5500 |
$ | 16,191,294 | ||||||
| 2006 | ||||||||
Distributions to participants per the financial statements |
$ | 7,816,600 | ||||||
Less: Defaulted Loans |
(9,518 | ) | ||||||
Distributions to participants per Form 5500 |
$ | 7,807,082 | ||||||
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| Identity of issuer | Description | Fair Value | ||||||||
| *Selective Insurance Group, Inc. common stock | Common Stock; |
94,522 shares | $ | 5,415,184 | ||||||
| *T. Rowe Price Funds: | ||||||||||
| Stable Value Common Trust Fund | Common Trust Fund; |
17,924,198 shares | 17,771,845 | |||||||
| Equity Income Fund | Mutual Fund; |
1,126,897 shares | 33,299,797 | |||||||
| Small-Cap Value Fund | Mutual Fund; |
546,170 shares | 22,507,655 | |||||||
| Mid-Cap Growth Fund | Mutual Fund; |
308,364 shares | 16,556,051 | |||||||
| New Income Fund | Mutual Fund; |
1,000,186 shares | 8,921,655 | |||||||
| International Stock Fund | Mutual Fund; |
467,734 shares | 7,871,963 | |||||||
| Science & Technology Fund | Mutual Fund; |
151,092 shares | 3,166,881 | |||||||
| Growth Stock Fund | Mutual Fund; |
169,592 shares | 5,364,185 | |||||||
| Real Estate Fund | Mutual Fund; |
106,476 shares | 2,697,036 | |||||||
| High Yield Fund | Mutual Fund; |
172,502 shares | 1,214,415 | |||||||
| Vanguard Funds: | ||||||||||
| Vanguard Institutional Index Fund | Mutual Fund; |
51,732 shares | 6,703,995 | |||||||
| Vanguard Intermediate Admiral – Term Treasury Fund | Mutual Fund; |
164,376 shares | 1,768,682 | |||||||
| Vanguard Inflation – Protected Securities Fund | Mutual Fund; |
68,603 shares | 1,587,482 | |||||||
| Vanguard Balanced Index Fund – Admiral Shares | Mutual Fund; |
38,845 shares | 829,719 | |||||||
| Other: | ||||||||||
| Lord Abbett Mid Cap Value Fund | Mutual Fund; |
126,493 shares | 2,833,452 | |||||||
| Tweedy, Browne Global Value Fund | Mutual Fund; |
96,653 shares | 2,989,489 | |||||||
| Matthews Asian Growth Income Fund | Mutual Fund; |
127,615 shares | 2,383,850 | |||||||
| Neuberger Berman Fasciano Fund | Mutual Fund; |
11,255 shares | 474,288 | |||||||
| 144,357,624 | ||||||||||
| *Participant Loans Receivable | 276 loans; interest rates from 5% to 10% maturity through 2021 |
2,204,343 | ||||||||
Total |
$ | 146,561,967 | ||||||||
| * | Party-in-interest as defined by ERISA. |
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| PLAN ADMINISTRATOR: | Selective Insurance Company of America | |||
Date: June 29, 2007
|
By: | /s/ Victor N. Daley | ||
| Victor N. Daley | ||||
| Chairman, Benefits Advisory Committee, | ||||
| Selective Insurance Company of America | ||||
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