Flood business is included in statutory underwriting results in accordance with prescribed statutory accounting practices. On a GAAP basis only,
Certain statements in this report, including information incorporated by reference, are "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995 ("PSLRA"). The PSLRA provides a safe harbor under the Securities Act of 1933 and the Securities Exchange Act of 1934 for forward-looking statements. These statements relate to our intentions, beliefs, projections, estimations or forecasts of future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, or performance to be materially different from those expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by use of words such as "may," "will," "could," "would," "should," "expect," "plan," "anticipate," "target," "project," "intend," "believe," "estimate," "predict," "potential," "pro forma," "seek," "likely" or "continue" or other comparable terminology. These statements are only predictions, and we can give no assurance that such expectations will prove to be correct. We undertake no obligation, other than as may be required under the federal securities laws, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Factors that could cause our actual results to differ materially from those projected, forecasted or estimated by us in forward-looking statements are discussed in further detail in Item 1A. "Risk Factors." These risk factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time-to-time. We can neither predict such new risk factors nor can we assess the impact, if any, of such new risk factors on our businesses or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied in any forward-looking statements in this report. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.
During 2005, we wrote-off one investment that we concluded was impaired during the second quarter of 2005 for other-than-temporary declines in fair value of $1.2 million compared to no impairment charges recorded in 2004 and $1.2 million in 2003.
Refer to the Glossary of Terms, attached to this Form 10-K as Exhibit 99.1 for definitions of terms used in this financial review, which exhibit
"From continuing operations," refer to Item 8. "Financial Statements and Supplementary Data," Note 11 to the consolidated financial
Technology also continues to play a critical role in our success. Recently, we rolled out our agency integration technology, xSELerate, which is another example of why we are ranked so highly by our agents for "ease of doing business." This technology allows automated movement of key underwriting data from an agent's management system to our systems, or vice versa, allowing seamless quoting and rating capabilities.
In comparison, the prior year treaty provided per occurrence coverage of $46.5 million in excess of the Company's $2.0 million retention and $1.5 million co-participation in the layer covering $3.0 million in excess of the $2.0 million retention for all casualty lines of business. The total cost of the 2005 fiscal year casualty program is expected to be $1.5 million higher than the prior fiscal year.
Our Terrorism Excess of Loss treaty was renewed effective January 1, 2006, with the expiring premium and somewhat broader coverage allowing for domestic as well as foreign terrorism. During 2005, we did not incur any terrorism losses, nor did we cede any losses to this treaty. The 2006 annual treaty cost is expected to remain flat compared with 2005.
In December 2004, the FASB issued FAS 123R, which requires that compensation expense be measured on the income statement for all share-based payments (including employee stock options) at grant date fair value of the equity instruments. Implementation is required for fiscal years beginning after June 15, 2005, and early adoption is permitted. The SEC issued a rule that allows public companies to defer the adoption to fiscal years beginning after December 15, 2005; however, we adopted FAS 123R on January 1, 2005. For further information on the impact of our adoption of FAS 123R in 2005, see Note 16 "Share Based Payments" to the consolidated financial statements.
Fixed maturity securities, which include bonds and redeemable preferred stocks, are purchased to support the investment strategies of Selective. These strategies are developed based on many factors including rate of return, maturity, credit risk, tax considerations and regulatory requirements. Fixed maturity securities that are not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity as accumulated other comprehensive income. Those fixed maturity securities that Selective has the ability and positive intent to hold to maturity are classified as held-to-maturity and carried at amortized cost, which is calculated using the scientific method.
(1) Investments: Fair values for fixed maturity and equity securities are based on quoted market prices where available, or from independent pricing services. Alternative investments are carried using the equity method, which approximates fair value.
(1) On November 3, 2005, Selective issued $100 million of 6.70% Senior Notes due 2035. These notes were issued at a discount of $0.7 million resulting in an effective yield of 6.754% and pay interest on May 1 and November 1 each year commencing on May 1, 2006. Net proceeds of approximately $50 million were used to fund an irrevocable trust to provide for certain payment obligations in respect of the Company's outstanding debt. The remainder of bond proceeds will be used for general corporate purposes, which may include contributions to its insurance subsidiaries and share repurchases.
Each note purchase agreement contains restrictive business covenants that are reviewed quarterly. They include, but are not limited to, a limitation on indebtedness, restricted ability to declare dividends and net worth maintenance. All of the covenants were met during 2005 and 2004. At December 31, 2005, the amount available for dividends to stockholders under said restrictions was $333.0 million for the 2000 Senior Notes.
Selective maintains a dividend reinvestment plan (the "DRP"). On November 18, 2003, Selective registered with the SEC 1,012,873 shares of Selective's common shares with the SEC for the DRP, of which 12,873 were previously registered unissued shares. At December 31, 2005, 897,185 shares of Selective's common stock were available for issuance under the DRP. Shares purchased under the DRP are issued at fair value. As of December 31, 2005, Selective had an additional 4.5 million shares reserved for various stock compensation plans, retirement plans and debt offerings.
In 2004, the FASB ratified Emerging Issues Task Force Issue No. 04-8, "The Effect of Contingently Convertible Instruments on Diluted Earnings per Share" ("EITF 04-8"). EITF 04-8 requires that instruments convertible into common stock upon the achievement of a specified price of the issuer's shares be included in diluted earnings per share computations under the if-converted method regardless of whether the triggering market conditions have been met. Selective adopted EITF 04-8 in December 2004 and, as a result, has restated 2003 diluted earnings per share to reflect the conversion feature of Selective's September 2002 Senior Convertible Notes, which is further described in Note 7, "Indebtedness." This restatement reduced 2003 diluted earnings per share from $2.40 to $2.20 and had no impact on the 2005 or 2004 diluted earnings per share as these shares had been included in the diluted computation for the entire year.
The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per share (EPS) computations of net income for the year ended:
All amounts in the reconciliations of funded status were recognized in the consolidated balance sheets for 2005 and 2004. There were no amounts to be included in accumulated other comprehensive income for the periods shown resulting from an additional minimum pension liability. Selective's measurement date was December 31, 2005 and its expected return on plan assets was 8.0%, which was based primarily on the plan's long-term historical returns. Selective's expected return is supported by its actual 7.8% annualized 10-year return and 9.1% annualized return achieved since plan inception for all plan assets. In addition to the plan's historical returns, Selective considers long-term historical rates of return on the respective asset classes. Selective presently anticipates contributing $8.0 million to the Retirement Income Plan in 2006 and has kept its expected return on plan assets at 8.0% after examining recent market conditions and trends.