UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark one)


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

For the fiscal year ended December 31, ~~2006~~2007


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

For the transition period from to .

Commission file number 0-8641

SELECTIVE INSURANCE GROUP, INC.

(Exact name of registrant as specified in its charter)


New Jersey		22-2168890
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

40 Wantage Avenue, Branchville, New Jersey		07890
(Address of Principal Executive Office)		(Zip Code)

Registrant’s telephone number, including area code: (973) 948-3000

Securities registered pursuant to Section 12(b) of the Act:


~~Registrant’s telephone number, including area code:~~Title of Each Class		~~(973) 948-3000~~Name of Each Exchange on Which Registered
~~Securities registered pursuant to Section 12(b) of the Act:~~
7.5% Junior Subordinated Notes due September 27, 2066		New York Stock Exchange

Common Stock, par value $2 per share		NASDAQ Global Select Market

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

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

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


		þ Yes o No

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


		o Yes þ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.


		þ Yes o No

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


		o

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

~~Large accelerated filer~~þ ~~Accelerated filer~~o


Large accelerated filerþ	Accelerated filero	Non-accelerated filero	Smaller reporting companyo
		(Do not check if a smaller reporting company)

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


		o Yes þ No

The aggregate market value of the voting Common stock held by non-affiliates of the registrant, based on the closing price on the NASDAQ Global Select ~~Market®,~~Market, was ~~$1,585,015,215~~$1,393,617,821 on June 30, ~~2006.~~2007.

As of February ~~13, 2007,~~15, 2008, the registrant had outstanding ~~56,995,648~~53,869,967 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the ~~2007~~2008 Annual Meeting of Stockholders to be held on April 24, ~~2007~~2008 are incorporated by reference into Part III of this report.

SELECTIVE INSURANCE GROUP, INC.
Table of Contents


	Page No.

PART I.
			~~Page No~~
~~PART I.~~
Item 1.	Business			3

Item 1A.	Risk Factors			2123

Item 1B.	Unresolved Staff Comments			2832

Item 2.	Properties			2832

Item 3.	Legal Proceedings			2832

Item 4.	Submission of Matters to a Vote of Security Holders			2832

PART II.
~~PART II.~~
Item 5.	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			2933

Item 6.	Selected Financial Data			3135

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			3337

Forward-looking Statements		3337

Introduction		3337

Critical Accounting Policies and Estimates		3337

Financial Highlights of Results for Years Ended December 31, 2007, 2006, and 2005		45

Results of Operations and Related Information by Segment		4246

Financial Condition, Liquidity and Capital Resources		55
	~~Federal Income Taxes~~			58
	~~Adoption of Accounting Pronouncements~~			59
~~Item 7A.~~	~~Quantitative and Qualitative Disclosures About Market Risk~~			59
~~Item 8.~~	~~Financial Statements and Supplementary Data~~			61
	~~Consolidated Balance Sheets as of December 31, 2006 and 2005~~			6260

	~~Consolidated Statements of~~Federal Income ~~for the Years Ended December 31, 2006, 2005 and 2004~~Taxes			63

Adoption of Accounting Pronouncements		63

~~Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2006, 2005~~Item 7A. Quantitative and ~~2004~~Qualitative Disclosures About Market Risk		64

Item 8. Financial Statements and Supplementary Data		67

Consolidated Balance Sheets as of December 31, 2007 and 2006		68

Consolidated Statements of Income for the Years Ended December 31, 2007, 2006 and 2005		69

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2007, 2006 and 2005		70

Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 ~~2005~~ and ~~2004~~2005		6571

	Notes to Consolidated Financial Statements			6672

Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			98
~~Item 9A.~~	~~Controls and Procedures~~			98
~~Item 9B.~~	~~Other Information~~			~~100~~103

Item 9A. Controls and Procedures
~~PART III.~~103

Item ~~10.~~	~~Directors and Executive Officers of the Registrant~~9B. Other Information			~~100~~105

PART III.

Item 10. Directors, Executive Officers and Corporate Governance		105

Item 11.	Executive Compensation			~~100~~105

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			~~100~~105

Item 13.	Certain Relationships and Related Transactions, and Director Independence			~~100~~105

Item 14.	Principal Accountant Fees and Services			~~100~~105

~~EX-3.1: RESTATED CERTIFICATE OF INCORPORATION~~Exhibit 10.5e
~~EX-10.5.D: AMENDMENT TO THE 2005 OMNIBUS STOCK PLAN AMENDMENT~~Exhibit 10.7a
~~EX-10.15.A: AMENDMENT TO THE STOCK PURCHASE PLAN~~Exhibit 10.14b
~~EX-18: LETTER REGARDING CHANGE IN ACCOUNTING PRINCIPLE~~Exhibit 10.14c
~~EX-21: SUBSIDIARIES OF SELECTIVE INSURANCE GROUP INC~~Exhibit 10.14d
~~EX-23.1: CONSENT OF KPMG LLP~~Exhibit 21
~~EX-24.1: POWER OF ATTORNEY~~Exhibit 23.1
~~EX-24.2: POWER OF ATTORNEY~~Exhibit 24.1
~~EX-24.3: POWER OF ATTORNEY~~Exhibit 24.2
~~EX-24.4: POWER OF ATTORNEY~~Exhibit 24.3
~~EX-24.5: POWER OF ATTORNEY~~Exhibit 24.2
~~EX-24.6: POWER OF ATTORNEY~~Exhibit 24.5
~~EX-24.7: POWER OF ATTORNEY~~Exhibit 24.6
~~EX-24.8: POWER OF ATTORNEY~~Exhibit 24.7
~~EX-24.9: POWER OF ATTORNEY~~Exhibit 24.8
~~EX-24.10: POWER OF ATTORNEY~~Exhibit 24.9
~~EX-24.11: POWER OF ATTORNEY~~Exhibit 24.10
~~EX-31.1: CERTIFICATION~~Exhibit 24.11
~~EX-31.2: CERTIFICATION~~Exhibit 31.1
~~EX-32.1: CERTIFICATION~~Exhibit 31.2
~~EX-32.2: CERTIFICATION~~Exhibit 32.1
~~EX-99.1: GLOSSARY OF TERMS~~Exhibit 32.2
Exhibit 99.1

PART I

Item 1. Business.

Overview

Selective Insurance Group, Inc., through its subsidiaries, (collectively known as “Selective” or ~~the “Company”~~“the Company”) offers property and casualty insurance products and diversified insurance services and products. Selective Insurance Group, Inc. was incorporated in New Jersey in ~~1977. Its principal property~~1977 and ~~casualty insurance subsidiary was organized in New Jersey in 1926. Its~~its main offices are located in Branchville, New Jersey. Selective Insurance Group, Inc.’s Common Stock is publicly traded on the NASDAQ Global Select Market under the symbol, “SIGI.”

Selective classifies its ~~businesses~~business into three operating segments:

	•		Insurance Operations, which sells property and casualty insurance products and services primarily in 2021 states in the Eastern and Midwestern United ~~States, and has at least one company licensed to do business in each of the 50 states;~~States;

	•		Investments; and

	•		Diversified Insurance Services, which provides human resource administration outsourcing products and services, and federal flood insurance administrative services.

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

Description of Operating Segment Products and Markets

Insurance Operations Segment

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

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


Insurance Subsidiaries	A.M. Best Rating¹	Domiciliary State

Selective Insurance Company of America (SICA)	“A+ (Superior)”	New Jersey
Selective Way Insurance Company (SWIC)	“A+ (Superior)”	New Jersey
Selective Insurance Company of South Carolina (SICSC)	“A+ (Superior)”	South Carolina
Selective Insurance Company of the Southeast (SICSE)	“A+ (Superior)”	North Carolina
Selective Insurance Company of New York (SICNY)	“A+ (Superior)”	New York
Selective Insurance Company of New England (SICNE)	“A+ (Superior)”	Maine
Selective Auto Insurance Company of New Jersey (SAICNJ)	“A+ (Superior)”	New Jersey


¹		With regard to an “A+” rating, A.M. Best uses its highest Financial Strength Rating of “Secure,” and a descriptor of “Superior,” which it defines as, “Assigned to companies that have, in our opinion, a superior ability to meet their ongoing obligations to policyholders.” Only 9%10% of commercial and personal insurance companies carry an “A+” or better rating from A.M. Best.

In ~~2006,~~2007, A.M. Best, in its list of “Top Property/Casualty Writers,” ranked Selective the 4746^th largest property and casualty group in the United States based on the ~~2005~~ combined net premiums written (“NPW”)~~, or premiums~~ for ~~all policies sold, by the Insurance Subsidiaries.~~2006.

Insurance Operations

Selective’s Insurance Operations segment derives substantially all of its revenues from insurance policy premiums. The Insurance Subsidiaries predominantly write annual policies, of which the associated premiums are defined as ~~net premiums written (“NPW”).~~NPW. NPW is recognized as revenue as net premiums earned (“NPE”) ratably over the ~~life~~term of the insurance policy. Expenses fall into three categories: (i) losses associated with claims and various loss expenses incurred for adjusting claims; (ii) expenses related to the issuance of insurance policies, such as agent commissions, premium taxes, and other underwriting expenses, including employee compensation and benefits; and (iii) policyholder dividends.

Selective’s Insurance Subsidiaries are regulated by each of the states in which they do business. Each Insurance Subsidiary is required to file financial statements with such states, prepared in accordance with accounting principles prescribed by, or permitted by, such Insurance Subsidiary’s state of domicile (“Statutory Accounting Principles” or “SAP”). SAP have been promulgated by the National Association of Insurance Commissioners (“NAIC”) and adopted by the various states. Selective evaluates the performance of our Insurance Subsidiaries in accordance with SAP. Incentive-based compensation to independent agents and employees is based on SAP results and our rating agencies use SAP information to evaluate our performance ~~as well as~~and for industry comparative purposes.

The underwriting performance of insurance companies is measured under SAP by four different ratios:

	1)		Loss and loss expense ratio, which is calculated by dividing incurred loss and loss expenses by NPE;

	2)		Underwriting expense ratio, which is calculated by dividing all expenses related to the issuance of insurance policies by NPW;

	3)		Dividend ratio, which is calculated by dividing policyholder dividends by NPE; and

	4)		Combined ratio, which is the sum of the loss and loss expense ratio, the underwriting expense ratio, and the dividend ratio.

A statutory combined ratio under 100% generally indicates ~~that an insurance company is generating~~ an underwriting profit and a statutory combined ratio over 100% generally indicates ~~that an insurance company is generating~~ an underwriting loss. The statutory combined ratio does not reflect investment income, federal income taxes, or other non-operating income or expense.

SAP differs in ~~many~~several ways from generally accepted accounting principles in the United States of America (“GAAP”), under which Selective is required to report our financial results to the United States Securities and Exchange Commission (“SEC”). The most notable differences impacting our reported net income are as follows:

	•		Under SAP, underwriting expenses are recognized when incurred; whereas under GAAP, underwriting expenses are deferred and amortized over the life of the policy;

	•		Under SAP, the underwriting expense ratio is calculated using NPW as the denominator; whereas NPE is used as the denominator under GAAP; and

	•		Under SAP, the results of Selective’s flood line of business are included in the Insurance Operations segment, whereas under GAAP, these results are included within the Diversified Insurance Services segment.

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

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

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


	Year Ended December 31,							Year Ended December 31,
(in thousands)	2006			2005		2004		2007			2006		2005

Insurance Operations Results
NPW	$	1,540,901			1,462,914		1,368,061	$	1,562,728			1,540,901		1,462,914


NPE	$	1,504,632			1,421,439		1,321,316	$	1,525,163			1,504,632		1,421,439
Losses and loss expenses incurred		958,741			902,557		862,621		997,230			958,741		902,557
Net underwriting expenses incurred		482,657			449,569		414,256		494,944			482,657		449,569
Policyholders’ dividends		5,927			5,688		4,275		7,202			5,927		5,688

Underwriting profit (loss)	$	57,307			63,625		40,164
Underwriting profit								$	25,787			57,307		63,625


Ratios:
Losses and loss expense ratio		63.7	%		63.5		65.3		65.4	%		63.7		63.5
Underwriting expense ratio		31.3	%		30.7		30.3		31.6	%		31.3		30.7
Policyholders’ dividends ratio		0.4	%		0.4		0.3		0.5	%		0.4		0.4

Combined ratio		95.4	%		94.6		95.9		97.5	%		95.4		94.6


GAAP Combined ratio¹		96.1	%		95.1		96.9		98.9	%		96.1		95.1


¹		The “GAAP Combined ~~Ratio”~~ratio” excludes the flood line of business, which is included in the Diversified Insurance Services segment on a GAAP ~~basis and therefore excluded from the GAAP combined ratio.~~basis. The total Statutory Combined ~~Ratio~~ratio excluding flood was 98.2% in 2007, 96.1% in 2006, and 95.3% in ~~2005, and 96.5% in 2004.~~2005.

Historically, Selective has ~~consistently~~ produced a lower statutory combined ratio than the property and casualty insurance industry, ~~generally outperforming~~and outperformed the industry average for the past ~~10 years~~10-year period by ~~an average of 2.7~~2.3 points. The table below sets forth a comparison of certain Company and industry statutory ratios:


	Simple
	Average of																												Simple
	All Periods																												Average of
	Presented			2006			2005			2004		2003			2002			2001		2000			1999		1998		1997		All Periods
																													Presented			2007			2006			2005		2004		2003			2002			2001		2000			1999		1998
Selective Ratios:⁽¹⁾
Loss and loss expense		69.8	%		63.7			63.5			65.3		70.3			72.3			74.3		75.7			74.4		70.2		68.2		69.5	%		65.4			63.7			63.5		65.3		70.3			72.3			74.3		75.7			74.4		70.2
Underwriting expense		31.0			31.3			30.7			30.3		30.7			30.3			31.5		31.7			30.5		32.2		31.2		31.1			31.6			31.3			30.7		30.3		30.7			30.3			31.5		31.7			30.5		32.2
Policyholders’ dividends		0.6			0.4			0.4			0.3		0.5			0.6			0.9		0.9			0.8		0.7		0.7		0.6			0.5			0.4			0.4		0.3		0.5			0.6			0.9		0.9			0.8		0.7
Statutory combined ratio⁽²⁾		101.5			95.4			94.6			95.9		101.5			103.2			106.7		108.2			105.7		103.2		100.1
Statutory combined ratio																														101.2			97.5			95.4			94.6		95.9		101.5			103.2			106.7		108.2			105.7		103.2
Growth (decline) in net premiums written		8.4			5.3			6.9			12.0		15.7			13.8			10.5		3.6			8.1		4.4		3.7		8.2			1.4			5.3			6.9		12.0		15.7			13.8			10.5		3.6			8.1		4.4
Industry Ratios:^{(1) (3)}
Industry Ratios:^{(1) (2)}
Loss and loss expense		76.9			66.9			74.8			73.1		75.1			81.5			88.4		81.5			78.8		76.2		72.8		76.3			67.7			65.3			75.3		73.5		75.0			81.5			88.4		81.5			78.8		76.2
Underwriting expense		26.3			25.9			25.5			24.9		24.6			25.1			26.5		27.4			27.9		27.7		27.1		26.3			27.2			26.2			25.4		24.9		24.6			25.1			26.5		27.4			27.9		27.7
Policyholders’ dividends		1.0			0.5			0.5			0.5		0.5			0.6			0.8		1.4			1.3		1.7		1.7		0.9			0.6			0.9			0.5		0.5		0.5			0.6			0.8		1.4			1.3		1.7
Statutory combined ratio⁽²⁾		104.2			93.3			100.8			98.5		100.2			107.3			115.7		110.4			108.1		105.6		101.6
Statutory combined ratio																														103.5			95.6			92.4			101.2		98.9		100.1			107.3			115.7		110.4			108.1		105.6
Growth in net premiums written		5.1			2.6			(0.2	)		4.4		9.6			15.1			8.5		4.7			1.9		1.8		2.9		4.9			(1.2	)		3.9			0.0		4.4		9.7			15.1			8.5		4.7			1.9		1.8
Selective Favorable (Unfavorable) to Industry:
Statutory combined ratio		2.7			(2.1	)		6.2			2.6		(1.3	)		4.1			9.0		2.2			2.4		2.4		1.5		2.3			(1.9	)		(3.0	)		6.6		3.0		(1.4	)		4.1			9.0		2.2			2.4		2.4
Growth (decline) in net premiums written		3.3			2.7			7.1			7.6		6.1			(1.3	)		2.0		(1.1	)		6.2		2.6		0.8		33			2.6			1.4			6.9		7.6		6.0			(1.3	)		2.0		(1.1	)		6.2		2.6


1.		The ratios and percentages are based upon SAP prescribed or permitted by state insurance departments in the states in which each company is domiciled. Effective January 1, 2001, Selective adopted a codified set of statutory accounting principles, as required by the NAIC. These principles were not retroactively applied, but would not have had a material effect on the ratios presented above.

2.		A statutory combined ratio under 100% generally indicates an underwriting profit and a statutory combined ratio over 100% generally indicates an underwriting loss. Due to investment income, a company may still be profitable even though its statutory combined ratio exceeds 100%.

3.		Source: A.M. Best. The industry ratios for ~~2006~~2007 have been estimated by A.M. Best.

Lines of Business and Products

Selective’s Insurance Operations segment includes commercial lines (“Commercial Lines”), which markets primarily to businesses and represents approximately ~~86%~~87% of Selective’s NPW; and personal lines (“Personal Lines”), which markets primarily to individuals and represents approximately ~~14%~~13% of NPW.

Commercial Lines

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

Personal Lines

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

Regional Geographic Market Focus

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


	Year Ended December 31,							Year Ended December 31,
Net Premiums Written	2006			2005		2004		2007			2006		2005

New Jersey		32.6	%		33.9		36.7		30.0	%		32.6		33.9
Pennsylvania		14.3			14.4		13.7		14.1			14.3		14.4
New York		11.1			11.2		10.9		10.8			11.1		11.2
Maryland		7.5			7.2		7.0		7.6			7.5		7.2
Virginia		5.9			5.6		5.4		6.0			5.9		5.6
Illinois		3.9			3.8		3.2		4.4			3.9		3.8
North Carolina		3.8			3.8		3.7		4.0			3.8		3.8
Georgia		3.2			3.1		3.0		3.5			3.2		3.1
Indiana		3.1			2.8		2.8		3.5			3.1		2.8
South Carolina		2.5			2.5		2.1		2.8			2.5		2.5
Michigan		1.9			1.8		1.9		2.0			1.9		1.8
Ohio		1.6			1.5		1.6		1.8			1.6		1.5
Connecticut		1.4			1.3		1.1		1.7			1.4		1.3
Rhode Island									1.3			1.3		1.2
Delaware		1.3			1.4		1.4		1.2			1.3		1.4
Rhode Island		1.3			1.2		1.1
Wisconsin									1.2			1.1		1.1
Minnesota		1.1			1.1		1.0		1.0			1.1		1.1
Wisconsin		1.1			1.1		1.2
Other states¹		2.4			2.3		2.2		3.1			2.4		2.3

Total		100.0	%		100.0		100.0		100.0	%		100.0		100.0


¹		Other states include, among others, ~~Washington, D.C.,~~ Florida, Iowa, Kentucky, Missouri and ~~Missouri.~~Washington D.C.

Independent Insurance Agent Distribution Model

According to a study done by the Independent Insurance Agents and Brokers of America, ~~(“IIABA”),~~ in ~~2004,~~2005, independent insurance agents and brokers ~~write~~wrote approximately 80% of ~~the~~ commercial property and casualty insurance and approximately ~~35%~~36% of the personal lines insurance business in the United States. Independent agents are a significant force in overall insurance industry premium production, in large part because they represent more than one insurance company and, therefore, can provide insureds with a wider choice of commercial and personal property and casualty insurance products. As a result, Selective is committed to the independent agency distribution channel and focuses its primary strategy on building relationships with well-established, independent insurance agents, ~~while~~including efforts to assist in the hiring and training of producers. In addition, Selective carefully ~~monitoring~~monitors each agent’s profitability, growth, financial stability, staff, and mix of business against plans that ~~Selective develops~~are developed annually with the agent. In developing annual plans with its independent insurance agents, Selective’s field personnel and management spend considerable time meeting with agencies to: (i) advise them on Company developments; (ii) receive feedback on products and services; (iii) help agents increase market share; and (iv) consolidate more of their business utilizing Selective’s technology advantages.

As of December 31, ~~2006,~~2007, Selective’s Insurance Subsidiaries had entered into agency agreements ~~pursuant to applicable state laws and regulations,~~ with approximately ~~770~~880 independent insurance agents having approximately ~~1,600~~1,800 storefronts pursuant to ~~allow such~~these agreements. The agents are authorized to sell policies written by the Insurance ~~Subsidiaries. Selective pays its independent agents~~Subsidiaries and are paid commissions pursuant to calculations and specific percentages stated in the agency agreement. Under the agency agreement, other than as provided by law, agents are not permitted to receive compensation for the business they place with Selective from any insured or applicant for insurance other than Selective. The agency agreement provides for commissions to be paid based on a percentage of the premium written. Selective and its agents also negotiate other compensation arrangements, including supplemental commissions, based on the volume and underwriting results of the business the agent writes with Selective.

Technology and Field Model Business Strategy

Selective uses the ~~trademarks, “High-Tech, High-Touch"™ and “HT~~service mark “High Tech x High Touch = HT²~~"™,~~^®” to describe its business strategy for the Insurance Operations. ~~“High-Tech”~~“High Tech” signifies the advanced technology that Selective uses to make it easy for: (i) independent insurance agents to transact and process business with Selective; and (ii) customers to access real-time information, manage their accounts and pay their bills through an on-line customer portal that was established in September 2006. ~~“High-Touch”~~

“High Touch” signifies the close relationships that Selective has with its independent insurance agents and customers as a result of its business model that places underwriters, claims representatives, technical or technology staff, and safety management representatives in the field near its agents and customers.

Technology

Selective seeks to transact as much of its business as possible through the use of technology and, in recent years, has made significant investments in state-of-the-art information technology platforms, integrated systems, Internet-based applications, and predictive modeling initiatives to: (i) provide its independent agents and customers with access to accurate business information; (ii) provide independent agents the ability to process business transactions from their offices and systems; and (iii) provide underwriters with targeted pricing tools to enhance profitability while growing the business. In ~~2006,~~2007, Applied Systems ~~Inc.~~Client Network presented Selective with the ~~“2006~~“2007 Commercial Lines Interface ~~Leadership and Innovation~~Carrier of the Year Award” for promoting efficient communication between insurance carriers and independent agents. Applied Systems is ~~the leading~~a provider of automated solutions for ~~the~~ property and casualty insurance ~~industry.~~agents. The award was ~~granted based on~~given in recognition of Selective’s ~~ability~~excellent work to ~~“advance agency-company~~implement download and real-time interface ~~through adoption, support and implementation of initiatives”~~technology with independent agents through its xSELerate^® agency integration technology. ~~Additionally,~~ Selective also received the ~~2006 E-Fusion~~2007 Quantum Award from ~~A.M. Best Co.~~the AMS Users’ Group, another major provider of automated management solutions for ~~innovative, business-focused agency integration technology.~~agents, for creating technology that enables independent agents to make a quantum leap in productivity and profitability. This award was granted to Selective for increasing productivity and efficiency for its independent insurance agents through its xSELerate^® agency integration technology. Additionally, Selective was recognized as a model carrier component by Celent, an IT consulting group, for its effective use of its xSELerate^{^®}technology.

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

Field Strategy

To support its independent agents, Selective employs a field underwriting model and a field claims model that are supported by the home office in Branchville, New Jersey, and ~~five~~six regional branch offices (“Region”), which ~~were as follows~~ as of December 31, ~~2006:~~2007 were as follows:


Region		Office Location

~~Mid-America~~Great Lakes/Big River		Columbus, Ohio
Heartland		Carmel, Indiana
New Jersey		Hamilton, New Jersey
Northeast		Branchville, New Jersey
~~Pennsylvania~~Mid-Atlantic		Allentown, Pennsylvania and Hunt Valley, Maryland
Southern		Charlotte, North Carolina

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

As of December 31, ~~2006, Selective had:~~2007, Selective’s field force included:

	•		8198 Commercial Lines field underwriters, ~~within commercial lines,~~ known as agency management specialists (“~~AMS”~~AMSs”). AMSs live and work in the geographic vicinity of Selective’s appointed agents and generally work from offices in their homes. As a result of this close proximity and direct and regular interaction, AMSs are able to build strong relationships with ~~agents through direct and regular interaction.~~agents.

	•		811 Personal Lines territory managers ~~within Personal Lines~~ that work with AMSs and independent agents to advance ~~Personal Lines~~ production. Territory managers build strong relationships with agents through direct and regular interaction, which better positions them to evaluate new business opportunities.

	•		7014 field technology employees. These employees work directly with agents, training and marketing Selective’s technology systems like xSELerate^® and SelectPLUS^®. They also gather feedback from the agents to help improve Selective’s technology to meet the needs of the agency force.

	•		75 safety management specialists (“SMSs”). SMSs are located in the Regions and are responsible for surveying and assessing insured and prospective risks from a risk/safety standpoint, and for providing ongoing safety management services to certain insureds.

	•		~~136~~149 field claims adjusters, known as claim management specialists (“CMSs”). Like AMSs, CMSs live in the geographic vicinity of Selective’s appointed agents and generally work from offices in their homes. CMSs, because of their geographic location, are able to conduct on-site inspections of losses and resolve claims faster, more accurately, and with higher levels of customer satisfaction. As a result, CMSs also obtain knowledge about potential exposures that they can share with AMSs.

Underwriting

Selective seeks to ~~price and~~ underwrite a variety of insurance risks and ~~focuses~~divides its ~~efforts on four market~~markets into three segments:

	•		Small business accounts ~~representing 9%~~with premiums less than $25,000 represent 52% of ~~Selective’s commercial lines~~total direct premium ~~can be~~written. During 2007, 30% of new small business was written through Selective’s Internet-based One & ~~Done®~~Done^® system’s automated underwriting templates;

	•		Middle market business accounts with ~~annual~~ premiums ~~up to~~greater than $25,000 but less than $250,000 ~~that~~represent 42% of total direct premium written. This business, which cannot be ~~underwritten~~written through the One & ~~Done®~~Done^® system, ~~are~~is the primary focus of the ~~AMSs~~AMSs; and, ~~represent 80% of Selective’s commercial lines premium;~~

	•		Large business accounts with annual premiums of approximately $250,000 or greater ~~which represents 11%~~represent 6% of Selective’s ~~commercial lines premuim,~~total direct premium written and are underwritten by a specialized commercial lines unit, ~~SRM.~~Selective Risk Managers (“SRM”). Approximately ~~20%~~24% of ~~these accounts employ~~the of the SRM premium includes alternative risk transfer mechanisms such as ~~guaranteed costs,~~ retrospective rating plans, ~~and~~ self-insured group retention programs, or ~~they are~~individual self-insured ~~group accounts that retain a portion of the risk.~~

	•		~~Personal Lines.~~accounts.

Selective’s underwriting process requires communication and interaction among:

	•		The independent agents and the AMSs, who identify product and market needs;

	•		Selective’s strategic business units (“SBUs”), located in the home office, which are organized by customer and product type, and develop Selective’s pricing and underwriting guidelines in conjunction with regions;

	•		The Regions, which work with the SBUs to establish annual premium and pricing goals; and

	•		The Actuarial Department, located in the home office, which assists in the determination of rate and pricing levels while also monitoring pricing and profitability.

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

Selective also has an underwriting service center (“USC”) located in Richmond, Virginia. The USC assists Selective’s agents by servicing small to ~~mid size~~mid-sized business customers. During 2006, the USC became available to personal lines business customers of our New Jersey agents, with a rollout to Selective’s remaining states during 2007. At the USC, Selective employees, who are licensed agents, respond to customer inquiries about insurance coverage, billing transactions, and other matters. The agent, as consideration for these services, receives a commission that is lower than the standard commission by approximately two points. Selective has found that the USC also provides additional opportunities to increase direct premiums written, as larger agencies seek insurance companies that have service center capabilities. Currently, the USC is servicing commercial lines net premiums written of $70 million and personal lines net premiums written of ~~$26~~$33 million. The total ~~$96~~$103 million serviced represents 6%7% of total net premiums written.

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

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

Field Claims Management

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

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

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

Net Loss and Loss Expense Reserves

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

~~The following information presents: (i)~~ Selective’s loss and loss expense reserve development over the proceeding ~~ten years; and (ii) a reconciliation of reserves in accordance with SAP to such reserves determined in accordance with GAAP, each as prescribed by Securities Act Industry Guide No. 6.~~10 years is shown on the following table.

Section I of the ~~ten-year~~10-year table shows the estimated liability that was recorded at the end of each of the indicated years for all current and prior accident ~~year~~year’s unpaid loss and loss expenses. The liability represents the estimated amount of loss and loss expenses for claims that were unpaid at the balance sheet date, including incurred but not reported (“IBNR”) reserves. In accordance with GAAP, the liability for unpaid loss and loss expenses is recorded in the balance sheet gross of the effects of reinsurance with an estimate of reinsurance recoverables arising from reinsurance contracts reported separately as an asset. The net balance represents the estimated amount of unpaid loss and loss expenses outstanding as of the balance sheet date, reduced by estimates of amounts recoverable under reinsurance contracts.

Section II shows the re-estimated amount of the previously recorded net liability as of the end of each succeeding year. Estimates of the liability for unpaid loss and loss expenses are increased or decreased as payments are made and more information regarding individual claims and trends, such as overall frequency and severity patterns, becomes known. Section III shows the cumulative amount of net loss and loss expenses paid relating to recorded liabilities as of the end of each succeeding year. Section IV shows the re-estimated gross liability and re-estimated reinsurance recoverables through December 31, ~~2006.~~2007. Section V shows the cumulative net (deficiency)/redundancy representing the aggregate change in the liability from the original balance sheet dates and the re-estimated liability through December 31, ~~2006.~~2007.

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

($ in millions) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

I.Gross reserves for unpaid losses and loss expenses at December 31 $ 1,189.8 1,161.2 1,193.3 1,273.8 1,272.7 1,298.3 1,403.4 1,587.8 1,835.2 2,084.0 2,288.8
Reinsurance recoverable on unpaid losses and loss expenses at December 31 $ (150.2 ) (124.2 ) (140.5 ) (192.0 ) (160.9 ) (166.5 ) (160.4 ) (184.6 ) (218.8 ) (218.2 ) (199.7 )
Net reserves for unpaid losses and loss expenses at December 31 $ 1,039.6 1,037.0 1,052.8 1,081.8 1,111.8 1,131.8 1,243.1 1,403.2 1,616.4 1,865.8 2,089.0

II. Net Reserves estimated as of:
One year later $ 1,029.5 1,034.5 1,044.2 1,080.7 1,125.5 1,151.7 1,258.1 1,408.1 1,621.5 1,858.5
Two years later 1,028.1 1,024.8 1,035.9 1,088.2 1,152.7 1,175.8 1,276.3 1,452.3 1,637.3
Three years later 1,020.5 1,014.0 1,033.3 1,115.6 1,181.9 1,210.7 1,344.6 1,491.1
Four years later 1,014.4 998.1 1,040.3 1,134.4 1,220.2 1,290.2 1,371.5
Five years later 1,000.9 997.9 1,049.9 1,156.0 1,278.3 1,306.8
Six years later 1,002.1 1,003.6 1,058.6 1,194.6 1,287.5
Seven years later 1,006.5 1,011.6 1,090.0 1,203.2
Eight years later 1,010.9 1,038.0 1,101.1
Nine years later 1,033.4 1,045.2
Ten years later 1,042.6
Cumulative net Redundancy (deficiency) $ (3.0 ) (8.2 ) (48.3 ) (121.4 ) (175.7 ) (174.9 ) (128.5 ) (87.8 ) (20.9 ) 7.3

III. Cumulative amount of net reserves paid through:
One year later $ 303.6 313.7 328.1 348.2 399.2 377.1 384.0 414.5 422.4 468.6
Two years later 519.6 531.1 537.5 600.3 649.1 627.3 653.3 691.4 729.5
Three years later 674.7 665.5 703.8 767.5 815.3 807.2 836.3 903.7
Four years later 760.8 760.8 797.1 870.8 930.9 926.9 966.2
Five years later 820.0 812.2 856.1 933.6 1,002.4 1,003.3
Six years later 850.9 849.7 892.2 974.6 1,046.3
Seven years later 877.3 875.9 919.2 1,001.1
Eight years later 896.0 894.7 937.1
Nine years later 912.1 908.5
Ten years later 924.2

IV. Re-estimated gross liability $ 1,305.9 1,294.2 1,352.0 1,469.3 1,519.9 1,546.8 1,583.3 1,716.5 1,867.0 2,090.5
Re-estimated Reinsurance Recoverable $ (263.3 ) (249.0 ) (250.9 ) (266.1 ) (232.3 ) (240.1 ) (211.7 ) (225.5 ) (229.7 ) (232.0 )

Re-estimated net Liability $ 1,042.6 1,045.2 1,101.1 1,203.2 1,287.5 1,306.8 1,371.5 1,491.1 1,637.3 1,858.5

V. Cumulative gross (deficiency) $ (116.1 ) (133.0 ) (158.7 ) (195.5 ) (247.2 ) (248.5 ) (179.8 ) (128.7 ) (31.8 ) (6.4 )

Cumulative net Redundancy (deficiency) $ (3.0 ) (8.2 ) (48.3 ) (121.4 ) (175.7 ) (174.9 ) (128.5 ) (87.8 ) (20.9 ) 7.3


($ in millions)	1997			1998			1999			2000			2001			2002			2003			2004			2005			2006			2007
I. Gross reserves for unpaid losses and loss expenses at December 31	$	1,161.2			1,193.3			1,273.8			1,272.7			1,298.3			1,403.4			1,587.8			1,835.2			2,084.0			2,288.8			2,542.5
Reinsurance recoverable on unpaid losses and loss expenses at December 31	$	(124.2	)		(140.5	)		(192.0	)		(160.9	)		(166.5	)		(160.4	)		(184.6	)		(218.8	)		(218.2	)		(199.7	)		(227.8	)
Net reserves for unpaid losses and loss expenses at December 31	$	1,037.0			1,052.8			1,081.8			1,111.8			1,131.8			1,243.1			1,403.2			1,616.4			1,865.8			2,089.0			2,314.7

II. Net Reserves estimated as of:
One year later	$	1,034.5			1,044.2			1,080.7			1,125.5			1,151.7			1,258.1			1,408.1			1,621.5			1,858.5			2,070.2
Two years later		1,024.8			1,035.9			1,088.2			1,152.7			1,175.8			1,276.3			1,452.3			1,637.3			1,845.1
Three years later		1,014.0			1,033.3			1,115.6			1,181.9			1,210.7			1,344.6			1,491.1			1,643.7
Four years later		998.1			1,040.3			1,134.4			1,220.2			1,290.2			1,371.5			1,522.9
Five years later		997.9			1,049.9			1,156.0			1,278.3			1,306.8			1,413.8
Six years later		1,003.6			1,058.6			1,194.6			1,287.5			1,349.6
Seven years later		1,011.6			1,090.0			1,203.2			1,325.5
Eight years later		1,038.0			1,101.1			1,238.2
Nine years later		1,045.2			1,135.4
Ten years later		1,078.3
Cumulative net redundancy (deficiency)	$	(41.3	)		(82.6	)		(156.5	)		(213.7	)		(217.8	)		(170.8	)		(119.7	)		(27.3	)		20.7			18.8


III. Cumulative amount of net reserves paid through:
One year later	$	313.7			328.1			348.2			399.2			377.1			384.0			414.5			422.4			468.6			469.4
Two years later		531.1			537.5			600.3			649.1			627.3			653.3			691.4			729.5			775.0
Three years later		665.5			703.8			767.5			815.3			807.2			836.3			903.7			942.4
Four years later		760.8			797.1			870.8			930.9			926.9			966.2			1,033.5
Five years later		812.2			856.1			933.6			1,002.4			1,003.3			1,044.6
Six years later		849.7			892.2			974.6			1,046.3			1,053.8
Seven years later		875.9			919.2			1,001.1			1,081.7
Eight years later		894.7			937.1			1,029.0
Nine years later		908.5			956.7
Ten years later		922.5

IV. Re-estimated gross liability	$	1,338.6			1,399.8			1,519.0			1,574.5			1,613.2			1,654.3			1,782.6			1,912.0			2,121.8			2,303.1
Re-estimated reinsurance recoverable	$	(260.3	)		(264.4	)		(280.8	)		(249.0	)		(263.6	)		(240.4	)		(259.6	)		(268.3	)		(276.7	)		(232.9	)

Re-estimated net liability	$	1,078.3			1,135.4			1,238.2			1,325.5			1,349.6			1,413.8			1,522.9			1,643.7			1,845.1			2070.2

V. Cumulative gross deficiency	$	(177.4	)		(206.5	)		(245.2	)		(301.8	)		(314.8	)		(250.8	)		(194.8	)		(76.8	)		(37.8	)		(14.4	)

Cumulative net redundancy (deficiency)	$	(41.3	)		(82.6	)		(156.5	)		(213.7	)		(217.8	)		(170.8	)		(119.7	)		(27.3	)		20.7			18.8

Note: Some amounts may not foot due to rounding.

Selective experienced favorable prior year development in 2007 and 2006 of $18.8 million and $7.3 million, respectively. In 2005, prior year adverse development was $5.1 million. The ~~Company~~following paragraphs provide information regarding the development in each of these calender years.

Selective experienced overall favorable development in its loss and loss expense reserves totaling ~~$7.3~~$18.8 million in ~~2006,~~2007, which was primarily driven by favorable prior year development in our commercial automobile, workers compensation, and personal automobile lines of business partially offset by adverse development in our general liability line of business. as follows:

	•		The commercial automobile line of business experienced favorable prior year loss and loss expense reserve development of approximately $19 million, which was primarily driven by lower than expected severity in accident years 2004 through 2006.

	•		The personal automobile line of business experienced favorable prior year development of approximately $10 million, due to lower than expected loss emergence for accident years 2005 and prior partially offset by higher severity in accident year 2006.

	•		The workers compensation line of business experienced favorable prior year development of approximately $4 million reflecting the implementation of a series of improvement strategies for this line in recent accident years partially offset by an increase in the tail factor related to medical inflation and general development trends.

	•		The homeowners line of business experienced adverse prior year loss and loss expense reserve development of approximately $6 million driven by unfavorable trends in claims for groundwater contamination caused by the leakage of certain underground oil storage tanks.

	•		The personal umbrella line of business experienced adverse prior year loss and loss expense reserve development of approximately $4 million in 2007, which was due to the impact of several significant losses on this small line.

	•		The remaining lines of business, which collectively contributed approximately $4 million of adverse development, do not individually reflect any significant trends related to prior year development.

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

	•		The commercial automobile line of business experienced favorable prior year loss and loss expense reserve development of approximately $15 million, which was primarily driven by lower than expected severity in accident years 2004 and 2005.

	•		The workers compensation line of business experienced favorable prior year development of approximately $4 million, which was driven, in part, by savings realized from changing medical and pharmacy networks outside New Jersey and re-contracting our medical bill review services.

	•		The personal automobile line of business experienced favorable prior year development of approximately $9 million, due to lower than expected frequency.

	•		The general liability line of business experienced adverse prior year loss and loss expense reserve development of approximately $15 million in 2006, which was largely driven by our contractor completed operations business and an increase in reserves for legal expenses.

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

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

~~In 2005 there was an~~

	•		Workers compensation reserves were increased by approximately $42 million to reflect rising medical cost trends that impacted accident years 2001 and prior.

	•		Commercial automobile reserves were decreased by approximately $48 million, primarily due to ongoing favorable severity trends in the 2002 through 2004 accident years.

	•		The general liability reserves adversely developed by approximately $14 million over the course of the year, which was driven mainly by our contractor completed operations business impacting accident years 2001 and prior, but partially offset by positive development in accident years 2002 through 2004.

The adverse judicial ruling by the New Jersey Supreme Court ~~which is discussed~~ in the ~~“Personal Automobile” section~~second quarter of ~~Item 7. “Management’s Discussion and Analysis~~2005 that eliminated the application of ~~Financial Condition and Results~~the serious life impact standard to personal automobile bodily injury liability cases under the verbal tort threshold of ~~Operations.” This adverse judicial ruling~~the New Jersey Automobile Insurance Cost Reduction Act (“AICRA”) led to an increase in personal automobile reserves of approximately $10 million, of which $6 million represents adverse development from prior years.

The cumulative loss and loss expense reserve net deficiencies seen in the years 1998 through 2003 are generally reflective of the soft market pricing in the industry during that time frame, which hit the lowest levels in 1999. The property and casualty insurance industry, as a whole, underestimated reserves and loss trends leading to intense pricing competition. Additionally, during 1999, Selective significantly increased gross and ceded reserves by $37.5 million for prior accident years related to unlimited medical claims under personal injury protection provisions of personal automobile policies ceded to the Unsatisfied Claim and Judgment Fund in the State of New Jersey. Approximately ~~24%~~18% of the cumulative gross deficiency for years 1998 and prior stems from this increase.

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


(in thousands)	2006			2005			2007			2006

Statutory losses and loss expense reserves⁽¹⁾	$	2,084,012			1,862,360		$	2,312,086			2,084,012
Provision for uncollectible reinsurance		2,700			3,500			2,750			2,700
Pension adjustment		2,619			(59	)		72			2,619
Other		(299	)		—			(162	)		(299	)


GAAP losses and loss expense reserve — net		2,089,032			1,865,801
GAAP losses and loss expense reserve – net								2,314,746			2,089,032
Reinsurance recoverable on unpaid losses and loss expenses								227,801			199,738

Reinsurance recoverable on unpaid losses and loss expenses		199,738			218,248
GAAP losses and loss expense reserves — gross	$	2,288,770			2,084,049

GAAP losses and loss expense reserves – gross							$	2,542,547			2,288,770


⁽¹⁾		Statutory losses and loss expense reserves are presented net of reinsurance recoverable on unpaid losses and loss expenses.

Environmental Reserves

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

“Asbestos claims” are claims presented to usSelective in which bodily injury is alleged to have occurred as a result of exposure to asbestos and/or asbestos-containing products. During the past two decades, the insurance industry has experienced the emergence and development of an increasing number of asbestos claims. At December 31, ~~2006,~~2007, asbestos claims constituted 89% of ~~our 2,568~~Selective’s 2,448 environmental claims compared with 88% of ~~our 2,382~~Selective’s 2,575 outstanding environmental claims at December 31, ~~2005.~~2006.

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

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

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

Reinsurance

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

	•		Treaty reinsurance, in which certain types of policies are automatically reinsured without the need for approval by the reinsurer of the individual risks covered; and

	•		Facultative reinsurance, in which an individual insurance policy or a specific risk is reinsured with the prior approval of the reinsurer. Facultative reinsurance is primarily used for policies with limits greater than the limits available under the reinsurance treaties.

In addition to treaty and facultative reinsurance, the Insurance Subsidiaries are partially protected by the Terrorism Risk Insurance Act of 2002, which was modified and extended through December 31, ~~2007~~2014 via the Terrorism Risk Insurance ~~Extension~~Program Reauthorization Act of ~~2005.~~2007. For further information regarding this legislation, see Item 1A. “Risk Factors” of this Form 10-K.

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

Reinsurance recoverable balances tend to fluctuate based on the underlying losses incurred by the Insurance Subsidiaries. If a severe catastrophic event occurs, reinsurance recoverable balances may increase significantly. The reinsurance recoverable balances on paid and unpaid claims were ~~19%~~22% of stockholders equity at December 31, ~~2006~~2007 compared to ~~23%~~19% at December 31, ~~2005.~~2006. These balances, net of available collateral, were ~~15%~~18% of stockholders equity at December 31, ~~2006~~2007 compared to ~~19%~~15% at December 31, ~~2005. Approximately half~~2006. Federal or state sponsored pools, which Selective believes to have minimal default risk, represented approximately 44% at December 31, 2007 and 50% at December 31, 2006 of the uncollateralized reinsurance recoverable on paid and unpaid ~~balances at December 31, 2006 and at December 31, 2005 stem from federal or state sponsored pools, which we believe to have minimal default risk.~~balance. The following are the five largest individual uncollateralized reinsurance recoverables on paid and unpaid ~~balances based on December 31, 2006 amounts:~~balances:


	As of: 12/31/07							As of: 12/31/06
		Unsecured						Unsecured
($ in thousands)	Ratings:	Recoverable on			% of			Recoverable on
Reinsurer Name	A.M. Best	Paidand Unpaid			Total			Paid and Unpaid			% of Total

NJ Unsatisfied Claim Judgement Fund	State pool	$	64,498			34	%	$	65,624			39	%

Munich Reinsurance America, Inc.	“A+”		34,620			18	%		30,776			18	%

Hannover Ruckversicherungs AG	“A”		18,014			9	%		12,161			7	%

Swiss Re America Corp.	“A+”		14,434			8	%		10,740			6	%

National Flood Insurance Program	Federal program		12,583			7	%		14,823			9	%

All Other Reinsurers	various		46,686			24	%		32,346			21	%

Total		$	190,835					$	166,470

% of Shareholders Equity			18	%					15	%

($ in thousands) As of: 12/31/06 As of: 12/31/05
Unsecured Unsecured
Ratings: Recoverable on % of Recoverable on Paid
Reinsurer Name A.M. Best Paid and Unpaid Total and Unpaid % of Total

NJ Unsatisfied Claim Judgement Fund State pool $ 65,624 39 % $ 65,636 35 %
Munich Reinsurance America, Inc. “A” 30,776 18 % 30,966 17 %
National Flood Insurance Program Federal program 14,823 9 % 40,316 22 %
Hannover Ruckversicherungs AG “A” 12,161 7 % 8,657 5 %
Swiss Re America Corp. “A+” 10,740 6 % 11,787 6 %
All Other Reinsurers various 32,346 21 % 28,641 15 %
Total $ 166,470 $ 186,003
% of Shareholders Equity 15 % 19 %

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


Treaty	Reinsurance Coverage	Terrorism Coverage

TRIA, Federal Statutory Program	See above for the description of TRIA. ~~90%~~85% of all TRIA certified losses above the retention. Selective’s retention for ~~2007~~2008 is approximately ~~$200~~$203 million. Current program covers both domestic and foreign terrorism. Terrorism acts related to the use of nuclear, biological, chemical or radioactive ~~reactions~~ (“NBCR”) weapons are covered by TRIA provided that the Secretary of the Treasury certifies the event.	Current program is set to expire on December 31, ~~2007.~~2014. For further information regarding this legislation and our risks concerning terrorism exposure, see Item 1A. “Risk Factors” of this Form 10-K.


Property Excess of Loss	$23 million above a $2 million retention in two layers. Losses other than TRIA certified losses are subject to the following reinstatements and annual aggregate limits: • $8 million in excess of $2 million layer provides unlimited reinstatements, no annual aggregate limit; • $15 million in excess of $10 million layer provides two reinstatements, $45 million in annual aggregate.	All NBCR losses are excluded regardless of whether or not they are certified under TRIA. For non-NBCR losses, the treaty distinguishes between acts certified under TRIA and those that are not. The treaty provides annual aggregate limits for TRIA certified (other than NBCR) acts of $24 million for the first layer and $22.5 million for the second layer. Non-certified terrorism losses (other than NBCR) are subject to the normal limits under the treaty.

	•	~~$8 million in excess of $2 million layer provides unlimited reinstatements, no annual aggregate limit;~~
	•	~~$15 million in excess of $10 million layer provides two reinstatements, $45 million in annual aggregate.~~


Property Catastrophe Excess of Loss	95% of ~~$285~~$310 million above $40 million retention in three layers: • 95% of losses in excess of $40 million up to $100 million; • 95% of losses in excess of $100 million up to $200 million; • 95% of losses in excess of $200 million up to $350 million; and The treaty provides one reinstatement per layer, $589.0 million in annual aggregate limit, net of Selective’s co-participation.	~~TRIA losses are excluded from the treaty. In addition, all NBC~~All nuclear, biological and chemical (NBC) losses are excluded regardless of whether or not they are certified under TRIA.
	•	~~95%~~ TRIA losses related to foreign acts of ~~losses~~terrorism are excluded from the treaty. Domestic terrorism is included regardless of whether it is certified under TRIA or not. Please see Item 1A. “Risk Factors” of this Form 10-K for further discussion regarding changes in ~~excess of $40 million up to $100 million;~~
	•	~~95% of losses in excess of $100 million up to $175 million;~~
	•	~~95% of losses in excess of $175 million up to $325 million; and~~
	~~The treaty provides one reinstatement per layer, $541.5 million in annual aggregate limit, net of Selective’s co-participation.~~		TRIA.


~~Treaty~~	~~Reinsurance Coverage~~		~~Terrorism Coverage~~

Casualty Excess of Loss	Casualty Excess of Loss program is structured in two treaties: Workers ~~Compensation~~compensation only working layer treaty and all inclusive Casualty treaty, which provides coverage for all casualty lines including Workers ~~Compensation.~~compensation. Workers ~~Compensation~~compensation losses have per occurrence coverage of $48 million in excess of $2 million retention and additional coverage of 75% of $40 million in excess of $50 million. All other casualty losses have per occurrence	All NBC losses are excluded. All other losses stemming from the acts of terrorism are subject to the following reinstatements and annual aggregate limits: Workers compensation only working layer of $3 million in excess of $2 million layer provides two reinstatements for terrorism losses, $9 million annual aggregate limit; Casualty treaty:
	coverage of $45 million in excess of $5 million retention and additional coverage of 75% of $40 million in excess of $50 million. Losses other than TRIA certified losses are subject to the following reinstatements and annual aggregate limits:	~~All NBC losses are excluded regardless of whether or not they are certified under TRIA. For non-NBC losses, the treaty distinguishes between acts certified under TRIA and those that are not.~~ ~~TRIA certified losses (other than NBC) are subject to the following reinstatements and annual aggregate limits:~~ Workers ~~Compensation only working layer of $3 million in excess of $2 million layer provides two reinstatements for TRIA losses, $9 million annual aggregate limit;~~ ~~Casualty treaty:~~
	~~Workers Compensation~~compensation only working layer of $3 million in excess of $2 million layer provides five reinstatements, $18 million annual aggregate limit;		•	~~$7 million in excess of $5 million layer provides two reinstatements for TRIA losses, $21 million annual aggregate limit;~~
	Casualty treaty:		•	~~$9 million in excess of $12 million layer provides two reinstatements for TRIA losses, $27 million annual aggregate limit;~~
	•	$7 $7 million in excess of $5 million layer provides three reinstatements, $28 million annual aggregate limit;	•
	•	$9 $9 million in excess of $12 million layer provides two reinstatements, $27 million annual aggregate limit;	•	~~$9 million in excess of $21 million layer provides one reinstatement for TRIA losses, $18 million annual aggregate limit;~~
	•	$9 $9 million in excess of $21 million layer provides one reinstatement, $18 million annual aggregate limit; and	•	~~$20 million in excess of $30 million layer provides one reinstatement for TRIA losses, $40 million annual aggregate limit;~~
	•	~~$20~~ $20 million in excess of $30 million layer provides one reinstatement, $40 million annual aggregate limit.	•	75% of $40 million in excess of $50 million layer provides up to $30 million of coverage net of co-participation with one reinstatement for TRIA losses, $60 million in net annual aggregate limit; and
	•	75% of $40 million in excess of $50 million layer provides up to $30 million of coverage net of co-participation with one reinstatement, $60 million in net annual aggregate limit.	~~Non-certified~~ • $7 million in excess of $5 million layer provides two reinstatements for terrorism losses, ~~(other than NBC) are subject~~$21 million annual aggregate limit; • $9 million in excess of $12 million layer provides two reinstatements for terrorism losses, $27 million annual aggregate limit; • $9 million in excess of $21 million layer provides one reinstatement for terrorism losses, $18 million annual aggregate limit; • $20 million in excess of $30 million layer provides one reinstatement for terrorism losses, $40 million annual aggregate limit; • 75% of $40 million in excess of $50 million layer provides up to ~~the normal limits under the treaty.~~$30 million of coverage net of co-participation with one reinstatement for terrorism losses, $60 million in net annual aggregate limit; and


~~Surety and Fidelity Excess of Loss~~	The treaty provides per loss/per principal coverage up to $7.2 million in excess of $1.0 million retention and $0.8 million co-participation. The treaty provides the following reinstatements and annual aggregate limits:		~~Contract does not provide specific exclusions regarding terrorism losses.~~
	•	~~$3 million in excess of $1 million layer provides two reinstatements, $8.1 million annual aggregate limit, net of our co-participation;~~
	•	~~$5 million in excess of $4 million layer provides one reinstatement, $9 million annual aggregate limit, net of our co-participation.~~


Flood	100% reinsurance by the federal government’s National Flood Insurance Program Write Your Own program.	None.

Reinsurance Pooling Agreement

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

	•		Pool or share proportionately the underwriting profit and loss results of property and casualty underwriting operations through reinsurance;

	•		Prevent any Insurance Subsidiary from suffering undue loss;

	•		Reduce administration expenses; and

	•		Permit all of the Insurance Subsidiaries to obtain a uniform rating from A.M. Best.

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


Insurance Subsidiary	Respective Percentage

SICA		49.5	%
SWIC		21.0	%
SICSC		9.0	%
SICSE		7.0	%
SICNY		7.0	%
SAICNJ		6.0	%
SICNE		0.5	%

Insurance Regulation

General

Insurance companies are subject to supervision and regulation in the states in which they are domiciled and transact business. Such supervision and regulation relates to a variety of aspects of an insurance company’s business and financial condition. The primary public purpose of such supervision and regulation is to protect the insurer’s ~~policyholders;~~policyholders, not the insurer’s shareholders. The extent of regulation varies, and generally is derived from state statutes that delegate regulatory, supervisory, and administrative authority to state insurance departments. Although the ~~United States government does not directly regulate the~~ insurance industry is primarily regulated by individual states, federal initiatives ~~from time to time~~ can have an impact on the industry, such as the federal government’s enactment and extension of ~~TRIA.~~TRIA, the enforcement of economic and trade sanctions by the Office of Foreign Assets Control, and the proposal for an optional federal charter that would allow companies to choose between state regulation and national regulatory structure that would eliminate the need to comply with 51 sets of different regulations.

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

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

State Regulation

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

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

National Association of Insurance Commissioners (“NAIC”) Guidelines

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

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

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

Insurers with total adjusted capital that is less than two times their “Authorized Control Level,” as calculated pursuant to the NAIC model laws and regulations, are subject to different levels of regulatory intervention and action. Based upon the unaudited ~~2006~~2007 statutory financial statements for the Insurance Subsidiaries, each Insurance Subsidiary’s total adjusted capital substantially exceeded two times their Authorized Control Level.

Investments Segment

~~Our~~Selective’s investment philosophy includes setting certain return and risk objectives for ~~our~~its equity and fixed maturity portfolios. The return objective of the equity portfolio is to meet or exceed a weighted-average benchmark of public equity indices. The primary return objective of the fixed maturity portfolio is to maximize after-tax investment yield and income while balancing certain risk ~~objectives, with a secondary objective of meeting or exceeding a weighted-average benchmark of public fixed income indices.~~objectives. The risk objectives for all portfolios are ~~to ensure investments are being~~ structured conservatively, focusing on: (i) asset diversification; (ii) investment quality; (iii) liquidity, particularly to meet the cash obligations of the insurance operations; (iv) consideration of taxes; and (v) preservation of capital. At December 31, ~~2006,~~2007, Selective’s investment portfolio consisted of ~~$2,946.9~~$3,079.3 million ~~(82%~~(83%) of fixed maturity securities, ~~$307.4~~$274.7 million ~~(9%~~(7%) of equity securities, ~~$197.0~~$190.2 million (5%) of short-term investments, and ~~$144.8~~$188.8 million ~~(4%~~(5%) of other investments.

Selective’s fixed maturity portfolio is comprised primarily of highly rated securities, with almost 100% rated investment grade. The average rating of its fixed maturity securities is ~~“AA”~~“AA+” by Standard & ~~Poors~~Poor’s (“S&P”), their second highest credit quality rating. Selective expects to continue to invest primarily in high quality, fixed maturity ~~investments.~~investments in order to reduce volatility of the portfolio and to maximize after-tax investment yield. For further information regarding Selective’s interest rate sensitivity as well as other risks associated with its portfolio, see Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” in this Form 10-K. The average duration of the fixed maturity portfolio, including short-term investments of $190.2 million at December 31, 2007 and $197.0 million at December 31, 2006, ~~and $185.1 million~~was 3.9 years at December 31, ~~2005, was~~2007 and 3.8 years at December 31, ~~2006 and 4.0 years at December 31, 2005.~~2006.

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

Diversified Insurance Services Segment

Selective’s Diversified Insurance Services segment provides fee-based revenues that are expected to contribute to earnings, increase operating cash flow, and help mitigate potential volatility in insurance operating results. The Diversified Insurance Services segment is complementary to Selective’s business model by sharing a common marketing or distribution system and creating new opportunities for independent agents to bring value-added services and products to their customers. In December 2005, Selective divested itself of its 100% ownership interest in CHN Solutions (Alta Services, LLC and Consumer Health Network Plus, LLC), which had historically been reported as part of the “Managed Care” component of the Diversified Insurance Services segment. For more information concerning the results of the Diversified Insurance Services segment for the last three fiscal years ended December 31, refer to Note 15, “Discontinued Operations” in Item 8. “Financial Statements and Supplementary Data” on this Form 10-K. The Diversified Insurance Services operation currently has two major components: (i) human resource administration outsourcing; and (ii) flood insurance.

Human Resource Administration Outsourcing

Human resource administration outsourcing (“HR Outsourcing”) products and services are sold by Selective HR Solutions, Inc. and its subsidiaries (“~~SHRS”~~Selective HR”), which are headquartered in Sarasota, Florida. ~~SHRS’s~~Selective HR’s customers are small ~~business owners~~businesses who generally have existing relationships with independent insurance agents. ~~SHRS~~Selective HR leverages these relationships by using independent insurance agents as its distribution channel for its products and services in the states where it operates. As a Professional Employer Organization (“PEO”), ~~SHRS~~Selective HR enters into agreements with clients that establish a three-party relationship under which ~~SHRS~~Selective HR and the client are co-employers of the employees who work at the client’s location (“worksite employees”). As of December 31, ~~2006, SHRS~~2007, Selective HR had approximately ~~27,000~~25,111 worksite ~~employees.~~employees, 39% of which are from the state of Florida.

Flood Insurance

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

federal government. The companies receive an expense allowance, or servicing fee, for policies written and claims processed under the program, while the federal government retains responsibility for all underwriting losses. Selective is servicing approximately ~~274,000~~299,000 flood policies under the NFIP through over ~~6,100~~5,900 independent agents in 50 states and the District of Columbia.

Diversified Insurance Services Regulation

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

~~Flood insurance is offered through~~The viability of the ~~federal government’s NFIP~~NFIP’s reinsurance program ~~which is managed by the Mitigation Division of FEMA~~ under the ~~U.S. Department~~WYO Program is an essential component of ~~Homeland Security.~~Selective’s Diversified Insurance Services operations. In 2005, the destruction caused by the active hurricane season stressed the NFIP with ~~unprecedented~~excessive levels of flood ~~losses that have significantly increased the NFIP’s deficit.~~

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

~~Effective October 1, 2006, the fee paid to us by~~monitor developments with the NFIP ~~decreased 0.6 points~~regarding its ability to ~~30.2%~~pay claims in the event of ~~premiums written. Future reductions~~another large-scale disaster. Congress controls the federal agency’s funding authority, which was exceeded after Hurricane Katrina, and is again nearing maximum capacity. Bills are pending in the House and Senate that could impact the NFIP. These bills contain substantial legislative changes and revisions to the NFIP and WYO Program, some of which may be favorable and some of which may be unfavorable for Selective. For additional information regarding regulation of flood insurance see Item 1A. “Risk Factors” of this ~~rate could occur through legislative activity.~~Form 10-K.

Competition

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

Property and casualty insurance is highly competitive on the basis of both price and service, and is extensively regulated by state insurance departments. In ~~2006,~~2007, Selective was ranked as the 4746^th largest property and casualty group in the United States based on the ~~2005~~2006 NPW, by A.M. Best in its list, “Top Property/Casualty Writers.” The Insurance Operations compete with regional insurers, such as Cincinnati Financial ~~Ohio Casualty,~~ and Harleysville, and national insurance companies, such as Travelers, The Hartford, and Zurich. Selective also competes against direct writers of insurance coverage, including insurance offered through competitors’ internet websites. These writers offer coverage primarily in personal lines, such as GEICO and Progressive. Many of these competitors have greater financial ~~technical,~~ and operating resources than Selective. Many of them also have more customers, which provide them with more information regarding their risks and, with the use of statistical and computer models, may give them greater ability to make pricing and underwriting decisions. Purchasers of property and casualty insurance products do not always differentiate between insurance carriers and differences in coverage. The more significant competitive factors for most of Selective’s insurance products are financial ratings, safety management, price, coverage terms, claims service, and technology. In addition, Selective also faces competition within each insurance agency that sells its insurance products as most of the agencies represent more than one insurance company.

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

Please refer to Item 1A. “Risk Factors,” of this Form 10-K for a discussion of the factors that could impact Selective’s ability to compete.

Seasonality

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

Customers

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

Employees

At December 31, ~~2006,~~2007, Selective had approximately ~~2,100~~2,200 employees, of which ~~1,900~~2,000 worked in the Insurance Operations and Investments segments and 200 worked in the Diversified Insurance Services segment.

Executive Officers of the Registrant

The following table sets forth biographical information about Selective’s Chief Executive Officer, Executive Officers, and senior management, as of ~~March 1, 2007:~~February 28, 2008:


Name, Age, Title	Occupation And Background

Gregory E. Murphy, 52 51 Chairman, President, and Chief Executive Officer	•	Chairman, President, and Chief Executive Officer of Selective, present position since May 2000
~~Chief Executive Officer~~	•	President, Chief Executive Officer, and Director of Selective, May 1999 to May 2000
	•	President, Chief Operating Officer, and Director of Selective, 1997 to May 1999
	•	Other senior executive, management, and operational positions at Selective, since 1980
	•	Director, Newton Memorial Hospital Foundation, Inc., since 1999
	•	Director, Insurance Information Institute
	•	~~Director, American Insurance Association (AIA), 2002 to December 2006~~
	•	Trustee, the American Institute for CPCU (AICPCU) and the Insurance Institute of America (IIA), since June 2001
	•	Graduate of Boston College (B.S.)
	Accounting) •	Harvard University (Advanced Management Program)
	•	Certified Public Accountant (New Jersey) (Inactive)

Jamie Ochiltree III, 5554 Senior Executive Vice President, Insurance Operations	•	Present position since February 2004
~~Senior Executive Vice~~	(scheduled retirement in March 2008) •	Variety of executive positions, Selective, 1994 —– February 2004
~~President, Insurance~~	•	Miami University (B.A.)
~~Operations~~	Zoology) •	Wharton School (Advanced Management Program)

Richard F. Connell, 6261 Senior Executive Vice President and Chief Administrative Officer	•	Present position since ~~January 2006~~
October 2007 •Senior ~~Executive Vice~~	•	Executive Vice President and Chief Information Officer, August 2000 ~~— January 2006~~
– October 2007 • Executive Vice President and Chief	•	~~Board member, ACORD, an insurance data standards organization~~
Information Officer,	August 2000 – January 2006 •	Central Connecticut State University (B.S.) Marketing)

Kerry A. Guthrie, 5049	•	~~Present position since February 2005~~
Executive Vice President and Chief Investment Officer	•	Present position since February 2005 •Senior Vice President and Chief Investment Officer, Selective, August 2002 —– February 2005
	•	Variety of investment positions, Selective, ~~1996 —~~1987 – 2002
	•	Chartered Financial Analyst
	•	Certified Public Accountant (New Jersey) (Inactive)
	•	Member, New York Society of Security Analysts • Siena College (B.S. Accounting) • Fairleigh Dickinson University (M.B.A. Finance)
	•	~~Siena College (B.S. Accounting)~~
	•	~~Fairleigh Dickinson University (M.B.A. Finance)~~

Dale A. Thatcher, 4645	•	~~Present position since February 2003~~
Executive Vice President, Chief Financial Officer and Treasurer	•	Present position since February 2003 •Senior Vice President, Chief Financial Officer and Treasurer, Selective, April 2000 —– February 2003
~~Treasurer~~	•	Certified Public Accountant (Ohio) (Inactive)
	•	Chartered Property and Casualty Underwriter
	•	Chartered Life Underwriter
	•	Member of the American Institute of Certified Public Accountants
	•	Member of the Ohio Society of Certified Public Accountants
	•	University of Cincinnati (B.B.A. Accounting; M.B.A., Finance)


Name, Age, Title	Occupation And Background

Ronald J. Zaleski, 5352 Executive Vice President and Chief Actuary	•	Present position since February 2003
~~Executive Vice President and~~	•	Senior Vice President and Chief Actuary, Selective, February 2000 —– February 2003
~~Chief Actuary~~	•	Vice President and Chief Actuary, Selective, September 1999 —– February 2000
	•	Fellow of Casualty Actuarial Society
	•	Member of the American Academy of Actuaries • Loyola College (B.A. Mathematics)
	•	~~Loyola College (B.A.)~~

Victor Daley, 6463 Executive Vice President, Human Resources	•	Present position since September 2005
~~Executive Vice President,~~ ~~Human Resources~~	•	Executive Vice President, Chief Administrative, and Human Resources Officer for AmerUs Group, September 1995 —– October 2004
	•	Providence College (B.S. Business Administration) • Roosevelt University (M.P.A.) • Harvard University (Advanced Management Program)
	•	~~Roosevelt University (M.P.A.)~~
	•	~~Harvard University (Advanced Management Program)~~

Sharon R. Cooper, 4645 Senior Vice President, Chief Marketing and Communications Officer	•	Present position since ~~February 2003.~~
~~Senior Vice President and~~ ~~Director of Communications~~	October 2007. •	Vice President and Director of Communications, Selective, December 2000 ~~— February 2003~~
	– October 2007 •	Director of Media Relations, Allstate Insurance, 1996 —– December 2000
	•	Member, Society of Chartered Property and Casualty Underwriters • University of Illinois (B.A. Broadcast Journalism) • Seton Hall (M.A. Strategic Communications and Leadership)
	•	~~University of Illinois (B.A.)~~

Michael H. Lanza, 4645 Executive Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer	•	Present position since July 2004
~~Senior Vice President,~~	•	Corporate advisor and legal consultant, April 2003 —– July 2004
~~General Counsel and~~ ~~Corporate Secretary~~	•	Executive Vice President & Corporate Secretary, QuadraMed Corporation, a publicly-traded healthcare technology company, September 2000 —– March 2003
	•	Member, Society of Corporate Secretaries and Corporate Governance Professionals
	•	University of Connecticut (B.A.)
	•	University of Connecticut School of Law (J.D.)

Mary T. Porter, 52 Executive Vice President, Chief Claims Officer	• Present position since October 2007 • Senior Vice President, Director of Corporate Claims, January 2007 - October 2007 • Vice President, Group General Counsel, St. Paul Travelers, 1999 - 2006 • Assistant Vice President, Group Counsel USF&G, St. Paul Companies, 1993 — 1999 • Private law practice in Washington, D.C. and Maryland, 1980 – 1993 • Long Island University, C.W. Post College, B.A, Political Science • George Washington University, JD


Name, Age, Title		Occupation And Background
John J. Marchioni, 38 Executive Vice President, Chief Field Operations Officer		• Present position since October 2007 • Senior Vice President, Director of Personal Lines, August 2005 – October 2007 • Vice President, Mercantile & Service SBU, July 2004 – August 2005 • Vice President, Director of Government Affairs, August 2002 – July 2004 • Assistant Vice President, Government Affairs, August 2000 – July 2002 • Government Affairs Specialist, January 1998 – July 2000 • Chartered Property Casualty Underwriter (CPCU) • Princeton University (B.A. History) • Harvard University (Advanced Management Program)

Eduard J. Pulkstenis, 41 Executive Vice President, Chief Underwriting Officer		• Present position since October 2007 • Senior Vice President, Chief Commercial Lines Underwriting Officer, July 2004 – October 2007 • Vice President, Small Business, July 2003 – July 2004 • Vice President, Director of Actuarial Pricing, March 2000 – July 2003 • Managing Actuary, American International Group, October 1998 – February 2000 • Various Actuarial positions, Selective, June 1988 – October 1998 • Fellow of the Casualty Actuarial Society • Member of the American Academy of Actuaries • Member of the Society of Chartered Property Casualty Underwriters • Messiah College (B.A. Mathematics)

Charles A. Musilli, III, 49 Senior Vice President, Northeast Region Manager and Agency Development		• Present position since October 2007 • Senior Vice President, Chief Field Operations and Marketing Officer, June 2004 – October 2007 • Senior Vice President, Selective Risk Managers, January 1997 – June 2004 • Other management and operational positions at Selective from 1981 – 1984 and 1989 – 1997 • Member, Society of Chartered Property and Casualty Underwriters • Rutgers University (B.A. Psychology)

Jeffrey F. Kamrowski, 43 Senior Vice President, Business Services		• Present position since October 2007 • Other management and operational positions at Selective, since 1988 • Member, Society of Chartered Property and Casualty Underwriters Hartwick College (B.S. Computer Information Science)

Daniel Bravo, 44 Senior Vice President, Strategic Operations Group		• Present position since October 2007 • Senior Vice President of Knowledge Management (2005 – October 2007) • Vice President of Corporate Services Information Technology Services (2002 – 2005) • Operations Manager, Liberty Mutual Insurance (2000 – 2002) • Management Consultant for various consulting companies (1993 – 2000) • Babson College, MBA • Harvard University Extension School, Special Studies in Management Certificate • University of the Basque Country (Spain), (B.S. Economics)

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

Information regarding Selective’s directors is included in the definitive Proxy Statement for the 2007 Annual Meeting of Stockholders to be held on April 24, 2008 in “Information About Proposal 1, Election of Directors,” and is also incorporated by reference into Part III of this Form 10-K.

Available Information

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

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

Item 1A. Risk Factors

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

~~The property and casualty insurance industry is cyclical~~.

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

	•		~~During 2006, pure price on Commercial Lines decreased 1.7%;~~

	•		~~During 2005, pure price on Commercial Lines remained flat compared to 2004;~~

	•		~~From 2001 — 2004, pure price on Commercial Lines was increasing in a range from 4.3% to 12.6%; and~~

	•		~~For several years prior to 2001, we experienced decreases in pure price in our Commercial Lines operations.~~

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

	•		~~Natural and man-made disasters;~~

	•		~~Fluctuations in interest rates and other changes in the investment environment that affect investment returns;~~

	•		~~Inflationary pressures (medical and economic) that affect the size of losses;~~

	•		~~Judicial decisions that affect insurers’ liabilities;~~

	•		~~Changes in the frequency and severity of losses;~~

	•		~~Pricing and availability of reinsurance in the marketplace; and~~

	•		~~Weather-related impacts due to the effects of global warming trends.~~

~~Catastrophic events~~

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

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

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

	•		~~The modeling software used to analyze the Insurance Subsidiaries’ risk proves inadequate;~~

	•		~~A major catastrophic loss exceeds the reinsurance limit or the reinsurers’ financial capacity; or~~

	•		~~The frequency of catastrophe losses result in the Insurance Subsidiaries exceeding their one reinstatement.~~

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

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

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

Selective is required to maintain loss reserves for its estimated liability for losses and loss expenses associated with reported and unreported insurance claims for each accounting period. From time to time, Selective adjusts reserves and, if the reserves are inadequate, ~~the Company~~ must increase its reserves. An increase in reserves: (i) reduces net income and stockholders’ equity for the period in which the deficiency in reserves is identified, and (ii) could have a material adverse effect on Selective’s results of operations, liquidity, financial condition and financial strength, and debt ratings. Selective’s estimates of reserve amounts are based on facts and circumstances of which it is aware, including its expectations of the ultimate settlement and claim administration expenses, predictions of future events, trends in claims severity and frequency, and other subjective factors. There is no method for precisely estimating the ~~Company’s~~ ultimate liability for settlement of claims. Selective regularly reviews its reserving techniques and its overall amount of reserves. For more information regarding reserves, see the section entitled “Reserve for Losses and Loss Expenses” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K. The Company also reviews:

	•		Information regarding each claim for ~~losses;~~losses, including potential extra-contractual liability, or amounts paid in excess of the policy limits, which may not be covered by the Company’s reinsurance contracts;

	•		The Company’s loss history and the industry’s loss history;

	•		Legislative enactments, judicial decisions and legal developments regarding damages;

	•		Changes in political attitudes; and

	•		Trends in general economic conditions, including inflation.

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

Selective is subject to a variety of operational risks which could have a material adverse impact on Selective’s business results.

Selective relies on complex financial models which have been developed internally and by third parties to analyze historical loss costs and pricing, trends in claim severity and frequency, the occurrence of catastrophe losses, and investment performance. Flaws in these financial models and/or faulty assumptions used by these financial models could lead to increased losses and loss reserving. Examples of these various models are Risk Management Solutions, the ALGO risk tool, and predictive modeling.

Catastrophic events.

Various natural and man-made events can cause catastrophes, including, but not limited to, hurricanes, tornadoes, windstorms, earthquakes, hail, terrorism, explosions, severe winter weather, and fires, some of which may be related to climate changes. The frequency and severity of these catastrophes are inherently unpredictable. The extent of losses from a catastrophe is determined by the severity of the event and the total amount of insured exposures in the area affected by the event. Although catastrophes can cause losses in a variety of property and casualty lines, most of the catastrophe-related claims of Selective’s Insurance Subsidiaries historically have been related to commercial property and homeowners coverages. Selective’s property and casualty insurance business is concentrated geographically in the Eastern and Midwestern regions of the United States. New Jersey accounts for 30% of the Company’s total net premiums written.

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

	•		The modeling software used to analyze the Insurance Subsidiaries’ risk proves inadequate;

	•		A major catastrophic loss exceeds the reinsurance limit or the reinsurers’ financial capacity; or

	•		The frequency of catastrophe losses result in the Insurance Subsidiaries exceeding their one reinstatement.

The property and casualty insurance industry is cyclical.

Historically, the results of the property and casualty insurance industry have experienced significant fluctuations due to economic conditions, interest rates, and other factors, such as, competition. For example, the competitors pricing business below technical levels could force the Company to reduce its profit margin in order to protect its best business. Selective has experienced the following fluctuations in Commercial Lines premium pricing, excluding exposure (“pure price”), over the past several years:

	•		During 2007, pure price on Commercial Lines renewal business decreased 3.9%;

	•		During 2006, pure price on Commercial Lines renewal business decreased 1.7%;

	•		During 2005, pure price on Commercial Lines renewal business remained flat compared to 2004;

	•		From 2001 — 2004, pure price on Commercial Lines renewal business was increasing in a range from 4.3% to 12.6%; and

	•		For several years prior to 2001, Selective experienced decreases in pure price in our Commercial Lines operations.

As an example of pricing and loss trends on the combined ratio, taking a pure price decline of 1.4% and removing the expense that directly varies with premium volume yields an adverse combined ratio impact of approximately 1 point, in addition to a claims inflation increase of 3%, will cause the loss and loss adjustment expense ratio to increase approximately 2 points, all else remaining equal. The combination of claims inflation and price decreases could raise the combined ratio approximately 3 points in this example, absent any initiatives targeted to address these trends.

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

	•		Natural and man-made disasters;

	•		Fluctuations in interest rates and other changes in the investment environment that affect investment returns;

	•		Inflationary pressures (medical and economic) that affect the size of losses;

	•		Judicial, regulatory, legislative, and legal decisions that affect insurers’ liabilities;

	•		Changes in the frequency and severity of losses;

	•		Pricing and availability of reinsurance in the marketplace; and

	•		Weather-related impacts due to the effects of climate changes.

Selective competes with regional and national property and casualty insurance companies, including public and mutual companies, some of which do not use independent agents and write directly with insureds. Many of these competitors are larger than Selective and have greater financial and operating resources, as well as greater information scale. The Internet has also emerged as a significant place of new competition, both from existing competitors and from new competitors. A new form of competition may enter the marketplace as reinsurers may attempt to diversify their insurance risk by writing business in the primary marketplace. Because Selective sells its coverages through independent insurance agents who also are agents of its competitors, the Company faces competition within each of its appointed independent insurance agencies.

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

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

General economic conditions can adversely affect Selective’s business results and prospects.

Changes in general economic conditions can impact Selective’s business. For example, Selective’s contractor business represents 45% of its insurance operations segment and is significantly impacted by changes in general economic conditions, including the downturn in the U.S. housing market. Other economic conditions impacting Selective’s business include, but, are not limited to, recessions; increases in corporate, municipal and/or consumer bankruptcies; changes in interest rate levels; a continued downturn in the U.S. housing market; changes in domestic and international laws, including tax laws and bankruptcy laws; intervention by governments in financial markets, including the imposition of limits on the ability of mortgagees to foreclose on defaulted mortgage loans; wars; and terrorist acts could adversely affect the performance of the Company’s insured and investment portfolios, possibly leading to increases in losses and loss reserves in the insured portfolio and decreases in the value of the investment portfolio and, therefore, the Company’s financial strength.

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

On November 26, 2002, the Terrorism Risk Insurance Act of 2002 legislation was signed into law. This legislation was amended in December 2005 and extended through December 31, 2007 through the Terrorism Risk Insurance Extension Act of 2005 (collectively, these two acts will be referred to as “TRIA”). On December 18, 2007, TRIA was extended for seven more years until December 31, 2014. This revised legislation ends the distinction between foreign and domestic acts of terrorism without increasing the level of damages necessary to trigger the program ($100 million). This seven year period will provide the market with much-needed stability. TRIA requires sharing the risk of future losses from terrorism between private insurers and the federal government, and is applicable to almost all commercial lines of insurance. Insurance companies with direct commercial insurance exposure in the United States are required to participate in this program. TRIA rescinded all previously approved exclusions for terrorism. Policyholders for non-workers compensation policies have the option to accept or decline the terrorism coverage Selective offers in its policies, or negotiate other terms. In 2007, approximately 90% of Selective’s commercial non-workers compensation policyholders purchased terrorism coverage. The terrorism coverage is mandatory for all workers compensation primary policies. In addition, 48%, or ten of the twenty-one primary states in which Selective writes commercial property coverage mandate the coverage of fire following an act of terrorism. These provisions apply to new policies written after enactment of TRIA. A terrorism act must be certified by the Secretary of Treasury in order to be covered by TRIA. Each participating insurance company will be responsible for paying out a certain amount in claims (a deductible) before federal assistance becomes available. This deductible, which is equal to approximately $200 million in 2008, is based on a percentage of commercial lines direct earned premiums for lines subject to TRIA from the prior calendar year. For losses above an insurer’s deductible, the federal government will cover 85%, while the insurer contributes 15%. Although the provisions of TRIA will serve to mitigate Selective’s exposure in the event of a large-scale terrorist attack, the Company’s deductible is substantial.

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

Like many other property and casualty insurance companies, Selective depends on income from its investment portfolio for a significant portion of its revenues and earnings. Any significant decline in the Company’s investment income as a result of falling interest rates, decreased dividend payment rates, reduced returns in the Company’s other investment portfolio, primarily from alternative investments, or general market conditions would have an adverse effect on its results. Fluctuations in interest rates cause inverse fluctuations in the market value of the Company’s debt portfolio. In addition, issuers of debt which the Company holds in its investment portfolio may default in its financial obligations as a result of insolvency, lack of liquidity, operational failure or other reasons. Any significant decline in the market value of its investments, excluding its held-to-maturity investments, would reduce the Company’s stockholders’ equity. A significant decline in the market value of its equity and other investments would also reduce its policyholders’ surplus, which could impact the Company’s ability to write additional premiums. In addition, Selective’s notes payable are subject to certain debt-to-capitalization restrictions, which could also be impacted by a significant decline in investment values. For more information see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” in this Form 10-K.

Changes in tax laws impacting marginal tax rates and/or the preferred tax treatment of municipal obligations could adversely impact Selective’s business.

Tax legislation which imposes a “flat tax” or otherwise changes the tax preference of municipal obligations under current law could adversely affect the market value of municipal obligations. Forty-one percent of the Company’s investment portfolio is invested in tax-exempt municipal obligations; as such, the value of the investment portfolio could be adversely affected by any such legislation. Additionally, any such changes in tax law could reduce the difference between tax-exempt interest rates and taxable rates.

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

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

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

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

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

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

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

Selective markets and sells its insurance products through independent, non-exclusive insurance agencies and brokers. Agents and brokers are not obligated to promote Selective’s insurance products, and they may also sell the insurance products of the Company’s competitors. As a result, Selective’s business depends in part on the marketing and sales efforts of these agencies and brokers. As Selective diversifies and expands its business geographically, it may need to expand its network of agencies and brokers to successfully market its products. If these agencies and brokers fail to market Selective’s products successfully, its business may be adversely impacted. Also, independent agents may decide to sell their businesses to banks, other insurance agencies, or other businesses. Agents with a Selective appointment may decide to buy other agents. Changes in ownership of agencies or expansion of agencies through acquisition could adversely affect an agency’s ability to control growth and profitability, thereby adversely affecting Selective’s business.

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

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

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

Although ~~the federal government does not directly regulate~~ the insurance industry is primarily regulated by individual states, federal initiatives, ~~from time to time,~~such as, the National Flood Insurance Program, the optional federal charter, and the Office of Foreign Assets Control, can also impact the insurance industry. Proposals intended to control the cost and availability of healthcare services have been debated in the U.S. Congress and state legislatures. Although Selective neither writes health insurance nor assumes any

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

Examples of insurance regulatory risks include:

Automobile Insurance Regulation

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

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

Workers Compensation Insurance Regulation

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

Homeowners Insurance Regulation

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

Certain coastal states have instituted, or are considering adopting, legislation or regulation to maintain or increase the availability of property insurance, particularly homeowners insurance, in those states. For example, in 2002 Florida combined its two high-risk insurance pools, the Windstorm and Joint Underwriting Association, to create Florida Citizens Property Insurance Corporation (“CPIC”). CPIC is a state-regulated association and historically has provided property insurance to policyholders unable to obtain coverage in the private insurance market. However, CPIC has evolved from market of last resort to become the state’s largest property insurer. In May 2007, a new insurance law passed in Florida expanding the role of CPIC and making its rates more competitive with the private market. Florida homeowners can now purchase coverage from CPIC if the rates for a policy from a private insurer are more than 15% higher than from a similar CPIC policy. CPIC can now also offer high-risk policyholders homeowners insurance as well as wind-only coverage in other parts of the state, which is driving homeowners rates down in the private market. In addition, effective January 1, 2008, an insurer writing homeowners insurance in another state, but not in Florida, may not continue to write private passenger automobile insurance in Florida unless such insurer is affiliated with an insurer writing homeowners insurance in Florida. At this time, none of Selective’s Insurance Subsidiaries write private passenger automobile insurance in Florida.

Certain other coastal states, including certain states in which Selective’s Insurance Subsidiaries transact homeowners insurance business, are considering legislation requiring that ~~homeowners~~ insurers that write homeowners insurance in any geographic area of a state must write homeowners insurance in all geographic areas of that state. WeSelective cannot predict whether any such legislation or regulation will be enacted, and the ultimate impact on Selective will depend upon the specifics of the legislation or regulation and the state or states that adopt any such legislation or regulation.

Credit Scoring Regulation

Selective uses certain aspects of credit scores when evaluating individual risks. In June 2007 the United States Supreme Court interpreted the Fair Credit Reporting Act (“FCRA”) concerning the meaning of the term “adverse action” as it relates to an insurance carrier’s use of credit scoring when it quotes premium for a personal lines applicant or raises premium for an existing personal lines insured. This interpretation requires insurance carriers to notify policyholders and applicants when their credit reports are the basis for adverse action, such as a rate increase. An adverse action notification, according to the interpretation, would be required if a quoted rate is higher than it would have been in a credit neutral comparison, which compares the credit score-based rate against a credit score neutral rate. The interpretation does not require an insurance carrier to inform all policyholders that their credit reports have been reviewed in the underwriting process or that the rate they have received is higher than the best possible rate of the carrier.

In 2007, 31 states introduced 83 bills seeking to limit or completely restrict the use of credit scores on individuals. In addition, the Federal Trade Commission produced a report in late 2007 stating the use of credit scores is an accurate predictor of risk and is not prejudicial to minority groups. Congress is expected to continue investigating this issue and many state legislatures and agencies will continue to monitor the impact credit scoring has on the insurance marketplace.

Changes to regulation regarding the use of credit scores may impact the way in which the Company prices business and/or notifies policyholders or applicants of adverse actions resulting from the use of these score.

Flood Insurance Regulation

The federal government’s NFIP program currently covers flooding caused by storm surge where water is pushed toward the shore by the force of the winds swirling around a storm. If this federal program is modified in an unfavorable manner, whereby flooding related to storm surge is no longer covered or is required to be covered by homeowners policies, such modification could have a material adverse effect on Selective’s Flood and/or Homeowners results. Legislation exists that may force policies to cover claims related to windstorm damage and could lower the fee paid by the NFIP to the servicing carrier. The current repayment of claims by the NFIP could also be restricted, with the current authorization expected to last only to 2009.

Regulation and Legislation of Agent Compensation

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

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

	•		Develop close relationships with each agent by: (i) soliciting their feedback on products and services, (ii) advising them concerning company developments, and (iii) investing significant time with them professionally and socially; and,

	•		Develop with each agent, and then carefully monitor, annual goals regarding: (i) types and mix of risks placed with Selective, (ii) amounts of premium or numbers of policies placed with Selective, (iii) customer service levels, and (iv) profitability of business placed with Selective.

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

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

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

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

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

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

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

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

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

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

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

Selective also faces credit risk with respect to reinsurance. In addition, reinsurers which the Company has contracted with may default in their financial obligations as a result of insolvency, lack of liquidity, operational failure or other reasons. The inability of any of the Company’s reinsurers to meet their financial obligations could materially and adversely affect Selective’s operations, as the Company remains primarily liable to its customers under the policies that it has reinsured.

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

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

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

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

	•		~~The Gramm-Leach-Bliley Act, which could result in increased competition from new entrants to the insurance market, including banks and other financial service companies;~~

	•		~~Programs in which state-sponsored entities provide property insurance in catastrophe-prone areas or other alternative market types of coverage; and~~

	•		~~Changing practices caused by the Internet, which has led to greater competition in the insurance business and, in some cases, greater expectations for customer service.~~

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

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

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

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

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

	•		After-market crash parts;

	•		Urban homeowner underwriting practices;

	•		Credit scoring and predictive modeling pricing;

	•		Investment disclosure;

	•		Health maintenance organization practices;

	•		Discounting and payment of personal injury protection claims; and

	•		Shareholder class action suits.

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

New Jersey insurance regulations require New Jersey auto insurers to involuntarily write private passenger automobile insurance for individuals who are unable to obtain insurance in the voluntary market. These policies are priced according to a separate rating scheme that is established by the assigned risk plan and subject to approval by NJDOBI. The amount of involuntary insurance an insurer must write in New Jersey depends on the insurer’s statewide market share — the greater the market share, the more involuntary coverage the insurer is required to write. The underwriting of involuntary personal automobile insurance in New Jersey has been historically unprofitable. In addition to the assigned risk plan in New Jersey, there are ongoing attempts to address rate disparities between different geographic regions in the state, as well as judicial attempts to address limitations of lawsuits.

Selective depends on key ~~personnel~~personnel..

To a large extent, the success of Selective’s businesses is dependent on its ability to attract and retain key employees, in particular its senior officers, key management, sales, information systems, underwriting, claims, HR Outsourcing, and corporate personnel. Competition to attract and retain key personnel is intense. While Selective has employment agreements with a number of key managers, the Company generally does not have employment contracts with its employees and cannot ensure that it will be able to attract and retain key personnel. In addition, Selective’s workforce is older, with an average age of 47. Approximately 25% of Selective’s workforce is retirement eligible under Selective’s retirement and benefit plans.

Selective faces risks from technology-related failures.

Selective’s ~~investments support~~businesses are increasingly dependent on computer and Internet-enabled technology. The Company’s inability to anticipate or manage problems with technology associated with scalability, security, functionality, or reliability could adversely affect its ~~operations and provide a significant portion of its revenues and earnings~~.

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

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

Flood insurance is offered through the NFIP, which is managed by the Mitigation Division of FEMA under the U.S. Department of Homeland Security. In 2005, the destruction caused by the active hurricane season stressed the NFIP with flood losses currently estimated by FEMA to be in excess of $20 billion. ~~We continue~~Selective continues to monitor developments with the NFIP regarding its ability to pay claims in the event of another large-scale disaster. Congress controls the federal agency’s funding authority and future limitations in this funding could occur.

Effective October 1, 2006, the fee paid to usSelective by the NFIP decreased 0.6 points to 30.2% of premiums written. ~~Future~~This fee structure is still in place as of December 31, 2007. However, during 2008, the NFIP is expected to further decrease the fee 0.5 points to 29.7%. Further reductions in this rate could occur through legislative activity.

The current program is also being reevaluated to include a cap on claim fees paid by the NFIP. While the final outcome of this legislation is unknown, this cap could impact the ultimate claim fee the Company could receive in the event that there is a large catastrophe in an area in which Selective is geographically concentrated.

Selective faces risks in the HR Outsourcing business.

Selective HR’s operations are affected by numerous federal and state laws and regulations relating to employment matters, benefits plans, and taxes. In performing services for its clients, Selective HR assumes some obligations of an employer under these laws and regulations. Regulation in the HR Outsourcing business is constantly evolving, which could result in the modification of laws and regulations from time to time. Selective cannot predict what additional government initiatives, if any, affecting Selective HR’s business may be promulgated in the future. Consequently, the Company also cannot predict whether Selective HR will be able to adapt to new or modified regulatory requirements or obtain necessary licenses and government approvals.

Selective is subject to the compliance requirements of the federal securities laws.

Selective is subject to extensive regulation under the federal securities laws as a registrant under the Securities Exchange Act of 1934, as amended. In the event Selective was unable to comply with the federal securities laws, the Company would likely be unable to access the public capital markets, which would make it more difficult to raise necessary capital and/or increase the cost of capital. If Selective cannot obtain adequate capital on favorable terms or at all, the business, operating results and financial condition would be adversely affected.

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

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

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

	•		Supermajority voting and fair price to ~~the Company’s~~Selective’s business combinations;

	•		Staggered terms for ~~the Company’s~~Selective’s directors;

	•		Supermajority voting requirements to amend the foregoing provisions;

	•		~~The Company’s~~Selective’s stockholders’ rights plan; and

	•		The ability of ~~the Company’s~~Selective’s board of directors to issue “blank check” preferred stock.

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

~~Selective faces risks from technology-related failures~~.

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

~~Selective faces risks in the HR Outsourcing business~~.

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

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties.

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

Item 3. Legal Proceedings.

In the ordinary course of conducting business, Selective and its subsidiaries are named as defendants in various legal proceedings. ~~Some~~Most of these proceedings are claims litigation involving the Insurance Subsidiaries as either: (a) liability insurers defending or providing indemnity for third-party claims brought against insureds or (b) insurers defending first-party coverage claims brought against them. Selective accounts for such activity through the establishment of unpaid loss and loss adjustment expense reserves. Selective’s management expects that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of defense, will not be material to Selective’s consolidated financial condition, results of operations, or cash flows.

From time-to-time, the Insurance Subsidiaries are also involved in other legal actions, some of which assert claims for substantial amounts. These actions include, among others, putative state class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, improper reimbursement of medical providers paid under workers compensation and personal and commercial automobile insurance policies. The Insurance Subsidiaries are also from time-to-time involved in individual actions in which extra-contractual damages, punitive damages, or penalties are sought, such as claims alleging bad faith in the handling of insurance claims. Selective believes that it has valid defenses to these cases. Selective’s management expects that the ultimate liability, if any, with respect to such lawsuits, ~~attempt~~after consideration of provisions made for estimated losses, will not be material to ~~establish liability under insurance contracts issued by~~ Selective’s ~~Insurance Subsidiaries. Plaintiffs in these lawsuits are seeking money damages that, in some cases, are extra-contractual in nature~~consolidated financial condition. Nonetheless, given the large or ~~they are seeking to have the court direct the activities of Selective’s operations~~indeterminate amounts sought in certain ~~ways.~~

~~Although the ultimate outcome~~ of these actions, and the inherent unpredictability of litigation, an adverse outcome in certain matters ~~is not presently determinable, Selective does not believe that the total amounts that it will ultimately have to pay, if any, in all of these lawsuits in the aggregate will~~could, from time-to-time, have a material adverse effect on ~~its financial condition,~~Selective’s consolidated results of operations or ~~liquidity.~~cash flows in particular quarterly or annual periods.

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

No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of ~~2006.~~2007.

PART II

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

(a) Market Information

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


	2006				2005
	High		Low		High		Low		2007				2006
									High		Low		High		Low
First Quarter	$	29.18		26.10		24.50		20.88	$	29.07		23.25		29.18		26.10
Second Quarter		28.23		25.38		25.24		20.95		27.87		25.27		28.23		25.38
Third Quarter		28.02		24.89		25.47		23.02		27.33		19.04		28.02		24.89
Fourth Quarter		29.10		25.95		29.64		23.53		25.41		20.84		29.10		25.95

On February ~~23, 2007,~~22, 2008, the closing price of Selective as reported on the NASDAQ Global Select Market was $24.89. All share and per share amounts have been restated to give retroactive effect to the two-for-one stock split distributed on February 20, 2007 to shareholders of record as of February 13, 2007. See Item 8. “Financial Statements and Supplementary Data,” Note 10 for discussion regarding the stock split.$24.40.

(b) Holders

As of February ~~13, 2006,~~15, 2008, there were approximately ~~2,744~~2,651 holders of record of Selective’s Common Stock, including beneficial holders whose securities were held in the name of the registered clearing agency or its nominee.

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


Dividend per share	2006		2005		2007		2006

First Quarter	$	0.11		0.10	$	0.12	$	0.11
Second Quarter	$	0.11		0.10		0.12		0.11
Third Quarter	$	0.11		0.10		0.12		0.11
Fourth Quarter	$	0.11		0.11		0.13		0.11

~~The Parent’s~~Selective’s ability to declare dividends is restricted by covenants contained in senior notes that it issued on May 4, 2000 (“2000 Senior Notes”). See Note 9 to the consolidated financial statements entitled, “Indebtedness.” All such covenants were met during ~~2006~~2007 and ~~2005.~~2006. At December 31, ~~2006,~~2007, the amount available for dividends to holders of Selective’s common shares under such restrictions was ~~$384.2~~$336.0 million for the 2000 Senior Notes.

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

(d) Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information about Selective’s Common Stock authorized for issuance under equity compensation plans as of December 31, ~~2006:~~2007:

(a)

(b)

(c)

(a)

(b)

(c)

Number of

securities remaining

Number of

available for

Number of

available for

securities to

future issuance under

securities to

future issuance under

be issued upon

Weighted-average

equity compensation

be issued upon

Weighted-average

equity compensation

exercise of

exercise price of

plans (excluding

exercise of

exercise price of

plans (excluding

outstanding options,

securities reflected

outstanding options,

securities reflected

Plan Category

warrants and rights

in column (a)

warrants and rights

in column (a))

Equity compensation plans approved by security holders

1,250,036

$14.99

6,370,460

⁽¹⁾

1,241,153

16.69

5,448,923

⁽¹⁾


⁽¹⁾		Includes ~~359,496~~251,434 shares available for issuance under Selective’s Employee Stock Purchase Savings Plan, ~~3,074,854~~2,418,754 shares available for issuance under Selective’s 2005 Omnibus Stock Plan, which can be issued, among other things, as stock options or restricted stock awards, and ~~2,936,110~~2,778,735 shares available for issuance under Selective’s Stock Purchase Plan for Independent Insurance Agencies.

(e) Performance Graph

The following chart, produced by Research Data Group, Inc., depicts Selective’s performance for the period beginning December 31, ~~2001~~2002 and ending December 31, ~~2006,~~2007, as measured by total stockholder return on the Company’s Common Stock compared with the total return of the NASDAQ Composite Index and a select group of peer companies.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Selective Insurance Group Inc., The NASDAQ Composite Index
And A Peer Group


*		$100 invested on 12/31/0702 in stock or ~~index — including~~index-including reinvestment of ~~dividends.~~dividents. Fiscal year ending December 31.

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

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

The following table provides information regarding Selective’s purchase of its own Common Stock in the fourth quarter of ~~2006:~~2007:

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

Total
335,012 27.41 311,978


					Total Number of		Maximum Number
					Shares Purchased		of Shares that May Yet Be
			Average Price		as Part of Publicly		Purchased Under the
	Total Number of		Paid		Announced Plans		Announced Plans
Period	Shares Purchased¹		per Share		or Programs²		or Programs²
October 1-31, 2007		163,505	$	24.27		—		3,519,300
November 1-30, 2007		4,017		22.75		—		3,519,300
December 1-31, 2007		10,619		24.07		—		3,519,300

Total		178,141	$	24.22		—


¹		~~Includes Selective’s purchases~~During the fourth quarter of 2007, 174,047 shares were purchased from employees ~~of 7,174 shares~~ in connection with the vesting of restricted ~~stock. These~~stock and 4,094 shares were purchased ~~at the closing market price on the date of vesting. Selective also purchased 15,860 shares~~from employees in connection with stock option exercises. These ~~shares~~repurchases were ~~purchased at the current market price of Selective’s Common Stock at the time of exercise. Shares purchased~~made in connection with ~~restricted stock vestings and option exercises are~~satisfying tax withholding obligations with respect to those employees. These shares were not purchased as part of the publicly announced program. The shares were purchased at the current market prices of Selective’s Common Stock on the dates of the purchases.

²		On ~~April 26, 2005,~~July 24, 2007, the Board of Directors authorized a ~~stock~~new share repurchase program offor up to ~~10.0~~4 million shares, which ~~is scheduled~~expires on July 26, 2009. During the fourth quarter of 2007, no shares were repurchased, leaving 3,519,300 shares remaining to ~~expire on April 26, 2007.~~be purchased under the authorized program.

Item 6. Selected Financial Data.

~~Eleven-Year Financial Highlights~~¹


Eleven-Year Financial Highlights¹

(All presentations are in accordance with
GAAP unless noted otherwise, number of
weighted average shares and dollars in
thousands, except per share amounts)	2007		2006		2005		2004		2003
Net premiums written	$	1,554,867		1,535,961		1,459,474		1,365,148		1,219,159
Net premiums earned		1,517,306		1,499,664		1,418,013		1,318,390		1,133,070
Net investment income earned		174,144		156,802		135,950		120,540		114,748
Net realized gains (losses)		33,354		35,479		14,464		24,587		12,842
Diversified Insurance Services revenue from continuing operations^2,3		115,566		110,526		98,711		86,484		70,780
Total revenues		1,846,228		1,807,867		1,671,012		1,553,624		1,335,056
Underwriting profit (loss)		15,957		57,978		69,728		40,768		(25,252	)
Diversified Insurance Services income (loss) from continuing operations^2,3		18,623		17,808		14,793		11,921		6,194
Net income from continuing operations³		146,498		163,574		147,452		127,177		64,375
Total discontinued operations, net of tax³		—		—		546		1,462		1,969
Cumulative effect of change in account principle, net of tax		—		—		495		—		—
Net income		146,498		163,574		148,493		128,639		66,344
Comprehensive income		131,940		159,802		112,078		134,723		99,362
Total assets		5,001,992		4,767,705		4,375,625		3,912,411		3,423,925
Notes payable and debentures⁶		295,067		362,602		339,409		264,350		238,621
Stockholders’ equity		1,076,043		1,077,227		981,124		882,018		749,784
Statutory premiums to surplus ratio⁴		1.5		1.5		1.6		1.7		1.8
Statutory combined ratio^2,5		97.5		95.4		94.6		95.9		101.5
Combined ratio^2,5		98.9		96.1		95.1		96.9		102.2
Yield on investment, before-tax		4.8		4.6		4.6		4.7		5.1
Debt to capitalization		21.5		25.2		25.7		23.1		24.1
Return on average equity		13.6		15.9		15.9		15.8		9.5

Per share data:
Net income from continuing operations³:
Basic	$	2.80		2.98		2.72		2.38		1.23
Diluted		2.59		2.65		2.33		2.01		1.07

Net income:
Basic	$	2.80		2.98		2.74		2.41		1.27
Diluted		2.59		2.65		2.35		2.04		1.10

Dividends to stockholders	$	0.49		0.44		0.40		0.35		0.31

Stockholders’ equity	$	19.81		18.81		17.34		15.79		13.74

Price range of Common Stock:
High	$	29.07		29.18		29.64		22.98		16.50
Low		19.04		24.89		20.88		15.86		10.91
Close		22.99		28.65		26.55		22.12		16.18

Number of weighted average shares:
Basic		52,382		54,986		54,342		53,462		52,262
Diluted		57,165		62,542		64,708		64,756		63,206

(All presentations are in accordance with
GAAP unless noted otherwise, number of
weighted average shares and dollars in
thousands, except per share amounts) 2006 2005 2004 2003 2002

Net premiums written $ 1,535,961 1,459,474 1,365,148 1,219,159 1,053,487
Net premiums earned 1,499,664 1,418,013 1,318,390 1,133,070 988,268
Net investment income earned 156,802 135,950 120,540 114,748 103,067
Net realized gains (losses)
35,479 14,464 24,587 12,842 3,294
Diversified Insurance Services revenue from continuing operations^2,3
110,526 98,711 86,484 70,780 59,399
Total revenues 1,807,867 1,671,012 1,553,624 1,335,056 1,157,553
Underwriting profit (loss) 57,978 69,728 40,768 (25,252 ) (38,743 )
Diversified Insurance Services income (loss) from continuing operations^2,3
17,808 14,793 11,921 6,194 3,103
Net income from continuing operations³
163,574 147,452 127,177 64,375 40,310
Total discontinued operations, net of tax³
— 546 1,462 1,969 1,659
Cumulative effect of change in account principle, net of tax — 495 — — —
Net income 163,574 148,493 128,639 66,344 41,969
Comprehensive income 146,054 112,078 134,723 99,362 59,366
Total assets 4,767,705 4,375,625 3,912,411 3,423,925 3,016,335
Notes payable and debentures⁶
362,602 339,409 264,350 238,621 262,768
Stockholders’ equity 1,077,227 981,124 882,018 749,784 652,102
Statutory premiums to surplus ratio⁴
1.5 1.6 1.7 1.8 1.9
Statutory combined ratio^2,5
95.4 94.6 95.9 101.5 103.2
Combined ratio^2,5
96.1 95.1 96.9 102.2 103.9
Yield on investment, before-tax 4.6 4.6 4.7 5.1 5.4
Debt to capitalization 25.2 25.7 23.1 24.1 28.7
Return on average equity 15.9 15.9 15.8 9.5 6.8

Per share data:
Net income from continuing operations^3,8:

Basic $ 2.98 2.72 2.38 1.23 0.80
Diluted 2.65 2.33 2.01 1.07 0.74

Net income⁸:

Basic $ 2.98 2.74 2.41 1.27 0.83
Diluted 2.65 2.35 2.04 1.10 0.77

Dividends to stockholders⁸
$ 0.44 0.40 0.35 0.31 0.30

Stockholders’ equity⁸
$ 18.81 17.34 15.79 13.74 12.26

Price range of Common Stock⁸:

High $ 29.18 29.64 22.98 16.50 15.74
Low 24.89 20.88 15.86 10.91 9.68
Close 28.65 26.55 22.12 16.18 12.59

Number of weighted average shares⁸:

Basic 54,986 54,342 53,462 52,262 50,602
Diluted 62,542 64,708 64,756 63,206 55,990


1.		See the Glossary of Terms attached to this Form 10-K as Exhibit 99.1.

2.		Flood business is included in statutory underwriting results in accordance with prescribed statutory accounting practices. On a GAAP basis only, flood servicing revenue and expense has been reclassified from underwriting results to Diversified Insurance Services. ~~1997 — 2005 have been restated to reflect the exclusion of results from discontinued operations.~~

3.		See Item 8. “Financial Statements and Supplementary Data,” Note 15 to the consolidated financial statements and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the section entitled “Diversified Insurance Services Segment” for a discussion of discontinued operations and Item 8. “Financial Statements and Supplementary Data,” Note 12 to the consolidated financial statements for the components of income.

2001 2000 1999 1998 1997 1996

925,420 843,604 811,677 748,873 717,618 692,239
883,048 821,265 799,065 722,992 676,268 694,947
96,767 99,495 96,531 99,196 100,530 96,952
6,816 4,191 29,377 (2,139 ) 6,021 2,786

51,783 43,463 22,554 8,562 7,060 7,061
1,041,177 972,153 950,669 831,791 793,007 804,780
(60,638 ) (65,122 ) (54,147 ) (24,986 ) (3,022 ) (21,982 )

(3,819 ) 2,112 4,257 1,765 646 1,950
24,112 24,487 53,483 53,277 69,531 55,551
1,581 2,048 234 293 77 —

— — — — — —
25,693 26,535 53,717 53,570 69,608 55,551
24,405 49,166 16,088 78,842 105,931 51,539
2,673,721 2,590,903 2,507,545 2,432,168 2,306,191 2,189,737
156,433 163,634 81,585 88,791 96,559 103,769
591,160 577,797 569,964 607,583 565,316 474,299
1.8 1.7 1.6 1.5 1.5 1.7
106.7 108.2 105.7 103.2 100.1 102.9
106.9 107.9 106.8 103.6 100.3 102.9
5.4 5.8 5.6 5.7 6.0 6.1
21.0 22.1 12.5 13.2 14.6 18.0
4.4 4.6 9.1 9.1 13.4 12.2

0.50 0.50 0.99 0.94 1.21 0.96
0.46 0.47 0.93 0.87 1.14 0.92

0.53 0.54 0.99 0.94 1.21 0.96
0.49 0.51 0.94 0.87 1.14 0.92

0.30 0.30 0.30 0.28 0.28 0.28

11.58 11.46 10.73 10.65 9.66 8.16

14.11 12.94 11.25 14.63 14.19 9.69
9.97 7.32 8.25 8.35 9.16 7.75
10.87 12.13 8.60 10.07 13.50 9.50

49,166 49,814 54,162 56,960 57,818 57,720
52,848 53,144 57,754 60,824 61,850 60,720


2002			2001			2000			1999			1998			1997
	1,053,487			925,420			843,604			811,677			748,873			717,618
	988,268			883,048			821,265			799,065			722,992			676,268
	103,067			96,767			99,495			96,531			99,196			100,530
	3,294			6,816			4,191			29,377			(2,139	)		6,021

	59,399			51,783			43,463			22,554			8,562			7,060
	1,157,553			1,041,177			972,153			950,669			831,791			793,007
	(38,743	)		(60,638	)		(65,122	)		(54,147	)		(24,986	)		(3,022	)

	3,103			(3,819	)		2,112			4,257			1,765			646
	40,310			24,112			24,487			53,483			53,277			69,531
	1,659			1,581			2,048			234			293			77

—			—			—			—			—			—
	41,969			25,693			26,535			53,717			53,570			69,608
	59,366			24,405			49,166			16,088			78,842			105,931
	3,016,335			2,673,721			2,590,903			2,507,545			2,432,168			2,306,191
	262,768			156,433			163,634			81,585			88,791			96,559
	652,102			591,160			577,797			569,964			607,583			565,316
	1.9			1.8			1.7			1.6			1.5			1.5
	103.2			106.7			108.2			105.7			103.2			100.1
	103.9			106.9			107.9			106.8			103.6			100.3
	5.4			5.4			5.8			5.6			5.7			6.0
	28.7			21.0			22.1			12.5			13.2			14.6
	6.8			4.4			4.6			9.1			9.1			13.4

	0.80			0.50			0.50			0.99			0.94			1.21
	0.74			0.46			0.47			0.93			0.87			1.14

	0.83			0.53			0.54			0.99			0.94			1.21
	0.77			0.49			0.51			0.94			0.87			1.14

	0.30			0.30			0.30			0.30			0.28			0.28

	12.26			11.58			11.46			10.73			10.65			9.66

	15.74			14.11			12.94			11.25			14.63			14.19
	9.68			9.97			7.32			8.25			8.35			9.16
	12.59			10.87			12.13			8.60			10.07			13.50

	50,602			49,166			49,814			54,162			56,960			57,818
	55,990			52,848			53,144			57,754			60,824			61,850


4.		Regulatory and rating agencies use the statutory premiums to surplus ratio as a measure of solvency, viewing an increase in the ratio as a possible increase in solvency risk. Management and analysts also view this ratio as a measure of the effective use of capital because, as the ratio increases, revenue per dollar of capital increases, indicating the possibility of increased returns or increased losses due to the effects of leverage.

5.		Changes in both the GAAP and statutory combined ratios are viewed by management and analysts as indicative of changes in the profitability of underwriting operations. A ratio over 100% is indicative of an underwriting loss, and a ratio below 100% is indicative of an underwriting profit.

6.		See Item 8. “Financial Statements and Supplementary Data,” Note 9 to the consolidated financial statements for a discussion of notes payable and debentures.

7.		In December 2004, Selective adopted Emerging Issues Taskforce Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share,” which resulted in the restatement of 2003 diluted earnings per share to reflect the conversion feature of Selective’s September 2002 Senior Convertible Notes. For further discussion of these senior convertible notes, see Item 8. “Financial Statements and Supplementary Data,” Note 9.

8.		All share and per share amounts have been restated to give retroactive effect to the two-for-one stock split distributed on February 20, 2007 to shareholders of record as of February 13, 2007. See Item 8. “Financial Statements and Supplementary Data,” Note 10 for discussion regarding the stock split.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-looking Statements

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~~Selective’s 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~~Selective’s or ~~our~~the 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 may be identified 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 weSelective can give no assurance that such expectations will prove to be correct. ~~We undertake~~Selective undertakes 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~~Selective’s actual results to differ materially from those Selective has 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~~Selective operates in a continually changing business environment, and new risk factors emerge from time-to-time. WeSelective can neither predict such new risk factors nor can weSelective assess the impact, if any, of such new risk factors on ~~our~~Selective’s 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.

Introduction

Selective Insurance Group, Inc., (“Selective,” the “Company,” “we,” or “our”) offers property and casualty insurance products and diversified insurance services through its various subsidiaries. Selective classifies its businesses into three operating segments: (i) Insurance Operations; (ii) Investments; and (iii) Diversified Insurance Services.

The purpose of the Management’s Discussion and Analysis (“MD&A”) is to provide an understanding of the consolidated results of operations and financial condition and known trends and uncertainties that may have a material impact in future periods. For convenience and reading ease, we have written the remainder of the MD&A in the first person plural.

In the MD&A, we will discuss and analyze the following:

•		Critical Accounting Policies and Estimates;

•		Financial Highlights of Results for years ended December 31, 2007, 2006, ~~2005,~~ and ~~2004;~~2005;

•		Results of Operations and Related Information by Segment;

•		Financial Condition, Liquidity, and Capital Resources;

•		Off-Balance Sheet Arrangements;

•		Contractual Obligations and Contingent Liabilities and Commitments;

•		Federal Income Taxes; and

•		Adoption of Accounting Pronouncements.

Critical Accounting Policies and Estimates

We have identified the policies and estimates described below as critical to our business operations and the understanding of the results of our operations. Our preparation of the ~~consolidated financial statements~~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,~~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. Those estimates that were most critical to the preparation of the financial statements involved the following: (i) reserve for losses and loss expenses; (ii) deferred policy acquisition costs; (iii) pension and postretirement benefit plan actuarial assumptions; and (iv) other-than-temporary investment impairments.

Reserves for Losses and Loss Expenses

Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the loss to the insurer, and the 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, ~~2006, the Company~~2007, we had accrued ~~$2.3~~$2.5 billion of gross loss and loss expense reserves compared to ~~$2.1~~$2.3 billion at December 31, ~~2005.~~2006.

How reserves are established

When a claim is reported to an insurance subsidiary, claims personnel establish a “case reserve” for the estimated amount of the ultimate payment. The amount of the reserve is primarily based upon a case-by-case evaluation of the type of claim involved, the circumstances surrounding each claim, and the policy provisions relating to the type of losses. The estimate reflects the informed judgment of such personnel based on their knowledge, experience, and general insurance reserving ~~practices, as well as the experience and knowledge of the claims person.~~practices. Until the claim is resolved, these estimates are revised as deemed ~~necessary~~appropriate by the responsible claims personnel based on subsequent developments and periodic reviews of the case.

In addition to case reserves, we maintain estimates of reserves for losses and loss expenses incurred but not yet reported (“IBNR”). Using generally accepted actuarial reserving techniques, we project our estimate of ultimate losses and loss expenses at each reporting date. The difference between: (i) projected ultimate loss and loss expense reserves and (ii) case loss reserves and loss expense reserves thereon are carried as the IBNR reserve. The actuarial techniques used are part of a comprehensive reserving process that includes two primary components. The first component is a detailed quarterly reserve analysis performed by our internal actuarial staff, which is managed independently from the operating units.In completing this analysis, the actuaries are required to make numerous assumptions, including, for example, the selection of loss development factors and the weight to be applied to each individual actuarial indication. These indications include paid and incurred versions for the following actuarial methodologies: loss development, Bornhuetter-Ferguson, Berquist-Sherman, and frequency/severity. Additionally, the actuaries must gather substantially similar data in sufficient volume to ensure the statistical credibility of the data. The second component of the analysis is the projection of the expected ultimate loss ratio for each line of business for the current accident year. This projection is part of ~~the Company’s~~our planning process wherein ~~the~~we review and update expected loss ratios ~~are reviewed and updated~~ each quarter. This review includes actual versus expected pricing changes, loss trend assumptions, and updated prior period loss ratios from the most recent quarterly reserve analysis.

In addition to the most recent loss trends, a range of possible IBNR reserves is determined annually and continually considered, among other factors, in establishing IBNR for each reporting period. Loss trends include, but are not limited to, large loss activity, environmental claim activity, large case reserve additions or reductions for prior accident years, and reinsurance recoverable issues. ~~The Company~~We also ~~considers~~consider factors such as: (i) per claim information; (ii) ~~Company~~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. Based on the consideration of the range of possible IBNR reserves, recent loss trends, uncertainty associated with actuarial assumptions and other factors, IBNR is established and the ultimate net liability for losses and loss expenses is determined. Such an assessment requires considerable judgment given that it is frequently not possible to determine whether a change in the data is an anomaly until some time after the event. Even if a change is determined to be permanent, it is not always possible to reliably determine the extent of the change until some time later. There is no precise method 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. The changes in these estimates, resulting from the continuous review process and the differences between estimates and ultimate payments, are reflected in the consolidated statements of income for the period in which such estimates are changed. Any changes in the liability estimate may be material to the results of operations in future periods.

Major trends by line of business creating additional loss and loss expense reserve uncertainty

The Insurance Subsidiaries are multi-state, multi-line property and casualty insurance companies and, as such, are subject to reserve uncertainty stemming from a variety of sources. These uncertainties are considered at each step in the process of establishing loss and loss expense reserves. However, as market conditions change, certain trends are identified that management believes create an additional amount of uncertainty. A discussion of recent trends, by line of business, that have been recognized by management ~~follows.~~follows:

Workers Compensation

With ~~$763~~$832 million, or ~~37%~~36% of our total recorded reserves, net of reinsurance at December 31, ~~2006,~~2007, workers compensation is our largest reserved line of business. In addition to the uncertainties associated with actuarial assumptions and methodologies described above, workers compensation is the line of business ~~that is~~ most susceptible to unexpected changes in ~~the cost of~~ medical services ~~because of~~costs due to the length of time over which medical services are provided and the unpredictability of medical cost inflation. From 2005 through 2007, we experienced an unusual amount of volatility associated with our workers compensation medical costs. In 2005, we had sufficient evidence of greater than expected increases in our workers compensation medical costs and raised our reserves in this line of business by $42 million for

accident years 2001 and prior. InFrom 2006 ~~while~~to 2007, our workers compensation medical ~~cost trends were higher than historical amounts, they were lower than 2005~~development returned to a more normal level and ~~were close to expected amounts in our reserve analysis. As~~as a result ~~in 2006,~~our reserves for prior accident years were reduced by the relatively moderate amount of $4 ~~million. The~~million in 2006 and $4 million in 2007. Even though medical cost development returned to a more customary level in 2007, the unusual amount of volatility over the past few years does create additional uncertainty. If the higher than historical ~~increase~~increases in medical costs in 2005 ~~and 2006 could be~~were a ~~relatively short-term~~just an anomaly, ~~in which case~~then our historical patterns ~~would be the best~~are an appropriate basis for our future reserve projections. If higher trends return and continue on a longer term, our historical patterns will be less meaningful in predicting future loss costs and could result in significant adverse reserve development.

General Liability

At December 31, ~~2006,~~2007, our general liability line of business had recorded reserves, net of reinsurance of ~~$708~~$815 million, which represented ~~34%~~35% of our total net reserves. ~~In recent years, this~~This line of business ~~has experienced adverse development mainly due to coverage for completed work under~~includes umbrella policies ~~issued to contractors~~which provide additional limits above underlying automobile and ~~higher than expected legal expenses. Contractors~~ general liability business in the late 1990’s was our fastest growing class of business, which brought with it more complex claims and created challenges in estimating the related reserves. By 2003, we had gained a better understanding of the underwriting complexities and were able to implement initiatives to improve the financial results for this line. Accordingly, our adverse development in 2006 of $15 million for this line of business was driven by reserve increases for accident years 2002 and prior, and was partially offset bycoverages. While favorable development in ~~accident~~2007 for prior years ~~2004~~was minimal, two recent changes in our book of business relating to umbrella coverage could create additional volatility in our results: (i) we have grown the number of our commercial umbrella policies at a greater rate than the rest of our commercial lines of business; and ~~2005 as~~(ii) we ~~compiled additional experience to improve~~have raised the net retention of our ~~actuarial projections~~reinsurance covering these policies. Both of ~~expected ultimate losses. At this time,~~these changes raise the average limits of losses that we retain on a net basis. While management has not identified any ~~recent~~specific trends ~~that would create~~relating to additional ~~significant~~ reserve uncertainty, our increase in average net retention does create the potential for ~~this line of business.~~additional volatility in our reserves.

Commercial Automobile

At December 31, ~~2006,~~2007, our commercial automobile line of business had recorded reserves, net of reinsurance, of ~~$313~~$330 million, which represented ~~15%~~14% of our total net reserves. This line of business has experienced favorable loss development in recent years driven by a downward trend in large claims. The number of large claims has a high degree of volatility from year-to-year and, therefore, requires a longer period before true trends are recognized and can be acted upon. We have experienced lower than expected severity in accident years 2002 through ~~2005,~~2006, which resulted in favorable development in ~~2005~~2006 and ~~2006~~2007 of ~~$48~~$15 million and ~~$15~~$19 million, respectively. This result is driven by trends that are positively affecting the commercial auto insurance market in general, as well as by Selective specific initiatives such as: (i) the increase in lower hazard auto business as a percentage of our overall commercial auto book of business; (ii) a re-underwriting of our newest operating region; and (iii) a more proactive approach to loss prevention. At this time, the lower trend in large claims has ~~to some extent~~ leveled off and management has not identified any other recent trends that would create significant reserve uncertainty for this line of business.

Personal Automobile

At December 31, ~~2006,~~2007, our personal automobile line of business had recorded reserves, net of reinsurance, of ~~$183~~$171 million, which represented 9%7% of our total net reserves. The majority of this business is written in ~~the State of~~ New Jersey, where the judicial and regulatory environment has been subject to significant changes over the past few decades. The most recent change occurred in June 2005, when the New Jersey Supreme Court ruled that the serious life impact standard does not apply to the Automobile Insurance Cost Reduction ~~Act’s~~Act (“AICRA”) limitation on lawsuit threshold. ~~Consequently,~~As a result of this decision, we increased reserves for this line of business by ~~$13~~a net amount of $10 million, the majority of which was reflected in ~~the second quarter of 2005.~~2005 results. This recent judicial decision ~~however, also~~ has increased the ~~amount of~~ uncertainty surrounding our personal automobile reserves, asparticularly for accident years 2006 and 2007, since much of the historical information used to make assumptions has been rendered less effective as a basis for projecting future results.

Other Lines of Business

At December 31, ~~2006,~~2007, no other individual line of business had recorded reserves of more than ~~$50~~$60 million, net of reinsurance. Management ~~at this time,~~ has not identified any recent trends that would create additional significant reserve uncertainty for these other lines of business.

The following tables provide case and IBNR reserves for losses, reserves for loss expenses, and reinsurance recoverable on unpaid losses and loss expenses as of December 31, ~~2006~~2007 and ~~2005:~~

Reinsurance
Recoverable
on Unpaid
Loss Reserves Loss Losses and
As of December 31, 2006 Case IBNR Expense Loss
($ in thousands) Reserves Reserves Total Reserves Expenses Net Reserves

Commercial automobile $ 104,490 180,937 285,427 $ 33,817 5,802 313,442
Workers compensation 351,511 386,796 738,307 93,095 68,018 763,384
General liability 154,807 448,474 603,281 139,714 34,882 708,113
Commercial property 19,076 1,321 20,397 3,622 347 23,672
Business owners’ policy 22,273 25,707 47,980 7,584 5,166 50,398
Bonds 1,106 4,139 5,245 2,391 339 7,297
Other 477 1,704 2,181 — 448 1,733

Total commercial lines 653,740 1,049,078 1,702,818 280,223 115,002 1,868,039

Personal automobile 127,051 81,663 208,714 42,849 68,196 183,367
Homeowners 13,895 13,953 27,848 3,969 1,080 30,737
Other 7,727 12,378 20,105 2,244 15,460 6,889

Total personal lines 148,673 107,994 256,667 49,062 84,736 220,993

Total $ 802,413 1,157,072 1,959,485 $ 329,285 199,738 2,089,032

2006:

Reinsurance
Recoverable
on Unpaid
Loss Reserves Loss Losses and
As of December 31, 2005 Case IBNR Expense Loss
($ in thousands) Reserves Reserves Total Reserves Expenses Net Reserves

Commercial automobile $ 92,390 169,220 261,610 $ 33,112 5,969 288,753
Workers compensation 337,235 315,375 652,610 84,891 68,354 669,147
General liability 142,899 373,094 515,993 110,941 26,366 600,568
Commercial property 17,488 1,161 18,649 1,246 579 19,316
Business owners’ policy 20,569 23,467 44,036 6,759 5,175 45,620
Bonds 1,527 4,635 6,162 1,777 382 7,557
Other 306 1,704 2,010 2 211 1,801

Total Commercial 612,414 888,656 1,501,070 238,728 107,036 1,632,762

Personal automobile 130,714 98,541 229,255 40,230 66,989 202,496
Homeowners 13,148 10,104 23,252 2,520 3,275 22,497
Other 35,010 11,159 46,169 2,825 40,948 8,046

Total personal lines 178,872 119,804 298,676 45,575 111,212 233,039

Total $ 791,286 1,008,460 1,799,746 $ 284,303 218,248 1,865,801

As of December 31, 2007


									Reinsurance
									Recoverable
									on Unpaid
	Loss Reserves						Loss		Losses and
	Case		IBNR				Expense		Loss
($ in thousands)	Reserves		Reserves		Total		Reserves		Expenses		Net Reserves
Commercial automobile	$	117,299		188,294		305,593		36,236		12,255		329,574
Workers compensation		382,364		424,528		806,892		102,315		76,747		832,460
General liability		198,636		500,806		699,442		162,098		46,434		815,106
Commercial property		44,520		2,030		46,550		3,572		5,895		44,227
Business owners’ policy		23,469		30,967		54,436		8,604		5,281		57,759
Bonds		4,008		3,509		7,517		2,217		296		9,438
Other		907		1,601		2,508		—		863		1,645

Total commercial lines		771,203		1,151,735		1,922,938		315,042		147,771		2,090,209

Personal automobile		127,646		70,989		198,635		38,221		65,541		171,315
Homeowners		17,889		21,227		39,116		4,511		944		42,683
Other		7,479		14,404		21,883		2,201		13,545		10,539

Total personal lines		153,014		106,620		259,634		44,933		80,030		224,537

Total	$	924,217		1,258,355		2,182,572		359,975		227,801		2,314,746

As of December 31, 2006


									Reinsurance
									Recoverable
									on Unpaid
	Loss Reserves						Loss		Losses and
	Case		IBNR				Expense		Loss
($ in thousands)	Reserves		Reserves		Total		Reserves		Expenses		Net Reserves
Commercial automobile	$	104,490		180,937		285,427	$	33,817		5,802		313,442
Workers compensation		351,511		386,796		738,307		93,095		68,018		763,384
General liability		154,807		448,474		603,281		139,714		34,882		708,113
Commercial property		19,076		1,321		20,397		3,622		347		23,672
Business owners’ policy		22,273		25,707		47,980		7,584		5,166		50,398
Bonds		1,106		4,139		5,245		2,391		339		7,297
Other		477		1,704		2,181		—		448		1,733

Total commercial lines		653,740		1,049,078		1,702,818		280,223		115,002		1,868,039

Personal automobile		127,051		81,663		208,714		42,849		68,196		183,367
Homeowners		13,895		13,953		27,848		3,969		1,080		30,737
Other		7,727		12,378		20,105		2,244		15,460		6,889

Total personal lines		148,673		107,994		256,667		49,062		84,736		220,993

Total	$	802,413		1,157,072		1,959,485	$	329,285		199,738		2,089,032

Range of reasonable reserves

~~The Company~~

We established a range of reasonably possible reserves for net claims of approximately $2,180 million to $2,414 million at December 31, 2007 and of $1,977 million to $2,174 million at December 31, ~~2006 and of $1,764 million to $1,950 million at December 31, 2005.~~2006. A low and high reasonable reserve selection was derived primarily by considering the range of indications calculated using generally accepted actuarial techniques. Such techniques assume that past experience, adjusted for the effects of current developments and anticipated trends, are an appropriate basis for predicting future events. Although this range reflects ~~the most~~ likely scenarios, it is possible that the final outcomes may fall above or below these amounts. Based on internal stochastic modeling, management feels that a reasonable estimate of the likelihood that the final outcome falls within the current range is approximately 70%. This range does not include a provision for potential increases or decreases associated with environmental ~~reserves, as management believes it is not meaningful to calculate a range given the uncertainties associated with environmental claims.~~reserves. Management’s best estimate is consistent with the actuarial best estimate. ~~The Company does~~We do not discount to present value that portion of its loss reserves expected to be paid in future periods; however, the loss reserves take into account anticipated recoveries for salvage and subrogation claims.

Sensitivity Analysis: Potential impact on reserve volatility due to changes in key assumptions

Our process to establish reserves includes a variety of key ~~assumptions. These~~ assumptions, ~~include,~~including, but ~~are~~ not limited to, the following:

	•		The selection of loss development factors;

	•		The weight to be applied to each individual actuarial indication;

	•		Projected future loss trend; and

	•		Expected ultimate loss ratios for the current accident year.

The importance of any single assumption depends on several considerations, such as the line of business and the accident year. If the actual experience emerges differently than the assumptions used in the process to establish reserves, changes in our reserve estimate are possible and may be material to the results of operations in future periods. Set forth below is a discussion of the potential impact of using certain key assumptions that differ from those used in our latest reserve analysis. It is important to note that the following discussion considers each assumption individually, without any consideration of correlation between lines of business and accident years, and therefore, does not constitute an actuarial range. While the following discussion represents possible volatility from variations in key assumptions as identified by management, there is no assurance that the future emergence of our loss experience will be consistent with either our current or alternative set of assumptions. By the very nature of the insurance business, loss development patterns have a certain amount of normal volatility.

Workers Compensation

In addition to the normal amount of volatility, medical loss development factors for workers compensation are particularly sensitive to assumptions relating to medical inflation. Actual medical loss development factors could be significantly different than those which are selected from historical loss experience if actual medical inflation is materially different than what was observed in the past. In addition, workers compensation has been the focus of a multi-faceted underwriting strategy designed to significantly reduce the loss ratio over time. The combination of the sensitivity of workers compensation results to medical inflation and changes in underwriting could lead to actual experience emerging differently than the assumptions used in the process to establish reserves. In our judgment, it is possible that actual medical loss development factors could range from 6% below to 8% above those ~~actually~~ selected in our latest reserve analysis and expected loss ratios could range from 5% below to ~~10%~~3% above those selected in our latest reserve analysis. IfThe combination of reducing the assumptions for medical loss development ~~assumptions were reduced~~ by 6%~~, that would~~ and the expected loss ratio by 5% could decrease our indicated workers compensation reserves by approximately ~~$50~~$55 million for accident years ~~2005~~2006 and prior. Alternatively, ifthe combination of increasing the medical loss development factors ~~were increased~~ by ~~10%, that would~~8% and the expected loss ratio by 3% could increase our indicated workers compensation reserves by approximately ~~$80~~$70 million.

General Liability

In addition to the normal amount of volatility, general liability loss development factors have greater uncertainty due to the complexity of the coverages and the possibly significant periods of time that 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. In our judgment, it is possible that general liability loss development factors could be +/- 6% from those actually selected in our latest reserve analysis. If the loss development assumptions were changed by +/- 6%, that would increase/decrease our indicated general liability reserves by approximately ~~$70~~$80 million for accident years ~~2005~~2006 and prior.

Commercial Automobile

In addition to the normal amount of volatility, ~~the~~our commercial automobile line of business ~~of the Company~~ has experienced significant favorable development in recent years. This favorable development has been driven in large part by a reduction in our bodily injury large loss experience. The actual number of large claims has a high degree of volatility from year-to-year and, therefore, requires a longer period of time before ~~a company~~we would respond to this type of information. Under these circumstances, the difference between a traditional loss development method and the expected ultimate loss ratio is larger than usually expected. For this reason, the weight to be applied to each individual actuarial indication in this situation is another key assumption. If the impact of changing the weights to be applied to each actuarial indication is combined with the impact of possible changes to selected loss development factors of +/- 5%6%, it is our judgment that the possible impact to overall reserves could range from approximately ~~$50~~$65 million reduction to approximately ~~$30~~$40 million increase for accident years ~~2005~~2006 and prior.

Personal Automobile

In addition to the normal amount of volatility, the uncertainty of personal automobile loss development factors is greater than usual due to the number of judicial and regulatory changes in the New Jersey personal automobile market over the years. In our judgment, it is possible that personal auto bodily injury loss development factors could range from 5% below those actually selected in our latest reserve analysis to 3%4% above those selected in our latest reserve analysis. If the loss development assumptions were reduced by 5%, that would decrease our indicated personal automobile reserves by

approximately ~~$40~~$35 million for accident years ~~2005~~2006 and prior. Alternatively, if the loss development factors were increased by 3%4%, that would increase our indicated personal automobile reserves by approximately ~~$20~~$30 million.

Current Accident Year

For the ~~2006~~2007 accident year, the expected ultimate loss ratio by line of business is a key assumption. This assumption is based upon a large number of inputs that are assessed periodically, such as historical loss ratios, projected future loss trend, and planned pricing amounts. In our judgment, it is possible that the actual ultimate loss ratio for the ~~2006~~2007 accident year could be +/-7% from the one selected in our latest reserve analysis for each of our four major long tailed lines of business. The table below summarizes the possible impact on our reserves of varying our expected loss ratio assumption by +/-7% by line of business for the ~~2006~~2007 accident year.

Reserve Impact of Changing Current Year Expected Ultimate Loss Ratio Assumption


	If Assumption			If Assumption		If Assumption			If Assumption
	Was Reduced			Was Raised		Was Reduced			Was Raised
($ in millions)	by 7%			by 7%		by 7%			by 7%

Workers Compensation		(21	)		21		(22	)		22
General Liability		(29	)		29		(29	)		29
Commercial Automobile Liability		(17	)		17		(17	)		17
Personal Automobile Liability		(7	)		7		(7	)		7

Prior year reserve development ~~in 2006~~

In light of the many uncertainties associated with establishing the estimates and making the assumptions necessary to establish reserve levels, ~~the Company reviews its~~we review our reserve estimates on a regular basis as described above and ~~makes~~make adjustments in the period that the need for such adjustment is determined. These reviews could result in the ~~Company identifying~~identification of information and trends that would require ~~the Company~~us to increase some reserves and/or decrease other reserves for prior periods and could also lead to additional increases in loss and loss adjustment expense reserves, which could materially adversely affect ~~the Company’s~~our results of operations, equity, business, insurer financial strength, and debt ratings. ~~The Company~~In 2007, we experienced ~~positive~~favorable loss development in accident years 2002 through 2006 of $61.7 million partially offset by unfavorable loss development in accident years 2001 and prior of $42.9 million, netting to total favorable prior year development ~~in its loss and loss expense reserves totaling~~of $18.8 million. In 2006, we experienced net favorable prior year development of $7.3 million, and in ~~2006,~~2005, we experienced net adverse prior year development of $5.1 ~~million in 2005 and adverse prior year development of $4.9 million in 2004.~~million. For further discussion on the ~~adverse~~prior year development in loss and loss expense reserves, see the discussion on “Net Loss and Loss Expense Reserves” in Item 1. “Business” and Note 8 of Item 8. “Financial Statements and Supplementary Data” in this Form 10-K.

Asbestos and Environmental Reserves

Included in our loss and loss expense reserves are amounts for environmental claims, both asbestos and non-asbestos. Carried net loss and loss expense reserves for environmental claims were $51.4 million as of December 31, 2007 and $46.5 million as of December 31, ~~2006 and $41.8 million as of December 31, 2005. Selective’s~~2006. Our exposure to environmental liability is primarily due to policies written prior to the introduction of the absolute pollution exclusion endorsement in the mid-1980’s and underground storage tank leaks, mostly from New Jersey homeowners policies in recent years. ~~Selective’s~~Our asbestos and non-asbestos environmental claims have arisen primarily from insured exposures in municipal government, small commercial risks, and homeowners policies. The emergence of these claims is slow and highly unpredictable. Over the past few years, ~~Selective~~we also experienced adverse development in its homeowners line of business as a result of unfavorable trends in claims for groundwater contamination caused by leakage of certain underground heating oil storage tanks in New Jersey. ~~Increased frequency has been triggered, in part,~~In addition, certain landfill sites are included on the National Priorities List (“NPL”) by the ~~state’s robust real estate market, which~~United States Environmental Protection Agency (“USEPA”). Once on the NPL the USEPA determines an appropriate remediation plan for these sites. A landfill can remain on the NPL for many years until final approval for the removal of the site is granted from the USEPA. The USEPA also has ~~led~~the authority to ~~an increase in home tank inspections.~~re-open previously closed sites and return them to the NPL. We currently have reserves for several claims related to sites on the NPL.

IBNR reserve estimation for environmental claims is often difficult because, in addition to other factors, there are significant uncertainties associated with critical assumptions in the estimation process, such as average clean-up costs, third-party costs, potentially responsible party shares, allocation of damages, insurer litigation costs, insurer coverage defenses, and potential changes to state and federal statutes.

However, management is not aware of any emerging trends that could result in future reserve adjustments. Moreover, normal historically-based actuarial approaches are difficult to apply because relevant history is not available. While models can be applied, such models can produce significantly different results with small changes in assumptions. As a result, management does not calculate a specific environmental loss range, as it believes it would not be meaningful.

The table below summarizes the number of asbestos and non-asbestos claims outstanding at December 31, 2007, 2006, ~~2005,~~ and ~~2004.~~2005. For additional information about our environmental reserves, see Item 1. “Business,” and Item 8. “Financial Statements and Supplementary Data,” Note 8 to the ~~consolidated financial statements.~~Consolidated Financial Statements.

Environmental Claims Activity (in
thousands except claim counts and average
gross loss settlements on closed claims) 2006 2005 2004

Asbestos Related Claims⁽¹⁾

Claims at beginning of year 2,089 3,025 2,772
Claims received during year 358 276 442
Claims closed during year⁽²⁾
(174 ) (1,212 ) (189 )

Claims at end of year 2,273 2,089 3,025

Average gross loss settlement on closed claims $ 910 530 180
Gross amount paid to administer closed claims $ 67 230 137
Net survival ratio⁽³⁾
20 16 20

Non-Asbestos Related Claims⁽¹⁾

Claims at beginning of year 293 285 286
Claims received during year 111 154 126
Claims closed during year⁽²⁾
(102 ) (146 ) (127 )

Claims at end of year 302 293 285

Average gross loss settlement on closed claims $ 600 65,200 13,600
Gross amount paid to administer closed claims $ 26 1,718 553
Net survival ratio⁽³⁾
9 7 7
Environmental Claims Activity


	2007			2006			2005
Asbestos Related Claims⁽¹⁾
Claims at beginning of year		2,273			2,089			3,025
Claims received during year		114			358			276
Claims closed during year⁽²⁾		(210	)		(174	)		(1,212	)

Claims at end of year		2,177			2,273			2,089

Average gross loss settlement on closed claims	$	81			914			527
Gross amount paid to administer closed claims	$	51,868			66,710			230,340
Net survival ratio⁽³⁾		16			20			16

Non-Asbestos Related Claims⁽¹⁾
Claims at beginning of year		302			293			285
Claims received during year		108			111			154
Claims closed during year⁽²⁾		(139	)		(102	)		(146	)

Claims at end of year		271			302			293

Average gross loss settlement on closed claims	$	4,149			555			65,204
Gross amount paid to administer closed claims	$	62,874			26,321			1,717,746
Net survival ratio⁽³⁾		14			9			7


⁽¹⁾		The number of environmental claims includes all multiple claimants who are associated with the same site or incident.

⁽²⁾		Includes claims dismissed, settled, or otherwise resolved.
��
⁽³⁾		The net survival ratio was calculated using a three-year average for net losses and expenses paid.

Deferred Policy Acquisition Costs

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 are made in the accounting period in which the adjustment arose. ~~The Company~~We measure the recoverability of deferred policy acquisition costs at the operating segment level. We had deferred policy acquisition costs of $226.4 million at December 31, 2007 compared to $218.1 million at December 31, ~~2006 compared to $204.8 million at December 31, 2005.~~2006.

Pension and Postretirement Benefit Plan Actuarial Assumptions

~~The Company’s~~

Our 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 Benefits Other thanPension” (“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.

The discount rate enables us to state expected future cash flow as a present value on the measurement date. The guideline for setting this rate is a high-quality long-term corporate bond rate. A ~~lower~~higher discount rate ~~increases~~decreases the present value of benefit obligations and ~~increases~~decreases pension expense. We ~~reduced~~increased our discount rate to ~~5.50%~~6.50% for ~~2006,~~2007, from ~~5.75%~~5.90% for ~~2005~~2006 to reflect market interest rate conditions. To determine the expected long-term rate of return on the plan assets, we consider the current and expected asset allocation, as well as historical and expected returns on each plan asset class. A lower expected rate of return on pension plan assets would increase pension expense. Our long-term expected return on plan assets was 8.00% in ~~2006~~2007 and ~~2005.~~2006. Changes in the related pension and postretirement benefit expense may occur in the future due to changes in these assumptions.

For additional information regarding ~~the Company’s~~our pension and postretirement benefit plan obligations, see Item 8. “Financial Statements and Supplementary Data,” Note 16(d) to the ~~consolidated financial statements.~~Consolidated Financial Statements.

Other-Than-Temporary Investment Impairments

An investment in a fixed maturity or equity security, ~~which~~that is available for sale orand reported at fair value, is impaired if its fair value falls below its book value and the decline is considered to be other than temporary. We regularly review our entire investment portfolio for declines in value. If we believe that a decline in the value of a particular investment is temporary, we record the decline as an unrealized loss in accumulated other comprehensive income. If we believe the decline is “other-than-temporary,” we write down the carrying value of the investment and record a realized loss in our Consolidated Statements of Income. Management’s assessment of a decline in value includes current judgment as to the financial position and future prospects of the entity that issued the investment security. Broad changes in the overall market or interest rate environment generally will not lead to a write-down provided that management has the ability and intent to hold such a security to maturity. In November 2005, the Financial Accounting Standards Board (“FASB”) issued two FASB Staff Positions (“FSP”), FAS115-1 and FAS124-1 titled “The Meaning of Other-Than-Temporary Impairments and its Application to Certain Investments.” These FSPs support existing requirements related to impairments with relatively few modifications.

Our evaluation for other-than-temporary impairment of a fixed maturity ~~securities,~~security, includes, but is not limited to, the evaluation of the following factors:

•		Whether the decline appears to be issuer or industry specific;

•		The degree to which an issuer is current or in arrears in making principal and interest payments on the fixed maturity ~~securities in question;~~security;

•		The issuer’s current financial condition and ability to make future scheduled principal and interest payments on a timely basis;

•		Buy/hold/sell recommendations published by outside investment advisors and analysts;

•		Relevant rating history, analysis and guidance provided by rating agencies and analysts;

•		The length of time and the extent to which the fair value has been less than carrying value; and

•		Our ability and intent to hold a security to maturity given interest rate fluctuations.

Our evaluation for other-than-temporary impairment of an equity ~~securities and alternative investments,~~security, other investment, or a short-term investment includes, but is not limited to, the evaluation of the following factors:

•		Whether the decline appears to be issuer or industry specific;

•		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;

•		The financial condition and near-term prospects of the issuer, including any specific events that may influence the issuer’s operations;

•		The recent income or loss of the issuer;

•		The independent auditors’ report on the issuer’s recent financial statements;

•		The dividend policy of the issuer at the date of acquisition and the date of evaluation;

•		Any buy/hold/sell recommendations or price projections published by outside investment advisors;

•		Any rating agency announcements; and

•		The length of time and the extent to which the fair value has been less than carrying value.

~~There~~In 2007, we recorded an impairment charge of $4.9 million for two investments that we concluded were impaired for other than temporary declines in fair value. We had no impairment charges during 2006. We recorded an impairment charge of $1.2 million in 2005 for one investment that we concluded was impaired for an other-than-temporary decline in value. ~~There were no~~For further information regarding the impairment charges, see the section entitled “Investments” in Item 7. “ Management’s Discussion and Analysis of Financial Condition and Results of Operations.” of this Form 10-K.

Goodwill

Goodwill results from business acquisitions where the cost of assets acquired exceeds the fair value of those assets. We test goodwill for impairment annually, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. Goodwill is allocated to the reporting units for the purposes of the impairment test. We did not record any impairments during 2007, 2006 or 2005.

Reinsurance

Reinsurance recoverable on paid and unpaid losses and loss expenses represent estimates of the portion of such liabilities that will be recovered from reinsurers. Each reinsurance contract is analyzed to ensure that the transfer of risk exists to properly record the transactions in the financial statements. Amounts recoverable from reinsurers are recognized as assets at the same time and in a manner consistent with the paid and unpaid losses associated with the reinsurance policies. An allowance for estimated uncollectible reinsurance is recorded ~~in 2004.~~based on an evaluation of balances due from reinsurers and other available information. This allowance totaled $2.8 million at December 31, 2007.

Financial Highlights of Results for ~~years ended~~Years Ended December 31, 2007, 2006, ~~2005,~~ and ~~2004~~2005¹


						2006					2005								2007					2006
($ in thousands, except per share amounts)	2006			2005		vs 2005			2004		vs 2004			2007			2006		vs 2006			2005		vs 2005

Revenues	$	1,807,867			1,671,012		8	%		1,553,624		8	%	$	1,846,228			1,807,867		2	%		1,671,012		8	%
Net income before cumulative effect of change in accounting principle		163,574			147,998		11			128,639		15			146,498			163,574		(10	)		147,998		11
Net income		163,574			148,493		10			128,639		15			146,498			163,574		(10	)		148,493		10
Diluted net income before cumulative effect of change in accounting principle per share		2.65			2.34		13			2.04		15			2.59			2.65		(2	)		2.34		13
Diluted net income per share		2.65			2.35		13			2.04		15			2.59			2.65		(2	)		2.35		13
Diluted weighted-average outstanding shares		62,542			64,708		(3	)		64,756		—			57,165			62,542		(9	)		64,708		(3	)
GAAP combined ratio		96.1	%		95.1	1.0		pts		96.9	(1.8		)pts		98.9	%		96.1	2.8		pts		95.1	1.0		pts
Statutory combined ratio		95.4	%		94.6		0.8			95.9		(1.3	)		97.5	%		95.4		2.1			94.6		0.8
Return on average equity		15.9	%		15.9		—			15.8		0.1			13.6	%		15.9		(2.3	)		15.9		—


¹		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 is incorporated by reference.

Revenues

Revenues increased in ~~2006~~2007 compared to ~~2005~~2006 and ~~2004,~~2005 primarily due to growth in net premiums earned (“NPE”) and net investment income earned.

NPE growth contributed $17.6 million of 6%the $38.4 million in revenue growth in 2007 compared to 2006 and $81.7 million to the $136.9 million in revenue growth in 2006 compared to ~~2005 and~~2005. The following factors contributed to the growth of ~~8% in 2005 as compared to 2004. Increases in NPE are attributed to the following:~~

NPE:

	o•		Direct ~~voluntary~~ new business written, excluding flood, of ~~$304.3~~$352.3 million in 2007 compared to $310.0 million in 2006 ~~compared to $289.2~~and $300.5 million in ~~2005 and $264.9 million in 2004;~~2005.

	o•		Commercial ~~Lines~~lines renewal ~~premium price increases,~~prices, including exposure, ~~averaged 2.2%~~which decreased by 0.3% in 2007 and increased in 2006 ~~3.5% in~~and 2005 by 2.2% and ~~8.8% in 2004. On a pure price basis, renewal pricing decreased 1.7% in 2006, decreased 0.4% in 2005, and increased 4.3% in 2004.~~3.5%, respectively.

The above items were partially offset by ~~increased competition~~(i) a slight reduction in commercial lines retention in 2007 compared to 2006 and 2005; (ii) a $17.9 million reduction in audit and endorsement premium activity in 2007 compared to 2006 and a $7.6 million reduction in 2006 compared to 2005 as a result of economic changes, especially in the ~~New Jersey personal automobile market. As of December 31, 2006, the number of cars we insured~~construction industry; and (iii) decreases in ~~New Jersey decreased 12% to 77,160 from 87,593 as of December 31, 2005. Net premiums earned for~~NPE on our New Jersey personal automobile book of business ~~were $101.3~~attributable to the loss of a portion of our book that was repriced at higher pricing levels through our MATRIX^® pricing system and subsequently did not renew. Our New Jersey personal automobile book of business experienced an 8% reduction in the number of cars insured at December 31, 2007 compared to December 31, 2006 and a 12% reduction in the number of cars from December 31, 2006 compared to December 31, 2005. Overall personal lines NPE was down 5% to $203.3 million ~~for~~in 2007 compared to $213.8 million in 2006. These premiums increased 2% in 2006 from $209.3 million in 2005.

Net investment income earned increased 11% in 2007 compared to 2006 and contributed $17.3 million to the $38.4 million revenue growth in 2007. In 2006, net investment income earned increased 15% compared to 2005 and contributed $20.9 million to the $136.9 million revenue growth in 2006. These increases are primarily attributable to a higher invested asset base, coupled with higher interest rates and strong returns from our other investment portfolio. The increase in our invested asset base is the result of operating cash flows of $386.3 million in 2007 and $393.1 million in 2006, as well as net proceeds of $96.8 million from our $100.0 million junior subordinated notes offering in the third quarter of 2006. These increases were partially offset by: (i) stock repurchases under our authorized stock repurchase program of 5.7 million shares during 2007 at a total cost of $143.3 million and 4.1 million shares during 2006 at a total cost of $110.1 million; and (ii) net share settlements of principal for $37.5 million in 2007 on our Senior convertible notes.

Net Income

Net income decreased in 2007 compared to ~~$118.1 million for 2005~~2006 due to increases in our GAAP combined ratio, resulting from lower pricing and ~~$136.7 million for 2004.~~

~~Additional items contributing~~higher claim severity, particularly in property losses, partially offset by profitability improvements in our workers compensation line of business and increases in net favorable prior year loss and loss expense development within our casualty lines of business. The reduction in our underwriting profit was partially offset by: (i) net investment income earned increases in 2007 as noted above; and (ii) decreases in federal income tax expense in 2007 compared to ~~the revenue increases were the following:~~2006, primarily attributable to lower underwriting income in our Insurance Operations segment, as explained above.

	o		Net investment income earned increased $20.9 million or 15% in 2006 compared to 2005 and increased $15.4 million or 13% in 2005 compared to 2004. These increases are primarily attributable to higher interest rates coupled with a higher invested asset base, and strong returns from our other investment portfolio, including limited partnerships. The increase in the invested asset base resulted from strong net investable cash flows of $326.9 million in 2006 and $460.4 million in 2005, which included net proceeds from our $100.0 million debt offerings in both the third quarter of 2006 and the fourth quarter of 2005 of $96.8 million and $98.1 million, respectively. These increases were partially offset by treasury stock purchases of approximately 4.1 million shares at a total cost of $110.1 million during 2006 and 0.7 million shares at a total cost of $16.3 million during 2005;

	o		~~Net realized gains before tax increased $21.0 million to $35.5 million in 2006 compared to 2005 and decreased $10.1 million to $14.5 million in 2005 compared to 2004; and~~

	o		~~Diversified Insurance Services revenue increased $11.8 million, or 12%, in 2006 compared to 2005 and increased $12.2 million, or 14%, in 2005 compared to 2004.~~

Net income increased ~~10%~~ in 2006 compared to 2005 due to growth in NPE, net investment income earned, and ~~15%~~net realized gains as discussed above, partially offset by the reduction in ~~2005 compared to 2004 primarily due to:~~

Commercial Lines underwriting and pricing improvements over the last few years and strong new business growth offset by increases in after-tax catastrophe losses in 2006 of $10.4 million to $13.5 million compared to catastrophe losses of $3.0 million in 2005 and $12.0 million in 2004;

After-tax investment income, which increased $16.6 million, or 16%, in 2006 as compared to 2005 and increased $14.2 million, or 16%, in 2005 compared to 2004 resulting from the higher invested asset base, higher interest rates, and strong other investment returns; and

~~After-tax net realized gains, which increased $13.7 million for 2006 as compared to 2005 resulting from the sale of certain long-term equity investments.~~

our underwriting profit, resulting from increased property losses, including catastrophe losses, and increased underwriting expenses.

Results of Operations and Related Information by Segment

Insurance Operations

Our Insurance Operations segment writes property and casualty insurance business ~~through seven insurance subsidiaries (the “Insurance Subsidiaries”). Our Insurance Operations segment sells property and casualty insurance products and services primarily~~ in 2021 states in the Eastern and Midwestern United States through seven insurance subsidiaries (the “Insurance Subsidiaries”). These Insurance Subsidiaries write business through approximately ~~770~~880 independent insurance agencies. ~~Selective has at least one Insurance Subsidiary licensed to do business in each of the 50 states.~~ Our Insurance Operations segment consists of two components: (i) commercial lines (“Commercial Lines”), which markets primarily to businesses, and represents approximately ~~86%~~87% of net premiums written (“NPW”), and (ii) personal lines (“Personal Lines”), which markets primarily to individuals and represents approximately ~~14%~~13% of NPW. The underwriting performance of these lines are generally measured by four different statutory ratios: (i) loss and loss expense ratio; (ii) underwriting expense ratio; (iii) dividend ratio; and (iv) combined ratio. For further details regarding these ratios see the discussion in the “Insurance Operations Results” section of Item 1. “Business” of this Form 10-K.

Summary of Insurance Operations

All Lines 2006 2005
($ in thousands) 2006 2005 vs. 2005 2004 vs. 2004

GAAP Insurance Operations Results:

NPW $ 1,535,961 1,459,474 5 % 1,365,148 7 %

NPE 1,499,664 1,418,013 6 1,318,390 8
Less:

Losses and loss expenses incurred 959,983 905,730 6 866,374 5
Net underwriting expenses incurred 475,776 436,867 9 406,973 7
Dividends to policyholders 5,927 5,688 4 4,275 33

Underwriting income $ 57,978 69,728 (17 )% 40,768 71 %

GAAP Ratios:

Loss and loss expense ratio 64.0 % 63.9 0.1 pts 65.7 (1.8 )pts
Underwriting expense ratio 31.7 30.8 0.9 30.9 (0.1 )
Dividends to policyholders ratio 0.4 0.4 — 0.3 0.1

Combined ratio 96.1 95.1 1.0 96.9 (1.8 )

Statutory Ratios¹:

Loss and loss expense ratio 63.7 63.5 0.2 65.3 (1.8 )
Underwriting expense ratio 31.3 30.7 0.6 30.3 0.4
Dividends to policyholders ratio 0.4 0.4 — 0.3 0.1

Combined ratio¹
95.4 % 94.6 0.8 pts 95.9 (1.3 )pts

All Lines


						2007					2006
($ in thousands)	2007			2006		vs. 2006			2005		vs. 2005
GAAP Insurance Operations Results:
NPW	$	1,554,867			1,535,961		1	%		1,459,474		5	%

NPE		1,517,306			1,499,664		1			1,418,013		6
Less:
Losses and loss expenses incurred		999,206			959,983		4			905,730		6
Net underwriting expenses incurred		494,941			475,776		4			436,867		9
Dividends to policyholders		7,202			5,927		22			5,688		4

Underwriting income	$	15,957			57,978		(72	)%		69,728		(17	)%

GAAP Ratios:
Loss and loss expense ratio		65.9	%		64.0	1.9		pts		63.9	0.1		pts
Underwriting expense ratio		32.5			31.7		0.8			30.8		0.9
Dividends to policyholders ratio		0.5			0.4		0.1			0.4		—

Combined ratio		98.9			96.1		2.8			95.1		1.0

Statutory Ratios¹:
Loss and loss expense ratio		65.4			63.7		1.7			63.5		0.2
Underwriting expense ratio		31.6			31.3		0.3			30.7		0.6
Dividends to policyholders ratio		0.5			0.4		0.1			0.4		—

Combined ratio¹		97.5	%		95.4	2.1		pts		94.6	0.8		pts


¹		The statutory ratios include Selective’s flood line of business, which is included in the Diversified Insurance Services Segment on a GAAP basis and therefore excluded from the GAAP ratios. The total Statutory Combined ~~Ratio~~ratio excluding flood was 98.2% for 2007, 96.1% for 2006, and 95.3% for ~~2005, and 96.5% for 2004.~~2005.

~~NPW increased due to:~~

	o•		~~Direct voluntary new business written of $304.3 million~~NPW increased in 2007 compared to 2006 and in 2006 compared to ~~$289.2~~2005. Premium growth in 2007 compared to 2006 is attributable to increases in direct new business written, excluding flood, of 14% to $352.3 million for 2007 compared to 2006 partially offset by (i) commercial lines renewal pricing, including exposure, which decreased by 0.3% in 2007; (ii) a slight reduction in commercial lines retention in 2007 compared to 2006 and 2005; (iii) an $17.9 million reduction in audit and endorsement premium activity in 2007 compared to 2006 and a $7.6 million reduction in 2006 compared to 2005 as a result of economic changes, especially in the construction industry; and, ~~$264.9~~(iv) a decline in NPW for our New Jersey personal automobile business of $12.6 million to $80.1 million for 2007 compared to 2006 driven by a reduction in ~~2004; and~~the number of New Jersey personal automobiles that we insure, primarily as a result of repricing at higher levels through our MATRIX^® pricing system.

	o		Premium growth in 2006 compared to 2005 is attributable to increases in direct new business written, excluding flood, of 3% to $310.0 million for 2006 compared to 2005 coupled with Commercial Lines renewal ~~premium price~~pricing increases, including exposure, ~~averaged~~of 2.2% in ~~2006, 3.5%~~2006. Partially offsetting these items is a decline in ~~2005, and 8.8% in 2004. On a pure price basis, renewal pricing decreased 1.7% in 2006, decreased 0.4% in 2005, and increased 4.3% in 2004.~~

~~These increases were partially offset by increased competition in the New Jersey personal automobile market. As of December 31, 2006, the number of cars we insured in New Jersey decreased 12%~~NPW for our New Jersey personal automobile business of $14.6 million to ~~77,160 from 87,593 in 2005 and 97,685 in 2004. Net premiums written for our New Jersey personal automobile business were~~ $92.7 million for 2006 ~~as compared to $107.3 million for 2005 and $133.9 million for 2004.~~

~~Underwriting income decreased in 2006 as compared to 2005 due to:~~

	o		~~Catastrophe losses increased to $20.7 million in 2006 as~~ compared to ~~$4.7 million in~~ 2005 ~~and $18.5 million in 2004; and~~as a result of the highly competitive marketplace.

	o•		~~Increased underwriting expenses resulting from: (i)~~NPE increased ~~commissions related~~slightly in 2007 compared to ~~the termination of the New Jersey Homeowners’ Quota Share Treaty (“Quota Share Treaty”) of 9.7 million~~2006 and increased in 2006 as compared to ~~2005; and (ii) an increase~~2005 reflecting increases in ~~profit-based compensation for employees of $3.3 million in 2006 as compared to 2005.~~NPW discussed above.

Partially offsetting these increases was favorable prior year development in our loss and loss expense reserves of $7.3 million, resulting from normal reserve development inherent in the uncertainty in establishing reserves for losses and loss expenses, anticipated loss trends, growth in exposures, as well

as increased reinsurance retentions. For further discussion on the prior year development in loss and loss expense reserves, see the discussion on “Net Loss and Loss Expense Reserves” in Item 1. “Business” and Note 8 of Item 8. “Financial Statements and Supplementary Data” in this Form 10-K.

~~Underwriting income increased in 2005 as compared to 2004 due to:~~

	o•		~~Decreased catastrophe~~The 1.9 point increase in the GAAP loss and loss expense ratio in 2007 compared to 2006 was primarily attributable to lower pricing on our Commercial and Personal Lines business, as well as increases in property losses and overall higher loss costs in 2007 compared to 2006. The increases in property losses were driven by higher non-catastrophe losses for 2007 compared to 2006. These increases to the GAAP loss and loss expense ratio were partially offset by (i) improved profitability in our workers compensation line of ~~$4.7~~business, and (ii) net favorable prior year loss and loss expense development within our casualty lines of business of approximately $19 million in ~~2005~~2007, compared to ~~$18.5~~approximately $7 million in ~~2004;~~2006. The GAAP loss and loss expense ratio in 2006 remained comparable with the 2005 ratio.

	o•		~~Underwriting improvements mainly~~The increases in the GAAP underwriting expense ratio in 2007 compared to 2006 and 2005 was primarily attributable to increases in underwriting expenses that outpaced premium growth in the comparable periods. Increased labor expenses drove the increase in expense dollars for 2007 and 2006. For additional information regarding our ~~Commercial Lines business.~~initiatives in the management of the underwriting expense ratio, see the outlook section below and Note 22, “Subsequent Events” in Item 8. “Financial Statements and Supplementary Data” of this Form 10-K.

These improvements were partially offset by unprofitable results in our workers compensation line of business and reserve increases related to the New Jersey Supreme Court judicial ruling described below.

~~The GAAP underwriting expense ratio increased by 0.9 points in 2006 as compared to 2005 and decreased 0.1 points in 2005 as compared to 2004, driven by the items discussed above.~~

Insurance Operations Outlook

Historically, the results of the property and casualty insurance industry have experienced significant fluctuations ~~from~~due to high levels of competition, economic conditions, interest rates, loss cost trends, and other factors. ~~We expect~~During 2007, the industry ~~will continue~~experienced low levels of catastrophe losses and a softening market characterized by accelerated competition, leading to ~~see increased~~ pricing ~~pressure~~deterioration in the primary insurance market ~~in 2007, which will exert pressure on the future profitability of the Company's commercial lines business.~~that was worse than originally anticipated. We expect this trend to continue into 2008. The average forecast, according to the ~~“A.M.~~“U.S. Property/Casualty — Review & Preview” from A.M. Best ~~Review/Preview”~~(the “Forecast”) dated January ~~2007,~~28, 2008, calls for ~~net premiums written~~negative growth in NPW of 0.6% in 2008. This is in addition to ~~be relatively flat~~the estimated negative growth in NPW of 1.2% for ~~2007. This represents~~2007 discussed in the Forecast and results from an across-the-board softening in the personal and commercial lines pricing environments, a ~~slowdown from the projected estimate~~weakening economy, leakage of ~~2.6% for 2006.~~premium to government operated reinsurers and strong interest in alternative forms of risk transfer, including various forms of self insurance, captives, and catastrophe bonds. The ~~2007~~2008 NPW forecast, if accurate, would represent the first decline in total industry annual premiums since 1943. As a result, we may need to reduce our pricing, which could lead to a decrease in margins in order to retain our best business. Accelerated competition in the marketplace, coupled with low premium growth rates, has also led to an increased interest in merger and acquisition activity within the industry. The Forecast also indicates an increase in the expected statutory combined ratio in 2008 compared to the 2007 expectation, indicating that underwriting performance in the industry, although still profitable, is ~~ranked the second slowest rate of growth for property and casualty insurers since 1998. Loss~~deteriorating.

We believe that future profitability may be impacted by higher loss trends, which are characterized by changes in frequency, severity, and frequency, may also impact the future profitability of our business. As an example, taking a pure price decline of 1.4% and removing the expense that directly varies with premium volume yields an adverse combined ratio impact of approximately 1 point, in addition to a claims inflation increase of 3%, will cause the loss and loss adjustment expense ratio to increase approximately 2 points, all else remaining equal. The combination of claims inflation and price decreases could raise the combined ratio approximately 3 points in this example, absent any initiatives targeted to address these trends. These company initiatives would include Knowledge Management, Predictive Modeling and Safety Management and are discussed below.

pricing deterioration. When renewal pure price increases are declining and loss costs trend higher, a market cycle shift occurs. General inflation and, notably, medical inflation, can drive up loss costs ~~up, leading~~and lead to higher industry-wide statutory combined ratios. We believe ~~that this is the point in the market cycle when~~ it is critical to have a clearly defined plan to improve risk selection and mitigate higher frequency and ~~severity.~~severity trends during market cycles. Some of the tools we use to lower frequency and severity are knowledge management, predictive modeling, safety management, managed care, ~~knowledge management, predictive modeling,~~ and enhanced claims review. Although it is uncertain at this time whether our initiatives will offset macro pricing and loss trends, we have outperformed the industry’s loss and loss adjustment expense ratio by ~~7.1~~6.8 points, on average, over the past 10 years.

Considering the current environment, in the upcoming year, we anticipate pricing discipline and expense management to be key factors in the generation of strong underwriting results. As ~~competition continues~~part of our expense management initiative, in February 2008, we announced a reduction in our workforce of approximately 80 positions, including the immediate displacement of 60 employees and the elimination of 20 open positions. We anticipate these changes to ~~intensify, managing growth~~have a related one-time pre-tax cost of approximately $4 million in the first quarter of 2008 and ~~profitability will be a major focus for us in 2007. Driving profitable organic growth has always been Selective’s strategy, and this will continue into 2007. Our growth drivers are:~~

	•		~~Expanding our appetite for existing products and creating new products to target pockets of opportunity as identified through market planning;~~

	•		~~Expanding the pipeline for our One-and-Done~~^® ~~system to include other successful programs such as auto services, manufacturing, and golf courses;~~

	•		~~Continuing new producer and sales training programs for agents;~~

	•		~~Adding 100 new agents throughout our footprint based on market planning analytics;~~

	•		~~Enhancing and expanding use of our superior technology, such as xSELerate~~^®;

	•		~~Growing Personal Lines with the continued rollout of our MATRIX pricing model for auto; and~~

	•		~~State expansion into Massachusetts for Commercial Lines.~~

~~Other strategic initiatives~~annualized pre-tax savings of approximately $8 million. In addition, we are implementing targeted changes to ~~increase~~agency commissions that will maintain highly competitive awards for agents who produce the ~~effectiveness~~strongest results for us, while reducing commissions where our historically higher payments have not generated an appropriate level of profitable growth. The changes will bring our program more in line with the competition; however, commissions on 87% of our ~~field strategy~~direct premiums written will not be affected, and ~~improve risk selection include:~~

•

~~Knowledge Management.~~We are accumulating and organizing existing underwriting data to enhance underwriting and pricing decisions, and have begun to implement predictive modeling to further support the underwriting process.

the supplemental commission program that rewards our most profitable growth agencies does not change. We feel the changes will bring our program more in line with the competition. These commission revisions are expected to generate annualized pre-tax savings of approximately $8.0 million, and are targeted for rollout in most states in July 2008.

•

~~Workers Compensation.~~~~This strategy includes six key underwriting initiatives~~Even in this competitive market, we believe that focus on predictive modeling, premium leakage, premium audit procedures, and other operational improvements. In addition, multiple claims initiatives include medical bill review services, medical and pharmacy networks, case management, and first notice of loss services.

~~The demand for reinsurance coverage by~~ the ~~property and casualty insurance industry has continued~~strategies we have implemented will allow us to grow. Recent catastrophes, such as the huge losses incurred from Hurricane Katrina in 2005, have created capacity issues in the market. Catastrophe models in current use by the industry, such as RMS v.6.0, have projected significant increases in expected losses as a result of changing weather patterns, including increased hurricane activity in the Atlantic basin, and have resulted in increased demand for additional reinsurance coverage. Additionally, construction costs, both labor and raw materials, have increased in recent years in both the commercial and residential markets. These factors will continue to profitably grow our business based on strong agency relationships and our unique field-based model. To this end, we have developed market-planning tools that are allowing us to strategically appoint additional independent agencies as well as agency management specialists (“AMSs”) in under-penetrated territories, with classes of business that we know historically have been profitable. Through the end of 2007, the Insurance Subsidiaries’ total agency count increased to approximately 880, up from 770 at last year-end, serviced by approximately 100 field-based AMSs who make hands-on underwriting decisions in agents’ offices on a ~~direct impact on~~daily basis.

We back the ~~pricing~~“high touch” component of our business model with technology that allows agents and ~~availability~~the Insurance Subsidiaries’ field teams to input business seamlessly into our systems, while also allowing them to select and price accounts at optimal levels through predictive modeling. Technology that allows for the seamless placement of ~~reinsurance coverage. Each year, as~~business into our systems includes our One & Done^® small business system and our xSELerate^® straight-through processing system. Premiums of $250,000 per workday were processed through our One & Done^® small business system in 2007, up 42% from 2006. We have set a multi-year small business growth target of $350,000 in One & Done^® business per work day, and in 2008 our efforts will be centered on: (i) better managing price points and scale; (ii) implementing a more comprehensive marketing and branding strategy; and (iii) updating the distribution model to address multiple agent and customer needs.

We also continue to pursue our organic growth strategy. Effective July 1, 2007, we ~~analyze~~entered our ~~reinsurance program,~~21^st primary state, Massachusetts, for Commercial Lines only and wrote approximately $3.8 million of new business in 2007. In 2008, we ~~consider treaty attachment points, co-participation, alternative risk transfer mechanisms,~~have plans to expand our footprint to Tennessee. We also have expanded Personal Lines into Rhode Island, Minnesota, and ~~other changes in program structures~~Iowa, states that ~~provide most effective protection in light of current market conditions.~~

~~Terrorism continues to remain an overall industry concern.~~are already within our existing Commercial Lines footprint. In addition to ~~treaty~~our organic growth strategy, we are taking note of opportunities that marketplace competition may be creating and ~~facultative reinsurance, the Insurance Subsidiaries~~would not rule out making an opportunistic acquisition.

Based on our expense management programs along with technology investments, ongoing underwriting improvements, our assessment of current loss cost and pricing trends, and other areas of strategic focus, we are partially protected by the Terrorism Risk Insurance Act of 2002, which was modified and extended through December 31, 2007 via the Terrorism Risk Insurance Extension Act of 2005. For further information regarding this legislation, see Item 1A. “Risk Factors” of this Form 10-K.

~~Competition~~providing 2008 earnings guidance in the ~~New Jersey personal automobile market has been influenced by~~range of $2.20 to $2.40 per diluted share. Our guidance is based on the ~~recent introduction~~following assumptions: (i) a statutory combined ratio of ~~new companies writing business~~98% and a GAAP combined ratio of 100%; (ii) after-tax catastrophe losses of $14.4 million; (iii) growth in after-tax investment income of 3%, including a 10% pre-tax yield on alternative investments, included in “Other investments” on the ~~state. Our new Personal Lines strategy allows us to better evaluate~~Consolidated Balance Sheets; (iv) Diversified Insurance Services revenue growth of 5% with a return on revenue of 10%; and ~~price risks,~~(v) diluted weighted average shares of 52.5 million, which ~~will help us to profitably compete for new business in an agent’s office. We are in~~includes the ~~process~~expectation of moving our existing renewal inventory into our new pricing and tiering structure in New Jersey, causing a one-time dislocation in this book of business. Annual increases or decreases are capped at 20% by NJDOBI. We continue to focus on increasing new business production through this advanced pricing methodology, as it will take several quarters forrepurchasing 3.5 million shares over the ~~improved renewal book profitability to materialize. We expect to see positive results more quickly outside of New Jersey, where the issues affecting the renewal inventory are less significant.~~

~~Technology also continues to play a critical role in our success. Our leading edge agency integration technology, xSELerate~~^®, is creating new business opportunities by facilitating the automated movement of key underwriting data from an agent’s management system to our systems. In December 2006, we were awarded the A.M. Best eFusion award for xSELerate^®, for innovative, business-focused agency integration technology. This technology allows for seamless quoting and rating capabilities, which is an example of why we are ranked so highly by our agents for “ease of doing business.”

~~On April 19, 2006, A.M. Best reaffirmed the “A+” (Superior) financial strength rating for our Insurance Subsidiaries for the 45th consecutive year. In support~~course of the rating, A.M. Best cited our “solid capitalization, historically favorable operating performance and strong regional presence within the small commercial lines business segment.” Only 9% of personal and commercial lines carriers attain an “A+” rating or better, which provides us with a competitive advantage that reinforces our agents’ decision to make us their carrier of choice. On July 25, 2006, Standard and Poor’s Insurance Rating Services (“S&P”) raised our financial strength rating to “A+” from “A”, citing our strong operating performance, strong operating company capitalization, and good financial flexibility. During the third quarter of 2006, Moody’s Investor Services elevated their outlook regarding Selective to “positive.”year.

We recently formed a new Insurance Subsidiary, Selective Auto Insurance Company of New Jersey (“SAICNJ”), which is domiciled in the State of New Jersey. SAICNJ writes Selective’s New Jersey personal automobile policies, effective July 1, 2006 for new business and August 15, 2006 for renewal business. SAICNJ, a member of the Pooling Agreement, received a financial strength rating of “A+” from A.M. Best on August 14, 2006.

Review of Underwriting Results by Line of Business

Commercial Lines

Commercial Lines


						2006					2005								2007					2006
($ in thousands)	2006			2005		vs. 2005			2004		vs. 2004			2007			2006		vs. 2006			2005		vs. 2005

GAAP Insurance Operations Results:
NPW	$	1,318,873			1,258,632		5	%		1,141,702		10	%	$	1,350,798			1,318,873		2	%		1,258,632		5	%

NPE		1,285,876			1,208,666		6			1,092,491		11			1,314,002			1,285,876		2			1,208,666		6
Less:
Losses and loss expenses incurred		811,326			748,548		8			699,277		7			838,577			811,326		3			748,548		8
Net underwriting expenses incurred		405,141			378,759		7			346,103		9			426,118			405,141		5			378,759		7
Dividends to policyholders		5,927			5,688		4			4,275		33			7,202			5,927		22			5,688		4

Underwriting income	$	63,482			75,671		(16	)		42,836		77		$	42,105			63,482		(34	)		75,671		(16	)

GAAP Ratios:
Loss and loss expense ratio		63.1	%		61.9		1.2			64.0		(2.1	)		63.8	%		63.1		0.7			61.9		1.2
Underwriting expense ratio		31.5	%		31.3		0.2			31.7		(0.4	)		32.5	%		31.5		1.0			31.3		0.2
Dividends to policyholders ratio		0.5	%		0.5		—			0.4		0.1			0.5	%		0.5		—			0.5		—

Combined ratio		95.1	%		93.7		1.4			96.1		(2.4	)		96.8	%		95.1		1.7			93.7		1.4

Statutory Ratios:
Loss and loss expense ratio		62.9	%		61.8	1.1		pts		63.7	(1.9		)pts		63.4	%		62.9	0.5		pts		61.8	1.1		pts
Underwriting expense ratio		31.6	%		31.3		0.3			31.3		—			32.0	%		31.6		0.4			31.3		0.3
Dividends to policyholders ratio		0.5	%		0.5		—			0.4		0.1			0.5	%		0.5		—			0.5		—

Combined ratio		95.0	%		93.6		1.4			95.4		(1.8	)		95.9	%		95.0		0.9			93.6		1.4

~~The increases in NPW and NPE were the result of:~~

	o		Direct voluntary new business written of $271.3 million for 2006, an 8% increase compared to $251.5 million in direct voluntary new business written in 2005, and $232.1 million in direct voluntary new business written in 2004;

	o		~~Year-on-year renewal retention remained level in 2006, 2005, and 2004; and~~

	o		Renewal premium price increases, including exposure averaged 2.2% for 2006, 3.5% for 2005, and 8.8% in 2004. On a pure price basis, renewal pricing decreased 1.7% in 2006, decreased 0.4% in 2005, and increased 4.3% in 2004.

	•		NPW increased in 2007 compared to 2006 and 2005. Premium growth in 2007 was attributable to increases in direct new business written of $36.4 million to $313.3 million for 2007 compared to 2006 partially offset by: (i) a slight reduction in retention for 2007 compared to 2006 and 2005; (ii) decreases in audit and endorsement premium activity of $11.5 million and $6.3 million, respectively; and, (iii) renewal price decreases, including exposure of 0.3% in 2007 reflecting the competitive pressure on our renewal book of business.

			Premium growth in 2006 as compared to 2005 was attributable to increases in direct new business of $14.1 million to $276.9 million coupled with renewal price increases, including exposure, of 2.2% in 2006.

	•		NPE increased reflecting increases in NPW as discussed above.

	•		The ~~increase in the~~GAAP loss and loss expense ratio ~~for~~increased 0.7 points in 2007 compared to 2006 isand 1.2 points in 2006 compared to 2005, primarily ~~the result~~due to: (i) lower pricing on our commercial book of business; and, (ii) increases in property losses. Included in total property losses were catastrophe losses ~~of $15.6~~that decreased $3.6 million, or ~~1.2~~0.3 points, ~~which was an increase of~~to $12.0 million in 2007 compared to 2006 and increased $11.8 million or 0.9 points to $15.6 million in 2006 compared to ~~catastrophe losses~~2005. The GAAP loss and loss expense ratio increases were partially offset by: (i) underwriting improvements related to the implementation of ~~$3.8~~our long-term strategies; and, (ii) favorable prior year loss and loss expense development within our workers compensation and commercial auto lines of business.

			For 2007, net favorable prior year loss and loss expense development within our casualty lines of business amounted to approximately $20 million, or ~~0.3 points, in 2005. In 2005, catastrophe losses had decreased $12.2 million, or 1.2~~1.5 points, compared to ~~2004.~~approximately $2 million in 2006, or 0.1 points, and minimal prior year loss and loss expense development in 2005.

	•		The increase in the GAAP ~~combined~~underwriting expense ratio ~~is primarily~~in 2007 compared to 2006 and 2005 was attributable to increases in underwriting expenses that outpaced premium growth. These underwriting expense increases were driven by higher labor costs. For additional information regarding our initiatives in the ~~increase in loss and loss~~management of the underwriting expense ratio, ~~discussed above for 2006 compared to 2005~~see the outlook section below and ~~for 2005 compared to 2004.~~Note 22, “Subsequent Events” in Item 8. “Financial Statements and Supplementary Data” of this Form 10-K.

The following is a discussion on our most significant commercial lines of business:

Commercial Automobile


						2006					2005								2007					2006
($ in thousands)	2006			2005		vs. 2005			2004		vs. 2004			2007			2006		vs. 2006			2005		vs. 2005

Statutory NPW	$	319,710			325,048		(2)	%		315,214		3	%	$	319,176			319,710		—	%		325,048		(2	)%
Statutory NPE		319,921			320,080		—			303,645		5			315,259			319,921		(1	)		320,080		—
Statutory combined ratio		88.1	%		74.4	13.7		pts		85.8	(11.4		)pts		88.1	%		88.1	—		pts		74.4	13.7		pts
% of total statutory commercial NPW		24	%		26					28					23	%		24					26

~~Continued~~Our continued strong performance in this line is the result of underwriting and pricing improvements over the last several years. ~~As we continue to write accounts, we~~We have implemented ~~granular~~targeted rate decreases on the best accounts to grow this profitable line of business. The policy count on this line of business increased 6%8% in ~~2006~~2007 compared to ~~2005, and 5% in 2005 compared to 2004. The~~2006 driven by new policy count ~~benefited from a 4% increase in new policies in~~increases of 18%. In 2006, as compared to 2005, ~~as well as~~policy counts increased 6% driven by new policy count increases of 4%. However, renewal prices, including exposure, decreased 2.9% in 2007 compared to a 4%decrease of 1.1% in 2006 and an increase of 0.4% in 2005, ~~as compared to 2004. Pure price~~which has put pressure on ~~our commercial automobile policies decreased 4.1%~~NPW and NPE. Lower severity trends have resulted in ~~2006. The results for this line of business were also positively impacted by~~ favorable prior year statutory loss and loss expense ~~reserve~~ development of approximately $19 million in 2007 compared to $15 million in 2006 ~~compared to~~and $48 million in ~~2005 and $20 million in 2004. This development was primarily driven by lower than expected severity in accident years 2002 and~~ 2005.

General Liability


						2007					2006
($ in thousands)	2007			2006		vs. 2006			2005		vs. 2005

Statutory NPW	$	420,388			413,381		2	%		382,172		8	%
Statutory NPE		410,024			402,745		2			363,713		11
Statutory combined ratio		98.8	%		96.5	2.3		pts		97.5	(1.0		) pts
% of total statutory commercial NPW		31	%		31					30

~~General Liability~~

2006 2005
($ in thousands) 2006 2005 vs. 2005 2004 vs. 2004

Statutory NPW $ 413,381 382,172 8 % 329,918 16 %
Statutory NPE 402,745 363,713 11 309,534 18
Statutory combined ratio 96.5 % 97.5 (1.0 )pts 98.7 (1.2 )pts
% of total statutory commercial NPW 31 % 30 29

~~Net premiums written for~~Total policy counts in this line of business increased 9% in 2007 compared to 2006 and 7% in 2006 compared to ~~2005~~2005. New business premiums in this line of business increased 14% for 2007 compared to 2006 and ~~2004 due~~1% for 2006 compared to 2005. Evidence of the ~~following: (i) increases~~softening market is illustrated in ~~policy counts of 8% and direct new policy premium of 1% in 2006; (ii)~~our renewal ~~price increases,~~pricing for this line which, including exposure, decreased 1.1% in 2007 compared to increases of 1.5% in ~~2006;~~2006 and ~~(iii) stable~~3.0% in 2005. Continuing evidence of the softening market is illustrated by retention ~~of approximately~~that decreased slightly to 75% in 2007 compared to 77% in 2006 and 76% ~~over the past two years.~~in 2005.

~~The~~Pricing pressure, coupled with higher loss costs, continues to put pressure on profitability in this line of ~~business reflects~~business. However, we continue to concentrate on our long-term ~~improvement~~ strategy ~~of:~~to improve profitability, which focuses on: (i) ~~focusing our~~ contractor growth onin business segments with lower completed operations exposures; and (ii) ~~improving contractor/~~contractor and subcontractor underwriting guidelines to minimize losses. Offsetting these improvements were pure renewal price decreases of 3.3% in 2006 and adverse prior year statutory loss and loss expense reserve development in this line of business of approximately $15 million in 2006 compared to $14 million in 2005 and $19 million in 2004. The adverse development in all years was largely driven by our contractor completed operations business and increases in reserves for legal expenses.

Workers Compensation


						2006					2005								2007					2006
($ in thousands)	2006			2005		vs. 2005			2004		vs. 2004			2007			2006		vs. 2006			2005		vs. 2005

Statutory NPW	$	325,008			309,584		5	%		272,739		14	%	$	336,189			325,008		3	%		309,584		5	%
Statutory NPE		314,221			293,311		7			263,508		11			325,657			314,221		4			293,311		7
Statutory combined ratio		108.4	%		124.1	(15.7		)pts		108.2	15.9		pts		101.6	%		108.4		(6.8	) pts		124.1		(15.7	) pts
% of total statutory commercial NPW		25	%		25					24					25	%		25					25

~~Statutory net~~Our multi-faceted workers compensation strategy, which incorporates our knowledge management and predictive modeling initiatives, has enabled us to retain and write more of the best accounts, leading to 2007 increases in total policy counts of 9% compared to 2006 and 6% in 2006 compared to 2005. Direct new voluntary policy premiums ~~written~~increased 28% for 2007 compared to 2006 and 30% for 2006 compared to 2005. At the same time, these initiatives have allowed us to target price increases for our ~~workers compensation~~worst performing business, which contributed to the decrease in our retention in 2007 to 79% from 80% in 2006 and 81% in 2005, thereby improving the profitability of our retained business.

The improvement in the statutory combined ratio of this line of ~~business increased by 5%~~6.8 points in 2007 compared to 2006 and 15.7 points in 2006 compared to 2005 ~~and by 14% in 2005 compared to 2004 due to: (i) increases in policy counts~~reflects not only the ongoing progress resulting from the execution of 5% in 2006; (ii) increases in direct new voluntary policy premium of 30% in 2006; and (iii) renewal price increases, including exposure, of 8% in 2006. Retention on this line of business decreased in 2006 to 80% from 82% in 2005, which was higher than 2004 retention of 80%.

~~We continue to execute on~~ our ~~multi-faceted~~ workers compensation ~~strategy aimed at reducing~~strategies, but also favorable prior year statutory development of $3 million attributable to these strategies, partially offset by an increase in the ~~statutory combined ratio by seven points by year-end 2007, barring other factors such as decreases in workers compensation rates or~~tail factor related to medical inflation ~~beyond expectation. In 2006, this line was impacted by favorable~~and general development trends. Favorable prior year statutory development of approximately $2 million ~~compared to adverse prior year statutory development of approximately $40 million in 2005 and approximately $4 million in 2004. The favorable prior year statutory development~~ in 2006 was driven, in part, by savings realized from changing medical and pharmacy networks outside ~~the State~~ of New Jersey and re-contracting our medical bill review services. ~~This redesign and re-contracting effort is expected to generate ongoing durable savings~~Adverse prior year statutory development of ~~about $3~~$40 million ~~annually. The adverse development~~ in 2005 was primarily the result of adverse loss trends, specifically in medical costs in the 2001 and prior accident years, which warranted an increase in management’s best estimates within the loss range. ~~The adverse development in 2004 was primarily the result of rating agency downgrades of certain reinsurers, which caused us to reevaluate our ability to collect under certain reinsurance contracts.~~

Over time, additional savings will be realized from other facets of our strategy, including our efforts to rank our operating states in tiers and target those which we believe will be the most profitable. Growth in our targeted states represents 76% of our 2006 new workers compensation voluntary business. Another facet of our workers compensation strategy is predictive modeling. The first predictive model for workers compensation was introduced in the second quarter of 2006. This model provides us with tools to identify unprofitable accounts and re-underwrite the workers compensation book more efficiently. We are pursuing strategies to grow the types of accounts that we have identified to be the most profitable. We are also looking at premiums written to ensure that they are reflective of the proper classes and payrolls for our workers compensation exposure. In the fourth quarter of 2006, we retained about 90% of our best business and non-renewed 33% of the worst business.

Commercial Property


						2006					2005								2007					2006
($ in thousands)	2006			2005		vs. 2005			2004		vs. 2004			2007			2006		vs. 2006			2005		vs. 2005

Statutory NPW	$	188,839			176,764		7	%		159,811		11	%	$	198,903			188,839		5	%		176,764		7	%
Statutory NPE		182,351			168,281		8			152,579		10			190,681			182,351		5			168,281		8
Statutory combined ratio		82.1	%		69.5	12.6		pts		80.9	(11.4		)pts		92.7	%		82.1		10.6	pts		69.5		12.6	pts
% of total statutory commercial NPW		14	%		14					14					15	%		14					14

Net premiums written for this line of business increased in 2007 compared to 2006 and 2005 due to increases in total policy counts of 11% in 2007 compared to 2006 and 9% in 2006 compared to ~~2005 and 2004 due to: (i) increases in direct new policy premium of 13% in 2006 to $45.1 million; (ii) stable~~2005. Stable retention of approximately ~~80%~~81% over the past ~~two years; and (iii)~~three years has also led to an increase in net premiums written. NPW growth was partially offset by renewal ~~price increases,~~prices, including exposure, ~~were 1.3%~~which decreased 0.4% in ~~2006.~~2007 compared to increases of 2.1% in 2006 and 2.8% in 2005.

~~The~~Although still profitable, the higher statutory combined ratio for commercial property increased in 2006 to a level more consistent with 2004 compared to 2005, primarily as a result of our catastrophe loss activity. Catastrophe losses were $13.2 million, or 7.2 points, in 2006 compared to $2.8 million, or 1.7 points, in 2005,reflects lower pricing and ~~$13.3 million, or 8.7 points, in 2004. In addition, large~~increased property losses especially in ~~2005 were~~comparison to the unusually low ~~compared to the more normalized trend we are experiencing this year. Despite the increased~~experience in 2006. The increase in property losses ~~this year, 2006 results continue~~appears to be ~~strong as~~part of the normal variability in this line of business is benefiting from underwriting improvements over the past five years, including better insurance-to-value estimates across our book of business, a shift to risks of better construction quality and ~~newer buildings, and an overall focus on low to medium hazard property exposures.~~

~~Business Owners’ Policy~~

2005 2005
($ in thousands) 2006 2005 vs. 2004 2004 vs. 2004

Statutory NPW $ 50,952 46,903 9 % 48,755 (4 )%
Statutory NPE 48,710 46,723 4 49,575 (6 )
Statutory combined ratio 102.4 % 99.5 2.9 pts 107.1 (7.6 )pts
% of total statutory commercial NPW 5 % 4 4

~~The statutory net premiums written growth is~~was primarily the result of ~~our completed Business Owners’ Policy (“BOP”) correction plan that included pricing~~an increase in the severity of losses, mainly attributable to flood events and underwriting actions focused on the growth of more profitable segments and the elimination of certain classes of business from our underwriting eligibility guidelines. With our BOP correction plan completed and our BOP rewrite in place in all of our states, we are beginningelectrical fires. For 2007, catastrophe losses decreased $2.5 million to see our new business increase. Additionally, in November 2006, we rolled out the BOP predictive model and early indications demonstrate positive trends in our selection of profitable new business. Direct new business in 2006 was up 15% as$10.7 million compared to ~~2005 and 2% in 2005~~2006, however, for 2006, catastrophe losses increased $10.4 million to $13.2 million compared to 2004. The policy count on this line of business increased 13% as of December 31, 2006 compared to December 31, 2005. The statutory combined ratio was negatively impacted by catastrophe losses of 4.0 points in 2006 compared to 1.5 points in 2005 and 3.9 points in 2004.

~~Bonds~~

2006 2005
($ in thousands) 2006 2005 vs. 2005 2004 vs. 2004

Statutory NPW $ 18,865 17,372 9 % 14,563 19 %
Statutory NPE 17,493 16,063 9 13,106 23
Statutory combined ratio 74.7 % 77.5 (2.8 )pts 112.8 (35.3 )pts
% of total statutory commercial NPW 1 % 1 1

~~Growth and profitability in this line of business is driven by enhancements to the bond underwriting process, including the successful rollout of our automated bond system in late~~ 2005.

Personal Lines

Personal Lines


							2006						2005									2007						2006
($ in thousands)	2006			2005			vs. 2005			2004			vs. 2004			2007			2006			vs. 2006			2005			vs. 2005

GAAP Insurance Operations Results:
NPW	$	217,088			200,842			8	%		223,446			(10	)%	$	204,069			217,088			(6	)%		200,842			8	%

NPE		213,788			209,347			2			225,899			(7	)		203,304			213,788			(5	)		209,347			2
Less:
Losses and loss expenses incurred		148,657			157,182			(5	)%		167,097			(6	)%		160,629			148,657			8	%		157,182			(5	)%
Net underwriting expenses incurred		70,635			58,108			22			60,870			(5	)		68,823			70,635			(3	)		58,108			22

Underwriting income (loss)	$	(5,504	)		(5,943	)		7			(2,068	)		(187	)
Underwriting loss																$	(26,148	)		(5,504	)		(375	)		(5,943	)		7

GAAP Ratios:
Loss and loss expense ratio		69.5	%		75.1		(5.6		)pts		74.0		1.1		pts		79.0	%		69.5			9.5	pts		75.1			(5.6	) pts
Underwriting expense ratio		33.1	%		27.8			5.3			26.9			0.9			33.9	%		33.1			0.8			27.8			5.3

Combined ratio		102.6	%		102.9			(0.3	)		100.9			2.0			112.9	%		102.6			10.3			102.9			(0.3	)

Statutory Ratios¹:
Loss and loss expense ratio		68.5	%		73.4		(4.9		)pts		72.8		0.6		pts		78.2	%		68.5			9.7	pts		73.4			(4.9	) pts
Underwriting expense ratio		29.7	%		27.2			2.5			25.2			2.0			29.7	%		29.7			—			27.2			2.5

Combined ratio		98.2	%		100.6			(2.4	)		98.0			2.6			107.9	%		98.2			9.7			100.6			(2.4	)


¹		The statutory ratios include Selective’s flood line of business, which is included in the Diversified Insurance Services Segment on a GAAP basis and therefore excluded from the GAAP ratios. The total Statutory Combined ~~Ratio~~ratio excluding flood was 113.0% for 2007, 102.9% for 2006, and 105.0 % for ~~2005, and 101.8% for 2004.~~2005.

NPW decreased in 2007 compared to 2006 after increasing in 2006 compared to 2005. Excluding the impact from the cancellation of the New Jersey Homeowners’ Quota Share Treaty (“Quota Share Treaty”), which increased 2006 NPW by $11.3 million, NPW decreased 1% in 2007 compared to 2006 and increased 2% in 2006 compared to 2005.

The ~~increase~~remaining decrease in NPW in 2007 compared to 2006 was primarily driven by a decline in NPW for our New Jersey personal automobile business of $12.6 million to $80.1 million in 2007. This resulted from a reduction in the number of New Jersey personal automobiles that we insure, primarily driven by repricing at higher levels through our MATRIX^® pricing system. Partially offsetting this decrease were increases in our personal automobile business outside of New Jersey of $5.4 million to $50.0 million coupled with increases in our homeowners business of $4.5 million to $65.4 million in 2007.

The New Jersey personal automobile market has been impacted by the introduction of new companies writing business in the state with rating plans that allow them to price accounts competitively without the legacy issue of repricing existing accounts through filed rate increases. Our new Personal Lines rating plan was approved by the New Jersey Department of Banking and Insurance (“NJDOBI”) and was implemented in August 2006. Our new plan allows us to better evaluate and price risks, which will help us to profitably compete for new business ~~reflects~~in our agencies. We have moved our entire existing renewal inventory into our new pricing and tiering structure in New Jersey, which has caused a dislocation in this book of business due to the repricing of certain business at higher levels, some of which did not renew. As annual increases or decreases are capped at 20% by the NJDOBI, we expect improvements to materialize over a three-year period. We continue to focus on increasing new business production within and outside of New Jersey through this advanced pricing methodology. In our continuing efforts to improve our existing book of automobile business, we have implemented average renewal rate increases of 13.1% in Pennsylvania effective August 1, 2007, and 8.5% in Maryland effective September 1, 2007. These changes applied to business written prior to the implementation of our MATRIX^® program. In 2008, we are taking steps to continue to improve our automobile business by filing further rate increases of 7% in New Jersey, which is targeted for May, 7% in Pennsylvania, targeted for July, and 6% in Maryland, targeted for August. The New Jersey change applies to all business, and the other changes apply to business originally written prior to the implementation of our MATRIX^® program. Such rate increases were necessary, as these states have regulatory restrictions on moving the renewal book into our new pricing methodology and the previous rates did not yield sufficient profitability.

Excluding the impact of the ~~termination~~one-time benefit received from the cancellation of the ~~New Jersey Homeowners~~ Quota Share Treaty, ~~on January 1, 2006. Excluding the impact of this treaty,~~ NPW ~~for Personal Lines would have decreased 7%~~increased 2% in 2006 compared to 2005. This ~~decrease is~~increase reflects the ~~result~~retention of ~~ongoing competition in~~homeowners business that had previously been ceded under the New Jersey personal automobile market. As of December 31, 2006, the number of cars we insure in New Jersey decreased 12% to 77,160 from 87,593 as of December 31, 2005 and 97,685 as of December 31, 2004. Partially offsetting the impact of the increased competition wastreaty coupled with an increase in direct homeowners premiums written ~~in our homeowners’ line of business~~ of 6% ~~to $65.1 million~~ in 2006 compared to 2005, ~~and an increase~~partially offset by a decrease in our personal automobile business of 8%$16.6 million to ~~$61.5 million in 2005 compared to 2004.~~

~~Personal Automobile~~

2006 2005
($ in thousands) 2006 2005 vs. 2005 2004 vs. 2004

Statutory NPW $ 137,355 153,915 (11 )% 181,316 (15 )%
Statutory NPE 146,737 164,805 (11 ) 185,375 (11 )
Statutory combined ratio 103.4 % 106.7 (3.3 )pts 98.9 7.8 pts
% of total statutory personal NPW 63 % 77 81

~~Net premiums written for this~~$137.4 million. NPW on our personal automobile line of business decreased in 2006 as a result of the ongoing competition in the New Jersey personal automobile ~~market~~marketplace coupled with our rating plans that were not competitive through the first half of the year due to a historically restrictive ~~regulatory~~rating environment. As

The fluctuations in NPE reflect the fluctuations in NPW as discussed above.

The deterioration in the GAAP loss and loss expense ratio in 2007 compared to 2006 was primarily driven by decreased pricing in our New Jersey personal automobile line of ~~December 31,~~business coupled with the following:

An increase of $6.7 million in non-catastrophe property losses in 2007 compared to 2006.

Unfavorable prior year development in our casualty lines of $1 million in 2007 compared to favorable prior year development of $6 million in 2006. The unfavorable development in 2007 reflects (i) higher severity in accident year 2006 for our personal automobile line of business; (ii) adverse prior year development due to unfavorable trends in claims for groundwater contamination caused by the leakage of certain underground oil storage tanks in our homeowners line of business; and, (iii) several significant losses in our personal umbrella line of business, partially offset by lower than expected loss emergence for accident years prior to 2006. In 2006, the ~~number~~favorable prior year development primarily related to lower than expected frequency in personal automobile claims.

This deterioration in the loss and loss expense ratio was partially offset by a reduction in catastrophe losses of ~~cars we insured decreased 12% compared~~$2.2 million, to December 31, 2005 and decreased 10% as of December 31, 2005 as compared to December 31, 2004. During the second half of the year, we redesigned our Personal Lines pricing model, which we refer to as “MATRIX.” MATRIX is designed to provide increased pricing flexibility$2.9 million in an effort to improve our competitive position, and allows us to better match price to risk and helps us to profitably compete for new business. Annual increases or decreases are capped at 20% by NJDOBI.2007.

The improvement in the 2006 ~~combined~~GAAP loss and loss expense ratio ~~improved slightly over 2005, however our non-New Jersey book of business is primarily driving~~was driven by the overall lack of profitability. Our New Jersey book of business posted a profitable combined ratio of 98.8% in 2006 compared to a 97.0% in 2005. The 1.8 point increase reflects the competitive pressures described above coupled with increased expenses resulting from the 2005 New Jersey Supreme Court decision discussed below. Our non-New Jersey book of business posted a combined ratio of 113.5% in 2006 compared to 130.8% in 2005.

~~The 2005 results compared to 2004 were significantly impacted by our~~ reserving actions taken in 2005 in light of a New Jersey Supreme Court decision ~~in 2005. This decision~~that eliminated the application of the serious life impact standard to personal automobile cases under the verbal tort threshold of New Jersey’s Automobile Insurance Cost Reduction Act (“AICRA”) and resulted in an increase to our reserves of $13.0 million in the second quarter of 2005. The implementation of AICRA, ~~combined with~~and our rating and tiering actions had enabled us to achieve profitability in the New Jersey personal automobile line of business over the two years ~~previous~~prior to the ~~Supreme Court~~ ruling. However, factoring higher expected claim costs

into our New Jersey personal automobile excess profits calculation ~~resulted in the elimination~~eliminated $5.5 million of an excess profits ~~reserve of $5.5 million~~reserves in the second quarter of 2005.

~~Homeowners~~

2006 2005
($ in thousands) 2006 2005 vs. 2005 2004 vs. 2004

Statutory NPW $ 72,243 39,737 82 % 35,730 11 %
Statutory NPE 59,334 37,706 57 34,370 10
Statutory combined ratio 103.6 % 99.0 4.6 pts 113.6 (14.6 )pts
% of total statutory personal NPW 33 % 20 16

~~Statutory NPW for 2006 as~~The deterioration in the GAAP underwriting expense ratio in 2007 compared to 2006 and 2005 ~~and 2004 increased as a result~~was primarily attributable to overhead costs that have outpaced premiums earned. In addition, costs associated with the reorganization of the ~~termination~~Personal Lines department in May of 2007, which reduced the Quota Share Treaty on January 1, 2006. The termination resulted in a return of ceded premium in the first quarter of 2006 as well as the retention of homeowners business that had previously been ceded. An increase in direct premiums written of 6% in 2006 and 8% in 2005 comparedstaffing level by 31 employees, added 0.6 points to the ~~prior years,~~underwriting expense ratio in 2007.

We have also ~~contributed~~implemented a three-part profit improvement plan that will focus on returning Personal Lines to profitability by the end of 2009. To decrease costs associated with writing policies and servicing claims, we plan to: (i) utilize the full capability of our MATRIX^® pricing system, along with widening the One & Done^® pipeline to maximize the cost savings that are associated with these policies; (ii) roll out our knowledge management initiatives to the ~~increase~~Personal Lines operation in statutory net premiums written. Despite growth in premiums, the 2006 statutory combined ratio was negatively impacted by 7.6 points of catastrophe losses, while the 2005 ratio included only 1.7 points in catastrophe losses,May 2008; and, ~~the 2004 ratio included 5.9 points in catastrophe losses.~~(iii) move additional claims to our centrally located claims department to cut down on costs incurred for claims handling.

Reinsurance

We have reinsurance contracts that cover both property and casualty business. ~~Selective uses~~We use traditional forms of reinsurance and ~~does~~do not utilize finite risk reinsurance. ~~For purpose of this discussion, our~~Our contracts can be segregated into the following key categories:

	•		Property Reinsurance—– includes our Property Excess of Loss treaty purchased for protection against large individual property losses and our Property Catastrophe treaty purchased to provide protection for the overall property portfolio against severe catastrophic events. Facultative reinsurance is also used for property risks that are in excess of our treaty capacity.

	•		Casualty Reinsurance—– purchased to provide protection for both individual large casualty losses and catastrophic casualty losses involving multiple claimants or insureds. Facultative reinsurance is also used for casualty risks that are in excess of our treaty capacity.

•

Other Reinsurance—– includes smaller treaties, such as our Surety and Fidelity Excess of Loss treaties, which do not fall within the categories above.

~~While this discussion will provide you with an overview regarding the reasons for changing our reinsurance program over the past year, additional~~Additional information regarding the terms and related coverage associated with each of our categories of reinsurance can be found in Item 1. “Business” of this Form 10-K.

We ~~continuously~~regularly reevaluate our overall reinsurance program and try to develop the most effective ways to manage our risk. Our analysis is based on a comprehensive process that includes periodic analysis of modeling results, aggregation of exposures, exposure growth, diversification of ~~portfolio,~~risks, limits written, projected reinsurance costs, financial strength of reinsurers and projected impact on earnings and statutory surplus. We strive to balance ~~often~~sometime opposing considerations of reinsurer credit quality, price, terms, and our appetite for retaining a certain level of risk. ~~This year the process led to two significant changes to our reinsurance program, which are effective January 1, 2007:~~

	•		We increased both limit and retention under our catastrophe excess of loss treaty to 95% of $285.0 million in excess of $40.0 million per occurrence compared to 95% of $250.0 million in excess of $20.0 million per occurrence in the prior year.

	•		~~We did not renew our Terrorism Treaty and purchased an additional 75% of $40.0 million in excess of $50.0 million layer in our Casualty Excess of Loss treaty.~~

Terrorism Reinsurance

We made the decision not to renew our Terrorism Treaty for 2007. We determined that additional per occurrence casualty coverage would be a cost efficient way to enhance our protection against man-made catastrophic events. The cost of our Terrorism Treaty in 2006 was $4.3 million. The additional layer of casualty coverage cost $0.7 million.

Property Reinsurance

Although 2006 proved to be a year characterized by low incidence of significant catastrophic events, the reinsurance market continued to be influenced by retrocessional capacity constraints, rating agencies’ added emphasis on reinsurers’ capital adequacy, and recalibrated catastrophic models. In 2006, Risk Management Solutions Inc. (“RMS”), one of the leaders in catastrophe modeling, launched a new version of its U.S. Hurricane model. In addition to storm and demand surge options, RMS v.6.0 now provides results on both a “stochastic” five-year view and the traditional, longer-term “historic” view. RMS v.6.0 was influenced by RMS’s analysis of the 2004 and 2005 hurricane seasons, as well as a prospective view that hurricane activity in the Atlantic Basin will be above historical averages in the short to medium-term (five years). As a result of these model changes, loss projections increased significantly. These external market forces, combined with the growth in our book of business, resulted in a $4.5 million, or 34%, increase in the cost of our property catastrophe programThe Property Catastrophe treaty renewed effective January 1, ~~2007 as compared~~2008 with ~~2006. Based on~~ a ~~modeled portfolio and capital stress test analysis, we chose to increase our retention under the Catastrophe Excess of Loss~~15% reduction in premium. The current treaty ~~to $40.0 million from the expiring $20.0 million retention. In addition, we purchased $35.0 million of additional~~provides per occurrence coverage ~~in the upper limit with the treaty now covering~~for 95% of ~~$285.0~~$310.0 million in excess of $40.0 million ~~per occurrence retention. This treaty provides~~retention compared to 95% of $335.0 million in excess of $40.0 million retention under the expiring treaty. The annual aggregate limit net of our co-participation is $589.0 million compared to $636.5 million for ~~one full reinstatement~~the expiring treaty. We continue to assess our property catastrophe exposure aggregations, modeled results and effects of ~~any portion~~growth on our property portfolio and strive to manage our exposure to individual large events balanced against the cost of ~~original limits exhausted by a loss.~~reinsurance protection.

The following table presents ~~RMS v.6.0~~Risk Management Solutions, Inc.’s (“RMS”) v.7.0 modeled hurricane losses based on ~~Selective’s~~the Insurance Subsidiaries’ property ~~portfolio~~book of business as of June 30, ~~2006 under our 2007 catastrophe reinsurance treaty:~~2007:


($ in thousands)	Historic Basis							Stochastic Basis							Historic Basis							Stochastic Basis
					Net Losses							Net Losses							Net Losses							Net Losses
	Gross				as a Percent			Gross				as a Percent			Gross				as a Percent			Gross				as a Percent
Occurrence Exceedence	Losses		Net		of 12/31/06			Losses		Net		of 12/31/06			Losses		Net		of 12/31/07			Losses		Net		of 12/31/07
Probability	RMS v.6.0		Losses¹		Equity			RMS v.6.0		Losses¹		Equity			RMS v.7.0		Losses¹		Equity			RMS v.7.0		Losses¹		Equity

4.00% (1 in 25 year event )	$	42,281		26,233		2	%	$	59,836		28,027		3	%	$	49,277		26,874		2	%	$	69,947		28,823		3	%
2.00% (1 in 50 year event)		87,638		30,868		3			116,609		33,362		3			100,670		31,702		3			134,532		34,057		3
1.00% (1 in 100 year event)		168,896		37,234		3			215,544		40,116		4			190,897		37,977		4			244,445		41,015		4
0.40% (1 in 250 year event)		360,560		69,791		6			435,526		118,518		11			400,631		79,637		7			485,837		135,021		13


¹		Losses are after tax and include applicable reinstatement premium.

RMS v.7.0 allows modeling based on the long term averages (historic view) and modeling based on a five year projection that includes an assumption of elevated hurricane activity in the Atlantic Basin in the short to medium term (stochastic view). Results of both models are provided above for select probabilities. Our current catastrophe program provides protection for a 1 in ~~219~~209 year event, or an event with 0.5 % probability according to the RMS ~~v.6.0~~v.7.0 historic model, and for a 1 in ~~168~~159 year event, or an event with 0.6% probability according to RMS ~~v.6.0~~v.7.0 stochastic model.

The retention and limit under our Property Excess of Loss treaty renewed July 1, ~~2006,~~2007, remained the same at $23.0 million in excess of $2.0 million. Consistent with ~~the~~ prior year contract, all ~~NBCR~~nuclear, biological, chemical and radioactive reaction (“NBCR”) losses are excluded from the Property Excess of Loss ~~treaty regardless of whether or not they are certified under TRIA.~~treaty. Terrorism (excluding NBCR) and per occurrence aggregate limits ofremain at $46.5 ~~million reflect a moderate reduction in the upper layer aggregate limits from the expiring $54.0 million. The estimated ceded premium decreased by $0.4~~ million.

Casualty Reinsurance

The Casualty Excess of Loss program was renewed ~~with an~~ effective ~~date of~~ July 1, 2006. We purchased an additional layer of our casualty treaty on January 1, 2007. The new layer provides protection for 75% of $40.0 million in excess of $50.0 million per occurrence. It was purchased for an 18 month period and has an estimated annual cost of $0.7 million.2007, with no changes to the expiring structure. The total program currently provides the following coverage:

	•		~~Workers compensation only treaty, covering up to $3.0 million in excess of $2.0 million per occurrence;~~

	•		Workers compensation only treaty, covering up to $3.0 million in excess of $2.0 million per occurrence; All Casualty Lines Excess of Loss treaty (“Casualty Treaty”) covering all casualty business, including workers compensation, up to ~~$45.0 million, in excess of $5.0 million per occurrence; and~~

	•		~~Additional layer to the Casualty Treaty covering all casualty business, including workers compensation, up to 75% of $40.0 million in excess of $50 million.~~

~~In comparison, the prior year treaty provided per occurrence coverage of $48.0 million in excess of the Company’s $2.0 million retention for workers compensation claims and~~ $45.0 million, in excess of $5.0 million per occurrence; and

Additional layer to the ~~Company’s $5~~Casualty Treaty covering all casualty business, including workers compensation, up to 75% of $40.0 million ~~retention for all other casualty claims.~~ in excess of $50 million.

The total ~~cost of the 2006 fiscal year casualty program is expected~~coverage for workers compensation claims continues to be ~~$1.0~~$78.0 million ~~higher~~per occurrence and $75.0 million per occurrence for casualty claims other than workers compensation, net of our co-participation in the ~~prior fiscal year.~~$40.0 million in excess of $50.0 million layer.

Other Reinsurance

Our Surety and Fidelity Excess of Loss treaty was renewed effective January 1, ~~2007~~2008, with essentially no changes in coverage and a ~~22%~~2.5% increase in estimated ceded premium ~~influenced by~~due to an increase in projected subject premium ~~increases~~offset by a decrease in the rate.

Effective January 1, 2008, we entered into a new treaty which covers our participation in the involuntary National Council on Compensation Insurance (NCCI) pool, a residual workers compensation market. The treaty provides 100% Quota Share coverage, including terrorism coverage, for the 2008 underwriting year business assumed from NCCI and ~~a modest increase~~has an aggregate combined ratio limit of approximately 142%. The treaty is placed with two carriers both rated “A+” by A. M. Best and we expect to ~~rate.~~cede $6.0 million in premium in 2008. We believe that the protection provided within this treaty for residual market business will be especially beneficial given current market conditions and the expected deterioration in the experience of the NCCI pool.

Investments

Our investment portfolio consists primarily ~~(82%)~~ of fixed maturity investments (83%), but also contains equity securities (7%), short-term investments (5%), and other ~~investments.~~investments (5%). Our investment philosophy includes setting certain return and risk objectives for our fixed maturity and equity portfolios. The primary return objective of our fixed maturity portfolio is to maximize after-tax investment yield and income while balancing certain risk ~~objectives, with a secondary objective of meeting or exceeding a weighted-average benchmark of public fixed income indices.~~objectives. The return objective of the equity portfolio is to meet or exceed a weighted-average benchmark of public equity indices. The risk ~~objectives~~objective for our entire portfolio is to ensure that our investments are structured conservatively, focusing on: (i) asset diversification; (ii) investment quality; (iii) liquidity, particularly to meet the cash obligations of the insurance operations; (iv) consideration of taxes; and (v) preservation of capital.

2006 2005
($ in thousands) 2006 2005 vs. 2005 2004 vs. 2004

Net investment income — before tax $ 156,802 135,950 15 % 120,540 13 %
Net investment income — after tax $ 121,460 104,840 16 % 90,679 16 %
Effective tax rate 22.5 % 22.9 (0.4 )pts 24.8 (1.9 )pts
Annual after-tax yield on investment portfolio 3.6 % 3.5 0.1 pts 3.5 — pts
Our investment returns for the last three years are as follows:


						2007					2006
($ in thousands)	2007			2006		vs. 2006			2005		vs. 2005
Net investment income – before tax	$	174,144			156,802		11	%		135,950		15	%
Net investment income – after tax	$	133,669			121,460		10	%		104,840		16	%
Total invested assets		3,733,029			3,596,102		4	%		3,245,545		11	%
Effective tax rate		23.2	%		22.5		0.7	pts		22.9		(0.4	) pts
Annual after-tax yield on investment portfolio		3.6	%		3.6		—	pts		3.5		0.1	pts

The increase in net investment income, before tax, of $17.3 million for 2007 compared to 2006 was primarily the result of increased fixed maturity income due to higher invested assets and increased income of approximately $7.0 million from certain alternative investments within our “Other investments” category. Growth in net investment income, before tax, of $20.9 million for 2006 compared to 2005 ~~and $15.4 million for 2005 compared to 2004~~ was primarily attributable to the increase in our investment ~~portfolio. The value~~portfolio as well as increased income of ~~the~~$4.0 million in alternative investment income and $1.0 million in dividend income. Our investment portfolio ~~reached~~totaled $3.7 billion at December 31, 2007, an increase of 4% compared to $3.6 billion at December 31, ~~2006, an increase of 11% compared to $3.2 billion at December 31, 2005.~~2006. The increase in invested assets was due to substantial cash flows from operations of ~~$393.4~~$386.3 million in 2007, $393.1 million in 2006 and $406.8 million in 2005. Cash flows from operations in 2007 were partially offset by cash outflows of: (i) $143.3 million related to treasury stock repurchases under our authorized program; (ii) $37.5 million related to principal payments on our senior convertible notes; and (iii) $18.3 million related to principal payments on our 8.87% and 8.63 senior notes. Debt offerings in September 2006 and November 2005 ~~also~~ added approximately $96.8 million and $98.4 million ~~respectively,~~ in assets, respectively, in 2006 and 2005. Also contributing to the growth in investment income were: (i) increased income of approximately $4.0 million from certain limited partnerships within our “Other investments” category for 2006 compared to 2005 and $1.8 million for 2005 compared to 2004; and (ii) dividend income increases of $1.0 million for 2006 compared to 2005 and $1.4 million for 2005 compared to 2004.

We continue to maintain a conservative, diversified investment portfolio, with fixed maturity investments representing ~~82%~~83% of invested assets. ~~73%~~Sixty-nine percent (69%) of our fixed maturities portfolio is rated “AAA” while the portfolio has an average rating of ~~“AA,~~“AA+,” S&P’s second highest credit quality rating. High credit quality continues to be a cornerstone of our investment strategy, as evidenced by the fact that almost 100% of the fixed maturities are investment grade. At December 31, ~~2006~~2007 and ~~2005,~~2006, non-investment grade securities (below ~~BBB-~~“BBB-“) represented less than 1%, or approximately $10 million, of our fixed maturity portfolio. Our mortgage backed securities portfolio totaled $697.9 million at December 31, 2007, with an average credit rating of “AA+.” Selective has no significant sub-prime mortgage exposure. Prior to investing in mortgage-backed securities, we analyze, among other credit factors, each transaction’s FICO credit score and loan to value ratio. For additional information regarding our fixed investment income portfolio, see Exhibit 99.1 of Form 8-K dated January 23, 2008 and Exhibit 99.2 of Form 8-K dated February 12, 2008. For additional information regarding market risk related to our investment portfolio, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” of this Form 10-K.

The following table presents the Moody’s and S~~&P’s~~&P ratings of our fixed maturities portfolio:


Rating	2006			2005			2007		2006

Aaa/AAA		73	%		68	%		69%		73%
Aa/AA		17	%		19	%		16%		17%
A/A		7	%		10	%		9%		7%
Baa/BBB		3	%		3	%		6%		3%
Ba/BB or below		<1	%		<1	%		<1%		<1%

Total		100	%		100	%		100%		100%

Our fixed maturity investment strategy is to make security purchases that are attractively priced in relation to perceived credit risks. We manage the interest rate risk associated with holding fixed maturity investments by monitoring and maintaining the average duration of the portfolio with a view toward achieving an adequate after-tax return without subjecting the portfolio to an unreasonable level of interest rate risk. We invest our fixed maturities portfolio primarily in intermediate-term securities to limit the overall interest rate risk of fixed maturity investments. The average duration of the fixed maturity portfolio, including short-term investments, was 3.8 years at December 31, 2006 compared to 4.0 years at December 31, 2005. To provide liquidity, while maintaining consistent performance, fixed maturity investments are “laddered” so that some issues are always approaching maturity, thereby providing a source of predictable cash flow. Managing investment risk by adhering to these strategies is intended to protect the interests of our stockholders and the policyholders of our Insurance Subsidiaries, and enhance our financial strength and underwriting capacity.

~~Realized Gains and Losses~~

Realized gains and losses are determined on the basis of the cost of specific investments sold or written-down, and are credited or charged to income. Our Investments segment included net realized gains before tax of $35.5 million in 2006, compared to $14.5 million in 2005, and $24.6 million in 2004. The realized gains were principally from the sale of equity securities. Net realized gains in 2006 reflect the sale of several equity positions which resulted in re-weighting various sector exposures. Within the energy sector, we reduced our overweighted allocation by selling several positions that we felt had exceeded their fair value. During 2006 there were no impairment charges recorded. Net realized gains in 2005 also reflect the sale of certain long-term equity holdings, which were partially offset by an impairment charge from one write-down for other than temporary declines in fair value of $1.2 million. There were no impairment charges recorded in 2004. We maintain a high quality and liquid investment portfolio and the sale of the securities that resulted in realized gains did not change the overall liquidity of the investment portfolio. Our philosophy for sales of securities generally is to reduce our exposure to securities and sectors based upon economic evaluations or if the fundamentals for that security or sector have deteriorated and/or for tax planning purposes. We generally have a long investment time horizon and our turnover is low, which has resulted in many securities accumulating large unrealized gains. Every purchase or sale is made with the intent of improving future investment returns.

~~The following table summarizes the Company’s net realized gains by investment type:~~

($ in thousands) 2006 2005 2004

Held-to-maturity fixed maturities
Gains $ 16 106 184
Available-for-sale fixed maturities
Gains 2,460 1,468 4,922
Losses (6,756 ) (4,196 ) (5,313 )
Available-for-sale equity securities
Gains 43,542 21,149 26,851
Losses (3,783 ) (4,063 ) (2,057 )

Total net realized gains $ 35,479 14,464 24,587

Generally, the Insurance Subsidiaries have a duration mismatch between assets and liabilities. The duration of the fixed maturity portfolio, including short-term investments, is ~~3.8~~3.9 years while the Insurance ~~Subsidiaries~~Subsidiaries’ liabilities have a duration of ~~approximately 3~~3.4 years. The current duration of our fixed maturities is within our historical range and is monitored and managed to maximize yield and limit interest rate risk. The duration mismatch is managed with a laddered maturity structure and an appropriate level of short-term investments that avoids liquidation of available-for-sale fixed maturities in the ordinary course of business. Liquidity is always a consideration when buying or selling securities, but because of the high quality and active market for the majority of securities in our investment portfolio, the securities sold have not diminished the overall liquidity of our portfolio. Our normal liquidity requirements ~~in the past~~ have historically been met by operating cash flow from our Insurance Operations and Diversified Insurance Services ~~segments and the issuance of debt and equity securities.~~segments. We expect our liquidity requirements in the future to be met by these sources of funds or, if necessary, the issuance of debt and equity securities, as well as borrowings from our credit ~~facilities.~~facility. Managing investment risk by adhering to these strategies is intended to protect the interests of our stockholders and the policyholders of our Insurance Subsidiaries, while enhancing our financial strength and underwriting capacity.

WeRealized Gains and Losses

Realized gains and losses are determined on the basis of the cost of specific investments sold, and are credited or charged to income. Also included in realized gains and losses are write-downs for other than temporary impairment charges. Our Investments segment included net realized gains before tax of $33.4 million in 2007, compared to $35.5 million in 2006, and $14.5 million in 2005. The realized gains were principally from the sale of equity securities. Net realized gains in 2007 and 2006 reflect the sale of several equity positions which resulted in re-weighting various sector exposures. Realized gains were partially offset by realized losses, of which the most significant losses are discussed below. We maintain a high quality and liquid investment portfolio and the sale of the securities that resulted in realized gains did not change the overall liquidity of the investment portfolio. Our philosophy for sales of securities generally is to reduce our exposure to securities and sectors based upon economic evaluations or if the fundamentals for that security or sector have deteriorated. We typically have a long investment time horizon and our turnover is low, which has resulted in many securities accumulating large unrealized gains. Every purchase or sale is made with the intent of improving future investment returns.

The following table summarizes our net realized gains by investment type:


($ in thousands)	2007			2006			2005
Held-to-maturity fixed maturities
Gains	$	—			16			106
Available-for-sale fixed maturities
Gains		445			2,460			1,468
Losses		(7,150	)		(6,756	)		(4,196	)
Available-for-sale equity securities
Gains		50,254			43,542			21,149
Losses		(9,359	)		(3,783	)		(4,063	)
Available-for-sale other investments
Gains		847			—			—
Losses		(1,683	)		—			—

Total net realized gains	$	33,354			35,479			14,464

Realized losses within the available-for-sale fixed maturity securities increased in 2007 as compared to 2006 and 2005. This is primarily the result of other than temporary impairment charge associated with two commercial real estate collateralized debt obligations (“CDO”) for $4.9 million. During the second half of 2007, the market for lower-rated commercial mortgage-backed securities (“CMBS”) saw severe contagion effects from the sub-prime mortgage crisis. CMBS spreads, particularly subordinated tranche CMBS, widened dramatically over the course of the second half of the year. As a result, CDOs in general have become extremely dislocated and difficult to value as the market spreads between bid and ask prices are very wide, even for CDOs that do not have any sub-prime asset backed exposure. At this time, there have been no credit defaults or rating downgrades on CDOs in our portfolio. However, given the severe lack of liquidity currently being experienced in the marketplace, it is difficult to value certain securities and, as a result, we recorded an other than temporary impairment charge on two commercial real estate CDOs in 2007. During 2006, Selective had not recognized any realized losses from other than temporary charges, whereas during 2005 Selective had recorded $1.2 million in realized losses related to other than temporary charges.

The dislocation in the sub-prime mortgage sector had also extended more broadly into both the credit and equity markets in early August 2007. These events adversely affected quantitative strategies that use factor-based models to identify incorrectly priced securities, and produced widespread de-leveraging and unprecedented negative returns to all standard quantitative factors in the U.S. during ~~2006, 2005,~~early August. With the increased uncertainty and ~~2004.~~ risk of the equity markets at that time, we had hedged our direct exposure to the S&P 500 by investing in an exchange-traded fund (“ETF”). The fund was set up to perform inversely to the S&P 500 Index at a 2:1 ratio. Through this action, we had protected $90 million of our equity capital base. While the investment limited the upside of the equity portfolio, we believed that this strategy was appropriate during this period of extreme market uncertainty. As a result of the aggressive actions by the Federal Reserve to lower the federal funds rate later in the third quarter, improvements were seen in the equity markets leading us to sell our interest in the ETF. This sale resulted in a $4.3 million realized loss in the third quarter of 2007.

In light of the market conditions, we also decided to dispose of one of our other investments, a global quantitative market-neutral equity hedge fund, primarily due to its undifferentiated model and greater than anticipated volatility. This disposition resulted in a $1.7 million realized loss and is reflected in the available-for-sale other investment category in the table above.

The following tables present the period of time that securities sold at a loss were continuously in an unrealized loss position prior to sale:

Period of time in an 2006 2005 2004
Unrealized loss position Fair Fair Fair
Value on Realized Value on Realized Value on Realized
($ in millions) Sale Date Loss Sale Date Loss Sale Date Loss

Fixed maturities:
0 – 6 months $ 94.9 1.5 67.1 1.4 107.7 4.6
7 – 12 months 76.6 2.5 32.4 0.7 30.2 0.6
Greater than 12 months 35.8 1.5 33.0 1.1 — —

Total fixed maturities 207.3 5.5 132.5 3.2 137.9 5.2

Equity Securities:
0 – 6 months 15.5 3.1 11.2 1.8 12.2 1.9
7 – 12 months 3.2 0.7 3.6 1.0 0.4 0.2
Greater than 12 months — — 0.7 0.1 — —

Total equity securities 18.7 3.8 15.5 2.9 12.6 2.1

Total $ 226.0 9.3 148.0 6.1 150.5 7.3

These securities were sold despite the fact that they were in a loss position. The decision to sell these securities was due to: (i) heightened credit risk of the individual security sold; (ii) the decision to reduce our exposure to certain issuers, industries or sectors in light of changing economic conditions; or (iii) tax purposes.


Period of time in an	2007				2006				2005
Unrealized loss position	Fair				Fair				Fair
	Value on		Realized		Value on		Realized		Value on		Realized
($ in millions)	Sale Date		Loss		Sale Date		Loss		Sale Date		Loss
Fixed maturities:
0 – 6 months	$	29.0		0.7		94.9		1.5		67.1		1.4
7 – 12 months		31.6		0.4		76.6		2.5		32.4		0.7
Greater than 12 months		10.2		0.2		35.8		1.5		33.0		1.1

Total fixed maturities		70.8		1.3		207.3		5.5		132.5		3.2

Equity Securities:
0 – 6 months		60.0		8.8		15.5		3.1		11.2		1.8
7 – 12 months		1.6		0.4		3.2		0.7		3.6		1.0
Greater than 12 months		0.4		0.2		—		—		0.7		0.1

Total equity securities		62.0		9.4		18.7		3.8		15.5		2.9

Other investments:
0 – 6 months		5.3		1.7		—		—		—		—
7 – 12 months		—		—		—		—		—		—
Greater than 12 months		—		—		—		—		—		—

Total other investments		5.3		1.7		—		—		—		—

Total	$	138.1		12.4		226.0		9.3		148.0		6.1

Unrealized Losses

The following table summarizes the aggregate fair value and gross pre-tax unrealized loss recorded in our accumulated other comprehensive income, by asset class and by length of time, for all available-for-sale securities that have continuously been in an unrealized loss position at December 31, ~~2006~~2007 and December 31, ~~2005:~~2006:


Period of time in an	2006				2005				2007				2006
Unrealized loss position			Gross				Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
($ in millions)	Value		Loss		Value		Loss		Value		Loss		Value		Loss

Fixed maturities:
0 – 6 months	$	376.6		1.7		962.7		8.0	$	219.2		8.0		376.6		1.7
7 – 12 months		107.6		0.7		164.8		3.0		188.6		11.6		107.6		0.7
Greater than 12 months		705.8		10.1		124.1		3.4		340.5		5.7		705.8		10.1

Total fixed maturities		1,190.0		12.5		1,251.6		14.4		748.3		25.3		1,190.0		12.5

Equities:
0 – 6 months		7.8		0.2		7.4		0.4		25.7		1.1		7.8		0.2
7 – 12 months		—		—		2.0		0.1		1.1		0.4		—		—
Greater than 12 months		0.4		0.2		—		—		—		—		0.4		0.2

Total equity securities		8.2		0.4		9.4		0.5		26.8		1.5		8.2		0.4

Other:
0 – 6 months		6.9		0.1		—		—		—		—		6.9		0.1
7 – 12 months		—		—		—		—		—		—		—		—
Greater than 12 months		—		—		—		—		—		—		—		—

Total other securities		6.9		0.1		—		—		—		—		6.9		0.1

Total	$	1,205.1		13.0		1,261.0		14.9	$	775.1		26.8		1,205.1		13.0

The following table presents information regarding our available-for-sale fixed maturities that were in an unrealized loss position at December 31, ~~2006~~2007 by contractual maturity:


Contractual Maturities	Amortized		Fair		Amortized		Fair
($ in millions)	Cost		Value		Cost		Value

One year or less	$	156.5		156.0	$	91.7		90.1
Due after one year through five years		658.5		650.3		373.4		365.0
Due after five years through ten years		362.9		359.2		233.7		223.2
Due after ten years through fifteen years		24.7		24.5		40.2		36.9
Due after fifteen years						34.6		33.1

Total	$	1,202.6		1,190.0	$	773.6		748.3

Investment Outlook

~~S&P earnings~~

As we look forward, we see a number of risks that could contribute to an extended period of uncertainty and volatility in the financial markets. Recession fears abound and negative economic predictions are increasingly more common. We foresee no stabilizing signs in the U.S. housing market. Declining home prices are seemingly already affecting retail sales and other consumer discretionary spending. A return to a more normally functioning housing market may not truly occur until the securitization markets start to properly function again. We are encouraged by signs pointing to a possible mortgage refinance wave that could occur in 2008 as interest rates and mortgage rates have declined. However, we believe the post-credit bubble effects will continue to keep volatility high in the financial markets for some time. Another concern is whether a financial market malaise will result in a global recession. Given the surge in prices of oil and other commodities, pricing inflation also remains a risk.

Our fixed income focus will be to seek high quality securities to reduce portfolio volatility and to maximize after–tax investment yield. This will entail maintaining a fairly elevated level of new purchase allocations to municipal securities, as they present attractive relative value on a taxable equivalent yield basis. Volatility, downgrades, and a lack of market liquidity in ABS and CMBS may also present some interesting opportunities in those sectors, as new issue volumes are expected to ~~grow 9.5%~~be down by well over 25% or more by some estimates. The volatility in ~~2007, following an~~this sector is not expected ~~16% increase~~to end soon as leveraged positions in ~~2006 and 18% increase~~structured bonds are unwound. Nonetheless, we expect that further Federal Reserve rate cuts may certainly aid the markets in ~~2005. The factors leading to this continued growth are lower energy prices, increased confidence~~2008; although additional cuts could further weaken the U.S. dollar, which could have a far-reaching negative impact in the ~~economy’s job and income generating capacity, expectations of robust corporate capital expenditures, and continued healthy overseas demand for~~ U.S. ~~securities. However, given~~financial markets.

Considering all the ~~uncertainty of the Federal Reserve’s monetary policy direction and international capital flows, we remain cautious on equity markets and we expect continued~~ volatility in the ~~fixed income~~equity market, ~~during~~we are even more cautious now than we were in late 2007.

We ~~believe that pre-tax investment income~~ will continue to ~~grow~~manage through this period of uncertainty by investing in companies with more defensive characteristics, such as ~~a result of strong~~solid free cash flow, ~~from our Insurance Operations. Given~~exposure to secular growth themes, strong balance sheets and reasonable valuations. Other considerations are favorable long-term corporate performance and attractive relative historical valuations.

Our outlook for the alternative investment strategy continues to be positive over the longer-term. In the near term, we expect the current ~~interest rate environment, which is marked by a very flat yield curve, we intend~~credit crisis to ~~maintain a fairly stable portfolio duration on our fixed income portfolio. We will also continue~~slow the pace of merger and acquisitions, as potential buyers no longer have access to make new investment decisions on our fixed income portfolio that are relatively duration neutral to the portfolio as a whole as we continue to dollar-cost average our reinvestment yields. With regard to our equity portfolio, we are committed to pursuing opportunities in industrieslarge quantities of debt with favorable ~~fundamentals and~~credit terms. This will ~~continue~~reduce the return that many private equity sponsors have been able to ~~reduce exposure to those stocks or sectors with less favorable fundamentals and valuations. Our “Other investment” portfolio has performed well~~realize over the past few years. AsTherefore, we expect a ~~result of favorable risk return characteristics for these investments, we are looking~~slowdown in deal activity and a reduction in distributions to modestly grow this investment class as a percentage of our overall portfolio, which should contribute to lowering our overall portfolio risk given that these investments have a low correlation to the S&P 500 Index.private equity investors.

Diversified Insurance Services Segment

The Diversified Insurance Services operations include two core functions: (i) human resource administration outsourcing (“HR Outsourcing”); and (ii) flood insurance. We believe these operations are ~~within~~in markets that continue to offer ~~opportunity for growth.~~growth opportunities. During ~~2006,~~2007, these operations provided a contribution of ~~$0.19~~$0.22 per diluted share, compared to ~~$0.15~~$0.19 per diluted share in ~~2005. These operations~~2006. Contributions from the Diversified Insurance Services segment, particularly the flood business, continue to provide ~~a level~~some mitigation of ~~mitigation to commercial lines~~insurance pricing ~~cycles.~~cycles and the adverse impact that catastrophe losses have on our Insurance Operations segment. We ~~measure~~evaluate the performance of these operations based on several measures, including, but not limited to, results of operations in accordance with ~~GAAP.~~GAAP, with a focus on our return on revenue (net income divided by revenues). The results for this segment’s continuing operations are as follows:

For the Year Ended December 31,
($ in thousands) 2006 2005 2004

HR Outsourcing

Revenue $ 63,322 60,227 53,710
Pre-tax profit (loss) 4,810 3,793 2,244
Flood Insurance

Revenue 41,522 34,320 29,169
Pre-tax profit 10,167 9,060 8,508
Other

Revenue 5,682 4,164 3,605
Pre-tax profit 2,831 1,940 1,169
Total

Revenue from continuing operations 110,526 98,711 86,484
Pre-tax profit from continuing operations 17,808 14,793 11,921
After-tax profit from continuing operations 11,848 9,844 7,860
After-tax return on revenue 10.7 % 10.0 % 9.1 %

~~HR Outsourcing~~

	•		Profitability improvements in our HR Outsourcing business in 2006 compared to 2005 and 2004 are mainly due to: (i) increased average administration fee per worksite employee to $649 for 2006 compared to $642 for 2005 and $596 for 2004; (ii) higher margins, particularly on our workers compensation business; and (iii) an increase in our number of worksite lives, as described below.

	•		As of December 31, 2006, our worksite lives were up 12% to 26,952 compared to 23,974 as of December 31, 2005 and 22,846 as of December 31, 2004. To improve sales, during the first quarter of 2006 we unveiled a new marketing strategy and a new agent commission structure for our human resources outsourcing product, which we refer to as our employer protection program (“EPP”). The EPP is designed to assist business owners in managing the risk of employer-related liabilities.


*For the Year Ended December 31,*
*($ in thousands)*	2007			2006			2005
HR Outsourcing
Revenue	$	59,109			63,322			60,227
Pre-tax profit (loss)		3,993			4,810			3,793
Flood Insurance
Revenue		47,842			41,522			34,320
Pre-tax profit		10,360			10,167			9,060
Other
Revenue		8,615			5,682			4,164
Pre-tax profit		4,270			2,831			1,940
Total
Revenue from continuing operations		115,566			110,526			98,711
Pre-tax profit from continuing operations		18,623			17,808			14,793
After-tax profit from continuing operations		12,355			11,848			9,844
After-tax return on revenue		10.7	%		10.7	%		10.0	%

HR Outsourcing

~~Flood Insurance~~
~~Pre-tax profit increased~~

HR Outsourcing revenue declined in 2007 compared to 2006 and 2005, primarily as a result of a reduction in worksite lives. As of December 31, 2007, our worksite lives were down 7% to 25,111 compared to 26,952 as of December 31, 2006 and 23,974 as of December 31, 2005, resulting from recent economic trends as well as the ~~following:~~sale, in the third quarter of 2007, of two large HR Outsourcing clients to companies that manage their payroll and human resources activities in-house. The increase in worksite lives in 2006 compared to 2005 is mainly due to the unveiling of the new marketing strategy and a new agent commission structure for our human resources outsourcing product during the first quarter of 2006. We refer to this product as our employer protection program (“EPP”), which is designed to assist business owners in managing the risk of employer-related liabilities.

	•		An increase in flood premium in force of 28%. In-force premium was $119.2 million on 274,000 policies at December 31, 2006, compared to in-force premium of $93.5 million on 222,000 policies at December 31, 2005, and premium in force of $78.0 million on 188,000 policies at December 31, 2004; and

	•		~~An increase in the pre-tax marketing bonus from the National Flood Insurance Program (“NFIP”) of 87% to $2.8 million in 2006 compared to $1.5 million in 2005 and $1.8 million in 2004.~~

Pre-tax profit decreased in our HR Outsourcing business in 2007 compared to 2006 mainly due to pricing pressure on our workers compensation product and the reduced level of worksite lives as mentioned above. In the fourth quarter of 2007, we reduced our internal workforce at this operation by 11% to better align expenses with production. Pre-tax profit increased in 2006 compared to 2005 mainly due to higher margins, particularly on our workers compensation business, and an increase in our number of worksite lives as mentioned above.

~~These~~Flood Insurance

Our Flood revenues are primarily derived from two activities: (i) fees associated with servicing policy premium; and (ii) fees associated with handling claims. Revenue increases of 15% in 2007 compared to 2006 and 21% in 2006 compared to 2005 were ~~partially offset by a decrease~~mainly attributable to the increase in servicing flood premium in force, which increased 19% to $141.9 million at December 31, 2007 compared to 2006 and 27% to $119.2 million at December 31, 2006 compared to 2005. The increases in premiums were not fully realized in revenues as the fee paid to us by the ~~NFIP,~~National Flood Insurance Program (“NFIP”) decreased 0.6 points to 30.2% from 30.8%, which was effective for the NFIP’s fiscal year beginning on October 1, 2006. This fee structure is still in place as of December 31, 2007. The fee arrangement for 2008 is still under review. In addition, our revenues associated with handling flood claims were $1.6 million in 2007 compared to $1.8 million in 2006 and $3.6 million in 2005.

The fluctuations in pre-tax profit, which increased $0.2 million in 2007 compared to ~~30.2% from 30.8%.~~2006 and increased $1.1 million in 2006 compared to 2005, were driven by the revenue items noted above.

In December 2005, we divested ourselves of our 100% ownership in CHN Solutions (Alta Services, LLC and Consumer Health Network Plus, LLC), which had historically been reported as part of the managed care component of the Diversified Insurance Services segment. These companies were sold for approximately $16 million in proceeds at an after-tax net loss of approximately $2.6 million. For further information regarding this divestiture, see Note 15 in Item 8. “Financial Statements and Supplementary Data” of this Form 10-K.

Diversified Insurance Services Outlook

Our HR Outsourcing products, primarily the EPP, offer an additional ~~potential agency~~ revenue stream for our independent agents. ~~New market entrants will continue to create increased competition for these products. We~~Since unveiling the EPP during the first quarter 2006, agents have ~~repositioned~~gained a better understanding of the HR Outsourcing ~~products as~~product. Despite this, consistent with trends in the ~~EPP, which assists business owners~~professional employer industry that are pointing to flat to negative growth in ~~managing~~worksite lives and the ~~risk of employee-related liabilities. Agent training regarding the EPP is ongoing and based on initial positive feedback,~~current economy, we expect our client sales to continue to ~~recognize synergies created from this product~~be difficult. We also have two issues in ~~2007.~~

~~The National Council on Compensation Insurance (“NCCI”) has passed an overall~~Florida, where we derive 29% of our co-employer service fees. First, the economy is struggling and, second, workers compensation rates have been reduced by the regulators by 18.4% for 2008, after a 15.7% rate ~~level~~ decrease ~~of 15.7% for voluntary industrial classes in the State of Florida. The new rates were~~that was effective on January 1, 2007 for ~~new and renewal business. Future reductions~~voluntary industrial classes. Consequently, we only expect marginal growth in ~~this rate could adversely affect our results~~the number of ~~operations for our HR Outsourcing business as workers compensation insurance~~worksite lives during 2008.

The viability of the NFIP’s reinsurance program under the “Write-Your-Own” (“WYO”) Program is an ~~important component of the EPP product.~~

~~Our ability to provide flood insurance is a significant~~essential component of our Diversified Insurance Services operations. ~~Information provided by the Federal Emergency Management Agency (“FEMA”) in 2004 indicated that total flood insurance premium written was approximately $2 billion.~~ In 2005, the destruction caused by the active hurricane season stressed the NFIP with excessive levels of flood ~~losses currently estimated by FEMA to be in excess of $20 billion.~~losses. We continue to monitor developments with the NFIP regarding its ability to pay claims in the event of another large-scale disaster. Congress controls the federal agency’s funding authority, which ~~topped out~~was exceeded after Hurricane Katrina, and is again nearing maximum capacity. ~~At this point, it~~Bills are pending in the House and Senate that could impact the NFIP. These bills contain substantial legislative changes and revisions to the NFIP and WYO Program, some of which may be favorable and some of which may be unfavorable for us. It is uncertain, at present, what the net impact to us may be if ~~any, this will have on our flood operations.~~

~~As described above,~~the legislation is passed. During 2008, the NFIP also is expected to further decrease the fee paid to us by ~~the NFIP decreased 0.6~~0.5 points to ~~30.2%~~29.7%, which could put some pressure on future margin levels. The current program is also being reevaluated to include a cap on claim fees paid by the NFIP. While the final outcome of ~~premiums written effective October 1, 2006. Future reductions~~this legislation is unknown, this cap could impact the ultimate claim fee that we receive in ~~this rate could occur through legislative activity.~~the event that there is a large catastrophe in an area in which we are geographically concentrated.

Financial Condition, Liquidity and Capital Resources

Capital resources and liquidity represent our overall financial strength and our ability to generate cash flows from business operations, borrow funds at competitive rates, and raise new capital to meet operating and growth needs.

Liquidity

Liquidity is a measure of our ability to generate sufficient cash flows to meet the ~~short~~short-term and long-term cash requirements of our business operations. Our cash and short-term investments position remained relatively flat at ~~December 31, 2006 was $203.5 million compared to $188.1~~$198.6 million at December 31, ~~2005.~~2007 compared to $203.5 million at December 31, 2006. Sources of cash consist of dividends from our subsidiaries, the issuance of debt and equity securities, as well as the sale of Common Stock under our employee and agent stock purchase plans. However, our ability to receive dividends from our subsidiaries is restricted. Dividends from our Insurance Subsidiaries ~~to the parent company~~ are subject to the approval and/or review of the insurance regulators in the respective domiciliary states of the Insurance Subsidiaries under insurance holding company acts, and are generally payable only from earned surplus as reported in the statutory annual statements of those subsidiaries as of the preceding December 31. Based on the ~~2006~~2007 unaudited statutory financial statements, the Insurance Subsidiaries are permitted to pay to ~~us, in 2007,~~Selective Insurance Group, Inc. ordinary dividends in the aggregate amount of approximately ~~$141.9 million.~~$139.4 million in 2008. For additional information regarding dividend restrictions, refer to Note 9, “Indebtedness” and Note 10, “Stockholders’ Equity” ~~of the Notes to Consolidated Financial Statements, included~~ in Item 8. “Financial Statements and Supplementary Data” of this ~~form~~Form 10-K.

Our Insurance Subsidiaries generate cash flows primarily from insurance ~~float. Float~~float, which is ~~money that an insurance company holds for a limited time. In an insurance operation, float arises because~~created by collecting premiums ~~are collected~~and earning investment income before losses are paid. ~~This interval~~The period of the float can extend over many years. During that time, the insurer invests the money and generates investment income. The duration of the fixed maturity portfolio, including short-term investments, was 3.8 years as of December 31, 2006, while the liabilities of our Insurance Subsidiaries’ have a duration of approximately 3 years. To provide liquidity while maintaining consistent investment performance, we ladder our fixed maturity investments so that some issues are always approaching maturity and provide a source of predictable cash flow for claim payments in the ordinary course of business. The duration of the fixed maturity portfolio, including short-term investments, was 3.9 years as of December 31, 2007, while the liabilities of our Insurance Subsidiaries have a duration of 3.4 years. In addition, the Insurance Subsidiaries purchase reinsurance coverage for protection against any significantly large claims or catastrophes that may occur during the year. ~~Our consolidated investment portfolio was $3.6 billion as of December 31, 2006 and $3.2 billion as of December 31, 2005.~~

During 2006, Selective had revolving lines of credit with State Street Corporation of $20 million and Wachovia Bank of $25 million, under which no balances were outstanding during the year. In August 2006, these lines of credit were replaced withWe have a syndicated line of credit agreement with Wachovia Bank, National Association as administrative agent. Under this ~~new~~ agreement, ~~Selective has~~we have access to a $50 million credit facility, which can be increased to $75 million with the consent of all lending parties. ~~Through~~At December 31, ~~2006,~~2007, no balances were outstanding under this credit facility.

Selective HR Solutions (“~~SHRS”~~Selective HR”), our HR Outsourcing business, generates cash flows from ~~their~~its operations. Dividends from ~~SHRS to the parent company~~Selective HR are restricted by the operating needs of this entity as well as professional employer organization licensing requirements to maintain a current ratio of at least 1:1. The current ratio, which Selective HR generally maintains just above 1:1, provides an indication of a company’s ability to meet its short-term obligations and is calculated by dividing current assets by current liabilities. ~~SHRS~~Selective HR provided dividends to ~~the parent company~~Selective Insurance Group, Inc. of $4.1 million in 2007 and $4.2 million in ~~2006 and $4.0 million in 2005.~~2006.

Dividends on shares of our Common Stock are declared and paid at the discretion of our Board of Directors based on ~~the Company’s~~our operating results, financial condition, capital requirements, contractual restrictions, and other relevant factors. Our ability to declare dividends is restricted by covenants contained in the notes payable ~~that~~ we issued on May 4, 2000 (the “2000 Senior Notes”). All such covenants were met during ~~2006~~2007 and ~~2005.~~2006. For further information regarding our notes payable, see Note 9, ~~of the Notes to Consolidated Financial Statements, entitled,~~ “Indebtedness,” included in Item 8. “Financial Statements and Supplementary ~~Data.”~~Data” of this Form 10-K. At December 31, ~~2006,~~2007, the amount available for dividends to holders of our Common Stock, in accordance with the restrictions of the 2000 Senior Notes, was ~~$384.2~~$336.0 million. On ~~March 1,~~January 30, 2007, our Board of Directors declared a two-for-one stock split of our Common Stock, in the form of a share dividend of one additional share of Common Stock for each outstanding share of Common Stock (the “Share Dividend”). The Share Dividend was paid on February 20, 2007 to stockholders of record as of the close of business on February 13, ~~2007, we have increased our dividend by 9%~~2007. The effect of the Share Dividend has been recognized retroactively in all share and per share data, as well as the capital stock account balances, in the accompanying Consolidated Financial Statements, Notes to ~~$0.12 per share.~~Consolidated Financial Statements and supplemental financial data. Book value per share increased 8%to $19.81 as of December 31, 2007 compared to $18.81 ~~in 2006 from $17.34 in 2005, and increased 19% compared to 2004, when it was $15.79.~~as of December 31, 2006. Our ability to continue to pay dividends to our stockholders is also dependent in large part on the ~~dividend paying~~ ability of our Insurance Subsidiaries and the subsidiaries in our Diversified Insurance Services segment to pay ~~dividends to the parent company.~~dividends. Restrictions on the ability of our subsidiaries, particularly the Insurance Subsidiaries, to declare and pay dividends, ~~to the parent company~~ could materially affect our ability to pay principal and interest on indebtedness and dividends on Common Stock.

~~Our~~

We have historically met our liquidity requirements ~~in the past have been met by~~through dividends from our subsidiaries ~~as well as the issuance of~~and by issuing debt and equity securities. ~~In the future, we~~We expect to meet our liquidity requirements ~~to be met~~ by these sources ~~of funds.~~in the future. The Insurance ~~Subsidiaries’~~Subsidiaries have historically met their liquidity requirements ~~have historically been met by cash receipts~~ from ~~operations, consisting of~~ insurance premiums and investment income. These ~~cash receipts~~items have historically provided more than sufficient funds to pay losses, operating expenses, and ~~dividends to the parent company.~~dividends.

Capital Resources

Capital resources provide protection for policyholders, furnish the financial strength to support the business of underwriting insurance risks, and facilitate continued business growth. At December 31, ~~2006,~~2007, we had stockholders’ equity of ~~$1,077.2~~$1,076.0 million and total debt of ~~$362.6~~$295.1 million. In addition, we have an irrevocable trust valued at ~~$31.3~~$13.2 million to provide for the repayment of notes having maturities in ~~2007~~2008.

Our cash requirements include, but are not limited to, principal and ~~2008.~~interest payments on senior convertible notes, various notes payable and convertible subordinated debentures, dividends to stockholders, payment of claims, the purchase of investments and capital expenditures, as well as other operating expenses, which include agents’ commissions, labor costs, premium taxes, general and administrative expenses, and income taxes. For further details regarding our cash requirements, refer to the section below titled “Contractual Obligations and Contingent Liabilities and Commitments.”

As active capital managers, we continually monitor our cash requirements ~~as well as~~and the amount of capital resources that we maintain at the holding company and operating subsidiary levels. As part of our long-term capital strategy, we strive to maintain a 25% debt-to-capital ratio and a premiums to surplus ratio sufficient to maintain an “A+” (Superior) financial strength A.M. Best rating for our Insurance Subsidiaries. Based on our analysis and market conditions, we may take a variety of actions, including, but not limited to, contributing capital to ~~the~~our subsidiaries in our Insurance Operations and Diversified Insurance Services segments, issuing additional debt and/or equity securities, repurchasing shares of our Common Stock, or increasing stockholders’ dividends. The following are a few examples of capital management actions we have taken during ~~2006:~~2007:

	•		On September 25, 2006, we successfully completed a $100 million offering of 60-year junior subordinated notes with a 7.5% coupon. At any time on or after September 26, 2011, we can call these notes, in whole or in part, at their aggregate principal amount, together with any accrued and unpaid interest. The proceeds from this offering will be used for general corporate purposes.

	•		In 2006, we repurchased approximately 4.1 million shares of our Common Stock under our authorized share repurchase program at a cost of $110.1 million. As of December 31, 2006, there were 5.2 million shares remaining under the current repurchase authorization.

~~Our cash requirements include principal and interest payments on senior convertible notes, various notes payable and convertible subordinated debentures, dividends~~On March 8, 2007, Selective Insurance Group, Inc. entered into a written trading plan under Rule 10b5-1 under the Securities Exchange Act of 1934 (“Trading Plan”) with a broker to ~~stockholders, payment of claims, and other operating expenses, income taxes,~~facilitate the purchase of ~~investments,~~our Common Stock. Rule 10b5-1 allows a company to purchase its shares at times when it ordinarily would not be in the market because of self-imposed trading blackout periods, such as the time preceding its quarterly earnings releases.

On July 24, 2007, the Board of Directors authorized a new stock repurchase program for up to 4 million shares, which expires on July 26, 2009.

In 2007, we repurchased approximately 5.7 million shares for $143.3 million under our previous and ~~other expenses. Our operating obligations~~current share repurchase programs.

On October 23, 2007, the Board of Directors declared, for stockholders of record as of November 15, 2007, a dividend of $0.13 per share, an 8% increase from the previous quarter, which was paid on December 3, 2007.

In the fourth quarter of 2007, we called for redemption the remaining Senior Convertible Notes that were scheduled to mature on September 24, 2032. For additional information regarding the settlement of this debt, see Note 9, “Indebtedness” in Item 8. “Financial Statements and cash outflows include: claim settlements, agents’ commissions, labor costs, premium taxes, general and administrative expenses, investment purchases, and capital expenditures. For further details regarding our cash requirements, refer to the section below titled “Contractual Obligations and Contingent Liabilities and Commitments.”Supplementary Data” of this Form 10-K.

Off-Balance Sheet Arrangements

At December 31, 2007 and December 31, 2006, ~~and 2005, the Company~~we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, ~~the Company is~~we are not exposed to any financing, liquidity, market, or credit risk that could arise if ~~the Company~~we had engaged in such relationships.

Contractual Obligations and Contingent Liabilities and Commitments

WeAs discussed in “Net Loss and Loss Expense Reserves” in Item 1. “Business.” of this Form 10-K, we maintain case reserves and estimates of reserves for losses and loss expenses incurred but not yet reported (“IBNR”), in accordance with industry practice. Using generally accepted actuarial reserving techniques, we project our estimate of ultimate losses and loss expenses at each reporting date. Included within the estimate of ultimate losses and loss expenses are case reserves, which are analyzed on a case-by-case basis by the type of claim involved, the circumstances surrounding each claim, and the policy provisions relating to the type of losses. The difference between: (i) projected ultimate loss and loss expense reserves; and (ii) case loss reserves and loss expense reserves thereon are carried as the IBNR reserve. A range of possible reserves is determined annually and considered in addition to the most recent loss trends and other factors in establishing reserves for each reporting period. Based on the consideration of the range of possible reserves, recent loss trends and other factors, IBNR is established and the ultimate net liability for losses and loss expenses is determined. Such an assessment requires considerable judgment given that it is frequently not possible to determine whether a change in the data is an anomaly until sometime after the event. Even if a change is determined to be permanent, it is not always possible to reliably determine the extent of the change until sometime later. As a result, there is no precise method 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.

Given that the loss and loss expense reserves are estimates as described above and in more detail under the “Critical Accounting Policies and Estimates” section of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10-K, the payment of actual losses and loss expenses is generally not fixed as to amount or timing. Due to this uncertainty, financial accounting standards prohibit us from discounting these reserves to their present value. Additionally, estimated losses as of the financial statement date do not consider the impact of estimated losses from future business. Therefore, the projected settlement of the reserves for net loss and loss expenses will differ, perhaps significantly, from actual future payments.

The information in the “Contractual Obligations” table below relating to loss and loss expense payments is presented in accordance with reporting requirements of the SEC. These projected paid amounts by year are estimates based on past experience, adjusted for the effects of current developments and anticipated trends, and include considerable judgment. There is no precise method for evaluating the impact of any specific factor on the projected timing of when loss and loss expense reserves will be paid and as a result, the timing and amounts of the actual payments will be affected by many factors. Care must be taken to avoid misinterpretation by those unfamiliar with this information or familiar with other data commonly reported by the insurance industry. As was noted above, for further information regarding the uncertainty associated with loss and loss expense reserves see the “Critical Accounting Policies and Estimates” section of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this ~~form~~Form 10-K.

Our future cash payments associated with contractual obligations pursuant to operating leases for office space and equipment, senior convertible notes, convertible subordinated debentures, notes payable, interest on debt obligations, and loss and loss expenses as of December 31, ~~2006~~2007 are summarized below:


Contractual obligations	Payment due by period										Payment due by period
			Less than		1-3		3-5		More than				Less than		1-3		3-5		More than
($ in millions)	Total		1 year		years		years		5 years		Total		1 year		years		years		5 years

Operating leases	$	24.8		8.9		11.0		4.3		0.6	$	25.3		8.6		10.5		4.5		1.7
Senior convertible notes		151.0		—		—		—		151.0		8.7		8.7		—		—		—
Convertible subordinated debentures		0.8		—		0.8		—		—
Notes payable¹		305.2		18.3		24.6		12.3		250.0		286.9		12.3		24.6		—		250.0
Interest on debt obligations		760.5		24.4		44.9		36.2		655.0		731.2		20.6		37.8		35.6		637.2

Subtotal	$	1,242.3		51.6		81.3		52.8		1,056.6	$	1,052.1		50.2		72.9		40.1		888.9

Gross loss and loss expense payments		2,288.8		611.2		778.9		356.6		542.1		2,542.5		655.5		846.7		395.8		644.5
Ceded loss and loss expense payments		199.8		38.3		47.0		27.9		86.6		227.8		47.9		52.4		28.4		99.1

Net loss and loss expense payments		2,089.0		572.9		731.9		328.7		455.5		2,314.7		607.6		794.3		367.4		545.4


Total	$	3,331.3		624.5		813.2		381.5		1,512.1	$	3,366.8		657.8		867.2		407.5		1,434.3


¹		Selective has an irrevocable trust to provide for the repayment of certain debt obligations with a market value of ~~$31.3~~$13.2 million as of December 31, ~~2006.~~2007.

See “Liquidity” section of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of ~~the Company’s~~our syndicated line of credit agreement.

At December 31, ~~2006,~~2007, we ~~had additional limited partnership investment commitments within “Other investments” of~~have contractual obligations that expire at various dates through 2022 to invest up to ~~$110.5 million; but there~~an additional $129.8 million in alternative investments. There is no certainty that any such additional investment will be required. We have issued no material guarantees on behalf of others and have no trading activities involving non-exchange traded contracts accounted for at fair value. We have no material transactions with related parties other than those disclosed in Note ~~19 of the Notes to Consolidated Financial Statements,~~18, “Related Party Transactions” included in Item 8. “Financial Statements and Supplementary Data” of this Form 10-K.

Ratings

We are rated by major rating agencies, which provide opinions of our financial strength, operating performance, strategic position, and ability to meet policyholder obligations. The principal agencies that issue financial strength ratings for the property and casualty insurance industry are: A.M. Best, S&P, Moody’s Investor Service (“Moody’s”), and Fitch Ratings (“Fitch”). We believe that our ability to write insurance business is most influenced by our rating from A.M. ~~Best. Currently, we are rated~~Best, which currently rates us “A+ (Superior),” ~~by A.M. Best, which is~~ their second highest of fifteen ~~ratings. Our insurance business~~ratings, and has been ~~rated “A+ (Superior)” by A.M. Best~~our rating for 4546 consecutive years. The financial strength reflected by our A.M. Best rating is a competitive advantage in the marketplace and influences where independent insurance agents place their business. A downgrade from A.M. Best, could: (i) affect our ability to write new business with customers and/or agents, some of whom are required (under various third party agreements) to maintain insurance with a carrier that maintains a specified A.M. Best minimum rating; (ii) be an event of default under our line of credit; or (iii) make it more expensive for us to access capital markets. ~~On July 25, 2006,~~In the third quarter of 2007, S&P’s Insurance Rating Services ~~raised~~(“S&P”) reaffirmed our financial strength rating toof “A+.” ~~from “A”, citing~~S&P’s reaffirmation cites our strong competitive position with close ties to our agents, strong operating performance, very strong operating company capitalization, and good financial flexibility. During the third quarter of 2006, Moody’s elevated their outlook regarding Selective to “positive.” The financial strength of our insurance business has been rated, “A2” by Moody’s since 2001 and “A+” by Fitch Ratings since 2004. Our Moody’s and S&P financial strength ratings affect our ability to access capital markets, and our interest rate under our line of credit varies based upon ~~SIGI’s~~Selective Insurance Group Inc.’s debt ratings from Moody’s and S&P. There can be no assurance that our ratings will continue for any given period of time or that they will not be changed. It is possible that positive or negative ratings actions by one or more of the rating agencies may occur in the future. We review our financial debt agreements for any potential rating triggers that could dictate a material change in terms if our credit ratings were to change.

Federal Income Taxes

The following table presents ~~the Company’s~~our taxable income, pre-tax financial statement income, and net deferred tax (liability) asset:


($ in millions)	2006		2005			2004			2007		2006		2005

Current taxable income from continuing operations	$	192.8		167.6			111.2		$	157.1		151.5		167.6
Pre-tax financial statement income from continuing operations		220.5		202.8			172.7			192.8		220.5		202.8
Net deferred tax asset (liability)		15.4		(5.7	)		(29.8	)		22.4		15.4		(5.7	)

~~The total~~Total federal income tax expense ~~increased $1.6~~was $46.3 million in 2007 compared to $56.9 million in 2006 ~~to $56.9 million, compared to~~and $55.3 million in ~~2005, and $45.6 million in 2004. These amounts reflect an~~2005. The effective tax rate ~~of 25.8% in 2006~~for 2007 was 24.0% compared to 25.8% for 2006 and 27.3% ~~in 2005, and compared to 26.4%~~ for ~~2004. The~~2005. Our effective tax rate differs from the federal corporate ~~tax~~ rate of 35% primarily as a result of ~~tax-exempt~~tax-advantaged investment income. The decline in underwriting profits and the resulting higher ratio of net investment income ~~and~~to total book income before tax contributed to the ~~dividends received deduction. The~~1.8% decrease in the effective tax rate from 2006 to 2007. The 1.5% decrease in ~~2006, as compared~~the effective tax rate from 2005 to ~~2005 and 2004,~~2006 is mainly attributable ~~to: (i) an~~to the increase in the tax advantaged securities within our investment ~~portfolio; (ii)~~portfolio and the settlement of an IRS audit.

We have a ~~current income~~net deferred tax ~~benefit recorded in 2006 as~~asset of $22.4 million at December 31, 2007 compared with a result of the Company settling research and development credits with the Internal Revenue Service (“IRS”); and (iii) additional alternative minimum tax credits that became available. The increase in the 2005 effective tax rate, as compared to 2004, is mainly attributable to significant improvements in underwriting results and increased capital gains on investment sales.

~~The Company has a net~~ deferred tax asset of $15.4 million at December 31, ~~2006 compared with a deferred tax liability of $5.7 million at December 31, 2005.~~2006. This change is primarily due to temporary differences relating to ~~pension, deferred compensation,~~the conversion and redemption of the convertible debt, the deferred impact of underwriting results and a reduction in unrealized gains in the investment portfolio offset by pension and ~~debt conversion.~~accelerated depreciation.

Adoption of Accounting Pronouncements

For information concerning the adoption of accounting pronouncements and new accounting pronouncements that have been issued but not yet adopted, see Item 8. “Financial Statements and Supplementary Data.” Note 3 to the ~~consolidated financial statements.~~Consolidated Financial Statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

The fair value of Selective’s assets and liabilities are subject to market risk, primarily interest rate, credit risk and equity price risk related to Selective’s investment portfolio. Selective’s investment portfolio is comprised of securities categorized as available for sale or held to maturity in accordance with the Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” issued by the Financial Accounting Standards Board (“FAS 115”), with no investment in securities categorized as trading. Selective does not hold derivative or commodity investments. Foreign investments are made on a limited basis, and all fixed maturity transactions are denominated in U.S. currency. Selective has minimal foreign currency fluctuation risk on certain equity securities.

Selective’s investment philosophy includes setting certain return objectives relating to the equity and fixed maturity portfolios as well as risk objectives relating to the overall portfolio. The return objective of the equity portfolio is to meet or exceed a weighted-average benchmark of public equity indices. The primary return objective of the fixed maturity portfolio is to maximize after-tax investment yield and income while balancing certain risk objectives, with a secondary objective of meeting or exceeding a weighted-average benchmark of public fixed income indices. The risk objectives for all portfolios are to ensure investments are being structured conservatively, focusing on: (i) asset diversification; (ii) investment quality; (iii) liquidity, particularly to meet the cash obligations of the insurance operations; (iv) consideration of taxes; and (v) preservation of capital. As of December 31, ~~2006,~~2007, the mix of Selective’s investment portfolio was ~~82%~~83% fixed maturity securities, 9%7% equity securities, 5% short-term investments, and 4%5% other investments.

~~There~~During 2007, portions of our investment portfolio were ~~no significant changes~~adversely affected by events and developments in the ~~primary~~capital markets, including decreased market liquidity for certain invested assets, market perception of increased credit risk ~~exposures for Selective’s overall investment portfolio for the year ended December 31, 2006 compared~~with respect to the ~~prior year. Selective does not anticipate any significant changes~~types of securities held in ~~market risk in~~Selective’s portfolio, and the ~~foreseeable future or in how it will manage that risk.~~corresponding credit spread-widening with respect to our invested assets.

Interest Rate Risk

In connection with the Insurance Subsidiaries, Selective invests in interest rate sensitive securities, mainly fixed maturity securities. Selective’s fixed maturity portfolio is comprised of primarily investment grade (investments receiving aS&P or an equivalent rating of 1BBB- or ~~2 from the NAIC’s Securities Valuation Office)~~above) corporate securities, U.S. government and agency securities, municipal obligations, and mortgage-backed securities. Selective’s strategy to manage interest rate risk is to purchase intermediate-term fixed maturity investments that are attractively priced in relation to perceived credit risks. Selective’s fixed maturity securities include both available-for-sale and held-to-maturity securities in accordance with FAS 115. 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 as a separate component of stockholders’ equity. 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.

Selective generally manages its interest rate risk associated with its portfolio of fixed maturity investments by monitoring the average duration of the portfolio, which allows Selective to achieve an adequate yield without subjecting the portfolio to an unreasonable level of interest rate risk. Increases and decreases in prevailing interest rates generally translate, respectively, into decreases and increases in fair values of fixed maturity investments. Fair values of interest rate sensitive instruments also may be affected by the credit worthiness of the issuer, prepayment options, relative values of other investments, the liquidity of the instrument, and other general market conditions. At December 31, ~~2006, 97%~~2007, 95% of Selective’s fixed maturity portfolio (excluding short-term investments) had a maturity of 10 years or less, ~~than ten years,~~ and the average duration was ~~4.1~~4.2 years. Based on its fixed maturity securities asset allocation and security selection process, Selective believes that its fixed maturity portfolio is not overly prone to prepayment or extension risk.

Selective uses interest rate sensitivity analysis to measure the potential loss or gain in future earnings, fair values, or cash flows of market sensitive fixed maturity securities and preferred stock. The sensitivity analysis hypothetically assumes a parallel 200 basis point shift in interest rates up and down in 100 basis point increments within one year from the date of the ~~consolidated financial statements.~~Consolidated Financial Statements. Selective uses fair values to measure its potential loss.

This analysis is not intended to provide a precise forecast of the effect of changes in market interest rates and equity prices on Selective’s income or stockholders’ equity. Further, the calculations do not take into account any actions Selective may take in response to market fluctuations.

The following table presents the sensitivity analysis of each component of market risk as of December 31, ~~2006:~~2007:


	2006															2007
	Interest Rate Shift in Basis Points															Interest Rate Shift in Basis Points
($ in millions)	-200			-100			0			100			200			-200			-100			0			100			200

Fair value of fixed maturity securities portfolio		3,197.1			3,070.2			2,947.2			2,825.0			2,705.1			3,340.9			3,210.2			3,079.5			2,951.0			2,822.5
Fair value change		249.9			123.0			—			(122.2	)		242.1			261.4			130.7			—			(128.5	)		(257.0	)
Fair value change from base (%)		8.5	%		4.2	%		—	%		(4.1)	%		(8.2	)%		8.5	%		4.2	%		—	%		(4.2	)%		(8.3	)%

Credit Risk

Credit quality of the fixed maturity portfolio continues to remain high, with the weighted average credit rating of the portfolio at “AA+.” Exposure to non-investment grade bonds remains at a low absolute level, composing less than 1% of the total fixed maturity portfolio. Selective only has three non-investment grade rated securities in the portfolio with a fair value of $10.1 million and an unrealized loss of $0.3 million. As of December 31, 2007, no single fixed maturity security is rated below “BB.”

However, Selective’s investment portfolio includes certain classes of assets, such as Residential Asset Backed Securities (“RABS”) and Residential Mortgage Backed Securities (“RMBS”), which have been affected by the current market conditions related to the sub-prime crisis. The RMBS and RABS portfolio represents 14% of our total fixed maturity portfolio and consists entirely of investment grade securities with 96% of the portfolio rated “AAA” and only 1% rated “A” or below. Agency securities backed by various federal agencies represent approximately 50% of Selective’s RMBS and RABS. Loan to Value (“LTV”) ratios and FICO score statistics are important in our initial as well as ongoing analysis of this portfolio. 99% of the non-agency securities have current LTV ratios of 80% and below and 94% have FICO scores above 700 with only 1% where FICO scores are below 650. In addition, we have no sub-prime reset risk in the RMBS or RABS portfolio. Despite the portfolio’s high quality, current market conditions reduced the liquidity of the RMBS and RABS securities, which in turn resulted in some volatility in their fair value. As of December 31, 2007, Selective’s RMBS and RABS portfolio has a fair value of $440.6 million with unrealized losses of $3.8 million. Selective continues to evaluate underlying credit quality within this portfolio and believes that current fair value fluctuations are reflective of temporary market dislocation. As long term, income-oriented investors, Selective remains comfortable with the credit risk in these securities.

Residual effects of the current market conditions may also affect other parts of Selective’s portfolio; such as bonds and equity investments in financial institutions and certain other invested assets. For example, as of December 31, 2007, the market value of Selective’s Commercial Mortgage Backed Securities (“CMBS”) portfolio is $284.4 million with unrealized losses of $4.6 million. The CMBS portfolio makes up 9% of our total fixed maturity portfolio and consists primarily of highly rated securities with 92% of CMBS securities rated above “A” and only 2% rated below investment grade as of December 31, 2007. In addition, agency securities backed by various federal agencies represent approximately 17% of Selective’s CMBS portfolio.

During 2007, our RMBS, RABS, and CMBS portfolios experienced no ratings downgrades which is in part a result of the high credit quality of the underlying collateral and stringent pre-purchase analysis and due diligence. Based on Selective’s fixed maturity portfolio asset allocation and security selection process, Selective believes that its fixed maturity portfolio is not overly prone to significant credit risk and Selective does not believe that the fair value fluctuations noted above will result in material changes to the value of our overall invested assets.

Equity Price Risk

Selective’s equity securities are classified as available for sale in accordance with FAS 115. The Company’s ~~portfolio of~~ equity securities portfolio is exposed to equity price risk arising from potential volatility in equity market prices. Selective attempts to minimize the exposure to equity price risk by maintaining a diversified portfolio and limiting concentrations in any one company or industry. The sensitivity analysis hypothetically assumes a 20% change in equity prices up and down in 10% increments at December 31, ~~2006.~~2007. In the analysis, ~~we include~~Selective includes investments in equity securities. The following table presents the hypothetical increases and decreases in market value of the equity portfolio as of December 31, ~~2006:~~2007:


	2006
	Change in Equity Values in Percent												2007
	-20%			-10%			0%		10%		20%		Change in Equity Values in Percent
													-20%			-10%			0%		10%		20%
Fair value of equity portfolio		245.9			276.7			307.4		338.1		368.9		219.8			247.2			274.7		302.2		329.6
Fair value change		(61.5	)		(30.7	)		—		30.7		61.5		(54.9	)		(27.5	)		—		27.5		54.9

Indebtedness

(a) Long-Term Debt. As of December 31, ~~2006,~~2007, Selective had outstanding long-term debt of ~~$362.6~~$295.1 million that mature as shown on the following table:


			2006						2007
	Year of		Carrying		Fair		Year of		Carrying		Fair
(in thousands)	Maturity		Amount		Value		Maturity		Amount		Value

Financial liabilities
Notes payable:
8.63% Senior Notes Series A		2007		6,000		6,023
8.87% Senior Notes Series B		2010		49,200		49,885		2010		36,900		37,990
7.25% Senior Notes		2034		49,887		56,010		2034		49,891		52,080
6.70% Senior Notes		2035		99,337		99,455		2035		99,360		90,000
7.50% Junior Subordinated Notes		2066		100,000		102,760		2066		100,000		85,000

Total notes payable				304,424		314,133				286,151		265,070
Senior convertible notes		2032		57,413		105,727		2032		8,740		13,853
Convertible subordinated debentures		2008		765		775		2008		176		1,143

The weighted average effective interest rate for Selective’s outstanding long-term debt is ~~6.94%~~7.26%. Selective is not exposed to material changes in interest rates because the interest rates are fixed on its long-term indebtedness.

(b) Short-Term Debt. During ~~2006,~~2007, Selective had revolving lines of credit with State Street Corporation of $20 million and Wachovia Bank of $25 million, under which no balances were outstanding during the year. In August 2006, these lines of credit were replaced with a syndicated line of credit agreement with Wachovia Bank, National Association, as administrative agent. Under this agreement, Selective has access to a $50 million credit facility, which can be increased to $75 million with the consent of all lending parties. ~~Through~~Selective accessed $6 million from the facility during 2007 at the London Interbank Offered Rate. At December 31, ~~2006,~~2007, there were no balances ~~were~~ outstanding under ~~this credit~~the facility.

~~There were no borrowings in 2006 and 2005 against any of the lines of credit.~~

Item 8. Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Selective Insurance Group, Inc.:

We have audited the accompanying consolidated balance sheets of Selective Insurance Group, Inc. and its subsidiaries as of December 31, ~~2006~~2007 and ~~2005,~~2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, ~~2006.~~2007. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedules I to VI. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Selective Insurance Group, Inc. and its subsidiaries as of December 31, ~~2006~~2007 and ~~2005,~~2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, ~~2006,~~2007, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the ~~consolidated financial statements,~~Consolidated Financial Statements, in 2006 the Company changed its definition of cash equivalents for presentation in the statement of cash flows and, in 2005, changed its method of accounting for share-based payments.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Selective Insurance Group, Inc.’s internal control over financial reporting as of December 31, ~~2006,~~2007, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February ~~28, 2007~~27, 2008 expressed an unqualified opinion on ~~management’s assessment~~the effectiveness of ~~and~~ the ~~effective operation of,~~Company’s internal control over financial reporting.

/s/ KPMG LLP
New York, New York
February ~~28, 2007~~27, 2008

Consolidated Balance Sheets
~~December 31,~~


December 31,
(in thousands, except share amounts)	2006			2005			2007			2006

ASSETS
Investments:
Fixed maturity securities, held-to-maturity — at amortized cost (fair value: $10,073 - 2006; $13,881 - 2005)	$	9,822			13,423
Fixed maturity securities, available-for-sale — at fair value (amortized cost: $2,916,884 - 2006; $2,618,963 - 2005)		2,937,100			2,645,253
Equity securities, available-for-sale — at fair value (cost of: $157,864 - 2006; $174,378 - 2005)		307,376			327,095
ASSETS Investments:
Fixed maturity securities, held-to-maturity – at amortized cost (fair value: $5,927 – 2007; $10,073 – 2006)							$	5,783			9,822
Fixed maturity securities, available-for-sale – at fair value (amortized cost: $3,049,913 – 2007; $2,916,884 – 2006)								3,073,547			2,937,100
Equity securities, available-for-sale – at fair value (cost of: $160,390 – 2007; $157,864 – 2006)								274,705			307,376
Short-term investments (at cost which approximates fair value)		197,019			185,111			190,167			197,019
Other investments		144,785			74,663			188,827			144,785

Total investments (Note 4)		3,596,102			3,245,545			3,733,029			3,596,102
Cash and cash equivalents		6,443			2,983			8,383			6,443
Interest and dividends due or accrued		34,846			32,579			36,141			34,846
Premiums receivable, net of allowance for uncollectible accounts of: $3,229 - 2006; $3,908 - 2005		458,452			447,220
Other trade receivables, net of allowance for uncollectible accounts of: $255 - 2006; $176 - 2005		21,388			16,553
Premiums receivable, net of allowance for uncollectible accounts of: $3,905 – 2007; $3,229 – 2006								496,363			458,452
Other trade receivables, net of allowance for uncollectible accounts of: $244 – 2007; $255 – 2006								21,875			21,388
Reinsurance recoverable on paid losses and loss expenses		4,693			4,549			7,429			4,693
Reinsurance recoverable on unpaid losses and loss expenses (Note 7)		199,738			218,248			227,801			199,738
Prepaid reinsurance premiums (Note 7)		69,935			67,157			82,182			69,935
Current federal income tax		468			—			4,235			468
Deferred federal income tax		15,445			—
Property and Equipment — at cost, net of accumulated depreciation and amortization of: $103,660 - 2006; $94,730 - 2005		59,004			53,194
Deferred policy acquisition costs (Note 2j)		218,103			204,832
Goodwill (Note 2k)		33,637			33,637
Deferred federal income tax (Note 14)								22,375			15,445
Property and Equipment – at cost, net of accumulated depreciation and amortization of: $117,832 – 2007; $103,660 – 2006								58,561			59,004
Deferred policy acquisition costs (Note 2i)								226,434			218,103
Goodwill (Note 2j)								33,637			33,637
Other assets		49,451			49,128			43,547			49,451

Total assets	$	4,767,705			4,375,625		$	5,001,992			4,767,705


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Reserve for losses (Note 8)	$	1,959,485			1,799,746		$	2,182,572			1,959,485
Reserve for loss expenses (Note 8)		329,285			284,303			359,975			329,285
Unearned premiums		791,540			752,465			841,348			791,540
Senior convertible notes (Note 9)		57,413			115,937			8,740			57,413
Notes payable (Note 9)		304,424			222,697			286,151			304,424
Current federal income tax		—			2,293
Deferred federal income tax (Note 14)		—			5,663
Commissions payable		54,814			55,882			60,178			54,814
Accrued salaries and benefits		94,560			68,024			88,079			94,560
Other liabilities		98,957			87,491			98,906			98,957

Total liabilities		3,690,478			3,394,501			3,925,949			3,690,478


Stockholders’ Equity:
Preferred stock of $0 par value per share:
Authorized shares: 5,000,000; no shares issued or outstanding
Common stock of $2 par value per share:
Authorized shares: 360,000,000 (Note 10)
Issued: 91,562,266 - 2006; 86,542,546 - 2005		183,124			173,085
Issued: 94,652,930 – 2007; 91,562,266 – 2006								189,306			183,124
Additional paid-in capital		153,246			71,638			192,627			153,246
Retained earnings		986,017			847,687			1,105,946			986,017
Accumulated other comprehensive income (Note 5)		100,601			118,121			86,043			100,601
Treasury stock — at cost (shares: 34,289,974 - 2006; 29,954,352 - 2005)		(345,761	)		(229,407	)
Treasury stock – at cost (shares: 40,347,894 – 2007; 34,289,974 – 2006)								(497,879	)		(345,761	)

Total stockholders’ equity (Notes 10 and 11)		1,077,227			981,124			1,076,043			1,077,227

Commitments and contingencies (Notes 20 and 21)
Commitments and contingencies (Notes 19 and 20)
Total liabilities and stockholders’ equity	$	4,767,705			4,375,625		$	5,001,992			4,767,705

See accompanying notes to consolidated financial statements.

Consolidated Statements of Income
~~Years ended December 31,~~



Years Ended December 31,
(in thousands, except per share amounts)	2006			2005			2004			2007			2006			2005

Revenues:
Net premiums written	$	1,535,961			1,459,474			1,365,148		$	1,554,867			1,535,961			1,459,474
Net increase in unearned premiums and prepaid reinsurance premiums		(36,297	)		(41,461	)		(46,758	)		(37,561	)		(36,297	)		(41,461	)

Net premiums earned		1,499,664			1,418,013			1,318,390			1,517,306			1,499,664			1,418,013
Net investment income earned		156,802			135,950			120,540			174,144			156,802			135,950
Net realized gains		35,479			14,464			24,587			33,354			35,479			14,464
Diversified Insurance Services revenue		110,526			98,711			86,484			115,566			110,526			98,711
Other income		5,396			3,874			3,623			5,858			5,396			3,874

Total revenues		1,807,867			1,671,012			1,553,624			1,846,228			1,807,867			1,671,012


Expenses:
Losses incurred		791,955			730,618			715,509			829,524			791,955			730,618
Loss expenses incurred		168,028			175,112			150,865			169,682			168,028			175,112
Policy acquisition costs		478,339			437,894			408,790			497,229			478,339			437,894
Dividends to policyholders		5,927			5,688			4,275			7,202			5,927			5,688
Interest expense		21,411			17,582			15,466			23,795			21,411			17,582
Diversified Insurance Services expenses		92,718			83,918			74,563			96,943			92,718			83,918
Other expenses		28,979			17,416			11,424			29,095			28,979			17,416

Total expenses		1,587,357			1,468,228			1,380,892			1,653,470			1,587,357			1,468,228


Income from continuing operations, before federal income tax		220,510			202,784			172,732			192,758			220,510			202,784


Federal income tax expense (benefit):
Current		66,717			60,130			31,705			43,046			66,717			60,130
Deferred		(9,781	)		(4,798	)		13,850			3,214			(9,781	)		(4,798	)

Total federal income tax expense		56,936			55,332			45,555			46,260			56,936			55,332


Net income from continuing operations		163,574			147,452			127,177			146,498			163,574			147,452


Income from discontinued operations, net of tax: $1,712 - 2005; $787 - 2004		—			3,180			1,462
Loss on disposal of discontinued operations, net of tax $(1,418) - 2005		—			(2,634	)		—
Income from discontinued operations, net of tax: $1,712 – 2005											—			—			3,180
Loss on disposal of discontinued operations, net of tax $(1,418) – 2005											—			—			(2,634	)

Total discontinued operations, net of tax		—			546			1,462			—			—			546


Net income before cumulative effect of change in accounting principle		163,574			147,998			128,639			146,498			163,574			147,998


Cumulative effect of change in accounting principle, net of tax		—			495			—			—			—			495


Net income	$	163,574			148,493			128,639		$	146,498			163,574			148,493


Earnings per share:
Basic net income from continuing operations	$	2.98			2.72			2.38		$	2.80			2.98			2.72
Basic net income from discontinued operations		—			0.01			0.03			—			—			0.01
Basic cumulative effect of change in accounting principle		—			0.01			—			—			—			0.01

Basic net income	$	2.98			2.74			2.41		$	2.80			2.98			2.74


Diluted net income from continuing operations	$	2.65			2.33			2.01		$	2.59			2.65			2.33
Diluted net income from discontinued operations		—			0.01			0.03			—			—			0.01
Diluted cumulative effect of change in accounting principle		—			0.01			—			—			—			0.01

Diluted net income	$	2.65			2.35			2.04		$	2.59			2.65			2.35


Dividends to stockholders	$	0.44			0.40			0.35		$	0.49			0.44			0.40

See accompanying notes to consolidated financial statements.

Consolidated Statements of Stockholders’ Equity
~~Years ended December 31,~~


Years Ended December 31,
(in thousands, except per share amounts)	2006					2005					2004				2007					2006					2005

Common stock:
Beginning of year	$	173,085					169,872					166,270			$	183,124					173,085					169,872
Dividend reinvestment plan (shares: 64,072 - 2006; 63,914 - 2005; 72,604 - - 2004)		128					128					145
Convertible debentures (shares: 3,999,128 - 2006; 72,872 - 2005; 42,646 - 2004)		7,998					146					85
Stock purchase and compensation plans (shares: 956,520 - 2006; 1,469,562 - 2005; 1,685,844 - 2004)		1,913					2,939					3,372
Dividend reinvestment plan (shares: 78,762 – 2007; 64,072 – 2006; 63,914 – 2005)																158					128					128
Convertible debentures (shares: 2,074,067 – 2007; 3,999,128 – 2006; 72,872 – 2005)																4,148					7,998					146
Stock purchase and compensation plans (shares: 937,835 – 2007; 956,520 – 2006; 1,469,562 – 2005)																1,876					1,913					2,939

End of year		183,124					173,085					169,872				189,306					183,124					173,085


Additional paid-in capital:
Beginning of year		71,638					57,356					30,148				153,246					71,638					57,356
Dividend reinvestment plan		1,604					1,441					1,229				1,708					1,604					1,441
Convertible debentures		51,249					113					67				9,806					51,249					113
Stock purchase and compensation plans		28,755					12,728					25,912				27,867					28,755					12,728

End of year		153,246					71,638					57,356				192,627					153,246					71,638


Retained earnings:
Beginning of year		847,687					721,483					612,208				986,017					847,687					721,483
Net income		163,574		163,574			148,493		148,493			128,639		128,639		146,498		146,498			163,574		163,574			148,493		148,493
Dividends to stockholders ($0.44 per share -2006; $0.40 per share - 2005; $0.35 per share - 2004)		(25,244	)				(22,289	)				(19,364	)
Dividends to stockholders ($0.49 per share –2007; $0.44 per share – 2006; $0.40 per share – 2005)																(26,569	)				(25,244	)				(22,289	)

End of year		986,017					847,687					721,483				1,105,946					986,017					847,687


Accumulated other comprehensive income:
Beginning of year		118,121					154,536					148,452				100,601					118,121					154,536
Other comprehensive (loss) income, (decrease) increase in:
Net unrealized gains on investment securities, net of deferred income tax effect of $(2,031) - 2006; $(19,608) - 2005;		(3,772	)	(3,772	)		(36,415	)	(36,415	)		6,084		6,084
Defined benefit pension plans, net of deferred income tax effect of $(7,403) - 2006 (Note 16d)		(13,748	)	(13,748	)		—		—			—		—
Net unrealized gains on investment securities, Net of deferred income tax effect of $(10,925) – 2007; $(2,031) – 2006; $(19,608) – 2005																(20,289	)	(20,289	)		(3,772	)	(3,772	)		(36,415	)	(36,415	)
Defined benefit pension plans, net of deferred income tax effect of $3,086 – 2007; $(7,403) – 2006 (Note 16d)																5,731		5,731			(13,748	)	—			—		—

End of year		100,601					118,121					154,536				86,043					100,601					118,121

Comprehensive income				146,054					112,078					134,723				131,940					159,802					112,078


Treasury stock:
Beginning of year		(229,407	)				(206,522	)				(197,792	)			(345,761	)				(229,407	)				(206,522	)
Acquisition of treasury stock (shares: 4,335,622 - 2006; 896,218 - 2005; 488,910 - 2004)		(116,354	)				(22,885	)				(8,730	)
Acquisition of treasury stock (shares: 6,057,920 – 2007; 4,335,622 – 2006; 896,218 – 2005)																(152,118	)				(116,354	)				(22,885	)

End of year		(345,761	)				(229,407	)				(206,522	)			(497,879	)				(345,761	)				(229,407	)


Unearned stock compensation and notes receivable from stock sales:
Beginning of year		—					(14,707	)				(9,502	)			—					—					(14,707	)
Unearned stock compensation		—					—					(13,050	)			—					—					—
Reclassification of unearned stock compensation		—					14,641					—				—					—					14,641
Amortization of deferred compensation expense and amounts received on notes		—					66					7,845				—					—					66

End of year		—					—					(14,707	)			—					—					—

Total stockholders’ equity	$	1,077,227					981,124					882,018			$	1,076,043					1,077,227					981,124

The Company also has authorized, but not issued, 5,000,000 shares of preferred stock without par value of which 300,000 shares have been designated Series A junior preferred stock without par value.

See accompanying notes to consolidated financial statements.

Consolidated Statements of Cash Flows
~~Years ended December 31,~~


Years Ended December 31,
(in thousands)	2006			2005			2004			2007			2006			2005

Operating Activities
Net income	$	163,574			148,493			128,639		$	146,498			163,574			148,493


Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		25,684			21,380			16,728			29,139			25,684			21,380
Stock compensation expense		14,524			11,361			7,790
Stock-based compensation expense											20,992			14,524			11,361
Net realized gains		(35,479	)		(14,464	)		(24,587	)		(33,354	)		(35,479	)		(14,464	)
Deferred tax		(9,781	)		(4,798	)		13,850			3,214			(9,781	)		(4,798	)
Loss on disposition of discontinued operations		—			2,634			—			—			—			2,634
Debt conversion inducement		2,117			—			—			—			2,117			—
Cumulative effect of change in accounting principle, net of tax		—			(495	)		—			—			—			(495	)
Gain on sale of property		—			—			(183	)

Changes in assets and liabilities:
Increase in reserves for losses and loss expenses, net of reinsurance recoverable on unpaid losses and loss expenses		223,231			249,356			213,243			227,749			223,231			249,356
Increase in unearned premiums, net of prepaid reinsurance and advance premiums		35,708			41,430			45,997			38,346			35,708			41,430
(Decrease) increase in net federal income tax payable		(2,761	)		585			(2,358	)		(3,767	)		(2,761	)		585
(Increase) in premiums receivable		(11,232	)		(35,785	)		(24,925	)
(Increase) decrease in other trade receivables		(4,835	)		(6,534	)		4,089
(Increase) in deferred policy acquisition costs		(13,271	)		(17,915	)		(14,531	)
(Increase) in interest and dividends due or accrued		(2,280	)		(4,632	)		(3,946	)
Increase in premiums receivable											(37,911	)		(11,232	)		(35,785	)
Increase in other trade receivables											(487	)		(4,835	)		(6,534	)
Increase in deferred policy acquisition costs											(8,331	)		(13,271	)		(17,915	)
Increase in interest and dividends due or accrued											(1,331	)		(2,280	)		(4,632	)
(Increase) decrease in reinsurance recoverable on paid losses and loss expenses		(144	)		1,292			1,885			(2,736	)		(144	)		1,292
Increase (decrease) in accrued salaries and benefits		5,385			17,953			(6,871	)
(Decrease) increase in accrued insurance expenses		(1,566	)		11,582			14,349
(Decrease) increase in accrued salaries and benefits											(3,266	)		5,385			17,953
Increase (decrease) in accrued insurance expenses											6,370			(1,566	)		11,582
Other, net		4,181			(14,605	)		(2,102	)		5,163			4,181			(14,605	)

Net adjustments		229,481			258,345			238,428			239,790			229,481			258,345

Net cash provided by operating activities		393,055			406,838			367,067			386,288			393,055			406,838


Investing Activities
Purchase of fixed maturity securities, available-for-sale		(801,647	)		(779,212	)		(732,042	)		(580,864	)		(801,647	)		(779,212	)
Purchase of equity securities, available-for-sale		(52,429	)		(47,645	)		(43,785	)		(148,569	)		(52,429	)		(47,645	)
Purchase of other investments		(71,486	)		(26,789	)		(11,272	)		(80,147	)		(71,486	)		(26,789	)
Purchase and adjustments of subsidiaries acquired (net of short-term investments and cash acquired of $4,890 in 2004)		—			—			(407	)
Purchase of short-term investments		(2,290,937	)		(1,907,686	)		(1,202,013	)		(2,198,362	)		(2,290,937	)		(1,907,686	)
Net proceeds from sale of subsidiary		376			14,785			—			—			376			14,785
Sale of fixed maturity securities, available-for-sale		306,044			181,279			219,944			102,613			306,044			181,279
Sale of short-term investments		2,279,055			1,821,231			1,126,399			2,205,194			2,279,055			1,821,231
Redemption and maturities of fixed maturity securities, held-to-maturity		3,635			27,616			31,632			4,051			3,635			27,616
Redemption and maturities of fixed maturity securities, available-for-sale		187,608			209,377			175,458			319,118			187,608			209,377
Sale of equity securities, available-for-sale		108,382			54,487			59,362			187,259			108,382			54,487
Proceeds from other investments		8,350			9,975			9,147			40,115			8,350			9,975
Purchase of property and equipment		(18,670	)		(9,558	)		(11,756	)		(14,511	)		(18,670	)		(9,558	)

Net cash used in investing activities		(341,719	)		(452,140	)		(379,333	)		(164,103	)		(341,719	)		(452,140	)


Financing Activities
Dividends to stockholders		(22,831	)		(19,908	)		(17,331	)		(24,464	)		(22,831	)		(19,908	)
Acquisition of treasury stock		(116,354	)		(22,885	)		(8,730	)		(152,118	)		(116,354	)		(22,885	)
Proceeds from issuance of notes payable, net of issuance costs		96,263			99,310			49,880			—			96,263			99,310
Principal payments of notes payable		(18,300	)		(24,000	)		(24,000	)		(18,300	)		(18,300	)		(24,000	)
Net proceeds from stock purchase and compensation plans		11,560			11,919			12,380			8,609			11,560			11,919
Excess tax benefits from share-based payment arrangements		3,903			3,783			—			3,484			3,903			3,783
Borrowings under line of credit agreement											6,000			—			—
Repayment of borrowings under line of credit agreement											(6,000	)		—			—
Debt conversion inducement		(2,117	)		—			—			—			(2,117	)		—
Principal payments of senior convertible notes											(37,456	)		—			—
Proceeds received on notes receivable from stock sales		—			66			55			—			—			66

Net cash (used in) provided by financing activities		(47,876	)		48,285			12,254			(220,245	)		(47,876	)		48,285

Net increase (decrease) in cash and cash equivalents		3,460			2,983			(12	)
Net increase in cash and cash equivalents											1,940			3,460			2,983
Cash and cash equivalents, beginning of year		2,983			—			12			6,443			2,983			—

Cash and cash equivalents, end of year	$	6,443			2,983			—		$	8,383			6,443			2,983


Supplemental Disclosures of Cash Flows Information
Cash paid during the year for:
Interest	$	21,391			16,984			15,450		$	25,311			21,391			16,984
Federal income tax		65,575			57,476			34,850			43,809			65,575			57,476
Supplemental schedule of non-cash financing activity:
Conversion of convertible debentures		58,534			258			153			12,066			58,534			258

See accompanying notes to consolidated financial statements.

Notes to Consolidated Financial Statements

December 31, 2007, 2006, ~~2005,~~ and ~~2004~~2005

Note 1 Organization

Selective Insurance Group, Inc., through its subsidiaries, (collectively known as “Selective” ~~or the “Company”~~) offers property and casualty insurance products and diversified insurance services and products. Selective Insurance Group, Inc. ~~(the “Parent”)~~ was incorporated in New Jersey in 1977 and its main offices are located in Branchville, New Jersey. ~~The Parent’s~~Selective Insurance Group, Inc.’s Common Stock is publicly traded on the NASDAQ Global Select MarketÒ under the symbol “SIGI.”

Selective classifies its business into three operating segments:

	•		Insurance Operations, which sells ~~property and casualty insurance products and services primarily in 20 states in the Eastern and Midwestern United States, and has at least one company licensed to do business in each of the 50 states;~~

	•		~~Investments; and~~

	•		~~Diversified Insurance Services, which provide human resource administration outsourcing products and services, and federal flood insurance administrative services.~~

~~During 2004, Selective purchased a~~ property and casualty insurance ~~company, domiciled~~products and services primarily in ~~Maine, with approximately $5.0 million~~21 states in ~~surplus that was not writing any business at~~ the ~~time of acquisition, for $5.3 million. Separate pro forma information of this acquisition has not been presented, as management has determined that this acquisition is not material.~~Eastern and Midwestern United States;

Investments; and

Diversified Insurance Services, which provides human resource administration outsourcing products and services, and federal flood insurance administrative services.

Note 2 Summary of Significant Accounting Policies

(a) Principles of Consolidation

The accompanying consolidated financial statements (“Financial Statements”), which include the accounts of Selective, have been prepared in conformity with: (i) ~~accounting principles~~U.S. generally accepted ~~in the United States of America~~accounting principles (“GAAP”); and (ii) the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). All significant intercompany accounts and transactions are eliminated in consolidation.

(b) Use of Estimates

The preparation of the Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported financial statement balances, as well as the disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

Fixed maturity securities are comprised of bonds, redeemable preferred stocks, and mortgage-backed securities. Fixed maturity securities classified as available for sale are reported at fair value. 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. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts ~~to maturity.~~over the expected life of the security using the effective interest method. Premiums expected and discounts arising from the purchase of mortgage-backed securities are amortized toover the expected ~~maturity~~life of the security based on future principal payments, and considering prepayments. These prepayments are estimated based upon historical and projected cash flows. Prepayment assumptions are reviewed annually and adjusted to reflect actual prepayments and changes in expectations. Future amortization of any premium and/or discount is also adjusted to reflect the revised assumptions. Interest income, as well as amortization and accretion, is included in “Net investment income earned.” The amortized cost of fixed maturity securities is written down to fair value when a decline in value is considered to be other than temporary. See the discussion below on realized investment gains and losses for a description of the accounting for impairments. Unrealized gains and losses on fixed maturities classified as ~~“available for sale,”~~available-for-sale, net of tax are included in accumulated other comprehensive income (loss) (“AOCI”).

Equity securities, which are classified as available for sale, are comprised of common stocks and non-redeemable preferred stocks and are carried at fair value. Dividend income on these securities is included in “Net investment income earned.” The associated unrealized gains and losses, net of tax are included in ~~accumulated other comprehensive income (loss).~~AOCI. The cost of equity securities is written down to fair value when a decline in value is considered to be other than temporary. See the discussion below on realized investment gains and losses for a description of the accounting for impairments.

Short-term investments are comprised of certain money market instruments, savings accounts, commercial paper, other debt issues purchased with a maturity of less than one year, and variable rate demand ~~notes,~~notes. These investments are carried at cost, which approximates fair value. The associated income is included in “Net investment income earned.”

Other investments are comprised of ~~limited partnerships~~alternative investments and other miscellaneous ~~securities, including limited liability companies. Our limited partnership~~securities. Alternative investments are ~~carried~~accounted for using the equity method. ~~The Company’s~~Selective’s share of distributed and undistributed net income from ~~limited partnerships~~alternative investments is included in “Net investment income earned.” ~~Our investment~~Investments in other miscellaneous securities are generally ~~accounted for using the~~carried at estimated fair value, because ~~the Company’s~~Selective’s interests are so minor that it exercises virtually no influence over operating and financial policies. ~~The Company’s~~Selective’s distributed share of net income from other miscellaneous investments is included in “Net investment income earned.” Any changes in estimated fair value associated with these investments isare recorded as an unrealized gain or loss, of which these items net of tax are included in ~~accumulated other comprehensive income (loss).~~AOCI.

Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold and are credited or charged to income. Also included in realized gains and losses are write-downs for other than temporary impairment charges.

When the fair value of any investment is lower than its cost, an assessment is made to determine if the decline is other than temporary. If the decline is deemed to be other than temporary, the investment is written down to fair value and the amount of the write-down is charged to income as a realized loss. The fair value of the investment becomes its new cost basis. ~~Our~~Selective’s assessment for other-than-temporary impairment of fixed maturity securities, includes, but is not limited to, the evaluation of the following factors:

	•		Whether the decline appears to be issuer or industry specific;

	•		~~The degree to which an issuer is current or in arrears in making principal and interest payments on the fixed maturity securities in question;~~

	•		~~The issuer’s current financial condition and its ability to make future scheduled principal and interest payments on a timely basis;~~

	•		~~Buy/hold/sell recommendations published by outside investment advisors and analysts;~~

	•		~~Relevant rating history, analysis and guidance provided by rating agencies and analysts;~~

	•		~~The length of time and the extent to which the fair value has been less than carrying value; and~~

	•		~~Our ability and intent to hold a security to maturity given interest rate fluctuations.~~

The degree to which an issuer is current or in arrears in making principal and interest payments on the fixed maturity securities in question;

The issuer’s current financial condition and its ability to make future scheduled principal and interest payments on a timely basis;

Buy/hold/sell recommendations published by outside investment advisors and analysts;

Relevant rating history, analysis and guidance provided by rating agencies and analysts;

The length of time and the extent to which the fair value has been less than carrying value; and

Our ~~evaluation~~ability and intent to hold a security to maturity given interest rate fluctuations.

Evaluation for other-than-temporary impairment of equity securities, other investments, and ~~alternative~~short-term investments, includes, but is not limited to, the ~~evaluation~~following factors:

Whether the decline appears to be issuer or industry specific;

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;

The financial condition and near-term prospects of the ~~following factors:~~issuer, including any specific events that may influence the issuer’s operations;

	•		~~Whether the decline appears to be issuer or industry specific;~~

	•		~~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;~~

	•		~~The financial condition and near-term prospects of the issuer, including any specific events that may influence the issuer’s operations;~~

	•		~~The recent income or loss of the issuer;~~

	•		~~The independent auditors’ report on the issuer’s recent financial statements;~~

	•		~~The dividend policy of the issuer at the date of acquisition and the date of evaluation;~~

	•		~~Any buy/hold/sell recommendations or price projections published by outside investment advisors;~~

	•		~~Any rating agency announcements; and~~

	•		~~The length of time and the extent to which the fair value has been less than carrying value.~~

The recent income or loss of the issuer;

The independent auditors’ report on the issuer’s recent financial statements;

The dividend policy of the issuer at the date of acquisition and the date of evaluation;

Any buy/hold/sell recommendations or price projections published by outside investment advisors;

Any rating agency announcements; and

The length of time and the extent to which the fair value has been less than carrying value.

(d) Fair Values of Financial Instruments

The following methods and assumptions ~~were~~are used ~~by Selective~~ in estimating ~~its~~the fair value ~~disclosures for~~of financial instruments:

(1) Investments: Fair values for fixed maturity and equity securities are based on ~~quoted~~ market prices ~~where available, or~~ from independent pricing services. ~~Other investments are comprised of limited partnerships and other miscellaneous securities, including limited liability companies and equity securities. Our limited partnership~~Short-term investments are carried ~~using the equity method.~~at cost, which approximates fair value. Our investment in other miscellaneous securities are generally accounted for at ~~estimated~~ fair value ~~with changes in estimated fair value associated with these investments recorded as an unrealized gain or loss, in AOCI.~~based on net asset value.

(2) Indebtedness: The fair value of the convertible subordinated debentures, the 1.6155% Senior Convertible Notes due September 24, 2032, the 7.25% Senior Notes due November 15, 2034, the 6.70% Senior Notes due November 1, 2035, and the 7.5% Junior Subordinated Notes due September 27, 2066 are based on quoted market prices. The fair ~~values~~value of the 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 Selective’s current incremental borrowing rate for the remaining term of the ~~loan.~~loans.

See Note 6 for a summary table of the fair value and related carrying amounts of financial instruments.

(e) Allowance for Doubtful Accounts

Selective estimates an allowance for doubtful accounts on its premiums and other trade receivables. The allowance for premiums and other trade receivables is based on historical write-off percentages adjusted for the effects of current and anticipated trends.

(f) Share-Based Compensation

Effective January 1, 2005, Selective adopted ~~the~~ Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (“FAS 123R”), which replaces FASB Statement No. 123 “Accounting for Stock Based Compensation” (“FAS 123”) and ~~supercedes~~supersedes Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB 25”). FAS 123R applies to all share-based payment transactions in which an entity acquires goods or services by issuing (or offering to issue) its shares, share options, or other equity instruments. FAS 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements, based on the fair value of such instruments at the grant date over the requisite service period. The requisite service period is typically the lesser of the vesting period or the period of time from the grant date to the date of retirement eligibility. The expense recognized for share-based awards, which, in some cases contain a performance criteria, is based on the number of shares/units expected to be issued at the end of the performance period. Prior to the adoption of FAS 123R, Selective accounted for its share-based compensation in accordance with the intrinsic value method prescribed by APB 25 as was permitted by FAS 123, wherein compensation cost is recognized over the explicit service period. The explicit service period is typically the lesser of the vesting period or the period of time from the grant date to the date of actual retirement, which was the practice for awards granted prior to the adoption of FAS 123R. Share-based compensation granted prior to the adoption of FAS 123R continues to be recognized over the remaining explicit service period. The impact on Selective’s results of operations or financial condition for the change in the period over which expense is recognized is not material.

In adopting FAS 123R, Selective applied the modified prospective application method, which did not have a material effect on: (i) income before cumulative effect of change in accounting principle in 2005; or (ii) basic or diluted earnings per share before cumulative effect of change in accounting principle in 2005. At adoption, Selective recognized a cumulative effect of change in accounting principle resulting in a net income benefit of $0.5 million, which corresponded to the requirement of estimating forfeitures at the date of grant. FAS 123R also eliminated the presentation of the contra-equity account, “Unearned Stock Compensation” from the face of the Consolidated Balance Sheets, resulting in a reclassification of $14.7 million to “Additional Paid-in Capital.”

~~The following table shows a pro forma reconciliation of net income reported under APB 25 to pro forma net income and earnings per share under FAS 123 for the year ended December 31, 2004:~~

($ in thousands, except per share amounts)

Net income, as reported $ 128,639
Add: Stock-based compensation reported in net income, net of related tax effect 5,288
Deduct: Total stock-based compensation expense determined under fair value-based method for all awards, net of related tax effects (5,545 )

Pro forma net income $ 128,382

Net income per share:

Basic — as reported $ 2.41
Basic — pro forma 2.40
Diluted — as reported 2.04
Diluted — pro forma 2.04

(g) Reinsurance

Reinsurance recoverable on paid and unpaid losses and loss expenses represent estimates of the portion of such liabilities that will be recovered from reinsurers. ~~Amounts~~Generally, amounts recoverable from reinsurers are recognized as assets at the same time and in a manner consistent with the paid and unpaid losses associated with the reinsured policies. An allowance for estimated uncollectible reinsurance is recorded based on an evaluation of balances due from reinsurers and other available information.

(h) Property and Equipment

Property and equipment used in operations, including certain costs incurred to develop or obtain computer software for internal use, are capitalized and carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which range up to 40 years.

(i) Deferred Policy Acquisition Costs

Policy acquisition costs directly related to the writing of insurance policies are deferred and amortized over the life of the policies. These costs include labor costs, commissions, premium taxes and assessments, boards, bureaus and dues, travel,

and other underwriting expenses incurred in the acquisition of premium. The deferred policy acquisition costs are limited to the sum of unearned premiums and anticipated investment income less anticipated losses and loss expenses, policyholder dividends and other expenses for maintenance of policies in force. Selective regularly conducts reviews for potential premium deficiencies. There were no premium deficiencies for any of the reported years as the sum of the anticipated losses and loss expenses, policyholder dividends, and other expenses did not exceed the related unearned premium and anticipated investment income. The investment yields assumed in the premium deficiency assessment for each reporting period, which are based upon the Company’s actual average investment yield before-tax as of the calculation date on September 30, were 4.6% for 2007, 4.4% for 2006 and ~~2005, and 4.6% for 2004.~~2005. Deferred policy acquisition costs amortized to expense were $460.2 million for 2007, $443.3 million for 2006, and $400.6 million for ~~2005, and $372.2 million for 2004.~~2005.

(j) Goodwill

Goodwill results from business acquisitions where the cost of ~~assets~~assets/liabilities acquired exceeds the fair value of those ~~assets.~~assets/liabilities. Goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. Goodwill is allocated to the reporting units for the purposes of the impairment test. Selective did not record any impairments during 2007, 2006 ~~2005,~~ or ~~2004.~~2005.

(k) Reserves for Losses and Loss Expenses

Reserves for losses and loss expenses are made up of both case reserves and reserves for claims incurred but not yet reported (“IBNR”). Case reserves result from claims that have been reported to the ~~Insurance Subsidiaries~~seven insurance subsidiaries (the “Insurance Subsidiaries”) and are estimated at the amount of ultimate payment. IBNR reserves are established based on generally accepted actuarial techniques. Such techniques assume that past experience, adjusted for the effects of current developments and anticipated trends, are an appropriate basis for predicting future events. In applying generally accepted actuarial techniques, Selective also considers a range of possible loss and loss adjustment expense reserves in establishing IBNR.

The internal assumptions considered by Selective in the estimation of the IBNR amounts for both environmental and non-environmental reserves at Selective’s reporting dates are based on: (i) an analysis of both paid and incurred loss and loss expense development trends; (ii) an analysis of both paid and incurred claim count development trends; (iii) the exposure estimates for reported claims; (iv) recent development on exposure estimates with respect to individual large claims and the aggregate of all claims; (v) the rate at which new environmental claims are being reported; and (vi) patterns of events observed by claims personnel or reported to them by defense counsel. External factors identified by Selective in the estimation of IBNR for both environmental and non-environmental IBNR reserves include: (i) legislative enactments; (ii) judicial decisions; (iii) legal developments in the determination of liability and the imposition of damages; and (iv) trends in general economic conditions, including the effects of inflation. Adjustments to IBNR are made periodically to take into account changes in the volume of business written, claims frequency and severity, the mix of business, claims processing, and other items that are expected by management to affect Selective’s reserves for losses and loss expenses over time.

By using both individual estimates of reported claims and generally accepted actuarial reserving techniques, Selective estimates the ultimate net liability for losses and loss expenses. While the ultimate actual liability may be higher or lower than reserves established, Selective believes the reserves to be adequate. Any changes in the liability estimate may be material to the results of operations in future periods. Selective 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 $49.6 million for 2006 and $46.5 million for 2005.~~

Reserves are reviewed for adequacy on a periodic basis. As part of the periodic review, Selective considers the range of possible loss and loss expense reserves, determined at the beginning of the year, in evaluating reserve adequacy. When reviewing reserves, Selective analyzes historical data and estimates the impact of various factors such as: (i) per claim information; (ii) Selective 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. Based upon such reviews, Selective believes that the estimated reserves for losses and loss expenses are adequate to cover the ultimate cost of claims. The changes in these estimates, resulting from the continuous review process and the differences between estimates and ultimate payments, are reflected in the consolidated statements of income for the period in which such estimates are changed.

(l) Revenue Recognition

~~Our Insurance Subsidiaries record~~

Selective’s seven insurance subsidiaries’ net premiums written ~~which~~ include direct insurance policy writings plus reinsurance assumed and estimates of premiums earned but unbilled on the workers compensation and general liability lines of insurance, less reinsurance ceded. Premiums written are recognized as revenue over the period that coverage is provided using the semi-monthly ~~pro rata~~pro-rata method. Unearned premiums and prepaid reinsurance premiums represent that portion of premiums written that are applicable to the unexpired terms of policies in force.

~~SHRS~~Selective HR Solutions (“Selective HR”), our human resource administration outsourcing operation, reports revenues on a net basis for the amount billed to clients for worksite employee salaries, wages and certain payroll-related taxes less amounts paid to worksite employees and taxing authorities for these salaries, wages and taxes. All fees that have the potential for a margin are included in revenue on a gross basis and all amounts that have no margin but are simply pass through amounts collected from the client and passed on to the employee or appropriate taxing authorities are presented on a net basis. Specifically, gross wages, Federal Insurance Contributions Act ~~(FICA)~~(“FICA”) tax and Federal Unemployment Tax ~~(FUTA)~~(“FUTA”) are included on a net basis whereas administration fees, state unemployment taxes, health fees and workers compensation fees are included on a gross basis. ~~SHRS~~Selective HR accounts for its revenues using the accrual method of accounting. Under the accrual method of accounting, ~~SHRS~~Selective HR recognizes its revenues ratably over the payroll period as worksite employees perform their ~~service~~services at the ~~client worksite.~~clients’ worksites.

(m) Dividends to Policyholders

Selective establishes reserves for dividends to policyholders on certain policies, most significantly 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 $5.9 million for 2006, $5.7 million for 2005, and $4.3 million in 2004.~~ Selective does not issue policies that entitle the policyholder to participate in the earnings or surplus of the Insurance Subsidiaries.

(n) Federal Income Tax

Selective uses the asset and liability method of accounting for income taxes. Deferred federal income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the tax basis of Selective’s assets and liabilities. A valuation allowance is established when it is more likely than not that some portion of the deferred tax asset will not be realized. The effect of a change in tax rates is recognized in the period of enactment.

(o) Cash and Cash Equivalents

Cash and cash equivalents are comprised of cash and certain money market accounts that are used as part of the Company’s daily cash management. ~~At December 31, 2006,~~

(p) Leases

Selective has various operating leases for office space and equipment. Rental expense for such leases is recorded on a straight-line basis over the ~~Company changed its definition~~lease term. If a lease has a fixed and determinable escalation clause, or periods of ~~cash equivalents for presentation~~rent holidays, the difference between rental expense and rent paid is included in “Other liabilities” as deferred rent in the statement of cash flows. The Company previously defined short-term investments with original maturities of 90 days or less to be cash equivalents for statement of cash flow purposes. The Company changed its policy to exclude short-term investments from cash equivalents. The Company believes the revised policy is preferable because these short-term investments are in alignment with the way short-term investments are managed and are now included in investing activities in the statement of cash flows. Prior year balances in the statement of cash flows have been restated, which had the effect of increasing net cash used in investing activities by $77.8 million and $75.6 million for the years ended December 31, 2005 and 2004, respectively. The increase in cash used in investing activities for the year ended December 31, 2005, includes $68 million of Variable Rate Demand Notes incorrectly classified as cash equivalents.

~~(p) Reclassifications~~

Certain amounts in Selective’s prior years’ Financial Statements and related footnotes have been reclassified. The December 31, 2005 amounts reflected on the consolidated balance sheets include the following reclassifications: (i) $11.7 million of other investments that have been reclassified from equity securities; (ii) $8.6 million of short-term investments that have been reclassified from available for sale fixed maturity securities; and (iii) $18.0 million of premiums receivable that have been reclassified from commissions payable. Such reclassifications had no effect on Selective’s net income, stockholders’ equity, or cash flows.Consolidated Balance Sheets.

Note 3 Adoption of Accounting Pronouncements

~~In December 2004, the~~

On January 1, 2007, Selective adopted Financial Accounting Standards ~~Board (“FASB”) issued Statement of Financial Accounting Standards 123 (revised 2004),~~~~Share-Based Payment~~(“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. Selective’s January 1, 2005 adoption of this accounting pronouncement resulted in an after-tax cumulative effect of change in accounting principle benefit of $0.5 million due to the requirement to estimate the impact of expected forfeitures at the grant date in the first quarter of 2005.

~~In February 2006, the FASB issued FAS~~No. 155,Accounting for Certain Hybrid Financial Instruments —– an amendment of FASB Statements No. 133 and 140(“FAS 155”)~~, to clarify and/or amend previous accounting standards relating to certain derivatives embedded in other financial instruments (known as “hybrid” financial instruments)~~. Under the guidance contained in FAS 155, companies are required to evaluate interests in securitized financial assets to identify whether such interests are freestanding derivatives or hybrid financial instruments that contain an embedded derivative. ~~FAS 155 is effective for financial instruments acquired, issued, or subject to a remeasurement event occurring after December 31, 2006.~~ During the fourth quarter of 2006, the ~~FASB~~Financial Accounting Standards Board (“FASB”) recommended a narrow scope exception for securitized interests if: (i) the securitized interest itself has no embedded derivative (including interest rate related derivatives) that would be required to be accounted for separately other than an embedded derivative that results solely from the embedded call options in the underlying financial assets; and (ii) the investor does not control the right to accelerate the settlement. ~~Selective is currently evaluating the applicability~~The adoption of FAS 155 did not have a material impact on ~~its operations.~~the results of operations or financial condition of Selective during 2007.

~~In June 2006,~~On January 1, 2007, Selective adopted the ~~FASB issued~~provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes —– an interpretation of FASB Statement No. 109(“FIN 48”). FIN 48 calls for a two-step process ~~in the evaluation of a~~to evaluate tax ~~position to be used in~~positions based on the recognition, derecognition, and measurement of benefits related to income taxes. The process begins with an initial assessment of whether a tax position, based on its technical merits and applicability to the facts and circumstances, ~~of the position,~~ will “more-likely-than-not” be sustained upon examination, including related appeals or litigation. The “more-likely-than-not” threshold is defined as having greater than a 50% chance of being realized upon settlement. Tax positions that are “more-likely-than-not” sustainable are then measured to determine how much of the benefit should be recorded in the financial statements. This determination is made by considering the probabilities of the amounts that could be realized upon ~~ultimate~~effective settlement. Each tax position is evaluated individually and must continue to meet the threshold in each subsequent reporting period or the benefit will be derecognized. A position that initially failed to meet the “more-likely-than-not” threshold should be recognized in a subsequent period if: (i) a change in facts and circumstances results in the position’s ability to meet the ~~threshold,~~threshold; (ii) the issue is settled with the taxing ~~authority,~~authority; or (iii) the statute of limitations expires. ~~FIN 48~~Selective has analyzed its tax positions in all federal and state jurisdictions in which it is required to file income tax returns for all open tax years. The open tax years for the federal returns are 2003 though 2006. The Internal Revenue Service completed a limited scope examination of tax year 2003 and 2004 that resulted in a favorable adjustment of $1.1 million. Selective did not have any unrecognized tax benefits as of January 1, 2007. Selective believes its tax positions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. As a result, there was no material change in Selective’s liability for unrecognized tax benefits.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,Fair Value Measurements(“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. It applies to other pronouncements that require or permit fair value, however, it does not require any new fair value measurements. FAS 157 is effective for fiscal years beginning after ~~December~~November 15, ~~2006 and~~2007. Selective will apply FAS 157 to its ~~implementation~~invested assets portfolio beginning in the first quarter of 2008. This application will require the Company to classify the fair values of its investments into three different categories, each of which requires varying levels of disclosure in the financial statements beginning in the first quarter of 2008. The adoption of this statement is not expected to have a material impact on ~~the~~Selective’s results of operations or financial ~~condition of the Company.~~condition.

In ~~September 2006,~~February 2007, the FASB issued Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. ~~158,~~~~Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment to FASB Statements No. 87, 88 ,106, and 132(R)~~115(“FAS ~~158”~~159”), which provides companies with an option to report selected financial assets and liabilities at fair value (“fair value option”). FAS 159 requires ~~employers~~companies to ~~recognize on their balance sheets the funded status of pension~~provide additional information that will help investors and other ~~postretirement benefit plans as~~users of ~~December 31, 2006 for calendar year public companies.~~financial statements to more easily understand the effect of a company’s choice to use fair value on its earnings. FAS ~~158 will~~159 also ~~require fiscal year-end measurements~~requires companies to display the fair value of ~~plan~~those assets and ~~benefit obligations, eliminating the~~liabilities for which a company has chosen to use of earlier measurement dates that are currently permissible. As Selective currently measures assets and benefit obligations as of each December 31, the measurement date change of FAS 158 will not have an impactfair value on the ~~Company. The requirement to recognize the funded status on the balance sheet has resulted in an after-tax charge~~face of ~~$13.7 million to accumulated other comprehensive income, which is a component of stockholders’ equity.~~

~~In September 2006, the SEC issued staff accounting bulletin No. 108,~~~~Considering the effects of prior year misstatements when quantifying misstatements in current year financial statements~~~~(“SAB 108”), to address diversity in practice in quantifying financial statement misstatements and the potential under current practice for the build-up of improper amounts on~~ the balance sheet. ~~SAB 108 concludes that an adjustment would be required~~Selective adopted FAS 159 on January 1, 2008 and has made the fair value option election as it relates to a ~~registrant’s financial statements when either the iron curtain or rollover approach results in quantifying a misstatement that~~portfolio of equity securities currently being managed by one outside manager. The impact of making this election is not expected to be material ~~after considering all relevant quantitative and qualitative factors. Selective has applied the guidance of SAB 108 with respect~~ to the Consolidated Financial Statements.

In June 2007, the Emerging Issues Task Force (“EITF”) of the FASB issued EITF Issue No. 06-11Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards(“EITF 06-11”). EITF 06-11 requires that the tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity classified nonvested equity shares, nonvested equity share units, and outstanding equity share options be recognized as an increase to additional paid-in capital. This EITF is effective on a prospective basis beginning with dividends declared in fiscal years beginning after December ~~2006~~15, 2007. The adoption of this EITF is not expected to have a material impact on Selective’s results of operations or financial ~~statements and will continue to do so prospectively. An adjustment to the current financial statements was not required as a result of applying this guidance.~~condition.

Note 4 Investments

(a) Net unrealized gains ~~(losses)~~ on investments included in other comprehensive income by asset class at December 31, are as follows:


(in thousands)	2006			2005			2004			2007			2006			2005

Fixed maturity securities	$	20,216			26,290			78,716		$	23,634			20,216			26,290
Equity securities		149,512			152,717			157,764			114,315			149,512			152,717
Other investments		6,193			2,717			1,267			6,758			6,193			2,717

Total net unrealized gains		175,921			181,724			237,747			144,707			175,921			181,724
Deferred income tax expense		(61,572	)		(63,603	)		(83,211	)		(50,647	)		(61,572	)		(63,603	)

Net unrealized gains, net of deferred income tax	$	114,349			118,121			154,536		$	94,060			114,349			118,121

(Decrease) increase in net unrealized gains, net of deferred income tax expense	$	(3,772	)		(36,415	)		6,084
Decrease in net unrealized gains, net of deferred income tax expense										$	(20,289	)		(3,772	)		(36,415	)

(b) The amortized cost, estimated fair values, and unrealized gains (losses) of held-to-maturity fixed maturity securities at December 31, ~~2006~~2007 and ~~2005,~~2006, respectively, were as follows:

2006 Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value

Obligations of states and political subdivisions $ 9,792 250 — 10,042
Mortgage-backed securities 30 1 — 31

Total held-to-maturity fixed maturity securities $ 9,822 251 — 10,073

2007


2005	Amortized		Unrealized		Unrealized		Fair
									Amortized		Unrealized		Unrealized		Fair
(in thousands)	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value

Obligations of states and political subdivisions	$	13,388		456		—		13,844	$	5,759		143		—		5,902
Mortgage-backed securities		35		2		—		37		24		1		—		25

Total held-to-maturity fixed maturity securities	$	13,423		458		—		13,881	$	5,783		144		—		5,927

2006

Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
Obligations of states and political subdivisions $ 9,792 250 — 10,042
Mortgage-backed securities 30 1 — 31

Total held-to-maturity fixed maturity securities $ 9,822 251 — 10,073

(c) The cost/amortized cost, estimated fair values, and unrealized gains (losses) of available-for-sale securities at December 31, ~~2006~~2007 and ~~2005,~~2006, respectively, were as follows:

Cost/
2006 Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value

U.S. government and government agencies $ 195,725 4,379 (794 ) 199,310
Obligations of states and political subdivisions 1,736,865 14,488 (7,704 ) 1,743,649
Corporate securities 295,964 6,676 (1,059 ) 301,581
Asset-backed securities 50,319 205 (103 ) 50,421
Mortgage-backed securities 638,011 7,011 (2,883 ) 642,139

Available-for-sale fixed maturity securities 2,916,884 32,759 (12,543 ) 2,937,100
Available-for-sale equity securities 157,864 149,895 (383 ) 307,376

Total available-for-sale securities $ 3,074,748 182,654 (12,926 ) 3,244,476

2007


	Cost/									Cost/
2005	Amortized		Unrealized		Unrealized			Fair
										Amortized		Unrealized		Unrealized			Fair
(in thousands)	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value

U.S. government and government agencies	$	206,738		6,771		(867	)		212,642	$	172,795		7,365		(448	)		179,712
Obligations of states and political subdivisions		1,480,464		11,544		(9,007	)		1,483,001		1,593,587		21,274		(3,646	)		1,611,215
Corporate securities		393,885		12,628		(1,495	)		405,018		479,169		10,923		(3,017	)		487,075
Asset-backed securities		23,334		196		(91	)		23,439		99,184		698		(2,197	)		97,685
Mortgage-backed securities		514,542		9,572		(2,961	)		521,153		705,178		8,685		(16,003	)		697,860

Available-for-sale fixed maturity securities		2,618,963		40,711		(14,421	)		2,645,253		3,049,913		48,945		(25,311	)		3,073,547
Available-for-sale equity securities		174,378		153,213		(496	)		327,095		160,390		115,742		(1,427	)		274,705

Total available-for-sale securities	$	2,793,341		193,924		(14,917	)		2,972,348	$	3,210,303		164,687		(26,738	)		3,348,252

2006

Cost/
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
U.S. government and government agencies $ 195,725 4,379 (794 ) 199,310
Obligations of states and political subdivisions 1,736,865 14,488 (7,704 ) 1,743,649
Corporate securities 295,964 6,676 (1,059 ) 301,581
Asset-backed securities 50,319 205 (103 ) 50,421
Mortgage-backed securities 638,011 7,011 (2,883 ) 642,139

Available-for-sale fixed maturity securities 2,916,884 32,759 (12,543 ) 2,937,100
Available-for-sale equity securities 157,864 149,895 (383 ) 307,376

Total available-for-sale securities $ 3,074,748 182,654 (12,926 ) 3,244,476

(d) The following tables summarize, for all securities in an unrealized loss position at December 31, ~~2006~~2007 and December 31, ~~2005,~~2006, the aggregate fair value and gross pre-tax unrealized loss recorded in Selective’s accumulated other comprehensive income, by asset class and by length of time those securities have been in an unrealized loss position:

2007

Less than 12 months 12 months or longer Total
Fair Unrealized Fair Unrealized Fair Unrealized
(in thousands) Value Losses Value Losses Value Losses
U.S. government and government agencies $ 10,816 (53 ) 10,028 (395 ) 20,844 (448 )
Obligations of states and political subdivisions 73,136 (651 ) 225,766 (2,995 ) 298,902 (3,646 )
Corporate securities 82,599 (2,843 ) 12,303 (174 ) 94,902 (3,017 )
Asset-backed securities 37,696 (2,181 ) 3,484 (16 ) 41,180 (2,197 )
Mortgage-backed securities 201,505 (13,895 ) 90,919 (2,108 ) 292,424 (16,003 )

Total fixed maturity securities 405,752 (19,623 ) 342,500 (5,688 ) 748,252 (25,311 )
Equity securities 26,780 (1,427 ) — — 26,780 (1,427 )
Total securities in a temporary unrealized loss position $ 432,532 (21,050 ) 342,500 (5,688 ) 775,032 (26,738 )

2006


	Less than 12 months					12 months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(in thousands)	Value		Losses			Value		Losses			Value		Losses
U.S. government and government agencies	$	43,873		(108	)		46,264		(686	)		90,137		(794	)
Obligations of states and political subdivisions		320,851		(1,623	)		455,970		(6,081	)		776,821		(7,704	)
Corporate securities		45,694		(279	)		29,965		(780	)		75,659		(1,059	)
Asset-backed securities		9,863		(29	)		3,425		(74	)		13,288		(103	)
Mortgage-backed securities		63,954		(380	)		170,171		(2,503	)		234,125		(2,883	)

Total fixed maturity securities		484,235		(2,419	)		705,795		(10,124	)		1,190,030		(12,543	)
Equity securities		7,763		(223	)		374		(160	)		8,137		(383	)
Other investments		6,913		(87	)		—		—			6,913		(87	)

Total securities in a temporary unrealized loss position	$	498,911		(2,729	)		706,169		(10,284	)		1,205,080		(13,013	)

~~2005~~

Less than 12 months 12 months or longer Total
Fair Unrealized Fair Unrealized Fair Unrealized
(in thousands) Value Losses Value Losses Value Losses

U.S. government and government agencies $ 76,468 (503 ) 9,956 (364 ) 86,424 (867 )
Obligations of states and political subdivisions 768,817 (7,269 ) 81,999 (1,738 ) 850,816 (9,007 )
Corporate securities 47,799 (699 ) 15,933 (796 ) 63,732 (1,495 )
Asset-backed securities 5,770 (91 ) — — 5,770 (91 )
Mortgage-backed securities 228,628 (2,456 ) 16,231 (505 ) 244,859 (2,961 )

Total fixed maturity securities 1,127,482 (11,018 ) 124,119 (3,403 ) 1,251,601 (14,421 )
Equity securities 9,439 (496 ) — — 9,439 (496 )

Total securities in a temporary unrealized loss position $ 1,136,921 (11,514 ) 124,119 (3,403 ) 1,261,040 (14,917 )

At December 31, ~~2006,~~2007, Selective held (i) ~~339~~231 fixed maturity securities, with a fair value of ~~$1,190.0~~$748.3 million in an unrealized loss position of ~~$12.5~~$25.3 million; (ii) ~~seven~~9 equity securities in an unrealized loss position, with a fair value of ~~$8.1~~$26.8 million and an unrealized loss of ~~$0.4 million; and (iii) one security in other investments with an unrealized loss of $0.1 million and an estimated fair value of 6.9~~$1.4 million. Of these ~~347~~240 securities, ~~345~~10 had fair values no less than ~~95%~~85% of their cost basis. The remaining 2230 securities had fair values between ~~70%~~86% and ~~87%~~99% of their cost basis. Selective believes the decline in the fair value of all of these securities to be temporary. The assessment of whether a decline in value is temporary includes Selective’s current judgment as to the financial position and future prospects of the entity that issued the investment security. Broad changes in the overall market or interest rate environment generally will not lead to a write-down, provided that management has the ability and intent to hold a security to maturity. If Selective’s judgment about an individual security changes in the future, Selective may ultimately record a realized loss after having originally concluded that the decline in value was temporary, which could have a material impact on Selective’s net income and financial position ofin future periods. Currently, except for securities for which an impairment loss has been recognized, Selective has the ability and intent to hold all securities in an unrealized loss position until their anticipated recovery.

Although overall interest rates decreased in 2007, the unrealized losses for fixed maturity securities increased due primarily to the credit stress and dislocation in the capital markets, along with inflation worries and uncertainty about the U.S. economy in general caused fixed maturities credit spreads to widen. At December 31, 2007, there were 240 securities in an unrealized loss position. Broad changes in the overall market or interest rate environment generally do not lead to impairment charges. During 2007 Selective recorded an other than temporary impairment charge associated with two commercial real estate collateralized debt obligations (“CDO”) for $4.9 million. During the second half of 2007, the market for lower-rated commercial mortgage-backed securities (“CMBS”) saw severe contagion effects from the sub-prime mortgage crisis. CMBS spreads, particularly subordinated tranche CMBS, widened dramatically over the course of the second half of the year. As a result, CDOs in general have become extremely dislocated and difficult to value as the market spreads between bid and ask prices are very wide, even for CDOs that do not have any sub-prime asset backed exposure. At this time, there have been no credit defaults or rating downgrades on CDOs in our portfolio. However, given the severe lack of liquidity currently being experienced in the marketplace, it is difficult to value certain securities and, as a result, we recorded an other than temporary impairment charge on two commercial real estate CDOs in 2007. During 2006, Selective had not recognized any realized losses from other than temporary charges, whereas during 2005 Selective had recorded $1.2 million in realized losses related to other than temporary charges.

(e) The amortized cost and estimated fair value of fixed maturity securities at December 31, ~~2006,~~2007, by contractual maturity are shown below. Mortgage-backed securities are included in the maturity tables using the estimated average life of each security. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Listed below are held-to-maturity fixed maturity securities:


(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value

Due in one year or less	$	4,368		4,431	$	4,391		4,455
Due after one year through five years		5,114		5,223		1,049		1,056
Due after five years through ten years		340		419		343		416

Total held-to-maturity fixed maturity securities	$	9,822		10,073	$	5,783		5,927

Listed below are available-for-sale fixed maturity securities:


(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value

Due in one year or less	$	230,250		230,293	$	252,754		252,595
Due after one year through five years		1,324,812		1,330,796		1,409,716		1,423,983
Due after five years through ten years		1,261,875		1,272,871		1,238,010		1,249,664
Due after ten years through fifteen years		99,947		103,140		98,609		97,592
Due after fifteen years		—		—		50,824		49,713

Total available-for-sale fixed maturity securities	$	2,916,884		2,937,100	$	3,049,913		3,073,547

(f) Certain investments were on deposit with various state regulatory agencies to comply with insurance laws and had carrying values of $26.0 million as of December 31, 2007 and $25.3 million as of December 31, ~~2006 and $28.2 million as of December 31, 2005.~~2006.

(g) Selective is not exposed to significant concentrations of credit risk within its investment portfolio. The largest investment in the securities of any one issuer was $16.0 million at December 31, 2007 and $19.3 million at December 31, ~~2006 and $23.2 million at December 31, 2005.~~2006.

(h) Other investments include the following at December 31:


(in thousands)	2006		2005		2007		2006

Limited partnerships	$	93,880		62,975
Alternative investments					$	156,618		93,880
Other securities		50,905		11,688		32,209		50,905

Total other investments	$	144,785		74,663	$	188,827		144,785

At December 31, ~~2006,~~2007, Selective has contractual obligations that expire at various dates through ~~2021~~2022 to further invest up to ~~$110.5~~$129.8 million in ~~limited partnerships.~~alternative investments. There is no certainty that any such additional investment will be required.

(i) The components of net investment income earned were as follows:


(in thousands)	2006			2005			2004			2007			2006			2005

Fixed maturity securities	$	128,771			117,987			107,719		$	140,383			128,771			117,987
Equity securities		9,898			8,873			7,454			8,626			9,898			8,873
Short-term investments		7,806			2,749			641			8,563			7,806			2,749
Other investments		13,746			8,579			6,580			21,828			13,746			8,579

		160,221			138,188			122,394			179,400			160,221			138,188
Investment expenses		(3,419	)		(2,238	)		(1,854	)		(5,256	)		(3,419	)		(2,238	)

Net investment income earned	$	156,802			135,950			120,540		$	174,144			156,802			135,950

(j) The components of net realized gains (losses) were as follows:


(in thousands)	2006			2005			2004			2007			2006			2005

Held-to-maturity fixed maturity securities
Gains	$	16			106			184		$	—			16			106
Available-for-sale fixed maturity securities
Gains		2,460			1,468			4,922			445			2,460			1,468
Losses		(6,756	)		(4,196	)		(5,313	)		(7,150	)		(6,756	)		(4,196	)
Available-for-sale equity securities
Gains		43,542			21,149			26,851			50,254			43,542			21,149
Losses		(3,783	)		(4,063	)		(2,057	)		(9,359	)		(3,783	)		(4,063	)
Available-for-sale other investments
Gains											847			—			—
Losses											(1,683	)		—			—

Total net realized gains	$	35,479			14,464			24,587		$	33,354			35,479			14,464

Proceeds from the sale of available-for-sale securities and other investments were ~~$422.0~~$289.9 million during 2007, $414.4 million during 2006, and $235.8 million during ~~2005, and $279.3~~2005. There was $4.9 million ~~during 2004.~~in realized losses in 2007 associated with the two other than temporary impairment charges mentioned above. There were no realized losses from ~~investment write-downs~~other than temporary impairment charges in ~~2006. There was~~2006 and there were $1.2 million in realized losses from ~~investment write downs for 2005 and no investment write downs recorded~~other than temporary impairment charges in ~~2004.~~2005.

Note 5 Other Comprehensive Income

The components of comprehensive income, both gross and net of tax, for 2006, 2005, and 2004 are as follows:

2006
(in thousands) Gross Tax Net

Net Income $ 220,510 56,936 163,574

Components of other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains during the period 29,676 10,387 19,289
Previous unrealized gains currently realized in net income (35,479 ) (12,418 ) (23,061 )

Net unrealized gains (5,803 ) (2,031 ) (3,772 )
Defined benefit pension plans:
Adoption of FAS 158 (21,151 ) (7,403 ) (13,748 )

Defined benefit pension plans net (21,151 ) (7,403 ) (13,748 )

Comprehensive income $ 193,556 47,502 146,054

2007

(in thousands) Gross Tax Net
Net Income $ 192,758 46,260 146,498

Components of other comprehensive income:
Unrealized gains on securities:

Unrealized holding gains during the period 2,140 749 1,391
Less: Reclassification adjustment for gains included in net income (33,354 ) (11,674 ) (21,680 )

Net unrealized losses (31,214 ) (10,925 ) (20,289 )
Defined benefit pension plans:

Net actuarial gain 8,003 2,801 5,202
Reversal of amortization items:
Net actuarial loss 696 244 452
Prior service cost 118 41 77

Defined benefit pension plans, net 8,817 3,086 5,731

Comprehensive income $ 170,361 38,421 131,940

2005
(in thousands) Gross Tax Net

Net Income $ 204,386 55,893 148,493

Components of other comprehensive income:
Unrealized holding gains during the period (41,666 ) (14,583 ) (27,083 )
Previous unrealized gains currently realized in net income (14,357 ) (5,025 ) (9,332 )

Net unrealized losses (56,023 ) (19,608 ) (36,415 )

Comprehensive income $ 148,363 36,285 112,078

2006


2004
(in thousands)	Gross			Tax			Net			Gross			Tax			Net

Net Income	$	174,981			46,342			128,639		$	220,510			56,936			163,574

Components of other comprehensive loss:
Components of other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains during the period		33,187			11,615			21,572			29,676			10,387			19,289
Previous unrealized gains currently realized in net income		(23,828	)		(8,340	)		(15,488	)		(35,479	)		(12,418	)		(23,061	)

Net unrealized gains		9,359			3,275			6,084
Net unrealized losses											(5,803	)		(2,031	)		(3,772	)

Comprehensive income	$	184,340			49,617			134,723		$	214,707			54,905			159,802

2005

(in thousands) Gross Tax Net
Net Income $ 204,386 55,893 148,493

Components of other comprehensive income:
Unrealized holding gains during the period (41,666 ) (14,583 ) (27,083 )
Previous unrealized gains currently realized in net income (14,357 ) (5,025 ) (9,332 )

Net unrealized losses (56,023 ) (19,608 ) (36,415 )

Comprehensive income $ 148,363 36,285 112,078

Note 6 Fair Values of Financial Instruments

The following table presents the carrying amounts and estimated fair values of Selective’s financial instruments as of December 31, ~~2006~~2007 and ~~2005:~~2006:


	2006				2005				2007				2006
	Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair
(in thousands)	Amount		Value		Amount		Value		Amount		Value		Amount		Value

Financial assets
Fixed maturity securities:
Held-to-maturity	$	9,822		10,073		13,423		13,881	$	5,783		5,927		9,822		10,073
Available-for-sale		2,937,100		2,937,100		2,645,253		2,645,253		3,073,547		3,073,547		2,937,100		2,937,100
Equity securities		307,376		307,376		327,095		327,095		274,705		274,705		307,376		307,376
Short-term investments		197,019		197,019		185,111		185,111		190,167		190,167		197,019		197,019
Other investments		144,785		144,785		74,663		74,663
Other securities										32,209		32,209		50,905		50,905

Financial liabilities
Notes payable:
8.63% Senior Notes Series A		6,000		6,023		12,000		12,150		—		—		6,000		6,023
8.87% Senior Notes Series B		49,200		49,885		61,500		62,919		36,900		37,990		49,200		49,885
7.25% Senior Notes		49,887		56,010		49,883		53,823		49,891		52,080		49,887		56,010
6.70% Senior Notes		99,337		99,455		99,314		101,943		99,360		90,000		99,337		99,455
7.50% Junior Notes		100,000		102,760		—		—		100,000		85,000		100,000		102,760

Total notes payable		304,424		314,133		222,697		230,835		286,151		265,070		304,424		314,133
Senior convertible notes		57,413		105,727		115,937		204,350		8,740		13,853		57,413		105,727
Convertible subordinated debentures		765		775		775		5,813		176		1,143		765		6,190

Selective’s carrying amounts shown in the table are included in the ~~consolidated balance sheets.~~Consolidated Balance Sheets. The convertible subordinated debentures are included in ~~“other~~“Other liabilities” on the ~~consolidated balance sheets.~~ Consolidated Balance Sheets. Alternative investments are not included in the table above as they are not financial instruments.

See Note ~~2(e)~~2(d) for the methods and assumptions used by Selective in estimating the fair values of its financial instruments.

Note 7 Reinsurance

Selective’s consolidated financial statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to the acceptance of certain insurance risks that other insurance entities have underwritten. Ceded reinsurance involves transferring certain insurance risks (along with the related written and earned premiums) that Selective has underwritten to other insurance companies that agree to share these risks. The primary purpose of ceded reinsurance is to protect Selective from potential losses in excess of the amount it is prepared to accept.

The Insurance Subsidiaries remain liable to policyholders to the extent that any reinsurer becomes unable to meet its contractual obligations. Selective evaluates and monitors the financial condition of its reinsurers under voluntary reinsurance arrangements to minimize its exposure to significant losses from reinsurer insolvencies. On an ongoing basis, Selective reviews amounts outstanding, length of collection period, changes in ~~reinsurance~~reinsurer credit ~~standing~~ratings and other relevant factors to determine collectibility of reinsurance recoverables. The allowance for reinsurance ~~recoverable~~recoverables on ~~unpaid losses~~paid and ~~loss~~

~~expenses was $2.7 million at December 31, 2006 and $3.5 million at December 31, 2005. The allowance for reinsurance recoverable on paid~~unpaid losses and loss expenses was ~~$0.5~~$2.8 million at ~~both~~ December 31, ~~2006~~2007 and $3.2 million at December 31, ~~2005.~~2006.

A trust fund in the amount of $31.6 million at December 31, 2007 and $30.4 million at December 31, 2006 ~~and $30.2 million at December 31, 2005~~ securing a portion of the liabilities ceded to Munich Reinsurance America, Inc. is held for the benefit of Selective. Amounts ceded to Munich Reinsurance America, Inc., which is rated “A+” by A.M. Best, exceeding the available trust fund, represent ~~13.5%~~13% or $36.0 million as of December 31, 2007 and 14% or $32.1 million as of December 31, 2006 ~~and 14% or $34.3 million as of December 31, 2005~~ of Selective’s consolidated prepaid reinsurance premiums and loss recoverable balances not secured by trust funds, letters of credit or funds withheld (collateral). In addition, approximately ~~61%~~55% of Selective’s consolidated prepaid reinsurance premiums and net reinsurance recoverable balances not secured by collateral are ceded to two state or federally sponsored pools. Selective ceded $64.5 million as of December 31, 2007 and $65.6 million as of December 31, 2006 ~~and December 31, 2005~~ to New Jersey Unsatisfied Claims Judgment Fund. Selective also ceded $88.0 million as of December 31, 2007 and $78.9 million as of December 31, 2006 ~~and $90.6 million as of December 31, 2005~~ to the National Flood Insurance ~~Program.~~Program (“NFIP”).

Under Selective’s reinsurance arrangements, which are ~~all~~ prospective in nature, reinsurance premiums ceded are recorded as prepaid reinsurance and amortized over the remaining contract period in proportion to the reinsurance protection provided, or recorded periodically, as per the terms of the contract, in a direct relationship to the gross premium recording. Reinsurance recoveries are recognized as gross losses are incurred.


(in thousands)	2006			2005			2004			2007			2006			2005

Premiums written:
Direct	$	1,660,177			1,572,180			1,467,863		$	1,723,083			1,660,177			1,572,180
Assumed		33,916			44,843			41,041			29,165			33,916			44,843
Ceded		(158,132	)		(157,549	)		(143,756	)		(197,381	)		(158,132	)		(157,549	)

Net	$	1,535,961			1,459,474			1,365,148		$	1,554,867			1,535,961			1,459,474


Premiums earned:
Direct	$	1,619,009			1,523,205			1,419,371		$	1,671,510			1,619,009			1,523,205
Assumed		36,009			43,464			37,328			30,930			36,009			43,464
Ceded		(155,354	)		(148,656	)		(138,309	)		(185,134	)		(155,354	)		(148,656	)

Net	$	1,499,664			1,418,013			1,318,390		$	1,517,306			1,499,664			1,418,013


Losses and loss expenses incurred:
Direct	$	1,021,133			1,001,762			964,243		$	1,083,601			1,021,133			1,001,762
Assumed		28,344			38,689			32,560			22,595			28,344			38,689
Ceded		(89,494	)		(134,721	)		(130,429	)		(106,990	)		(89,494	)		(134,721	)

Net	$	959,983			905,730			866,374		$	999,206			959,983			905,730

Assumed premiums ~~written~~ and ~~earned~~losses decreased in ~~2006~~2007 compared to ~~2005~~2006 primarily due to reduction in mandatory pool assumptions. Ceded written premiums increased in ~~2006~~2007 compared to ~~2005,~~2006, primarily due to increases in flood premiums that are 100% ceded to the ~~National Flood Insurance Program, as well as increases in reinsurance costs. Offsetting the increase in the flood premiums was~~NFIP and the termination of ~~the~~ New Jersey Homeowners Property 75% Quota Share treaty (“Quota Share Treaty”) effective January 1, 2006. In 2005, ceded written premiums were $21.1 million and ceded earned premiums were $20.4 million for the Quota Share Treaty. The Quota Share Treaty ~~termination was effective as of January 1, 2006 and there was no prospective coverage for 2006. Consequently~~that resulted in ~~2006, Selective received~~ a return of premium of $11.3 million in the first quarter of 2006, previously ceded to this treaty and still unearned as of December 31, 2005. ~~The overall effect~~Increase in ceded loss and loss adjustment expenses incurred of $17.5 million is primarily a result of increase in large loss activity, which was offset by decreases in losses ceded to the ~~termination of this treaty was to reduce ceded written premiums by $32.4 million for 2006 compared to 2005 and ceded earned premiums by $20.4 million for 2006 compared to 2005.~~NFIP. The flood ceded premiums and losses are as follows:


(in thousands)	2006			2005			2004			2007			2006			2005

Ceded premiums written	$	(120,003	)		(93,660	)		(77,957	)	$	(143,404	)		(120,003	)		(93,660	)
Ceded premiums earned		(106,214	)		(85,276	)		(70,914	)		(132,041	)		(106,214	)		(85,276	)
Ceded losses and loss expenses incurred		(56,653	)		(108,729	)		(79,880	)		(48,698	)		(56,653	)		(108,729	)

Note 8 Reserves For Losses and Loss Expenses

The table below provides a roll-forward of reserves for losses and loss expenses for beginning and ending reserve balances:


(in thousands)	2006			2005		2004		2007			2006			2005

Gross reserves for losses and loss expenses, at beginning of year	$	2,084,049			1,835,217		1,587,813	$	2,288,770			2,084,049			1,835,217
Less: reinsurance recoverable on unpaid loss and loss expenses, at beginning of year		218,248			218,772		184,611		199,738			218,248			218,772

Net reserves for losses and loss expenses, at beginning of year		1,865,801			1,616,445		1,403,202		2,089,032			1,865,801			1,616,445

Incurred losses and loss expenses for claims occurring in the:
Current year		967,272			900,658		861,474		1,018,050			967,272			900,658
Prior years		(7,289	)		5,072		4,900		(18,844	)		(7,289	)		5,072

Total incurred losses and loss expenses		959,983			905,730		866,374		999,206			959,983			905,730

Paid losses and loss expenses for claims occurring in the:
Current year		268,173			233,969		238,612		304,121			268,173			233,969
Prior years		468,579			422,405		414,519		469,371			468,579			422,405

Total paid losses and loss expenses		736,752			656,374		653,131		773,492			736,752			656,374

Net reserves for losses and loss expenses, at end of year		2,089,032			1,865,801		1,616,445		2,314,746			2,089,032			1,865,801
Add: Reinsurance recoverable on unpaid loss and loss expenses, at end of year		199,738			218,248		218,772		227,801			199,738			218,248

Gross reserves for losses and loss expenses at end of year	$	2,288,770			2,084,049		1,835,217	$	2,542,547			2,288,770			2,084,049

The net loss and loss expense reserves increased by $225.7 million in 2007, $223.2 million in 2006, and $249.4 million in ~~2005,~~2005. The loss reserves include anticipated recoveries for salvage and ~~$213.2~~subrogation claims, which amounted to $52.3 million for 2007, $49.6 million for 2006, and $46.5 million in ~~2004. These~~2005. The changes in the net loss and loss expense reserves were the result of growth in exposures, anticipated loss trends, changes in reinsurance retentions, as well as normal reserve development inherent in the uncertainty in establishing reserves for losses and loss expenses. As additional information is collected in the loss settlement process, reserves are adjusted accordingly. These adjustments are reflected in the consolidated statements of income in the period in which such adjustments are recognized. These changes could have a material impact on the results of operations of future periods when the adjustments are made.

In 2007, Selective experienced favorable loss development in accident years 2002 through 2006 of $61.7 million partially offset by unfavorable loss development in accident years 2001 and prior of $42.9 million, netting to total favorable prior year development of $18.8 million. This development was primarily driven by favorable prior year development in Selective’s commercial automobile, personal automobile, and workers compensation lines of business partially offset by adverse development in its homeowners and personal umbrella lines of business. The ~~Company~~commercial automobile line of business experienced favorable prior year loss and loss expense reserve development of approximately $19 million, which was primarily driven by lower than expected severity in accident years 2004 through 2006. The personal automobile line of business experienced favorable prior year development of approximately $10 million, due to lower than expected loss emergence for accident years 2005 and prior, partially offset by higher severity in accident year 2006. The workers compensation line of business experienced favorable prior year development of approximately $4 million reflecting the implementation of a series of improvement strategies for this line in recent accident years partially offset by an increase in the tail factor related to medical inflation and general development trends. The homeowners line of business experienced adverse prior year loss and loss expense reserve development of approximately $6 million driven by unfavorable trends in claims for groundwater contamination caused by the leakage of certain underground oil storage tanks. The personal umbrella line of business experienced adverse prior year loss and loss expense reserve development of approximately $4 million in 2007, which was due to the impact of several significant losses on this small line. The remaining lines of business, which collectively contributed approximately $4 million of adverse development, do not individually reflect any significant trends related to prior year development.

Selective experienced favorable development in its loss and loss expense reserves totaling $7.3 million in 2006, which was primarily driven by favorable prior year development in ~~our~~its commercial automobile, workers compensation, and personal automobile lines of business partially offset by adverse development in ~~our~~its general liability line of business. The commercial automobile line of business experienced favorable prior year loss and loss expense reserve development of approximately $15 million, which was primarily driven by lower than expected severity in accident years 2004 and 2005. The workers compensation line of business experienced favorable prior year development of approximately $4 million, which was driven, in part, by savings realized from changing medical and pharmacy networks outside ~~the State~~ of New Jersey and re-contracting our medical bill review services. The personal automobile line of business experienced favorable prior year development of approximately $9 million, due to lower than expected frequency. The general liability line of business experienced adverse prior year loss and loss expense reserve development of approximately $15 million in 2006, which was largely driven by ~~our~~Selective’s contractor completed operations business and an increase in reserves for legal expenses. The remaining lines of business, which collectively contributed approximately $6 million of adverse development, do not individually reflect significant prior year development.

~~The Company~~
Selective experienced adverse development in its loss and loss expense reserves totaling $5.1 million in 2005. Through ~~our~~ internal actuarial reviews, weSelective analyzed certain negative trends in the workers compensation line of business and certain positive trends in the commercial automobile line of business. In the fourth quarter of 2005, weSelective had sufficient evidence accumulated to move management’s best estimate of loss reserves for these lines. Accordingly, workers compensation reserves were increased by approximately $42 million to reflect rising medical cost trends that impacted accident years 2001 and prior. At the same time, commercial automobile reserves were decreased by approximately $48 million, primarily due to ongoing favorable severity trends in the 2002 through 2004 accident years. In addition, the general liability reserves adversely developed by approximately $14 million over the course of the year, which was driven mainly by our contractor completed operations business impacting accident years 2001 and prior, but partially offset by positive development in accident years 2002 through 2004. Also in 2005, weSelective increased personal automobile reserves by approximately $10 million, of which $6.0 million was attributable to prior year development due to anthe adverse judicial ruling by the New Jersey Supreme Court ~~which~~in the second quarter of 2005 that eliminated the application of the serious life impact standard to personal automobile bodily injury liability cases under the verbal tort threshold of the New ~~Jersey’s~~Jersey Automobile Insurance Cost Reduction Act (“AICRA”). The reserving action was based on an analysis of ~~our~~ claim files and loss experience pre- and post-AICRA, which resulted in an increase to ~~our~~ New Jersey personal automobile loss projections.
In 2004, the Company experienced adverse development in its loss and loss expense reserves totaling $4.9 million. This development was driven by an increase to our loss reserves in the general liability and workers compensation lines of business of $3.5 million, which was the result of rating agency downgrades of certain reinsurers during 2004, and reductions in expected bond subrogation recoveries in our bond line of business of $2.0 million. In addition, we had net favorable
77

emergence of $0.6 million from our other lines of business, which was primarily the result of increases to our loss reserves for our general liability line of business of approximately $19 million, offset by decreases to our loss reserves for our commercial automobile line of business of approximately $20 million and minor development in other lines. The adverse development in the general liability line of business was mainly due to our contractor completed operations business. Prior to 2002, we had more exposure to faulty workmanship and materials for both the general contractors and subcontractors and inadequate limits on subcontractors. After 2002, we took extensive underwriting actions to limit our exposure. The positive development in the commercial automobile line of business was driven by a reduction in claim frequency and severity. The most significant adverse development came from accident years 1999 and 2000, which was offset by favorable development from accident years 2002 and 2003.

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 Selective’s 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 that arise in environmental cases include federal or state venue, 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 that arise in environmental cases include the interpretation and application of policy exclusions, the determination and calculation of policy limits, the determination of the ultimate amount of a loss, the extent to which a loss is covered by a policy, if at all, the obligation of an insurer to defend a claim and the extent to which a party can prove the existence of coverage. Courts have reached different and sometimes inconsistent conclusions on these legal and coverage issues. Selective does not discount to present value that portion of its loss reserves expected to be paid in future periods.

At December 31, ~~2006,~~2007, Selective’s reserves for environmental claims amounted to ~~$50.7~~$58.7 million on a gross basis (including case reserves of ~~$20.2~~$26.1 million and IBNR reserves of ~~$30.5~~$32.6 million) and ~~$46.5~~$51.4 million on a net basis (including case reserves of ~~$19.7~~$22.6 million and IBNR reserves of ~~$26.7~~$28.8 million). There are a total of ~~2,575~~2,448 environmental claims, including multiple claimants who are associated with the same site or incident. Of these, ~~2,273~~2,177 are asbestos related, of which ~~859 involve three insureds. The total~~1,150 are with seven insureds in the wholesale and/or retail of plumbing, electrical, and other building supplies with related case reserves ~~associated with these three insureds amounted to $0.9 million on a gross and net basis.~~of $3.1 million. During ~~2006, 174~~2007, 210 asbestos claims were closed, which accounted for approximately ~~$0.2~~$0.1 million of the total asbestos paid of ~~$1.0~~$1.2 million. The total case reserves for asbestos related claims amounted to ~~$6.9~~$6.8 million on a gross and net basis. ~~Sixty-six~~About 69 of the total environmental claims involve ~~seven~~six landfill sites. The landfill sites account for case reserves of ~~$8.1~~$11.8 million on a gross and net ~~basis.~~basis, and include reserves for several sites that are currently listed on the National Priorities List. The remaining claims, which account for ~~$5.1~~$7.5 million of case reserves on a gross and ~~$4.7~~$4.0 million on a net basis, involve leaking underground heating oil storage tanks and other latent environmental exposures.

The following table details our exposures to various environmental claims:


	2006				2007
($ in millions)	Gross		Net		Gross		Net

Asbestos	$	14.2		12.9	$	15.0		13.7
Landfill sites		16.3		15.8		21.2		17.7
Other*		20.2		17.8		22.5		20.0

Total	$	50.7		46.5	$	58.7		51.4


*		Consists of leaking underground storage tanks, and other latent environmental exposures.

IBNR reserve estimation is often difficult because, in addition to other factors, there are significant uncertainties associated with critical assumptions in the estimation process such as average clean-up costs, third-party costs, potentially responsible party shares, allocation of damages, insurer litigation costs, insurer coverage defenses and potential changes to state and federal statutes. Moreover, normal ~~historically-based~~historically based actuarial approaches are difficult to apply because relevant history is not available. In addition, while models can be applied, such models can produce significantly different results with small changes in assumptions.

The following table provides a roll-forward of gross and net environmental incurred losses and loss expenses and related reserves thereon:


	2006						2005						2004						2007						2006						2005
(in thousands)	Gross			Net			Gross			Net			Gross			Net			Gross			Net			Gross			Net			Gross			Net

Asbestos
Reserves for losses and loss expenses at the beginning of year	$	13,113			11,813			10,602			9,302			9,245			6,945		$	14,164			12,863			13,113			11,813			10,602			9,302
Incurred losses and loss expenses		2,083			1,327			3,703			3,702			1,815			2,815			1,943			1,845			2,083			1,327			3,703			3,702
Less losses and loss expenses paid		(1,032	)		(277	)		(1,192	)		(1,191	)		(458	)		(458	)		(1,152	)		(1,053	)		(1,032	)		(277	)		(1,192	)		(1,191	)

Reserves for losses and loss expenses at the end of year	$	14,164			12,863			13,113			11,813			10,602			9,302		$	14,955			13,655			14,164			12,863			13,113			11,813


Non-Asbestos
Reserves for losses and loss expenses at the beginning of year	$	32,513			30,013			31,674			29,174			33,019			29,519		$	36,547			33,615			32,513			30,013			31,674			29,174
Incurred losses and loss expenses		7,357			6,534			3,716			2,834			8,345			5,756			10,496			7,128			7,357			6,534			3,716			2,834
Less losses and loss expenses paid		(3,323	)		(2,932	)		(2,877	)		(1,995	)		(9,690	)		(6,101	)		(3,302	)		(3,027	)		(3,323	)		(2,932	)		(2,877	)		(1,995	)

Reserves for losses and loss expenses at the end of year	$	36,547			33,615			32,513			30,013			31,674			29,174		$	43,741			37,716			36,547			33,615			32,513			30,013


Total Environmental Claims
Reserves for losses and loss expenses at the beginning of year	$	45,626			41,826			42,276			38,476			42,264			36,464		$	50,711			46,478			45,626			41,826			42,276			38,476
Incurred losses and loss expenses		9,440			7,861			7,419			6,536			10,160			8,571			12,439			8,973			9,440			7,861			7,419			6,536
Less losses and loss expenses paid		(4,355	)		(3,209	)		(4,069	)		(3,186	)		(10,148	)		(6,559	)		(4,454	)		(4,080	)		(4,355	)		(3,209	)		(4,069	)		(3,186	)

Reserves for losses and loss expenses at the end of year	$	50,711			46,478			45,626			41,826			42,276			38,476		$	58,696			51,371			50,711			46,478			45,626			41,826

Based on its aggregate reserve for net losses and loss expenses at December 31, ~~2006,~~2007, Selective does not expect that liabilities associated with environmental and non-environmental claims will have a materially adverse impact on its future liquidity, financial position and results of operations. However, given the complexity of coverage and other legal issues, and the significant assumptions used in estimating such exposures, actual results could significantly differ from Selective’s current estimates. ~~The increase in paid losses in 2004 for non-asbestos environmental claims includes final payment for two large outstanding claims that were included in Selective’s 2003 case reserves.~~

Note 9 Indebtedness

(a) Senior Convertible Notes

In 2002, Selective 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%. Selective recorded gross proceeds of $116.0 million along with $3.2 million of deferred charges, which ~~are~~were amortized over the life of the Convertible Notes, in connection with debt issuance costs. Approximately $72.0 million of the net proceeds were used to fund an irrevocable trust, which provided for certain payment obligations in respect of Selective’s outstanding debt obligations through 2005. Selective also paid a $40.0 million capital contribution to its Insurance Subsidiaries with the remainder of the net proceeds.

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 Selective on its Common Stock during that quarterly period multiplied by the then applicable conversion rate and (b) $0.08 multiplied by 25.9566.

On October 26, 2004, in accordance with the provisions of the Indenture dated September 24, 2002 covering the Convertible Notes (the “Convertible Notes Indenture”), Selective’s Board of Directors voted to permanently waive the stock price contingency provision, which was satisfied for the quarters ended March 31, 2004 and June 30, 2004, when the price of Selective’s Common Stock maintained a 20% premium to the conversion price of $14.65, or $17.58, for 20 of 30 consecutive trading days ending on the last day of each of these respective quarters.

The Convertible Notes ~~are~~were redeemable by Selective in whole or in part, at any time on or after September 24, 2007, at a price equal to the sum of the issue price, plus the call premium, if any, plus accrued original issue discount and accrued and unpaid cash interest, if any, on such Convertible Notes to the applicable redemption date. The holders of the Convertible Notes may require Selective to purchase all or a portion of their Convertible Notes on September 24, 2009, 2012, 2017, 2022, or 2027 at stated prices plus accrued cash interest, if any, to the purchase date. Selective may pay the purchase price in cash or shares of Selective’s Common Stock or in a combination of cash and shares of Selective’s Common Stock.

~~Between May 3 and 4,~~During 2006, Selective separately negotiated two private transactions under Section 3(a)(9) of the Securities Act of 1933, as amended, through which it exchanged a total of 153,961 of the Convertible Notes, representing approximately $58.5 million of the ~~$115.9 million carrying value outstanding at~~principal balance was redeemed through an induced conversion that resulted in (i) the ~~time~~issuance of ~~conversion for 3,996,304~~3,996,306 shares of ~~Selective Insurance Group, Inc. Common Stock, and cash. Selective incurred~~stock; (ii) additional expense of $2.1 million ~~which represents~~representing the incremental consideration in connection with the ~~transactions,~~transactions; and ~~charged~~(iii) a $1.5 million equity charge representing the related unamortized debt ~~costs~~costs.

During the first ten months of ~~$1.5~~2007, $21.7 million ~~to stockholders’ equity as part~~ of the ~~equity~~principal balance was voluntarily presented for conversion, $11.2 million of which was settled through the issuance ~~transaction. No conversions occurred during 2005. If~~of 765,903 shares, with the remaining $10.5 million net-share settled resulting in the issuance of 235,220 shares.

During the last two months of 2007, the remaining $35.7 million of the Convertible Notes were ~~converted, Selective would be required~~called for redemption, of which $8.7 million settled in January 2008. The Company net-share settled the majority of these notes, which had been voluntarily presented for conversion prior to ~~issue 4.0 million shares of Common Stock.~~

~~Selective has various covenants under the Convertible Notes Indenture dated September 24, 2002, which include, but are not limited to, timely payment of securities, timely filing of SEC~~redemption, and ~~other reports, and compliance with securities laws upon purchase of securities.~~as a result, issued 905,052 shares.

(b) Notes Payable

(1) On September 25, 2006, Selective issued $100 million aggregate principal amount of 7.5% Junior Subordinated Notes due 2066 (“Junior Notes”). The Junior Notes will pay interest, subject to Selective’s right to defer interest payments for up to ~~ten~~10 years, on March 15, June 15, September 15, and December 15 of each year, beginning December 15, 2006, and ending on September 27, 2066. At anytime on or after September 26, 2011, the Junior Notes may be called by Selective at any time, in whole or in part, at their aggregate principal amount, together with any accrued and unpaid interest. The net proceeds of $96.8 million from the issuance ~~will be~~were used for general corporate purposes.

(2) 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~~Selective’s outstanding debt. The remainder of the bond proceeds were used for general corporate purposes.

(3) On November 15, 2004, Selective issued $50 million of 7.25% Senior Notes due 2034. These notes were issued at a discount of $0.1 million, resulting in an effective yield of 7.27% and pay interest on May 15 and November 15 each year. The Parent contributed $25.0 million of the bond proceeds to the Insurance Subsidiaries as capital. The remainder of the proceeds were ~~deployed~~used for general corporate purposes.

(4) On May 4, 2000, Selective entered into a $30.0 million and a $61.5 million note purchase agreement with various private lenders covering the 8.63% and 8.87% Senior Notes, respectively.

As of December 31, 2007, the principal amount of the 8.63% Senior Notes has been paid in full. Selective has paid $24.0 million in principal to date, in addition to accrued interest thereon for the 8.63% Senior Notes. One remaining principal payment of $6.0 million is required on May 4, 2007. The principal amount of these senior notes, which was $6.0 million at December 31, 2006 and $12.0 million at December 31, 2005, accrues interest and is payable semiannually on May 4 and November 4 of each year, until the principal is paid in full.

~~Selective has paid $12.3~~$24.6 million in principal to date, in addition to accrued interest thereon, for the 8.87% Senior Notes. Principal payments of $12.3 million are required annually through May 4, 2010. The unpaid principal amount of these ~~senior notes,~~Senior Notes, which was $36.9 million at December 31, 2007 and $49.2 million at December 31, 2006, ~~and $61.5 million at December 31, 2005,~~ accrues interest and is payable semiannually on May 4 and November 4 of each year, until the principal is paid in full.

The note purchase agreement covering the ~~8.63% and~~ 8.87% Senior Notes 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 ~~2006~~2007 and ~~2005.~~2006. At December 31, ~~2006,~~2007, the amount available for dividends to stockholders under such restrictions was ~~$384.2~~$336.0 million for the 2000 senior notes.

(c) Convertible Subordinated Debentures

The Convertible Subordinated Debentures (the “Debentures”) were issued under an Indenture dated December 29, 1982, (the “1982 Indenture”) in the principal amount of $25.0 million, bearing interest at a rate of 8.75% per annum, which is payable on the unpaid principal semiannually on January 1 and July 1 in each year to holders of record at the close of business on the preceding December 15 and June 15, respectively. The Debentures are convertible into Common Stock at an effective conversion price of $3.54 per share. The principal amount of the Debentures, which was $0.8 million at 2006 and 2005, including any accrued interest thereon, is due on January 1, 2008 and is included in other liabilities on the consolidated balance sheets.

~~The~~ 1982 Indenture requires Selective to retire, through the operation of a mandatory sinking fund, 5% of the original $25.0 million aggregate principal amount of the debentures on or before December 31 of each year from 1993 through 2006. Voluntary conversions have satisfied this obligation in its entirety.

The principal amount of the Debentures, which was $0.2 million at December 31, 2007 and $0.8 million at December 31, 2006, is included in “Other liabilities” on the Consolidated Balance Sheets. On January 2, 2008, the Debentures matured and were settled through the issuance of 45,763 shares of Selective’s Common Stock along with an insignificant cash payment.

(d) Short-Term Debt

~~At December 31, 2005, Selective had revolving lines of credit with State Street Corporation of $20.0 million and Wachovia Bank of $25.0 million which expired during the third quarter of 2006.~~

On August 11, 2006, Selective entered into a syndicated line of credit agreement with Wachovia Bank, National Association, as administrative agent. Under this agreement, Selective has access to a $50.0 million revolving credit facility, which can be increased to $75.0 million with the consent of all lending parties. The agreement will expire on August 11, 2011. Interest rates on borrowings under the credit facility are based on either London Interbank Offered Rate or the higher of the prime rate and adjusted federal funds rate. ~~There have been no borrowings under this credit agreement through~~Selective accessed $6.0 million from the facility during 2007 at the London Interbank Offered Rate. At December 31, 2007, there were no balances outstanding under the line of credit. Prior to this time, Selective had revolving lines of credit with State Street Corporation of $20.0 million and Wachovia Bank, National Association, of $25.0 million which expired during the third quarter of 2006.

Note 10 Stockholders’ Equity

On January 30, 2007, the Board of Directors of Selective Insurance Group, Inc. declared a two-for-one stock split of ~~the Company’s~~Selective’s Common Stock, par value $2.00 per share in the form of a share dividend of one additional share of Common Stock for each outstanding share of Common Stock issued by Selective (the “Share Dividend”). The Share Dividend was paid on February 20, 2007 to shareholders of record as of the close of business on February 13, 2007. The effect of the Share Dividend has been recognized retroactively in ~~all~~2006 and 2005 share and per share data, as well as the capital stock account balances, in the accompanying ~~consolidated financial statements, notes~~Consolidated Financial Statements, Notes to ~~consolidated financial statements~~Consolidated Financial Statements and supplemental financial data.

Effective April 26, 2005, the Board of Directors: (i) approved a new plan to repurchase up to 10.0 million shares of Selective Common Stock through April 26, 2007; and (ii) cancelled the then existing stock repurchase program, under which Selective was authorized to repurchase 4.8 million shares through November 30, 2005. Under the new plan, Selective has repurchased approximately 4.1 million shares at a cost of $110.1 million during 2006 and 670,000 shares at a cost of $16.3 million during 2005. In 2004, under the previous plan, Selective acquired 282,000 shares at a cost of $4.9 million.

Selective maintains a dividend reinvestment plan (the “DRP”). On November 18, 2003, Selective registered with the SEC 2,025,746 shares of Selective’s Common Shares with the SEC for the DRP, of which 25,746 were previously registered unissued shares. At December 31, 2006, 1,705,638 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, ~~2006,~~2007, Selective had an additional ~~13.9~~12.5 million shares reserved for various stock compensation and purchase plans, retirement plans, dividend reinvestment plans and convertible debt offerings. As part of its ongoing capital management strategy, Selective repurchases its own stock. The following table provides information regarding Selective’s purchase of its own Common Stock during the 2005-2007 reporting periods:

~~In conjunction with restricted~~

($ in thousands)
Shares Purchased Cost of Shares Purchased Shares Purchased Cost of Shares Purchased
in connection with in connection with as Part of Publicly as Part of Publicly
Restricted stock Vestings Restricted stock Vestings Announced Plans Announced Plans
Period and Stock Option Exercises and Stock Option Exercises or Programs or Programs
2007 354,456 $ 8,813 5,703,464 $ 143,305
2006 228,914 $ 6,237 4,106,708 $ 110,117
2005 225,690 $ 6,557 670,528 $ 16,327

The maximum number of shares that may yet be purchased under Selective’s authorized stock vestings and option exercises, Selective repurchased 229,000 shares at a cost of $6.2 million in 2006, 226,000 shares at a cost of $6.6 million in 2005, and 206,000 shares at a cost of $3.8 million in 2004.repurchase program is 3.5 million. This program is scheduled to expire on July 26, 2009.

Selective’s ability to declare and pay dividends on its Common Stock is affected by the ability of its subsidiaries to declare and pay dividends to the parent holding company. The dividends from ~~SHRS~~Selective HR are restricted by the operating cash flows of this entity, as well as professional employer organization licensing requirements to maintain a current ratio of at least 1:1. The dividends from the Insurance Subsidiaries are subject to the regulatory limitations of the states in which the Insurance Subsidiaries are domiciled: New Jersey, New York, North Carolina, South Carolina, or Maine. Based on the unaudited 2007 statutory financial statements, the maximum ordinary dividends that can be paid to Selective by the Insurance Subsidiaries in 2008 are:

($ in millions)
Selective Insurance Company of America $ 84.5
Selective Way Insurance Company 25.7
Selective Insurance Company of South Carolina 11.3
Selective Insurance Company of the Southeast 9.0
Selective Insurance Company of New York 7.5
Selective Insurance Company of New England 1.3
Selective Auto Insurance Company of New Jersey 0.1

Total $ 139.4

The statutory capital and surplus of the Insurance Subsidiaries in excess of these ordinary dividend amounts must remain with the Insurance Subsidiaries in the absence of the approval of a request for an extraordinary dividend. In each such ~~jurisdictions,~~jurisdiction, domestic insurers are prohibited from paying “extraordinary dividends” without approval of the insurance commissioner of the respective state. Additionally, New Jersey, North Carolina, and South Carolina require notice of the declaration of any ordinary or extraordinary dividend distribution. During the notice period, the relevant state regulatory authority may disallow all or part of the proposed dividend if it determines that the insurer’s surplus, with regard to policyholders, is not reasonable in relation to the insurer’s outstanding liabilities and adequate for its financial needs.

~~Based on the unaudited 2006 statutory financial statements, the maximum ordinary dividends that can be paid to Selective by the Insurance Subsidiaries in 2007 are:~~

($ in millions)

Selective Insurance Company of America $ 78.1
Selective Way Insurance Company 27.6
Selective Insurance Company of South Carolina 11.8
Selective Insurance Company of the Southeast 9.5
Selective Insurance Company of New York 7.1
Selective Insurance Company of New England 1.2
Selective Auto Insurance Company of New Jersey 6.6

Total $ 141.9

Note 11 Preferred Share Purchase Rights Plan

On February 2, 1999, Selective’s Board of Directors (the “Board”) approved the Amended and Restated Rights Agreement (the “Rights Agreement”). Under the Rights Agreement, the right to purchase one-half of one two-hundredth (or one four-hundredth) of a share of Selective’s Series A Junior Preferred Stock (each, a “Preferred Share”) at an exercise price of $80 (each, a “Right” and collectively, the “Rights”) is attached to each share of Selective’s Common Stock. The Right is exercisable ~~ten (10)~~10 days after an announcement that a person or group has acquired 15% or more of Selective’s outstanding Common Stock (an ~~“Acquiring~~��Acquiring Person”) or ~~ten (10)~~10 business days after a person or group commences or announces its intent to make a tender offer that would result in such person or group becoming an Acquiring Person. If a person or group becomes an Acquiring Person, each Right will entitle the holder, other than an Acquiring Person, to purchase such number of one-half of one two-hundredths of a Preferred Share, as set forth in the Rights certificate (the “Rights Amount”), at a price of $80 per one-half of one two-hundreds of a Preferred Share.

If Selective is acquired in a merger, or 50% or more of its assets are sold (each a “Triggering Transaction”), each holder of a Right, other than an Acquiring Person, will have the right to receive, for an exercise price of $80, such number of shares of Common Stock of the Principal Party (as defined in the Rights Agreement) equal to $80 multiplied by the Rights Amount, divided by 50% of the current per-share market price of the Common Stock of the Principal Party on the consummation date of the Triggering Transaction.

Selective’s Board may, after a person or group becomes ~~and~~an Acquiring Person, but before an Acquiring Person acquires 50% or more of Selective’s outstanding Common Stock, exchange all or part of the outstanding Rights, other than the Rights of an Acquiring Person, for Selective’s Common Stock, at an exchange ratio of one (1) share of Common Stock per Right. The Rights expire at the earliest of: (i) the close of business on February 2, 2009; (ii) the time at which Selective’s Board of Directors redeems all of the outstanding Rights at a redemption price of $0.01 per Right before an announcement that a person or group has become an Acquiring Person; or (iii) the time at which the Rights are exchanged for shares of Selective’s Common Stock as described above.

Note 12 Segment Information

Selective has classified its operations into three segments, the disaggregated results of which are reported to and used by senior management to manage Selective’s operations:

	•		Insurance Operations, which are evaluated based on statutory underwriting results (net premiums earned, incurred losses and loss expenses, policyholders dividends, policy acquisition costs, and other underwriting expenses), and statutory combined ratios;

	•		~~Investments, which are evaluated based on net investment income and net realized gains and losses; and~~

	•		Diversified Insurance Services (federal flood insurance administrative services and human resource administration outsourcing), which, because they are not dependent on insurance underwriting cycles, are evaluated based on several measures including, but not limited to, results of operations in accordance with GAAP, with a focus on return on revenues (net income divided by revenues).

Insurance Operations, which are evaluated based on statutory underwriting results (net premiums earned, incurred losses and loss expenses, policyholders dividends, policy acquisition costs, and other underwriting expenses), and statutory combined ratios;

Investments, which are evaluated based on net investment income and net realized gains and losses; and

Diversified Insurance Services (federal flood insurance administrative services and human resource administration outsourcing products and servicing), which, because they are not dependent on insurance underwriting cycles, are evaluated based on several measures including, but not limited to, results of operations in accordance with GAAP, with a focus on return on revenues (net income divided by revenues).

Selective does not aggregate any of its operating segments. The Insurance Operations and Diversified Insurance Services segments share a common marketing or distribution system and create new opportunities for independent insurance agents to bring value-added services and products to their customers. Selective’s commercial and personal lines property and casualty insurance products, flood insurance, and human resource administration outsourcing products are sold through independent insurance agents.


(in thousands)	2006		2005		2007		2006

Diversified Insurance Services goodwill	$	25,788		25,788	$	25,788		25,788
Insurance Operations goodwill		7,849		7,849		7,849		7,849

Total goodwill	$	33,637		33,637	$	33,637		33,637

Selective’s Insurance Operations and Diversified Insurance Services segments are subject to geographic concentration. Approximately ~~33%~~30% of net premiums written are related to insurance policies written in New Jersey and ~~38%~~29% of ~~SHRS’s~~

Selective HR’s co-employer service fees are related to business in Florida. ~~Substantially all of Selective’s~~For additional information regarding the states that the Company’s remaining revenues ~~come~~are generated from, see the states of Connecticut, Delaware, Georgia, Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Missouri, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Virginia, and Wisconsin. Consequently, changes to economic or regulatory conditionssection entitled “Regional Geographic Market Focus” in ~~these states could adversely affect Selective.~~Item 1. “Business,” from this Form 10-K.

Selective and its subsidiaries also provide services to each other in the normal course of business. These transactions totaled $17.8 million in 2007, $19.3 million in 2006, and $19.4 million in ~~2005, and $28.5 million in 2004.~~2005. These transactions were eliminated in all consolidated statements. In computing the results of each segment, Selective does not make adjustments for interest expense, net general corporate expenses, or federal income taxes. Selective does not maintain separate investment portfolios for the segments and therefore, does not allocate assets to the segments.

The following summaries present revenues from continuing operations (net investment income and net realized gains on investments in the case of the Investments segment) and pre-tax income from continuing operations for the individual segments:

Revenue by segment


(in thousands)	2006		2005		2004		2007		2006		2005

Insurance Operations:
Commercial automobile net premiums earned	$	319,921		320,080		303,645	$	315,259		319,921		320,080
Workers compensation net premiums earned		314,174		293,268		263,473		325,636		314,174		293,268
General liability net premiums earned		402,745		363,513		309,288		410,024		402,745		363,513
Commercial property net premiums earned		182,351		168,282		152,579		190,681		182,351		168,282
Business owners’ policy net premiums earned		48,500		46,708		49,570		52,677		48,500		46,708
Bonds net premiums earned		17,466		16,026		13,035		19,036		17,466		16,026
Other net premiums earned		719		789		901		689		719		789

Total commercial lines net premiums earned		1,285,876		1,208,666		1,092,491		1,314,002		1,285,876		1,208,666

Personal automobile net premiums earned		146,737		164,805		185,375		132,944		146,737		164,805
Homeowners net premiums earned		59,334		37,706		34,370		62,280		59,334		37,706
Other net premiums earned		7,717		6,836		6,154		8,080		7,717		6,836

Total personal lines net premiums earned		213,788		209,347		225,899		203,304		213,788		209,347

Miscellaneous income		5,390		3,768		3,515		5,795		5,390		3,768

Total insurance operations revenues		1,505,054		1,421,781		1,321,905		1,523,101		1,505,054		1,421,781

Investments:
Net investment income		156,802		135,950		120,540		174,144		156,802		135,950
Net realized gains on investments		35,479		14,464		24,587		33,354		35,479		14,464

Total investment revenues		192,281		150,414		145,127		207,498		192,281		150,414

Diversified Insurance Services:
Human resource administration outsourcing		63,322		60,227		53,710		59,109		63,322		60,227
Flood insurance		41,522		34,320		29,169		47,842		41,522		34,320
Other		5,682		4,164		3,605		8,615		5,682		4,164

Total diversified insurance services revenues from continuing operations		110,526		98,711		86,484		115,566		110,526		98,711

Total all segments		1,807,861		1,670,906		1,553,516		1,846,165		1,807, 861		1,670,906

Other income		6		106		108		63		6		106

Total revenues from continuing operations	$	1,807,867		1,671,012		1,553,624	$	1,846,228		1,807,867		1,671,012

Income or (loss) from continuing operations before federal income tax by segment:


(in thousands)	2006			2005			2004			2007			2006			2005

Insurance Operations:
Commercial lines underwriting income	$	63,482			75,671			42,836		$	42,105			63,482			75,671
Personal lines underwriting loss		(5,504	)		(5,943	)		(2,068	)		(26,148	)		(5,504	)		(5,943	)

Underwriting income, before federal income tax		57,978			69,728			40,768			15,957			57,978			69,728
GAAP combined ratio		96.1	%		95.1			96.9			98.9	%		96.1			95.1
Statutory combined ratio		95.4	%		94.6			95.9			97.5	%		95.4			94.6

Investments:
Net investment income		156,802			135,950			120,540			174,144			156,802			135,950
Net realized gains on investments		35,479			14,464			24,587			33,354			35,479			14,464

Total investment income, before federal income tax		192,281			150,414			145,127			207,498			192,281			150,414


Diversified Insurance Services:
Income from continuing operations, before federal income tax		17,808			14,793			11,921			18,623			17,808			14,793


Total all segments		268,067			234,935			197,816			242,078			268,067			234,935
Interest expense		(21,411	)		(17,582	)		(15,466	)		(23,795	)		(21,411	)		(17,582	)
General corporate expenses		(26,146	)		(14,569	)		(9,618	)		(25,525	)		(26,146	)		(14,569	)


Income from continuing operations, before federal income tax	$	220,510			202,784			172,732		$	192,758			220,510			202,784

Note 13 Earnings per Share

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:

2006 Income Shares Per Share
(in thousands, except per share amounts) (Numerator) (Denominator) Amount

Basic EPS:
Net income available to common stockholders $ 163,574 54,986 2.98

Effect of dilutive securities:
Restricted stock — 1,264
8.75% convertible subordinated debentures 43 216
4.25% senior convertible notes 2,170 5,334
Stock options — 566
Deferred shares — 176

Diluted EPS:
Income available to common stockholders and assumed conversions $ 165,787 62,542 2.65

2007


2005	Income		Shares		Per Share
							Income		Shares		Per Share
(in thousands, except per share amounts)	(Numerator)		(Denominator)		Amount		(Numerator)		(Denominator)		Amount

Basic EPS:
Net income from continuing operations	$	147,452		54,342	$	2.72
Net income from discontinued operations		546		54,342		0.01
Cumulative effect of change in accounting principle		495		54,342		0.01

Net income available to common stockholders	$	148,493		54,342	$	2.74	$	146,498		52,382		2.80


Effect of dilutive securities:
Restricted stock		—		1,318				—		1,158
8.75% convertible subordinated debentures		45		224				25		128
4.25% senior convertible notes		3,203		7,916				1,268		2,931
Stock options		—		726				—		385
Deferred shares		—		182				—		181


Diluted EPS:
Income from continuing operations	$	150,700		64,708	$	2.33
Net income from discontinued operations		546		64,708		0.01
Cumulative effect of change in accounting principle		495		64,708		0.01

Income available to common stockholders and assumed conversions	$	151,741		64,708	$	2.35	$	147,791		57,165		2.59

During the fourth quarter of 2007, the remaining $46.6 million principal balance of Selective’s Senior Convertible Notes that were scheduled to mature on September 24, 2032 were either voluntarily converted or mandatorily redeemed, with the final $8.7 million settled in January 2008. These activities resulted in the issuance of approximately 1.2 million shares as well as the elimination of approximately 3.2 million common stock equivalents. The full impact on the weighted average shares for these transactions was not realized during 2007, because the transactions occurred during the fourth quarter of the year. For additional information regarding these transactions, see Note 9, “Indebtedness.”

2006

Income Shares Per Share
(in thousands, except per share amounts) (Numerator) (Denominator) Amount
Basic EPS:
Net income available to common stockholders $ 163,574 54,986 2.98

Effect of dilutive securities:
Restricted stock — 1,264
8.75% convertible subordinated debentures 43 216
4.25% senior convertible notes 2,170 5,334
Stock options — 566
Deferred shares — 176

Diluted EPS:
Income available to common stockholders and assumed conversions $ 165,787 62,542 2.65

2004 Income Shares Per Share
(in thousands, except per share amounts) (Numerator) (Denominator) Amount

Basic EPS:
Net income from continuing operations $ 127,177 53,462 $ 2.38
Net income from discontinued operations 1,462 53,462 0.03

Net income available to common stockholders $ 128,639 53,462 $ 2.41

Effect of dilutive securities:
Restricted stock — 1,988
8.75% convertible subordinated debentures 60 300
4.25% senior convertible notes 3,203 7,916
Stock options — 870
Deferred shares — 220

Diluted EPS:
Income from continuing operations $ 130,440 64,756 $ 2.01
Net income from discontinued operations 1,462 64,756 0.03

Income available to common stockholders and assumed conversions $ 131,902 64,756 $ 2.04

2005

Income Shares Per Share
(in thousands, except per share amounts) (Numerator) (Denominator) Amount
Basic EPS:
Net income from continuing operations $ 147,452 54,342 $ 2.72
Net income from discontinued operations 546 54,342 0.01
Cumulative effect of change in accounting principle 495 54,342 0.01

Net income available to common stockholders $ 148,493 54,342 $ 2.74

Effect of dilutive securities:
Restricted stock — 1,318
8.75% convertible subordinated debentures 45 224
4.25% senior convertible notes 3,203 7,916
Stock options — 726
Deferred shares — 182

Diluted EPS:
Income from continuing operations $ 150,700 64,708 $ 2.33
Net income from discontinued operations 546 64,708 0.01
Cumulative effect of change in accounting principle 495 64,708 0.01

Income available to common stockholders and assumed conversions $ 151,741 64,708 $ 2.35

Note 14 Federal Income Tax

(a) A reconciliation of federal income tax on pre-tax earnings at the corporate rate to the effective tax rate is as follows:

(in thousands) 2006 2005 2004

Tax at statutory rate of 35% $ 77,178 70,974 60,456
Tax-advantaged interest (17,911 ) (14,334 ) (10,178 )
Dividends received deduction (2,019 ) (2,152 ) (2,150 )
Other (312 ) 844 (2,573 )

Federal income tax expense $ 56,936 55,332 45,555

The “other” benefit in 2004 was primarily due to a reduction to the Company’s current federal income taxes payable as a result of a favorable resolution of an IRS appeals issue. The IRS had attempted to disallow, on a consolidated basis, a deduction for interest expense incurred by the Parent while its Insurance Subsidiaries held municipal bonds. A notice that the issue was resolved in the Company’s favor was received on September 30, 2004, at which time the benefit was recognized.

(in thousands) 2007 2006 2005
Tax at statutory rate of 35% $ 67,465 77,178 70,974
Tax-advantaged interest (19,246 ) (17,911 ) (14,334 )
Dividends received deduction (1,213 ) (2,019 ) (2,152 )
Other (746 ) (312 ) 844

Federal income tax expense $ 46,260 56,936 55,332

(b) The tax effects of the significant temporary differences that give rise to deferred tax assets and liabilities are as follows:


(in thousands)	2006		2005			2007		2006

Deferred tax assets:
Net loss reserve discounting	$	93,466		87,520		$	96,697		93,466
Net unearned premiums		50,553		48,014			53,158		50,553
Employee Benefits		10,695		1,275			8,736		10,695
Long-term incentive compensation plans		10,575		6,027			11,518		10,575
Other		5,052		5,313			7,020		5,052

Total deferred tax assets		170,341		148,149			177,129		170,341


Deferred tax liabilities:
Deferred policy acquisition costs		76,333		71,688			79,249		76,333
Unrealized gains on available-for-sale securities		61,572		63,603			50,648		61,572
Accelerated depreciation		8,434		8,223
Accelerated depreciation and amortization							14,510		8,434
Other		8,557		10,298			10,347		8,557

Total deferred tax liabilities		154,896		153,812			154,754		154,896

Deferred federal income tax asset (liability)	$	15,445		(5,663	)
Net deferred federal income tax asset						$	22,375		15,445

Based on ~~our~~Selective’s federal tax loss carryback availability, ~~and~~ expected levels of pre-tax financial statement income and federal taxable income, ~~we believe that~~Selective believes it is more likely than not that the existing deductible temporary differences will reverse during periods in which ~~we generate~~Selective generates net federal taxable income or ~~have~~has adequate federal carryback availability. As a result, Selective has no valuation allowance recognized for federal deferred tax assets.

Stockholders’ equity reflects tax benefits related to compensation expense deductions for stock options exercised ~~in the amounts~~ of $17.0 million at December 31, 2007, $13.5 million at December 31, 2006, and $9.6 million at December 31, ~~2005, and $5.9 million at December 31, 2004.~~2005.

Note 15 Discontinued Operations

In December 2005, Selective divested itself of its 100% ownership interest in CHN Solutions (Alta Services, LLC and Consumer Health Network Plus, LLC), which had historically been reported as part of the “Managed Care” component of the Diversified Insurance Services segment. Selective sold its interest in CHN Solutions for proceeds of $16.4 million, which produced an after tax loss of $2.6 million. This loss, which is net of a tax benefit of $1.4 million, is included in discontinued operations on the ~~consolidated statements~~Consolidated Statements of ~~income.~~Income. Also included in discontinued operations on the ~~consolidated statements~~Consolidated Statements of ~~income~~Income are after tax profits of $3.2 million in 2005 ~~and $1.5 million in 2004~~ from the operations of CHN Solutions prior to divestiture. Taxes on these operating profits amounted to $1.7 million in ~~2005 and $0.8 million in 2004.~~2005.

As part of the divestiture, Selective’s Insurance Subsidiaries entered into an agreement with the buyer, wherein Selective’s Insurance Subsidiaries have agreed to continue to use the managed care services of CHN Solutions in processing claims for its workers compensation and automobile policies issued by the Insurance Subsidiaries in the State of New Jersey. This agreement is effective until December 2010 and can be terminated by either party for the following reasons: (i) breach of contract; (ii) insolvency; or (iii) a change in control. In addition, Selective’s Insurance Subsidiaries can terminate the agreement if the buyer fails to meet the performance standards as outlined in the agreement.

Selective has reclassified prior period amounts on the consolidated statements of income to present the operating results of CHN Solutions as a discontinued operation.

Operating results, as well as the loss on disposition, from discontinued operations are as follows:

(in thousands) 2005 2004

Net revenue $ 25,791 17,912
Pre-tax profit 4,893 2,249
After-tax profit 3,180 1,462
Loss on disposition, net of tax (2,634 ) —

~~Intercompany transactions related to the discontinued operations are as follows:~~


(in thousands)	2005		2004		2005

Net revenue	$	—		10,649	$	25,791
Pre-tax profit		—		725		4,893
After-tax profit		—		471		3,180
Loss on disposition, net of tax						(2,634	)

Note 16 Retirement Plans

(a) Retirement Plan for Nonemployee Directors

Selective terminated, effective December 31, 1997, a nonqualified defined benefit retirement income plan for ~~nonemployee~~non-employee 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 stockholders approved the conversion of the units issued under the termination plan into shares of Selective Common Stock. All of the shares issued under this conversion have been deferred by the participants for receipt upon retirement, or at each Director’s election, over a period of no more than five years after such retirement. These deferred shares, which are currently being held in accounts on behalf of each Director, are credited with cash dividends along with interest on those dividends. The adoption of FAS 123R on January 1, 2005 resulted in a reclassification of $1.3 million to “Additional ~~Paid-in Capital”~~paid-in capital” on the ~~consolidated balance sheet~~Consolidated Balance Sheet for these deferred shares. ~~At December 31, 2006 and December 31, 2005, Additional Paid-in Capital~~The amount reflected in “Additional paid-in capital” for these deferred shares was $1.0 million at December 31, 2007 and $1.1 ~~million.~~million at December 31, 2006.

(b) Retirement Savings Plan

Selective offers a voluntary defined contribution 401(k) retirement savings plan to employees who meet eligibility requirements. Participants, other than highly compensated employees as defined by the IRS, can contribute up to 50% of their defined compensation to the Retirement Savings Plan. Highly compensated employees are limited to 8% of their defined compensation. Contributions by participants are matched 65% by ~~the Company~~Selective up to a maximum of 7% of defined compensation. Effective January 1, 2006, Selective Insurance Retirement Savings Plan (“Retirement Savings 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 for the Retirement Income Plan for Selective Insurance Company of America (“Retirement Income Plan”). For those employees, following one year of service, ~~the Company~~Selective matches, dollar for dollar, up to 2% of the employee’s base pay contributions. In addition, ~~the Company~~Selective makes non-elective contributions to the Retirement Savings Plan equal to 2% of the employee’s base pay effective with the first pay following one year of service.

The Retirement Savings Plan allows employees to make voluntary contributions to a number of diversified investment options, as well as Selective’s Common Stock, on a before and/or after-tax basis. Shares of Selective’s Common Stock issued under this plan were 29,214 during 2007, 21,472 during 2006, and 29,572 during ~~2005, and 23,460 during 2004.~~2005. The number of shares of Selective’s Common Stock available to be purchased under the Retirement Savings Plan was ~~1,546,168~~1,516,954 at December 31, ~~2006.~~2007.

Two additional defined contribution plans are maintained by ~~SHRS,~~Selective HR, which does not participate in Selective’s defined contribution plan. The maximum allowable employee contribution to these plans is 75% of defined compensation. The contributions of highly compensated employees may be further restricted in accordance with the plan terms.

In all plans, employees age 50 or older who are contributing the maximum may also make additional contributions not to exceed the additional amount permitted by the IRS.

Employer contributions for all the plans amounted to $5.4 million in 2007, $4.4 million in 2006, and $4.0 million in ~~2005, and $3.4 million in 2004.~~2005.

(c) Deferred Compensation Plan

Selective offers a ~~nonqualifed~~nonqualified deferred compensation plan (“Deferred Compensation Plan”) to a group of management or highly compensated employees (the “Participants”) as a method of recognizing and retaining such employees. The Deferred Compensation 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. A Participant in the Deferred Compensation Plan may elect to defer compensation or awards to be received from Selective, including up to: (i) 50% of annual base salary; (ii) 100% of incentive compensation; and/or (iii) a percentage of other compensation as otherwise designated by the Administrator of the Deferred Compensation Plan.

In addition to the deferrals elected by the Participants, Selective may choose at any time to make discretionary contributions on a consistent basis to the deferral accounts of all Participants in its sole discretion. No discretionary contributions were made in 2007, 2006, ~~2005,~~ or ~~2004.~~2005. Selective 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 Selective’s Retirement Savings Plan due to limitations under the Internal Revenue Code or the Retirement Savings Plan.

~~The Company~~Selective contributed $0.1 million in 2007 and 2006 and $0.4 million in 2005 ~~and $0.3 million in 2004~~ to the Deferred Compensation Plan.

(d) Retirement Income and Postretirement Plans

Selective’s Retirement Income Plan is a noncontributory defined benefit retirement income plan covering all employees who meet eligibility requirements. Selective’s funding policy provides that payments to the pension trust shall be equal to the minimum funding requirements of the Employee Retirement Income Security Act, plus additional amounts that the Board of Directors of Selective Insurance Company of America, the plan sponsor, may approve from time to time. For entrants into the Retirement Income Plan on or after July 1, 2002, the monthly retirement benefits beginning at normal retirement were decreased to 1.2% from 2.0% of the average monthly compensation as defined. Also, for all Retirement Income Plan participants, early retirement eligibility begins at age 55 with 10 years of service or when the sum of a participant’s age plus years of service equals at least 70.

Effective January 1, 2006, the Retirement Income Plan was amended to eliminate eligibility for plan participation by employees hired on or after January 1, 2006. If otherwise qualified, these employees will, however, be eligible for enhanced matching and non-elective ~~Company~~Selective contributions under the Retirement Savings Plan as discussed above.

Selective also provides life insurance benefits (postretirement benefits) for retired employees. Substantially all of Selective’s employees may become eligible for these benefits if they reach retirement age while working for Selective and meet a minimum of 10 years of eligibility service. Those individuals who retired prior to January 1, 1991 receive life insurance coverage which decreases over ten years to a current ultimate value of ~~$5,000~~up to approximately $70,000 per retiree. Those individuals ~~retiring~~who retired on or after January 1, 1991, through December 31, 2001, 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 individuals retiring on or after January 1, 2002, through December 31, 2004, 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. Those individuals retiring on or after January 1, 2005, through December 31, 2007, receive life insurance coverage in an amount equal to 50% of their active life insurance coverage in effect at the end of their active career to a maximum benefit of $35,000. Those individuals retiring on or after January 1, 2008 that have attained age 60 by December 31, 2007 will receive life insurance coverage in an amount equal to 50% of their active life insurance coverage in effect at the end of their active career to a maximum benefit of $35,000. All other individuals retiring on or after January 1, 2008 will receive life insurance coverage in an amount equal to $10,000. The estimated cost of these benefits is accrued over the working lives of those employees expected to qualify for such benefits.

~~The incremental effect of applying FAS 158 on individual line items in the Consolidated Balance Sheet is presented in the following table:~~

~~Incremental Effect of Applying FASB Statement No. 158~~
~~On Individual Line Items in the Consolidated Balance Sheet~~
~~December 31, 2006~~
~~(in thousands)~~

Before After
Application of Application of
Statement 158 Adjustments Statement 158
Deferred federal income tax $ 8,042 7,403 15,445
Other assets 58,693 (9,242 ) 49,451
Total assets 4,769,544 (1,839 ) 4,767,705
Accrued salaries and benefits 91,821 2,739 94,560
Other liabilities 89,787 9,170 98,957
Total liabilities 3,678,569 11,909 3,690,478
Accumulated other comprehensive income 114,349 (13,748 ) 100,601
Total stockholders’ equity $ 1,090,975 (13,748 ) 1,077,227

Retirement Income Plan Postretirement Plan
(in thousands) 2007 2006 2007 2006
Change in Benefit Obligation:

Benefit obligation, beginning of year $ 149,943 148,137 8,610 7,554
Service cost 7,454 7,345 317 339
Interest cost 8,963 8,061 495 472
Actuarial (gains) losses (11,265 ) (10,310 ) (275 ) 488
Benefits paid (3,743 ) (3,290 ) (261 ) (243 )
Special termination benefits 900 — 100 —

Benefit obligation, end of year $ 152,252 149,943 8,986 8,610

Change in Fair Value of Assets:

Fair value of assets, beginning of year $ 135,911 121,785 — —
Actual return on plan assets (net of expenses) 7,555 13,194 — —
Contributions by the employer to funded plans 8,200 4,150 — —
Contributions by the employer to unfunded plans 72 72 — —
Benefits paid (3,743 ) (3,290 ) — —

Fair value of assets, end of year $ 147,995 135,911 — —

Funded status
$ (4,257 ) (14,032 ) (8,986 ) (8,610 )

Amounts Recognized in the Consolidated Balance Sheet:

Liabilities (4,257 ) (14,032 ) (8,986 ) (8,610 )

Net pension liability, end of year $ (4,257 ) (14,032 ) (8,986 ) (8,610 )

Amounts Recognized in the Accumulated Other Comprehensive Income:

Prior service cost (credit) $ 776 926 (235 ) (267 )
Net actuarial loss 11,543 19,967 250 525

Total $ 12,319 20,893 15 258

Other Information as of December 31:

Accumulated benefit obligation $ 128,524 125,005 — —

Information for Pension Plans with an Accumulated Benefit Obligation in Excess of Plan Assets as of December 31:

Projected benefit obligation $ 3,957 3,836 — —
Accumulated benefit obligation 2,771 2,658 — —

Weighted-Average Liability Assumptions as of December 31:

Discount rate 6.50 % 5.90 6.50 5.90
Rate of compensation increase 4.00 % 4.00 4.00 4.00

Retirement Income Plan Postretirement Plan
(in thousands) 2007 2006 2005 2007 2006 2005
Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income:

Net Periodic Benefit Cost:

Service cost $ 7,454 7,345 6,911 317 339 384
Interest cost 8,963 8,061 7,502 495 472 392
Expected return on plan assets (11,092 ) (9,753 ) (9,286 ) — — —
Amortization of unrecognized prior service cost (credit) 150 150 150 (32 ) (32 ) (32 )
Amortization of unrecognized actuarial loss 696 1,682 1,198 — 25 —
Special termination benefits 900 — — 100 — —

Net periodic cost $ 7,071 7,485 6,475 880 804 744

Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income:

Net actuarial gain (7,728 ) — — (275 ) — —
Reversal of amortization of net actuarial loss (696 ) — — — — —
Reversal of amortization of prior service (cost)/credit (150 ) — — 32 — —

Total recognized in other comprehensive income (8,574 ) — — (243 ) — —

Total recognized in net periodic benefit cost and other comprehensive income $ (1,503 ) 7,485 6,475 637 804 744

In the second quarter of 2007, Selective restructured its personal lines department. As part of this restructuring, an early retirement enhancement option was offered to eligible employees. The ~~effects~~present value of ~~adopting FAS 158 are applied prospectively, while~~the enhancement to be made in conjunction with this early retirement option is equal to $0.9 million for the Retirement Income Plan and $0.1 million for the Postretirement Plan.

The amortization of prior ~~year information remains unchanged.~~

Retirement Income Plan Postretirement Plan
(in thousands) 2006 2005 2006 2005

Change in Benefit Obligation:

Benefit obligation, beginning of year $ 148,137 130,335 7,554 6,715
Service cost 7,345 6,911 339 384
Interest cost 8,061 7,502 472 392
Actuarial (gains) losses (10,310 ) 6,418 488 270
Benefits paid (3,290 ) (3,029 ) (243 ) (207 )

Benefit obligation, end of year $ 149,943 148,137 8,610 7,554

Change in Fair Value of Assets:

Fair value of assets, beginning of year $ 121,785 110,083 — —
Actual return on plan assets (net of expenses) 13,194 6,659 — —
Contributions by the employer to funded plans 4,150 8,000 — —
Contributions by the employer to unfunded plans 72 72 — —
Benefits paid (3,290 ) (3,029 ) — —

Fair value of assets, end of year $ 135,911 121,785 — —

Funded status
$ (14,032 ) (26,352 ) (8,610 ) (7,554 )

Amounts Recognized in the Consolidated Balance Sheet:

Assets $ — 12,132 — —
Liabilities (14,032 ) (2,008 ) (8,610 ) (7,791 )

Net pension liability, end of year $ (14,032 ) 10,124 (8,610 ) (7,791 )

Amounts Recognized in the Accumulated Other Comprehensive Income:

Prior service cost (credit) $ 926 — (267 ) —
Net actuarial loss 19,967 — 525 —

Total $ 20,893 — 258 —

Other Information as of December 31:

Accumulated benefit obligation $ 125,005 122,286 — —

Information for Pension Plans with an Accumulated Benefit Obligation in Excess of Plan Assets as of December 31:

Projected benefit obligation $ 3,836 3,502 — —
Accumulated benefit obligation 2,658 2,348 — —

Weighted-Average Liability Assumptions as of December 31:

Discount rate 5.90 % 5.50 5.90 5.50
Rate of compensation increase 4.00 % 4.00 4.00 4.00

Retirement Income Plan Postretirement Plan
(in thousands) 2006 2005 2004 2006 2005 2004

Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income:

Net Periodic Benefit Cost:

Service cost $ 7,345 6,911 6,235 339 384 347
Interest cost 8,061 7,502 7,259 472 392 369
Expected return on plan assets (9,753 ) (9,286 ) (6,687 ) — — —
Amortization of unrecognized prior service cost 150 150 212 (32 ) (32 ) (32 )
Amortization of unrecognized net (gain) loss 1,682 1,198 1,164 25 — —

Net periodic cost $ 7,485 6,475 8,183 804 744 684

Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income:

Adoption of FAS 158 20,893 — — 258 — —

Total recognized in other comprehensive income 20,893 — — 258 — —

Total recognized in net periodic benefit cost and other comprehensive income $ 28,378 6,475 8,183 1,062 744 684

service cost related to the Retirement Income Plan and Postretirement Plan is determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the Plans.

The estimated net actuarial loss and prior service cost ~~and transition obligation~~ for the ~~defined benefit pension plan~~Retirement Income Plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost during the ~~2007~~2008 fiscal year are ~~$0.5 million, $0.2~~$0.1 million and ~~$0,~~$0.2 million respectively. The estimated net actuarial loss and prior service cost ~~and transition obligation~~ for the ~~postretirement life insurance plan~~Postretirement Plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost during the ~~2007~~2008 fiscal year are $0 ~~$(32,000),~~ and ~~$0,~~$(32,000) respectively.


	Retirement Income Plan							Postretirement Plan						Retirement Income Plan							Postretirement Plan
(in thousands)	2006			2005		2004		2006		2005		2004		2007			2006		2005		2007		2006		2005

Weighted-Average Expense Assumptions for the years ended December 31:
Discount rate		5.50	%		5.75		6.25		5.50		5.75		6.25		5.90	%		5.50		5.75		5.90		5.50		5.75
Expected return on plan assets		8.00	%		8.00		8.25		—		—		—		8.00	%		8.00		8.00		—		—		—
Rate of compensation increase		4.00	%		4.00		5.00		4.00		4.00		5.00		4.00	%		4.00		4.00		4.00		4.00		4.00


	Retirement		Postretirement		Retirement		Postretirement
(in thousands)	Income Plan		Plan		Income Plan		Plan

Benefits Expected to be Paid in Future
Fiscal Years:
2007		3,766		275
2008		4,149		287		4,197		288
2009		4,611		300		4,670		299
2010		5,078		316		5,163		310
2011		5,600		332		5,711		323
2012-2016		40,054		1,981
2012						6,532		336
2013-2017						45,398		1,937

The funded status was recognized in the consolidated balance sheet for ~~2006, while the 2005 consolidated balance sheet reflects the amounts required to be recognized prior to the adoption of FAS 158.~~2007 and 2006.

Selective’s measurement date was December 31, ~~2006~~2007 and its expected return on plan assets was 8.0%, which was based primarily on the Retirement Income Plan’s long-term historical returns. Selective’s expected return is supported by its actual ~~7.8% annualized 10-year return and 9.2%~~9.0% 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 $4.2 million to the Retirement Income Plan in ~~2007~~2008 and has kept its expected return on plan assets at 8.0% after examining recent market conditions and trends.

Selective’s ~~2006~~2007 discount rate used to value the liability is ~~5.9%~~6.5% for both the Retirement Income Plan and ~~postretirement plan.~~Postretirement Plan. Selective determined the most appropriate discount rate in comparison to our expected pay-out patterns of the plans’ obligations.

Assets of the Retirement Income Plan shall be invested to ensure that principal is preserved and enhanced over time. In addition, the Retirement Income Plan is expected to perform above average relative to comparable funds without assuming undue risk, and to add value through active

management. Selective’s return objective is to meet or exceed the returns of the plan’s policy index, which is the return the plan would have earned if the assets were invested according to the target asset class weightings and earned index returns. The plan’s allocated target and ranges by investment categories are as follows:


Investment Category	Target			Range
Equity		44	%		40-50	%
Alternative investments		27	%		22-32	%
Fixed Income		29	%		~~25-35~~21-37	%

Additionally, the portfolio may not contain more than 5% of the portfolio value invested in any one security or issuer, regardless of the number of differing issues, except for U.S. Treasury and agency obligations, as well as sovereign debt issues rated A through ~~AAA~~AAA. The use of leverage is prohibited and the fund managers are prohibited from investing in certain types of securities.

The weighted average asset allocation by percentage of the Retirement Income Plan at December 31 is as follows:


	2006			2005
						2007			2006
Equity securities and funds		49	%		45		40	%		49
Fixed income securities and funds		27			25		28			27
Alternative investments		21			17		30			21
Cash and short-term investments		3			13		2			3

Total		100	%		100		100	%		100

The Retirement Income Plan had no investments in the Common Stock of the Company at December 31, ~~2006~~2007 and ~~2005.~~2006.

Note 17 ~~Incentive Compensation Plans~~

Selective has incentive compensation plans in which employees are eligible to participate based on corporate and individual performance goals. The total compensation costs charged to expense in connection with the plans were $26.5 million in 2006, $21.8 million in 2005, and $16.7 million in 2004.

~~Note 18~~ Share-Based Payments

The following is a brief description of each of Selective’s share-based compensation plans:

2005 Omnibus Stock Plan

The Selective Insurance Group, Inc. 2005 Omnibus Stock Plan (“Stock Plan”) was adopted and approved by the Board of Directors effective as of April 1, 2005, and approved by stockholders’ on April 27, 2005. With the Stock Plan’s approval, no further grants are available under the: (i) Selective Insurance Stock Option Plan III, as amended (“Stock Option Plan III”); (ii) Selective Insurance Group, Inc. Stock Option Plan for Directors, as amended (“Stock Option Plan for Directors”); or (iii) Selective Insurance Group, Inc. Stock Compensation Plan for Nonemployee Directors, as amended (“Stock Compensation Plan for Nonemployee Directors”), but awards outstanding under these plans and the Selective Insurance Group, Inc. Stock Option Plan II, as amended (“Stock Option Plan II”), under which future grants ceased being available on May 22, 2002, shall continue in effect according to the terms of those plans and any applicable award agreements.

Under the Stock Plan, the Board of Directors’ Salary and Employee Benefits Committee (“SEBC”) may grant stock options, stock appreciation rights, restricted stock, phantom stock, stock bonuses, and other awards in such amounts and with such terms and conditions as it shall determine, subject to the provisions of the Stock Plan. Each award granted under the Stock Plan (except unconditional stock bonuses and the cash component of Director compensation) shall be evidenced by an agreement containing such restrictions as the SEBC may, in its sole discretion, deem necessary or desirable and which are not in conflict with the terms of the Stock Plan. During ~~2006,~~2007, Selective issued, net of forfeitures, 478,862 restricted shares, 309,218 restricted shares during 2006 and 8,750 during 2005. Selective also granted options to purchase 158,435 shares during 2007, 88,940, ~~shares.~~shares during 2006 and 2,500 shares during 2005. As of December 31, ~~2006, 3,179,474~~2007, 2,691,599 shares of Selective’s Common Stock remain available for issuance pursuant to outstanding stock options and restricted stock awards granted under the Stock Plan.

Cash Incentive Plan

The Selective Insurance Group, Inc. Cash Incentive Plan (“Cash Incentive Plan”) was adopted and approved by the Board of Directors effective March 1, 2006 and approved by stockholders on April 27, 2005. Under the Cash Incentive Plan, the Board of Directors’ SEBC may grant cash incentive units in such amounts and with such terms and conditions as it shall determine, subject to the provisions of the Cash Incentive Plan. The initial dollar value of these grants will be adjusted to reflect the percentage increase or decrease in the total shareholder return on the Common Stock of Selective over a specified performance period. In addition, for certain grants, the number of units granted will be adjusted to reflect Selective’s performance on specified indicators as compared to targeted peer companies. Each award granted under the Cash Incentive Plan shall be evidenced by an agreement containing such restrictions as the SEBC may, in its sole discretion, deem necessary or desirable and which are not in conflict with the terms of the Cash Incentive Plan. During ~~2006,~~2007, Selective issued 38,681 cash units and 79,384 cash units, net of ~~forfeitures of 728.~~forfeitures.

Stock Option Plan II

As of December 31, ~~2006, 625,808~~2007, 548,682 shares of Selective’s Common Stock remain available for issuance pursuant to outstanding stock options and restricted stock awards granted under Stock Option Plan II, under which future grants ceased being available on May 22, 2002. Under Stock Option Plan II, employees were granted qualified and nonqualified stock options, with or without stock appreciation rights (“SARs”), and restricted or unrestricted stock: (i) at not less than fair value on the date of grant and (ii) subject to certain vesting periods as determined by the SEBC. Restricted stock awards also could be subject to the achievement of performance objectives as determined by the SEBC. The maximum exercise period for an option grant under this plan is ten years from the date of the grant. ~~Selective experienced restricted~~There were no forfeitures under ~~Stock Option Plan II of~~this plan in 2007 and forfeitures in 2006 and 2005 amounted to 984 restricted shares ~~during 2006,~~and 13,600 restricted shares ~~during 2005, and 29,076 shares during 2004.~~respectively.

During the vesting period, dividends are earned on the restricted shares and held in escrow subject to the same vesting period and conditions set forth in the award agreement. Effective September 3, 1996, dividends earned on the restricted shares were reinvested in Selective’s Common Stock at fair value. Selective issued, net of forfeitures, ~~346~~539 restricted shares from the DRP reserves during 2007, 346 restricted shares during 2006, and 5,892 restricted shares during ~~2005, and 13,828 restricted shares during 2004.~~2005.

Stock Option Plan III

As of December 31, ~~2006,~~2007, there were ~~473,730~~458,930 shares of Selective’s Common Stock available for issuance pursuant to outstanding stock options and restricted stock awards granted under Stock Option Plan III, under which future grants ceased being available with the approval of the Stock Plan. Under Stock Option Plan III, employees were granted qualified and nonqualified stock options, with or without SARs, and restricted or unrestricted stock: (i) at not less than fair value on the date of grant and (ii) subject to certain vesting restrictions determined by the SEBC. Restricted stock awards also could be subject to achievement of performance objectives as determined by the SEBC. The maximum exercise period for an option grant under this plan is ten years from the date of the grant. Under Stock Option Plan III, Selective granted options to purchase 211,326 shares without SARs during ~~2005, and options to purchase 209,200 shares without SARs during 2004.~~2005.

Selective also granted 626,216 restricted shares during 2005, and ~~657,368 restricted~~experienced forfeitures of 25,128 shares during ~~2004, and experienced forfeitures of~~2007, 61,446 shares during 2006 and 48,030 shares during ~~2005, and 54,868 shares during 2004.~~2005. During the vesting period, dividends earned on restricted shares are reinvested in Selective’s Common Stock at fair value. Selective issued, net of forfeitures, ~~24,446~~11,694 restricted shares from the DRP reserves during 2007, 24,446 restricted shares during 2006, 27,042 restricted shares during ~~2005, and 20,010 restricted shares during 2004.~~2005.

Stock Option Plan for Directors

As of December 31, ~~2006, 468,000~~2007, 420,000 shares of Selective’s Common Stock were available for issuance pursuant to outstanding stock option awards under the Stock Option Plan for Directors, under which future grants ceased being available with the approval of the Stock Plan. All non-employee directors participated in this plan and automatically received an annual nonqualified option to purchase 6,000 shares of Common Stock at not less than fair value on the date of grant, which was on March 1. Options under this plan vested on the first anniversary of the grant and must be exercised by the tenth anniversary of the grant. Under the Stock Option Plan for Directors, Selective granted 66,000 options during ~~2005, and 60,000 options during 2004.~~2005.

Stock Compensation Plan for ~~Nonemployee~~Non-employee Directors

As of December 31, ~~2006,~~2007, there were 95,250 shares of the Common Stock available for issuance pursuant to outstanding stock option awards under the Stock Compensation Plan for ~~Nonemployee~~Non-employee Directors, under which future grants ceased being available with the approval of the Stock Plan. Under the Stock Compensation Plan for ~~Nonemployee~~Non-employee Directors, Directors could elect to receive a portion of their annual compensation in shares of Selective’s Common Stock. Selective issued 21,838 shares during 2005 ~~and 27,548 shares during 2004~~ under this plan.

Employee Stock Purchase Savings Plan

Under Selective’s Employee Stock Purchase Savings Plan (“ESPP”), there were ~~359,496~~251,434 shares of Common Stock available for purchase as of December 31, ~~2006.~~2007. The ESPP is available to all employees who meet the plan’s eligibility requirements. The ESPP 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. Shares are generally issued on June 30 and December 31 of each year. Under the ESPP, Selective issued ~~88,310~~108,062 shares to employees during 2007, 88,310 shares during 2006, 88,758 shares during ~~2005, and 99,560 shares during 2004.~~2005.

Agent Stock Purchase Plan

On April 26, 2006, Selective’s stockholders approved the Selective Insurance Group, Inc. Stock Purchase Plan for Independent Insurance Agencies (“Agent Plan”). This plan replaced the previous agent purchase plan under which no further purchases could be made as of July 1, 2006. Under the Agent Plan, there were ~~2,936,110~~2,778,735 shares of Common Stock available for purchase as of December 31, ~~2006.~~2007. The Agent Plan provides for quarterly offerings in which independent insurance agencies and certain eligible persons associated with the agencies with contracts with the Insurance Subsidiaries can purchase Selective’s Common Stock at a 10% discount with a one year restricted period during which the shares purchased cannot be sold or transferred. Collectively, under the current and prior plans, Selective issued shares to agents in the amount of 157,375 in 2007, 153,478 in 2006, and 158,856 in 2005 ~~and 173,772 in 2004~~ and charged to expense $0.4 million in 2007, 2006, ~~$0.4~~and 2005, with a corresponding income tax benefit of $0.1 million in ~~2005, and $0.3 million in 2004.~~each year.

A summary of the stock option transactions under Selective’s share-based payment plans is as follows:

Weighted
Weighted Average
Average Remaining Aggregate
Number Exercise Contractual Intrinsic Value
of shares Price Life in Years ($ in thousands)

Outstanding at December 31, 2005 1,579,046 $ 13.48
Granted 2006 89,230 28.46
Exercised 2006 408,640 12.23
Forfeited or expired 2006 9,600 9.76

Outstanding at December 31, 2006 1,250,036 $ 14.99 5.2 $ 17,075

Exercisable at December 31, 2006 1,164,576 $ 14.00 5.0 $ 17,058

Weighted
Weighted Average
Average Remaining Aggregate
Number Exercise Contractual Intrinsic Value
of shares Price Life in Years ($ in thousands)
Outstanding at December 31, 2006 1,250,036 $ 14.99
Granted 2007 158,435 26.37
Exercised 2007 165,054 13.12
Forfeited or expired 2007 2,264 14.02

Outstanding at December 31, 2007 1,241,153 $ 16.69 5.22 $ 7,821

Exercisable at December 31, 2007 1,075,096 $ 15.13 4.66 $ 8,453

The total intrinsic value of options exercised was $1.9 million at December 31, 2007, $6.1 million at December 31, 2006, and $7.4 million at December 31, ~~2005, and $6.8 million at December 31, 2004.~~2005.

A summary of the restricted stock transactions under Selective’s share-based payment plans is as follows:

Weighted
Average
Number Grant Date
of shares Fair Value

Unvested restricted stock awards at January 1, 2006 2,044,676 $ 16.46
Granted 2006 318,458 28.46
Vested 2006 426,986 11.75
Forfeited 2006 71,670 18.99

Unvested restricted stock awards at December 31, 2006 1,864,478 $ 19.49

Weighted
Average
Number Grant Date
of shares Fair Value

Unvested restricted stock awards at January 1, 2007 1,864,478 $ 19.49
Granted 2007 493,416 27.30
Vested 2007 908,847 17.41
Forfeited 2007 39,682 22.66

Unvested restricted stock awards at December 31, 2007 1,409,365 $ 23.47

As of December 31, ~~2006,~~2007, total unrecognized compensation cost related to nonvested restricted stock awards granted under Selective’s stock plans was ~~$12.0~~$9.5 million. That cost is expected to be recognized over a weighted-average period of ~~1.8~~1.6 years. The total fair value of restricted stock vested was $22.7 million for 2007, $11.7 million for 2006, and $10.9 million for ~~2005, and $5.1 million for 2004.~~2005. In connection with the restricted stock vestings, the total fair value of the DRP shares that also vested was $1.1 million during 2007, $0.9 million during 2006, and $1.0 million during ~~2005, and $0.6 million during 2004.~~2005.

At December 31, ~~2006,~~2007, the liability recorded in connection with Selective’s Cash Incentive Plan was ~~$5.8~~$9.4 million. The fair value of the liability is re-measured at each reporting period through the settlement date of the awards, which is three years from the date of grant. A Monte Carlo simulation is performed to determine the fair value of the cash incentive units that, in accordance with the Cash Incentive Plan, are adjusted to reflect Selective’s performance on specified indicators as compared to targeted peer companies. The remaining cost associated with the cash incentive units is expected to be recognized over a weighted average period of ~~1.8~~1.2 years. During 2007 and 2006, no cash incentive unit payments were made.

In determining expense to be recorded for stock options granted under Selective’s share-based compensation plans, the fair value of each option award is estimated on the date of grant using the Black Scholes option valuation model (“Black Scholes”). The following are the significant assumptions used in applying Black Scholes: (i) risk-free interest rate, which is the implied yield currently available on U.S. Treasury zero-coupon issues with an equal remaining term; (ii) expected term, which is based on historical experience of similar awards; (iii) dividend yield, which is determined by dividing the expected per share dividend during the coming year by the grant date stock price; and (iv) expected volatility, which is based on the volatility of Selective’s stock price over a historical period comparable to the expected term. In applying Black Scholes, Selective uses the weighted average assumptions illustrated in the following table:


	Employee Stock Purchase Plan									All Other Option Plans
	2006			2005			2004			2006			2005			2004			Employee Stock Purchase Plan									All Other Option Plans
																			2007			2006			2005			2007			2006			2005
Risk-free interest rate		4.78	%		2.94	%		1.31	%		4.55	%		3.99	%		3.60	%		5.11	%		4.78	%		2.94	%		4.67	%		4.55	%		3.99	%
Expected term	6 months			6 months			6 months			6 years			7 years			7 years			6 months			6 months			6 months			6 years			6 years			7 years
Dividend yield		1.6	%		1.6	%		2.0	%		1.5	%		1.7	%		1.9	%		1.7	%		1.6	%		1.6	%		1.8	%		1.5	%		1.7	%
Expected volatility		19	%		27	%		26	%		25	%		26	%		26	%		17	%		19	%		27	%		23	%		25	%		26	%

The expense recorded for restricted stock awards and stock compensation for non-employee directors is determined using the number of awards granted and the grant date fair value.

The weighted-average fair value of options and stock granted per share for Selective’s stock plans, during 2007, 2006, ~~2005,~~ and ~~2004~~2005 is as follows:


	2006		2005		2004
							2007		2006		2005
Stock options	$	8.01		6.57		4.83	$	7.02		8.01		6.57
Restricted stock		28.46		22.57		17.42		27.30		28.46		22.57
Directors’ stock compensation plan		26.87		23.54		18.05		25.57		26.87		23.54
Employee stock purchase plan (ESPP):
Six month option		1.58		1.59		1.14		1.47		1.58		1.59
15% of grant date market value		4.19		3.50		2.69		3.72		4.19		3.50

Total ESPP	$	5.77		5.09		3.83		5.19		5.77		5.09
Agent stock purchase plan:
Discount of grant date market value		2.71		2.45		1.90	$	2.40		2.71		2.45

Share-based compensation expense charged against net income before tax was $20.6 million at December 31, 2007 with a corresponding income tax benefit of $6.8 million. Share-based compensation expense that was charged against net income before tax was $20.1 million at December 31, 2006 with a corresponding income tax benefit of $6.7 million. Share-based compensation expense that was charged against net income before cumulative effect of change in accounting principle before tax was $11.0 million at December 31, 2005 with a corresponding income tax benefit of $3.3 million. As part of the 2005 divestiture of CHN Solutions, unvested restricted stock awards were modified, resulting in a cash payment of $1.0 million in lieu of issuing shares. In addition, accelerated share based compensation of $0.4 million as of December 31, 2005 after tax, is included in “Loss on ~~Disposal~~disposal of ~~Discontinued Operations,~~discontinued operations, net of tax” on the ~~consolidated statements~~Consolidated Statements of ~~income.~~Income. See Note 15, “Discontinued Operations,” for additional information regarding the divestiture. ~~Share-based compensation expense that was charged against income before tax was $8.1 million for the year ended December 31, 2004 with a corresponding income tax benefit of $2.8 million.~~

Note 1918 Related Party Transactions

In August 1998, certain officers of Selective purchased stock on the open market with proceeds advanced by Selective. These officers gave Selective promissory notes totaling $1.8 million. The notes bear interest at 2.5% and are secured by the purchased shares of Selective’s Common Stock. The promissory notes are full recourse and subject to certain employment requirements. The principal amount outstanding, which is scheduled to be fully repaid in 2009, was $0.2 million at December 31, ~~2006~~2007 and ~~$0.3 million at~~ December 31, ~~2005. These~~2006. The outstanding balances are reflected in ~~“other~~“Other assets” on the Consolidated Balance Sheets.

William M. Rue, a Director of Selective Insurance Group, Inc., is President of, and owns more than 10% of the equity of, Chas. E. Rue & Sons, Inc. t/a Rue Insurance, a general independent insurance agency (“Rue Insurance”). Rue Insurance is an appointed independent agent of Selective’s Insurance Subsidiaries and ~~SHRS,~~Selective HR, on terms and conditions similar to those of other Selective agents. Rue Insurance also places insurance for Selective’s business operations. Selective’s relationship with Rue Insurance has existed since 1928.

The following is a summary of transactions with Rue Insurance:

	•		Rue Insurance placed insurance policies with Selective’s Insurance Subsidiaries. Direct premiums written associated with these policies was $9.9 million in 2007, $9.5 million in 2006, and $10.2 million in ~~2005, and $9.9 million in 2004.~~2005. In return, Selective’s Insurance Subsidiaries paid commissions to Rue Insurance of $1.7 million in 2007 and $1.9 million in 2006 ~~$1.9 million in 2005,~~ and ~~$1.8 million in 2004.~~2005.

	•		Rue Insurance placed human resource outsourcing contracts with ~~SHRS~~Selective HR resulting in revenues to ~~SHRS~~Selective HR of $69,000 in 2007, $62,000 in 2006, and $64,000 in ~~2005, and $57,000 in 2004.~~2005. In return, ~~SHRS~~Selective HR paid commissions to Rue Insurance of $15,000 in 2007, $14,000 in 2006, and $15,000 in ~~2005, and $13,000 in 2004.~~2005.

	•		Rue Insurance placed insurance coverage for Selective with non-Selective insurance companies for which Rue Insurance was paid commission pursuant to its agreements with those carriers. Selective paid premiums for such insurance coverage of $0.5 million in 2007, $0.5 million in 2006, and $0.6 million in ~~2005, and $1.4 million in 2004.~~2005.

	•		Selective paid reinsurance commissions of $0.2 million in 2007, 2006, ~~2005,~~ and ~~2004~~2005 to PL, LLC. PL, LLC is an insurance fund administrator of which Rue Insurance owns ~~20%~~26.67% and which places reinsurance through a Selective Insurance Subsidiary.

In 2005, a private foundation, The Selective Group Foundation (the “Foundation”), was established by Selective under Section 501(c)(3) of the Internal Revenue Code. The Board of Directors of the Foundation is comprised of certain Selective Insurance Group, Inc. officers. Selective made contributions to the Foundation in the amount of $0.4 million in 2007 and $0.5 million in 2005. No donations were made to the Foundation in 2006.

Note 2019 Commitments and Contingencies

(a) Selective purchases annuities from life insurance companies to fulfill obligations under claim settlements which provide for periodic future payments to claimants. As of December 31, ~~2006,~~2007, Selective had purchased such annuities in the amount of $10.3 million for settlement of claims on a structured basis for which Selective is contingently liable. To Selective’s knowledge, none of the issuers of such annuities have defaulted in their obligations thereunder.

(b) Selective has various operating leases for office space and equipment. Such lease agreements, which expire at various times, are generally renewed or replaced by similar leases. Rental expense under these leases amounted to $11.2 million in 2007, $9.6 million in 2006, and $10.0 million in ~~2005, and $9.7 million in 2004.~~2005. See Note 2(p) for information on Selective’s accounting policy regarding leases.

In addition, certain leases for rented premises and equipment are ~~noncancelable,~~non-cancelable, and liability for payment will continue even though the space or equipment may no longer be in use.

At December 31, ~~2006,~~2007, the total future minimum rental commitments under ~~noncancelable~~non-cancelable leases ~~was $24.8~~were $25.3 million and such yearly amounts are as follows:


($ in millions)

2007	$	8.9
2008		6.6	$	8.6
2009		4.4		6.0
2010		2.8		4.5
2011		1.5		2.9
After 2011		0.6
2012				1.6
After 2012				1.7

Total minimum payment required	$	24.8	$	25.3

(c) At December 31, ~~2006,~~2007, Selective has contractual obligations that expire at various dates through ~~2021~~2022 to invest up to an additional ~~$110.5~~$129.8 million in ~~limited partnerships.~~alternative investments. There is no certainty that any such additional investment will be required.

Note 2120 Litigation

In the ordinary course of conducting business, Selective ~~Insurance Group, Inc.~~ and its subsidiaries are named as defendants in various legal proceedings. ~~Some~~Most of these proceedings are claims litigation involving Selective’s seven insurance subsidiaries (the “Insurance Subsidiaries”) as either (a) liability insurers defending or providing indemnity for third-party claims brought against insureds or (b) insurers defending first-party coverage claims brought against them. Selective accounts for such activity through the establishment of unpaid loss and loss adjustment expense reserves. Selective’s management expects that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of defense, will not be material to Selective’s consolidated financial condition, results of operations, or cash flows.

100

The Insurance Subsidiaries are also from time-to-time involved in other legal actions, some of which assert claims for substantial amounts. These actions include, among others, putative state class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, improper reimbursement of medical providers paid under workers compensation and personal and commercial automobile insurance policies. The Insurance Subsidiaries are also from time-to-time involved in individual actions in which extra-contractual damages, punitive damages, or penalties are sought, such as claims alleging bad faith in the handling of insurance claims. Selective believes that it has valid defenses to these cases. Selective’s management expects that the ultimate liability, if any, with respect to such lawsuits, ~~attempt~~after consideration of provisions made for estimated losses, will not be material to ~~establish liability under insurance contracts issued by our insurance subsidiaries. Plaintiffs in these lawsuits are seeking money damages that, in some cases, are extra-contractual in nature~~Selective’s consolidated financial condition. Nonetheless, given the large or ~~they are seeking to have the court direct the activities of Selective’s operations~~indeterminate amounts sought in certain ~~ways. Although the ultimate outcome~~ of these actions, and the inherent unpredictability of litigation, an adverse outcome in certain matters ~~is not presently determinable, Selective does not believe that the total amounts that it will ultimately have to pay, if any, in all of these lawsuits in the aggregate will~~could, from time-to-time, have a material adverse effect on ~~its financial condition,~~Selective’s consolidated results of operations or ~~liquidity.~~cash flows in particular quarterly or annual periods.

Note 2221 Statutory Financial Information

The Insurance Subsidiaries prepare their statutory financial statements in accordance with accounting principles prescribed or permitted by the various state insurance departments of domicile. Prescribed statutory accounting principles 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 principles encompass all accounting principles that are not prescribed; such principles 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 principles that materially affect the determination of statutory surplus, statutory net income, or risk-based capital. As of December 31, 2005 the various state

insurance departments of domicile have adopted the NAIC Accounting Practices and Procedures manual, version as of March ~~2006,~~2007, in its entirety, as a component of prescribed or permitted practices.

Selective’s combined statutory capital and surplus of the Insurance Subsidiaries was ~~$1,030.1~~$1,034.3 million (unaudited) in ~~2006~~2007, and ~~$930.6~~$1,030.1 million in ~~2005.~~2006. Selective’s combined statutory net income of the Insurance Subsidiaries was ~~$164.2~~$167.6 million (unaudited) in 2007, $164.2 million in 2006, and $140.2 million in ~~2005, and $135.0 million in 2004.~~2005.

The Insurance Subsidiaries are 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 ~~2006~~2007 unaudited statutory financial statements, their combined total adjusted capital exceeded the authorized control level RBC by ~~5.4:~~5.0:1, as defined by the NAIC.

Note 22 Subsequent Event

In February 2008, Selective announced a reduction in its workforce of approximately 80 positions, including the immediate displacement of 60 employees and the elimination of 20 open positions. Selective anticipates these changes will have a related one-time pre-tax cost of approximately $4 million in the first quarter of 2008. In addition, Selective is implementing targeted changes to agency commissions that will maintain highly competitive awards for agents who produce the strongest results, while reducing commissions where historically higher payments have not generated an appropriate level of profitable growth. The changes will bring Selective’s program more in line with the competition; however, commissions on 87% of direct premiums written will not be affected, and the supplemental commission program that rewards the most profitable growth agencies does not change and is targeted for rollout in most states in July 2008.

101

Note 23 Quarterly Financial
Information¹


(unaudited, in thousands,	First Quarter						Second Quarter					Third Quarter					Fourth Quarter						First Quarter						Second Quarter						Third Quarter				Fourth Quarter
except per share data)	2006			2005			2006			2005		2006		2005			2006			2005			2007			2006			2007			2006			2007		2006		2007			2006

Net premiums written	$	431,989			396,778			395,621			369,621		401,426		383,402			306,925			309,673		$	417,185			431,989			404,923			395,621			409,523		401,426		323,236			306,925
Net premiums earned		370,157			342,740			374,755			350,452		377,572		361,062			377,180			363,759			380,013			370,157			376,351			374,755			378,260		377,572		382,682			377,180
Net investment income earned		36,002			32,362			37,390			32,747		38,891		32,755			44,519			38,086			39,863			36,002			40,642			37,390			43,674		38,891		49,965			44,519
Net realized gains		7,367			4,598			14,487			559		3,948		4,379			9,677			4,928			11,243			7,367			13,148			14,487			2,814		3,948		6,149			9,677
Diversified Insurance Services revenue from continuing operations²		27,278			23,485			27,550			24,481		29,284		26,903			26,415			23,842
Diversified Insurance Services net income from continuing operations²		2,359			1,467			2,754			2,461		3,943		3,390			2,791			2,526
Net income from continuing operations²		39,978			35,008			41,996			30,967		38,056		38,560			43,543			42,917
Total discontinued operations, net of tax²		—			598			—			1,111		—		717			—			(1,879	)
Cumulative effect of change in accounting principle, net of tax³		—			495			—			—		—		—			—			—
Diversified Insurance Services revenues																								29,178			27,278			30,677			27,550			29,331		29,284		26,380			26,415
Diversified Insurance Services net income																								2,903			2,359			4,019			2,754			3,075		3,943		2,358			2,791
Net income		39,978			36,101			41,996			32,078		38,056		39,277			43,543			41,038			37,252			39,978			35,886			41,996			37,119		38,056		36,240			43,543
Other comprehensive income (loss)		(12,571	)		(31,084	)		(30,119	)		23,364		34,921		(15,519	)		(9,751	)		(13,176	)		(3,139	)		(12,571	)		(23,774	)		(30,119	)		13,534		34,921		(1,178	)		3,997

Comprehensive income		27,407			5,017			11,877			55,442		72,977		23,758			33,792			27,862			34,113			27,407			12,112			11,877			50,653		72,977		35,062			47,540
Net income per share:⁶
Net income per share:⁴
Basic		0.75			0.67			0.77			0.59		0.69		0.73			0.79			0.76			0.68			0.75			0.69			0.77			0.72		0.69		0.70			0.79
Diluted		0.64			0.58			0.68			0.51		0.63		0.63			0.72			0.65			0.62			0.64			0.64			0.68			0.66		0.63		0.67			0.72
Dividends to stockholders^4,6		0.11			0.10			0.11			0.10		0.11		0.10			0.11			0.11
Price range of common stock:^5,6
Dividends to stockholders^2,4																								0.12			0.11			0.12			0.11			0.12		0.11		0.13			0.11
Price range of common stock:^3,4
High		29.18			24.50			28.23			25.24		28.02		25.47			29.10			29.64			29.07			29.18			27.87			28.23			27.33		28.02		25.41			29.10
Low		26.10			20.88			25.38			20.95		24.89		23.02			25.95			23.53			23.25			26.10			25.27			25.38			19.04		24.89		20.84			25.95

The addition of all quarters may not agree to annual amounts on the consolidated financial statements due to rounding.


1.		Refer to the Glossary of Terms attached to this Form 10-K as Exhibit 99.1.

2.		See Note ~~15 to the consolidated financial statements for a discussion of discontinued operations.~~

3.		~~See Note 2(g) to the consolidated financial statements for a discussion of the cumulative effect of change in accounting principle.~~

4.		~~See Note~~ 9(b) and Note 10 to the consolidated financial statements for a discussion of dividend restrictions.

5.3.		These ranges of high and low prices of Selective’s Common Stock, as reported by ~~The~~the NASDAQ Global Select 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 ~~3, 2007~~2, 2008 and ending February ~~23, 2007~~22, 2008 was ~~$29.07~~$20.78 to ~~$24.52.~~$24.92.

6.4.		All per share amounts in 2006 have been restated to give retroactive effect to the two-for-one stock split distributed on February 20, 2007 to shareholders of record as of February 13, 2007. See Note 10 to the consolidated financial statements for a discussion of the stock split.

102

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures

Selective’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Selective’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, Selective’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, Selective’s disclosure controls and procedures are: (i) effective in recording, processing, summarizing, and reporting information on a timely basis that Selective is required to disclosed in the reports that it files or submits under the Exchange Act; and (ii) effective in ensuring that information that Selective is required to disclose in the reports that it files or submits under the Exchange Act is accumulated and communicated to Selective’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

Selective’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) is a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

	•		Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

	•		Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

	•		Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Selective’s management assessed the effectiveness of Selective’s internal control over financial reporting as of December 31, ~~2006.~~2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control-Integrated Framework.

Based on its assessment, Selective’s management believes that, as of December 31, ~~2006,~~2007, Selective’s internal control over financial reporting is effective.

~~Selective’s independent auditors have issued an audit report on management’s assessment of the Selective’s internal control over financial reporting. This report appears below.~~

No changes in Selective’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) of the Exchange Act) occurred during the fourth quarter of ~~2006~~2007 that materially affected, or are reasonably likely to materially affect, Selective’s internal control over financial reporting.

103

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Selective Insurance Group, Inc.:

We have audited ~~management’s assessment, included in the accompanying~~~~Management’s Report on Internal Control Over Financial Reporting~~~~, that~~ Selective Insurance Group, Inc. ~~maintained effective~~’s and subsidiaries’ (“the Company”) internal control over financial reporting as of December 31, ~~2006,~~2007, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).~~Selective Insurance Group, Inc.’s~~ The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial ~~reporting.~~reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on ~~management’s assessment and an opinion on the effectiveness of~~ Selective Insurance Group, Inc.’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, ~~evaluating management’s assessment,~~assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control ~~and~~based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, ~~management’s assessment that~~ Selective Insurance Group, Inc. ~~maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in~~~~Internal Control—Integrated Framework~~~~issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Selective Insurance Group, Inc.~~and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2006,~~2007, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Selective Insurance Group, Inc. and subsidiaries as of December 31, ~~2006~~2007 and ~~2005,~~2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, ~~2006,~~2007, and our report dated February ~~28, 2007~~27, 2008 expressed an unqualified opinion on those consolidated financial statements. Our report refers to a change in accounting principle regarding the definition of cash equivalents in 2006 and a change in the method of accounting for share-based payments in 2005.

/s/ KPMG LLP
New York, New York
February ~~28, 2007~~27, 2008

104

Item 9B. Other Information

There is no other information that was required to be disclosed in a report on Form 8-K during the fourth quarter of ~~2006~~2007 that Selective did not report.

PART III

Because Selective will file a Proxy Statement within 120 days after the end of the fiscal year ending December 31, ~~2006,~~2007, this Annual Report on Form 10-K omits certain information required by Part III and incorporates by reference certain information included in the Proxy Statement.

Item 10. Directors, ~~and~~ Executive Officers ~~of the Registrant.~~and Corporate Governance.

Information regarding Selective’s executive officers appears in Item 1. “Business” of this Form 10-K under “Management.” Information about Selective’s directors and all other matters required to be disclosed in Item 10. “Directors and Executive Officers of the Registrant” appears under “Election of Directors” in the Proxy Statement. That portion of the Proxy Statement is hereby incorporated by reference.

Section 16(a) Beneficial Ownership Reporting Compliance

Information about compliance with Section 16(a) of the Exchange Act appears under “Section 16(a) Beneficial Ownership Reporting Compliance” in the “Election of Directors” section of the Proxy Statement and is hereby incorporated by reference.

Item 11. Executive Compensation.

Information about compensation of Selective’s named executive officers appears under “Executive Compensation” in the “Election of Directors” section of the Proxy Statement and is hereby incorporated by reference. Information about compensation of Selective’s directors appears under “Director Compensation” in the “Election of Directors” section of the Proxy Statement and is hereby incorporated by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information about security ownership of certain beneficial owners and management appears under “Security Ownership of Directors and Executive Officers” in the “Election of Directors” section of the Proxy Statement and is hereby incorporated by reference.

Item 13. Certain Relationships and Related ~~Transactions.~~Transactions, and Director Independence.

Information about certain relationships and related transactions appears under “Certain Relationships and Related Transactions” in the “Election of Directors” section of the Proxy Statement and is hereby incorporated by reference.

Item 14. Principal Accountant’s Fees and Services

Information about the fees and services of Selective’s principal accountants appears under “Audit Committee Report” and “Fees of Independent Auditors” in the “Ratification of Appointment of Independent Public Accountants” section of the Proxy Statement and is hereby incorporated by reference.

~~100~~

105

PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a)

The following documents are filed as part of this report:

(1)

~~(1)~~ Financial Statements:

The consolidated financial statements of the Company listed below are included in Item 8. “Financial Statements and Supplementary Data.”


		Form 10-K
		Page
Consolidated Balance Sheets as of December 31, ~~2006~~2007 and ~~2005~~2006		68
			62
Consolidated Statements of Income for the Years ended December 31, 2007, 2006 ~~2005~~ and ~~2004~~2005		69
			63
Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2007, 2006 ~~2005~~ and ~~2004~~2005		70
			64
Consolidated Statements of Cash Flows for the Years ended December 31, 2007, 2006 ~~2005~~ and ~~2004~~2005		71
			65
Notes to Consolidated Financial Statements, December 31, 2007, 2006 ~~2005~~ and ~~2004~~2005		72
	66

(2)

~~(2)~~ Financial Statement Schedules:

The financial statement schedules, with Independent Auditors’ Report thereon, required to be filed are listed below by page number as filed in this report. All other schedules are omitted as the information required is inapplicable, immaterial, or the information is presented in the consolidated financial statements or related notes.


				Form 10-K
		Page
Schedule I	~~Page~~
~~Schedule I~~		~~Summary of Investments – Other than Investments in Related Parties at December 31, 2006~~			~~104~~
~~Schedule II~~		Condensed Financial Information of Registrant at December 31, ~~2006~~2007 and ~~2005,~~2006, and for the years ended December 31, 2007, 2006 ~~2005~~ and ~~2004~~2005			~~105~~109
~~Schedule III~~	~~Supplementary Insurance Information for the years ended December 31, 2006, 2005 and 2004~~		~~108~~
~~Schedule IV~~		~~Reinsurance for the years ended December 31, 2006, 2005 and 2004~~			~~111~~
Schedule VII	Allowance for Uncollectible Premiums and Other Receivables for the years ended December 31, 2007, 2006 ~~2005~~ and ~~2004~~2005		112
~~Schedule VI~~	~~Supplemental~~
Schedule III	Summary of Investments — Other than Investments in Related Parties at December 31, 2007		113

Schedule IV	Supplementary Insurance Information for the years ended December 31, 2007, 2006 ~~2005~~ and ~~2004~~2005		~~113~~114

Schedule V	Reinsurance for the years ended December 31, 2007, 2006 and 2005		117

(3)

~~(3)~~ Exhibits:

The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index, which is incorporated by reference and immediately precedes the exhibits filed with or incorporated by reference in this Form 10-K.

~~101~~

106

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

~~SELECTIVE INSURANCE GROUP, INC.~~


SELECTIVE INSURANCE GROUP, INC.

By: ~~/s/~~	/s/ Gregory E. Murphy		February 28, 2008

Gregory E. Murphy		~~March 1, 2007~~
Chairman of the Board, President and Chief Executive Officer

By: ~~/s/~~	/s/ Dale A. Thatcher		February 28, 2008

Dale A. Thatcher		~~March 1, 2007~~
Executive Vice President, Chief Financial Officer and Treasurer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.


By: ~~/s/~~	/s/ Gregory E. Murphy	~~March 1, 2007~~February 28, 2008

Gregory E. Murphy
Chairman of the Board, President and Chief Executive Officer

*	~~March 1, 2007~~
*		February 28, 2008

Paul D. Bauer
Director

*	~~March 1, 2007~~
*		February 28, 2008

W. Marston Becker
Director

*	~~March 1, 2007~~
*		February 28, 2008

A. David Brown
Director

*	~~March 1, 2007~~
*		February 28, 2008

John C. Burville
Director

*	~~March 1, 2007~~
*		February 28, 2008

William M. Kearns, Jr.
Director

*	~~March 1, 2007~~	February 28, 2008

Joan M. Lamm-Tennant
Director

~~102~~

107


*	~~March 1, 2007~~
*			February 28, 2008

S. Griffin McClellan III
Director

*	~~March 1, 2007~~		February 28, 2008

Ronald L. O’Kelley
Director

*	~~March 1, 2007~~
*			February 28, 2008

John F. Rockart
Director

*	~~March 1, 2007~~		February 28, 2008

William M. Rue
Director

*	~~March 1, 2007~~		February 28, 2008

J. Brian Thebault
Director

* By: ~~/s/~~	/s/ Michael H. Lanza	~~March 1, 2007~~	February 28, 2008

Michael H. Lanza
Attorney-in-fact

~~103~~

108

SCHEDULE I

~~SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES~~
~~SUMMARY OF INVESTMENTS-OTHER THAN INVESTMENTS IN RELATED PARTIES~~
~~December 31, 2006~~

Type of investment Amortized Cost Fair Carrying
(in thousands) or Cost Value Amount

Fixed maturity securities:

Held-to-maturity:
Obligations of states and political subdivisions $ 9,792 10,042 9,792
Mortgage-backed securities 30 31 30

Total fixed maturity securities, held-to-maturity 9,822 10,073 9,822

Available-for-sale:
U.S. government and government agencies 195,725 199,310 199,310
Obligations of states and political subdivisions 1,736,865 1,743,649 1,743,649
Corporate securities 295,964 301,581 301,581
Asset-backed securities 50,319 50,421 50,421
Mortgage-backed securities 638,011 642,139 642,139

Total fixed maturity securities, available-for-sale 2,916,884 2,937,100 2,937,100

Equity securities, available-for-sale:

Common stocks:
Banks, trust and insurance companies 29,530 54,243 54,243
Industrial, miscellaneous and all other 128,334 253,133 253,133

Total equity securities, available-for-sale 157,864 307,376 307,376

Short-term investments 197,019 197,019 197,019
Other investments 138,506 144,785 144,785

Total investments $ 3,420,095 3,596,353 3,596,102

~~104~~

~~SCHEDULE II~~

SELECTIVE INSURANCE GROUP, INC.
(Parent Corporation)
Balance Sheets


	December 31,						December 31,
(in thousands, except share amounts)	2006			2005			2007			2006

Assets
Fixed maturity securities, available-for-sale — at fair value¹ (cost: $47,612 — 2006; $61,910 — 2005)	$	47,470			61,629
Fixed maturity securities, available-for-sale — at fair value¹ (cost: $14,006 - 2007; $47,612 - 2006)							$	13,980			47,470
Short-term investments		115,332			85,095			64,492			115,332
Cash		71			—			81			71
Investment in subsidiaries		1,253,392			1,160,848			1,271,494			1,253,392
Current federal income tax		14,842			11,580			18,453			14,842
Deferred federal income tax		9,220			3,543			12,347			9,220
Other assets		9,267			2,282			5,979			9,267

Total assets	$	1,449,594			1,324,977		$	1,386,826			1,449,594


Liabilities and Stockholders’ Equity
Liabilities:
Senior convertible notes	$	57,413			115,937		$	8,740			57,413
Notes payable		304,424			222,697			286,151			304,424
Other liabilities		10,530			5,219			15,892			10,530

Total liabilities		372,367			343,853			310,783			372,367


Stockholders’ equity:
Preferred stock of $0 par value per share:
Authorized shares: 5,000,000; no shares issued or outstanding
Common stock of $2 par value per share:
Authorized shares: 360,000,000 Issued: 91,562,266 — 2006; 86,542,546 — 2005		183,124			173,085
Authorized shares: 360,000,000
Issued: 94,652,930 - 2007; 91,562,266 - 2006								189,306			183,124
Additional paid-in capital		153,246			71,638			192,627			153,246
Retained earnings		986,017			847,687			1,105,946			986,017
Accumulated other comprehensive income		100,601			118,121			86,043			100,601
Treasury stock — at cost (shares: 34,289,974 — 2006; 29,954,352 — 2005)		(345,761	)		(229,407	)
Treasury stock — at cost (shares: 40,347,894 - 2007; 34,289,974 - 2006)								(497,879	)		(345,761	)

Total stockholders’ equity		1,077,227			981,124			1,076,043			1,077,227

Total liabilities and stockholders’ equity	$	1,449,594			1,324,977		$	1,386,826			1,449,594


¹		As part of ~~it’s~~its notes payable issuance in 2005, Selective Insurance Group, Inc.’s established an irrevocable trust for the benefit of senior note holders with a market value of approximately ~~$31.3~~$13.2 million as of December 31, ~~2006~~2007 to provide for certain payment obligations in respect to its outstanding debt. Information should be read in conjunction with the Notes to consolidated financial statements of Selective Insurance Group, Inc., and its subsidiaries in Item 8. “Financial Statements and Supplementary Data” of the Company’s Form 10-K.

~~105~~

~~SCHEDULE II (continued)~~

~~SELECTIVE INSURANCE GROUP, INC.~~
~~(Parent Corporation)~~
~~Statements of Income~~

Year ended December 31,
(in thousands) 2006 2005 2004

Revenues:

Dividends from subsidiaries $ 111,829 40,950 28,773
Net investment income earned 4,652 2,299 1,606
Realized gains (losses) (164 ) 130 46
Other income 6 106 108

Total revenues 116,323 43,485 30,533

Expenses:

Interest expense 21,411 17,582 15,466
Other expenses 26,152 14,509 9,971

Total expenses 47,563 32,091 25,437

Income from continuing operations before federal income tax and equity in undistributed income of subsidiaries 68,760 11,394 5,096

Federal income tax (benefit) expense:

Current (11,433 ) (8,877 ) (11,092 )
Deferred (3,833 ) (881 ) 1,115

Total federal income tax benefit (15,266 ) (9,758 ) (9,977 )

Net income from continuing operations before equity in undistributed income of subsidiaries, net of tax 84,026 21,152 15,073

Equity in undistributed income of subsidiaries, net of tax 79,548 126,300 112,104

Dividends from discontinued operations, net of tax — 3,180 1,462
Loss on disposal of discontinued operations, net of tax — (2,634 ) —

Total discontinued operations, net of tax — 546 1,462

Net income before cumulative effective of change in accounting principle 163,574 147,998 128,639

Cumulative effect of change in accounting principle, net of tax — 495 —

Net income $ 163,574 148,493 128,639

Information should be read in conjunction with the Notes to ~~consolidated financial statements~~Consolidated Financial Statements of Selective Insurance Group, Inc. and its subsidiaries in Item 8. “Financial Statements and Supplementary Data” of the Company’s Form 10-K.

~~106~~

109

SCHEDULE III (continued)

SELECTIVE INSURANCE GROUP, INC.
(Parent Corporation)
Statements of ~~Cash Flows~~Income

Year ended December 31,
(in thousands) 2006 2005 2004

Operating Activities:

Net income $ 163,574 148,493 128,639

Adjustments to reconcile net income to net cash provided by operating activities:

Equity in undistributed income of subsidiaries, net of tax (79,548 ) (127,405 ) (105,214 )
Stock compensation 14,524 11,361 7,791
Loss on disposition of discontinued operations — 2,634 —
Deferred income tax (3,833 ) (881 ) 1,115
Debt conversion inducement 2,117 — —
Net realized (gain)/loss on investments 164 (130 ) (46 )
Amortization — other (554 ) (211 ) 910
Cumulative effect of change in accounting principle, net of tax — (495 ) —

Changes in assets and liabilities:

Increase in accrued salaries and benefits 5,818 — —
Increase in net federal income tax recoverable (3,262 ) (1,290 ) (2,159 )
Other, net (4,481 ) 3,126 (17,392 )

Net adjustments (69,055 ) (113,291 ) (114,995 )

Net cash provided by operating activities 94,519 35,202 13,644

Investing Activities:

Purchase of fixed maturity securities, available-for-sale (15,000 ) (53,692 ) (17,998 )
Sale of fixed maturity securities, available-for-sale 23,167 19,344 11,725
Redemption and maturities of fixed maturity securities, available-for-sale 6,009 8,716 24,171
Purchase of subsidiaries — — (5,297 )
Sale of subsidiary — 14,785 —
Purchase of short-term investments (386,912 ) (273,491 ) (240,658 )
Sale of short-term investments 356,771 209,365 226,475
Capital contribution to subsidiaries (32,100 ) (12,530 ) (24,328 )
Dividend in excess of subsidiary’s income 1,493 4,016 —

Net cash used in investing activities (46,572 ) (83,487 ) (25,910 )

Financing Activities:

Dividends to stockholders (22,831 ) (19,908 ) (17,331 )
Acquisition of treasury stock (116,354 ) (22,885 ) (8,730 )
Proceeds from issuance of notes payable, net of issuance costs 96,263 99,310 49,880
Principal payment on note payable (18,300 ) (24,000 ) (24,000 )
Net proceeds from stock purchase and compensation plans 11,560 11,919 12,380
Excess tax benefits from share-based payment arrangements 3,903 3,783 —
Debt conversion inducement (2,117 ) — —
Proceeds received on notes receivable from stock sale — 66 55

Net cash (used in) provided by financing activities (47,876 ) 48,285 12,254

Net increase (decrease) in cash 71 — (12 )
Cash, beginning of year — — 12

Cash, end of year $ 71 — —

Year ended December 31,
(in thousands) 2007 2006 2005
Revenues:

Dividends from subsidiaries $ 142,743 111,829 40,950
Net investment income earned 3,529 4,652 2,299
Net realized (losses) gains — (164 ) 130
Other income 63 6 106

Total revenues 146,335 116,323 43,485

Expenses:

Interest expense 23,795 21,411 17,582
Other expenses 25,588 26,152 14,509

Total expenses 49,383 47,563 32,091

Income from continuing operations before federal income tax and equity in undistributed income of subsidiaries 96,952 68,760 11,394

Federal income tax benefit:

Current (14,969 ) (11,433 ) (8,877 )
Deferred (861 ) (3,833 ) (881 )

Total federal income tax benefit (15,830 ) (15,266 ) (9,758 )

Net income from continuing operations before equity in undistributed income of subsidiaries, net of tax 112,782 84,026 21,152

Equity in undistributed income of subsidiaries, net of tax 33,716 79,548 126,300

Dividends from discontinued operations, net of tax — — 3,180
Loss on disposal of discontinued operations, net of tax — — (2,634 )

Total discontinued operations, net of tax — — 546

Net income before cumulative effective of change in accounting principle 146,498 163,574 147,998

Cumulative effect of change in accounting principle, net of tax — — 495

Net income $ 146,498 163,574 148,493

~~107~~

~~SCHEDULE III~~

~~SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES~~
~~SUPPLEMENTARY INSURANCE INFORMATION~~
~~Year ended December 31, 2006~~

Amortization
Deferred Reserve Losses of deferred
policy for losses Net and loss policy Other Net
acquisition and loss Unearned premiums expenses acquisition operating premiums
(in thousands) costs expenses premiums earned Incurred costs² expenses^1, 2 written

Commercial $ 178,001 1,868,054 613,742 1,285,876 811,326 384,341 26,727 1,318,873
Personal 40,102 220,978 107,863 213,788 148,657 58,959 11,676 217,088
Reinsurance recoverable on unpaid losses and loss expenses — 199,738 — — — — — —
Prepaid reinsurance premiums — — 69,935 — — — — —
Interest and general corporate expenses — — — — — — 47,557 —

Total $ 218,103 2,288,770 791,540 1,499,664 959,983 443,300 85,960 1,535,961


~~NOTE:~~		A meaningful allocation of net investment income of $156,802 and net realized gain on investments of $35,479 is considered impracticable because the Company does not maintain distinct investment portfolios for each segment.

1		Other operating expenses include $2,564 of underwriting income that is included in other income or other expense on the consolidated income statement in Item 8. “Financial Statements and Supplementary Data” of the Company’s Form 10-K.

2		~~The total, $529,260, of amortization of deferred policy acquisition costs, $443,300, and other operating expenses, $85,960, is reconciled to the consolidated statements of income, as follows:~~

Policy acquisition costs $ 478,339
Dividends to policyholders 5,927
Interest expense 21,411
Other expenses 28,979
Other income (5,396 )

Total $ 529,260

~~108~~

~~SCHEDULE III (continued)~~

~~SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES~~
~~SUPPLEMENTARY INSURANCE INFORMATION~~
~~Year ended December 31, 2005~~

Amortization
Deferred Reserve Losses of deferred
policy for losses Net and loss policy Other Net
acquisition and loss Unearned premiums expenses acquisition operating premiums
(in thousands) costs expenses premiums earned Incurred costs² expenses^1,2 written

Commercial $ 166,501 1,632,760 580,744 1,208,666 748,548 351,738 32,709 1,258,632
Personal 38,331 233,041 104,564 209,347 157,182 48,875 9,233 200,842
Reinsurance recoverable on unpaid losses and loss expenses — 218,248 — — — — — —
Prepaid reinsurance premiums — — 67,157 — — — — —
Interest and general corporate expenses — — — — — — 32,151 —

Total $ 204,832 2,084,049 752,465 1,418,013 905,730 400,613 74,093 1,459,474


~~NOTE:~~		A meaningful allocation of net investment income of $135,950 and net realized gain on investments of $14,464 is considered impracticable because the Company does not maintain distinct investment portfolios for each segment.

1		Other operating expenses include $1,021 of underwriting income that is included in other income or other expense on the consolidated income statement in Item 8. “Financial Statements and Supplementary Data” of the Company’s 2005 Annual Report on Form 10-K.

2		~~The total, $474,706, of amortization of deferred policy acquisition costs, $400,613, and other operating expenses, $74,093, is reconciled to the consolidated statements of income, as follows:~~

Policy acquisition costs $ 437,894
Dividends to policyholders 5,688
Interest expense 17,582
Other expenses 17,416
Other income (3,874 )

Total $ 474,706

~~109~~

~~SCHEDULE III (continued)~~

~~SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES~~
~~SUPPLEMENTARY INSURANCE INFORMATION~~
~~Year ended December 31, 2004~~

Amortization
Deferred Reserve Losses of deferred
policy for losses Net and loss policy Other Net
acquisition and loss Unearned premiums expenses acquisition operating premiums
(in thousands) costs expenses premiums earned incurred costs² expenses^{1, 2} written

Commercial $ 150,766 1,390,860 530,778 1,092,491 699,277 321,607 28,771 1,141,702
Personal 36,151 225,585 113,069 225,899 167,097 50,623 10,247 223,446
Reinsurance recoverable on unpaid losses and loss expenses — 218,772 — — — — — —
Prepaid reinsurance Premiums — — 58,264 — — — — —
Interest and general corporate expenses — — — — — — 25,084 —

Total $ 186,917 1,835,217 702,111 1,318,390 866,374 372,230 64,102 1,365,148


~~NOTE:~~		A meaningful allocation of net investment income of $120,540 and net realized gain on investments of $24,587 is considered impracticable because the Company does not maintain distinct investment portfolios for each segment.

1		Other operating expenses include $1,816 of underwriting income that is included in other income or other expense on the consolidated income statement in Item 8. “Financial Statements and Supplementary Data” of the Company’s 2004 Annual Report on Form 10-K.

2		~~The total, $436,332, of amortization of deferred policy acquisition costs, $372,230, and other operating expenses, $64,102, is reconciled to the consolidated statements of income, as follows:~~

Policy acquisition costs $ 408,790
Dividends to policyholders 4,275
Interest expense 15,466
Other expenses 11,424
Other income (3,623 )

Total $ 436,332

110

SCHEDULE IVI (continued)

SELECTIVE INSURANCE GROUP, INC. ~~AND CONSOLIDATED SUBSIDIARIES~~
~~REINSURANCE~~(Parent Corporation)
~~Years ended December 31, 2006, 2005~~Statements of Cash Flows

Year ended December 31,
(in thousands) 2007 2006 2005
Operating Activities:

Net income $ 146,498 163,574 148,493

Adjustments to reconcile net income to net cash provided by operating activities:

Equity in undistributed income of subsidiaries, net of tax (33,716 ) (79,548 ) (127,405 )
Stock-based compensation expense 20,992 14,524 11,361
Loss on disposition of discontinued operations — — 2,634
Deferred income tax (861 ) (3,833 ) (881 )
Debt conversion inducement — 2,117 —
Net realized losses/(gains) — 164 (130 )
Amortization — other 1,306 (554 ) (211 )
Cumulative effect of change in accounting principle, net of tax — — (495 )

Changes in assets and liabilities:

Increase in accrued salaries and benefits — 5,818 —
Increase in net federal income tax recoverable (3,611 ) (3,262 ) (1,290 )
Other, net 4,208 (4,481 ) 3,126

Net adjustments (11,682 ) (69,055 ) (113,291 )

Net cash provided by operating activities 134,816 94,519 35,202

Investing Activities:

Purchase of fixed maturity securities, available-for-sale — (15,000 ) (53,692 )
Sale of fixed maturity securities, available-for-sale — 23,167 19,344
Redemption and maturities of fixed maturity securities, available-for-sale 33,619 6,009 8,716
Sale of subsidiary — — 14,785
Purchase of short-term investments (381,775 ) (386,912 ) (273,491 )
Sale of short-term investments 432,615 356,771 209,365
Capital contribution to subsidiaries — (32,100 ) (12,530 )
Dividend in excess of subsidiary’s income 980 1,493 4,016

Net cash used in investing activities 85,439 (46,572 ) (83,487 )

Financing Activities:

Dividends to stockholders (24,464 ) (22,831 ) (19,908 )
Acquisition of treasury stock (152,118 ) (116,354 ) (22,885 )
Proceeds from issuance of notes payable, net of issuance costs — 96,263 99,310
Principal payment on note payable (18,300 ) (18,300 ) (24,000 )
Net proceeds from stock purchase and compensation plans 8,609 11,560 11,919
Excess tax benefits from share-based payment arrangements 3,484 3,903 3,783
Borrowings under line of credit agreement 6,000 — —
Repayment of borrowings under line of credit agreement (6,000 ) — —
Debt conversion inducement — (2,117 ) —
Principal payments of senior convertible notes (37,456 ) — —
Proceeds received on notes receivable from stock sale — — 66

Net cash (used in) provided by financing activities (220,245 ) (47,876 ) 48,285

Net increase in cash 10 71 —
Cash, beginning of year 71 — —

Cash, end of year $ 81 71 —

Information should be read in conjunction with the Notes to Consolidated Financial Statements of Selective Insurance Group, Inc. and ~~2004~~its subsidiaries in Item 8. “Financial Statements and Supplementary Data” of the Company’s Form 10-K.

% of
Assumed Ceded Amount
Direct from Other to Other Assumed
(in thousands) Amount Companies Companies Net Amount to Net

2006

Premiums earned:
Accident and health insurance $ 509 — 476 33 —
Property and liability insurance 1,618,500 36,009 154,878 1,499,631 2 %

Total premiums earned $ 1,619,009 36,009 155,354 1,499,664 2 %

2005

Premiums earned:
Accident and health insurance $ 120 — — 120 —
Property and liability insurance 1,523,085 43,464 148,656 1,417,893 3 %

Total premiums earned $ 1,523,205 43,464 148,656 1,418,013 3 %

2004

Premiums earned:
Accident and health insurance $ 125 — — 125 —
Property and liability insurance 1,419,246 37,328 138,309 1,318,265 3 %

Total premiums earned $ 1,419,371 37,328 138,309 1,318,390 3 %

111

SCHEDULE VII

SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
ALLOWANCE FOR UNCOLLECTIBLE PREMIUMS AND OTHER RECEIVABLES
Years ended December 31, 2007, 2006 ~~2005~~ and ~~2004~~2005


(in thousands)	2006			2005			2004			2007			2006			2005

Balance, January 1	$	8,085			8,242			6,531		$	6,656			8,085			8,242
Additions		2,955			6,120			3,542			3,625			2,955			6,120
Deletions¹		(4,384	)		(6,277	)		(1,831	)		(3,382	)		(4,384	)		(6,277	)

Balance, December 31	$	6,656			8,085			8,242		$	6,899			6,656			8,085


¹		The 2005 deletion amount includes $493 related to the December 2005 divestiture of Selective’s 100% ownership interest in CHN Solutions (Alta Services, LLC and Consumer Health Network Plus, LLC). For additional information regarding this divestiture, see Item 8. “Financial Statements and Supplementary Data,” Note 15 to the ~~consolidated financial statements~~Consolidated Financial Statements in the Company’s Form 10-K

112

SCHEDULE VIIII

SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
~~SUPPLEMENTAL~~SUMMARY OF INVESTMENTS-OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2007

Type of investment Amortized Cost Fair Carrying
(in thousands) or Cost Value Amount
Fixed maturity securities:

Held-to-maturity:
Obligations of states and political subdivisions $ 5,759 5,902 5,759
Mortgage-backed securities 24 25 24

Total fixed maturity securities, held-to-maturity 5,783 5,927 5,783

Available-for-sale:
U.S. government and government agencies 172,795 179,713 179,713
Obligations of states and political subdivisions 1,593,587 1,611,215 1,611,215
Corporate securities 479,169 487,075 487,075
Asset-backed securities 99,184 97,684 97,684
Mortgage-backed securities 705,178 697,860 697,860

Total fixed maturity securities, available-for-sale 3,049,913 3,073,547 3,073,547

Equity securities, available-for-sale:

Common stocks:
Banks, trust and insurance companies 4,834 11,606 11,606
Industrial, miscellaneous and all other 155,556 263,099 263,099

Total equity securities, available-for-sale 160,390 274,705 274,705

Short-term investments 190,167 190,167
Other investments 158,180 188,827

Total investments $ 3,564,433 3,733,029

113

SCHEDULE IV

SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
~~Years~~Year ended December 31, ~~2006, 2005 and 2004~~2007

Losses and loss
expenses
incurred related to
(1) (2) Paid losses
Affiliation with Registrant Current Prior and loss
(in thousands) year years expenses
Consolidated Property & Casualty Subsidiaries:
Year ended December 31, 2006 $ 967,272 (7,289 ) 736,752

Year ended December 31, 2005 $ 900,658 5,072 656,374

Year ended December 31, 2004 $ 861,474 4,900 653,131

Amortization
Deferred Reserve Losses of deferred
policy for losses Net Net and loss policy Other Net
acquisition and loss Unearned premiums investment expenses acquisition operating premiums
(in thousands) costs expenses¹ premiums earned income² incurred³ costs⁴ expenses⁴ written
Insurance Operations Segment $ 226,434 2,542,547 841,348 1,517,306 — 999,206 460,167 41,976 1,554,867
Investments Segment — — — — 207,498 — — — —

Total $ 226,434 2,542,547 841,348 1,517,306 207,498 999,206 460,167 41,976 1,554,867


~~NOTE:~~¹		Includes “Reserve for losses” and “Reserve for loss expenses” on the Consolidated Balance Sheet.

²		Includes “Net investment income earned” and “Net realized gains” on the Consolidated Income Statement.

³		Includes “Losses incurred” and “Loss expenses incurred” on the Consolidated Income Statement.

⁴		The ~~other information required in this schedule (e.g., deferred policy acquisition costs, reserves for losses and loss expenses, unearned premiums, net premiums earned, net investment income, amortization~~total of “Amortization of deferred policy acquisition ~~costs,~~costs” of $460,167, and ~~net premiums written) is contained in Schedule III~~“Other operating expenses” of $41,977 reconciles to ~~this report~~the Consolidated Income Statement as follows:

Policy acquisition costs $ 497,229
Dividends to policyholders 7,202
Other income (5,795 )
Other expenses 3,507

Total $ 502,143

In addition to amounts related to the Insurance Operations segment, “Other income” and “Other expense” on the Consolidated Income Statement includes holding company income and expense amounts of $63 and $25,588, respectively.

114

SCHEDULE IV (continued)

SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 2006

Amortization
Deferred Reserve Losses of deferred
policy for losses Net Net and loss policy Other Net
acquisition and loss Unearned premiums investment expenses acquisition operating premiums
(in thousands) costs expenses¹ premiums earned income² incurred³ costs⁴ expenses⁴ written
Insurance Operations Segment $ 218,103 2,288,770 791,540 1,499,664 — 959,983 443,300 38,403 1,535,961
Investments Segment — — — — 192,281 — — — —

Total $ 218,103 2,288,770 791,540 1,499,664 192,281 959,983 443,300 38,403 1,535,961


¹		Includes “Reserve for losses” and “Reserve for loss expenses” on ~~Form 10-K. In addition,~~ the ~~Company does not discount loss reserves.~~Consolidated Balance Sheet.

²		Includes “Net investment income earned” and “Net realized gains” on the Consolidated Income Statement.

³		Includes “Losses incurred” and “Loss expenses incurred” on the Consolidated Income Statement.

⁴		The total of “Amortization of deferred policy acquisition costs” of $443,300 and “Other operating expenses” of $38,404 reconciles to the Consolidated Income Statement as follows:

Policy acquisition costs $ 478,339
Dividends to policyholders 5,927
Other income (5,390 )
Other expenses 2,827

Total $ 481,703

~~113~~

115

SCHEDULE IV (continued)

SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 2005

Amortization
Deferred Reserve Losses of deferred
policy for losses Net Net and loss policy Other Net
acquisition and loss Unearned premiums investment expenses acquisition operating premiums
(in thousands) costs expenses¹ premiums earned income² incurred³ costs⁴ expenses⁴ written
Insurance Operations Segment $ 204,832 2,084,049 752,465 1,418,013 — 905,730 400,613 41,942 1,459,474
Investments Segment — — — — 150,414 — — — —

Total $ 204,832 2,084,049 752,465 1,418,013 150,414 905,730 400,613 41,942 1,459,474


¹		Includes “Reserve for losses” and “Reserve for loss expenses” on the Consolidated Balance Sheet.

²		Includes “Net investment income earned” and “Net realized gains” on the Consolidated Income Statement.

³		Includes “Losses incurred” and “Loss expenses incurred” on the Consolidated Income Statement.

⁴		The total of “Amortization of deferred policy acquisition costs” of $400,613 and “Other operating expenses” of $41,942 reconciles to the Consolidated Income Statement as follows:

Policy acquisition costs $ 437,894
Dividends to policyholders 5,688
Other income (3,769 )
Other expenses 2,742

Total $ 442,555

116

SCHEDULE V

SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
REINSURANCE
Years ended December 31, 2007, 2006 and 2005

% of
Assumed Ceded Amount
Direct from Other to Other Assumed
(in thousands) Amount Companies Companies Net Amount to Net
2007

Premiums earned:
Accident and health insurance $ 80 — 80 — —
Property and liability insurance 1,671,430 30,930 185,054 1,517,306 2 %

Total premiums earned $ 1,671,510 30,930 185,134 1,517,306 2 %

2006

Premiums earned:
Accident and health insurance $ 509 — 476 33 —
Property and liability insurance 1,618,500 36,009 154,878 1,499,631 2 %

Total premiums earned $ 1,619,009 36,009 155,354 1,499,664 2 %

2005

Premiums earned:
Accident and health insurance $ 120 — — 120 —
Property and liability insurance 1,523,085 43,464 148,656 1,417,893 3 %

Total premiums earned $ 1,523,205 43,464 148,656 1,418,013 3 %

117

EXHIBIT INDEX


Exhibit
Number
*3.1		Restated Certificate of Incorporation of Selective Insurance Group, Inc., dated August 4, 1977, as ~~amended.~~amended (incorporated by reference to Exhibit 3.1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, File No. 1-33067).

3.2		By-Laws of Selective Insurance Group, Inc., effective October 24, 2006 (incorporated by reference herein to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed October 24, 2006, File No. 001-33067).

4.1		Indenture dated December 29, 1982, between Selective Insurance Group, Inc. and ~~Midatlantic~~Midlantic National Bank, as Trustee, relating to the Company’s 8 3/4% Subordinated Convertible Debentures due 2008 (incorporated by reference herein to Exhibit 4.3 to the Company’s Registration Statement on Form S-3 No. 2-80881).

4.2		Indenture dated as of September 24, 2002, between Selective Insurance Group, Inc. and National City Bank, as Trustee, relating to the Company’s 1.6155% Senior Convertible Notes due September 24, 2032 (incorporated by reference herein to Exhibit 4.1 of the Company’s Registration Statement on Form S-3 No. 333-101489).

4.3		Indenture, dated as of November 16, 2004, between Selective Insurance Group, Inc. and Wachovia Bank, National Association, as Trustee, relating to the Company’s 7.25% Senior Notes due 2034 (incorporated by reference herein to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed November 18, 2004, File No. 0-8641).

4.4		Indenture, dated as of November 3, 2005, between Selective Insurance Group, Inc. and Wachovia Bank, National Association, as Trustee, relating to the Company’s 6.70% Senior Notes due 2035 (incorporated by reference herein to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed November 9, 2005, File No. 0-8641).

4.5		Amended and Restated Rights Agreement, dated as of February 2, 1999, between Selective Insurance Group, Inc. and Wells Fargo, National Association, as Successor to First Chicago Trust Company of New York, as Rights Agent (incorporated by reference herein to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed February 4, 1999, File No. 0-8641).

4.5a		Certificate of Adjustment, dated February 20, 2007, to the Amended and Restated Rights Agreement (incorporated by reference herein to Exhibit 4.2 to the Company’s Form 8-A filed February 20, 2007, File No. 001-33067).

4.6		Registration Rights Agreement, dated as of November 16, 2004, between Selective Insurance Group, Inc. and Keefe, Bruyette & Woods, Inc. (incorporated by reference herein to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed November 18, 2004, File No. 0-8641).

4.7		Registration Rights Agreement, dated as of November 3, 2005, between Selective Insurance Group, Inc. and Keefe, Bruyette & Woods, Inc. (incorporated by reference herein to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed November 9, 2005, File No. 0-8641).

4.8		Form of Junior Subordinated Debt Indenture between Selective Insurance Group, Inc. and U.S. Bank National Association (incorporated by reference herein to Exhibit 4.3 of the Company’s Registration Statement on Form S-3 No. 333-137395).

118


Exhibit
Number
4.9		First Supplemental Indenture, dated as of September 25, 2006, between Selective Insurance Group, Inc. and U.S. Bank National Association, as Trustee, relating to the Company’s 7.5% Junior Subordinated Notes due 2066 (incorporated by reference herein to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed September 27, 2006, File No. 0-8641).

~~114~~


~~Exhibit~~
~~Number~~
10.1		Selective Insurance Supplemental Pension Plan, effective as of January 1, 1989 (incorporated by reference herein to Exhibit 10.1 of the Company’s Registration Statement on Form S-4, No. 333-129927).

10.2		Selective Insurance Company of America Deferred Compensation Plan, effective July 1, 2002 (incorporated by reference herein to Exhibit 99.1 of the Company’s Registration Statement on Form S-8, No. 333-97799).

10.3		Selective Insurance Stock Option Plan II, as amended (incorporated by reference herein to Exhibit 10.13b to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999, File No. 0-8641).

10.3a		Amendment to the Selective Insurance Stock Option Plan II, as amended, effective as of July 26, 2006 (incorporated by reference herein to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, File No. 0-8641).

10.4		Selective Insurance Stock Option Plan III (incorporated by reference herein to Exhibit A to the Company’s Definitive Proxy Statement for its 2002 Annual Meeting of Stockholders filed with the Securities and Exchange Commission on April 1, 2002).

10.4a		Amendment to the Selective Insurance Stock Option Plan III, effective as of July 26, 2006 (incorporated by reference herein to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, File No. 0-8641).

10.5		Selective Insurance Group, Inc. 2005 Omnibus Stock Plan (incorporated by reference herein to Appendix A of the Company’s Definitive Proxy Statement for its 2005 Annual Meeting of Stockholders filed with the Securities and Exchange Commission on April 6, 2005).

10.5a		Amendment to the Selective Insurance Group, Inc. 2005 Omnibus Stock Plan (incorporated by reference herein to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, File No. 0-8641).

10.5b		Amendment No. 2 to the Selective Insurance Group, Inc. 2005 Omnibus Stock Plan (incorporated by reference herein to Exhibit 10.5b of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, File No. 0-8641).

10.5c		Amendment No. 3 to the Selective Insurance Group, Inc. 2005 Omnibus Stock Plan (incorporated by reference herein to Exhibit 10.5c of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, File No. 0-8641).

*10.5d		Amendment No. 4 to the Selective Insurance Group, Inc. 2005 Omnibus Stock Plan ~~Amendment.~~Amendment (incorporated by reference herein to Exhibit 10.5d of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, File No. 0-8641).

*10.5e		Amendment No. 5 to the Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Amendment (incorporated by reference herein to Exhibit 10.5e of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, File No. 0-8641).

10.6		Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Stock Option Agreement (incorporated by reference herein to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 0-8641).

119


Exhibit
Number
10.7		Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Director Restricted Stock Agreement (incorporated by reference herein to Exhibit 10.8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, File No. 0-8641).

*10.7a		Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Director Restricted Stock Agreement (incorporated by reference herein to Exhibit 10.7a of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, File No. 0-8641).

10.8		Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Director Stock Option Agreement (incorporated by reference herein to Exhibit 10.9 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, File No. 0-8641).

10.9		Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Restricted Stock Agreement (incorporated by reference herein to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 0-8641).

~~115~~


~~Exhibit~~
~~Number~~
10.10		Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Restricted Stock Agreement (incorporated by reference herein to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 0-8641).

10.11		Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Automatic Director Stock Option Agreement (incorporated by reference herein to Exhibit 2 of the Company’s Definitive Proxy Statement for its 2005 Annual Meeting of Stockholders filed with the Securities and Exchange Commission on April 6, 2005).

10.12		Deferred Compensation Plan for Directors (incorporated by reference herein to Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1993, File No. 0-8641).

10.13		Selective Insurance Group, Inc. Employee Stock Purchase Savings Plan (incorporated by reference herein to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1993, File No. 0-8641).

10.13a		Amendment to the 1987 Employee Stock Purchase Savings Plan, effective May 2, 1997, (incorporated by reference herein to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, File No. 0-8641).

10.14		Selective Insurance Group, Inc. Cash Incentive Plan (incorporated by reference herein to Appendix B to the Company’s Definitive Proxy Statement for its 2005 Annual Meeting of Stockholders filed with the Securities and Exchange Commission on April 6, 2005).

10.14a		Amendment No. 1 to the Selective Insurance Group, Inc. Cash Incentive Plan (incorporated by reference herein to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 0-8641).

*10.14b		Amendment No.��2 to the Selective Insurance Group, Inc. Cash Incentive Plan ~~Cash Incentive Unit Award Agreement~~ (incorporated by reference herein to Exhibit ~~10.5 to~~10.14b of the Company’s ~~Quarterly~~Annual Report on Form ~~10-Q~~10-K for the ~~quarter~~year ended ~~March~~December 31, ~~2006,~~2007, File No. 0-8641).

*10.14c		Selective Insurance Group, Inc. Cash Incentive Plan Cash Incentive Unit Award Agreement (incorporated by reference herein to Exhibit ~~10.6 to~~10.14c of the Company’s ~~Quarterly~~Annual Report on Form ~~10-Q~~10-K for the ~~quarter~~year ended ~~March~~December 31, ~~2006,~~2007, File No. 0-8641).

*10.14d		Selective Insurance Group, Inc. Cash Incentive Plan Cash Incentive Unit Award Agreement (incorporated by reference herein to Exhibit 10.14d of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, File No. 0-8641).

120


Exhibit
Number
10.15		Selective Insurance Group, Inc. Stock Purchase Plan for Independent Insurance Agencies, effective July 1, 2006 (incorporated by reference herein to Appendix A of the Company’s Definitive Proxy Statement for its 2006 Annual Meeting of Stockholders filed with the Securities and Exchange Commission on March 28, 2006).

*10.15a		Amendment No. 1 to the Selective Insurance Group, Inc. Stock Purchase Plan for Independent Insurance ~~Agencies.~~Agencies (incorporated by reference to Exhibit 10.15a of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, File No. 1-33067).

10.16		Selective Insurance Group, Inc. Stock Option Plan for Directors (incorporated by reference herein to Exhibit B of the Company’s Definitive Proxy Statement for its 2000 Annual Meeting of Stockholders filed with the Securities and Exchange Commission on March 31, 2000).

10.16a		Amendment to the Selective Insurance Group, Inc. Stock Option Plan for Directors, as amended, effective as of July 26, 2006, (incorporated by reference herein to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, File No. 0-8641).

~~116~~


~~Exhibit~~
~~Number~~
10.17		Selective Insurance Group, Inc. Stock Compensation Plan for Nonemployee Directors, as amended (incorporated by reference herein to Exhibit A to the Company’s Definitive Proxy Statement for its 2000 Annual Meeting of Stockholders filed with the Securities and Exchange Commission on March 31, 2000).

10.18		Employment, Termination and Severance Agreements.

10.18a		Employment Agreement between Selective Insurance Group, Inc. and Gregory E. Murphy, dated as of April 26, 2006 (incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 28, 2006, File No. 0-8641).

10.18b		Employment Agreement between Selective Insurance Group, Inc. and Jamie Ochiltree, III, dated as of August, 1, 2006 (incorporated by reference herein to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, File No. 0-8641).

10.18c		Employment Agreement between Selective Insurance Group, Inc. and Dale A. Thatcher, dated as of August 1, 2006 (incorporated by reference herein to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, File No. 0-8641).

10.18d		Employment Agreement between Selective Insurance Group, Inc. and Richard F. Connell, dated as of August 1, 2006 (incorporated by reference herein to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, File No. 0-8641).

10.18e		Termination Agreement between Selective Insurance Company of America and Michael H. Lanza, dated as of July 27, 2004 (incorporated by reference herein to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 0-8641).

10.18f		Employment Agreement among Selective Insurance Company of America, Selective Insurance Group, Inc. and Victor N. Daley, dated as of September 26, 2005 (incorporated by reference to Exhibit 10.18m of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, File No. 0-8641).

10.18g		Employment Agreement between Selective Insurance Group, Inc. and Kerry A. Guthrie, dated as of August 1, 2006 (incorporated by reference herein to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, File No. 0-8641).

121


Exhibit
Number
10.18h		Employment Agreement between Selective Insurance Group, Inc. and Ronald J. Zaleski, dated as of August 1, 2006 (incorporated by reference herein to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, File No. 0-8641).

10.19		Credit Agreement among Selective Insurance Group, Inc., the Lenders Named Therein and Wachovia Bank, National Association, as Administrative Agent, dated as of August 11, 2006 (incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 16, 2006, File No. 0-8641).

*18		~~Letter regarding change in accounting principle.~~

*21		Subsidiaries of Selective Insurance Group, Inc.

*23.1		Consent of KPMG LLP.

*24.1		Power of Attorney of Paul D. Bauer.

~~117~~


~~Exhibit~~
~~Number~~
*24.2		Power of Attorney of W. Marston Becker.

*24.3		Power of Attorney of A. David Brown.

*24.4		Power of Attorney of John C. Burville.

*24.5		Power of Attorney of William M. Kearns, Jr.

*24.6		Power of Attorney of Joan M. Lamm-Tennant.

*24.7		Power of Attorney of S. Griffin McClellan III.

*24.8		Power of Attorney of Ronald L. O’Kelley.

*24.9		Power of Attorney of John F. Rockart.

*24.10		Power of Attorney of William M. Rue.

*24.11		Power of Attorney of J. Brian Thebault.

*31.1		Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.

*31.2		Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.

*32.1		Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.

*32.2		Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.

*99.1		Glossary of Terms.


*		Filed herewith.

~~118~~

122


($ in millions)	1996			1997			1998			1999			2000			2001			2002			2003			2004			2005			2006

I.Gross reserves for unpaid losses and loss expenses at December 31	$	1,189.8			1,161.2			1,193.3			1,273.8			1,272.7			1,298.3			1,403.4			1,587.8			1,835.2			2,084.0			2,288.8
Reinsurance recoverable on unpaid losses and loss expenses at December 31	$	(150.2	)		(124.2	)		(140.5	)		(192.0	)		(160.9	)		(166.5	)		(160.4	)		(184.6	)		(218.8	)		(218.2	)		(199.7	)
Net reserves for unpaid losses and loss expenses at December 31	$	1,039.6			1,037.0			1,052.8			1,081.8			1,111.8			1,131.8			1,243.1			1,403.2			1,616.4			1,865.8			2,089.0

II. Net Reserves estimated as of:
One year later	$	1,029.5			1,034.5			1,044.2			1,080.7			1,125.5			1,151.7			1,258.1			1,408.1			1,621.5			1,858.5
Two years later		1,028.1			1,024.8			1,035.9			1,088.2			1,152.7			1,175.8			1,276.3			1,452.3			1,637.3
Three years later		1,020.5			1,014.0			1,033.3			1,115.6			1,181.9			1,210.7			1,344.6			1,491.1
Four years later		1,014.4			998.1			1,040.3			1,134.4			1,220.2			1,290.2			1,371.5
Five years later		1,000.9			997.9			1,049.9			1,156.0			1,278.3			1,306.8
Six years later		1,002.1			1,003.6			1,058.6			1,194.6			1,287.5
Seven years later		1,006.5			1,011.6			1,090.0			1,203.2
Eight years later		1,010.9			1,038.0			1,101.1
Nine years later		1,033.4			1,045.2
Ten years later		1,042.6
Cumulative net Redundancy (deficiency)	$	(3.0	)		(8.2	)		(48.3	)		(121.4	)		(175.7	)		(174.9	)		(128.5	)		(87.8	)		(20.9	)		7.3


III. Cumulative amount of net reserves paid through:
One year later	$	303.6			313.7			328.1			348.2			399.2			377.1			384.0			414.5			422.4			468.6
Two years later		519.6			531.1			537.5			600.3			649.1			627.3			653.3			691.4			729.5
Three years later		674.7			665.5			703.8			767.5			815.3			807.2			836.3			903.7
Four years later		760.8			760.8			797.1			870.8			930.9			926.9			966.2
Five years later		820.0			812.2			856.1			933.6			1,002.4			1,003.3
Six years later		850.9			849.7			892.2			974.6			1,046.3
Seven years later		877.3			875.9			919.2			1,001.1
Eight years later		896.0			894.7			937.1
Nine years later		912.1			908.5
Ten years later		924.2

IV. Re-estimated gross liability	$	1,305.9			1,294.2			1,352.0			1,469.3			1,519.9			1,546.8			1,583.3			1,716.5			1,867.0			2,090.5
Re-estimated Reinsurance Recoverable	$	(263.3	)		(249.0	)		(250.9	)		(266.1	)		(232.3	)		(240.1	)		(211.7	)		(225.5	)		(229.7	)		(232.0	)

Re-estimated net Liability	$	1,042.6			1,045.2			1,101.1			1,203.2			1,287.5			1,306.8			1,371.5			1,491.1			1,637.3			1,858.5

V. Cumulative gross (deficiency)	$	(116.1	)		(133.0	)		(158.7	)		(195.5	)		(247.2	)		(248.5	)		(179.8	)		(128.7	)		(31.8	)		(6.4	)

Cumulative net Redundancy (deficiency)	$	(3.0	)		(8.2	)		(48.3	)		(121.4	)		(175.7	)		(174.9	)		(128.5	)		(87.8	)		(20.9	)		7.3


($ in thousands)			As of: 12/31/06						As of: 12/31/05
			Unsecured						Unsecured
	Ratings:		Recoverable on			% of			Recoverable on Paid
Reinsurer Name	A.M. Best		Paid and Unpaid			Total			and Unpaid			% of Total

NJ Unsatisfied Claim Judgement Fund	State pool		$	65,624			39	%	$	65,636			35	%
Munich Reinsurance America, Inc.		“A”		30,776			18	%		30,966			17	%
National Flood Insurance Program	Federal program			14,823			9	%		40,316			22	%
Hannover Ruckversicherungs AG		“A”		12,161			7	%		8,657			5	%
Swiss Re America Corp.		“A+”		10,740			6	%		11,787			6	%
All Other Reinsurers	various			32,346			21	%		28,641			15	%
Total			$	166,470					$	186,003
% of Shareholders Equity				15	%					19	%


*Environmental Claims Activity (in*
*thousands except claim counts and average*
*gross loss settlements on closed claims)*	2006			2005			2004

Asbestos Related Claims⁽¹⁾
Claims at beginning of year		2,089			3,025			2,772
Claims received during year		358			276			442
Claims closed during year⁽²⁾		(174	)		(1,212	)		(189	)

Claims at end of year		2,273			2,089			3,025

Average gross loss settlement on closed claims	$	910			530			180
Gross amount paid to administer closed claims	$	67			230			137
Net survival ratio⁽³⁾		20			16			20

Non-Asbestos Related Claims⁽¹⁾
Claims at beginning of year		293			285			286
Claims received during year		111			154			126
Claims closed during year⁽²⁾		(102	)		(146	)		(127	)

Claims at end of year		302			293			285

Average gross loss settlement on closed claims	$	600			65,200			13,600
Gross amount paid to administer closed claims	$	26			1,718			553
Net survival ratio⁽³⁾		9			7			7


All Lines						2006					2005
($ in thousands)	2006			2005		vs. 2005			2004		vs. 2004

GAAP Insurance Operations Results:
NPW	$	1,535,961			1,459,474		5	%		1,365,148		7	%

NPE		1,499,664			1,418,013		6			1,318,390		8
Less:
Losses and loss expenses incurred		959,983			905,730		6			866,374		5
Net underwriting expenses incurred		475,776			436,867		9			406,973		7
Dividends to policyholders		5,927			5,688		4			4,275		33

Underwriting income	$	57,978			69,728		(17	)%		40,768		71	%

GAAP Ratios:
Loss and loss expense ratio		64.0	%		63.9	0.1		pts		65.7	(1.8		)pts
Underwriting expense ratio		31.7			30.8		0.9			30.9		(0.1	)
Dividends to policyholders ratio		0.4			0.4		—			0.3		0.1

Combined ratio		96.1			95.1		1.0			96.9		(1.8	)

Statutory Ratios¹:
Loss and loss expense ratio		63.7			63.5		0.2			65.3		(1.8	)
Underwriting expense ratio		31.3			30.7		0.6			30.3		0.4
Dividends to policyholders ratio		0.4			0.4		—			0.3		0.1

Combined ratio¹		95.4	%		94.6	0.8		pts		95.9	(1.3		)pts


($ in thousands, except per share amounts)

Net income, as reported	$	128,639
Add: Stock-based compensation reported in net income, net of related tax effect		5,288
Deduct: Total stock-based compensation expense determined under fair value-based method for all awards, net of related tax effects		(5,545	)

Pro forma net income	$	128,382


Net income per share:
Basic — as reported	$	2.41
Basic — pro forma		2.40
Diluted — as reported		2.04
Diluted — pro forma		2.04


($ in thousands)
	Shares Purchased		Cost of Shares Purchased		Shares Purchased		Cost of Shares Purchased
	in connection with		in connection with		as Part of Publicly		as Part of Publicly
	Restricted stock Vestings		Restricted stock Vestings		Announced Plans		Announced Plans
Period	and Stock Option Exercises		and Stock Option Exercises		or Programs		or Programs
2007		354,456	$	8,813		5,703,464	$	143,305
2006		228,914	$	6,237		4,106,708	$	110,117
2005		225,690	$	6,557		670,528	$	16,327


($ in millions)
Selective Insurance Company of America	$	84.5
Selective Way Insurance Company		25.7
Selective Insurance Company of South Carolina		11.3
Selective Insurance Company of the Southeast		9.0
Selective Insurance Company of New York		7.5
Selective Insurance Company of New England		1.3
Selective Auto Insurance Company of New Jersey		0.1

Total	$	139.4


($ in millions)

Selective Insurance Company of America	$	78.1
Selective Way Insurance Company		27.6
Selective Insurance Company of South Carolina		11.8
Selective Insurance Company of the Southeast		9.5
Selective Insurance Company of New York		7.1
Selective Insurance Company of New England		1.2
Selective Auto Insurance Company of New Jersey		6.6

Total	$	141.9


	Before					After
	Application of					Application of
	Statement 158		Adjustments			Statement 158
Deferred federal income tax	$	8,042		7,403			15,445
Other assets		58,693		(9,242	)		49,451
Total assets		4,769,544		(1,839	)		4,767,705
Accrued salaries and benefits		91,821		2,739			94,560
Other liabilities		89,787		9,170			98,957
Total liabilities		3,678,569		11,909			3,690,478
Accumulated other comprehensive income		114,349		(13,748	)		100,601
Total stockholders’ equity	$	1,090,975		(13,748	)		1,077,227


					Weighted
			Weighted		Average
			Average		Remaining		Aggregate
	Number		Exercise		Contractual		Intrinsic Value
	of shares		Price		Life in Years		($ in thousands)

Outstanding at December 31, 2005		1,579,046	$	13.48
Granted 2006		89,230		28.46
Exercised 2006		408,640		12.23
Forfeited or expired 2006		9,600		9.76


Outstanding at December 31, 2006		1,250,036	$	14.99		5.2	$	17,075

Exercisable at December 31, 2006		1,164,576	$	14.00		5.0	$	17,058


Type of investment	Amortized Cost		Fair		Carrying
(in thousands)	or Cost		Value		Amount

Fixed maturity securities:
Held-to-maturity:
Obligations of states and political subdivisions	$	9,792		10,042		9,792
Mortgage-backed securities		30		31		30

Total fixed maturity securities, held-to-maturity		9,822		10,073		9,822

Available-for-sale:
U.S. government and government agencies		195,725		199,310		199,310
Obligations of states and political subdivisions		1,736,865		1,743,649		1,743,649
Corporate securities		295,964		301,581		301,581
Asset-backed securities		50,319		50,421		50,421
Mortgage-backed securities		638,011		642,139		642,139

Total fixed maturity securities, available-for-sale		2,916,884		2,937,100		2,937,100


Equity securities, available-for-sale:
Common stocks:
Banks, trust and insurance companies		29,530		54,243		54,243
Industrial, miscellaneous and all other		128,334		253,133		253,133

Total equity securities, available-for-sale		157,864		307,376		307,376

Short-term investments		197,019		197,019		197,019
Other investments		138,506		144,785		144,785

Total investments	$	3,420,095		3,596,353		3,596,102


											Amortization
	Deferred		Reserve						Losses		of deferred
	policy		for losses				Net		and loss		policy		Other		Net
	acquisition		and loss		Unearned		premiums		expenses		acquisition		operating		premiums
(in thousands)	costs		expenses		premiums		earned		Incurred		costs²		expenses^1, 2		written

Commercial	$	178,001		1,868,054		613,742		1,285,876		811,326		384,341		26,727		1,318,873
Personal		40,102		220,978		107,863		213,788		148,657		58,959		11,676		217,088
Reinsurance recoverable on unpaid losses and loss expenses		—		199,738		—		—		—		—		—		—
Prepaid reinsurance premiums		—		—		69,935		—		—		—		—		—
Interest and general corporate expenses		—		—		—		—		—		—		47,557		—

Total	$	218,103		2,288,770		791,540		1,499,664		959,983		443,300		85,960		1,535,961


	Losses and loss
	expenses
	incurred related to
	(1)		(2)			Paid losses
Affiliation with Registrant	Current		Prior			and loss
(in thousands)	year		years			expenses
Consolidated Property & Casualty Subsidiaries:
Year ended December 31, 2006	$	967,272		(7,289	)		736,752

Year ended December 31, 2005	$	900,658		5,072			656,374

Year ended December 31, 2004	$	861,474		4,900			653,131