3. See Item 8. "Financial Statements and Supplementary Data," Note 13 to the consolidated financial statements and
(1)- Refer to the Glossary of Terms on Exhibit 13 of the 2003 Form 10-K for definitions of terms used in this financial review, incorporated by reference herein.
Net investment income earned for the year was $114.7 million compared with $103.1 million in 2002 and $96.8 million in 2001. Pre-tax investment yield was 5.1% for 2003, compared with 5.4% for both 2002 and 2001, however net investment income was driven higher by an increased investment base of $2.4 billion in 2003, compared with $2.1 billion in 2002. This increased investment base was largely due to operating cash flows of $281.9 million in 2003, compared with $180.1 million in 2002 and $52.7 million in 2001.
For 2003, net premiums written were just over $1.2 billion, an increase of 16% over 2002 net premiums written of just less than $1.1 billion which were 14% higher than 2001 net premiums written of $925.4 million. The 2003 increase included approximately $261.8 million in new business, up 19% over last year's $220.6 million, while 2001 included $187.9 million of new business. Net premiums written for commercial lines grew 18% in 2003, while personal lines were up 8%. This growth reflects our ongoing strategy to primarily focus on our core commercial lines operation, while building a smaller, but profitable personal lines segment. Net premiums written are recognized as earned premium in the statements of income over the period that coverage is provided. The vast majority of net premiums written have a coverage period of twelve months. It should be noted that when premium rates increase, the effect of those increases will not immediately affect earned premium. Rather, those increases will be recognized ratably over the period of coverage. For 2003, our overall combined ratio was 102.2% including 2.7 points from weather-related catastrophe losses, which include the effects of several winter storms and Hurricane Isabel, down from 103.9% in 2002, which included 1.1 points from catastrophe losses, and 106.9% in 2001, which included 0.4 points from catastrophe losses.
The commercial lines underwriting expense ratio increased modestly to 31.7% in 2003 from 31.6% in 2002 which was better than the 32.7% in 2001. Improvement in the underwriting expense ratio, of 0.5 points, is being masked by the impact of incentive-based agent and employee profit sharing expense. These expenses, which are ratably recognized to properly match expenses with revenues under GAAP, were $20.5 million in 2003, $12.4 million in 2002, and $7.7 million in 2001. The underlying improvement is being driven by technology initiatives, such as our web-based commercial lines automated system (CLAS), that provides a secure, powerful and easy-to-use platform that allows independent agents to service their customers at point of contact. Through CLAS, agents seamlessly process certain new and renewal business, and endorsement transactions without any Selective involvement. One & Done, which has a marginal underwriting expense ratio of about 23%, also adds to the improvement by providing agents with straight-through small business processing capability. 33% of commercial lines new business transactions came through One & Done in 2003, compared with 25% in 2002. These initiatives help lower the underwriting expense ratio since agents are performing tasks that in the past would have been performed by a Selective employee, allowing us to improve productivity.
Our commercial automobile line of business had a loss and loss expense ratio of 63.9% in 2003, compared with 69.6% in 2002 and 78.8% in 2001. The results of this line, which had $275.0 million of net premiums written in 2003, or 28% of total commercial lines net premiums written, compared with $233.6 million in 2002 and $199.0 million in 2001, are being driven by price increases and stricter underwriting standards, including a changed vehicle mix which reduced the percentage of extra-heavy vehicles and the removal of certain classes of business we determined to be unprofitable.
The workers' compensation line of business, improved modestly to an 85.3% loss and loss expense ratio compared with 86.3% at 2002, but higher than the 77.9% ratio in 2001. Workers' compensation net premiums written were $240.9 million or 24% of total commercial lines net premium written for 2003, compared with $203.1 million in 2002 and $180.3 million in 2001. Our account-based strategy focuses on writing this line as a companion product, with less than 5% of workers' compensation policies written stand-alone. We no longer accept new workers' compensation business on a stand-alone basis, it must be packaged with at least one other line of business. Workers' compensation results continue to be impacted by external factors, including: a regulatory climate that makes it difficult to obtain rate increases in some states; inflationary medical costs; increasing indemnity benefits; the slow economic recovery; and a decreasing number of workers' compensation-only providers. However, we believe the strict underwriting measures we have put in place over the last three years, including: writing primarily small- to mid-size employers in low to medium hazard classes, requiring job site inspections and increasing by 36% the number of highly trained loss control representatives we employ, coupled with the combination of rate increases, credit reductions, decreased use of dividend plans and shifting business to higher-priced tiers, will make this a more manageable line for Selective. We continue to seek premium price increases, with a targeted 6% for the overall workers' compensation line of business in 2004, including about 7% in New Jersey, which represents 26% of total workers' compensation net premiums written.
Personal lines net premiums written were $219.7 million in 2003, $204.3 million in 2002, and $201.6 million in 2001. The increase in net premiums written is attributable to renewal price increases reaching an average of 7.1% in 2003, compared with approximately 9.0% in 2002 and 2.1% in 2001.
Our personal automobile line of business, with net premiums written of $180.8 million, or 82% of total personal lines net premiums written, had a loss and loss expense ratio of 74.3% in 2003, compared with 80.4% on $169.1 million of net premium written for 2002 and 88.7% from $169.5 million of net premiums written in 2001. This improvement reflects continued progress in our New Jersey personal automobile business resulting from significant actions taken over the last four years, including aggressive pricing initiatives; a redesign of our rating tiers; and an improving political and regulatory climate. New Jersey, which represents 73% of total personal automobile net premiums written, had a loss and loss expense ratio of 72.1% in 2003, compared with 79.1% in 2002 and 90.9% in 2001. Our average premium per vehicle in New Jersey increased 10.5% over 2002, which was 9.3% higher than 2001, due to these price increases and tier changes. The number of vehicles we insure declined to 106,700 in 2003, compared with 111,000 in 2002 and 121,000 in 2001. This reduction was due to lower new business submissions.
Our homeowners line of business, which had $33.2 million of net written premiums, or 15% of total personal lines net premiums written, compared with $28.5 million in 2002 and $26.1 million in 2001, suffered from extreme weather-related losses in 2003. The 2003 loss and loss expense ratio was 90.8%, but included 23.0 points from weather-related catastrophe losses, compared with 77.9% in 2002, which included 8.6 points from catastrophe losses and 75.5% in 2001, which included 2.6 points from catastrophe losses. We have implemented an action plan in this line of business that includes: premium rate increases, increased pricing due to underwriting on an insurance to value (ITV) basis, and adding a wind and other deductible clause to policies.
The Insurance Subsidiaries follow the customary practice of ceding a portion of their risks and paying to reinsurers a portion of the premiums received under the policies. This permits greater diversification of business and the ability to offer increased coverage while limiting maximum net losses. Reinsurance does not legally discharge an insurer from its liability for the full
Our Property Excess of Loss treaty, renewed effective July 1, 2003, covers each property risk in excess of a $2.0 million retention up to $20.0 million in three layers with the Company retaining 25% of the $5.0 million excess of $5.0 million second layer. This is a change from the 2002 treaty, when the Company had no participation in the second layer and treaty coverage up to $15.0 million. The current treaty provides coverage up to $16.7 million per risk in excess of the Company's $2.0 million retention and a $1.3 million co-participation in the second layer. In 2002, the treaty provided coverage up to $13.0 million per risk in excess of the Company's $2.0 million retention. The property treaty distinguishes between certified (Terrorism Risk Insurance Act of 2002 (TRIA) events or foreign acts) and non-certified (all other or domestic) terrorism losses. The treaty provides coverage for certified terrorism (TRIA) losses for all risks up to $75.0 million in total insured value per location. The treaty provides annual certified terrorism limits of $9.0 million for the first layer, $11.3 million for the second layer and $20.0 million for the third layer. Claims arising from non-certified terrorist acts are treated like any other losses and are not subject to limitations or annual aggregate caps. Consistent with the 2002 treaty: nuclear, biological and chemical losses are excluded from the Property Excess of Loss treaty, however, our Terrorism Excess of Loss treaty, discussed later in this section, does cover these exposures once our $15.0 million annual aggregate deductible is met. There is no exclusion for mold or cyber risks in this contract.
The Casualty Excess of Loss treaty, renewed effective July 1, 2003, provides per occurrence coverage of $47.2 million in excess of the Company's $2.0 million retention and $0.8 million co-participation in the layer covering $3.0 million in excess of the $2.0 million retention. This structure is unchanged from 2002. Effective July 1, 2003, each umbrella policy is covered up to $15.0 million compared to $10.0 million in 2002 treaty year. The casualty treaty distinguishes between certified and non-certified terrorism losses. Non-certified terrorism losses are treated like any other losses. The annual aggregate limit for certified terrorism (TRIA) losses is capped at two times each layer's occurrence limit, or $94.4 million. Consistent with the 2002 treaty: nuclear, biological and chemical losses are excluded from the Casualty Excess of Loss treaty; however, our Terrorism Excess of Loss treaty, which is discussed later in this section, does cover these exposures once our $15.0 million annual aggregate retention is met. There is no exclusion for mold or cyber risks in this contract. The following additional exclusions were added to the 2003 - 2004 treaty: 1) "Fortune 500" companies ($8 plus billion in sales); 2) war; 3) asbestos; and 4) pharmaceutical manufacturers. Due to the types of exposures the Company insures, these additional exclusions are not expected to have a material impact on our results.
On November 26, 2002 TRIA legislation was signed into law. The program terminates on December 31, 2005. 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 of America are required to participate in the program. In following this legislation, Selective offers its commercial policyholders an option to purchase terrorism coverage that will provide protection against a TRIA certified event. An event has to cause at least $5.0 million in losses to be certified as an act of terrorism. Each participating insurance company is responsible for paying out a certain amount in claims - a deductible - before Federal assistance becomes available. This deductible is based on a percentage of commercial lines direct earned premiums from the prior calendar year. The deductible equaled or equals: 7% of 2002 commercial lines direct earned premium for the 2003 calendar year, 10% of
2003 commercial direct earned premium for 2004 calendar year and 15% of 2004 commercial direct earned premium for 2005 calendar year. For losses above an insurer's deductible, the federal government will cover 90%, while the insurer contributes 10%. While the provisions of TRIA will serve to mitigate our exposure in the event of a large-scale terrorist attack, our deductible is substantial, approximating $60.0 million in 2003 and $97.0 million in 2004. Therefore, we continue to monitor concentrations of risk. Effective February 1, 2003 and renewed effective January 1, 2004, Selective has a separate Terrorism Excess of Loss treaty that covers $45.0 million in the aggregate in excess of a $15.0 million retention in the aggregate for TRIA, as well as, nuclear, biological and chemical losses not covered by the Act. Any TRIA, nuclear, biological and chemical losses incurred within a calendar year that are retained by the Insurance Subsidiaries under the terms of other reinsurance treaties, discussed earlier in this section, or specifically excluded from those treaties count towards the $15.0 million aggregate retention for the terrorism treaty. The treaty has a 10% return of premium provision if no losses are ceded to the treaty. The 2004 annual treaty cost decreased 8% compared with 2003. During 2003, we did not incur any terrorism losses, nor did we cede any losses to this treaty.
Our surety reinsurance program was revised effective January 1, 2004 to more effectively serve our needs. The Surety Excess of Loss treaty renewal included an increase in Company retention to $1.0 million in 2004 from $0.8 million in 2003 as well as an increase in premium to an estimated $1.8 million for 2004 from $1.6 million in 2003. The Surety Excess of Loss treaty is structured in two layers that cover up to $8.0 million per principal/per loss at 90%, with Selective retaining 10% of the exposure. The Surety 17.5% Quota Share treaty we had in prior years was cancelled effective January 1, 2004. The Company ceded $2.5 million in premium and an estimated $1.0 million in losses to the Surety Quota Share treaty in 2003.
In compliance with New Jersey regulation, the Insurance Subsidiaries ceded premium and no-fault claims for medical benefits in excess of $75,000 to the New Jersey Unsatisfied Claim and Judgment Fund (UCJF). Due to change in New Jersey regulations, the cessions to UCJF will discontinue for policies with effective dates of January 1, 2004 or later. Claims covered under policies issued or renewed prior to January 1, 2004 will continue to be paid by the UCJF.
Although lower interest rates have put pressure on investment returns, we still generated an increase in before-tax investment income to $114.7 million for the year, compared with $103.1 million for 2002 and $96.8 million in 2001. The increase reflects an increased asset base as our overall investment portfolio reached $2.4 billion. This was due to strong operating cash flows of $281.9 million in 2003, compared with $180.1 million in 2002 and $52.7 in 2001, in addition to our convertible debt offering in 2002 which added $116.0 million in assets. Our before-tax portfolio yield was 5.1% in 2003 compared with 5.4% in 2002 and 2001.
We continue to follow an investment philosophy that has historically proven successful. The strategy is to purchase debt securities in sectors that represent the most attractive relative value and maintain a moderate equity exposure. Managing investment risk by adhering to these strategies is intended to protect the interests of our stockholders as well as those of our policyholders and, at the same time, enhance our financial strength and underwriting capacity.
- Buy/hold/sell recommendations published by outside investment advisors and analysts; and
Factors considered, but not limited to, in evaluating potential impairment of equity securities include the following:
- The relationship of market prices per share to book value per share at the date of acquisition and date of evaluation;
- The price-earnings ratio at the time of acquisition and date of evaluation;
- Any buy/hold/sell recommendations or price projections published by outside investment advisors; and
The Company realized gains and losses from the sale of available-for-sale debt and equity securities during 2003, 2002 and 2001. The following table presents the period of time that securities, sold at a loss during these years, were continuously in an unrealized loss position prior to sale:
The following table summarizes, for all available-for-sale securities in an unrealized loss position at December 31, 2003 and 2002, the aggregate fair value and gross pre-tax unrealized loss recorded in our accumulated other comprehensive income, by asset class and by length of time those securities have continuously been in an unrealized loss position:
The following table presents information regarding our available-for-sale debt securities that were in an unrealized loss position at December 31, 2003 by contractual maturity:
Our HR outsourcing company, Selective HR Solutions, Inc., provides human resource administration, including benefits, payroll and employee management services, and risk and compliance management products and services, including workers' compensation insurance. HR outsourcing, by the nature of its product package, provides a high level of day-to-day services to its customers, which we believe will be attractive to small business owners, who can be accessed through existing relationships with our independent agents. Under certain product offerings the company enters into a co-employment relationship with its clients and as such assumes the obligations to pay the salaries, wages and related benefit costs, and payroll taxes of its clients' worksite employees. For additional information regarding the risks associated with this business, refer to the "Risk Factors" section of Item 1. "Business" on page 24.
HR outsourcing net revenues increased 16% to $44.1 million for 2003, compared with $38.1 million for 2002 and $34.4 million for 2001. Net loss decreased to $0.1 million for 2003, compared with $0.7 million for 2002 and $4.2 million for 2001. Although the ramp-up time to sell this product has been longer than we originally anticipated, we are finding increasing support among our agency force for the value-added benefit that HR outsourcing brings to their clients. For 2003, workers' compensation prices were up more than 8% compared with 5% in 2002, while client administration prices rose about 5% compared with 8% in 2002. This stronger pricing is a direct result of our pricing initiatives, which began in 2002, and we expect it to continue to drive further gains into 2004. In addition, cost reduction initiatives that have taken place since 2001 have led to the steadily improving results.
Our managed care company, CHN Solutions, provides workers' compensation and automobile medical claim services, third party administrative services and discounted access to the largest membership based medical provider network in New Jersey while bearing no underwriting risks. Although there is no underwriting risk associated with this business, there is the risk that the unionization of medical providers could impact our ability to maintain and grow our networks, negotiate fee discount arrangements and lease networks to our customers. For additional information regarding the risks associated with this business, refer to the "Risk Factors" section of Item 1. "Business" on page 24.
During 2003, our medical provider network expanded to just over 88,000 locations from 83,000 locations in 2002 and 60,000 locations in 2001. Managed care net revenues decreased to $22.1 million for 2003, compared with $22.5 million for 2002 and $19.1 million for 2001. Net income remained flat at $2.0 million in 2003 compared with 2002, but down from $2.4 million in 2001.. The decrease in net revenue during 2003 was attributable to aggressive competition from several major competitors in New Jersey, as well as our pricing strategy that led to the loss of several large clients. Further impacting net income were increased costs related to litigation, including a purported class action lawsuit. For information regarding this lawsuit, see Item 3. "Legal Proceedings" and Item 8. "Financial Statements and Supplementary Data," Note 18(e) to the consolidated financial statements. Lower revenue and increased litigation costs were offset by significant reductions in operating expenses from the consolidation of two offices as well as lower labor costs from staff reductions. Increases in net revenues during 2002 as compared with 2001 were the result of network and client expansion, largely attributable to the acquisition of NHD, a 16,000-location network that operates in Connecticut and certain regions within the states of Massachusetts, Vermont, and New Hampshire. Increased legal expenses and benefit costs tempered growth in 2002 as compared with 2001.
Our total federal income tax expense increased $10.8 million in 2003 to $21.6 million, compared with $10.8 million in 2002 and $(2.6) million in 2001. These amounts reflect an effective tax rate of 24.6% for 2003, compared with 20.4% in 2002, and (11.1)% in 2001. The increase was attributable to improved underwriting results, increased capital gains on investment sales and higher levels of taxable investment income. The benefit in 2001 is reflective of underwriting losses and higher levels of tax-exempt income in that year. Our effective tax rate differs from the federal corporate tax rate of 35% primarily as a result of tax-exempt investment income and the dividends received deduction.
We have identified the policies described below as critical to our business operations and the understanding of our results of operations. For additional discussion on the application of these and other accounting policies, see Item 8. "Financial Statements and Supplementary Data," Note 2 to the consolidated financial statements. Our preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.
Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the loss to the insurer and the insurer's payment of that loss. To recognize liabilities for unpaid losses and loss expenses, insurers establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported net losses and loss expenses. As of December 31, 2003, the Company had accrued $1.6 billion of loss and loss expense reserves compared with $1.4 billion at December 31, 2002.
Reserves are reviewed by both internal and independent actuaries for adequacy on a periodic basis. Beginning in 2003, we are using independent actuaries to certify the adequacy of our reserves. When reviewing reserves, we analyze historical data and estimate the impact of various factors such as: (i) per claim information; (ii) Company and industry historical loss experience; (iii) legislative enactments, judicial decisions, legal developments in the imposition of damages, and changes in political attitudes; and (iv) trends in general economic conditions, including the effects of inflation. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for
predicting future events. There is no precise method, however, for subsequently evaluating the impact of any specific factor on the adequacy of reserves because the eventual deficiency or redundancy is affected by many factors.
Of the 2,772 asbestos related claims, 1,627 involve four insureds. The case reserves associated with these four insureds amounted to $3.9 million on a net and gross basis as of December 31, 2003. About 70 environmental claims involve approximately 13 landfill sites. The landfill sites account for case reserves of $16.3 million on a gross basis and $16.1 million on a net basis. The remaining claims, which account for $7.5 million of case reserves on a gross basis and $6.7 million on a net basis, involve leaking underground storage tanks and other latent environmental exposures. The overall net survival ratio for asbestos and non-asbestos related claims was 10 years for 2003 and 11 years for 2002 and 2001.
After taking into account all relevant factors, we believe that the reserve for net losses and loss expenses at December 31, 2003, is adequate to provide for the ultimate net costs of claims incurred as of that date. Establishment of appropriate reserves is an inherently uncertain process and there can be no certainty that currently established reserves will prove adequate in light of subsequent actual experience.
Net premiums written equal direct premiums written, plus assumed premiums less ceded premiums. All three components of net premiums written are recognized in revenue over the period that coverage is provided. The vast majority of our net
Policy acquisition costs, which include commissions, premium taxes, fees, and certain other costs of underwriting policies, are deferred and amortized over the same period in which the related premiums are earned. Deferred policy acquisition costs are limited to the estimated amounts recoverable after providing for losses and loss expenses that are expected to be incurred, based upon historical and current experience. Anticipated investment income is considered in determining whether a premium deficiency exists. The methods of making such estimates and establishing the deferred costs are continually reviewed by the Company, and any adjustments therefrom are made in the accounting period in which the adjustment arose.
The Company's pension benefit and postretirement life benefit obligations and related costs are calculated using actuarial concepts, within the framework of Statement of Financial Accounting Standards No. 87 Employers' Accounting for Pensions (SFAS 87) and Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefit Other than Pension (SFAS 106), respectively. Two key assumptions, the discount rate and the expected return on plan assets, are important elements of expense and/or liability measurement. We evaluate these key assumptions annually. Other assumptions involve demographic factors such as retirement age, mortality, turnover and rate of compensation increases.
Changes in the related pension and post-retirement benefit expense may occur in the future due to changes in these assumptions.
Selective Insurance Group, Inc., (Parent) is a holding company whose principal assets are its investments in its subsidiaries. The Parent's primary means of meeting its liquidity requirements is through dividends from these subsidiaries. The payment of dividends from the Insurance Subsidiaries is governed by state regulatory requirements, and these dividends are generally payable only from earned surplus as reported in our statutory Annual Statements as of the preceding December 31. Based upon the 2003 unaudited statutory financial statements, the Insurance Subsidiaries are permitted to pay the Parent in 2004 ordinary dividends in the aggregate amount of approximately $64.0 million. There can be no assurance that the Insurance Subsidiaries will be able to pay dividends to the Parent in the future in an amount sufficient to enable the Parent to meet its liquidity requirements. For additional information regarding regulatory limitations on the payment of dividends by the Insurance Subsidiaries to the Parent and amounts available for the payment of such dividends, see Item 8. "Financial Statements and Supplementary Data," Note 8 to the consolidated financial statements.
operating cash flows from the Diversified Insurance Services segment, which are only restricted by ongoing operational needs of those businesses, resulted in dividends to the Parent of $8.9 million in 2003 with no dividends being made in 2002, and $5.0 million in 2001.
The Parent also generates cash from the sale of its common stock under various stock plans, the dividend reinvestment program, and from investment income, all of which approximated $10.0 million and reduced the Parent's annual cash requirements from $33.1 million to $23.1 million.
The Parent's cash requirements include principal and interest payments on the senior convertible notes, various notes payable and convertible subordinated debentures, dividends to stockholders and general operating expenses. As indicated in the table on page 43, the Company has contractual obligations pursuant to various notes payable of $24.0 million in 2004. As part of our senior convertible note issuance in 2002, the Company established an irrevocable trust in the approximate amount of $72.0 million. As of December 2003, approximately $53.0 million remains in the trust to provide funds for the notes with maturities in the next two years. The 2002 convertible note issuance has a contingent conversion feature that allows conversion of the notes when the stock price has maintained a 20% premium to the conversion price of $29.29, or $35.15, for 20 of 30 consecutive trading days ending on the last trading day of the previous calendar quarter. On any business day in the following calendar quarter, the holders may surrender notes for conversion into shares of common stock, or cash at the Company's option. If this trigger is met, it will add 3.9 million shares to our diluted earnings per share calculation. See Item 8. "Financial Statements and Supplementary Data," Note 7(a) to the consolidated financial statements for additional information on our senior convertible notes.
Financial instruments that could potentially subject the Company to concentration of credit risk include accounts receivable associated with our HR Outsourcing subsidiary, which acts as a co-employer with certain clients. As a co-employer, we contractually assume substantial employer rights, responsibilities and risks of our clients' employees, who are considered co-employees. Co-employer payroll and related service fees that were earned, but unpaid, were $15.5 million as of December 31, 2003 and $12.2 million as of December 31, 2002. Certain states, in which we conduct this business, limit a co-employer's liability for earned payroll to minimum wage. This would reduce the Company's potential liability for accrued co-employer payroll. In the event that a client does not pay their related payroll and service fees prior to the applicable payroll date, the Company has the right to cancel the co-employer contract or, at its option, require letters of credit or other collateral. As of December 31, 2003, the maximum exposure to any one account for earned, but unpaid, payroll is approximately $1.2 million.
Cash provided by operating activities amounted to $281.9 million in 2003, $180.1 million in 2002, and $52.7 million in 2001. This increase in 2003 is a result of: i) a 16% increase in net premiums written and improved underwriting profitability, driven by rate increases in renewal premiums; and ii) increased investment income from a larger investment portfolio.
Total liabilities increased 13%, or $311.3 million, to $2.7 billion at December 31, 2003 from December 31, 2002. Loss and loss expense reserves increased $184.4 million as a result of growth in policy count and exposure and adverse loss development of approximately $15.0 million. Increased premium volume resulted in higher unearned premium reserves of $92.8 million. Notes payable decreased $24.0 million due to a scheduled payment made in May 2003 on the 8.63% Senior Notes of $6.0 million and a scheduled payment made in August 2003 on the 8.77% Senior Notes of $18.0 million. Deferred federal income tax liability increased $21.4 million to a payable of $12.7 million at December 31, 2003 from a receivable of $8.7 million at December 31, 2002 primarily due to the increase in unrealized gains in the debt and equity portfolios. Commissions payable increased to $53.7 million at December 31, 2003 compared with $37.5 million at December 31, 2002. This increase is attributable to improved underwriting profitability, which generated $24.6 million in agent profit sharing commissions compared with $16.5 million last year, as well as increased premium-based commission amounts due to higher premium levels. Accrued salaries and benefits increased $12.0 million resulting from the rising costs of employee benefits as well as the increase in incentive-based employee profit sharing of $5.5 million.
Our future cash payments associated with contractual obligations pursuant to operating leases for office space and equipment, senior convertible notes, convertible subordinated debentures and notes payable as of December 31, 2003 are summarized below:
the last trading day of such calendar quarter. On any business day in the following calendar quarter, the holders may surrender notes for conversion into shares of common stock, or cash at the Company's option. If this trigger is met, it will add 3.9 million shares to our diluted earnings per share calculation. We expect to have the capacity to repay and/or refinance all of these obligations as they come due.
Selective Insurance Group, Inc., headquartered in Branchville, New Jersey, is a holding company for five property and casualty insurance companies that offer primary and alternative market insurance for commercial and personal risks. Through other subsidiaries, the company offers medical claim management services; human resources benefits and administration services; risk management products and services; and flood insurance policy, administration and claim services.
The consolidated financial statements include the accounts of Selective Insurance Group, Inc. (Selective) and its subsidiaries (collectively, the "Company") and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). All material intercompany accounts and transactions have been eliminated.
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 ("the Interpretation"). The Interpretation was originally effective for public companies at the beginning of fiscal periods beginning after June 15, 2003. In October 2003, the FASB agreed to defer the effective date of the Interpretation to the end of fiscal periods ending after December 15, 2003. In December 2003, the FASB further deferred the effective date of the Interpretation to the end of fiscal periods ending after March 15, 2004, for potential variable interest entities other than those commonly referred to as special-purpose entities. Since the Company has no entities commonly referred to as special-purpose entities, we will adopt the Interpretation as of March 31, 2004. The Company does not believe the adoption of the Interpretation will have a material impact on its results of operations or financial condition.
Certain amounts in the Company's prior years' consolidated financial statements and related footnotes have been reclassified to conform with the 2003 presentation. Such reclassification had no effect on the Company's net income or stockholders' equity.
Held-to-maturity debt securities are carried at amortized cost, which is calculated using the scientific method, because management has the ability and intent to hold such securities until maturity. Available-for-sale debt and equity securities are carried at fair value. Limited partnerships are carried using the equity method, which approximates fair value. Net unrealized gains and losses on held-to-maturity debt securities are not reflected in accumulated other comprehensive income. Net unrealized gains and losses on available-for-sale debt and equity securities, net of deferred income tax effect, are included as a separate component of accumulated other comprehensive income. No material investments of the Company were non-income producing for the years ended December 31, 2003 and 2002.
(1) Investment Securities: Fair values for held-to-maturity debt securities are based on quoted market prices where available, or from independent pricing services. The fair values of available-for-sale debt and equity securities, which also represent their carrying amounts, are based on quoted market prices. Other investments are carried at either cost or the equity method, which approximates fair value.
8.63% Senior Notes due May 4, 2007, and the 8.87% Senior Notes due May 4, 2010 were estimated using a cash flow analysis based upon the Company's current incremental borrowing rate for the remaining term of the loan.
See Note 4 for a summary table of the fair value and related carrying amounts of financial instruments.
The Company estimates an allowance for doubtful accounts on its premiums, other trade receivables, and reinsurance recoverables. The allowance for premiums and other trade receivables is based on historical write-off percentages adjusted for the effects of current and anticipated trends. The allowance for reinsurance recoverables is based on the specific identification method. The allowance for premium receivables was $3.1 million at December 31, 2003 and $2.8 million at December 31, 2002. The allowance for other trade receivables was $1.1 million at December 31, 2003 and $0.9 million at December 31, 2002. The allowance for reinsurance recoverables was $2.3 million at December 31, 2003 and $1.5 million at December 31, 2002.
The Company records its ceded reinsurance transactions on a gross basis which results in reinsurance recoverables on losses and loss expenses and ceded unearned premiums (prepaid reinsurance premiums). The Company also discloses reinsurance amounts for ceded premiums written and earned and ceded losses and loss expenses incurred. See Note 5 for more information on reinsurance.
By using both individual estimates of reported claims and generally accepted actuarial reserving techniques, the Company estimates the ultimate net liability for losses and loss expenses. While the ultimate actual liability may be higher or lower than reserves established, the Company believes the reserves to be adequate. Any changes in the liability estimate may be material to the results of operations in future periods. The Company does not discount to present value that portion of its loss reserves expected to be paid in future periods; however, the loss reserves include anticipated recoveries for salvage and subrogation claims. Such salvage and subrogation amounted to $43.6 million for 2003 and $40.5 million for 2002.
The Company establishes reserves for dividends to policyholders on certain workers' compensation policies. These dividends are based on the policyholders' loss experience. The dividend reserves are established based on past experience, adjusted for the effects of current developments and anticipated trends. The expense for these dividends is recognized over a period that begins at policy inception and ends with the payment of the dividend. The expense recognized for these dividends was $5.1 million in 2003, $5.8 million in 2002, and $8.3 million in 2001. The Company issues no policies that entitle the policyholder to participate in the earnings or surplus of the Insurance Subsidiaries.
During 2002, the Company completed the acquisition of NHD, a 16,000-location network that operates in Connecticut and certain regions within the states of Massachusetts, Vermont, and New Hampshire. Consumer Health Network Plus, LLC (CHN), which is included in our Diversified Insurance Services segment, acquired NHD for $4.0 million, including certain acquisition and financial performance related costs, as well as additional consideration of $0.8 million that was paid in 2003. CHN may be further required to pay additional consideration of approximately $0.3 million in 2004 based on certain criteria related to future financial performance. In connection with the acquisition, the Company recorded intangible assets of $1.7 million for network physician contracts and $0.7 million for existing client contracts. The network physician contracts have
(f) The following table summarizes, for all securities in an unrealized loss position at December 31, 2003, the aggregate fair value and gross pre-tax unrealized loss recorded in our accumulated other comprehensive income, by asset class and by length of time those securities have been in an unrealized loss position:
At December 31, 2003, the Company had three equity securities with a fair value of $18.9 million in an unrealized loss position of $0.3 million. All of these securities had fair values no less than 98% of cost, and the Company believes these declines to be temporary.
Proceeds from the sale of available-for-sale securities were $239.4 million during 2003, $240.3 million during 2002, and $101.6 million during 2001.
(i) Certain investments were on deposit with various state regulatory agencies to comply with insurance laws with carrying values of $29.5 million as of December 31, 2003 and $26.1 million at December 31, 2002.
(j) The Company is not exposed to significant concentrations of credit risk within its investment portfolio.
(l) The components of comprehensive income, both gross and net of tax, for 2003, 2002 and 2001 are as follows:
The Company's carrying amounts shown in the table are included in the consolidated balance sheets. The convertible subordinated debentures are included in "other liabilities" on the consolidated balance sheets. See Note 2(e) for the methods and assumptions used by the Company in estimating the fair values of its financial instruments.
stipulated amounts arising from any one occurrence or event and quota share reinsurance treaties where the Company and the reinsurer share the amount of premium and covered losses based on a stated percentage. The reinsurance arrangements enable greater diversification of business and can serve to limit the maximum net loss on catastrophes and large and unusually hazardous risks.
The Insurance Subsidiaries are contingently liable to the extent that any reinsurer becomes unable to meet its contractual obligations. The Company reviews the financial condition of its existing reinsurers for any potential write-offs of uncollectible amounts as well as suitability to remain on the reinsurance program. The Company had prepaid reinsurance premiums and net reinsurance recoverables with American Re-Insurance Company (American Re) (rated "A+ Superior" by A.M. Best Company, Inc.) that amounted to $53.6 million at December 31, 2003 and $62.0 million at December 31, 2002, a state insurance fund for $71.3 million in 2003 and $64.9 million in 2002 and the federal government's National Flood Insurance Program for $52.2 million in 2003 and $33.0 million in 2002. The Company has a $38.7 million trust fund agreement with American Re that secures a portion of their recoverable amounts.
In addition to our flood business, ceded written and earned premium increased in 2003 compared with 2002 due to increased direct premium written and $4.3 million from our Terrorism treaty placed on February 1, 2003.
Direct losses and loss expenses incurred increased in 2003 compared with 2002 primarily due to i) $40.2 million increase in flood losses which are 100% ceded to the federal government's National Flood Insurance Program; ii) $21.4 million increase in losses from catastrophes; and iii) an increase in exposure attributable to premium growth.
In 2002, the Company issued $305 million aggregate principal amount of 1.6155% senior convertible notes (Convertible Notes), due September 24, 2032, at a discount of 61.988% resulting in an effective yield of 4.25%. The Company recorded gross proceeds of $116.0 million along with $3.2 million of deferred charges, which are amortized over the life of the note, in connection with debt issuance costs. Net proceeds of approximately $72.0 million were used to fund an irrevocable trust to provide for certain payment obligations in respect of the Company's outstanding debt obligations. The Company paid as a capital contribution $40.0 million to the Company's insurance operating subsidiaries. Interest on the Convertible Notes is payable semi-annually at a rate of 1.6155% beginning March 24, 2003 until September 24, 2009, to holders of record at the close of business on the preceding March 9 or September 9, respectively. After that date, cash interest will not be paid on the Convertible Notes prior to maturity unless contingent cash interest becomes payable. Contingent cash interest becomes payable if the average market price of a Convertible Note for the applicable five trading day period equals 120% or more of the sum of the Convertible Note's issue price, accrued original issue discount and accrued cash interest, if any, for a Convertible Note to the day immediately preceding the relevant six-month period. The contingent cash interest payable per Convertible Note in respect of any quarterly period within any six-month period will equal the greater of (a) any regular cash dividends per share paid by the Company on our common stock during that quarterly period multiplied by the then applicable
(1) On May 4, 2000, the Company entered into a $30.0 million and a $61.5 million note purchase agreement with various lenders covering the 8.63% and 8.87% Senior Notes, respectively.
(2) On August 12, 1994, the Company entered into a $54.0 million note purchase agreement with various lenders covering the 8.77% Senior Notes. Commencing on August 1, 2003, the Company paid $18.0 million in principal, together with accrued interest thereon for the 8.63% Senior Notes. This $18.0 million principal payment is required annually through August 1, 2005. The unpaid principal amount of the 8.77% Senior Notes accrues interest and is payable semiannually on February 1 and August 1 of each year, until the principal is paid in full.
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. At December 31, 2003, the amount available for dividends to stockholders under said restrictions was $226.4 million for the 1994 Senior Notes and $188.7 million for the 2000 Senior Notes.
On November 4, 2003, the Board of Directors authorized a 2.5 million share common stock repurchase program scheduled to expire on November 30, 2005. This program replaces the Company's previous common stock repurchase program authorized by the Board of Directors on July 29, 1996 and extended on July 28, 1998, May 7, 1999, November 2, 1999, February 3, 2000, May 31, 2001 and May 31, 2002, which allowed the Company to repurchase up to 8.0 million shares. No shares were repurchased under the current program and 7.3 million shares at a total cost of $140.5 million were repurchased under the expired program. The Company acquired no shares in 2003, 11,000 shares for $0.2 million in 2002, and 0.3 million shares for $7.5 million in 2001.
The Company maintains a dividend reinvestment plan. On November 18, 2003, the Company registered with the Securities and Exchange Commission 1,012,873 shares of which 12,873 were previously registered unissued shares of the dividend reinvestment plan. At December 31, 2003, 998,830 shares of common stock were available for issuance. Shares purchased under this plan are issued at fair value. As of December 31, 2003, the Company had an additional 5.7 million shares reserved for various stock compensation plans, retirement plans and debt offerings.
Selective and its subsidiaries provide services to each other in the normal course of business. These transactions totaled $27.1 million in 2003, $32.1 million in 2002 and $14.1 million in 2001. These transactions were eliminated in all consolidated financial statements.
Income or (loss) from continuing operations before federal income tax by segment:
During September 2002, the Company issued senior convertible notes with a contingent conversion feature that becomes effective if the Company's common stock trades at or above $35.15 for 20 out of 30 consecutive trading days at the end of a calendar quarter. If the contingent conversion feature is triggered, the Company would have to include approximately 3.9 million shares in the diluted EPS calculation. For additional discussion of these senior convertible notes, see Note 7(a).
Based on our tax loss carryback availability, and the historic levels of current taxable income and pretax financial statement income, we believe that more likely than not, the existing deductible temporary differences will reverse during periods in which we generate net taxable income or have adequate carryback availability. As a result, the Company has no valuation allowance recognized for deferred tax assets.
Stockholders' equity reflects tax benefits related to compensation expense deductions for stock options exercised of $3.4 million at December 31, 2003, $2.4 million at December 31, 2002, and $1.3 million at December 31, 2001.
In December 2001, the Company's management adopted a plan to divest itself of its 100% ownership interest in PDA. During May 2002, the Company sold all of the issued and outstanding shares of capital stock and certain software applications developed by PDA for proceeds of $16.3 million at a net gain of $0.5 million. This gain is included in discontinued operations, on the consolidated statements of income. The tax benefit included in the loss from discontinued operations was $0.4 million for 2002 and $0.2 million for 2001. The amount of tax expense in 2002 for the gain on disposition of discontinued operations is $0.3 million. As a result of the sale, $5.0 million of capitalized software development cost were recovered. We have reclassified prior period amounts to present the operating results of PDA as a discontinued operation.
The Company terminated, effective December 31, 1997, a nonqualified defined benefit retirement income plan for nonemployee Directors. The estimated accrued costs for this plan were not material. As part of the termination, the present value of each Director's future benefits, as of that date, was converted into units based on the fair value of Selective common stock. The original termination called for the cash value of these units based upon the fair value of Selective common stock on retirement date to be distributed to each Director, or at each Director's election, over a period of fifteen years after such retirement. On May 8, 2002, the shareholders approved the conversion of the units issued under the termination plan into shares of Selective stock. All of the shares issued under this conversion have been deferred by the participants for receipt
The Company offers a voluntary defined contribution 401(k) retirement savings plan to employees who meet eligibility requirements. The plan allows employees to make voluntary contributions to a number of diversified investment options including the Company's common stock, on a before and/or after-tax basis. Shares of the Company's common stock issued under this plan were 14,251 during 2003, 23,496 during 2002 and 23,095 during 2001.
Effective July 1, 2002, the Company began offering a nonqualifed deferred compensation plan (deferred compensation plan) to a group of management or highly compensated employees (the Participants). The plan provides the Participants the opportunity to elect to defer receipt of specified portions of compensation and to have such deferred amounts treated as if invested in specified investment options as a method of rewarding and retaining such employees. A Participant in the plan may elect to defer compensation or awards to be received from the Company or an affiliated entity, including up to: (i) 50% annual base salary; (ii) 100% of incentive compensation, and/or (iii) a percentage of other compensation as otherwise designated by the Administrator of the plan.
In addition to the deferrals elected by the Participants, the Company may choose at any time to make discretionary Company contributions on a consistent basis to the deferral accounts of all Participants in its sole discretion. No discretionary contributions were made. The Company may also choose to make matching contributions to the deferral accounts of some or all Participants to the extent a Participant did not receive the maximum matching contribution permissible under the Selective Insurance Retirement Savings Plan due to limitations under the Internal Revenue Code or such plan.
The Company also provides life insurance benefits ("postretirement benefits") for retired employees. Substantially all the Company's employees may become eligible for these benefits if they reach retirement age while working for the Company and meet a minimum of ten years of eligibility service. Those who retired prior to January 1, 1991 receive life insurance coverage which decreases over ten years to a current ultimate value of $5,000 per retiree. Those retiring on or after January 1, 1991 receive life insurance coverage in an amount equal to 50% of their annual salary amount in effect at the end of their active career to a maximum benefit of $100,000. Those retiring on or after January 1, 2002 receive life insurance coverage in an amount equal to 50% of their annual salary amount in effect at the end of their active career to a maximum benefit of $35,000.
As of December 31, 2003, the Company adopted the revised FASB statement of Financial Accounting Standards No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits" (FAS 132). The revised FAS 132 addresses disclosure items only and does not address measurement or recognition. The revised FAS 132 requires additional disclosures to those required by the original statement, all of which are included for all periods presented.
Our strategy is to utilize a long-term time horizon to design the portfolio in such a manner as for the plan assets to achieve an appropriate balance between equity and debt securities, alternative investments and cash. The asset allocation is a function of the relative attractiveness of each asset class and its risk/reward characteristics.
Our investment policy limits our asset allocation in equity investments to a maximum of 60% of the total plan assets and alternative investments to a maximum of 20% of the total plan assets. A combination of equity investments and alternative investments is limited to 70% of the total market value of the plan assets. Each individual category of private equity, hedge funds and real estate has a limit of 10% of total plan assets. Additionally, a limit of 10% of total plan assets is placed on non-U.S. equity investments, while no more than 10% of total plan assets may be invested in the stock of Selective Insurance Group, Inc., the plan sponsor. A limit of 10% of the plan's assets or 20% of debt securities may be invested in non-investment grade securities.
Our 8.25% expected return on plan assets is based primarily on the plan's long-term historical returns. Our expected return is supported by our actual 8.6% annualized 10 year return and 9.3% annualized return achieved since plan inception for all plan assets. In addition to the plan's historical returns, we consider long-term historical rates of return on the respective asset classes.
The Company has adopted the pro forma footnote disclosure-only provisions of FAS 123. See Note 2(n) for the pro forma effect on net income and earnings per share if the Company had adopted FAS 123. The fair value of each option grant is estimated on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions for 2003, 2002 and 2001:
The weighted-average fair value of options and stocks granted per share, during the year for 2003, 2002 and 2001 is as follows:
A summary of the option transactions under the stock option plans is as follows:
The following table summarizes information about stock options outstanding and exercisable under the stock option plans at December 31, 2003:
Under the Company's Stock Option Plan II, 836,046 shares of the Company's common stock are available for issuance at December 31, 2003. The plan permits the granting of qualified and nonqualified stock options to employees, which may or may not have SARs attached. Options and related SARs may be granted at not less than fair value on the date of the grant and may be
subject to certain vesting periods as determined by the Company's Salary and Employee Benefits Committee (Committee). Each grant must be exercised within ten years from the date of the grant. Under this plan, the Company did not grant any options in 2003, but did grant 146,750 in 2002, and 161,350 in 2001.
Under the Company's Stock Option Plan II, the Committee may, at its discretion, make restricted or unrestricted grants of common stock, or grant rights to receive common stock, to employees in addition to or in substitution for options and/or SARs granted. The Company did not grant restricted shares in 2003, but did grant 208,588 in 2002, and 235,342 in 2001, and forfeited shares of 31,348 in 2003, 39,415 in 2002, and 52,969 in 2001. Each such grant must be expressly subject to the attainment of one or more performance-related objectives for certain executive officers, and may be subject to the attainment of one or more performance-related objectives for other employees, as determined by the Committee and set forth in an award agreement. Each such grant also is subject to a vesting period or other terms, conditions, restrictions and limitations as determined by the Committee at its discretion and set forth in an award agreement.
Unearned stock compensation is recognized for the fair value of the restricted shares when granted and is accounted for as a reduction of stockholders' equity. This balance is amortized into compensation expense over the 4 year length of the restriction along with the adjustment for the increases or decreases in the fair value of the Company's common stock for share awards subject to performance-related objectives. Unearned stock compensation of $4.0 million in 2003, $7.2 million in 2002, and $6.8 million in 2001 was recorded as a reduction of stockholders' equity and the amounts amortized to compensation expense were $3.6 million in 2003, $3.8 million in 2002, $3.0 million in 2001. This plan expired on September 1, 2002 and was replaced with the Company's Stock Option Plan III.
Under the Company's Stock Option Plan III, the Committee may, at its discretion, make restricted or unrestricted grants of common stock, or grant rights to receive common stock, to employees in addition to or in substitution for options and/or SARs granted. The Company granted total restricted shares of 264,069 for 2003 and 11,000 for 2002 and forfeited shares of 10,667 in 2003 with no shares being forfeited in 2002. Each such grant must be expressly subject to the attainment of one or more performance-related objectives for certain executive officers, and may be subject to the attainment of one or more performance-related objectives for other employees, as determined by the Committee and set forth in an award agreement. Each such grant also is subject to a vesting period or other terms, conditions, restrictions and limitations as determined by the Committee at its discretion as set forth in an award agreement. Dividends earned on the restricted shares are reinvested in the Company's common stock at fair value. The Company issued through the dividend reinvestment feature (net of forfeitures), 5,882 restricted shares in 2003 and 75 restricted shares in 2002.
Under the terms of the employee stock purchase plan, the number of shares of common stock available to be purchased is 318,062. This plan is available to all employees who meet the eligibility requirements and provides for the issuance of options to purchase shares of common stock. The purchase price is the lower of: (i) 85% of the closing market price at the time the option is granted or (ii) 85% of the closing price at the time the option is exercised. The Company issued shares to employees in the amount of 66,463 in 2003, 64,869 in 2002, and 72,460 in 2001.
Under the terms of the agents' stock purchase plan, the number of shares of common stock available to be purchased is 727,816. This plan provides for quarterly offerings in which independent insurance agents can purchase the Company's common stock at a 10% discount with a one year restricted period during which the shares purchased cannot be sold or transferred. Purchases made prior to the December 1, 2001 quarterly offering were discounted at 5% with no holding restrictions applied. The Company issued shares to agents in the amount of 73,467 in 2003, 69,341 in 2002, and 40,883 in 2001 and charged to expense $0.2 million in 2003, $0.2 million in 2002 and $0.1 million in 2001.
In 1994, certain officers of Selective exercised stock options by signing promissory notes in payment for the stock, totaling $1.0 million. The Company's noninterest bearing promissory notes are secured by the common stock shares issued upon exercise, which are held by the Company as collateral. The promissory notes are full recourse and subject to certain employment requirements. The outstanding principal amount was $0.1 million at December 31, 2003 and $0.2 million at December 31, 2002.
(a) Reserves established for liability insurance, written primarily in the general liability line of business, continue to reflect exposure to environmental claims, both asbestos and non-asbestos. These claims have arisen primarily under older policies containing exclusions for environmental liability which certain courts, in interpreting such exclusions, have determined do not bar such claims. The emergence of these claims is slow and highly unpredictable. Since 1986, policies issued by the Insurance Subsidiaries have contained a more expansive exclusion for losses related to environmental claims. There are significant uncertainties in estimating our exposure to environmental claims (for both case and IBNR reserves) resulting from lack of historical data, long reporting delays, uncertainty as to the number and identity of claimants and complex legal and coverage issues. Legal issues which arise in environmental cases include the determination of whether a case is one for a federal or state forum, choice of law, causation, admissibility of evidence, allocation of damages and contribution among joint defendants, successor and predecessor liability and whether direct action against insurers can be maintained. Coverage issues which arise
At December 31, 2003, our reserves for environmental claims amounted to $42.3 million on a gross basis (including case reserves of $30.8 million and IBNR reserves of $11.5 million) and $36.5 million on a net basis (including case reserves of $28.8 million and IBNR reserves of $7.7 million). There are a total of 3,058 environmental claims, including multiple claimants who are associated with the same site or incident. Of these, 2,772 are asbestos related, of which 1,627 involve four insureds. The total case reserves associated with these four insureds amounted to $3.9 million on a net and gross basis. The total case reserves for asbestos related claims amounted to $7.0 million on a gross basis and $6.0 million on a net basis. About 70 of the total environmental claims involve 13 landfill sites. The landfill sites account for case reserves of $16.3 million on a gross basis and $16.1 million on a net basis. The remaining claims, which account for $7.5 million of case reserves on a gross basis and $6.7 million on a net basis, involve leaking underground storage tanks and other latent environmental exposures.
We have established a range of reasonably possible IBNR losses for non-environmental net claims of approximately $661.5 million to $818.4 million at December 31, 2003 and of approximately $531.7 million to $674.6 million at December 31, 2002. A low and high reasonable IBNR selection was derived primarily by considering the range of indications calculated using standard actuarial techniques. Our net IBNR reserves for non-environmental claims, including loss expense reserves, were $733.7 million at December 31, 2003 and $588.5 million at December 31, 2002.
(b) The Company purchases annuities from life insurance companies to fulfill obligations under claim settlements which provide for periodic future payments to claimants. As of December 31, 2003, the Company had purchased such annuities in the amount of $11.0 million for settlement of claims on a structured basis for which the Company is contingently liable. To the Company's knowledge, none of the issuers of such annuities have defaulted in their obligations thereunder.
In addition, certain leases for rented premises and equipment are noncancelable, and liability for payment will continue even though the space or equipment may no longer be in use.
At December 31, 2003, the total future minimum rental commitments under noncancelable leases was $23.9 million and such yearly amounts are as follows:
(d) The Company has additional investment commitments for its limited partnership investments of up to $32.4 million. There is no certainty that any additional investment will be required. See Note 3(k) for additional discussion of our investments in limited partnerships.
(e) On May 21, 2003, a purported class action lawsuit was brought in the Superior Court of New Jersey, Law Division - Camden County, against Consumer Heath Network Plus, LLC (CHN), Alta Services, LLC, and Selective Insurance Company of America (SICA) together with ten other unrelated defendants. The lawsuit alleges that the defendants breached participating provider agreements and insurance policies and were unjustly enriched. We are vigorously defending this action, and the Company and the other defendants filed a Motion to Dismiss. A hearing was held on the Motion and the Court ordered the plaintiffs to amend their complaint by March 10, 2004. Since the lawsuit remains in its early stages, management cannot at this time provide a meaningful estimate or range of estimates of a potential loss, if any.
The Insurance Subsidiaries prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the various state insurance departments of domicile. Prescribed statutory accounting practices include state laws, regulations and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). Permitted statutory accounting practices encompass all accounting practices that are not prescribed; such practices differ from state to state, may differ from company to company within a state and may change in the future. The Insurance Subsidiaries do not utilize any permitted statutory accounting practices that materially affect the determination of statutory surplus, statutory net income or risk-based capital. As of December 31, 2003 the various state insurance departments of domicile have adopted the NAIC Accounting Practices and Procedures manual, version as of March 2003, (NAIC SAP) in its entirety, as a component of prescribed or permitted practices.
The Company's combined statutory capital and surplus was $666.2 million (unaudited) in 2003 and $549.4 million in 2002. The Company's combined statutory net income was $53.8 million (unaudited) in 2003, $29.4 million in 2002 and $21.4 million in 2001.
The Company is required to maintain certain minimum amounts of statutory surplus to satisfy their various state insurance departments of domicile. These risk-based capital (RBC) requirements for property and casualty insurance companies are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. Based upon the Insurance Subsidiaries 2003 unaudited statutory financial statements, their combined total adjusted capital exceeded the authorized control level RBC by 4.7:1, as defined by the NAIC.
3. See Note 7(b) and Note 8 to the consolidated financial statements and Financial Review for a discussion of dividend restrictions.
4. These ranges of high and low prices of the Company's common stock, as reported by The Nasdaq National Market, represent actual transactions. All price quotations do not include retail markups, markdowns and commissions. The range of high and low prices for common stock for the period beginning January 1, 2004 and ending January 31, 2004 was $35.60 to $31.72 and the last sale price on January 31, 2004 was $35.40.