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<SEC-DOCUMENT>0000950123-01-500488.txt : 20010409
<SEC-HEADER>0000950123-01-500488.hdr.sgml : 20010409
ACCESSION NUMBER:		0000950123-01-500488
CONFORMED SUBMISSION TYPE:	10-K
PUBLIC DOCUMENT COUNT:		5
CONFORMED PERIOD OF REPORT:	20001231
FILED AS OF DATE:		20010402

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			SELECTIVE INSURANCE GROUP INC
		CENTRAL INDEX KEY:			0000230557
		STANDARD INDUSTRIAL CLASSIFICATION:	FIRE, MARINE & CASUALTY INSURANCE [6331]
		IRS NUMBER:				222168890
		STATE OF INCORPORATION:			NJ
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10-K
		SEC ACT:		
		SEC FILE NUMBER:	000-08641
		FILM NUMBER:		1590542

	BUSINESS ADDRESS:	
		STREET 1:		40 WANTAGE AVENUE
		CITY:			BRANCHVILLE
		STATE:			NJ
		ZIP:			07890
		BUSINESS PHONE:		2019483000

	MAIL ADDRESS:	
		STREET 1:		40 WANTAGE AVE
		STREET 2:		40 WANTAGE AVE
		CITY:			BRANCHVILLE
		STATE:			NJ
		ZIP:			07890

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	SRI CORP
		DATE OF NAME CHANGE:	19860508
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>y47342e10-k.txt
<DESCRIPTION>SELECTIVE INSURANCE GROUP, INC.
<TEXT>

<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                  FORM 10-K

(Mark one)
[X]        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934 (Fee required)

           For the fiscal year ended... December 31, 2000
                                       OR
[ ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934 (No fee required)

           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               (IRS Employer Identification No.)
Incorporation or Organization)

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

                               TITLE OF EACH CLASS
                               -------------------
         8 3/4% Convertible Subordinated Debentures due January 1, 2008
                                (Title of class)
                      Common Stock, par value $2 per share
                                (Title of class)
                         Preferred Share Purchase Rights
                                (Title of Class)

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.
                                                        [X] Yes         [ ] 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.

                                                                            [ ]

State the aggregate market value of the voting stock held by non-affiliates of
the registrant based on last sale price on the Nasdaq National Market on
February 20, 2001.

Common Stock, par value $2 per share: $589,641,460

Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of February 20, 2001.

Common Stock, par value $2 per share: 25,360,923.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Selective Insurance Group, Inc. 2000 Annual Report to
Shareholders and definitive Proxy Statement for the 2001 Annual Meeting of
Stockholders are incorporated by reference to Parts I, II and III of this
report.




                                       1
<PAGE>   2




FORWARD-LOOKING STATEMENTS

        Some of the statements in this report are not historical facts and are
"forward-looking statements" (as defined in the Private Securities Litigation
Reform Act of 1995). These statements use words such as "believes," "expects,"
"intends," "may," "will," "should," "anticipates," and other similar words and,
among other things, describe our current strategies, opinions, expectations of
future results and other forward-looking information. We derive forward-looking
information from information which we currently have and numerous assumptions
which we make. We cannot assure that results which we anticipate will be
achieved, since results may differ materially because of both known and unknown
risks and uncertainties which we face. Factors which could cause actual results
to differ materially from our expectations include, but are not limited to: the
effects of economic conditions and conditions which affect the market for
property and casualty insurance; laws, rules and regulations which apply to
insurance companies, including the impact of personal automobile reform
legislation in New Jersey; the effects of competition from other insurers and
our diversified insurance services and banks, and the trend toward
self-insurance; risks we face in entering new markets and diversifying the
products and services we offer; weather-related events and other catastrophes
affecting our insureds; our ability to obtain rate increases and to retain
business; the performance of our independent insurance agencies; and other risks
and uncertainties we identify in this report and in other filings with the
Securities and Exchange Commission, although we do not promise to update such
forward-looking statements to reflect actual results or changes in assumptions
or other factors that could affect these statements.




                                       2
<PAGE>   3
                                     PART I

ITEM 1.    BUSINESS.

         GENERAL

         Selective was founded in 1925, and the holding company was established
in 1977. Selective Insurance Group, Inc. (Parent) is a regional insurance
holding company which, through its subsidiaries, (collectively, "Selective" or
the "Company") offers, through over 900 independent agents in 20 northeastern,
southeastern and midwestern states, a broad range of commercial insurance and
alternative risk management products, to small and medium-sized businesses and
government entities. Our commercial insurance products represent 76% of net
premiums written. We also provide personal insurance products to individuals and
families in nine states, which represent 24% of net premiums written. We write
business in the following states: Connecticut, Delaware, Georgia, Illinois,
Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Missouri, New Jersey,
New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina,
Virginia, Wisconsin, and Washington D.C. Since 1996, we expanded into the
Midwest, Connecticut and Rhode Island in an effort to diversify our exposure to
any one geographic or regulatory environment. As part of an effort to diversify
our business and develop fee-based revenues, we also offer diversified insurance
services which include: flood business managed by us for the National Flood
Insurance Program, medical cost containment services, professional employer
organization (PEO) products and services, software development and
administration services, and fee based income from alternative market
affiliation programs.

         We offer our insurance products through Selective Insurance Company of
America (SICA), Selective Way Insurance Company (SWIC), Selective Insurance
Company of the Southeast (SISE), Selective Insurance Company of South Carolina
(SISC) and Selective Insurance Company of New York (SINY) (collectively, the
Insurance Subsidiaries). In November 1997, we acquired the assets of Alta
Services LLC (Alta), formerly MCSI/MRSI, a managed care company that provides
medical claims handling services to Selective and other insurers. In 1997, we
formed Selective Risk Managers (SRM) to accommodate clients with self-insurance
and group/association-based insurance. In December 1998, we acquired the assets
of PDA Software Services, Inc. (PDA), a software developer specializing in the
insurance industry. In July 1999, we acquired Selective HR Solutions, formerly
Modern Employers Inc., a Florida-based PEO and Consumer Health Network Plus,
(CHN) a New Jersey-based Preferred Provider Organization (PPO).

         We reorganized our internal operations during 1999 by creating an
"Insurance Operations" group and a "Diversified Insurance Services" group. The
reorganization reflects the need for distinct management focus on Selective's
core insurance businesses and on the insurance-related businesses we have
developed, either internally or by acquisition.

         We have classified our business into three operating segments:
Insurance Operations (Commercial Lines and Personal Lines underwriting),
Investments, and Diversified Insurance Services. For a comprehensive discussion
of our segments, see Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations." and Footnote 15 to the Consolidated
Financial Statements, "Segment Information" on page 54, of our 2000 Annual
Report to Shareholders, which are incorporated herein by reference.

         We currently employ approximately 2,450 employees of which 1,750 work
in our Insurance and Investments Operations and 700 work in our Diversified
Insurance Services businesses.

         We face competition in both the Insurance and Diversified Insurance
Services segments. Please refer to the "Risk Factors" beginning on page 16 of
this report on Form 10-K, and Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations."


                                       3
<PAGE>   4




         INSURANCE OPERATIONS SEGMENT

         Our principal strategy for the Insurance Operations segment is to
generate profitable premium growth based on superior customer service and on
strong franchise value with our independent agents. In addition, we strive to
maintain and build on Selective's position as a market leader among regional
property and casualty insurers. We analyze this segment by looking at results a
number of ways, including by state, by line-of-business and by Strategic
Business Unit (SBU). The SBUs are organized by type of customer.

         For the ten years ended December 31, 2000, our average statutory loss
and loss expense ratio and average statutory combined ratio were 71.2% and
105.0%, respectively. Our average statutory loss and loss expense ratio during
this period outperformed the property and casualty industry's average ratio, as
reported by A.M. Best Company, Inc. (A.M. Best), by 8.4 points (71.2% for us
compared with 79.6% for the industry). We attribute our performance to the
franchise value we have created with our independent agency force, expertise in
underwriting property and casualty insurance risks, and our penetration of high
quality markets in the northeastern, southeastern and midwestern states. For the
ten years ended December 31, 2000, our average statutory underwriting expense
ratio was 32.8% compared to 26.8% for the property and casualty industry. Our
historical statutory underwriting expense ratio is higher than the industry
average primarily due to the fact that the industry average expense ratio
reflects the inclusion of direct writers of insurance which generally have lower
distribution costs than we do. Our 2000 underwriting expense ratio was 31.7%,
which reflects an increase of 0.3 points attributable to increased premium
write-offs, due to non-payment of premiums, and 0.1 points attributable to
increased spending on automation and technology initiatives. Our average
statutory combined ratio outperformed the property and casualty industry average
statutory combined ratio by 2.7 points (105.0% for us compared with 107.7% for
the industry). The table below sets forth a comparison of certain Company and
industry ratios:


<TABLE>
<CAPTION>
                                      Simple
                                      Average
                                      of All
                                      Periods
                                     Presented      2000      1999      1998      1997      1996
- ------------------------------------ ---------- --------- --------- --------- --------- ---------
<S>                                 <C>           <C>       <C>       <C>       <C>      <C>
CERTAIN COMPANY RATIOS: (1)
Loss                                   60.5  %      66.4      65.0      59.9      56.8      60.6
Loss expense                           10.7          9.3       9.4      10.3      11.4      10.8
Underwriting expense                   32.8         31.7      30.5      32.2      31.2      30.8
Policyholders' dividends                1.0          0.9       0.8       0.7       0.7       0.7
Combined ratio (2) , (3)              105.0        108.2     105.7     103.2     100.1     102.9

Growth (decline) in net premiums
written                                 6.0          3.6       8.1       4.4       3.7      (8.6)
CERTAIN INDUSTRY RATIOS: (1) (4)
Loss                                   66.6         68.2      64.8      63.3      60.3      65.4
Loss expense                           13.0         13.3      13.5      12.9      12.5      12.9
Underwriting expense                   26.8         27.5      28.1      27.3      27.1      26.4
Policyholders' dividends                1.3          1.3       1.1       1.5       1.7       1.1
Combined ratio (3)                    107.7        110.3     107.5     105.0     101.6     105.8
Growth in net premiums written          3.3          5.0       2.3       1.7       2.8       3.4
COMPANY FAVORABLE (UNFAVORABLE) TO
INDUSTRY:
Combined ratio                          2.7          2.1       1.8       1.8       1.5       2.9
Growth in net premiums written          2.7        (1.4)       5.8       2.7       0.9     (12.0)
</TABLE>



<TABLE>
<CAPTION>
                                         1995      1994     1993      1992      1991
- ------------------------------------ --------- --------- --------- --------- ---------
<S>                                    <C>       <C>       <C>       <C>       <C>
CERTAIN COMPANY RATIOS: (1)
Loss                                     60.4      60.6      60.3      58.2      56.6
Loss expense                             10.8      11.1      11.5      11.3      11.3
Underwriting expense                     29.4      31.6      35.5      37.0      38.3
Policyholders' dividends                  1.0       1.0       1.2       1.3       1.5
Combined ratio (2) , (3)                101.6     104.3     108.5     107.9     107.6

Growth (decline) in net premiums
written                                   8.5      14.8       8.9      13.0       3.8
CERTAIN INDUSTRY RATIOS: (1) (4)
Loss                                     65.7      68.1      66.7      74.7      68.5
Loss expense                             13.2      13.0      12.8      13.4      12.6
Underwriting expense                     26.3      26.0      26.3      26.6      26.4
Policyholders' dividends                  1.4       1.3       1.1       1.2       1.3
Combined ratio (3)                      106.5     108.5     106.9     115.7     108.8
Growth in net premiums written            3.6       3.8       6.2       2.0       2.4
COMPANY FAVORABLE (UNFAVORABLE) TO
INDUSTRY:
Combined ratio                            4.9       4.2     (1.6)       7.8       1.2
Growth in net premiums written            4.9      11.0       2.7      11.0       1.4
</TABLE>


1.     The ratios and percentages are based upon Statutory Accounting Practices
       (SAP) prescribed or permitted by state insurance departments in the
       states in which each company is domiciled. These practices may differ
       from accounting principles generally accepted in the United States of
       America (GAAP). For definitions of these ratios, please refer to the
       section entitled "Glossary of Terms" on page 62 of our 2000 Annual Report
       to Shareholders, incorporated herein by reference.

2.     In 1993, this ratio includes the one-time restructuring charge of $9
       million, which increased the ratio by 1.5 points.

3.     A combined ratio under 100% generally indicates an underwriting profit
       and a combined ratio over 100% generally indicates an underwriting loss.
       Because of investment income, a company may still be profitable although
       its combined ratio exceeds 100%.

4.     Source: A.M. Best. The industry ratios for 2000 have been estimated by
       A.M. Best.



                                       4
<PAGE>   5



INSURANCE OPERATIONS

<TABLE>
<CAPTION>

                                                           Unaudited twelve months ended December 31,
($ in thousands)                                              2000            1999            1998
- ----------------------------------------------------- ---- ----------- --- ----------- --- -----------
TOTAL INSURANCE OPERATIONS
<S>                                                   <C>                  <C>             <C>
Net premiums written                                   $     843,604         811,677         748,873
                                                           ===========     ===========     ===========
Net premiums earned                                          821,265         799,065         722,992
Losses and loss expenses incurred                            614,066         592,215         507,800
Net underwriting expenses incurred                           264,651         254,315         234,849
Dividends to policyholders                                     7,670           6,682           5,329
                                                           -----------     -----------     -----------
Underwriting  loss                                     $     (65,122)        (54,147)        (24,986)
                                                           -----------     -----------     -----------
GAAP RATIOS:
Loss and loss expense ratio                                     74.8   %        74.1            70.2
Underwriting expense ratio                                      32.2   %        31.8            32.5
Dividends to policyholders ratio                                 0.9   %         0.9             0.7
                                                           -----------     -----------     -----------
Combined ratio                                                 107.9   %       106.8           103.6
                                                           ===========     ===========     ===========
</TABLE>


For the year, we continued to outperform the industry with a statutory combined
ratio of 108.2%, compared with an A.M. Best estimate for the industry of 110.3%,
up from 107.5% one year ago. On a GAAP basis, The combined ratio was 107.9% in
2000, compared to 106.8% in 1999 and 103.6% in 1998. The increase for 2000 was
caused by a 6.6 point increase in the Personal Lines combined ratio to 109.5% in
2000 from 102.9% in 1999; the Commercial Lines combined ratio decreased 0.8
points to 107.5% in 2000 from 108.3% in 1999. The increase from 1998 to 1999 was
caused by a 6.5 point increase in the Personal Lines combined ratio to 102.9%
from 96.4%, and a 1.8 point increase in the Commercial Lines combined ratio to
108.3% from 106.5%.

    The following table shows the distribution of net premiums written, in our
insurance operations, by state for the periods indicated:


<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
WRITTEN PREMIUM DISTRIBUTION BY STATE                             2000              1999               1998
<S>                                                             <C>                 <C>               <C>
New Jersey                                                        41.8  %            46.2              51.5
Pennsylvania                                                      13.4               12.2              11.2
New York                                                          11.3               10.1               9.0
Maryland                                                           6.9                6.3               5.6
Virginia                                                           4.8                5.0               5.0
Illinois                                                           3.4                2.9               2.1
South Carolina                                                     3.0                4.0               5.1
North Carolina                                                     2.5                2.4               2.6
Georgia                                                            2.3                2.3               2.3
Ohio                                                               2.2                1.9               0.8
Indiana                                                            2.2                1.7               1.0
Wisconsin                                                          1.7                1.4               0.8
Delaware                                                           1.6                1.8               2.1
Michigan                                                           1.1                0.6               0.3
Other States                                                       1.8                1.2               0.6
                                                           ------------       -----------       ------------
Total                                                            100.0  %           100.0             100.0
</TABLE>

AGENCY DISTRIBUTION FORCE

         We believe we have a premier agency distribution force in the property
and casualty industry. Our strong agency relationships start with providing a
broad range of products, an ease of doing business with us due to updated
technology, superior service, in both underwriting and claims, stable markets,
consistent underwriting standards, and opportunity for growth and profitability.
We have competitive commission schedules and agents can earn additional
commissions of up to 17% of their direct premiums written under the agency
profit sharing plan. Our local staff maintains a high level of communication
with agents. Senior management also interacts frequently with agents through a
variety of company sponsored events. These include: annual agency meetings in
our operating territories; annual agency incentive trips; annual agency customer
service representative meetings; annual Producer Council meetings where leading
local agents discuss with management how we can improve our product offerings,
customer service and overall efficiency; and, an annual


                                       5
<PAGE>   6


agency strategy meeting where a group of agents from our operating territories
advise management as corporate strategies and key initiatives are developed.

         Selective continues to work with its 920 independent agents to generate
profitable premium growth. At this point, while the long-term effects of ongoing
agency consolidation and bank acquisitions of agencies cannot be fully
anticipated, Selective is taking steps to work even more closely with our best
agents including those purchased by a bank or other entity.

         FIELD STRATEGY

         In 1995, we began deploying field underwriters - agency management
specialists (AMS) and in 1997 field claim adjusters - claims management
specialists (CMS) into the territories serviced by our agents. Through year-end
2000, there were approximately 85 AMSs and 135 CMSs working in our operating
territories. Working and living near agents and customers enables AMSs to work
side-by-side with agents to evaluate new business opportunities and develop
strong relationships based on technical excellence and regular, personal
interaction. The AMSs work account-by-account to ensure we make fair, accurate
underwriting decisions. CMSs also work and live close to agents and customers so
that they are able to quickly be on site when a loss occurs, as well as conduct
on-site inspections and obtain knowledge about potential exposures. We believe
that personal, early intervention by CMSs results in higher levels of customer
satisfaction, and quicker, more accurate claim settlements and fraud detection.

         AMSs and CMSs are supported by six regional field offices located
throughout our operating territories. In addition to supporting agency service
and relationship objectives, the regional offices are responsible for handling
renewal business. The AMSs, regional office underwriting teams and agents work
together with corporate management to maintain underwriting discipline and
business quality. The account-by-account and team strategy for underwriting
supports our objective of retaining established accounts with favorable
underwriting results.

         UNDERWRITING

         The AMSs, regional offices, SBU personnel and our agents all play an
integral role in the underwriting process, subject to our underwriting
guidelines for particular policies and types of customers. The regional offices
and the SBUs work together to develop products and underwriting guidelines as
well as pricing, growth and profitability objectives. These activities are also
based on AMS input regarding agents' needs for products and pricing.

         For certain classes of business and policy limits, agencies have the
authority to bind the Insurance Subsidiaries. The Insurance Subsidiaries have a
period, generally 60 days after the effective date of coverage, during which
they can cancel undesirable risks. During the 60 day period, the Insurance
Subsidiaries are required to pay any claim which would be covered under such
policies. Our agents handbook sets forth underwriting criteria for particular
policies and insureds. When a risk falls outside of the established guidelines,
the agencies must contact their AMS to obtain authorization to bind coverage.
Insurance accounts that exceed the AMS's authority require additional management
or home office approval. Policies that are accepted become subject to regulatory
limitations on policy cancellations and, except for nonpayment of premiums,
generally may not be canceled after the first 60 days other than at renewal upon
prescribed notice of cancellation.

         Loss control representatives (LCRs) are responsible for surveying and
assessing accounts from a safety standpoint. Accounts with significant exposures
in a particular line of coverage may be placed on service by the LCR and receive
regular individualized attention. The premium audit staff conducts audits of a
commercial account's financial records on an interim basis during the policy
year, or at the end of a policy term to adjust interim or final audit premium
payments.

         The Insurance business operates through seven SBUs, each responsible
for the profitability and production of their core classes of business. The SBUs
were established in 1993 to organize our insurance segment around customers.
This approach allows us to identify new business opportunities and quickly
correct under-performing business classes. This operating structure is enhanced
by line of business specialists that are responsible for the profitability of
our major lines of business. In addition to increasing prices and implementing
loss and loss expense cost savings initiatives to improve profitability, the
SBUs have strengthened the underwriting discipline in under-performing classes
of business.



                                       6
<PAGE>   7




    The specific SBUs and their results are as follows:


<TABLE>
<CAPTION>

STRATEGIC BUSINESS UNIT  HIGHLIGHTS                                Net          Net          GAAP          GAAP
                                                                Premiums     Premiums    Underwriting    Combined
($ IN THOUSANDS)                                                 Written      Earned     Income (Loss)     Ratio
- --------------------------------------------------------------------------------------------------------------------
<S>                                              <C>        <C>              <C>             <C>          <C>
All SBUs                                          2000      $   843,604       821,265        (65,122)      107.9%
                                                  1999          811,677       799,065        (54,147)      106.8
                                                  1998          748,873       722,992        (24,986)      103.6

Contractors                                       2000          250,184       241,848        (22,952)      109.5
                                                  1999          227,979       216,665        (22,507)      110.4
                                                  1998          195,494       184,076        (18,997)      110.3

Mercantile and Service                            2000          168,194       162,055         (8,985)      105.5
                                                  1999          156,944       154,411        (10,804)      107.0
                                                  1998          148,954       143,330         (9,685)      106.8

Community Services and                            2000           85,442        80,671         (1,507)      101.9
Organizations                                     1999           79,089        80,100            107        99.9
                                                  1998           70,786        76,075         (1,509)      102.0

Habitational and Recreational                     2000           66,856        64,107         (7,207)      111.2
                                                  1999           62,003        60,576         (9,216)      115.2
                                                  1998           56,890        54,543         (3,447)      106.3

Manufacturing and Processing                      2000           55,176        51,164         (5,932)      111.6
                                                  1999           49,198        46,391         (5,880)      112.7
                                                  1998           39,893        36,059         (2,274)      106.3

Bonds                                             2000           13,138        12,020          1,397        88.4
                                                  1999           12,308        12,507            675        94.6
                                                  1998           12,546        11,937          3,041        74.5

Personal Lines                                    2000          204,613       209,400        (19,936)      109.5
                                                  1999          224,156       228,415         (6,522)      102.9
                                                  1998          224,310       216,972          7,885        96.4
</TABLE>

         The Insurance Operations segment focuses on the sale and servicing of
property and casualty insurance. The insurance coverages provided by the
commercial SBUs include: workers' compensation, commercial automobile,
liability, property, umbrella, and fidelity and surety. The Personal Lines SBU
provides homeowners', personal automobile, and personal catastrophe liability
insurance coverages.

         CLAIMS

         Timely investigation and the fair settlement of meritorious claims is
one of the most important customer services we provide. In addition, we
aggressively investigate potentially suspicious or fraudulent claims so that
appropriate action can be taken before payment is authorized. Also, company
policy emphasizes the maintenance of timely and adequate reserves for claims,
and the cost-effective delivery of claims services by controlling loss and loss
expenses.

         Our CMSs are primarily responsible for investigating and settling
claims directly with policyholders. By promptly and personally investigating
claims, the CMS is able to provide personal service and quickly resolve claims.
In territories where there is insufficient claims volume to justify the
placement of a CMS, or when particular claim expertise is required, we use
independent adjusters to investigate and settle claims.

         We have recently introduced a new technology platform designed to
support our mobile field-claims staff. In addition it provides our agents
24-hour access to claim information. Once the system is fully implemented over
the course of 2001, we expect to have improved service, efficiency and
flexibility.

         Claims settlement authority levels are established for each CMS and
supervisor based on their experience and expertise, up to the regional branch
office's $100,000 limit. Those claims with an exposure potential in excess of
$100,000, those claims involving significant or catastrophic injury or damage
(such as, fatalities, amputations and brain damage) as well as claims involving
suits against us and/or questions of coverage are reported to the home office
where senior claim specialists review the claims and determine the appropriate
reserve. They also provide guidance on the handling of the claim until its final
disposition. All environmental claims are referred to a centralized
environmental claims unit, which specializes in the management and consistency
of decisions regarding coverage application to these exposures.

         For small policyholder claims, generally defined as less than $2,500,
we have implemented an "Agency Draft Program" enabling agents to pay property
damage claims on the spot without CMS involvement. In 1995, agents handled 1,600
of these small claims. By 2000, that number increased 35% to 23,000 up from
17,000 in 1999. Expanding this program enables agents to provide immediate
customer service and satisfaction, while reducing our costs because they are
settled without the involvement of a CMS.


                                       7
<PAGE>   8


         We have centralized, in the home office, a fraud unit to manage our 17
field fraud investigators and adhere to uniform internal procedures to improve
detection and action on potentially fraudulent claims. Our automated claim
system tracks suspicious claims and determines the amount of loss dollars saved
when a claim is not paid because it is judged to have been fraudulent. Also, we
provide anti-fraud training for employees who may be involved in claim matters.

         We also focus on, and have invested in, additional loss cost
containment initiatives. These initiatives include: (i) a comprehensive managed
care program, administered by Alta Services LLC, which reduced workers'
compensation and automobile loss costs; (ii) a voluntary automobile repair shop
program which reduced repair costs in 2000 while maintaining a 92% customer
service satisfaction rating; and (iii) a small estimate and property review
program.


         REINSURANCE

         The Insurance Subsidiaries follow the customary practice of ceding a
portion of their risks and paying to reinsurers a portion of the premiums
received under the policies. This reinsurance program permits greater
diversification of business and the ability to offer increased coverage while
limiting maximum net losses. The Insurance Subsidiaries are parties to
reinsurance contracts under which certain types of policies are automatically
reinsured without the need for approval by the reinsurer of individual risks
covered (treaty reinsurance), reinsurance contracts handled on an individual
policy or per-risk basis requiring the agreement of the reinsurer as to each
risk insured (facultative reinsurance) and limits (automatic facultative
reinsurance). Reinsurance does not legally discharge an insurer from its
liability for the full face amount of its policies, but does make the reinsurer
liable to the insurer to the extent of the reinsurance ceded.

         We have a Reinsurance Security Committee (Reinsurance Committee) that
reviews and approves all reinsurers who do business with our company. The
Reinsurance Committee reviews the financial condition of the reinsurer as well
as applicable company ratings from: (i) A.M. Best; (ii) Insurance Solvency
International; and (iii) Standard and Poor's Insurance Rating Services (Standard
and Poor's). Further information is obtained from our reinsurance brokers,
direct reinsurers and market information sources. Company guidelines require a
reinsurer to have an "A-" or better rating by A.M. Best. However, the
Reinsurance Committee may approve reinsurers who have ratings below "A-" or who
have not been assigned a rating.

         We continuously monitor the reinsurance program to determine that its
protection is not excessive, but adequate to ensure the availability of funds to
provide for losses while maintaining adequate funds for business growth. Our
primary reinsurers are American Re-Insurance Company, Axa Re (Paris), Hartford
Steam Boiler Inspection and Insurance Company, Gerling Global Reinsurance
Corporation, Zurich Reinsurance Company of America, and Renaissance Re. In
addition, we cede no-fault claims for medical benefits in excess of $75,000 to
the New Jersey Unsatisfied Claim and Judgment Fund (UCJF).

         We have both property and casualty excess of loss treaties as well as a
property catastrophe program. Effective July 1, 2000,we increased the retention
on our property treaty excess of loss program to cover each property occurrence
in excess of $1 million up to $15 million. Prior to this change each property
occurrence in excess of $750,000 was covered up to $15 million. Our casualty
excess of loss treaty covers each casualty occurrence in excess of $2 million up
to $50 million, except for commercial umbrella, which is reinsured up to $10
million.

         The catastrophe program is in six layers and covers: (i) 95% of losses
in excess of $15 million up to $25 million; (ii) 95% of losses in excess of $25
million up to $50 million; (iii) 95% of losses in excess of $50 million up to
$85 million; (iv) 95% of losses in excess of $95 million up to $130 million; (v)
95% of losses in excess of $130 million up to $165 million. The layer of $10
million in losses in excess of $85 million has been retained in full by the
Company, as has the $15 million in losses underlying the 1st layer. Total
coverage under the program is $133 million.

         In addition, we have a homeowners' quota share program that reinsures
75% of New Jersey homeowners' property coverage up to a $1 million limit and
contains no per-occurrence limit. We believe that the property catastrophe
program, coupled with the Homeowners Quota Share Program, (which contains no
per-occurrence limit), provides adequate protections for catastrophic losses.

         Please see the section entitled "Reinsurance" beginning on page 31 of
our 2000 Annual Report to Shareholders, herein incorporated by reference for a
more complete discussion of our reinsurance programs.

         POOLING ARRANGEMENTS

         The Insurance Subsidiaries participate in inter-company pooling and
expense sharing arrangements ("pool" or "pooling agreement"). The pool permits
each Insurance Subsidiary to rely on the capacity of the entire pool, rather
than only its own capital and surplus and it prevents any one Insurance
Subsidiary from suffering any undue losses, as all Insurance Subsidiaries share
underwriting profits and losses in proportion to their pool participation
percentages. The pool permits all Insurance Subsidiaries to obtain a uniform
rating from A.M. Best and Standard and Poor's.

         The pool participation percentage of each Insurance Subsidiary reflects
the ratio of that subsidiary's policyholders' surplus to our aggregate
policyholders' surplus. The percentages are as follows:

             Selective Insurance Company of America                 55.5%
             Selective Way Insurance Company                        21.5%
             Selective Insurance Company of the Southeast            9.0%
             Selective Insurance Company of South Carolina           7.0%
             Selective Insurance of New York                         7.0%


                                       8
<PAGE>   9

         Through the pooling agreement, SICA assumes from the other Insurance
Subsidiaries, net of applicable reinsurance, all of their combined premiums,
losses, loss expenses and underwriting expenses and SICA cedes to the other
Insurance Subsidiaries 44.5% of the Insurance Subsidiaries' combined premiums,
losses, loss expenses and underwriting expenses. Through the pool, the Insurance
Subsidiaries also share underwriting and administration expenses. Accounts are
rendered within forty-five days after the end of the calendar quarter and are
settled within sixty days after the end of the calendar quarter. The pool may be
terminated at the end of any calendar month by any Insurance Subsidiary giving
ninety days prior notice of termination.

         RESERVES FOR NET LOSSES AND LOSS EXPENSES

         The table on page 10 provides information about reserves for net losses
and loss expenses. Also see Notes 14 and 17(a) to the Consolidated Financial
Statements of the Company included in the 2000 Annual Report to Shareholders,
which notes are incorporated herein by reference.

         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.

         When a claim is reported to an insurance subsidiary, its 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 general insurance
reserving practices, as well as the experience and knowledge of the claims
person. Until the claim is resolved, these estimates are revised as deemed
necessary by the responsible claims personnel based on subsequent developments
and periodic reviews of the cases.

         In accordance with industry practice, we maintain, in addition to case
reserves, estimates of reserves for losses and loss expenses incurred but not
yet reported (IBNR). 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 is carried as the IBNR reserve. By using both estimates of
reported claims and IBNR determined using generally accepted actuarial reserving
techniques, we estimate the ultimate net liability for losses and loss expenses.
The ultimate actual liability may be higher or lower than reserves established.
We do not discount to present value that portion of our loss and loss expense
reserves expected to be paid in future periods. However, the loss reserves
include anticipated recoveries from salvage and subrogation.

         Reserves are reviewed for adequacy on a periodic basis. When reviewing
reserves, we analyze historical data and estimate the impact of various factors
such as: (i) per claim information; (ii) Company and industry historical loss
experience; (iii) legislative enactments, judicial decisions, legal developments
in the imposition of damages, and changes in political attitudes; and (iv)
trends in general economic conditions, including the effects of inflation. This
process assumes that past experience, adjusted for the effects of current
developments and anticipated trends, is an appropriate basis for predicting
future events. There is no precise method, however, for subsequently evaluating
the impact of any specific factor on the adequacy of reserves because the
eventual deficiency or redundancy is affected by many factors.

         The anticipated effect of inflation is implicitly considered when
estimating reserves for net losses and loss expenses. While anticipated
increases due to inflation are considered in estimating ultimate claim costs,
the increase in the average severity of claims is caused by a number of factors
that vary with the individual type of policy written. Future average severity is
projected based on historical and anticipated trends and also are adjusted for
anticipated changes in general economic trends.

         After taking into account all relevant factors, we believe that the
reserve for net losses and loss expenses at December 31, 2000, is adequate to
provide for the ultimate net costs of claims incurred as of that date.
Establishment of appropriate reserves is an inherently uncertain process and
there can be no certainty that currently established reserves will prove
adequate in light of subsequent actual experience.

         The table on page 11 represents the development of balance sheet net
reserves for 1990 through 2000. The top three lines of the table reconcile gross
accounting principles generally accepted in the United States of America (GAAP)
reserves to net GAAP reserves for unpaid losses and loss expenses recorded at
the balance sheet date for each of the indicated years. The upper portion of the
table shows the re-estimated amount of the previously recorded net reserves
based on experience as of the end of each succeeding year. The estimate is
either increased or decreased as more information becomes known about the
frequency and severity of claims for individual years.

         The "cumulative redundancy (deficiency)" represents the aggregate
change in the estimates over all prior years. For example, the 1991 reserve
developed a $17.9 million redundancy over the course of the succeeding nine
years. That amount has been included in income over the past nine years.

         The lower section of the table shows the cumulative amount paid with
respect to the previously recorded reserves as of the end of each succeeding
year. For example, as of December 31, 2000, we paid $513 million of the
currently estimated $582.9 million of losses and loss expenses that were
incurred through the end of 1990; thus, the difference, an estimated $70 million
of losses and loss expenses incurred through 1990, remained unpaid as of
December 31, 2000.


                                       9
<PAGE>   10

         In evaluating this information, it should be noted that each amount
includes the total of all changes in amounts for prior periods. For example, the
amount of redundancy to losses settled in 2000, but incurred in 1997, will be
included in the cumulative redundancy (deficiency) amounts in 1997, 1998, and
1999. This table does not present accident or policy year development data,
which certain readers may be more accustomed to analyzing. Conditions and trends
that have affected development of the reserves in the past may not necessarily
occur in the future. Accordingly, it may not be appropriate to extrapolate
redundancies or deficiencies based on this table.


ANALYSIS OF NET LOSS AND LOSS EXPENSE DEVELOPMENT

<TABLE>
<CAPTION>
($ in millions)         1990       1991       1992      1993       1994       1995
- -------------------------------------------------------------------------------------
<S>                <C>             <C>        <C>         <C>      <C>      <C>
Gross reserves
for unpaid losses
and loss expenses
at December 31     $     669.2      731.5      870.2      917.7     999.4    1,120.1

Reinsurance
recoverable on
unpaid losses and
loss expenses at
December 31        $     (87.0)     (91.9)    (132.6)    (114.0)   (111.5)    (121.4)

Net reserves for
unpaid losses and
loss expenses at
December 31        $     582.2      639.6      737.6      803.7     887.9      998.7

Net reserves estimated
 as of:
One year later     $     585.7      634.3      734.8      801.0     900.6      989.5
Two years later          583.1      626.3      732.5      790.0     899.5      977.6
Three years later        577.0      626.5      718.7      788.5     894.9      974.4
Four years later         581.2      626.8      716.5      782.9     894.7      965.2
Five years later         583.6      625.3      717.3      780.3     892.2      960.8
Six years later          582.8      627.1      716.4      778.9    888,9
Seven years later        585.7      626.8      714.0      772.1
Eight years later        586.4      625.9      706.0
Nine years later         585.6      621.7
Ten years later          582.9

Cumulative
redundancy
(deficiency)        $    (0.7)      17.9        31.6      31.6      (1.0)       37.9
                      =========  =========  =========  ========  =========  =========

Cumulative amount
of net reserves
paid through:
One year later     $     174.5      183.7      219.5      224.6     259.4      280.4
Two years later          288.1      308.8      352.3      382.3     443.4      481.6
Three years later        371.7      391.3      451.4      497.7     573.7      628.0
Four years later         422.5      447.7      517.2      567.4     661.3      722.2
Five years later         452.0      481.4      556.3      611.1     716.0      773.3
Six years later          472.8      502.6      580.6      642.8     748.4
Seven years later        487.0      516.0      600.4      662.6
Eight years later        496.3      529.7      613.6
Nine years later         506.0      538.7
Ten years later          513.0
</TABLE>



<TABLE>
<CAPTION>
($ in millions)                 1996       1997      1998        1999      2000
- -------------------           ----------------------------------------------------
<S>                            <C>       <C>        <C>        <C>       <C>
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

Reinsurance
recoverable on
unpaid losses and
loss expenses at
December 31                      (150.2)    (124.2)   (140.5)    (192.0)    (160.9)

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

Net reserves estimated
 as of:
One year later                  1,029.5    1,034.5   1,044.2    1,080.7
Two years later                 1,028.1    1,024.8   1,035.9
Three years later               1,020.5    1,014.0
Four years later                1,014.4
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later

Cumulative
redundancy
(deficiency)                      25.0       23.0      16.9         1.1
                               ========   ========  ========   =========

Cumulative amount
of net reserves
paid through:
One year later                    303.6      313.7     328.1      348.2
Two years later                   519.6      531.1     537.5
Three years later                 674.7      665.5
Four years later                  760.8
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
</TABLE>



                                       10
<PAGE>   11



RECONCILIATION OF STATUTORY TO GAAP LOSS RESERVES
<TABLE>
<CAPTION>
($ in thousands)                                                    2000             1999
- ----------------------------------------------------------------------------------------------
<S>                                                        <C>                  <C>
Statutory reserves (1)                                      $     1,095,641         1,064,624

Adjustment for funds withheld (2)                                    17,375            17,375
Provision for uncollectible reinsurance                                 609             1,080

Elimination of inter-company profit in loss expense
reserves (3)                                                         (1,838)           (1,315)
                                                                -------------     ------------
GAAP net reserve for loss and loss adjustment expenses            1,111,787         1,081,764

Reinsurance recoverable on unpaid loss and loss
adjustment expenses                                                 160,869           192,044
                                                                -------------     ------------

GAAP gross reserves for loss and loss adjustment expenses   $     1,272,656         1,273,808
                                                                =============     ============
</TABLE>

(1)      Statutory loss and loss expense reserves, net of reinsurance
         recoverable on unpaid loss and loss adjustment expenses.

(2)      Represents statutory funds withheld under reinsurance contracts that
         have been re-classified as loss reserves for GAAP.

(3)      Alta Services, LLC, an affiliate of the insurance companies, charges a
         fee for medical managed care services which is included in loss
         expense.

ENVIRONMENTAL RESERVES

         Reserves established for liability insurance 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. Our asbestos and non-asbestos environmental claims have
arisen primarily from exposures in municipal government, small commercial risks
and homeowners policies.

         "Asbestos claims" means those claims presented to us in which bodily
injury is alleged to have occurred as a result of exposure to asbestos and/or
asbestos-containing products. During the past two decades, the insurance
industry has witnessed the emergence and development of an increasing number of
asbestos claims. At December 31, 2000, asbestos claims constituted 76% of our
total outstanding environmental claims.

         "Non-asbestos claims" means all pollution and environmental claims
alleging bodily injury or property damage presented, or expected to be
presented, to us other than asbestos. These claims include landfills, leaking
underground storage tanks, oil spills, air pollution, lead poisoning and general
contamination. In past years, landfill claims have accounted for a significant
portion of our environmental claim unit's litigation costs.

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

         The table below summarizes the number of asbestos and non-asbestos
claims outstanding at December 31, 2000. See Note 17 beginning on page 55 of our
2000 Annual Report to Shareholders, herein incorporated by reference, for
additional information regarding environmental reserves.


ENVIRONMENTAL CLAIMS ACTIVITY

<TABLE>
<CAPTION>

                                                2000       1999         1998
- -------------------------------------------------------------------------------
<S>                                        <C>            <C>         <C>
ASBESTOS RELATED CLAIMS (1)

Claims at beginning of year                     1,700      1,665       1,723

Claims received during year                       320        569         597

Claims closed during year                        (152)      (534)       (655)
                                               -------    --------    --------

Claims at end of year                           1,868      1,700       1,665
                                               =======    ========    ========

Average net loss settlement on closed
claims(2)                                    $  1,934        141         148

NON-ASBESTOS RELATED CLAIMS (1)

Claims at beginning of year                       414        407         337

Claims received during year                       449        411         291

Claims closed during year                        (322)      (404)       (221)
                                               -------    --------    --------

Claims at end of year                             541        414         407
                                               =======    ========    ========

Average net loss settlement on closed
claims                                       $ 14,414      6,688      22,772
</TABLE>

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

(2)      The 2000 average includes payment on two asbestosis claims. Excluding
         these two claims, the average for the remaining 150 claims is $213.


                                       11
<PAGE>   12



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 relate to numerous aspects of an insurance company's business and
financial condition. The primary purpose of such supervision and regulation is
the protection of policyholders. The extent of regulation varies but generally
is derived from state statutes which delegate regulatory, supervisory and
administrative authority to state insurance departments. We believe that we are
in compliance with applicable regulatory requirements in all material respects
as of the date of this report. Although the U.S. Federal government does not
directly regulate the insurance industry, Federal initiatives from time to time
can have an impact on the industry.

         On June 1, 2000, federal regulators issued final regulations
implementing the provisions of the Financial Services Modernization Act of 1999,
also known as the Gramm-Leach-Bliley Act (the "Act"), governing the privacy of
consumer financial information. The regulations became effective on November 13,
2000, and compliance with the regulations is required by July 1, 2001. The
regulations limit disclosure by financial institutions of "nonpublic personal
information" about individuals who obtain financial products or services for
personal, family, or household purposes. The Act and the regulations generally
apply to disclosures to nonaffiliated third parties, subject to specified
exceptions, but not to disclosures to affiliates. It is anticipated that the
states will adopt regulations that are at least as restrictive that will be
imposed on insurance companies. This is an evolving area of regulation, which
requires us to continue to monitor developments.

         While we believe that we are in compliance with all currently effective
and applicable laws affecting our operations, we will review the steps necessary
to comply with applicable privacy laws and regulations under the Act prior to
the mandatory date of compliance. We cannot currently quantify the financial
impact we will incur to satisfy revised or additional regulatory requirements.

STATE REGULATION

         The authority of the state insurance departments extends to such
matters as the establishment of standards of solvency, which must be met and
maintained by insurers, the licensing of insurers and agents, the imposition of
restrictions on investments, premium rates for property and casualty insurance,
the payment of dividends and distributions, the provisions which insurers must
make for current losses and future liabilities, the deposit of securities for
the benefit of policyholders and the approval of policy forms. State insurance
departments also conduct periodic examinations of the financial and business
affairs of insurance companies and require the filing of annual and other
reports relating to the financial condition of insurance companies. Regulatory
agencies require that premium rates not be excessive, inadequate or unfairly
discriminatory. In general, the Insurance Subsidiaries must file all rates for
personal and commercial 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 the insurance supervisory agency of its state of domicile 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 examine the Parent and the Insurance Subsidiaries at any time,
require disclosure or prior approval of material transactions of the Insurance
Subsidiaries with any affiliate and require prior approval or notice of certain
transactions, such as dividends or distributions to the Parent from the
Insurance Subsidiary domiciled in that state.

NAIC GUIDELINES

         The Insurance Subsidiaries are subject to the general statutory
accounting practices and reporting formats established by the National
Association of Insurance Commissioners (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 eleven 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 commissioners about
certain aspects of the insurer's business. The Insurance Subsidiaries have, in
recent years, met all of the IRIS ratio tests.

         NAIC model laws and rules 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 states. All of the domiciliary states of
the Insurance Subsidiaries are accredited, with the exception of New York.
Examinations conducted by accredited states can be accepted by other states. The
NAIC intends to create an eventual nationwide regulatory network of accredited
states.

         The NAIC Model Act is also intended to enhance the regulation of
insurer solvency. This act contains certain risk-based capital (RBC)
requirements for property and casualty insurance companies. The requirements are
designed to assess capital adequacy and to raise the level of protection that
statutory surplus provides for policyholders. RBC measures 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 a ratio below 200% of their total adjusted capital to their
Authorized Control Level, as calculated in the Model Law, are subject to
different levels of regulatory intervention and action. Based upon the 2000


                                       12
<PAGE>   13


statutory financial statements for the Insurance Subsidiaries, each Insurance
Subsidiary's total adjusted capital exceed the Authorized Control Level, and the
risk based capital ratios are as follows:

                 Selective Insurance Company of America                 457%
                 Selective Way Insurance Company                        570%
                 Selective Insurance Company of the Southeast           564%
                 Selective Insurance Company of South Carolina          496%
                 Selective Insurance Company of New York                489%


         Effective January 1, 2001, we adopted a codified set of statutory
accounting principles as required by the NAIC. The changes to the statutory
accounting principles reduce the differences in statutory accounting permitted
practices among the states. We estimate that the adoption of the codified
statutory accounting principles will have a minimal impact to the Risk Based
Capital ratios for the insurance subsidiaries and will not significantly impact
the dividend paying capabilities of the insurance subsidiaries.

    INVESTMENTS SEGMENT

         The long-term objective of our investment policy is to maximize
after-tax yield while providing liquidity and preserving assets and
stockholders' equity. The current investment mix is 81% debt securities, 14%
equity securities, and 5% short-term investments. High credit quality has always
been a cornerstone of our investment strategy, as evidenced by the fact that 99%
of the debt securities are investment grade. To further emphasize this superior
quality, 38% of the debt securities have a Moody's rating of Aaa (or its
Standard & Poor's equivalent), considered to be the highest credit quality.

         We emphasize liquidity requirements in response to an unpredictable
underwriting environment and the need to minimize the exposure to catastrophic
events. To provide liquidity while maintaining consistent performance,
maturities of debt securities are "laddered" so that some issues are always
approaching maturity, thereby providing a source of predictable cash flow. To
reduce sensitivity to interest rate fluctuations, we invest our debt portfolio
primarily in intermediate-term debt securities. The average life of the
portfolio at year-end 2000 was 4.7 years.

         We will continue to follow the investment philosophy that has
historically proven successful for us. The strategy will be to continue to
purchase debt securities in sectors that represent the most attractive relative
value and maintain a moderate equity exposure. Managing investment risk by
adhering to these strategies is intended to protect the interests of our
stockholders as well as those of our policyholders and, at the same time,
enhance our financial strength and underwriting capacity.



                                       13
<PAGE>   14



                     DIVERSIFIED INSURANCE SERVICES SEGMENT

    Our principal strategy for the Diversified Insurance Services Segment is
building, both internally and through acquisition, insurance-related businesses
that enhance our core skill sets and generate strong revenue growth and
profitability that is less subject to the risks of writing property and casualty
insurance. The businesses fit into our business model either: vertically (one
company employs the other's products or services into its own production or
supply output); or complementary (they share a common marketing or distribution
system). Results for this segment are as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,

($ in thousands)                                                 2000           1999           1998
- -------------------------------------------------------------------------------------------------------
<S>                                                      <C>                  <C>             <C>
FLOOD INSURANCE
Net Revenue                                               $     11,991         10,665          8,004
Pre-tax Profit                                                   1,609          3,297          1,902
MEDICAL COST CONTAINMENT
        Managed Care
        Net Revenue                                              8,802          5,874          6,096
        Pre-tax Profit                                           2,316            895            315
        Preferred Provider Organization
        Net Revenue                                              6,212          1,964              -
        Pre-tax Profit                                           1,192            253              -
PROFESSIONAL EMPLOYER ORGANIZATION
Net Revenue                                                     29,155         11,262              -
Pre-tax Profit                                                     110            980              -
SOFTWARE DEVELOPMENT AND PROGRAM ADMINISTRATION
Net Revenue                                                     18,536         16,888              -
Pre-tax (Loss)                                                    (281)          (653)             -
OTHER
Net Revenue                                                      1,367              -              -
Pre-tax Profit                                                     281              -              -
TOTAL
Net Revenue                                                     76,063         46,653         14,100
Pre-tax Profit                                                   5,227          4,772          2,217
After Tax Profit                                                 3,454          2,948          1,440
Return on Net Revenue                                              4.5  %         6.3           10.2
</TABLE>


         FLOOD INSURANCE

         Selective is a servicing carrier for the National Flood Insurance
Program. We provide a market for flood insurance to our agents and also have
flood-only appointments with about 3,200 agents across the country. The premiums
we collect are ceded 100% to the federal government. As a servicing carrier, not
an underwriter, Selective bears no risk of policyholder loss. We receive a
servicing fee from which we pay agency commissions and other related expenses.
In addition to the underwriting fees, we receive fees for handling claims. We
implemented an internally developed flood policy processing system in the fourth
quarter of 2000. The system has eliminated the need for us to purchase policy
support from an outside vendor, while it will also enable FloodConnect to
provide policy processing support for other Flood servicing carriers in the
future, thus creating an opportunity for additional program administration
revenues and profit.

         MEDICAL COST CONTAINMENT - ALTA SERVICES AND CONSUMER HEALTH NETWORK

         Alta manages workers' compensation and automobile medical claims for
our underwriting subsidiaries, for unrelated companies, and for self-insured
businesses and employer groups. Alta bears no underwriting risk and offers a
full array of medical cost containment services.

         Alta provides a broad range of medical claims services to Selective
including first report of injury, referrals to medical providers, comprehensive
medical case management, as well as medical bill audits and re-pricing. The goal
of Alta's program is to return patients to their normal routine, at work and at
home, and ensure medical costs are delivered in the most cost effective manner
possible. In addition, Alta also provides medical services to other insurers,
including medical claim management services under New Jersey's Automobile
Insurance Cost Reduction Act.

         Alta's results include SelecTech, LLC (SelecTech) which generates fees
by providing third party administrative services to self-insured accounts.
Self-insured businesses often need insurance services, such as managed care and
other claim handling programs, and loss control that would otherwise be provided
by an insurer. SelecTech also works closely with Selective Risk Managers
(addressed below) to assist businesses and government entities seeking
customized insurance products and services.

                                       14
<PAGE>   15


         In 1999, Selective purchased CHN a PPO. CHN expanded its network
providers from 42,000 to over 50,000 locations during 2000 in its initial three
key operating territories (New Jersey, New York, and Connecticut). Network
expansion will continue to be a major initiative at CHN. Both Alta and Selective
benefit from having access to CHN's networks, which are the largest in New
Jersey.

         Going forward, both Alta and CHN will focus on expanding their
businesses by entering into new states where we have a major presence, starting
with Pennsylvania. Also, as Selective HR Solutions (see below) continues to
penetrate New Jersey and other key Selective territories, both Alta and CHN are
expected to have new business opportunities to manage property and casualty
medical claims, and the day-to-day medical needs of the employees of Selective
HR Solutions' business customers. This is an example of the vertical integration
synergies made possible by our business model.

         PROFESSIONAL EMPLOYER ORGANIZATION - SELECTIVE HR SOLUTIONS

         We believe that small to mid-sized businesses will begin demanding new
and better solutions to many of their operational problems. We believe that the
PEO concept provides an answer to many problems employers face retaining good
employees, providing competitive benefits, eliminating administrative and
compliance burdens that keep them from focusing on their core operations. The
PEO provides human resource administration, including benefits, payroll and
employee management services, and risk and compliance management products and
services, including workers' compensation. A PEO, by the nature of its product
package, provides a very high level of day-to-day services to its customers,
which we believe will be attractive to small business owners.

         We purchased a leading PEO, Selective HR Solutions, in 1999. This
acquisition provides us and our distribution force access to a product line that
complements our traditional commercial insurance package. As independent agents
have control of more than two-thirds of the small business (those with 25 or
less employees) insurance market, we believe we can successfully market the PEO
product in our operating territories through our agents. We will continue to
introduce the PEO product in our operating territories throughout 2001, where we
believe we can build on the existing agent/business owner relationships. As
stated above, introducing the PEO product in New Jersey is expected to also
generate business opportunities for Alta and CHN. Selective HR Solutions will
also begin using an Internet-enabled payroll and human resource management
system in 2001, which we believe will further improve efficiency and service
levels.

         SOFTWARE DEVELOPMENT AND ADMINISTRATION -- PDA SOFTWARE SERVICES, INC.

         We have already made a significant resource commitment to technology,
which was accentuated further by our acquisition of PDA in late 1998. PDA has
assisted in the development of our automated claim and flood processing systems.
In addition, PDA provides software development and administration services and
is also a leading vendor of administrative services to the federal government's
Women, Infants and Children (WIC) nutritional program administered by the
states. Currently, PDA administers the WIC program in 16 states.

         ALTERNATIVE MARKETS -- SELECTIVE RISK MANAGERS

         We have recognized that many businesses are exploring different methods
of meeting their risk management needs. Larger companies and government entities
have self-insured or partially self-insured themselves for many years, and
smaller companies and government bodies are exploring self-insurance and other
alternative market options. Many businesses are buying insurance through
affinity group or trade associations. Many of our agents are working with
customers looking for new insurance options.

         In response to the trend towards self-insurance and
group/association-based insurance, we formed Selective Risk Managers (SRM) in
1997. SRM is able to tailor insurance products and coverages, and also create
programs enabling agents and business owners to participate in the profits their
programs may generate. SRM also creates programs for government entities. In
addition, SRM manages our specialty lines products. We are able to secure
through reinsurance agreements, on behalf of our agents and customers, newer or
hard-to-place coverages, such as directors and officers, errors and omissions,
environmental liability and employment practices liability. The financial
results of this business are recorded in the Insurance Operations segment.

         DIVERSIFIED INSURANCE SERVICES REGULATION

         The strategic companies of our Diversified Insurance Services segment
are each subject to various state and/or federal regulations.

         Selective HR is a PEO. In this capacity, it is a co-employer for its
clients and is affected by federal, state and local laws relating to labor, tax
and employment matters. By contracting with its clients and creating a
co-employer relationship with employees assigned to work at client company
locations, Selective HR assumes certain contractual obligations, legal
~obligations and responsibilities of an employer under these laws. Many of these
laws do not specifically address the obligations and responsibilities of
co-employers such as PEOs. If these laws, such as the Employee Retirement Income
Security Act, and federal and state employment laws and tax laws, are ultimately
applied to a PEO's co-employer relationship with their work-site employees, they
could have a material adverse effect on Selective HR's results of operations or
financial condition. Some states in which Selective HR operates have passed
licensing or registration requirements for PEOs. These requirements vary from
state to state but generally provide for monitoring the fiscal responsibility of
PEOs.

         Alta and CHN, operate as a managed care organization (MCO) and/or a PPO
and are subject to laws and/or regulations in some states where they do
business, which require them to be licensed to operate as an MCO or a PPO.



                                       15
<PAGE>   16


    In New Jersey, a state from which both Alta and CHN derive substantial
revenue, regulations implementing the Health Care Quality Act may deem insured
health benefit plans who contract with PPOs to be Managed Care Plans. Managed
Care Plans may be required, through PPO contracts, to provide enrollees with
information regarding the plan and the network and also to afford providers with
certain protections.

    Alta and CHN are also affected by both federal and state laws regarding
privacy of medical records and patient privacy. This is an evolving area of
regulation requiring us to continually monitor and review our operations.

    SRM Insurance Brokerage, LLC, is subject to the laws and/or regulations in
the states in which it does business, which require it to be licensed to operate
as an insurance agent/broker.

    SelecTech, LLC is overseen by Alta and provides third party administrative
services to self-insured accounts. SelecTech also works closely with Selective
Risk Managers to assist businesses and government entities looking for
customized insurance products and services. When operating as an insurance
adjuster, SelecTech is subject to the laws and/or regulations in some of the
states in which it does business, which require it to be licensed as an
adjuster.

    PDA provides insurance software development and processing services to
public and private sector organizations. FloodConnect provides enhanced third
party administration for carriers who participate in the federal "Write Your
Own" (WYO) flood insurance program and services flood insurance policies written
through the WYO program countrywide.

    While we believe all subsidiaries are currently in compliance with all laws
and regulations affecting their operations, there can be no assurance that, in
the future, they will be able to satisfy new or revised licensing and regulatory
requirements.

    RISK FACTORS

    The risks described below are not the only ones we face. There may be
additional risks and uncertainties. Either by their presence or absence, these
risks could materially affect our business, financial condition or results of
operations, including the trading price of our common stock.

WE MAY BE ADVERSELY AFFECTED BY CATASTROPHES AND WEATHER-RELATED EVENTS

    Property and casualty insurance companies frequently experience losses from
catastrophes and other weather-related events. Catastrophes may have a material
adverse effect on our operations. Catastrophes are caused by various events
including windstorms, hurricanes, earthquakes, tornadoes, hail, severe winter
weather and fires. We cannot predict how severe a particular catastrophe may be
until after it occurs. The extent of our losses from these catastrophes is a
function of:

- -          the total amount of losses our clients incur;

- -          the number of our clients affected;

- -          the frequency of the events; and

- -          the severity of the particular catastrophe.


    Most catastrophes are restricted to small geographic areas. However,
hurricanes, floods and earthquakes may produce significant damage in large,
heavily populated areas.

OUR GEOGRAPHIC CONCENTRATION TIES OUR PERFORMANCE TO THE ECONOMIC, REGULATORY
AND DEMOGRAPHIC CONDITIONS OF THE EAST-COAST AND MIDWESTERN STATES.

    Our property and casualty insurance business is concentrated geographically.
Therefore, unusually severe storms or other natural disasters which destroy
property in the states in which we write insurance could adversely affect our
operations. Approximately 42% of our net premiums are written for insurance
policies in New Jersey. Other East Coast states, including Connecticut,
Delaware, Georgia, Maryland, New York, North Carolina, Pennsylvania, Rhode
Island, South Carolina, Virginia and several Midwestern states, including
Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, Ohio and
Wisconsin, account for substantially all of our other business. Because our
business is concentrated in a limited number of markets, we may be exposed to
risks of adverse developments that are greater than the risks of having business
in more markets.

    Our revenues and profitability also are subject to prevailing economic,
regulatory, demographic and other conditions in the states in which we write
insurance.

WE FACE SIGNIFICANT COMPETITION FROM OTHER REGIONAL AND NATIONAL INSURANCE
COMPANIES AND FROM SELF-INSURANCE.

    We compete with regional and national insurance companies, including direct
writers of insurance coverage. Many of these competitors are larger than we are
and have greater financial, technical and operating resources. The property and
casualty insurance industry is highly competitive on the basis of both price and
service. There are many companies competing for the same insurance customers in
the geographic areas in which we operate, particularly outside of New Jersey.
The Internet may also emerge as a significant source of new competition, both
from existing competitors using their brand name and resources to write business
through this new distribution channel, and from start-up companies.

                                       16
<PAGE>   17


         The insurance industry tends to be very competitive on price. If our
competitors price their premiums more aggressively, they may adversely affect
our ability to grow our business in the future. In addition, we face competition
within each agency which markets our insurance, because most of our agencies
represent more than one insurance company.

         We also face competition from the implementation of self-insurance,
primarily in commercial insurance. Many of our customers and potential customers
are examining the risks of self-insuring as an alternative to traditional
insurance.

WE FACE COMPETITION FROM NEW ENTRANTS INTO THE MARKET.

         BANKS

         The Financial Services Modernization Act of 1999, also known as the
Gramm-Leach-Bliley Act permits banks to engage in non-banking, financial
services businesses including the underwriting of insurance. As a result, we may
face future competition from banks in the underwriting of insurance.

         Since this Act was passed, banks have begun acquiring insurance
agencies, including agencies that have appointments with us, in states where we
sell insurance and related services and products. Some banks could have business
strategies for operating their insurance agencies that differ from strategies
that we think are important for the distribution of our insurance products
through independent insurance agencies. If those banks were to acquire
additional insurance agencies which are important to us in states where we do
business, we might have to try to replace those insurance agencies. Also, as a
result of the Act, banks will be able to write property and casualty insurance
and could compete directly with us by selling insurance through their own
insurance agencies.

         PEO'S AND PAYROLL PROCESSORS

         Other PEO's and payroll processors have begun functioning as agents for
workers compensation insurers who compete with us for this line as well as other
lines. This could result in portions of our customers insurance programs being
placed with other carriers. In the future competition could lead to additional
loss of business.

WE ARE HEAVILY REGULATED IN THE STATES IN WHICH WE OPERATE.

         We are subject to extensive supervision and regulation in the states in
which we transact business. Supervision and regulation relate to numerous
aspects of our business and financial condition. The primary purpose of such
supervision and regulation is the protection of insurance policyholders, and not
shareholders or other investors. Our business can be adversely affected by
automobile insurance regulations and any other regulations affecting property
and casualty insurance companies. The extent of regulation varies but generally
is derived from state statutes. These statutes delegate regulatory, supervisory
and administrative authority to state insurance departments. Changes in laws and
regulations, or their interpretations, pertaining to insurance, including
workers' compensation, health care or managed care, including preferred provider
organizations and professional employer organizations, may also have an adverse
effect on our business. Although the federal government does not directly
regulate the insurance industry, federal initiatives, from time to time, can
impact the insurance industry.

         In addition, proposals intended to control the cost and availability of
health care services have been debated in Congress and state legislatures.
Although we do not write health insurance, rules and regulations affecting
healthcare services can affect workers' compensation, commercial and personal
automobile, liability and other insurance which we do write. We cannot determine
what health care reform legislation will be adopted by Congress or any state
legislature. We also cannot determine the nature and effect, if any, that the
adoption of health care legislation or regulations, or changing interpretations,
at the federal or state level would have on us.

         Other regulatory risks are as follows:

               AUTOMOBILE INSURANCE REGULATION

         In March 1999, we began to implement a state-mandated 15% rate
reduction for all personal automobile policies in New Jersey. As a result of
this roll-back our 1999 annual premiums in this line were reduced by
approximately $19 million and the effect of this rollback has continued through
2000 decreasing premium collected and adversely impacting profitability. In
addition, the New Jersey Urban Enterprise Zone (UEZ) Program requires New Jersey
auto insurers, including Selective, to write involuntary urban auto insurance
proportionate to our voluntary market share. This business is unprofitable and
has generated combined ratios over 170% for the past two years. New Jersey
currently requires urban rates to be no more than 135% of our lowest rural rate.
see Pages 30 and 31 of our 2000 Annual Report to Shareholders, incorporated
herein by reference, for a complete discussion of our New Jersey private
passenger automobile business.

         South Carolina law has established a joint underwriting association for
automobile insurance. We are required to be a member along with other automobile
insurers in South Carolina. As a member of this association, we have to write
automobile insurance for some involuntary risks, and we share in the profit or
loss of the association. On March 1, 2003, the association will be replaced by
an assigned risk plan. This plan will assign risks which are unable to obtain
coverage voluntarily to insurers based on their market share. We are unable at
this time to assess the impact of these changes on our results of operations.
                                       17
<PAGE>   18

               WORKERS' COMPENSATION INSURANCE REGULATION

         Because we voluntarily write workers' compensation insurance, we are
required by state law to write involuntary coverage. Insurance companies that
underwrite voluntary workers' compensation insurance can either write
involuntary coverage assigned by state regulatory authorities or participate in
a sharing arrangement. We currently write involuntary coverage assigned to us
directly from the State of New Jersey.

               HOMEOWNERS INSURANCE REGULATION

         New Jersey regulations prohibit us from canceling or not renewing
homeowners insurance policies for any arbitrary, capricious or unfairly
discriminatory reason or without adequate notice to the insured. We are subject
to regulatory provisions that are designed to address problems in the homeowners
property insurance marketplace. These provisions regulate problems in the
availability and affordability of such insurance and take two forms: voluntary
and involuntary. Voluntary provisions, such as the New Jersey Windstorm Market
Assistance Program, generally do not result in assessments to us. This program
is designed to assist property owners in New Jersey coastal areas in obtaining
homeowners insurance. We have the option to accept or decline to write insurance
offered to us through the program. Involuntary provisions, such as the New
Jersey Fair Access to Insurance Requirements, generally result in assessments to
us. The New Jersey Fair Access to Insurance Requirements 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 Access to
Insurance Requirements based on their share of the voluntary market. Similar
involuntary plans exist in the District of Columbia and most other states where
we operate.

THE PROPERTY AND CASUALTY INSURANCE INDUSTRY IS CYCLICAL.

         Historically, the property and casualty insurance industry has been
cyclical. For example in 2000 commercial lines pricing increased, but decreased
for several years preceding 2000. Furthermore, the industry's profitability is
affected by unpredictable developments, including:

         -        natural disasters;

         -        fluctuations in interest rates and other changes in the
                  investment environment that affect returns on our investments;

         -        inflationary pressures that affect the size of losses; and

         -        judicial decisions that affect insurers' liabilities.

The demand for property and casualty insurance, particularly commercial lines,
can also vary with the overall level of economic activity.

WE MAY BE RESTRICTED IN DECLARING DIVIDENDS AND DISTRIBUTIONS.

         As an insurance holding company, our principal assets consist of the
capital stock of the insurance subsidiaries and investment in our diversified
insurance services subsidiaries. The holding company relies on dividends from
the insurance and diversified insurance services subsidiaries to meet its cash
needs. The insurance subsidiaries may only declare and pay dividends to us if
they are permitted to do so under the insurance regulations of their respective
domiciled states. All of the states in which our insurance subsidiaries are
domiciled, including New Jersey, New York, North Carolina and South Carolina,
regulate the payment of dividends.

         Some states, including New Jersey and South Carolina, require that we
give notice to the relevant state insurance commissioner prior to declaring any
dividends and distributions. During the notice period, the state insurance
commissioner may disallow all or part of the proposed dividend if it determines
that the insurer's surplus as regards policyholders is not reasonable in
relation to the insurer's liabilities and adequate to its financial needs, or in
the case of New Jersey, if the regulatory authority determines that the insurer
is otherwise in a hazardous financial condition.

OUR RESERVES MAY NOT BE ADEQUATE TO COVER ESTIMATED LOSSES AND EXPENSES.

         We are required to maintain loss reserves for our estimated liability
for losses and loss expenses associated with reported and unreported claims for
each accounting period. Although our reserves have been adequate in the past, we
cannot guarantee they will be adequate in the future. If our reserves are
inadequate, we will be required to increase reserves. That would result in an
increase in losses and a reduction in our net income and stockholders' equity
for the period in which the deficiency in reserves is identified. Our reserve
amounts are estimates of what we expect the ultimate settlement and
administration expenses of claims will be. Reserve amounts are based on facts
and circumstances of which we are aware, predictions of future events, estimates
of future trends in claims severity and frequency and other subjective factors.
There is no method for precisely estimating our ultimate liability.

    We regularly review our reserving techniques and our overall amount of
reserves. We also review:

         -        information regarding each claim for losses;

         -        our 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.



                                       18
<PAGE>   19


WE RELY ON THE AVAILABILITY OF REINSURANCE TO REDUCE OUR EXPOSURE TO RISKS.

         We transfer our exposure to some risks to others through reinsurance
arrangements with other insurance companies. Under our reinsurance arrangements,
another insurer assumes a specified portion of our losses and allocated loss
adjustment expense in exchange for a specified portion of policy premiums. The
availability, amount and cost of reinsurance depend on general market conditions
and may vary significantly. Any decrease in the amount of our reinsurance will
increase our risk of loss. Furthermore, we face a credit risk with respect to
reinsurance. When we obtain reinsurance, we are still liable for those
transferred risks if the reinsurer cannot meet those obligations. Therefore, the
inability of any of our reinsurers to meet its financial obligations could
materially affect our operations.

WE DEPEND ON INVESTMENT INCOME FOR A SIGNIFICANT PORTION OF OUR REVENUES AND
EARNINGS.

         We, like many other property and casualty insurance companies, depend
on income from our investment portfolio for a significant portion of our
revenues and earnings. Any significant decline in our investment income would
have an adverse effect on our results. Additional information discussing market
risk is incorporated herein by reference to the section entitled "Quantitative
and Qualitative Disclosures About Market Risk" on page 36 of the 2000 Annual
Report to Shareholders.

WE DEPEND ON INDEPENDENT INSURANCE AGENTS.

         We market and sell our insurance products through independent,
non-exclusive insurance agencies and brokers. Agencies and brokers are not
obligated to promote our insurance products, and they may also sell our
competitors' insurance products. As a result, our business depends in part on
the marketing efforts of these agencies and brokers. Therefore, we must offer
insurance products and services that meet the requirements of the clients and
customers of these agencies and brokers. As we diversify and expand our business
geographically, we may need to expand our network of agencies and brokers to
successfully market our products. If these agencies and brokers fail to market
our products successfully, our 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 or control of agencies, or expansion of
agencies through acquisition could adversely affect an agency's ability to
control growth and profitability, thereby adversely affecting our business.

WE MAY BE ADVERSELY IMPACTED BY A CHANGE IN OUR RATING.

         Insurance companies are rated by independent rating agencies. Higher
ratings generally indicate financial stability and a strong ability to pay
claims. Ratings are assigned by rating agencies to insurers based upon factors
relevant to policyholders. Ratings are not recommendations to buy, hold or sell
our common stock. We cannot be sure that we will maintain our current A.M. Best,
Moody's, or Standard and Poor's ratings. Our business could be adversely
effected if we were to receive a significant downgrade in these ratings.

         During 2000, A.M. Best reaffirmed our "A+" (Superior) rating. Ratings
by A.M. Best in the insurance industry range from "A++" (Superior) to "F" (in
Liquidation). According to A.M. Best, an insurer with an "A++" or "A+" rating
has demonstrated superior overall performance..

         Additionally, we have a Long Term Insurance Financial Strength Rating
of "A3" (Good) from Moody's Investor Services. Moody's ratings range from a low
of "c" to a high of "Aaa".

         During 2000, Standard and Poor's reaffirmed our "A+" rating. According
to Standard and Poor's, insurers with this rating offer good financial security,
but their ability to meet policyholder obligations is susceptible to adverse
economic and underwriting conditions. Claims-paying ability ratings by Standard
and Poor's for the industry range from "AAA (Superior)" to "R (Regulatory
Action)". Insurers with a rating of "BBB-" or better, such as Selective, are
considered to have a secure claims-paying ability.


WE EMPLOY ANTI-TAKEOVER MEASURES.

         We own, directly or indirectly, all of the shares of stock of our
insurance subsidiaries domiciled in the States of New Jersey, New York, North
Carolina and South Carolina. State insurance laws require prior approval by
state insurance departments of any acquisition or control of a domestic
insurance company or of any company which controls a domestic insurance company.
Any purchase of 10% or more of our outstanding common stock would require prior
action by all or some of the insurance commissioners of the above-referenced
states.

         In addition, other factors may discourage, delay or prevent a change of
control of Selective. These include, among others, provisions in our Restated
Certificate of Incorporation, as amended, relating to:

         -        supermajority voting and fair price requirements with respect
                  to certain business combinations;

         -        staggered terms for our directors;

         -        supermajority voting requirements to amend the foregoing
                  provisions;

         -        our stockholder rights plan;

         -        guaranteed payments which are to be made to certain officers
                  upon a change of control of our company; and

         -        the ability of our board of directors to issue "blank check"
                  preferred stock.


                                       19
<PAGE>   20


         The New Jersey Shareholders Protection Act provides, among other
things, that a New Jersey corporation, such as Selective, may not engage in
transactions specified in the statute (including business combinations) with a
shareholder having indirect or direct beneficial ownership of 10% or more of the
stock for a period of five years following the date on which the shareholder
became an interested shareholder, unless that transaction is approved by the
board of directors of the corporation before that date. These provisions also
could have the effect of depriving shareholders of an opportunity to receive a
premium over the prevailing market price if a hostile takeover is attempted.

WE DEPEND ON KEY PERSONNEL

         The success of our business is dependent, to a large extent, on our
ability to attract and retain key employees, in particular our senior officers,
key management, sales, information systems, underwriting, claims, managed care,
PEO, and corporate personnel. Competition for key personnel is intense. While we
have employment agreements with a number of key managers, in general we do not
have employment contracts or non-compete arrangements with our employees.

WE FACE RISKS FROM TECHNOLOGY-RELATED FAILURES.

         Increasingly, our businesses are dependent on computer and
Internet-enabled technology. Our inability to bring new technology on-line or to
market, or our inability to anticipate or manage problems with technology
associated with scalability, security, functionality or reliability, may
adversely impact our businesses.

WE FACE RISKS IN THE PROFESSIONAL EMPLOYMENT ORGANIZATION BUSINESS.

         We intend to expand the operating territories of Selective HR Solutions
into our core operating states. The co-employment relationship of the PEO
business model is less understood, accepted and regulated in these markets,
compared with Selective HR Solution's home state of Florida.

         Adverse litigation or regulation, service problems, our inability to
encourage our agents to sell the product and the consuming public's lack of
awareness or interest in PEOs are risks we could encounter which could adversely
affect our business.

CLASS ACTION LITIGATION COULD AFFECT OUR BUSINESS PRACTICES AND FINANCIAL
RESULTS.

         The insurance industry has been the target of class action litigation
in the following areas:

         *        after-market crash parts,

         *        urban homeowner underwriting practices,

         *        health maintenance organization practices and

         *        personal injury protection payments.

                  To date, this litigation has not impacted us, but it is
possible that future class action litigation could adversely affect our
insurance and managed care (including PPO) businesses.

UNIONIZATION OF MEDICAL PROVIDERS COULD IMPACT OUR OPERATIONS.

         CHN builds medical provider networks and leases networks to insurers,
medical management companies, third party administrators and other medical claim
payors. The lessors receive medical fee discounts from network providers in
exchange for patient volume commitments. If medical providers (e.g., physicians)
decided to unionize, that might impair CHN's ability to maintain and grow
networks, negotiate fee discount arrangements and lease networks to their
customers. These events would have an adverse impact not only on CHN, but also
on Alta Services which leases CHN networks, and on our company as a whole
because we rely in part, on provider networks and discounts to manage our claim
medical expenses.


ITEM 2.  PROPERTIES.

         Information required under this item is incorporated herein by
reference to the sections entitled "Subsidiaries", "Regional Offices", and
"Properties" on page 61 of the 2000 Annual Report to Shareholders. Our
facilities are substantially fully utilized and are adequate for the conduct of
our business.

ITEM 3.  LEGAL PROCEEDINGS.

         Information required under this item is incorporated herein by
reference to Note 17 to the Consolidated Financial Statements beginning on page
55 of the 2000 Annual Report to Shareholders.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

    None
                                     PART II



                                       20
<PAGE>   21

ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
              MATTERS.

Information required under this item regarding the principal market on which our
common stock is traded and the number of holders thereof is incorporated herein
by reference to the section entitled "Common Stock Information" on the inside
back cover of the 2000 Annual Report to Shareholders.

Information required under this item regarding the price range of our common
stock and frequency and amount of dividends is incorporated herein by reference
to the section entitled "Quarterly Financial Information" on page 59; and the
section entitled "Financial Condition, Liquidity and Capital Resources" on page
34 up through the third full paragraph on page 35 of the 2000 Annual Report to
Shareholders.

ITEM 6.       SELECTED FINANCIAL DATA.

         Information required under this item is incorporated herein by
reference to pages 26 and 27, including related notes on page 27 of our 2000
Annual Report to Shareholders.

ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
              RESULTS OF OPERATIONS.

         Information required under this item is incorporated herein by
reference to the section entitled "Financial Review" on pages 28 through the
Sixth full paragraph on page 36 of the 2000 Annual Report to Shareholders.

ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         The information required under this item is incorporated herein by
reference to the section entitled "Quantitative and Qualitative Disclosures
About Market Risk" on page 36 of the 2000 Annual Report to Shareholders.

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The consolidated financial statements and supplementary data of the
company are incorporated herein by reference to pages 38 through 58, inclusive,
of our 2000 Annual Report to Shareholders. An index to the consolidated
financial statements is contained in item 14 (a)(1) of this Annual Report on
Form 10-K, and the Quarterly financial Information is incorporated herein by
reference to page 59 of the 2000 Annual Report to Shareholders.

ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
              FINANCIAL DISCLOSURE.

         None

                                    PART III

         The Company will file with the Securities and Exchange Commission,
within 120 days after the end of the fiscal year covered by this report, a
definitive Proxy Statement pursuant to Regulation 14A under the Securities
Exchange Act of 1934 in connection with its 2000 Annual Meeting of Stockholders,
which meeting includes the election of directors. In accordance with General
Instruction G(3) of Form 10-K, the information required by Items 10, 11, 12 and
13 below is incorporated herein by reference to the Proxy Statement.

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Incorporated herein by reference to the sections entitled: (i)
"Election of Directors," "Nominees" "Continuing Directors" and "Executive
Officers of the Company" in the Proxy Statement, and (ii) "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement.

ITEM 11.      EXECUTIVE COMPENSATION.

         Incorporated herein by reference to the sections entitled: (i)
"Compensation of Directors," "Compensation Committee Interlocks and Insider
Participation," and "Report of the Selective Insurance Group, Inc. Salary and
Employee Benefits Committee" in the Proxy Statement and (ii) "Executive
Compensation and Other Information" "Summary Compensation Table," "Footnotes to
Summary Compensation Table," "Stock Options and Stock Appreciation Rights,"
"Options and SAR Exercises and Holdings," "Pension Plans" in the Proxy
Statement.

ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         Incorporated herein by reference to the sections entitled: (i) "General
Matters" in the Proxy Statement; and (ii) "Stock Ownership of Directors and
Officers" in the Proxy Statement.

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Incorporated herein by reference to the section entitled "Interest of
Management and Others in Certain Transactions" in the Proxy Statement.




                                       21
<PAGE>   22



                                     PART IV


ITEM 14       EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

         (a)      THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:


         (1)         CONSOLIDATED FINANCIAL STATEMENTS:

         The consolidated financial statements of the Company with Independent
Auditors' Report thereon listed below are incorporated herein by reference to
pages 37 through 58, inclusive, of the 2000 Annual Report to Shareholders.


<TABLE>
<CAPTION>
                                                                                                              2000 Annual
                                                                                                                 Report
                                                                                                                  Page
<S>                                                                                                             <C>
Independent Auditors Report                                                                                        37

Consolidated Balance Sheets at December 31, 2000 and 1999..................................................        38

Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998.....................        39

Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998.......        40

Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998.................        41

Notes to Consolidated Financial Statements.................................................................      42-58
</TABLE>


(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.

<TABLE>
<CAPTION>
                                                                                                                Form 10-K
                                                                                                                   Page
<S>                                <C>                                                                         <C>
Schedule I                         Summary of Investments - Other than Investments in Related Parties at
                                   December 31, 2000...........................................................     23

Schedule II                        Condensed Financial Information of Registrant at December 31, 2000
                                   and 1999, and for the years ended December 31, 2000, 1999 and 1998..........   24-26

Schedule III                       Supplementary Insurance Information for the year ended
                                   December 31, 2000, 1999 and 1998............................................   27-29

Schedule IV                        Reinsurance for the year ended December 31, 2000, 1999 and 1998.............     30

Schedule V                         Allowance for Uncollectible Premiums and Other Receivables for the
                                   year ended December 31, 2000, 1999 and 1998.................................     31

Schedule VI                        Supplemental Information for the year ended December 31, 2000, 1999
                                   and 1998....................................................................     32

                                   Independent Auditors' Report................................................ Exhibit 23
</TABLE>


         (3)        EXHIBITS:

The exhibits required by Item 601 of Regulation SK are listed in the Exhibit
Index, which immediately precedes the exhibits filed with this Form 10-K or
incorporated in this report by reference, and is incorporated herein by this
reference.

         (b)      REPORTS ON FORM 8-K.

         There were no reports on form 8-K filed during the fourth quarter of
the year ended December 31, 2000.



                                       22
<PAGE>   23




                                                                      SCHEDULE I



          SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
        SUMMARY OF INVESTMENTS-OTHER THAN INVESTMENTS IN RELATED PARTIES
                                DECEMBER 31, 2000


===============================================================================


<TABLE>
<CAPTION>
Type of investment                                        AMORTIZED COST           FAIR             CARRYING
($ in thousands)                                            OR COST                VALUE             AMOUNT
- ----------------------------------------------------------------------------------------------------------------
<S>                                                   <C>                       <C>              <C>
DEBT SECURITIES:
Held-to-maturity:
       U.S.  government and government agencies        $         2,136                 2,144             2,136
       Obligations of states and political
       subdivisions                                            207,415               213,027           207,415
       Mortgage-backed securities                               15,626                15,886            15,626
                                                          --------------        -------------     --------------
Total debt securities, held-to-maturity                        225,177               231,057           225,177

Available-for-sale:
       U.S. government and government agencies                  94,572                97,453            97,453
       Obligations of states and political
       subdivisions                                            445,666               456,944           456,944
       Corporate securities                                    544,044               545,492           545,492
       Asset-backed securities                                  10,716                10,486            10,486
       Mortgage-backed securities                               89,700                92,383            92,383
                                                          --------------        -------------     --------------
Total debt securities, available-for-sale                    1,184,698             1,202,758         1,202,758

EQUITY SECURITIES, AVAILABLE-FOR-SALE:
Common stocks:
       Public utilities                                          2,573                10,140            10,140
       Banks, trust and insurance companies                     17,712                24,886            24,886
       Industrial, miscellaneous and all other                  83,545               203,552           203,552
                                                          --------------        -------------     --------------
Total common stock                                             103,830               238,578           238,578
Preferred Stocks:
       Industrial, miscellaneous and all other                   1,000                 1,000             1,000
Total equity securities, available-for-sale                    104,830               239,578           239,578
Short-term investments                                          95,908                95,908            95,908
Other investments                                               13,642                13,642            13,642
                                                          --------------        -------------     --------------
Total investments                                      $     1,624,255             1,782,943         1,777,063
                                                          ==============        =============     ==============
</TABLE>



                                       23
<PAGE>   24



                                                                     SCHEDULE II


                         SELECTIVE INSURANCE GROUP, INC
                              (PARENT CORPORATION)
                                 BALANCE SHEETS


===============================================================================

<TABLE>
<CAPTION>
                                                                                         December 31,
($ in thousands, except share amounts)                                          2000                     1999
- ------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                            <C>
ASSETS

Equity securities, available-for-sale - at fair value (cost:
      $1,000 - 2000; $1,974 - 1999)                                      $         1,000                    2,118
Short-term investments                                                            26,458                        -
Cash                                                                               1,574                       71
Investment in subsidiaries                                                       722,269                  701,224
Current Federal income tax                                                             -                      441
Deferred Federal income tax                                                        7,088                    5,251
Other assets                                                                      14,239                   11,991
                                                                            --------------           -------------
Total assets                                                             $       772,628                  721,096
                                                                            ==============           =============

LIABILITIES AND STOCKHOLDERS' EQUITY

Convertible subordinated debentures                                      $         3,848                    6,157
Notes payable                                                                    172,117                   75,428
Short-term debt                                                                        -                   51,302
Current Federal income tax                                                            58                        -
Other liabilities                                                                 18,808                   18,245
                                                                            --------------           -------------
Total liabilities                                                                194,831                  151,132
                                                                            --------------           -------------

Stockholders' equity
Common stock of $2 par value per share:
Authorized shares: 180,000,000
Issued: 38,783,742-2000; 37,964,405-1999                                          77,568                   75,929
Additional paid-in capital                                                        63,074                   53,470
Retained earnings                                                                525,669                  514,477
Accumulated other comprehensive income                                            99,325                   76,694
Treasury stock - at cost (shares: 13,577,266-2000;
      11,406,722-1999)                                                          (181,552)                (143,875)
Deferred compensation expense and notes receivable from stock
      sales                                                                       (6,287)                  (6,731)
                                                                            --------------           -------------
Total stockholders' equity                                                       577,797                  569,964
                                                                            --------------           -------------
Total liabilities and stockholders' equity                               $       772,628                  721,096
                                                                            ==============           =============
</TABLE>

Information should be read in conjunction with the Notes to Consolidated
Financial Statements of Selective Insurance Group, Inc. and its subsidiaries in
Item 8. of the 2000 Form 10-K.



                                       24
<PAGE>   25



                                                         SCHEDULE II (CONTINUED)


                         SELECTIVE INSURANCE GROUP, INC
                              (PARENT CORPORATION)
                              STATEMENTS OF INCOME

===============================================================================


<TABLE>
<CAPTION>
($ in thousands)                                                           2000          1999            1998
- -----------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                  <C>              <C>
REVENUES:
Dividends from subsidiaries                                      $       38,519          47,242          54,451
Net investment income earned                                                312             603           1,826
Realized gains (losses)                                                     227            (339)             53
Miscellaneous income                                                        848              93             125
                                                                      -----------     -----------     -----------
                                                                         39,906          47,599          56,455
                                                                      -----------     -----------     -----------
Expenses:
Interest                                                                 13,745           9,460           9,409
Other operating                                                           5,602           3,765           1,051
                                                                      -----------     -----------     -----------
                                                                         19,347          13,225          10,460
                                                                      -----------     -----------     -----------

Income before Federal income tax and equity in undistributed
      income of subsidiaries                                             20,559          34,374          45,995
                                                                      -----------     -----------     -----------

FEDERAL INCOME TAX BENEFIT:
Current                                                                  (4,552)         (4,158)         (3,252)
Deferred                                                                 (1,424)         (1,253)           (401)
                                                                      -----------     -----------     -----------
                                                                         (5,976)         (5,411)         (3,653)
                                                                      -----------     -----------     -----------
Income before equity in undistributed income of subsidiaries,
      net of tax                                                         26,535          39,785          49,648
Equity in undistributed income of subsidiaries, net of tax                   --          13,932           3,922
                                                                      -----------     -----------     -----------
Net income                                                       $       26,535          53,717          53,570
                                                                      ===========     ===========     ===========
</TABLE>

Information should be read in conjunction with the Notes to Consolidated
Financial Statements of Selective Insurance Group, Inc. and its subsidiaries in
Item 8. of the 2000 Form 10-K.



                                       25
<PAGE>   26



                                                         SCHEDULE II (CONTINUED)


                         SELECTIVE INSURANCE GROUP, INC
                              (PARENT CORPORATION)
                            STATEMENTS OF CASH FLOWS

===============================================================================

<TABLE>
<CAPTION>
($ in thousands)                                                               2000             1999             1998
- --------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                 <C>               <C>
OPERATING ACTIVITIES:
Net income                                                               $       26,535           53,717           53,570
                                                                            ------------     ------------     ------------

Adjustments to reconcile net income to net cash provided
    by operating activities:
Equity in undistributed income of subsidiaries, net of tax                           --          (13,932)          (3,922)
Dividend in excess of subsidiaries' income                                       15,366               --               --
(Increase) decrease in net Federal income tax                                    (1,646)          (4,676)           3,362
Net realized (gain) loss on investments                                            (227)             339              (53)
Other, net                                                                        9,812           10,451          (12,025)
                                                                            ------------     ------------     ------------
Net adjustments                                                                  23,305           (7,818)         (12,638)
                                                                            ------------     ------------     ------------

Net cash provided by operating activities                                        49,840           45,899           40,932
                                                                            ------------     ------------     ------------

INVESTING ACTIVITIES:
Purchase of other investments                                                    (1,000)              --               --
Purchase of subsidiaries                                                         (5,999)         (30,152)          (6,601)
Sale of equity securities, available-for-sale                                     2,201           24,879              551
                                                                            ------------     ------------     ------------
Net cash used in investing activities                                            (4,798)          (5,273)          (6,050)
                                                                            ------------     ------------     ------------

FINANCING ACTIVITIES:
Proceeds from notes payable                                                      88,440               --               --
(Paydown of) proceeds from short-term debt                                      (51,302)          23,015           10,887
Principal payment on note payable                                                (7,143)          (7,143)          (7,143)
Dividends to stockholders                                                       (15,343)         (16,358)         (16,263)
Acquisition of treasury stock                                                   (37,677)         (45,885)         (38,205)
Increase from issuance of common stock                                            8,962            9,066           16,479


Increase in deferred compensation expense and notes receivable
    from stock sale                                                             (3,018)           (3,366)            (913)
                                                                            ------------     ------------     ------------
Net cash used in financing activities                                           (17,081)         (40,671)         (35,158)
                                                                            ------------     ------------     ------------

Net Increase (decrease) in cash and short-term investments                       27,961              (45)            (276)
Cash and short-term investments at beginning of year                                 71              116              392
                                                                            ------------     ------------     ------------
Cash and short-term investments at end of year                           $       28,032               71              116
                                                                            ============     ============     ============
</TABLE>


Information should be read in conjunction with the Notes to Consolidated
Financial Statements of Selective Insurance Group, Inc. and its subsidiaries in
Item 8. of the 2000 Form 10-K.



                                       26
<PAGE>   27

                                                                    SCHEDULE III


          SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
                       SUPPLEMENTARY INSURANCE INFORMATION
                          YEAR ENDED DECEMBER 31, 2000


===============================================================================


<TABLE>
<CAPTION>
Segment

                                 Deferred
                                  policy       Reserve for                      Net
                                acquisition     losses and      Unearned      premiums
($ in thousands)                   costs      loss expenses     premiums       earned
- ----------------------------------------------------------------------------------------
<S>                        <C>                     <C>          <C>           <C>
Commercial                  $      91,175           861,643      296,240       611,865

Personal                           27,238           250,144      107,169       209,400

Reinsurance recoverable
on unpaid loss and loss
expenses                               --           160,869           --            --

Prepaid reinsurance
premiums                               --                --       33,097            --

Interest and general
corporate expenses                     --                --           --            --
- ----------------------------------------------------------------------------------------
Total                       $     118,413         1,272,656      436,506       821,265
</TABLE>


<TABLE>
<CAPTION>
Segment
                                          Amortization
                            Losses and    of deferred       Other
                               loss          policy       operating        Net
                             expenses     acquisition     expenses/      premiums
($ in thousands)             incurred        costs        income (1)     written
- ------------------------------------------------------------------------------------
<S>                           <C>          <C>              <C>          <C>
Commercial                     443,933      181,285          31,833       638,991

Personal                       170,133       54,158           5,045       204,613

Reinsurance recoverable
on unpaid loss and loss
expenses                            --           --              --            --

Prepaid reinsurance
premiums                            --           --              --            --

Interest and general
corporate expenses                  --           --          19,247            --
- --------------------------------------------------------------------------------------
Total                          614,066      235,443          56,125       843,604
</TABLE>


NOTE:      A meaningful allocation of net investment income of $99,495 and net
           realized gain on investments of $4,191 is considered impracticable
           because the Company does not maintain distinct investment portfolios
           for each segment.

         (1)      Other operating expenses includes $3,111 of underwriting
                  charges that are included in other income or other expense on
                  the consolidated income statement in Item 8. of the 2000 form
                  10-K.



                                       27
<PAGE>   28


                                                        SCHEDULE III (CONTINUED)


          SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
                       SUPPLEMENTARY INSURANCE INFORMATION
                          YEAR ENDED DECEMBER 31, 1999


===============================================================================


<TABLE>
<CAPTION>
Segment

                                 Deferred
                                  policy       Reserve for                      Net
                                acquisition     losses and      Unearned      premiums
($ in thousands)                   costs      loss expenses     premiums       earned
- ----------------------------------------------------------------------------------------
<S>                        <C>                    <C>            <C>           <C>
Commercial                  $      80,799           824,889      269,111       570,650

Personal                           28,296           256,875      111,959       228,415



Reinsurance recoverable
on unpaid loss and loss
expenses                               --           192,044           --            --

Prepaid reinsurance
premiums                               --                --       32,531            --

Interest and general
corporate expenses                     --                --           --            --
- ----------------------------------------------------------------------------------------
Total                       $     109,095         1,273,808      413,601       799,065
</TABLE>



<TABLE>
<CAPTION>
Segment
                                       Amortization
                         Losses and    of deferred       Other
                            loss          policy       operating        Net
                          expenses     acquisition     expenses/      premiums
($ in thousands)          incurred        costs        income (1)     written
- ---------------------------------------------------------------------------------
<S>                        <C>          <C>             <C>          <C>
Commercial                  416,559      171,771          29,945       587,521

Personal                    175,656       60,154            (873)      224,156



Reinsurance recoverable
on unpaid loss and loss
expenses                         --           --              --            --

Prepaid reinsurance
premiums                         --           --              --            --

Interest and general
corporate expenses               --           --          13,130            --
- ---------------------------------------------------------------------------------
Total                       592,215      231,925          42,202       811,677
</TABLE>

NOTE:      A meaningful allocation of net investment income of $96,531 and net
           realized gain on investments of $29,377 is considered impracticable
           because the Company does not maintain distinct investment portfolios
           for each segment. Certain reclassifications have been made to conform
           with 2000 presentation.

       (1) Other operating expenses includes $429 of underwriting charges that
           are included in other income or other expense on the consolidated
           income statement in Item 8. of the 2000 form 10-K.



                                       28
<PAGE>   29



                                                        SCHEDULE III (CONTINUED)


          SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
                       SUPPLEMENTARY INSURANCE INFORMATION
                          YEAR ENDED DECEMBER 31, 1998


===============================================================================

<TABLE>
<CAPTION>
Segment                                                    Amortization
                                                                of          Other
                                               Losses and    deferred     operating
                                    Net           loss        policy      expenses/        Net
                                  premiums      expenses    acquisition    income        premiums
($ in thousands)                   earned       incurred       costs         (1)         written
- ----------------------------------------------------------------------------------------------------
<S>                       <C>                  <C>           <C>           <C>          <C>
Commercial                 $      506,020       352,863       154,484       31,544       524,571

Personal                          216,972       154,937        54,844         (694)      224,302



Reinsurance recoverable
on unpaid loss and loss
expenses                               --            --            --           --            --

Prepaid reinsurance
premiums                               --            --            --           --            --

Interest and general
corporate expenses                     --            --            --       10,584            --
- -------------------------- ---- ------------- ------------- ------------ ------------- ------------

Total                      $      722,992       507,800       209,328       41,434       748,873
</TABLE>


   NOTE:     A meaningful allocation of net investment income of $99,196 and net
             realized loss on investments of $2,139 is considered impracticable
             because the Company does not maintain distinct investment
             portfolios for each segment.

         (1) Other operating expenses includes $674 of underwriting charges that
             are included in other income or other expense on the consolidated
             income statement in Item 8. of the 1999 form 10-K.





                                       29
<PAGE>   30



                                                                     SCHEDULE IV


          SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
                                   REINSURANCE
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998



<TABLE>
<CAPTION>
                                                                                          Assumed
                                                                            Ceded to       from                       % of amount
                                                              Gross          other         other                        assumed
($ in thousands)                                             amount        companies     companies       Net amount     to net
- --------------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>             <C>             <C>             <C>           <C>
2000
- ----
Premiums earned:
Accident and health insurance                                   365              --              --             365         --
Property and liability insurance                            900,824          94,453          14,529         820,900        1.8
                                                         ------------    ------------    -----------     -----------    -------

Total premiums earned                                       901,189          94,453          14,529         821,265        1.8
                                                         ============    ============    ===========     ===========    =======

1999
- ----
Premiums earned:
Accident and health insurance                                   258              --              --             258         --
Property and liability insurance                            856,041          78,177          20,943         798,807        2.6
                                                         ------------    ------------    -----------     -----------    -------

Total premiums earned                                       856,299          78,177          20,943         799,065        2.6
                                                         ============    ============    ===========     ===========    =======

1998
- ----
Premiums earned:
Accident and health insurance                                   270              --              --             270         --
Property and liability insurance                            780,572          79,089          21,239         722,722        2.9
                                                         ------------    ------------    -----------     -----------    -------

Total premiums earned                                       780,842          79,089          21,239         722,992        2.9
                                                         ============    ============    ===========     ===========    =======
</TABLE>



                                       30
<PAGE>   31



                                                                      SCHEDULE V


          SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
           ALLOWANCE FOR UNCOLLECTIBLE PREMIUMS AND OTHER RECEIVABLES
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998



===============================================================================



<TABLE>
<CAPTION>

($ in thousands)                                             2000           1999            1998
- -------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                  <C>             <C>
Balance, January 1                                    $       3,649           2,740          3,056


Additions                                                     6,713           2,476          1,996


Deletions                                                    (4,291)         (1,567)        (2,312)
                                                          -----------     ----------     -----------

Balance, December 31                                  $       6,071           3,649          2,740
                                                          ===========     ==========     ===========

</TABLE>



                                       31
<PAGE>   32



                                                                     SCHEDULE VI


          SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
                            SUPPLEMENTAL INFORMATION
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


===============================================================================



<TABLE>
<CAPTION>

                                                            Losses and loss expenses
                                                               incurred related to
                                                           ----------------------------

Affiliation with Registrant                                     (1)           (2)                       Paid losses
                                                              Current        Prior                       and loss
($ in thousands)                                               year          years                       expenses
- ---------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                     <C>                         <C>
Consolidated Property/Casualty
Subsidiaries:

    Year ended December 31, 2000                        $       615,095         (1,029)                      584,043

    Year ended December 31, 1999                        $       600,793         (8,578)                      563,272

    Year ended December 31, 1998                        $       510,319         (2,519)                      491,951
</TABLE>


NOTE:    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 of
         deferred policy acquisition costs, and net premiums written) is
         contained in Schedule III in this report. In addition, the Company does
         not discount loss reserves. Certain prior year amounts have been
         restated to conform to 2000 presentation.



                                       32
<PAGE>   33



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.

By: /s/ Gregory E. Murphy                 March 26, 2001
- ------------------------------------------------------------
Gregory E. Murphy
Chairman of the Board, President and Chief Executive Officer


By: /s/ Dale A. Thatcher                  March 26, 2001
- ------------------------------------------------------------
Dale A. Thatcher,
Senior Vice President of Finance and Chief Financial Officer

==============================================================================

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/ Gregory E. Murphy                 March 26, 2001
- ------------------------------------------------------------
Gregory E. Murphy
Chairman of the Board, President and Chief Executive Officer



By: /s/ Paul D. Bauer                     March 26, 2001
- ------------------------------------------------------------
Paul D. Bauer
Director



By: /s/ A. David Brown                     March 26, 2001
- ------------------------------------------------------------
David Brown
Director



By: /s/ William A. Dolan, II                March 26, 2001
- ------------------------------------------------------------
William A. Dolan, II
Director



By: /s/ William C. Gray, D.V.M.             March 26, 2001
- ------------------------------------------------------------
William C. Gray, D.V.M.
Director



By: /s/ C. Edward Herder                    March 26, 2001
- ------------------------------------------------------------
C. Edward Herder
Director




                                       33
<PAGE>   34


By: /s/ William M. Kearns,Jr.             March 26, 2001
- ------------------------------------------------------------
William M. Kearns, Jr.
Director



By: /s/ Joan M. Lamm-Tennant, Ph.D.       March 26, 2001
- ------------------------------------------------------------
Joan M. Lamm-Tennant, Ph.D.
Director



By: /s/ S. Griffin McClellan, III         March 26, 2001
- ------------------------------------------------------------
S. Griffin McClellan, III
Director



By: /s/ William M. Rue                    March 26, 2001
- ------------------------------------------------------------
William M. Rue
Director



By: /s/ Thomas D. Sayles, Jr.             March 26, 2001
- ------------------------------------------------------------
Thomas D. Sayles, Jr.
Director



By: /s/ J. Brian Thebault                 March 26, 2001
- ------------------------------------------------------------
J. Brian Thebault
Director



                                       34
<PAGE>   35


    EXHIBIT INDEX

*        Exhibits included within this 10K filing

Exhibit
NUMBER


3.1      Restated Certificate of Incorporation of Selective Insurance Group,
         Inc., dated August 4, 1977, as amended, (incorporated herein by
         reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K
         for the year ended December 31, 1997, File No. 0-8641).

3.2      The Company's By-Laws, adopted on August 26, 1977, as amended,
         (incorporated herein by reference to Exhibit 3.2 to the Company's
         Quarterly Report on Form 10-Q for the quarter ended September 30, 1999,
         File No. 0-8641).

4.1      The form of Indenture dated December 29, 1982, between the Selective
         Insurance Group, Inc. and Midlantic National Bank, as Trustee relating
         to the Company's 8 3/4% Subordinated Convertible Debentures due 2008
         (incorporated herein by reference to Exhibit 4.3 to the Company's
         Registration Statement on Form S-3 No. 2-80881).

4.2      Amended and Restated Rights Agreement, dated February 2, 1999, between
         Selective Insurance Group, Inc. and First Chicago Trust, (incorporated
         herein by reference to the Company's Current Report on Form 8-K filed
         February 2, 1999, File No. 0-8641.)

10.1     The Selective Insurance Retirement Savings Plan as amended through
         August 15, 1996 (incorporated herein by reference to Exhibit 4 to the
         Company's Registration Statement on Form S-8 No. 333-10477).

10.1a    Amendment, dated May 2, 1997, to the Selective Insurance Retirement
         Savings Plan in Exhibit 10.1 above (incorporated herein by reference to
         Exhibit 10.6 to the Company's Quarterly Report on Form 10Q for the
         quarter ended June 30, 1997, File No. 0-8641).

10.2     The Retirement Income Plan for Employees of Selective Insurance Company
         of America, as amended through May 6, 1994 (incorporated herein by
         reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K
         for the year ended December 31, 1994, File No. 0-8641).

10.3     The Company's Stock Option Plan, as amended through May 6, 1988
         (incorporated herein by reference to Exhibit 4 to the Company's
         Registration Statement on Form S-8 No. 33-22450).

10.4     Selective Insurance Group, Inc. Stock Option Plan II, as amended
         through October 9, 1997, and related forms of option agreements
         (incorporated herein by reference to Exhibits 4.1 to the Company's
         Registration Statement on Form S-8 No. 333-37501).

10.4a    The Selective Insurance Group, Inc. Stock Option Plan II, as amended
         through July 28, 1998, (incorporated herein by reference to Exhibit
         10.13a to the Company's Annual Report on Form 10-K for the year ended
         December 31, 1993, File No. 0-8641).

10.4b    The Selective Insurance Group, Inc. Stock Option Plan II, as amended
         through January 31, 2000, (incorporated herein by reference 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).

10.5     Deferred Compensation Plan for Directors (incorporated herein by
         reference 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).

10.6     The Company's 1987 Employee Stock Purchase Savings Plan (incorporated
         herein by reference 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).

10.6a    Amendment, dated May 2, 1997, to the 1987 Employee Stock Purchase
         Savings Plan in Exhibit 10.6 above (incorporated herein by reference to
         Exhibit 10.5 to the Company's Quarterly Report on Form 10Q for the
         quarter ended June 30, 1997, File No. 0-8641).


                                       35
<PAGE>   36


10.7     The Selective Insurance Rewards Program adopted January 1, 1994, which
         replaced the Annual Incentive Compensation Plan (incorporated herein by
         reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K
         for the year ended December 31, 1994, File No. 0-8641).

10.8     The Selective Insurance Group, Inc. Stock Purchase Plan for Independent
         Insurance Agents as amended through December 1, 1995 (incorporated
         herein by reference to Exhibit 10.8 to the Company's Annual Report on
         Form 10-K for the year ended December 31, 1995, File No. 0-8641).

10.8a    The Selective Insurance Group, Inc. Stock Purchase Plan for Independent
         Insurance Agents, as amended (incorporated herein by reference to the
         Company's Post Effective Amendment No. 2 on Form S-3 No. 033-30833).

10.9     The Selective Insurance Group, Inc. Stock Option Plan for Directors as
         amended, (incorporated herein by reference to Exhibit 10.12a to the
         Company's Annual Report on Form 10-K for the year ended December 31,
         1993, File No. 0-8641).

10.9a    The Selective Insurance Group, Inc. Stock Option Plan for Directors, as
         amended (incorporated herein by reference to Exhibit 4.4 of the
         Company's Registration Statement on Form S-8 No. 333-10477).

10.10    The Selective Insurance Group, Inc. Stock Compensation Plan for
         Nonemployee Directors (incorporated herein by reference to Exhibit 4 to
         the Company's Registration Statement on Form S-8 No. 333-10465).

10.10a   The Selective Insurance Group, Inc. Stock Compensation Plan for
         Nonemployee Directors, as amended (incorporated herein by reference 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).

10.11    Employment, Termination and Severance Agreements.

10.11a   Employment Agreement with Thornton R. Land, dated September 1, 1993, as
         amended (incorporated herein by reference to Exhibit 10.15 to the
         Company's Annual Report on Form 10-K for the year ended December 31,
         1993, File No. 0-8641).

10.11a1  Amendment, dated September 1, 1996, to the Employment Agreement in
         Exhibit 10.11a above (incorporated herein by reference to Exhibit 10.3
         to the Company's Quarterly Report on Form 10-Q for the quarter ended
         September 30, 1996, File No. 0-8641).

10.11a2  Amendment, dated September 1, 1999 to the employment agreement with
         Thornton R. Land in Exhibit 10.12b above (incorporated herein by
         reference to the company's Annual Report on Form 10K for the year ended
         December 31, 1999, file No. 0-8641).

10.11b   Form of Termination Agreement, between the Company and Mr. Land, as
         amended (incorporated herein by reference to Exhibit 10.16 to the
         Company's Annual Report on Form 10-K for the year ended December 31,
         1993, File No. 0-8641).

10.11b1  Amendment, dated December 16, 1998, to the Form of Termination
         Agreement between Mr. Land and the Company in Exhibit 10.11b above
         (incorporated herein by reference to Exhibit 10.16s to the Company's
         Annual Report on Form 10-K for the year ended December 31, 1998, File
         No. 0-8641).

10.11c   Employment Agreement with Gregory E. Murphy, dated August 1, 1995
         (incorporated herein by reference to Exhibit 10.1 to the Company's
         Quarterly Report on Form 10-Q for the quarter ended September 30, 1995,
         File No. 0-8641).

10.11c1  Amendment, dated May 1, 1998, to the Employment Agreement with Gregory
         E. Murphy in Exhibit 10.11c above (incorporated herein by reference to
         Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the
         quarter ended June 30, 1998, File No. 0-8641).

10.11c2  Amendment Number 2, dated May 5, 2000, to the Employment Agreement with
         Gregory E. Murphy in Exhibit 10.11c above (incorporated herein by
         reference to Exhibit 10.16a to the Company's Quarterly Report on Form
         10-Q for the quarter ended June 30, 2000, File No. 0-8641).

10.11d   Termination Agreement, dated August 1, 1995, between Selective
         Insurance Company of America and Gregory E. Murphy (incorporated herein
         by reference to Exhibit 10.2 to the Company's Quarterly Report on Form
         10-Q for the quarter ended September 30, 1995, File No. 0-8641).


                                       36
<PAGE>   37



10.11d1  Amendment, dated December 16, 1998, to the Termination Agreement
         between Selective Insurance Company of America and Gregory E. Murphy in
         Exhibit 10.11d above (incorporated herein by reference to Exhibit
         10.16t to the Company's Annual Report on Form 10-K for the year ended
         December 31, 1998, File No. 0-8641).

10.11e   Employment Agreement with Jamie Ochiltree, III, dated October 31, 1995
         (incorporated herein by reference to Exhibit 10.11f to the Company's
         Annual Report on Form 10-K for the year ended December 31, 1995, File
         No. 0-8641).

10.11e1  Amendment, dated October 31, 1998, to the Employment Agreement with
         Jamie Ochiltree, III in Exhibit 10.11e above (incorporated herein by
         reference to Exhibit 10.16r to the Company's Annual Report on Form 10-K
         for the year ended December 31, 1998, File No. 0-8641).

10.11e2  Amendment Number 2, dated May 5, 2000, to the Employment Agreement with
         Jamie Ochiltree, III in Exhibit 10.11e above incorporated herein by
         reference to Exhibit 10.16b to the Company's Quarterly Report on Form
         10-Q for the quarter ended June 30, 2000, File No. 0-8641).

10.11f   Termination Agreement, dated August 1, 1995, between Selective
         Insurance Company of America and Jamie Ochiltree (incorporated herein
         by reference to Exhibit 10.11j to the Company's Annual Report on Form
         10-K for the year ended December 31, 1995, File No. 0-8641).

10.11f1  Amendment, dated December 16, 1998, to the Termination Agreement
         between Selective Insurance Company of America and Jamie Ochiltree in
         Exhibit 10.11f above. (incorporated herein by reference to Exhibit
         10.16v to the Company's Annual Report on Form 10-K for the year ended
         December 31, 1998, File No. 0-8641).

10.11g   Employment Agreement, dated May 2, 1997, between Selective Insurance
         Company of America and James W. Coleman, Jr. (incorporated herein by
         reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10Q
         for the quarter ended June 30, 1997, File No. 0-8641).

10.11g1  Amendment, dated May 5, 2000, to the Employment Agreement with James W.
         Coleman, Jr. in Exhibit 10.11g above (incorporated herein by reference
         to Exhibit 10.16c to the Company's Quarterly Report on Form 10-Q for
         the quarter ended June 30, 2000, File No. 0-8641).

10.11h   Termination Agreement, dated May 2, 1997, between Selective Insurance
         Company of America and James W. Coleman, Jr. (incorporated herein by
         reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10Q
         for the quarter ended June 30, 1997, File No. 0-8641).

10.11h1  Amendment, dated December 16, 1998, to the Termination Agreement
         between Selective Insurance Company of America and James W. Coleman,
         Jr. in Exhibit 10.11h above (incorporated herein by reference to
         Exhibit 10.16w to the Company's Annual Report on Form 10-K for the year
         ended December 31, 1998, File No. 0-8641).

10.11i   Form of Termination Agreement, dated September 27, 1999, between
         Selective Insurance Company of America and Ronald J. Zaleski,
         (incorporated herein by reference to Exhibit 10.16z to the Company's
         Annual Report on Form 10-K for the year ended December 31, 1999, File
         No. 0-8641).

10.11j   Form of Termination Agreement, dated March 1, 2000, between Selective
         Insurance Company of America and Eduard Pulkstenis (incorporated herein
         by reference to Exhibit 10.16ab to the Company's Quarterly Report on
         Form 10-Q for the quarter ended March 31, 2000, File No. 0-8641).

10.11k   Employment Agreement with Richard H. Eskow, dated May 5, 2000
         (incorporated herein by reference to Exhibit 10.16d to the Company's
         Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File
         No. 0-8641).

10.11l   Termination Agreement with Richard H. Eskow, dated May 5, 2000
         (incorporated herein by reference to Exhibit 10.16e to the Company's
         Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File
         No. 0-8641).

10.11m   Employment Agreement with Dale A. Thatcher, dated May 5, 2000
         (incorporated herein by reference to Exhibit 10.16f to the Company's
         Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File
         No. 0-8641).

10.11n   Termination Agreement with Dale A. Thatcher, dated May 5, 2000
         (incorporated herein by reference to Exhibit 10.16g to the Company's
         Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File
         No. 0-8641).

10.11o   Employment Agreement with Richard F. Connell, dated August 8, 2000
         (incorporated herein by reference to Exhibit 10.16a to the Company's
         Quarterly Report on Form 10-Q for the quarter ended September 30, 2000,
         File No. 0-8641).


                                       37
<PAGE>   38



10.11p   Termination Agreement with Richard F. Connell, dated August 8, 2000
         (incorporated herein by reference to Exhibit 10.16b to the Company's
         Quarterly Report on Form 10-Q for the quarter ended September 30, 2000,
         File No. 0-8641).

10.12    Form of Note Purchase Agreement dated as of November 15, 1992 with
         respect to Selective Insurance Group, Inc. 7.84% Senior Notes due
         November 15, 2002 (incorporated herein by reference to Exhibit 99.1 to
         the Company's Post-Effective Amendment No. 1 to the Registration
         Statement on Form S-3, No. 33-30833).

10.13    Form of Note Purchase Agreement dated as of August 1, 1994 with respect
         to Selective Insurance Group, Inc. 8.77% Senior Notes due August 1,
         2005 (incorporated herein by reference to Exhibit 99.2 to the Company's
         Post-Effective Amendment No. 1 to the Registration Statement on Form
         S-3, No. 33-30833).

10.14    Promissory Note of $25,000,000 Revolving Line of Credit with State
         Street Bank and Trust Company (incorporated herein by reference to
         Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
         quarter ended March 31, 1997, File No. 0-8641).

10.14a   Amendment, dated June 30, 1998, to the Promissory Note of $25,000,000
         Revolving Line of Credit with State Street Bank and Trust Company in
         Exhibit 10.14 above, (incorporated herein by reference to Exhibit 10.2
         to the Company's Quarterly Report on Form 10-Q for the quarter ended
         June 30, 1998, File No. 0-8641).

10.14b   Amendment, dated November 6, 1998, to the Promissory Note of
         $25,000,000 Revolving Line of Credit with State Street Bank and Trust
         Company in Exhibit 10.14 above.

10.14c   Amendment, dated June 30, 2000, to the Promissory Note of $40,000,000
         Revolving Line of Credit with State Street Bank and Trust Company in
         Exhibit 10.14 above, (incorporated herein by reference to Exhibit 10.1
         to the Company's Quarterly Report on Form 10-Q for the quarter ended
         September 30, 2000, File No. 0-8641).

10.15    Commercial Loan Note of $25,000,000 Line of Credit with Summit Bank as
         amended through June 30, 1997, (incorporated herein by reference to
         Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
         quarter ended June 30, 1997, File No. 0-8641).

10.15a   Amendment, dated May 31, 1998, to the Commercial Loan Note of
         $25,000,000 Line of Credit with Summit Bank in Exhibit 10.15 above,
         (incorporated herein by reference to Exhibit 10.1 to the Company's
         Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File
         No. 0-8641).

10.16    Amendment, dated July 31, 2000, to the Promissory Note of $15,000,000
         Line of Credit with Summit Bank as amended through July 31, 2001,
         (incorporated herein by reference to Exhibit 10.2 to the Company's
         Quarterly Report on Form 10-Q for the quarter ended September 30, 2000,
         File No. 0-8641).

10.17    Commercial Loan Note of $10,000,000 Line of Credit with First Union
         National Bank as of October 22, 1999, (incorporated herein by reference
         to Exhibit 10.28 to the Company's Quarterly Report on Form 10-Q for the
         quarter ended June 30, 2000, File No. 0-8641).

* 11     Computation of earnings per share, filed herewith.

* 13     Portions of the 2000 Annual Report to Shareholders incorporated by
         reference into this Form 10-K, filed herewith.

* 21     Subsidiaries of Selective Insurance Group, Inc., filed herewith.

* 23     Consent and Opinion of Independent Auditors, filed herewith.






                                       38
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11
<SEQUENCE>2
<FILENAME>y47342ex11.txt
<DESCRIPTION>COMPUTATION OF EARNINGS PER SHARE
<TEXT>

<PAGE>   1


                                                                      EXHIBIT 11

          SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
                        COMPUTATION OF EARNINGS PER SHARE
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998


===============================================================================



<TABLE>
<CAPTION>

($ in thousands, except per share amounts)                   Income                Shares            Per Share
                                                          (Numerator)           (Denominator)         Amount
- -----------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                    <C>                <C>
2000
- ----

BASIC EPS:
Net Income available to common stockholders                  26,535                 24,907           $  1.07
                                                                                                        ========
EFFECT OF DILUTIVE SECURITIES
Restricted stock                                                 --                    752


8.75% convertible subordinated debentures                       250                    649
Stock options                                                   (18)                   210
                                                          -----------            ------------


DILUTED EPS
Income available to common stockholders and assumed
conversions                                                  26,767                 26,518              1.01
                                                          ===========            ============           ========

1999
- ----

BASIC EPS:
Net Income available to common stockholders                  53,717                 27,081              1.98
                                                                                                        ========
EFFECT OF DILUTIVE SECURITIES
Restricted stock                                                 --                    683


8.75% convertible subordinated debentures                       355                    873
Stock options                                                  (127)                   240
                                                          -----------            ------------


DILUTED EPS
Income available to common stockholders and assumed
conversions                                                  53,945                 28,877              1.87
                                                          ===========            ============           ========

1998
- ----

BASIC EPS:
Net Income available to common stockholders                  53,570                 28,480              1.88
                                                                                                        ========
EFFECT OF DILUTIVE SECURITIES
Restricted stock                                                 --                    534


8.75% convertible subordinated debentures                       375                    926
Stock options                                                  (989)                   472
                                                          -----------            ------------
DILUTED EPS
Income available to common stockholders and assumed
conversions                                                  52,956                 30,412              1.74
                                                          ===========            ============           ========
</TABLE>



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>3
<FILENAME>y47342ex13.txt
<DESCRIPTION>PORTIONS OF 2000 ANNUAL REPORT TO SHAREHOLDERS
<TEXT>

<PAGE>   1

                                                                      EXHIBIT 13

ANNUAL REPORT PAGES 26 THROUGH 62 INCLUDING THE INSIDE BACK COVER

<TABLE>
<CAPTION>
===========================================================================================================
ELEVEN-YEAR FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------
(All presentations are in accordance with GAAP
unless noted otherwise; number of weighted average
shares and dollars in thousands, except per share amounts)                     2000               1999
- -----------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                 <C>
Net premiums written 1                                                     $843,604            811,677
Net premiums earned                                                         821,265            799,066
Net investment income earned                                                 99,495             96,531
Net realized gains (losses)                                                   4,191             29,377
Diversified insurance services revenue 2                                     76,063             46,653
Total revenues                                                            1,004,753            974,768
Underwriting loss 3                                                         (65,122)           (54,147)
Diversified insurance services net income (loss) 2                            3,454              2,948
Operating income 3                                                           23,811             34,622
Net income 4                                                                 26,535             53,717
Comprehensive income                                                         49,166             16,088
Total assets                                                              2,573,002          2,507,545
Notes payable and debentures                                                163,634             81,585
Stockholders' equity                                                        577,797            569,964
Statutory premiums to surplus ratio 3,5                                       1.7:1              1.6:1
Statutory combined ratio 2,3,6                                               108.2%              105.7
Combined ratio 2,3,6                                                         107.9%              106.8
Yield on investment, before-tax                                                5.8%                5.6
Debt to capitalization                                                        22.1%               12.5
Return on average equity                                                       4.6%                9.1
Per share data:
Net income:
Basic                                                                          1.07               1.98
Diluted                                                                        1.01               1.87
Dividends to stockholders                                                       .60                .59
Stockholders' equity                                                          22.92              21.46
Price range of common stock:
High                                                                          25 7/8               22 1/2
Low                                                                           14 5/8               16 1/2
Close                                                                         24 1/4               17 3/16

Number of weighted average shares:
Basic                                                                        24,907             27,081
Diluted                                                                      26,518             28,877
- -----------------------------------------------------------------------------------------------------------
</TABLE>




<TABLE>
<CAPTION>
=====================================================================================================
ELEVEN-YEAR FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------
(All presentations are in accordance with GAAP
unless noted otherwise; number of weighted average
shares and dollars in thousands, except per share amounts)              1998               1997
- -----------------------------------------------------------------------------------------------------
<S>                                                               <C>                <C>
Net premiums written 1                                               748,873            717,618
Net premiums earned                                                  722,992            676,268
Net investment income earned                                          99,196            100,530
Net realized gains (losses)                                           (2,139)             6,021
Diversified insurance services revenue 2                              14,100              8,236
Total revenues                                                       837,329            794,183
Underwriting loss 3                                                  (24,986)            (3,022)
Diversified insurance services net income (loss) 2                     1,440                495
Operating income 3                                                    54,961             65,694
Net income 4                                                          53,570             69,608
Comprehensive income                                                  78,842            105,931
Total assets                                                       2,432,168          2,306,191
Notes payable and debentures                                          88,791             96,559
Stockholders' equity                                                 607,583            565,316
Statutory premiums to surplus ratio 3,5                                1.5:1              1.5:1
Statutory combined ratio 2,3,6                                         103.2              100.1
Combined ratio 2,3,6                                                   103.6              100.3
Yield on investment, before-tax                                          5.7                6.0
Debt to capitalization                                                  13.2               14.6
Return on average equity                                                 9.1               13.4
Per share data:
Net income:
Basic                                                                   1.88               2.41
Diluted                                                                 1.74               2.27
Dividends to stockholders                                                .56                .56
Stockholders' equity                                                   21.30              19.32
Price range of common stock:
High                                                                      29 1/4            283 /8
Low                                                                      161 1/16           185 /16
Close                                                                     20 1/8             27

Number of weighted average shares:
Basic                                                                 28,480              28,909
Diluted                                                               30,412              30,925
- -----------------------------------------------------------------------------------------------------
</TABLE>

                                       26
<PAGE>   2

<TABLE>
<CAPTION>
         1996                1995                   1994                  1993
- --------------------------------------------------------------------------------------
      <S>                   <C>                    <C>                  <C>
         692,239             757,021                 697,941             607,462
         694,947             742,817                 680,270             594,919
          96,952              91,640                  80,657              77,326
           2,786                 900                   4,230               4,528
           6,378               4,529                   3,482               2,912
         804,780             843,100                 771,682             682,510
         (21,982)            (17,468)                (35,119)            (54,530)
           1,261                 555                     384                 354
          53,740              52,457                  35,526              19,735
          55,551              53,042                  38,276              22,678
          51,539             105,035                   1,078              21,380
       2,189,737           2,119,804               1,870,718           1,725,736
         103,769             111,292                 111,378              61,291
         474,299             436,749                 329,164             322,807
               1.7:1               2.1:1                   2.4:1               2.6:1
             102.9               101.6                   104.3               108.5
             102.9               102.3                   105.1               109.1
               6.1                 6.4                     6.5                 6.8
              18.0                20.3                    25.3                16.0
              12.2                13.9                    11.7                 7.1



               1.92                1.86                    1.38                 .83
               1.83                1.81                    1.29                 .81

                .56                 .56                     .56                 .56

              16.31               15.17                   11.62               11.74


               19 3/8              19 3/16                 15 3/8               15 1/2
               15 1/2              12 1/4                  11 1/2               10 1/4
               19                  17 3/4                  12 5/8               15 1/4

          28,860              28,481                  27,759              27,271
          30,360              29,846                  29,356              29,133
- --------------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
                1992               1991              1990
- ----------------------------------------------------------------
           <S>               <C>                <C>
               560,360            500,283           482,735
               539,792            503,726           470,681
                73,516             68,501            64,508
                 3,943              3,580             9,888
                 2,519              2,273             2,059
               622,084            580,193           549,228
               (42,127)           (38,310)          (38,439)
                   294                158                (3)
                24,845             24,429            24,491
                53,915             27,293            32,402
                53,520             33,245            22,837
             1,639,033          1,321,120         1,240,916
                63,681             14,470            15,173
               311,705            269,998           248,274
                     2.5:1              2.5:1             2.7:1
                   107.9              107.6             108.0
                   107.7              107.6             108.2
                     7.2                7.6               7.5
                    17.0                5.1               5.8
                    18.5               10.5              13.5



                     2.02               1.03              1.25
                     1.93               1.01              1.16

                      .55                .52               .51

                    11.60              10.17              9.46


                       11 3/4             9                10 1/8
                        8                 6 1/2             6 1/4
                       11                 8 3/8             6 5/8

                26,690             26,388            25,942
                28,869             28,502            28,222
- -------------------------------------------------------------
</TABLE>


                                       27
<PAGE>   3









1.Net premiums written in 1997 were increased by approximately $30 million due
to a conversion of New Jersey personal automobile policies from six-month to
annual terms. This conversion had no effect on net premiums earned.

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. Prior years have been restated to reflect this
reclassification.

3. Refer to the Glossary of Terms on page 62 for definitions of terms and
specific measures.

4. Net income for 1992 increased by $26 million due to the adoption of two
accounting policies, Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (FASB 109), and a change in the method of deferring policy
acquisition costs. FASB 109 increased net income by $20 million ($0.76 per basic
share and $0.70 per diluted share) and the change in deferred policy acquisition
costs increased net income by $6 million ($0.23 per basic share and $0.21 per
diluted share).

5. 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 since, as the ratio increases, revenue per dollar
of invested capital increases, indicating the possible opportunity for an
increased return.

6. 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.



                                       27
<PAGE>   4






ANNUAL REPORT - FINANCIAL REVIEW PAGES 28-35

Results of Operations
2000 Compared with 1999 and 1998
Financial Highlights1

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
(dollars in thousands)                          2000                1999                 1998
- ---------------------------------------------------------------------------------------------
<S>                                        <C>                  <C>                  <C>
Net premiums written                        $843,604             811,677              748,873
Diversified insurance services revenue        76,063              46,653               14,100
Net investment income earned                  99,495              96,531               99,196
Operating income                              23,811              34,622               54,961
Net realized gains/(losses), after-tax         2,724              19,095               (1,391)
Net income                                    26,535              53,717               53,570
Statutory combined ratio                      108.2%               105.7                103.2
GAAP combined ratio                           107.9%               106.8                103.6
Return on average equity                        4.6%                 9.1                  9.1
</TABLE>


1 - Refer to the Glossary of Terms on page 62 for definitions of terms used in
this financial review.

We took a number of actions starting in 1999, and intensifying in 2000 aimed at
effectively positioning the Company to take maximum advantage of changing market
forces in the commercial lines marketplace. Although we believe that we have
made substantial progress in this regard, we still see the effects of
price-based competition in our Commercial Lines operations. We also saw the
Personal Lines combined ratio increase over the past three years primarily due
to the New Jersey state mandate to write involuntary business and the 15%
rollback of New Jersey private passenger automobile rates. Together, these items
were the principal reason for lower levels of operating income beginning in 1998
and continuing through 2000. Operating income decreased to $24 million, or $0.91
per diluted share in 2000, compared to $35 million, or $1.21 per diluted share
in 1999 and $55 million, or $1.79 per diluted share in 1998.

         Realized gains, net of taxes, were $3 million, or $0.10 per diluted
share in 2000 compared to $19 million, or $0.66 per diluted share in 1999, and a
realized loss of $1 million, or $0.05 per diluted share in 1998. Realized
investment gains and losses fluctuate based on investment decisions regarding
individual securities as well as tax planning considerations. After several
years of substantial appreciation in the equity markets, we took the opportunity
in 1999 to rebalance the investment portfolio by selling $72 million in equity
securities. This generated realized gains of $37 million in 1999. The proceeds
from the sales were reinvested in debt instruments that have a higher current
yield than the equity securities they replaced. This resulted in additional
investment income in 1999 and 2000.

Net income for 2000 was $27 million, or $1.01 per diluted share, compared to $54
million, or $1.87 per diluted share in 1999 and $54 million, or $1.74 per
diluted share in 1998.

         We manage our business in three operating segments: Insurance
Operations (Commercial and Personal Lines underwriting), Investments, and
Diversified Insurance Services. The Insurance Operations segment is evaluated
based on Accounting Principles Generally Accepted in the United States of
America (GAAP) underwriting results, as well as statutory and GAAP combined
ratios. Investment income is an important source of revenue and the return on
our investment portfolio has a material effect on operating income. Investments
are evaluated based on after-tax investment returns. Diversified Insurance
Services is evaluated based on revenue growth, and net income and earnings
before interest, taxes, depreciation and amortization EBITDA) returns on revenue
computed in accordance with GAAP.

Insurance Operations

         Net premiums written increased over the prior year by 4% in 2000 to
$844 million, 8% in 1999 to $812 million, and 4% in 1998 to $749 million. These
increases resulted in a 3% increase over the prior year in net premiums earned
in 2000, 11% in 1999 and 7% in 1998.

BAR GRAPH:  Net Premium Written (dollars in millions)
1996       $692
1997       $718
1998       $749
1999       $812
2000       $844



<PAGE>   5


<TABLE>
<CAPTION>
(in millions)                                         Total                Commercial        Personal
- -----------------------------------------------------------------------------------------------------
<S>                           <C>                       <C>                     <C>
2000                           $844                        639                     205
% Change                        3.9%                       8.8                    (8.7)

1999                             812                       588                     224
% Change                         8.4                      12.0                      --

1998                             749                       525                     224
% Change                         4.4                      11.0                    (8.5)
</TABLE>

         We actively write business in 20 states. Expansion into the Midwest and
Northeast is reflected in the increased percentage of business generated outside
of New Jersey. This amounted to 58% during 2000, compared to 54% in 1999, and
49% in 1998. Just ten years ago, business outside of New Jersey was only 35% of
our total business.

         The combined ratio was 107.9% in 2000, compared to 106.8% in 1999 and
103.6% in 1998. The increase for 2000 was caused by a 6.6 point increase in the
Personal Lines combined ratio to 109.5% in 2000 from 102.9% in 1999; the
Commercial Lines combined ratio decreased 0.8 points to 107.5% in 2000 from
108.3% in 1999. The increase from 1998 to 1999 was caused by a 6.5 point
increase in the Personal Lines combined ratio to 102.9% from 96.4%, and a 1.8
point increase in the Commercial Lines combined ratio to 108.3% from 106.5%.

         We have an ongoing plan to improve underwriting profitability through
the following steps: (i) improve pricing in both Personal and Commercial Lines
by filing for base rate increases, reducing the use of pricing credits, and, as
permitted by state laws, limiting the amount of business placed in preferred
pricing programs; (ii) manage business growth by focusing on appropriately
priced underwriting risks which support our business strategy; and (iii) pursue
a pending New Jersey rate filing to improve New Jersey private passenger auto
results.

    We expect our underwriting improvements and price increases, measured in
terms of lower GAAP and statutory combined ratios, to become more significant in
the later quarters of 2001 and into 2002. As a result of our initiatives, we
presently expect to see a 2.5 to 3.5 point improvement in the statutory combined
ratio results in 2001 compared to 2000.

Commercial Lines Results

         The Commercial Lines Strategic Business Units' (SBU) net premiums
written accounted for 76% of our total net premiums written in 2000, and
increased 9%, or $51 million, in 2000 compared to 12%, or $63 million, in 1999,
and 11%, or $52 million, in 1998. Growth in Commercial Lines net premiums
written during 2000 was primarily due to price increases on renewal premiums,
including exposure, which averaged 9% in the first quarter, and 13% to 15% for
the last three consecutive quarters, for a full year average of 13%. This trend
continued into 2001 as renewal price increases in the Commercial SBU's were up
an additional 16% for the first two months of 2001 compared to the same period
one year ago. During 1999 and 1998, prices were generally decreasing. For those
policies that we retain, this measures the increase in year-to-year premium,
including any increase in coverage purchased on those policies. Since we earn
these higher premiums over the life of the policy, generally one year, the
positive effects of Commercial Lines price increases generated in 2000 will be
more fully reflected on the combined ratio in the later quarters of 2001 and
into 2002. Our pricing strategy is implemented on an account-by-account basis to
preserve agency relationships and retain our best business. Retention during
2000 of existing business remained comparable to prior years at approximately
77%.

         Net premiums written during 2000 included $134 million of new business,
compared to $154 million in 1999 and $167 million in 1998. The decrease in new
business during 2000 is attributed to our focus on price increases and
tightening underwriting criteria. The commercial lines pricing environment in
2000, which has allowed us to price our products more profitably, has also had a
positive impact on our mix of new and renewal business. In 2000, agents focused
more on selling needed price increases and less on producing new business. Also,
generally higher commercial lines prices industry-wide gave customers fewer
options and led them to stay more frequently with the carriers on their expiring
policies. Accordingly, there was less availability of new accounts in 2000.
While always necessary to grow the business, new business involves by its nature
a higher loss ratio than mature business. In 2000, new premiums made up 21% of
our commercial book, down from 26% last year. This factor, along with increased
prices on both new and renewal accounts, should have a positive impact on our
loss ratio going forward. We believe that the ability to increase renewal
pricing on a sustained basis is an important leading indicator for improving
results.

         The loss and loss expense ratio was 72.6% in 2000, 73.0% in 1999 and
69.7% in 1998. This ratio has been impacted during 2000 and 1999 by unusual
large property and workers' compensation losses, as well as weather related
catastrophe losses. These increases were partially offset by decreases in the
1999 and 2000 company-wide loss expense ratio due to an increased focus on
existing loss cost initiatives including: (i) increased use of inside staff
counsel, which has a cost per closed suit approximately 60% lower than outside
staff counsel; (ii) reducing the number of outside law firms; (iii) active case
management; and (iv) more favorable fee arrangements with remaining outside law
firms. In addition to controlling loss expenses, our loss cost containment
initiatives include: (i) a comprehensive managed care program which reduced 2000
and 1999 workers' compensation and automobile losses; (ii) a special
investigative unit and
<PAGE>   6


claims professionals which uncovered fraudulent claims; (iii) a voluntary
automobile repair shop program which reduced repair costs while maintaining
customer satisfaction; and (iv) a small estimate automobile and property review
program.

Commercial Lines SBU's Results

         The Commercial Lines business operates through six Commercial Lines
SBUs, each responsible for the profitability and production of their core
classes of business. The SBUs were established in 1993 to organize our insurance
segment around customers. This approach allows us to identify new business
opportunities and quickly correct under-performing business classes. This
operating structure is enhanced by line of business specialists that are
responsible for the profitability of our major lines of business. In addition to
increasing prices and implementing loss and loss expense cost savings
initiatives to improve profitability, the SBUs have strengthened the
underwriting discipline in under-performing classes of business.

Contractors' SBU

         The Contractors' unit is the largest SBU with net premiums written of
$250 million in 2000 compared to $228 million in 1999 and $195 million in 1998.
The unit focuses on the building, carpentry and electrical trades, as well as
grading, excavation and other construction businesses. The combined ratio for
the Contractors SBU was 109.5% in 2000 compared to 110.4% in 1999 and 110.3% in
1998. Results in the past three years have been negatively impacted by
falls-from-heights losses. As a result, we have intensified our underwriting
training to recognize and correct or avoid these hazards.

         Mercantile and Service SBU

         The Mercantile and Services SBU had net premiums written of $168
million in 2000 compared to $157 million in 1999 and $149 million in 1998. The
SBU concentrates on retail stores, offices, wholesalers and service businesses.
The combined ratio for the unit was 105.5% in 2000, compared to 107.0% in 1999
and 106.8% in 1998. Over the past several years the transportation
sub-classification of this business, which amounts to approximately $18 million
in net premiums written, has performed poorly. As a result, we have implemented
stricter underwriting guidelines and price increases which have resulted in a
14% drop in policy count and a 19% increase in renewal premium in 2000.

Community Services and Organizations (CSO) SBU

         The CSO SBU had net premiums written of $85 million in 2000 compared to
$79 million in 1999 and $71 million in 1998. This unit focuses its products and
marketing on municipalities, school boards, religious organizations and
volunteer fire departments. The combined ratio for the unit was 101.9% in 2000
compared to 99.9% in 1999 and 102.0% in 1998. This SBU has performed well over
the past three years. Our focus is to profitably grow this business in our
expansion regions.

Habitational and Recreational SBU

         The Habitational and Recreational SBU had net premiums written of $67
million in 2000 compared to $62 million in 1999 and $57 million in 1998. This
SBU focuses on providing insurance products to hotels, motels, condominiums,
property owners associations, golf courses, country clubs, restaurants, and
other recreational industries. The combined ratio for this unit was 111.2% in
2000, compared to 115.2% in 1999 and 106.3% in 1998. Results for this SBU have
been negatively impacted by large property losses predominantly from electrical
related fire losses. We have tightened underwriting guidelines and established
training programs on effective age of buildings to mitigate these losses in the
future.

Manufacturing and Processing SBU

         The Manufacturing and Processing SBU had net premiums written of $55
million in 2000 compared to $49 million in 1999 and $40 million in 1998. This
unit concentrates on light industrial and processing businesses with low product
liability exposures. The combined ratio for this unit was 111.6% for 2000
compared to 112.7% in 1999 and 106.3% in 1998. Over the past several years, this
SBU has incurred an unusual number of large losses. We are eliminating more
difficult property risks in order to lower our overall exposure and reduce
losses.

Bonds SBU

         Net premiums written for 2000 were $13 million compared to $12 million
in 1999 and $13 million in 1998. The Bonds SBU markets a full array of fidelity,
contract surety and commercial surety products. The combined ratio was 88.4% in
2000 compared to 94.6% in 1999 and 74.5% in 1998. Results in the bond line of
business tend to have large fluctuations from year to year. This is due to the
fact that when losses occur they tend to be total losses.

Personal Lines Results

         The Personal Lines SBU net premiums written decreased 9%, or $20
million, in 2000 compared to remaining flat in 1999, and decreasing 9% or $19
million in 1998. The decrease resulted in an 8% decrease in net premiums earned
in 2000 compared to a 5% increase in 1999, and a 3% increase in 1998. The
decrease in personal lines net premiums written during 2000 was caused by: (i) a
$29 million decline in New Jersey private passenger automobile net premiums
written mainly due to a 9% reduction in voluntary policies (approximately $13
million) and $13 million of New Jersey Personal Automobile Insurance Plan (PAIP)
involuntary business transferred to a servicing carrier in exchange for the
premium plus a 17.5% servicing fee; and (ii) a $6 million decrease in South
Carolina net

<PAGE>   7


premiums written due to a reduction in our policies in-force as a result of a
highly competitive personal lines marketplace and our reluctance to participate
at inadequate rates. These decreases were partially offset by an $18 million
increase in expansion state business.

         As part of our geographic expansion program, personal lines products
for several states were enhanced in 1998 and 1999 to grow this segment of the
business. Personal Lines net premiums written in our expansion states increased
$18 million, to $51 million in 2000, from $33 million in 1999 and $17 million in
1998. At December 31, 2000 New Jersey Personal Automobile now represents just
15% of our annual net written premium volume compared to 19% at December 31,
1999, and 22% at December 31, 1998.

In 1998, the New Jersey legislature passed the New Jersey Automobile Insurance
Cost Reduction Act or "AICRA" (The Act) which was implemented in March of 1999.
The Act required private passenger automobile insurers to reduce their rates by
15% in return for savings which were expected to be generated due to medical
cost controls mandated by the state and other potential savings (e.g., changes
in the no-fault law, increased fraud prevention and prosecution). We estimate
the actual savings attributable to the new law in 2000 were in the 3% to 4%
range. This had an adverse impact on profitability in the New Jersey personal
automobile line of business which we expect to continue in 2001 with this line
of business expected to operate in the range of 108% to 113% combined ratio.

In 1998, New Jersey also began requiring carriers to write personal automobile
business at their normal rates in areas designated as "Urban Enterprise Zones"
(UEZ) in an amount equal to their statewide personal automobile market share.
Our market share at December 31, 2000 was estimated to be 2.9% compared to 3.1%
in both 1999 and 1998. UEZ business decreased to $16 million, or 12,000 policies
written during 2000 from $19 million, or 15,000 policies, written during 1999.
During 1998, we wrote only $12 million, or 7,000 policies in UEZ business and
that business was produced by our voluntary agents.

The Personal Lines SBU results for 2000 and 1999 reflected unfavorable New
Jersey private passenger automobile results and the costs associated with
writing new business in our expansion states. The personal lines SBU ratio of
losses and loss expenses incurred to net premiums earned increased 4.3 points,
to 81.2%, in 2000, compared to 76.9% in 1999 and 71.4% in 1998. The increase in
2000 continued to reflect the effect of the New Jersey AICRA rate rollback and
New Jersey personal automobile UEZ business. The 2000 New Jersey personal
automobile loss and loss expense ratio increased 3.6 points to 81.4%, and added
3.1 points to the overall personal lines combined ratio. Total UEZ business
generated a 164% loss and loss expense ratio for 2000, up from 150% in 1999. The
portion of this business assigned to us by the state generated a loss and loss
expense ratio over 200% for both years. As we strive to write more of this
business through our voluntary agents, and lessen our exposure to business
assigned to us by the state, it continues to present problems for our
profitability. We made a filing with the insurance department in New Jersey in
August 2000 for an 18.9% rate increase. The filing was deemed complete, and the
initial hearing was held before an Administrative Law Judge in early February
2001. The judge has 60 days to provide his advisory ruling to the Commissioner
of Insurance. The Commissioner, in turn, has 60 days to affirm, deny, or modify
that ruling. The ruling could then be appealed to the State court if we feel
that is necessary. The rate process is expected to be long and difficult, and
the outcome remains uncertain at this time.

Business in our expansion states produced a statutory combined ratio of 115.5%
in 2000 compared to a combined ratio of 116.7% in 1999 and 97.9% in 1998. The
personal automobile line generated a combined ratio in these states of 119% for
the past two years and has not performed to our expectation despite the fact
that we expect new business to generate a higher loss ratio than a seasoned book
of business. New personal automobile business in our preferred pricing tier is
performing within our expectations; however, business placed in our higher
priced rating tiers is performing poorly. As a result, we have significantly
slowed the growth of new business in these states by restricting personal
automobile business for insureds with at-fault accidents until rate filings are
complete, rates have been adjusted and rating tiers have been redefined. The
Company expects these changes to be implemented throughout 2001.

Personal Lines results in 2000 also reflect a 19 point increase in the combined
ratio of the homeowners line of business of 106.3% in 2000 compared to 87.5% in
1999 and 76.2% in 1998. The increase from 1999 to 2000 added 2 points to the
total personal lines combined ratio, and was due to higher storm losses that
were not classified as catastrophes and decreased contingent commissions on
homeowners' reinsurance contracts.

Commercial Lines and Personal Lines Insurance Operations Expenses

         The GAAP ratio of underwriting expenses incurred to net premiums earned
was 32.2% in 2000, 31.8% in 1999 and 32.5% in 1998. The increase in 2000 is
comprised of 0.1 points attributable to spending on strategic initiatives and
0.3 points attributable to increased premium charge-offs partially offset by
increased audit premiums. The 0.7 point decrease in 1999 from 1998 is primarily
attributable to a decrease in profit based incentive payouts to both employees
and agents. During 2000, we began implementing automation, service and expense
control initiatives to eliminate processing duplication and reduce overhead
expenses. These actions include: i) consolidation of two New Jersey offices and
consolidation of the Richmond, Virginia and Chesapeake, Maryland regional
offices in conjunction with the formation of a service center that is being
piloted in Richmond beginning in January 2001; and ii) streamlined processing
for small commercial lines accounts that will improve service to our agents and
reduce expenses.

         The office consolidation began during the third quarter of 2000 and is
expected to be completed by the third quarter of 2001. The Service Center is
designed to directly service our small business customers. Currently, over 50%
of our commercial lines business would fit into the model for this program and
our agents have suggested the potential for new growth and rollover
opportunities. In exchange for two points on their commission rates, the agents
who choose to use the Service Center can eliminate the processing expense for
high volume transactions.




<PAGE>   8


         Two automation strategies that pursue straight-through processing which
we expect to increase sales and eliminate redundant processing between the
Company and the independent agencies include: (i) continued implementation and
expansion of our small business issue system, called "One and Done," for
Business Owners Policies and related lines. We have a goal to write $13 million
in premium in 2001; and to expand the types of business and types of
transactions processed throughout 2001; and (ii) the development of the "eSelect
Agency Internet Site," that provides on-line access to account and claim history
as well as key sources of Company information.

         Our automation strategies, are designed to improve the ratio of
statutory net premiums written per insurance operations employee. Management
tracks this number as a measure of efficiency within the insurance operations
segment. Net premiums written per employee were $475,000 in 2000 compared to
$471,000 in 1999 and $455,000 in 1998.

Reinsurance

         We maintain reinsurance programs to protect us from unusually serious
individual occurrences or catastrophes in which a number of claims could produce
an extraordinary aggregate loss. We have both property and casualty excess of
loss treaties as well as a property catastrophe program. In certain instances
where greater capacity is needed for a larger property or casualty risk, we
purchase facultative (individual risk) reinsurance.

         In addition, we have a homeowners' quota share program that reinsures
75% of New Jersey homeowners' property coverage up to a $1 million limit and
contains no per-occurrence limit. Given the favorable experience in both the New
Jersey homeowner's quota share and property catastrophe treaties, the 2001
homeowner contract renewed at the expiring rate while the property catastrophe
program increase was about 5%, and in line with our expectations. Our property
catastrophe program covers losses in excess of $15 million per catastrophe up to
$165 million. Total coverage under the program is $133 million.

         We increased the retention on our property treaty excess of loss
program to cover each property occurrence in excess of $1 million up to $15
million, effective July 1, 2000. Prior to this change each property occurrence
in excess of $750,000 was covered up to $15 million. This treaty is expected to
cost approximately $6 million for the one-year policy term ended June 30, 2001.
Given our unsatisfactory property results, coupled with overall reinsurance
price increases, we expect that the July 1, 2001 renewal of the property excess
of loss treaty will generate substantially higher reinsurance costs.

         Our casualty excess of loss treaty covers each casualty occurrence in
excess of $2 million up to $50 million, except for commercial umbrella, which is
reinsured up to $10 million.

Investments

         The long-term objective of our investment policy is to maximize
after-tax yield while providing liquidity and preserving assets and
stockholders' equity. The current investment mix is 81% debt securities, 14%
equity securities, and 5% short-term investments. High credit quality has always
been a cornerstone of our investment strategy, as evidenced by the fact that 99%
of the debt securities are investment grade. To further emphasize this superior
quality, 38% of the debt securities have a Moody's rating of Aaa (or its
Standard & Poor's equivalent), considered to be the highest credit quality.

         Net investment income earned, after-tax, was $76 million in 2000, $75
million in 1999, and $77 million in 1998. Two primary factors affecting net
investment income are cash flow available from operations and reinvestment rates
available in the marketplace. Investment income earned for 2000 was positively
impacted by higher returns on our investments in limited partnerships that are
subject to market fluctuations. The fair value of these investments increased $4
million before tax during 2000 when compared to 1999, decreased $2 million in
1999 compared to 1998, and increased $1 million in 1998 compared to 1997. Our
overall after-tax investment yield was 4.4% in 2000, compared to 4.3% in 1999
and 4.4% in 1998.

         We repurchased 2.1 million shares of Company stock for $37 million in
2000, 2.5 million shares for $46 million in 1999, and 1.8 million shares for $38
million in 1998. We have repurchased 7 million shares of the 8 million-share
authorization that expires on May 31, 2001. As a direct result of the share
repurchase program, after-tax net investment income per diluted share, increased
to $2.86 in 2000, from $2.60 in 1999, and $2.51 in 1998. Invested assets also
increased to $3.08 per dollar of stockholders' equity compared to $3.00 in 1999
and $2.91 in 1998.

         We emphasize liquidity requirements in response to an unpredictable
underwriting environment and the need to minimize the exposure to catastrophic
events. To provide liquidity while maintaining consistent performance,
maturities of debt securities are "laddered" so that some issues are always
approaching maturity, thereby providing a source of predictable cash flow. To
reduce sensitivity to interest rate fluctuations, we invest our debt portfolio
primarily in intermediate-term debt securities. The average life of the
portfolio at year-end 2000 was 4.7 years.

         We will continue to follow the investment philosophy that has
historically proven successful for us. The strategy will be to continue to
purchase debt securities in sectors that represent the most attractive relative
value and maintain a moderate equity exposure. Managing investment risk by
adhering to these strategies is intended to protect the interests of our
stockholders as well as those of our policyholders and, at the same time,
enhance our financial strength and underwriting capacity.




<PAGE>   9


         PIE CHART: Debt Securities Quality Analysis

         Aaa/AAA          38%
         Aa/AA            34%
         A/A              21%
         Baa/BBB           6%
         Other             1%


         Diversified Insurance Services

         The Diversified Insurance Services businesses create a fee-based source
of revenue that is not dependent on insurance underwriting cycles. These
businesses are not capital intensive and strengthen our ability to develop new
revenue streams in fast-growing markets. This segment is composed of
non-risk-bearing insurance-related businesses that fit into our business model
either: vertically (one business uses another's products or services in its own
production or supply output); or complementary (one business shares a common
marketing or distribution system with another). We measure the performance of
these companies' in terms of net income and earnings before interest, taxes,
depreciation and amortization (EBITDA) returns on revenue.

Selective HR Solutions, Inc. (Selective HR), formerly Modern Employers Inc.,
utilizes our independent agency network to distribute its professional employer
organization (PEO) product. A PEO offers human resource administration services
and risk management products and services to small and mid-sized businesses.
Consumer Health Network Plus LLC (CHN), a preferred provider network, offers
access to a network of credentialed health care providers to insurance companies
and other businesses. Alta Services LLC (Alta) manages workers' compensation and
automobile medical claims for our insurance subsidiaries, for unrelated
insurance companies, and for self-insured businesses and employer groups. Alta
offers a full array of medical cost containment services and bears no
underwriting risk. FloodConnect LLC (FloodConnect) operates as a servicing
carrier for the National Flood Insurance Program. FloodConnect provides a market
for flood insurance to our agents and has a distribution force, when combined
with the insurance company's, of approximately 3,200 agents countrywide. As a
servicing carrier, not an underwriter, FloodConnect bears no risk of
policyholder loss. PDA Software Services Inc. (PDA) has assisted in the
development of the Company's automated claim and flood processing systems. In
addition, PDA provides administrative services to the federal government's
Women, Infants and Children (WIC) nutritional program administered by the
states. Currently, PDA administers the WIC program in 15 states.

         Diversified Insurance Services revenue now represents 8% of our revenue
base, increasing 63% to $76 million in 2000, 231% to $47 million in 1999, and
71% to $14 million in 1998. The increase in revenues during 2000 is partially
due to the result of the acquisitions of Selective HR and CHN in July 1999. The
1999 results do not include a full year of activity of those companies. During
2000, increased infrastructure investments of approximately $1 million by
Selective HR resulted in a 51% increase in the number of worksite employees to
more than 18,000 at the end of 2000 compared to just over 12,000 one year ago.
The increase in the number of worksite employees is primarily attributable to
the ability of Selective HR to market the PEO product through our network of
independent insurance agents. Currently, there are just under 200 out of
Selective's 900 agents actively marketing the PEO product. Additionally, Alta
generated a 50% increase in revenue to $9 million in 2000 from $6 million in
1999; and PDA generated a 10% increase in revenue to $19 million in 2000 from
$17 million in 1999.

         The focus of our Diversified Insurance Services businesses continues to
be revenue growth, geographic expansion and cross marketing opportunities.
EBITDA as a percentage of revenue was 14.5% in 2000, 20.6% in 1999 and 25.3% in
1998. Partially offsetting the increase due to the 1999 acquisitions was the
loss of approximately $1 million in EBITDA generated in 1999 by servicing flood
business directly attributable to Hurricane Floyd. Current year results do not
reflect revenues from any event of that magnitude.

         Net income increased $1 million, or 17%, to $4 million in 2000,
compared to $3 million in 1999 and $2 million in 1998. These changes in net
income are in line with the changes in EBITDA as previously described.

         Diversified Insurance Services generated a return on revenue of 4.5%
for 2000 compared to 6.3% for 1999 and 10.2% in 1998. During 2000, we continued
marketing, through our independent insurance agents, the PEO payroll and human
resource services to small and medium commercial accounts. The related cost of
establishing the sales staff to work with these agents in this effort, along
with the impact of claim servicing fees generated by Hurricane Floyd in 1999,
were the primary reasons for the decline in our return on revenue compared to
the same periods a year ago. We expect our Diversified Insurance Services
businesses to continue to grow at 20% to 25% per year and produce returns on
revenue of between 5% and 6%.

<PAGE>   10


Federal Income Taxes

         Our total federal income tax expense decreased $12 million in 2000 to a
benefit of ($2 million), an effective tax rate of (8.1%), compared to an
effective tax rate of 15.3% in 1999, which was essentially unchanged when
compared to 15.9% for 1998. During 1999, an increase in the underwriting loss
was offset by a comparable increase in realized gains keeping taxable income
unchanged. The decrease for 2000 reflects lower taxable income for the year
mainly due to decreased realized gains and an increased underwriting loss. Our
effective tax rate differs from the federal corporate rate of 35% primarily as a
result of tax-exempt investment income.

         We had a total net deferred tax asset at December 31, 2000 of $9
million, compared to $16 million at December 31, 1999 and a $7 million net
deferred tax liability at December 31, 1998. Increases and decreases in the
unrealized gains on the available-for-sale investment portfolio were the primary
cause for the changes in the net deferred tax asset and liability.

<TABLE>
<CAPTION>
(in millions)                             2000                1999                 1998
- ---------------------------------------------------------------------------------------
<S>                                      <C>                 <C>                 <C>
Current taxable income                    $ (7.8)             37.7                 23.8

Pretax financial statement income           24.5              63.4                 63.7

Net deferred tax asset/(liability)           9.0              16.1                 (7.2)
</TABLE>


Financial Condition, Liquidity and Capital Resources

         Selective Insurance Group, Inc., ( the Parent) is a holding company,
the principal assets of which are investments in Insurance and Diversified
Insurance Services subsidiaries. The Parent's primary means of meeting its
liquidity requirements is through dividends from these subsidiaries. The payment
of dividends from the insurance subsidiaries is governed by state regulatory
requirements, and these dividends are generally payable only from earned surplus
as reported on our statutory annual statements as of the preceding December 31.

         The Parent's cash requirements include principal and interest payments
on the various senior notes and subordinated debentures, dividends to
stockholders, and general operating expenses as well as the cost of shares of
common stock repurchased under our common stock repurchase program, which
commenced in 1996. As of December 31, 2000, the Parent had repurchased under the
program a total of 7 million shares at a total cost of $133 million. During
2000, the Parent purchased 2 million shares at a total cost of $37 million.
Through February 2001, we repurchased 228,000 shares for $5 million.
Approximately 800,000 shares remain under the current Parent's Board of
Directors (the Board) authorization, which expires May 2001. In addition to
these annual cash flow requirements, in 2000 the Parent paid $6 million in
deferred purchase price for a 1999 acquisition of a subsidiary and $4 million in
expenses related to a private placement financing.

         The Parent generates cash from the sale of its common stock under
various stock plans, the dividend reinvestment program, and from investment
income, all of which approximated $3 million and reduces the Parent's annual
cash requirements from $34 million annually to $31 million. Payments totaling
$15 million will be made to Selective Way Insurance Company and Selective
Insurance Company of the Southeast for the Parent's purchase of Alta Services
LLC.

         Growth in the Diversified Insurance Services segment has significantly
augmented cash flow from operations by generating $10 million in operating cash
flow in 2000, compared to $3 million in 1999 and no cash flow from operations in
the 1998 start-up year. Dividends from these companies are not subject to the
same regulatory restrictions as the insurance subsidiaries.

         Based upon the 2000 statutory financial statements, the insurance
subsidiaries are permitted to pay the Parent in 2001 ordinary dividends in the
aggregate amount of $47 million. There can be no assurance that the insurance
subsidiaries will be able to pay dividends to the Parent in the future in an
amount sufficient to enable the Parent to meet its liquidity requirements. For
additional information regarding regulatory limitations on the payment of
dividends by the insurance subsidiaries to the Parent and amounts available for
the payment of such dividends, see Note 10 to the Consolidated Financial
Statements. Dividends to stockholders are declared and paid at the discretion of
the Board based upon the Company's operating results, financial condition,
capital requirements, contractual restrictions and other relevant factors. The
Parent has paid regular quarterly cash dividends to its stockholders for 72
consecutive years and currently plans to continue to pay quarterly cash
dividends. For information regarding restrictions on the Parent's ability to pay
dividends to its stockholders, see Note 5(b) to the consolidated financial
statements.

         In addition to the cash requirements of the Parent, our overall
obligations and cash outflow also include: claim settlements; commissions; labor
costs; premium taxes; general and administrative expenses; investment purchases
and capital expenditures. The insurance subsidiaries satisfy their obligations
and cash outflow through premium collections, interest and dividend income and
maturities of investments.

         Cash provided by operating activities amounted to $64 million in both
2000 and 1999, and $57 million in 1998.

Underwriting cash flow decreased $26 million in 2000 compared to 1999 due to:
(i) a $25 million increase in losses and loss expenses paid partially as a
result of a deterioration in underwriting results discussed previously; and our
efforts to close claims faster in order to mitigate ultimate losses, and (ii) a
$20 million increase in underwriting expenses paid resulting from higher premium
production and increased

<PAGE>   11



overall compensation and benefits. These decreases were partially offset by
increased premium collections of $22 million as a result of higher prices.

         Offsetting the decrease in underwriting cash flow: (i) federal taxes
paid decreased $17 million in 2000 compared to 1999 partially due to reduced
capital gains; and (ii) cash flow from Diversified Insurance Services increased
$8 million in 2000 compared to 1999 due to the growth of existing businesses, as
well as, growth due to acquisitions.

Since cash inflow from premiums is received in advance of required cash outflow
to settle claims, we accumulate funds that we invest. At December 31, 2000, we
had $1.8 billion in investments compared to $1.7 billion in 1999. Our investment
program is structured with staggered maturities so that liquidation of debt
securities, available-for-sale should not be necessary in the ordinary course of
business.

         Total assets increased 3%, or $65 million, from December 31, 1999 to
December 31, 2000. This increase was primarily due to (i) an increase in total
investments of $66 million resulting from an increase of $35 million in pre-tax
unrealized gains in the available for sale debt portfolio, as well as additional
purchases made due to positive operating cash flow; and (ii) a 10% increase in
premium receivables of $25 million corresponding with the net written premium
growth for fourth quarter 2000 when compared to fourth quarter 1999. These
increases were partially offset by a decrease in reinsurance recoverable on
unpaid losses and loss expenses of $31 million primarily attributable to
recoveries at December 31, 1999 related to Hurricane Floyd which occurred in the
third quarter of 1999, as well as lower reinsurance recoveries resulting from
higher retention limits on the excess of loss treaties.

         The rise in total liabilities of $58 million, or 3%, from December 31,
1999, to December 31, 2000, was primarily attributable to an increase in notes
payable of $84 million. On May 4, 2000, the Parent successfully completed a
private placement of notes in the amount of $91.5 million. The offering consists
of two tranches: a five year average life tranche of $30 million at 8.63% and an
eight year average life tranche of $61.5 million at 8.87%. This increase was
partially offset by a $51 million decrease in short-term debt, as the majority
of the proceeds, $68.2 million, were used to pay off the outstanding balances on
lines of credit. The unearned premium reserve increased 6%, or $23 million due
to growth in net premiums written over the year 2000.

    BAR GRAPH:  Operating Cash Flow (dollars in millions)
    1996             $90
    1997             $51
    1998             $57
    1999             $64
    2000             $64

Insurance Regulation

         On June 1, 2000, federal regulators issued final regulations
implementing the provisions of the Financial Services Modernization Act of 1999,
also known as the Gramm-Leach-Bliley Act (the Act), governing the privacy of
consumer financial information. The regulations became effective on November 13,
2000, and compliance with the regulations is required by July 1, 2001. The
regulations limit disclosure by financial institutions of "nonpublic personal
information" about individuals who obtain financial products or services for
personal, family, or household purposes. The Act and the regulations generally
apply to disclosures to nonaffiliated third parties, subject to specified
exceptions, but not to disclosures to affiliates. It is anticipated that the
states will adopt regulations that are at least as restrictive that will be
imposed on insurance companies. This is an evolving area of regulation, which
requires us to continue to monitor developments.

         Effective January 1, 2001, we adopted a codified set of statutory
accounting principles as required by the National Association of Insurance
Commissioners. The changes to the statutory accounting principles reduce the
differences within statutory accounting permitted practices between states. We
estimate that the adoption of the codified statutory accounting principles will
have a minimal impact to the Risk Based Capital ratios for the insurance
subsidiaries and will not significantly impact the dividend paying capabilities
of the insurance subsidiaries.

         While we believe that we are in compliance with all currently effective
and applicable laws affecting our operations, we will review the steps necessary
to comply with applicable privacy laws and regulations under the Act prior to
the mandatory date of compliance. We can not currently quantify the financial
impact we will incur to satisfy revised or additional regulatory requirements.

Diversified Insurance Services Regulation

         The strategic companies of our Diversified Insurance Services segment
include Selective HR, Alta, CHN, SRM Insurance Brokerage, LLC and SelecTech, LLC
(SelecTech)which are subject to certain regulations and two companies, PDA
Software Services, Inc., and FloodConnect, LLC, which are not heavily regulated.

         Selective HR is a professional employer organization (PEO). In this
capacity, it is a co-employer for its clients. As a co-employer, Selective HR is
affected by federal, state and local laws relating to labor, tax and employment
matters. By contracting with its clients and


<PAGE>   12


creating a co-employer relationship with employees assigned to work at client
company locations, Selective HR assumes certain contractual obligations, legal
obligations and responsibilities of an employer under these laws. Many of these
laws do not specifically address the obligations and responsibilities of
co-employers such as PEOs. If these laws, such as the Employee Retirement Income
Security Act, and federal and state employment laws and tax laws, are ultimately
applied to a PEO's co-employer relationship with their work-site employees, they
could have a material adverse effect on Selective HR's results of operations or
financial condition.

    Some states in which Selective HR operates have passed licensing or
registration requirements for PEOs. These regulatory laws vary from state to
state but generally provide for monitoring the fiscal responsibility of PEOs.

    Alta and CHN, operate as a managed care organization (MCO) and/or a
preferred provider organization (PPO) and are subject to laws and/or regulations
in some states where they do business, which require them to be licensed to
operate as an MCO or a PPO.

    In New Jersey, a state from which both Alta and CHN derive substantial
revenue, regulations implementing the Health Care Quality Act may deem insured
health benefit plans who contract with PPOs to be Managed Care Plans. Managed
Care Plans may be required, through PPO contracts, to provide enrollees with
information regarding the plan and the network and also to afford providers with
certain protections.

    Alta and CHN are also affected by both federal and state laws regarding
privacy of medical records and patient privacy. This is an evolving area of
regulation requiring us to continually monitor and review our operations.

    While Selective HR, Alta and CHN believe they are currently in compliance
with all laws and regulations affecting their operations, there can be no
assurance that, in the future, they will be able to satisfy new or revised
licensing and regulatory requirements.

    SRM Insurance Brokerage, LLC, is subject to the laws and/or regulations in
the states in which it does business, which require it to be licensed to operate
as an insurance agent/broker.

    SelecTech, LLC is overseen by Alta and provides third party administrative
services to self-insured accounts. SelecTech also works closely with Selective
Risk Managers to assist businesses and government entities looking for
customized insurance products and services. When operating as an insurance
adjuster, SelecTech is subject to the laws and/or regulations in some of the
states in which it does business, which require it to be licensed as an
adjuster.

    PDAprovides insurance software development and processing services to public
and private sector organizations. FloodConnect provides enhanced third party
administration for carriers who participate in the federal "Write Your Own"
(WYO) flood insurance program and services flood insurance policies written
through the WYOprogram countrywide.



<PAGE>   13




         Quantitative and Qualitative Disclosures About Market Risk

         Market risk is the risk of potential loss in fair value arising from
adverse fluctuations in interest rates, market rates and prices, foreign
currency exchange rates, and other relevant market rate or price changes. The
following is a discussion of our primary market risk exposures and how they were
being managed as of December 31, 2000. Our market risk sensitive instruments are
for other than trading purposes.

         Our investment policy is conservative with the long-term objective of
maximizing after-tax yield while providing liquidity and preserving assets and
stockholders' equity. The current investment mix is 81% debt securities, 14%
equity securities and 5% short-term investments. We have no direct exposure to
foreign exchange or commodity risks.

         To reduce the sensitivity of interest rate fluctuations, we invest our
debt portfolio primarily in intermediate-term debt securities. At December 31,
2000, 95% of the portfolio was ten years or less to maturity, and the average
life was 4.7 years.

         Our portfolio of marketable equity securities is exposed to equity
price risk arising from potential volatility in equity market prices. We attempt
to minimize the exposure to equity price risk by maintaining a diversified
portfolio limiting concentrations in any one company or industry.

         For our investment portfolio, there were no significant changes in our
primary market risk exposures or in how those exposures are managed compared to
the years ended December 31, 1999 and 1998. We do not currently anticipate
significant changes in our primary market risk exposures or in how those
exposures are managed in future reporting periods based upon what is known or
expected to be in effect in future reporting periods.

         We utilize sensitivity analysis to measure the potential loss in future
earnings, fair values or cash flows of market sensitive instruments. The
sensitivity analysis assumes a hypothetical: (i) change of 100 basis points in
interest rates; (ii) a 10% change in equity values at December 31, 2000; and
(iii) a parallel shift in the yield curve for rate sensitive instruments. The
timing of calls and prepayments cannot be estimated with precision.

         In the analysis, we include the following financial instruments:
investments in debt securities, investments in equity securities, convertible
debentures, and senior notes. The primary market risk to our market sensitive
instruments is interest rate risk and equity price risk.

         This analysis is not intended to provide a precise forecast of the
effect of changes in market interest rates and equity prices on our income or
stockholders' equity. Further, the calculations do not take into account any
actions we may take in response to market fluctuations.

         The following table presents the sensitivity analysis (adverse
scenario) of each component of market risk as of December 31, 2000 and 1999.

<TABLE>
<CAPTION>
                                          Fair Value          Estimated            Fair Value          Estimated
(in thousands)                            @12/31/00           Fair Value*           @12/31/99         Fair Value*
- -------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                  <C>                  <C>                  <C>
Assets:
Investments in  debt securities           $1,433,815           1,376,462            1,394,390            1,336,140
Investments in  equity securities            239,578             215,620              251,998              226,798

Liabilities:
Convertible  debentures                       13,228              14,551               14,908               16,399
8.77% Senior notes                            57,189              58,781               55,322               57,061
7.84% Senior notes                            14,415              14,595               21,388               21,726
8.63% Senior notes
      Series A                                31,028              32,005                    -                    -
8.87% Senior notes
      Series B                                63,247              65,756                    -                    -
</TABLE>


*-Estimated fair value after the hypothetical change in rates and equity market
conditions.


                                       36
<PAGE>   14



INDEPENDENT AUDITORS' REPORT

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, 2000 and
1999, 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,
2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.


/s/ KPMG LLP
New York, New York
February 6, 2001



                                       37
<PAGE>   15

<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
December 31,                                                                            2000                            1999
- ----------------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                            <C>
(in thousands, except share amounts)
ASSETS
Investments:
Debt securities, held-to-maturity--at amortized cost
   (fair value: $231,057--2000; $271,604--1999)                                    $     225,177                     271,384
Debt securities, available-for-sale--at fair value
   (amortized cost: $1,184,698--2000; $1,141,167--1999)                                1,202,758                   1,122,786
Equity securities, available-for-sale--at fair value
   (cost: $104,830--2000; $115,626--1999)                                                239,578                     251,998
Short-term investments (at cost which approximates fair value)                            95,908                      48,807
Other investments                                                                         13,642                      15,963
                                                                                          ------                      ------
Total investments (Note 4)                                                             1,777,063                   1,710,938
Cash                                                                                       8,759                       8,588
Interest and dividends due or accrued                                                     22,808                      23,545
Premiums receivables, net of allowance for uncollectible
   accounts of: $5,204--2000; $3,009--1999                                               274,031                     248,910
Other trade receivables, net of allowance for uncollectible
   accounts of: $867--2000; $640--1999                                                    24,915                      15,488
Reinsurance recoverable on paid losses and loss expenses                                   9,332                       9,797
Reinsurance recoverable on unpaid losses and loss expenses (Note 6)                      160,869                     192,044
Prepaid reinsurance premiums                                                              33,097                      32,531
Current Federal income tax                                                                 1,681                       4,417
Deferred Federal income tax (Note 19)                                                      8,971                      16,129
Real estate, furniture, equipment and software development--at cost,
    net of accumulated depreciation and amortization of:
    $61,024--2000; $56,631--1999                                                          57,820                      54,558
Deferred policy acquisition costs (Note 3)                                               118,413                     109,095
Goodwill, net of accumulated amortization of:
    $10,655--2000; $7,334--1999                                                           49,338                      52,001
Other assets                                                                              25,905                      29,504
                                                                                          ------                      ------
Total assets                                                                       $   2,573,002                   2,507,545
                                                                                    ============                   =========
LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
Reserve for losses (Note 14)                                                       $   1,099,929                   1,092,026
Reserve for loss expenses                                                                172,727                     181,782
Unearned premiums                                                                        436,506                     413,601
Convertible subordinated debentures                                                        3,848                       6,157
Short-term debt                                                                                -                      51,302
Notes payable (Note 5)                                                                   159,786                      75,428
Other liabilities                                                                        122,409                     117,285
                                                                                         -------                     -------

Total liabilities                                                                      1,995,205                   1,937,581
                                                                                       ---------                   ---------

Stockholders' Equity:
Common stock of $2 par value per share:
Authorized shares: 180,000,000
   Issued: 38,783,742--2000; 37,964,405--1999                                             77,568                      75,929
Additional paid-in capital                                                                63,074                      53,470
Retained earnings                                                                        525,669                     514,477
Accumulated other comprehensive income                                                    99,325                      76,694
Treasury stock--at cost (shares: 13,577,266--2000;
   11,406,722--1999)                                                                    (181,552)                   (143,875)
Deferred compensation expense and notes receivable from stock sales                       (6,287)                     (6,731)
                                                                                          -------                     -------

Total stockholders' equity                                                               577,797                     569,964
                                                                                         -------                     -------
Commitments and contingencies (Notes 6 and 17)

Total liabilities and stockholders' equity                                         $   2,573,002                   2,507,545
                                                                                    ============                   =========
See accompanying notes to consolidated financial statements.
</TABLE>


                                       38
<PAGE>   16

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,                                                    2000                  1999                1998
- -------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S>                                                                  <C>                    <C>                   <C>
Revenues:
Net premiums written                                                  $     843,604             811,677              748,873
Net increase in unearned premiums and
    prepaid reinsurance premiums                                            (22,339)            (12,612)             (25,881)
                                                                            --------            --------             --------
Net premiums earned                                                         821,265             799,065              722,992
Net investment income earned                                                 99,495              96,531               99,196
Net realized gains (losses)                                                   4,191              29,377               (2,139)
Diversified insurance services revenue                                       76,063              46,653               14,100
Other income                                                                  3,739               3,142                3,180
                                                                              -----               -----                -----
Total revenues                                                            1,004,753             974,768              837,329
                                                                          ---------             -------              -------

Expenses:
Losses incurred                                                             541,487             517,700              433,316
Loss expenses incurred                                                       72,579              74,515               74,484
Policy acquisition costs                                                    261,540             254,744              235,523
Dividends to policyholders                                                    7,670               6,682                5,329
Interest expense                                                             13,745               9,460                9,409
Diversified insurance services expenses                                      70,836              41,881               11,883
Other expenses                                                               12,352               6,383                3,681
                                                                             ------               -----                -----
Total expenses                                                              980,209             911,365              773,625
                                                                            -------             -------              -------
Income before Federal income tax                                             24,544              63,403               63,704
                                                                             ------              ------               ------

Federal income tax expense (benefit):
Current                                                                       3,038              12,729                9,879
Deferred                                                                     (5,029)             (3,043)                 255
                                                                             -------             -------                 ---
Total Federal income tax expense (benefit)                                   (1,991)              9,686               10,134
                                                                             -------              -----               ------
Net income                                                                  $26,535              53,717               53,570
                                                                             ======              ======               ======

Earnings per share:
Basic                                                                 $           1.07                1.98                 1.88
Diluted                                                               $           1.01                1.87                 1.74
</TABLE>



See accompanying notes to consolidated financial statements.


                                       39
<PAGE>   17
<TABLE>
<CAPTION>


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended December 31,                                                 2000                 1999                 1998
- ----------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>           <C>         <C>      <C>       <C>        <C>
(in thousands, except per share amounts)

Common stock:
Beginning of year                                                     $  75,929               74,833              72,728
Dividend reinvestment plan (shares: 63,928--2000;
    64,952--1999; 52,183--1998)                                             128                  130                 104
Convertible subordinated debentures (shares: 326,122--2000;
    8,752--1999; 88,412--1998)                                              652                   17                 177
Stock purchase and compensation plans
    (shares: 429,287--2000; 474,464--1999; 600,113--1998)                   859                  949               1,201
Stock issued for acquisition (shares: 311,673--1998)                         --                   --                 623
                                                                             --                   --                 ---
End of year                                                              77,568               75,929              74,833
                                                                         ------               ------              ------
Additional paid-in capital:
Beginning of year                                                        53,470               45,449              30,450
Dividend reinvestment plan                                                1,017                1,057               1,046
Convertible subordinated debentures                                       1,629                   35                 448
Stock purchase and compensation plans                                     6,958                6,929               7,861
Stock issued for acquisition                                                 --                   --               5,644
                                                                             --                   --               -----
End of year                                                              63,074               53,470              45,449
                                                                         ------               ------              ------
Retained earnings:
Beginning of year                                                       514,477              477,118             439,811
Net income                                                               26,535    26,535     53,717    53,717    53,570    53,570
Cash dividends to stockholders ($.60 per share--2000;
    $.59 per share--1999; $.56 per share--1998)                         (15,343)             (16,358)            (16,263)
                                                                        --------             --------            --------
End of year                                                             525,669              514,477             477,118
                                                                        -------              -------             -------

Accumulated other comprehensive income:
Beginning of year                                                        76,694              114,323              89,051
Other comprehensive income-increase (decrease) in net
      unrealized gains on available-for-sale securities,
      net of deferred income tax effect                                  22,631    22,631    (37,629)  (37,629)   25,272    25,272
                                                                         ------    ------    --------  -------    ------    ------
End of year                                                              99,325               76,694             114,323
                                                                         ------               ------             -------
          Comprehensive income                                                     49,166               16,088               78,842
                                                                                   ======               ======               ======

Treasury stock:
Beginning of year                                                      (143,875)             (97,990)            (59,785)
Acquisition of treasury stock (shares: 2,170,544--2000;
     2,514,387--1999; 1,794,873--1998)                                  (37,677)             (45,885)            (38,205)
                                                                        --------             --------            --------
End of year                                                            (181,552)            (143,875)            (97,990)
                                                                       ---------            ---------            --------

Deferred compensation expense and notes receivable from stock sales:

Beginning of year                                                        (6,731)              (6,150)             (6,939)
Deferred compensation expense                                            (3,156)              (3,418)               (966)
Amortization of deferred compensation expense and
      amounts received on notes                                           3,600                2,837               1,755
                                                                          -----                -----               -----
End of year                                                              (6,287)              (6,731)             (6,150)
                                                                         -------              -------             -------

Total stockholders' equity                                            $ 577,797              569,964             607,583
                                                                        =======              =======             =======
</TABLE>


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.


                                      40
<PAGE>   18


<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,                                                                2000                 1999            1998
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S>                                                                               <C>                      <C>             <C>
OPERATING ACTIVITIES
Net income                                                                          $     26,535             53,717         53,570
                                                                                          ------             ------         ------

Adjustments to reconcile net income to net cash provided by operating
    activities:
Increase in reserves for losses and loss expenses, net of
    reinsurance recoverable on unpaid losses and loss expenses                            30,023             28,943         15,849
Net increase in unearned premiums and prepaid
    reinsurance premiums                                                                  22,339             12,612         25,881
Increase in net Federal income tax                                                        (2,292)            (7,520)        (1,411)
Depreciation and amortization                                                             15,247             13,044          9,273
Increase in premiums receivables                                                         (25,121)           (19,116)       (35,649)
(Increase) decrease in other trade receivables                                            (9,427)             2,950         (1,858)
(Increase) decrease in deferred policy acquisition costs                                  (9,318)               679        (11,664)
Decrease (increase) in interest and dividends due or accrued                                 737             (1,008)         1,065
Decrease (increase) in reinsurance recoverable on paid losses
    and loss expenses                                                                        465              1,698           (407)
Net realized (gains) losses                                                               (4,191)           (29,377)         2,139
Other--net                                                                                19,271              7,185           (162)
                                                                                          ------              -----           -----
Net adjustments                                                                           37,733             10,090          3,056
                                                                                          ------             ------          -----
Net cash provided by operating activities                                                 64,268             63,807         56,626
                                                                                          ------             ------         ------

INVESTING ACTIVITIES
Purchase of debt securities, held-to-maturity                                                 --                 --        (12,682)
Purchase of debt securities, available-for-sale                                         (157,685)          (314,283)      (178,213)
Purchase of equity securities, available-for-sale                                        (25,384)           (14,948)       (46,131)
Purchase of other investments                                                             (4,406)              (111)       (15,000)
Purchase of Selective HR Solutions, Inc.
    (net of cash acquired of $1,127)                                                      (5,994)           (23,015)            --
Purchase of Consumer Health Network Plus, LLC                                                 (2)            (6,010)            --
Purchase of PDA Software Services, Inc. (net of cash
    acquired of $356)                                                                         --               (258)        (6,030)
Sale of debt securities, available-for-sale                                               21,629            132,680         64,648
Redemption and maturities of debt securities, held-to-maturity                            46,183             87,053         64,464
Redemption and maturities of debt securities, available-for-sale                          90,818             66,787         90,392
Sale of equity securities, available-for-sale                                             42,506             71,615         27,891
Proceeds from other investments                                                            6,727                235         20,690
(Decrease) increase in net payable from security transactions                             (2,304)           (13,414)         8,655
Net additions to real estate, furniture, equipment and
    software development                                                                 (12,003)           (10,908)       (11,160)
                                                                                         --------           --------       --------

Net cash provided by (used in) investing activities                                           85            (24,577)         7,524
                                                                                              --            --------         -----

FINANCING ACTIVITIES
Dividends to stockholders                                                                (15,343)           (16,358)       (16,263)
Acquisition of treasury stock                                                            (37,677)           (45,885)       (38,205)
Net proceeds from notes payable                                                           88,440                 --             --
Principal payment of notes payable                                                        (7,143)            (7,143)       (10,972)
Proceeds from short-term debt                                                             40,200            111,840        102,267
Paydown of short-term debt                                                               (91,502)           (88,825)       (91,505)
Net proceeds from issuance of common stock                                                 8,962              9,066         16,479
Increase in deferred compensation expense and amounts received
    on notes receivable from stock sales                                                  (3,018)            (3,366)          (913)
                                                                                          -------            -------          -----
Net cash used in financing activities                                                    (17,081)           (40,671)       (39,112)
                                                                                         --------           --------       --------
Net increase (decrease) in short-term investments and cash                                47,272             (1,441)        25,038
Short-term investments and cash at beginning of year                                      57,395             58,836         33,798
                                                                                          ------             ------         ------
Short-term investments and cash at end of year                                      $    104,667             57,395         58,836
                                                                                     ===========             ======         ======
</TABLE>

See accompanying notes to consolidated financial statements.



                                      41





<PAGE>   19






NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PAGES 42-58

December 31, 2000, 1999, and 1998

Note 1 Summary of Significant Accounting Policies

(a) Consolidation Policy The consolidated financial statements include the
accounts of Selective Insurance Group, Inc. (Selective) and its subsidiaries
(collectively, the Company) and have been prepared in accordance with
accounting principles generally accepted in the United States of America
(GAAP). All significant intercompany accounts and transactions have been
eliminated.

(b) Investments Debt securities, held-to-maturity are carried at amortized
cost because management has the ability and intent to hold such securities
until maturity. Securities, available-for-sale are carried at fair value. Net
unrealized gains and losses on debt securities, held-to-maturity are not
reflected in consolidated net income or stockholders' equity. Net unrealized
gains and losses on securities, available-for-sale, net of deferred income tax
effect, are not reflected in con-solidated net income, but are included in
comprehensive income as well as accumulated other comprehensive income, a
separate component of stockholders' equity. No material investments of the
Company were non-income producing for the years ended December 31, 2000 and
1999.

      Realized gains and losses are determined on the basis of the cost of
specific investments sold and are credited or charged to income. In the event
that a decline in fair value of an investment is considered to be other than
temporary, such investments are written down to their net realizable value.

(c) Reinsurance The Company records its ceded reinsurance transactions on a
gross basis on the balance sheet which results in reinsurance recoverables on
unpaid losses and loss expenses and ceded unearned premiums (prepaid
reinsurance premiums). The Company also discloses reinsurance amounts for
ceded premiums written and earned and ceded loss and loss expenses incurred.

(d) Stock-Based Compensation The Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (FASB 123) establishes financial accounting and
reporting standards for stock-based compensation plans. As permitted by FASB
123, the Company will continue to use the accounting method prescribed by
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" (APB 25). Companies using APB 25 are required to make pro forma
footnote disclosures of net income and earnings per share as if the fair value
method of accounting, as defined in FASB 123, had been applied.

(e) Real Estate, Furniture, Equipment and Software Development The value of
real estate, furniture and equipment is stated at cost less accumulated
depreciation. Provisions for depreciation are computed using the straight-line
method over the estimated useful lives of the assets, which range from three
to forty years for financial statement purposes and the straight-line method
and various accelerated methods for Federal income tax purposes. The Company
capitalizes the costs of computer software developed or obtained for internal
use in accordance with the American Institute of Certified Public Accountants'
Statement of Position No. 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). As a result of SOP 98-1,
the Company capitalized $5 million of internal computer software development
costs in each year, 2000 and 1999, which are amortized using the straight-line
method over estimated useful lives of the systems being developed that range
from four to ten years.

(f) Deferred Policy Acquisition Costs Policy acquisition costs are directly
related to the writing of an insurance policy and are deferred and amortized
over the life of the policies in order to facilitate a matching of revenues
and expenses. 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 adjustment expenses, policyholder dividends
and other expenses for maintenance of policies in force. The investment yields
assumed for each reporting period, which are based upon the Company's actual
average investment yield, before-tax, were 5.8%, 5.6% and 5.7% for 2000, 1999
and 1998, respectively.

(g) Goodwill Goodwill resulting from business acquisitions represents the
excess of cost over fair value of assets acquired and is being amortized over
estimated useful lives, which range between nine and twenty-five years, using
the straight-line method. Amortization expense, which is included in other
expense, was $3,320,000, $2,153,000 and $1,346,000 for 2000, 1999 and 1998,
respectively. Periodically, the Company reviews intangible assets for
impairments where the fair value is less than the carrying value.

(h) Use of Estimates The preparation of the consolidated 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.

In accordance with industry practice, the Company maintains reserves for
losses and loss expenses. These reserves are made up of both case reserves and
reserves for claims incurred but not yet reported (IBNR). Case reserves result
from a claim that has been reported to an insurance subsidiary and is
estimated at the amount of ultimate payment. Additional 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.
The internal assumptions considered by the Company in the estimation of the
IBNR amounts for both environmental and non-environmental reserves at the
Company'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 the Company in the estimation of IBNR for both
environmental and non-environmental IBNR reserves include: legislative
enactments, judicial decisions, legal developments in the determination of
liability and the imposition of damages; and 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 as described that are expected by management to affect the
Company's reserves for losses and loss expenses over time.

      By using both individual estimates of reported claims and generally
accepted actuarial reserving techniques, the Company estimates the ultimate
net liability for losses and loss expenses. While the ultimate actual
liability may be higher or lower than reserves established, the Company
believes the reserves to be adequate. Any changes in the liability estimate
may be material to the results of operations in future periods. The Company
does not discount to present value that portion of its loss reserves expected
to be paid in



<PAGE>   20





future periods, however, the loss reserves include anticipated recoveries for
salvage and subrogation claims. Such salvage and subrogation amounted to
$38,123,000 and $38,702,000 in 2000 and 1999, respectively.

      Reserves are reviewed for adequacy on a periodic basis. When reviewing
reserves, the Company analyzes historical data and estimates the impact of
various factors such as: (i) per claim information; (ii) Company and industry
historical loss experience; (iii) legislative enactments, judicial decisions,
legal developments in the imposition of damages, and changes in political
attitudes; and (iv) trends in general economic conditions, including the
effects of inflation. This process assumes that past experience, adjusted for
the effects of current developments and anticipated trends, is an appropriate
basis for predicting future events. There is no precise method, however, for
subsequently evaluating the impact of any specific factor on the adequacy of
reserves because the eventual deficiency or redundancy is affected by many
factors. Based upon such reviews, the Company 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.

(j) Premium Revenue Premiums written include direct writings plus reinsurance
assumed and estimates of premiums earned but unbilled on the workers'
compensation and general liability lines of insurance, less reinsurance ceded
to other insurers. Premiums written are recognized as revenue over the period
that coverage is provided using the semi-monthly 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.

(k) Federal Income Tax The Company 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 the Company's assets and liabilities, as well as
tax on net unrealized gains or losses on securities, available-for-sale. 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.

(l) Statement of Cash Flows Short-term investments are comprised of highly
liquid investments that are readily convertible into known amounts of cash.
Such investments have maturities of 90 days or less from the date of purchase.

(m) Fair Values of Financial Instruments The following methods and assumptions
were used by the Company in estimating its fair value disclosures for
financial instruments:

      (1) Investment securities: Fair values for debt securities,
held-to-maturity are based on quoted market prices where available. For debt
securities, held-to-maturity not actively traded, fair values are estimated
using values obtained from independent pricing services. The fair values for
debt securities, available-for-sale and equity securities, available-for-sale,
which also represent the carrying amounts, are based on quoted market prices.
Fair values for other investments are not material and are carried at either
cost or the equity method, which approximates fair value.

      (2) Indebtedness: The fair value of the convertible subordinated
debentures is based on quoted market prices. The fair values of the 7.84%
Senior Notes due November 15, 2002, the 8.77% Senior Notes due August 1, 2005,
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.

(n) Reclassifications Certain amounts in the Company's prior years'
consolidated financial statements and related footnotes have been reclassified
to conform with the 2000 presentation. Such reclassification had no effect on
the Company's net income or stockholders' equity.

Note 2  Pending Accounting Pronouncements

In June of 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FASB 133). FASB 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement was
previously effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. In June 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 137, which defers the
effective date of FASB 133 to all fiscal quarters of fiscal years beginning
after June 15, 2000. In June 2000, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, which amends
the accounting and reporting standards of FASB 133 for certain derivative
instruments and certain hedging activities. The Company will adopt FASB 133
and FASB 138 for the fiscal year beginning January 1, 2001 and has determined
the adoption of these statements will not have a material effect on the
Company's results of operations or financial condition.


<PAGE>   21

Note 3  Policy Acquisition Costs

Changes in deferred policy acquisition costs and policy acquisition costs
expensed are summarized as follows:

<TABLE>
<CAPTION>
(in thousands)                          2000                1999                 1998
- -------------------------------------------------------------------------------------
<S>                                 <C>                  <C>                 <C>
Deferred policy acquisition
    costs:
Deferred, January 1                    $109,095             109,774               98,110
                                        -------             -------               ------
Additions:
Commissions                             135,161             135,165              130,498
Labor costs                              56,696              50,466               46,830
Premium taxes and
    assessments                          18,773              17,368               17,147
Other                                    34,131              28,247               26,517
                                         ------              ------               ------
Total additions                         244,761             231,246              220,992
                                        -------             -------              -------

Amortized to expense                   (235,443)           (231,925)            (209,328)
                                       ---------           ---------            ---------
Deferred, December 31                  $118,413             109,095              109,774
                                        =======             =======              =======

Policy acquisition costs:
Amortized to expense                   $235,443             231,925              209,328
Period costs                             26,097              22,819               26,195
                                         ------              ------               ------
Total policy
    acquisition costs                  $261,540             254,744              235,523
                                        =======             =======              =======
</TABLE>


Note 4  Investments

(a) The components of net investment income earned are as follows:
<TABLE>
<CAPTION>
 (in thousands)                         2000                1999                 1998
- -------------------------------------------------------------------------------------
<S>                              <C>                      <C>              <C>
Debt securities                   $   88,559               88,800              89,928
Equity securities                      4,979                6,146               5,775
Short-term investments                 2,773                1,624               1,705
Other                                  4,750                1,317               3,140
                                       -----                -----               -----
                                     101,061               97,887             100,548
Investment expenses                   (1,566)              (1,356)             (1,352)
                                      ------               ------              ------
Net investment
    income earned                 $   99,495               96,531              99,196
                                    ========               ======              ======
</TABLE>



(b) Net unrealized gains on debt securities, held-to-maturity are as follows:

<TABLE>
<CAPTION>
(in thousands)                          2000                1999                 1998
- -------------------------------------------------------------------------------------
<S>                            <C>                      <C>                <C>
Net unrealized gains              $     5,880                 220              14,799
                                        =====                 ===              ======
Increase (decrease) in net
    unrealized gains              $     5,660             (14,579)             (1,283)
                                        =====             ========             =======

</TABLE>

(c) Gross and net unrealized gains (losses) on securities, available-for-sale
are as follows:

<TABLE>
<CAPTION>
(in thousands)                          2000                1999                 1998
- -------------------------------------------------------------------------------------
<S>                            <C>                      <C>                <C>
Debt securities:
Gains                               $ 27,977                8,812              44,227
Losses                                (9,917)             (27,193)             (2,579)
                                      ------              -------              ------
                                      18,060              (18,381)             41,648
                                      ------              -------              ------
Equity securities:
Gains                                138,093              141,206             140,001
Losses                                (3,345)              (4,834)             (5,768)
                                      ------               ------              ------
                                     134,748              136,372             134,233
                                     -------              -------             -------
Net unrealized gains
    on available-for-sale
    securities                       152,808              117,991             175,881
Deferred income tax
    expense                          (53,483)             (41,297)            (61,558)
                                     -------              -------             -------
Net unrealized gains,
    net of deferred income tax      $ 99,325               76,694             114,323
                                      ======               ======             =======
Increase (decrease) in net
    unrealized gains, net
    of deferred income tax           $22,631              (37,629)             25,272
                                      ======              ========             ======
</TABLE>

<PAGE>   22

(d) The amortized cost, estimated fair values and gross unrealized gains
(losses) of debt securities, held-to-maturity at December 31, 2000 and 1999,
respectively, are as follows:

<TABLE>
<CAPTION>
                                                                              Gross                Gross
                                                  Amortized                Unrealized           Unrealized           Fair
                                                    Cost                      Gains               Losses            Value
 (in thousands)                              2000         1999           2000       1999      2000    1999      2000      1999
- --------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>              <C>          <C>        <C>       <C>     <C>       <C>       <C>
U.S. government and
    government agencies                     $     2,136        8,415        8         63        -       (58)     2,144     8,420
Obligations of states and
    political subdivisions                      207,415      246,844    5,758      4,588     (146)   (4,272)   213,027   247,160
Mortgage-backed securities                       15,626       16,125      260          7        -      (108)    15,886    16,024
                                                 ------       ------      ---          -               ----     ------    ------
Total debt securities, held-to-maturity     $   225,177      271,384    6,026      4,658     (146)   (4,438)   231,057   271,604
                                             ==========      =======    =====      =====     ====    ======    =======   =======
</TABLE>


(e) The cost/amortized cost, estimated fair values and gross unrealized gains
(losses) of securities, available-for-sale at December 31, 2000 and 1999,
respectively, are as follows:

<TABLE>
<CAPTION>
                                                 Cost/                    Gross                  Gross
                                               Amortized               Unrealized             Unrealized                Fair
                                                  Cost                    Gains                  Losses                Value
(in thousands)                               2000        1999        2000       1999         2000       1999      2000       1999
- ----------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>             <C>          <C>        <C>       <C>        <C>        <C>       <C>
U.S. government and
    government agencies                $     94,572     122,263      2,929        735       (48)     (1,954)     97,453    121,044
Obligations of states and
    political subdivisions                  445,666     439,167     12,053      5,714      (775)    (10,543)    456,944    434,338
Corporate securities                        544,044     493,951     10,274      2,240    (8,826)    (12,147)    545,492    484,044
Asset-backed securities                      10,716      19,704         28         10      (258)       (727)     10,486     18,987
Mortgage-backed securities                   89,700      66,082      2,693        113       (10)     (1,822)     92,383     64,373
                                             ------      ------      -----        ---       ---      ------      ------     ------
Debt securities, available-for-sale       1,184,698   1,141,167     27,977      8,812    (9,917)    (27,193)  1,202,758  1,122,786
Equity securities, available-for-sale       104,830     115,626    138,093    141,206    (3,345)     (4,834)    239,578    251,998
                                            -------     -------    -------    -------    ------      ------     -------    -------
Total securities, available-for-sale   $  1,289,528   1,256,793    166,070    150,018   (13,262)    (32,027)  1,442,336  1,374,784
                                        ===========   =========    =======    =======   =======     =======   =========  =========

</TABLE>





f) Realized gains (losses) are as follows:

<TABLE>
<CAPTION>
(in thousands)                          2000                1999                 1998
- -------------------------------------------------------------------------------------
<S>                               <C>                  <C>                <C>
Debt securities,
  held-to-maturity
    Gains                           $      8                  102                 129
Debt securities,
  available-for-sale
    Gains                                197                   53               1,086
    Losses                            (2,340)              (7,312)               (271)
Equity securities,
  available-for-sale
    Gains                             11,039               43,295               5,513
    Losses                            (4,713)              (6,761)             (8,596)
                                      ------               ------              ------

Net realized gains (losses)         $  4,191               29,377              (2,139)
                                     =======               ======              ======

</TABLE>




(g) The amortized cost and estimated fair value of debt securities at December
31, 2000, by contractual maturity are shown below. Mortgage-backed securities
are included in the maturity tables using the estimated average life. 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 debt securities, held-to-maturity:

<TABLE>
<CAPTION>
                                             Amortized                 Fair
(in thousands)                                 Cost                   Value
- ---------------------------------------------------------------------------
<S>                                         <C>                   <C>
Due in one year or less                       $ 30,029               30,369
Due after one year through
    five years                                 177,384              181,958
Due after five years through
    ten years                                   17,283               18,053
Due after ten years through
    fifteen years                                  481                  677
Due after fifteen years                              -                    -
                                                     -                    -
Total debt securities,
    held-to-maturity                          $225,177              231,057
                                               =======              =======
</TABLE>
<PAGE>   23




Listed below are debt securities, available-for-sale:

<TABLE>
<CAPTION>
                                                Amortized             Fair
(in thousands)                                    Cost                Value
- ---------------------------------------------------------------------------
<S>                                         <C>                   <C>
Due in one year or less                       $112,696              112,540
Due after one year through
    five years                                 584,611              596,784
Due after five years through
    ten years                                  422,389              426,190
Due after ten years through
    fifteen years                               53,211               53,813
Due after fifteen years                         11,791               13,431
                                                ------               ------
Total debt securities,
    available-for-sale                      $1,184,698            1,202,758
                                             =========            =========
</TABLE>



(h) Certain investments were on deposit with various state regulatory agencies
to comply with insurance laws with carrying values of $15,755,000 and
$12,880,000 as of December 31, 2000 and 1999, respectively.

(i) The Company is not exposed to significant concentrations of credit risk
within the investment portfolio.

(j) The components of comprehensive income, both gross and net of tax, for
2000, 1999 and 1998 are as follows:


<TABLE>
<CAPTION>
                                                       2000

(in thousands)                                                   Gross                 Tax                 Net
- --------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                 <C>                    <C>
Income                                                        $ 24,544              (1,991)              26,535
Components of other com- prehensive income:
    -Unrealized holding gains   during the period               39,000              13,650               25,350
    Reclassification adjustment                                 (4,183)             (1,464)              (2,719)
                                                                ------              ------               ------
    Other comprehensive income                                  34,817              12,186               22,631

Comprehensive income                                           $59,361              10,195               49,166
                                                                ======              ======               ======

<CAPTION>
                                                        1999

(in thousands)                                                   Gross                 Tax                 Net
- --------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                 <C>                    <C>
Income                                                         $63,403               9,686               53,717
Components of other com- prehensive income:
    -Unrealized holding losses   during the period             (28,616)            (10,016)             (18,600)
    Reclassification adjustment                                (29,275)            (10,246)             (19,029)
                                                               -------             -------              -------
    Other comprehensive income                                 (57,891)            (20,262)             (37,629)

Comprehensive income                                            $5,512             (10,576)              16,088
                                                                 =====             =======               ======

<CAPTION>
                                                        1998

(in thousands)                                                   Gross                 Tax                 Net
- --------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                 <C>                    <C>
Income                                                         $63,704              10,134               53,570
Components of other com- prehensive income:
    -Unrealized holding gains   during the period               36,612              12,814               23,798
    Reclassification adjustment                                  2,268                 794                1,474
    Other comprehensive income                                  38,880              13,608               25,272
                                                                ------              ------               ------

Comprehensive income                                          $102,584              23,742               78,842
                                                               =======              ======               ======
</TABLE>


<PAGE>   24


Note 5  Indebtedness

(a) Convertible Subordinated Debentures The Debentures were issued under an
Indenture dated December 29, 1982, (Indenture) in the principal amount of
$25,000,000, 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. The Debentures are convertible into common stock at an effective
conversion price of $7.08 per share. The principal amount of the Debentures,
including any accrued interest, is due on January 1, 2008.

      The Indenture requires the Company to retire, through the operation of a
mandatory sinking fund, 5% of the original $25,000,000 aggregate principal
amount of the debentures on, or before, December 31 of each of the years from
1993, to and including, 2006. Voluntary conversions have satisfied this
obligation in its entirety.

(b) Notes Payable (1) On May 4, 2000, the Company entered into a $30,000,000 and
a $61,500,000 note purchase agreement with various lenders covering the 8.63%
and 8.87% Senior Notes, respectively.

       For the 8.63% Senior Notes, the Company is required to pay $6,000,000
principal amount in each year commencing on May 4, 2003 and ending on May 4,
2007, inclusive, together with accrued interest thereon. The unpaid principal
amount of these Senior Notes accrues interest that is payable semiannually on
May 4 and November 4 of each year, until the principal is paid in full.

       For the 8.87% Senior Notes, the Company is required to pay $12,300,000
principal amount in each year commencing on May 4, 2006 and ending on May 4,
2010, inclusive, together with accrued interest thereon. The unpaid principal
amount of these Senior Notes accrues interest that is payable semiannually on
May 4 and November 4 of each year, until the principal is paid in full.

       (2) On August 12, 1994, the Company entered into a $54,000,000 note
purchase agreement with various lenders covering the 8.77% Senior Notes. The
Company is required to pay $18,000,000 principal amount in each year
commencing on August 1, 2003 and ending on August 1, 2005, inclusive, together
with accrued interest thereon. The unpaid principal amount of the 8.77% Senior
Notes accrues interest that is payable semiannually on February 1 and August 1
of each year, until the principal is paid in full.

       (3) On November 24, 1992, the Company entered into a $50,000,000 note
purchase agreement with various lenders covering the 7.84% Senior Notes. The
Company made its fifth required principal payment of the 7.84% Senior Notes of
$7,143,000 on November 15, 2000. The Company will continue to make the
required principal payment of $7,143,000 per annum through November 15, 2002,
inclusive, together with accrued interest thereon. The unpaid principal amount
of the 7.84% Senior Notes accrues interest that is payable semiannually on May
15 and November 15 of each year, until the principal is paid in full.

       Each note purchase agreement contains restrictive covenants that limit
the Company's ability to declare dividends or incur additional indebtedness.
At December 31, 2000 the amount available for dividends to stockholders under
said restrictions was $127,377,000 for the 1992 and 1994 Senior Notes and
$95,868,000 for the 2000 Senior Notes.

(c) Short-Term Debt The Company has revolving lines of credit amounting to
$50,000,000 at December 31, 2000 and $75,000,000 at December 31, 1999. At
December 31, 2000 there was no balance outstanding, and at December 31, 1999,
$51,302,000 was outstanding under these lines. Interest is determined on a
LIBOR, prime rate or money market rate basis at the Company's option. At
December 31, 1999 there was approximately $192,000, in accrued interest
relating to the outstanding balance. The weighted average interest rate on
these borrowings was 6.5% in 2000 and 5.7% in 1999. The amounts available
under these agreements at December 31, 2000 and 1999 were $50,000,000 and
$23,698,000, respectively.

Note 6  Reinsurance

In the ordinary course of business, the insurance subsidiaries assume and cede
premiums with other insurance companies and various pools and associations of
which they are members. A large portion of the reinsurance is effected under
reinsurance contracts known as treaties and, in some instances, by negotiation
on each individual risk. In addition, there are excess of loss and catastrophe
reinsurance contracts which protect against losses over stipulated amounts
arising from any one occurrence or event. The reinsurance arrangements enable
greater diversification of business and can serve to limit the maximum net
loss on catastrophes and large and unusually hazardous risks.

      The insurance subsidiaries are contingently liable to the extent that
any reinsurer becomes unable to meet its contractual obligations. The Company
reviews the financial condition of its existing reinsurers for any potential
write-offs of uncollectible amounts. At December 31, 2000, the Company had
prepaid reinsurance premiums and net reinsurance recoverables with American
Re-Insurance Company (rated "A++ Superior" by A.M. Best Company, Inc.) and a
state insurance fund that amounted to $64,037,000 and $75,161,000,
respectively. The Company has a $35,000,000 trust fund agreement with American
Re-Insurance Company to secure a portion of the Company's recoverable amounts.

      Under the Company'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 insurance
protection provided, and recoveries are recognized as losses are recorded.



The following is a table of assumed and ceded amounts by income statement
caption:

<TABLE>
<CAPTION>
(in thousands)                          2000                1999                 1998
- -------------------------------------------------------------------------------------
<S>                                 <C>               <C>                   <C>
Premiums written:
Assumed                              $14,192               18,774              19,583
Ceded                                (95,019)             (79,023)            (79,585)
Premiums earned:
Assumed                               14,529               20,943              21,239
Ceded                                (94,453)             (78,177)            (79,089)
Losses incurred:
Assumed                                9,738               14,661              16,339
Ceded                                (46,258)            (129,250)            (52,067)
Loss expenses incurred:
Assumed                                1,269                1,629               2,166
Ceded                                 (3,543)              (5,887)             (2,349)
</TABLE>


<PAGE>   25




      Assumed business has declined when compared to prior years due to a
decrease in involuntary commercial and personal automobile plan business.
Ceded premiums increased in 2000 partially due to an additional $8,000,000 in
Flood business which is 100% ceded to the National Flood Insurance Program.
The remaining increase in ceded premiums is attributable to an overall
increase in direct business written. Losses ceded decreased substantially from
1999 due to a drop in 2000 catastrophic losses. Ceded losses in 1999 included
$47,000,000 from Hurricane Floyd ceded to the National Flood Insurance
Program. In addition, a $36,000,000 adjustment was made in 1999 to New Jersey
Personal Injury Protection (PIP) claims ceded to the New Jersey Unsatisfied
Claims Judgement Fund for reimbursement to the Company in accordance with
state law. The Company performed a comprehensive review of New Jersey PIP
claims and determined that 27 claims should be re-classified to "lifetime"
benefit status. Adjusting outstanding loss reserves on these 27 claims to new
ultimate projections resulted in the additional loss reserves in 1999.

Note 7  Retirement Plans

(a) Retirement Savings Plan The Company offers a voluntary defined
contribution 401(k) retirement savings plan to employees who meet eligibility
requirements. The plan allows employees to make contributions to a number of
diversified investment options including the Company's common stock, on a
before and/or after-tax basis. During 2000 and 1999, 37,697 and 37,963 shares
of the Company's common stock were issued under this plan, respectively.

      The number of shares of the Company's common stock available to be
purchased under the plan was 871,178 at December 31, 2000. Employees can
contribute up to a maximum of 12% of their defined compensation and these
contributions, up to a maximum of 6%, are matched 50% by the Company.

      Two additional defined contribution plans are maintained by certain
subsidiaries of the Diversified Insurance Services segment which do not
participate in the company's defined contribution plan. One 401(k) plan allows
employees to contribute up to a maximum of 15% of annual pay and up to 3% of
contributions are matched 200% by employer, while the other plan has a maximum
contribution of 16% with employer matching 50% of contributions by associates
employed over 6 years and 25% for all other employees.

      Employer contributions for all the plans amounted to $2,366,000,
$1,840,000 and $1,597,000 in 2000, 1999 and 1998 respectively. (b) Retirement
Income Plan The Company has a noncontributory defined benefit retirement
income plan covering substantially all employees who meet eligibility
requirements. The Company'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 may be
approved by the Company from time to time. The Company has made various
amendments to the plan in order to comply with certain Internal Revenue Code
changes.

      The plan's assets are generally invested in debt and equity securities.
The debt securities are invested 100% in investment grade quality securities.
The reconciliations of the plan are as follows:

<TABLE>
<CAPTION>
(in thousands)                                              2000                 1999
- -------------------------------------------------------------------------------------
<S>                                                    <C>                  <C>
Change in Benefit Obligation:
Benefit obligation, beginning of year                     $63,075              66,979
Service cost                                                4,047               4,364
Interest cost                                               4,638               4,225
Actuarial gains                                              (329)            (10,734)
Benefits paid                                              (1,817)             (1,759)
                                                           ------              ------
Benefit obligation, end of year                           $69,614              63,075
                                                           ======              ======
Change in Fair Value of Assets:
Fair value of assets, beginning of year                   $49,827              53,100
Actual return on plan assets (net of
     expenses)                                                598              (1,531)
Contributions by the employer                               3,220                  --
Benefits paid                                              (1,800)             (1,742)
                                                           ------              ------
Fair value of assets, end of year                         $51,845              49,827
                                                           ======              ======
Reconciliation of Funded Status:
Funded status                                            $(17,769)            (13,248)
Unrecognized prior service cost                               931               1,103
Unrecognized net loss                                       3,938                 655
                                                            -----                 ---
Net amount recognized                                    $(12,900)            (11,490)
                                                          =======             =======

</TABLE>


<PAGE>   26

<TABLE>
<CAPTION>
(in thousands)                                               2000                1999        1998
- -------------------------------------------------------------------------------------------------
<S>                                                    <C>                   <C>           <C>
Components of Net Periodic
    Benefit Cost:
Service cost                                               $4,047               4,364           3,340
Interest cost                                               4,638               4,225           3,892
Expected return on plan assets                             (4,222)             (4,351)         (4,043)
Amortization of unrecognized prior
    service cost                                              172                 225             237
Amortization of unrecognized net
    loss                                                       12                  38              15
                                                               --                  --              --
Net periodic benefit cost                                  $4,647               4,501           3,441
                                                            =====               =====           =====

Weighted-Average Assumptions as of
    December 31:
Discount rate                                                7.50%                7.50           6.50
Expected return on plan assets                               8.50%                8.50           8.50
Rate of compensation increase                                5.00%                5.00           4.50
</TABLE>

      All amounts in the reconciliation of funded status were recognized in
the balance sheets for 2000 and 1999. There were no amounts to be included in
other comprehensive income for the periods shown resulting from a change in
the minimum pension liability.



(c) Postretirement Plan The Company provides life insurance benefits
(postretirement benefits) for retired employees. Substantially all the
Company's employees may become eligible for these benefits if they reach
retirement age while working for the Company and meet a minimum of ten years
of eligibility service. Those who retired prior to January 1, 1991, receive
life insurance coverage which decreased over ten years to a current ultimate
value of $5,000 per retiree. Those retiring on or after January 1, 1991,
receive life insurance coverage in an amount equal to 50% of their annual
salary amount in effect at the end of their active career. The estimated cost
of these benefits is accrued over the working lives of those employees
expected to qualify for such benefits as a level percentage of their payroll
costs.

      The reconciliations of the plan are presented as follows:

<TABLE>
<CAPTION>
(in thousands)                                              2000                 1999
- -------------------------------------------------------------------------------------
<S>                                                     <C>                 <C>
Change in Post Retirement Obligation:
Benefit obligation, beginning of year                      $5,118               5,315
Service cost                                                  216                 253
Interest cost                                                 374                 337
Actuarial gains                                               (76)               (532)
Benefits paid                                                (226)               (255)
                                                             ----                ----
Benefit obligation, end of year                            $5,406               5,118
                                                            =====               =====

Reconciliation of Funded Status:
Funded status                                             $(5,406)             (5,118)
Unrecognized transition
    obligation                                                502                 548
Unrecognized net gain                                        (533)               (457)
                                                             ----                ----
Net amount recognized                                     $(5,437)             (5,027)
                                                           ======              ======

<CAPTION>

(in thousands)                                              2000                 1999                1998
- ---------------------------------------------------------------------------------------------------------
<S>                                                      <C>                <C>                  <C>
Components of Net Post      Retirement Cost:
Service cost                                                 $216                 253                  165
Interest cost                                                 374                 337                  340
Amortization of unrecognized
    transition obligation                                      46                  46                   46
Amortization of unrecognized net
    gain                                                       --                  --                   (6)
                                                               --                  --                   ---
Net post retirement cost                                     $636                 636                  545
                                                              ===                 ===                  ===

Weighted-Average Assumptions as of
    December 31:
Discount rate                                                7.50%               7.50                 6.50
Rate of compensation increase                                5.00%               5.00                 4.50
</TABLE>



All amounts in the reconciliation of funded status were recognized in the
balance sheets for 2000 and 1999. There were no unrecognized prior service
costs for 2000 and 1999. There were no amounts to be included in other
comprehensive income for the periods shown.

(d) Retirement Plan for Nonemployee Directors The Company terminated,
effective December 31, 1997, a nonqualified unfunded defined benefit
retirement income plan for nonemployee Directors. The estimated accrued costs
for this plan were not material. As part of the termination, the present value
of each Director's future benefits, as of that date, was converted into units
based on the fair value of



<PAGE>   27

<TABLE>
<CAPTION>
(in thousands)                                     2000              1999       1998
- ------------------------------------------------------------------------------------
<S>                                              <C>               <C>              <C>
Components of Net Periodic
    Benefit Cost:
Service cost                                     $4,047             4,364            3,340
Interest cost                                     4,638             4,225            3,892
Expected return on plan assets                   (4,222)           (4,351)          (4,043)
Amortization of unrecognized prior
    service cost                                    172               225              237
Amortization of unrecognized net
    loss                                             12                38               15
                                                     --                --               --
Net periodic benefit cost                        $4,647             4,501            3,441
                                                  =====             =====            =====
Weighted-Average Assumptions as of
    December 31:
Discount rate                                      7.50%             7.50             6.50
Expected return on plan assets                     8.50%             8.50             8.50
Rate of compensation increase                      5.00%             5.00             4.50
</TABLE>

        All amounts in the reconciliation of funded status were recognized in
the balance sheets for 2000 and 1999. There were no amounts to be included in
other comprehensive income for the periods shown resulting from a change in the
minimum pension liability.

(c) Postretirement Plan The Company provides life insurance benefits
(postretirement benefits) for retired employees. Substantially all the Company's
employees may become eligible for these benefits if they reach retirement age
while working for the Company and meet a minimum of ten years of eligibility
service. Those who retired prior to January 1, 1991, receive life insurance
coverage which decreased over ten years to a current ultimate value of $5,000
per retiree. Those retiring on or after January 1, 1991, receive life insurance
coverage in an amount equal to 50% of their annual salary amount in effect at
the end of their active career. The estimated cost of these benefits is accrued
over the working lives of those employees expected to qualify for such benefits
as a level percentage of their payroll costs.

        The reconciliations of the plan are presented as follows:

<TABLE>
<CAPTION>
(in thousands)                                     2000              1999
- -------------------------------------------------------------------------
<S>                                             <C>                <C>
Change in Post Retirement Obligation:
Benefit obligation, beginning of year            $5,118             5,315
Service cost                                        216               253
Interest cost                                       374               337
Actuarial gains                                     (76)             (532)
Benefits paid                                      (226)             (255)
                                                   ----              ----
Benefit obligation, end of year                  $5,406             5,118
                                                  =====             =====
Reconciliation of Funded Status:
Funded status                                   $(5,406)           (5,118)
Unrecognized transition
    obligation                                      502               548
Unrecognized net gain                              (533)             (457)
                                                   ----              ----
Net amount recognized                           $(5,437)           (5,027)
                                                 ======            ======
</TABLE>


<TABLE>
<CAPTION>
(in thousands)                                     2000              1999             1998
- ------------------------------------------------------------------------------------------
<S>                                                <C>               <C>              <C>
Components of Net Post      Retirement Cost:
Service cost                                       $216               253              165
Interest cost                                       374               337              340
Amortization of unrecognized
    transition obligation                            46                46               46
Amortization of unrecognized net
    gain                                             --                --               (6)
                                                     --                --               ---
Net post retirement cost                           $636               636              545
                                                    ===               ===              ===
Weighted-Average Assumptions as of
    December 31:
Discount rate                                      7.50%             7.50             6.50
Rate of compensation increase                      5.00%             5.00             4.50
</TABLE>

All amounts in the reconciliation of funded status were recognized in the
balance sheets for 2000 and 1999. There were no unrecognized prior service costs
for 2000 and 1999. There were no amounts to be included in other comprehensive
income for the periods shown.

(d) Retirement Plan for Nonemployee Directors The Company terminated, effective
December 31, 1997, a nonqualified unfunded defined benefit retirement income
plan for nonemployee Directors. The estimated accrued costs for this plan were
not material. As part of the termination, the present value of each Director's
future benefits, as of that date, was converted into units based on the fair
value of

<PAGE>   28

Selective common stock on that date. The cash value of these units based upon
the fair value of Selective common stock on retirement date will be distributed
to each Director upon retirement, or at each Director's election, over a period
of fifteen years after such retirement. The units will accrue amounts equivalent
to dividends which will also be converted into units based on the fair market
value of Selective common stock on the applicable dividend reinvestment dates.
The accrued liability of these units at December 31, 2000 was $1,251,000
compared with $1,301,000 at the time of conversion.

Note 8 Incentive Compensation Plans The Company 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 $1,518,000, $883,000 and $5,217,000 in 2000, 1999 and 1998,
respectively. The decrease in incentive compensation for 2000 and 1999 reflects
the absence of a payout in the insurance companies due to insufficient
profitability experienced during both of those years.

        On December 18, 1998, one of the Company's subsidiaries established an
irrevocable trust for certain key executives. The total compensation costs
charged to expense in connection with this agreement were $1,646,000 in 2000 and
$1,712,000 in 1999. The agreement ends December 2002.

Note 9 Stock Compensation Plans The Company has adopted the pro forma footnote
disclosure-only provisions of FASB 123. Based on the fair value method
consistent with the provisions of FASB 123, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts
indicated below:

<TABLE>
<CAPTION>
(in thousands, except per share amounts)
                                  2000        1999      1998
- ------------------------------------------------------------
Net income:
<S>                              <C>         <C>        <C>
As reported                      $26,535     53,717     53,570
Pro forma                         25,939     53,181     52,142

Basic earnings per share:
As reported                         1.07       1.98       1.88
Pro forma                           1.04       1.96       1.83

Diluted earnings per share:
As reported                         1.01       1.87       1.74
Pro forma                            .99       1.85       1.69
</TABLE>

        The fair value of each option grant is estimated on the date of grant
using the Black Scholes option-pricing model with the following weighted average
assumptions for 2000, 1999 and 1998, respectively: (i) risk free interest rate
of 6.00%, 5.45% and 4.84% for the employee stock purchase plan and 6.56%, 5.40%
and 4.76% for all other option plans; (ii) expected life of six months for the
employee stock purchase plan for all years and seven, eight, and five years for
all other option plans for 2000, 1999, and 1998 respectively; (iii) dividend
yield of 3.4%, 3.2% and 2.4%; and (iv) an expected volatility of 31%, 26% and
23% for the employee stock purchase plan and 23%, 22% and 23% for all other
option plans for 2000, 1999, and 1998, respectively.

        The weighted-average fair value of options and stocks granted per share,
during the year for 2000, 1999 and 1998, respectively, is as follows:

<TABLE>
<CAPTION>
                                      2000      1999     1998
- -------------------------------------------------------------
<S>                                   <C>      <C>       <C>
Stock option plans                    $4.01     4.52      4.00
Restricted stock                      15.60    18.38     26.41
Employee stock purchase plan:
  Six month option                     1.55     1.31      1.36
  15% of grant date market value       2.67     2.70      3.17
                                       ----     ----      ----
Total                                  4.22     4.01      4.53
Agents stock purchase plan:
  Discount of grant date market value  1.00      .91      1.14
</TABLE>

<PAGE>   29

A summary of the option transactions under the stock option plans is as follows:

<TABLE>
<CAPTION>
                                             Stock    Weighted
                                            appre-      average
                            Number          ciation    exercise
                           of shares        rights       price
- --------------------------------------------------------------
<S>                        <C>              <C>        <C>
Outstanding at
    December 31, 1997      1,936,690        107,800     $16.17
Granted--1998                240,700             --      19.90
Exercised--1998             (253,176)        (3,362)     13.14
Forfeited--1998              (34,562)       (60,438)     17.10
                             -------        -------      -----
Outstanding at
     December 31, 1998     1,889,652         44,000      17.03
Granted--1999                 60,000             --      18.45
Exercised--1999              (44,660)            --      14.16
Forfeited--1999              (31,710)        (8,000)     18.83
                             -------         ------      -----
Outstanding at
    December 31, 1999      1,873,282         36,000      17.11
Granted--2000                163,950             --      15.49
Exercised--2000             (103,430)        (7,610)     13.11
Forfeited--2000              (98,210)       (14,390)     18.97
                             -------        -------      -----
Outstanding at
    December 31, 2000      1,835,592         14,000     $17.12
                           =========         ======      =====
</TABLE>

        Options exercisable and their weighted average exercise price at year
end are 1,773,915, and $17.02, 1,772,082 and $16.78, 1,754,448 and $16.35 for
2000, 1999 and 1998, respectively.

        The following table summarizes information about stock options
outstanding and exercisable under the stock option plans at December 31, 2000:

<TABLE>
<CAPTION>
                               Options Outstanding                     Options Exercisable
                --------------------------------------------    ---------------------------------

                                Weighted
                                 average         Weighted                           Weighted
   Range of                     remaining         average                            average
   exercise      Number        contractual       exercise           Number          exercise
     prices     of shares     life in years        price           of shares          price
- -------------------------------------------------------------------------------------------------
<S>             <C>                 <C>            <C>          <C>                   <C>
$ 5 to 10        42,500             1.0            $  9.13         42,500             $  9.13
10 to 14         297,896            3.5              12.45        297,896               12.45
14 to 18         699,686            5.0              15.85        666,686               15.88
18 to 20         562,540            6.3              18.54        562,540               18.54
20 to 28         232,970            6.7              24.92        204,293               24.85
                 -------            ---              -----        -------               -----
                1,835,592           5.3             $17.12      1,773,915             $ 17.02
                =========           ===              =====      =========               =====
</TABLE>

(a) Stock Option Plan Under the Company's original stock option plan, 14,000
shares of the Company's common stock are reserved for issuance, upon exercise of
stock options outstanding at December 31, 2000. This plan permitted the granting
of qualified and nonqualified stock options to key employees, which may or may
not have stock appreciation rights (SARs) attached. Options and related SARs
were granted at not less than fair value on the date of the grant, are required
to be exercised within ten years from the date of the grant and are exercisable
immediately upon the grant. This plan expired in August 1992 and was replaced
with the Company's stock option plan II.

        Compensation expense, based on the increase or decrease in the fair
value of the Company's common stock, is charged or (credited) to other expense
in recognition of the SARs attached to the granted options. Such amounts were
$(28,000), $(194,750) and $(1,481,000) in 2000, 1999 and 1998, respectively.

(b) Stock Option Plan II Under the Company's stock option plan II, 2,738,527
shares of the Company's common stock are available for issuance at December 31,
2000. The plan permits the granting of qualified and nonqualified stock options
to employees, which may or may not have SARs attached. Options and related SARs
may be granted at not less than fair value on the date of the grant and may be
subject to certain vesting periods as determined by the Company's Salary and
Employee Benefits Committee (Committee). Each grant must be exercised within ten
years from the date of the grant. Under this plan, the Company granted options
of 130,950, 24,000 and 207,700 for 2000, 1999 and 1998, respectively.

        Under the Company's stock option plan II, the Committee may, at its
discretion, make restricted or unrestricted grants of common stock, or grant
rights to receive common stock, to employees in addition to or in substitution
for options and/or SARs granted. The Company granted a total of 211,309, 230,328
and 157,356 restricted shares for 2000, 1999 and 1998, respectively, and 69,718
and 23,293 and 27,295 shares were forfeited in 2000, 1999 and 1998,
respectively. Each such grant must be expressly subject to the attainment of one
or more performance-related objectives for certain executive officers, and may
be subject to the attainment of one or more performance-related objectives for
other employees, as determined by the Committee and set forth in an award
agreement. Each such grant also is

<PAGE>   30

subject to a vesting period or other terms, conditions, restrictions and
limitations as determined by the Committee at its discretion and set forth in an
award agreement.

        During the vesting period, dividends are earned and held in escrow on
the restricted shares subject to the same vesting period and conditions as set
forth in the award agreement. Effective September 3, 1996, dividends earned on
the restricted shares are reinvested in the Company's common stock at fair
value. The Company issued through the dividend reinvestment feature (net of
forfeitures), 9,908, 17,118 and 12,870 restricted shares in 2000, 1999 and 1998,
respectively, from the dividend reinvestment plan reserves.

Deferred compensation expense is recognized for the fair value of the restricted
shares when granted and is adjusted for the increases or decreases in the fair
value of the Company's common stock for share awards subject to
performance-related objectives and is amortized ratably over the vesting period.
The unamortized amount is accounted for as a reduction of stockholders' equity.
At December 31, 2000, 1999 and 1998, respectively, deferred compensation of
$5,941,000, $6,246,000 and $5,613,000 was recorded as a reduction of
stockholders' equity and the amounts amortized to expense in 2000, 1999 and
1998, respectively, were $3,462,000, $2,785,000 and $1,593,000.

(c) Employee Stock Purchase Plan Under the terms of the employee stock purchase
plan, the number of shares of common stock available to be purchased is 521,854.
This plan is available to all employees who meet the eligibility requirements
and provides for the issuance of options to purchase shares of common stock. The
purchase price is the lower of: (i) 85% of the closing market price at the time
the option is granted or (ii) 85% of the closing price at the time the option is
exercised. The Company issued 92,886, 87,026 and 74,613 shares in 2000, 1999 and
1998, respectively, to employees and charged to expense $248,000, $235,000 and
$235,000 in 2000, 1999 and 1998, respectively.

(d) Stock Unit Awards Beginning in 1998, certain officers of the Company were
granted phantom stock units in lieu of grants of restricted stock. There were no
phantom stock units awarded in 2000. The total number of phantom stock units
awarded in 1999 and 1998 was 6,000 and 23,000, respectively. The value of the
phantom stock units will be paid in cash upon retirement. The value of the
phantom stock units is being charged to expense over the estimated remaining
employment period.

(e) Stock Option Plan for Nonemployee Directors Under the Company's stock option
plan for directors, 794,500 shares of the Company's common stock are available
for issuance. Each director who is not a full-time employee of the Company
participates in the plan and automatically receives a nonqualified option to
purchase 3,000 shares of common stock at not less than fair value on March 1 of
each year. Each option becomes exercisable one year after the option was granted
and expires no more than ten years from the date the option is granted. Under
this plan, the Company granted options of 33,000, 36,000 and 33,000 for 2000,
1999 and 1998, respectively.

(f) Stock Compensation Plan for Nonemployee Directors In May 1996, the
shareholders approved the stock compensation plan for nonemployee directors,
effective January 1, 1997. The purpose of this plan is to provide for the
payment of the annual compensation for the directors' services in shares of the
Company's common stock. The amount of common shares available for issuance under
the plan is 359,334. The Company issued 11,435 shares, 10,127 shares and 7,872
shares shares during 2000, 1999 and 1998, respectively and charged to expense
$418,000, $438,000 and $243,000, respectively. The plan was amended effective
January 1, 2001 to permit the directors to elect to receive up to 50% of his or
her compensation under the plan in cash for each calendar year. Each
non-employee director must elect on or before December 20 of each year how
compensation for the following year will be paid.

(g) Agent Stock Purchase Plan Under the terms of the agents' stock purchase
plan, the number of shares of common stock available to be purchased is 911,507.
This plan provides for quarterly offerings in which independent insurance agents
can purchase the Company's common stock at a 5% discount for the purchases
through September 1, 2000. During 2000, the plan was amended so that effective
with the December 1, 2000 purchase, the discount is 10% with a one year
restricted period during which the shares purchased cannot be sold or
transferred. The Company issued 33,082 shares, 59,285 shares and 85,672 shares
in 2000, 1999 and 1998, respectively, to agents and charged to expense $33,000,
$54,000 and $98,000 in 2000, 1999 and 1998, respectively.

Note 10 Stockholders' Equity The Company maintains a dividend reinvestment plan,
under which 188,583 shares of common stock are available for issuance. Shares
purchased under this plan are issued at fair value.

        Under a common stock repurchase program authorized by the Board of
Directors on July 29, 1996 and extended on July 28, 1998, May 7, 1999, November
2, 1999 and February 3, 2000, the Company can repurchase up to 8,000,000 shares.
In 2000, 1999 and 1998, the Company acquired 2,101,000, 2,505,000 and 1,774,000
shares, respectively, at a total cost of $36,536,000, $45,716,000 and
$37,750,000, respectively. The total amounts of stock repurchased under this
program since July 29, 1996 through December 31, 2000 is 6,973,000 shares at a
total cost of $132,788,000.

        Shares repurchased in conjunction with restricted stock vestings and
option exercises are 69,000, 9,000 and 21,000 for 2000, 1999 and 1998,
respectively, at a total cost of $1,141,000, $169,000 and $455,000,
respectively.

        Selective's ability to declare and pay dividends on common stock is
affected by the ability of its subsidiaries to declare and pay dividends to the
holding company. The dividends from the Diversified Insurance Services
subsidiaries are restricted only by the operating needs of those subsidiaries.
The dividends from insurance subsidiaries are under the regulatory limitations
of the states in which the insurance subsidiaries are domiciled: New Jersey, New
York, North Carolina and South Carolina.

        In all such jurisdictions, domestic insurers are prohibited from paying
"extraordinary dividends" without approval of the insurance commissioner of the
respective state. Additionally, New Jersey 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

<PAGE>   31

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 to its financial needs.

        Based on the 2000 statutory financial statements, the maximum dividends
that can ultimately be paid to Selective in 2001 by Selective Insurance Company
of America, Selective Way Insurance Company, Selective Insurance Company of the
Southeast, Selective Insurance Company of South Carolina and Selective Insurance
Company of New York are $25,105,000, $11,690,000, $2,388,000, $4,216,000 and
$3,230,000, respectively. The statutory capital and surplus of the insurance
subsidiaries in excess of these ordinary dividend amounts must remain within the
insurance subsidiaries in the absence of the approval of a request for an
extraordinary dividend.

        The National Association of Insurance Commissioners (NAIC) has
risk-based capital (RBC) requirements that require insurance companies to
calculate and report information under a risk-based formula, which measures
statutory capital and surplus needs based on a regulatory definition of risk in
a company's mix of products and its balance sheet. At December 31, 2000 and
1999, all the Companies have an amount above the authorized control level RBC,
as defined by the NAIC.

Note 11 Preferred Share Purchase Rights Plan On February 2, 1999, Selective's
Board of Directors approved the amended and restated stockholder rights plan.
The rights to purchase one two-hundredth of a share of Selective Series A Junior
Preferred Stock at an exercise price of $80 are attached to all shares of
Selective common stock and are exercisable ten days after an announcement that a
person or group has acquired 15% or more of the common stock (Acquiring Person)
or ten business days after a person commences or announces its intent to make a
tender offer which would result in their acquiring 15% or more of the common
stock (Acquiring Person). If a person or group becomes an Acquiring Person, each
right will entitle the holder, other than the Acquiring Person, to purchase the
number of Selective common shares having a market value of two times the
exercise price of $80.

        If Selective is acquired in a merger, or 50% or more of its assets are
sold, each right other than the rights of an Acquiring Person, will be
exercisable to purchase shares of the acquiring company having twice the market
value of the $80 exercise price.

        Before an Acquiring Person acquires 50% or more of the common shares,
Selective's Board may exchange rights, other than the rights of an Acquiring
Person, at an exchange ratio of one share of common stock per right. The rights
expire February 2, 2009, unless Selective's Board redeems them at $.01 per right
before a person or group triggers the plan or unless Selective's Board exchanges
them for common stock.

Note 12 Reconciliation of Statutory To Generally Accepted Accounting Principles
Financial Statements (a) The following is a reconciliation of the differences
between the Statutory Financial Statements and the GAAP Financial Statements:

<TABLE>
<CAPTION>
(in thousands)                            2000              1999              1998
- ----------------------------------------------------------------------------------
<S>                                     <C>               <C>               <C>
Combined insurance
    subsidiaries - statutory basis
    net income                          $26,374           61,686            50,223
Deferred policy acquisition costs         9,318             (679)           11,664
Deferred Federal income taxes             3,634            2,076              (422)
Net gains (losses) of subsidiaries        4,865            2,790              (304)
Other, net                               (5,672)          (4,390)           (2,234)
                                         ------           ------            ------
Combined subsidiaries
    - GAAP basis                         38,519           61,483            58,927
Selective Insurance Group, Inc.,
    net of intercompany equity
    eliminations                        (11,984)          (7,766)           (5,357)
                                        -------           ------            ------
Consolidated financial
    statement - GAAP basis
    net income                          $26,535           53,717            53,570
                                         ======           ======            ======
</TABLE>

<TABLE>
<CAPTION>
(in thousands)                            2000              1999
- ----------------------------------------------------------------
<S>                                    <C>              <C>
Combined insurance subsidiaries -
    statutory surplus                  $484,884          515,624
Deferred policy acquisition costs       118,413          109,095
Deferred Federal income taxes             3,808           13,131
Loss reserves                              (609)          (1,080)
Net unrealized gains (losses) - debt
   securities, available-for-sale        18,060          (18,381)
Nonadmitted assets                       34,025           28,648
Stockholders' equity of subsidiaries     57,440           37,585
Other, net                                6,248           15,710
                                          -----           ------
Combined subsidiaries - GAAP
    basis                               722,269          700,332
Selective Insurance Group, Inc.,
    net of intercompany equity
    eliminations                       (144,472)        (130,368)
                                       --------         --------
Consolidated financial statement -
    GAAP basis stockholders' equity    $577,797          569,964
                                        =======          =======
</TABLE>

<PAGE>   32

(b) The insurance subsidiaries prepare their statutory financial statements in
accordance with accounting practices prescribed or permitted by the various
states of domicile. Prescribed statutory accounting practices include state
laws, regulations and general administrative rules, as well as a variety of
publications of the NAIC. Permitted statutory accounting practices encompass all
accounting practices that are not prescribed; such practices differ from state
to state, may differ from company to company within a state and may change in
the future. The insurance subsidiaries do not utilize any permitted statutory
accounting practices that materially affect the determination of statutory
surplus or risk-based capital. Furthermore, the NAIC had a project to codify
statutory accounting practices, which becomes effective for reporting periods
beginning after January 1, 2001, and is expected to constitute the principal
source of "prescribed" statutory accounting practices. Codification is not
expected to have a material impact on the Company.

Note 13 Earnings per Share The following table provides a reconciliation of the
numerators and denominators of the basic and diluted EPS computations of net
income for the year ended:

<TABLE>
<CAPTION>
(in thousands, except per share amounts)
                                 Income           Shares           Per Share
                               (Numerator)     (Denominator)        Amount
- --------------------------------------------------------------------------------
<S>                            <C>               <C>                   <C>
2000
- ----
Basic EPS
Net Income available
  to common stockholders       $26,535           24,907                $1.07
                                                                        ====
Effect of Dilutive Securities
Restricted stock                    --              752
8.75% convertible
  subordinated debentures          250              649
Stock options                      (18)             210
                                   ---              ---
Diluted EPS
Income available to common
  stockholders + assumed
  conversions                  $26,767           26,518                $1.01
                                ======           ======                 ====

1999
- ----
Basic EPS
Net Income available
  to common stockholders       $53,717           27,081                $1.98
                                                                        ====
Effect of Dilutive Securities
Restricted stock                    --              683
8.75% convertible
  subordinated debentures          355              873
Stock options                     (127)             240
                                  ----              ---
Diluted EPS
Income available to common
  stockholders + assumed
  conversions                  $53,945           28,877                $1.87
                                ======           ======                 ====

1998
- ----
Basic EPS
Net Income available
  to common stockholders       $53,570           28,480                $1.88
                                                                        ====
Effect of Dilutive Securities
Restricted stock                    --              534
8.75% convertible
  subordinated debentures          375              926
Stock options                     (989)             472
                                  ----              ---
Diluted EPS
Income available to common
  stockholders + assumed
  conversions                  $52,956           30,412                $1.74
                                ======           ======                 ====
</TABLE>

<PAGE>   33

Note 14 Liability For Unpaid Claims And Claim Adjustment Expenses The table
below provides a roll-forward of reserves for losses and loss expenses for
beginning and ending reserve balances:

<TABLE>
<CAPTION>
(in thousands)                                2000                1999                 1998
- -------------------------------------------------------------------------------------------
<S>                                     <C>                  <C>                  <C>
Gross reserves for losses
    and loss expenses at
    beginning of year                   $1,273,808           1,193,274            1,161,169
Less reinsurance recoverable
    on unpaid losses and loss
    expenses at beginning of
    year                                   192,044             140,453              124,197
                                           -------             -------              -------
Net reserves for losses
    and loss expenses at
    beginning of year                    1,081,764           1,052,821            1,036,972
Provision for losses and loss
    expenses for claims
    occurring in the current
    year                                   615,095             600,793              510,319
Decrease in estimated
    losses and loss expenses for
    claims occurring in prior
    years                                   (1,029)             (8,578)              (2,519)
                                            ------              ------               ------

                                         1,695,830           1,645,036            1,544,772
                                         ---------           ---------            ---------

Net losses and loss expenses
    paid for claims occurring
    during:
Current year                               235,879             235,157              178,286
Prior years                                348,164             328,115              313,665
                                           -------             -------              -------
Total paid losses                          584,043             563,272              491,951
                                           -------             -------              -------
Net reserves for losses and
    loss expenses at end of year         1,111,787           1,081,764            1,052,821
Reinsurance recoverable on
    unpaid losses and loss
    expenses at end of year                160,869             192,044              140,453
                                           -------             -------              -------
Gross reserves for losses
    and loss expenses at
    end of year                         $1,272,656           1,273,808            1,193,274
                                         =========           =========            =========
</TABLE>

As additional information is collected in the loss settlement process reserves
are adjusted accordingly. These changes could have a material impact on the
results of operations of future periods when the adjustments are made.

Note 15 Segment Information The Company is primarily engaged in writing property
and casualty insurance. The Company has classified its business into three
segments which are Insurance Operations (commercial lines underwriting, personal
lines underwriting), Investments, and Diversified Insurance Services. The
insurance segments are evaluated based on their GAAP underwriting results,
Investments are evaluated based on after-tax investment returns, and the
Diversified Insurance Services are evaluated based on results of operations in
accordance with GAAP.

        The GAAP underwriting results of the Insurance Operations segment are
determined taking into account net premiums earned, incurred losses and loss
expenses, policy acquisition costs and other underwriting expenses and
policyholders dividends. Management of the investment portfolio is separate from
the insurance underwriting segment and, therefore, has been classified as a
segment. The operating results of the Investments segment take into account net
investment income and net realized gains and losses. The Diversified Insurance
Services business is managed independently from the other segments and,
therefore, has been classified separately. The Diversified Insurance Services
segment consists of the flood business managed by the Company for the National
Flood Insurance Program, medical cost containment operations, professional
employer organization operations, software development and program
administration operations, and fee based income from alternative market
affiliation programs. The segment's results are determined taking into account
the net revenues generated in each of the businesses, less the costs of
operations.

        In computing the results of each segment, no adjustment is made for
interest expense, net general corporate expenses or federal income taxes. The
Company does not maintain separate investment portfolios for the segments and,
therefore, does not allocate assets to the segments.

        The following summaries present revenues (net investment income and net
realized gains or losses in the case of the investments segment) and pre-tax
income for the individual segments:

<PAGE>   34

Revenue by segment

<TABLE>
<CAPTION>
(in thousands)                            2000              1999              1998
- ----------------------------------------------------------------------------------
<S>                                  <C>                 <C>              <C>
Insurance Operations:
Commercial lines net
   premiums earned                     $611,865          570,650           506,020
Personal lines net
  premiums earned                       209,400          228,415           216,972
                                        -------          -------           -------
Total insurance operations              821,265          799,065           722,992
Investments:
Net investment income                    99,495           96,531            99,196
Net realized gains
  (losses) on investments                 4,191           29,377            (2,139)
                                          -----           ------            ------
Total investments                       103,686          125,908            97,057
Diversified Insurance
   Services                              76,063           46,653            14,100
                                         ------           ------            ------
Total all segments                   $1,001,014          971,627           834,149
                                      =========          =======           =======
</TABLE>

Income or (loss) before Federal income tax by segment

<TABLE>
<CAPTION>
(in thousands)                            2000              1999              1998
- ----------------------------------------------------------------------------------------
<S>                                    <C>               <C>               <C>
Insurance Operations:
Commercial lines
   underwriting                        $(45,186)         (47,625)          (32,871)
Personal lines
  underwriting                          (19,936)          (6,522)            7,885
                                        -------           ------             -----
Underwriting loss,
 before Federal income tax              (65,122)         (54,147)          (24,986)
Investments:
Net investment income                    99,495           96,531            99,196
Net realized gains
  (losses) on investments                 4,191           29,377            (2,139)
                                          -----           ------            ------
Total investment income,
before Federal income tax               103,686          125,908            97,057
Diversified Insurance Services:
Income before Federal
  income tax                              5,227            4,772             2,217
                                          -----            -----             -----

Total all segments                       43,791           76,533            74,288

Interest expense                        (13,745)          (9,460)           (9,409)
General corporate
   expenses                              (5,502)          (3,670)           (1,175)
                                         ------           ------            ------
Income before
  Federal income tax                   $ 24,544           63,403            63,704
                                         ======           ======            ======
</TABLE>

Note 16 Related Party Transactions Certain officers of Selective exercised stock
options by giving Selective promissory notes totalling $992,000 in payment for
the stock purchased. The Company's noninterest bearing notes are secured by
shares of the Company's common stock. The promissory notes are full recourse and
subject to certain employment requirements. At December 31, 2000, the
outstanding principal amount was $347,000.

        In August 1998, certain officers of Selective purchased stock on the
open market with proceeds advanced by the Company. These officers gave Selective
promissory notes totalling $1,773,000. 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. At
December 31, 2000, the principal amount outstanding was $1,110,000.

        The Company has utilized the services of Chas. E. Rue & Sons, Inc., a
general insurance agency, of which William M. Rue, a director of Selective
Insurance Group, Inc., is the President and owner of more than a 5% equity
interest. The Company's insurance subsidiaries purchased insurance coverages
from Chas. E. Rue & Sons, Inc. with premiums of $931,000, $689,000, and $826,000
during 2000, 1999, and 1998, respectively. Additionally, Chas. E. Rue & Sons,
Inc. received $1,192,000, $1,226,000 and $1,276,000 in commissions for

<PAGE>   35

insurance policies placed with the Company's insurance subsidiaries during 2000,
1999, and 1998, respectively. The company believes that the related party
transactions with Chas. E. Rue & Sons, Inc. were on terms as fair to the Company
as could have been obtained from unaffiliated third parties.

Note 17 Commitments and Contingencies (a) Reserves established for liability
insurance 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 the Company'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 which arise in environmental cases include the
determination of whether a case is one for a federal or state forum, choice of
law, causation, admissibility of evidence, allocation of damages and
contribution among joint defendants, successor and predecessor liability and
whether direct action against insurers can be maintained. Coverage issues which
arise 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. The Company does not discount to present value that portion of
its loss reserves expected to be paid in future periods.

        At December 31, 2000, the Company's reserves for environmental claims
amounted to $52,715,000 on a gross basis (including IBNR reserves of
$19,775,000) and $47,175,000 (including IBNR reserves of $18,235,000) on a net
basis. At December 31, 2000, the Company established a range of reasonably
possible losses for reported environmental exposures of approximately
$11,000,000 to $50,000,000 on a gross basis, and $10,000,000 to $44,000,000, on
a net basis.The Company's case reserves for known environmental claims,
excluding IBNR, were $32,940,000 on a gross basis and $28,940,000 on a net basis
in connection with 2,409 claims, including multiple claimants who are associated
with the same site or incident. These claims involved about 1,613 lawsuits. Of
the 2,409 total environmental claims, 1,868 claims are asbestos related, of
which 1,058 involve only two insureds. One such insured manufactured
asbestos-containing products, while the other supplied asbestos-containing
products. The reserve associated with these two insureds amounted to $2,249,000
on a gross basis and $1,649,000 on a net basis. About 80 of the total
environmental claims involve approximately 20 landfills. The landfill sites
account for reserves of approximately $14,818,000 on a gross basis and
$14,618,000 on a net basis. The remaining claims, which represent about
$15,873,000 on a gross basis and $12,673,000 on a net basis, involve leaking
underground storage tanks, air pollution, as well as other asbestos claims.
Litigation costs associated with environmental claims have been significant,
particularly for landfill claims.

        While the number of asbestos type claims has been increasing, the
average estimated loss is decreasing; therefore these claims represent only 9%
of the company's total environmental exposure as of December 31, 2000. The
Company has also experienced a shift in its non-asbestos environmental exposure.
The number of traditional environmental claims, such as landfill and leaking
underground storage tank claims, has remained constant or in some cases has
decreased, while the number of short-tail exposure claims such as oil truck
spills and Exterior Insulation Finishing System (EIFS) have increased. These
claims tend to have lower litigation costs and generally can be settled in a
shorter time frame than traditional environmental claims.

        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 actuarial
approaches do not 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 Company has established a range of reasonably possible IBNR losses
for non-environmental net claims at December 31, 2000, of approximately
$446,000,000 to $555,000,000 and at December 31, 1999, of approximately
$424,000,000 to $531,000,000. For each major product line of business, a
non-environmental IBNR point estimate was calculated using standard actuarial
techniques and an estimated split of loss expense reserves was then allocated to
the IBNR provision. From this point estimate, the upper end of the range was
calculated by adding 5% of the Company's aggregate reserve for net losses and
loss expenses and the lower end of the range was calculated subtracting 5%. The
Company's net IBNR loss and loss expense reserves for non-environmental claims
were $494,000,000 at December 31, 2000 and $493,000,000 at December 31, 1999.

        Based on the Company's aggregate reserve for net losses and loss
expenses at December 31, 2000, the Company 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 the Company's current estimates.

        The table on page 56 provides a roll-forward of the Company's gross and
net environmental incurred losses and loss expenses and related reserves
thereon. The total environmental claims net incurred losses and loss expenses
for 2000 decreased slightly while payments increased due to the settlement of
certain asbestos and landfill claims during the year when compared to 1999. The
total environmental claims net incurred losses and loss expenses for 1999
increase slightly when compared to 1998.

        The following table provides a roll-forward of the Company's gross and
net environmental incurred losses and loss expenses and related reserves
thereon:

<PAGE>   36

<TABLE>
<CAPTION>
(in thousands)
                                                                 2000                      1999                  1998
                                                          Gross        Net           Gross       Net       Gross        Net
- -----------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>          <C>         <C>         <C>         <C>        <C>
Asbestos
Environmental reserves (including IBNR)
  for losses and loss expenses at the beginning of year   $  8,100       4,257       8,249       4,406       8,277       4,384
Incurred losses and loss expenses                             (887)        644          33          33         219         269
Less losses and loss expenses paid                            (563)       (563)       (182)       (182)       (247)       (247)
                                                          --------    --------    --------    --------    --------    --------
Environmental reserves (including IBNR)
  for losses and loss expenses at the end of year         $  6,650       4,338       8,100       4,257       8,249       4,406
                                                          ========    ========    ========    ========    ========    ========
Non-Asbestos
Environmental reserves (including IBNR)
  for losses and loss expenses at the beginning of year   $ 46,204      44,247      45,879      43,922      46,458      44,851
Incurred losses and loss expenses                            5,751       4,220       5,711       5,711       5,119       4,769
Less losses and loss expenses paid                          (5,890)     (5,630)     (5,386)     (5,386)     (5,698)     (5,698)
                                                          --------    --------    --------    --------    --------    --------
Environmental reserves (including IBNR)
  for losses and loss expenses at the end of year         $ 46,065      42,837      46,204      44,247      45,879      43,922
                                                          ========    ========    ========    ========    ========    ========
Total Environmental Claims
Environmental reserves (including IBNR)
  for losses and loss expenses at the beginning of year   $ 54,304      48,504      54,128      48,328      54,735      49,235
Incurred losses and loss expenses                            4,864       4,864       5,744       5,744       5,338       5,038
Less losses and loss expenses paid                          (6,453)     (6,193)     (5,568)     (5,568)     (5,945)     (5,945)
                                                          --------    --------    --------    --------    --------    --------
Environmental reserves (including IBNR)
  for losses and loss expenses at the end of year         $ 52,715      47,175      54,304      48,504      54,128      48,328
                                                          ========    ========    ========    ========    ========    ========
</TABLE>

(b) The Company purchases annuities from life insurance companies to fulfill
obligations under claim settlements which provide for periodic future payments
to claimants. As of December 31, 2000, the Company had purchased such annuities
in the amount of $10,788,000 for settlement of claims on a structured basis for
which the Company is contingently liable. To the Company's knowledge, none of
the issuers of such annuities have defaulted in its obligations thereunder.

(c) The Company 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
$8,438,000, $7,933,000 and $5,979,000 for the years ended December 31, 2000,
1999 and 1998, respectively.

        In addition, certain leases for rented premises and equipment are
noncancelable, and liability for payment will continue even though the space or
equipment may no longer be in use. At December 31, 2000, the total future
minimum rental commitments under noncancelable leases was $25,509,000 and such
yearly amounts are as follows:

<TABLE>
<CAPTION>
(in thousands)
<S>                                                    <C>
2001                                                     7,737
2002                                                     5,232
2003                                                     3,036
2004                                                     2,745
2005                                                     2,569
After 2005                                               4,190
                                                         -----
Total minimum payment required                         $25,509
                                                        ======
</TABLE>

Note 18  Acquisition of Wholly-Owned Subsidiaries

On July 27, 1999, the Company acquired all of the net assets of Consumer Health
Network Plus, LLC (formerly Consumer Health Network, Inc.), a nationally
accredited preferred provider organization, for cash of $6,010,000 including
related acquisition costs. The purchase agreement provides for additional
consideration to be paid if certain financial criteria are achieved. As a result
of this agreement provision, an additional $163,000 of consideration was
incurred during 2000 and future additional consideration of $1,837,000 may be
incurred if financial performance criteria are met over the next year. As this
consideration is incurred, it will be recorded as an increase in goodwill and
amortized over the remaining life of the asset. The acquisition has been
accounted for using the purchase method of accounting, and included $4,822,000
of goodwill, which is being amortized on a straight-line basis over 15 years.
The amount of goodwill amortization for 2000 and 1999 was $312,000 and $130,000,
respectively.

        On July 21, 1999, the Company acquired all of the outstanding shares of
Selective HR Solutions, Inc. (formerly Modern Employers, Inc.), a professional
employer organization, for $29,958,000 including related acquisition costs. The
purchase agreement provides for additional consideration to be paid if certain
financial criteria are achieved. As a result of this agreement provision, an
additional $178,000 of consideration was incurred during 2000. This
consideration along with $5,816,000 accrued at December 31, 1999 was paid in
2000. A final consideration payment of $97,000 in January 2001 will also be
recorded as an increase in goodwill and amortized over the remaining life of the
asset. The acquisition has been accounted for using the purchase method of
accounting, and included $29,193,000 of goodwill, which is being amortized on a
straight-line basis over 20 years. The amount of goodwill amortization for 2000
and 1999 was $1,462,000 and $477,000, respectively.

        On December 8, 1998, the Company acquired all of the outstanding shares
of PDA Software Services, Inc. (formerly, PDA, Inc.), a software developer which
specializes in the insurance industry, for 311,673 shares of the Company's
common stock valued at $6,644,000 including related acquisition costs. The
acquisition has been accounted for using the purchase method of accounting and
included $4,805,000 of goodwill, which is being amortized on a straight-line
basis over 24 years. The amount of goodwill amortization for both 2000 and 1999
was $200,000.
<PAGE>   37

         On November 14, 1997, the Company acquired all of the net assets of
Alta Services LLC (formerly MCSI/MRSI), a non-risk bearing managed care company,
for cash of approximately $8,291,000 including related acquisition costs. The
purchase agreement provides for future contingent consideration of up to
$10,000,000 if certain growth and profitability objectives are achieved through
the year 2001. If these objectives are met, the additional consideration will be
recorded as an increase in goodwill and amortized over the remaining life of the
asset. The acquisition has been accounted for using the purchase method of
accounting and included $8,060,000 of goodwill, which is being amortized on a
straight-line basis over nine years. The amount of goodwill amortization for
each year: 2000, 1999, and 1998, was $879,000 with prior accumulated
amortization of $150,000.

         The operating results of all of the above acquisitions have been
included in the consolidated statement of income from their respective date of
acquisition. On the basis of a pro forma consolidation of the results of
operations as if the acquisitions had taken place at the beginning of the
respective acquisition years rather than their respective acquisition dates,
there would not have been a materially different result from the reported
amounts in any of the historical reporting years. Additionally, such pro forma
amounts would not necessarily be indicative of what the actual consolidated
results of operations might have been if the acquisition had been effective at
the beginning of those years.

Note 19  Federal Income Tax

(a) A reconciliation of federal income tax on pretax earnings at the corporate
rate to the effective tax rate is as follows:

<TABLE>
<CAPTION>
                                  2000             1999              1998
- -------------------------------------------------------------------------
<S>                             <C>             <C>              <C>
Tax at statutory rate           $8,590           22,191            22,296
Tax-exempt interest             (9,495)         (10,448)          (10,048)
Dividends received
    deduction                   (1,997)          (2,191)           (2,250)
Other                              911              134               136
                                   ---              ---               ---
Income tax provision (benefit) $(1,991)           9,686            10,134
                               =======            =====            ======
</TABLE>

(b) The tax effects of the significant temporary differences that give rise to
deferred tax liabilities and assets are as follows:

<TABLE>
<CAPTION>
(in thousands)                                     2000              1999
- -------------------------------------------------------------------------
<S>                                            <C>                <C>
Deferred tax liabilities:
Deferred policy acquisition costs               $41,445            38,183
Unrealized gains on securities,
    available-for-sale                           53,483            41,297
Accelerated depreciation                          2,621             4,449
Other                                             8,014             5,435
Total deferred tax liabilities                  105,563            89,364
                                                -------            ------

Deferred tax assets:
Net loss reserve discounting                     65,331            65,220
Net unearned premiums                            28,240            26,675
Self-insured employee benefit reserves            2,221             2,085
Pension                                           4,271             3,572
Other                                            13,921             7,391
Total deferred tax assets                       113,984           104,943
                                                -------           -------
Valuation allowance recognized for
    deferred tax assets                             550               550
                                                    ---               ---

Deferred federal Income Tax                      $8,971            16,129
                                                  =====            ======
</TABLE>


Based on our tax loss carry back availability, and the historic levels of
current taxable income and pretax financial statement income, we believe that
more likely than not, the existing deductible temporary differences will reverse
during periods in which we will generate net taxable income or have adequate
carry back availability. However, there can be no assurance that we will
generate any earnings or any specific level of earnings in future years.


<PAGE>   38




Note 20 Fair Values of Financial Instruments The following table presents the
carrying amounts and estimated fair values of the Company's Financial
Instruments as of December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                  2000             1999

                                Carrying           Fair            Carrying           Fair
(in thousands)                   Amount            Value            Amount            Value
- --------------------------------------------------------------------------------------------
<S>                         <C>               <C>              <C>              <C>
Financial assets:
Debt securities:
Held to maturity              $225,177          231,057           271,384          271,604
Available-for-sale           1,202,758        1,202,758         1,122,786        1,122,786
Equity securities              239,578          239,578           251,998          251,998
Other investments              109,550          109,550            64,770           64,770

Financial liabilities:
8.77% Senior Notes              54,000           57,189            54,000           55,322
7.84% Senior Notes              14,286           14,415            21,428           21,388
8.63% Senior Notes
  Series A                      30,000           31,028                 -                -
8.87% Senior Notes  Series B    61,500           63,247                 -                -
                                ------           ------         ---------        ---------
Notes payable                  159,786          165,879            75,428           76,710
Debentures                      $3,848           13,228             6,157           14,908
</TABLE>

The Company's carrying amounts shown in the table are included in the
Consolidated balance sheets.

Note 21 Supplemental Cash Flow Information The Company's cash paid during the
year for interest and federal income taxes, non-cash investing and financing
activities were as follows:

<TABLE>
<CAPTION>
(in thousands)                    2000             1999              1998
- -------------------------------------------------------------------------
<S>                            <C>              <C>               <C>
Cash paid during the year for:
Interest                       $12,536            9,995             9,527
Federal income tax                 304           17,229            11,554

Non-cash investing activity:
  Acquisitions:
     Fair value of assets
     acquired                   $6,473           44,571            12,546
     Cash paid or stock issued  (5,996)         (30,152)           (6,601)
                                ------          -------            ------
     Liabilities assumed           477           14,419             5,945

Non-cash financing activity:
  -Conversion of convertible
subordinated debentures         $2,309               62               626
</TABLE>



<PAGE>   39

QUARTERLY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                     First Quarter         Second Quarter         Third Quarter        Fourth Quarter
                                     2000      1999        2000      1999        2000      1999       2000     1999
<S>                                <C>        <C>         <C>       <C>         <C>        <C>       <C>      <C>
Net premiums written               $212,961   207,725     218,089   215,059     218,658   211,166    193,896  177,727

Net premiums earned                 199,826   193,028     200,626   196,454     205,191   199,663    215,622  209,921

Net investment income earned         23,300    23,473      24,498    23,455      24,459    23,756     27,238   25,847

Net realized gains (losses)           2,273     8,597         446    23,604         (72)   (1,160)     1,544   (1,664)

Diversified insurance services
    revenue                          17,668     8,882      18,364     7,613      20,333    14,592     19,699   15,566

Diversified insurance services
    net income                          795       396         613       238       1,046     1,611      1,000      704

Operating income (1,2,3,4)            9,433     8,435       2,816    12,272       5,419     2,690      6,143   11,225

Net income (2,3,4)                   10,910    14,023       3,106    27,615       5,373     1,935      7,146   10,144

Other comprehensive income (loss)    (3,267)  (10,592)        648   (22,365)     16,321   (12,920)     8,929    8,248
                                     ------   -------         ---   -------      ------   -------      -----    -----

Comprehensive income (loss)           7,643     3,431       3,754     5,250      21,694   (10,985)    16,075   18,392

Net income per share:

Basic (2,3,4)                            .43       .50         .12      1.00         .22       .07        .29      .38

Diluted (2,3,4)                          .40       .48         .12       .95         .21       .07        .28      .36

Dividends to stockholders (5)            .15       .14         .15       .15         .15       .15        .15      .15

Price range of common stock: (6)

High                                 17 5/16    21 3/4      20 3/8    21 1/2      19 3/8    22 1/2     25 7/8   19 5/8

Low                                   14 5/8    17 1/2      16 5/8    17 5/8     17 3/16    17 1/4     15 1/4   16 1/2
</TABLE>



1. -Refer to the Glossary of Terms on page 62 for definitions of specific terms.

2. -Operating and net income for the second quarter of 2000 were reduced by $4
million, after reinsurance and taxes, due to losses incurred from severe
catastrophe storms.

3. -Operating and net income for the first quarter of 1999 were reduced by $2.8
million, after reinsurance and taxes, due to higher losses incurred from unusual
property damages and numerous winter storms.

4. -Operating and net income for the third quarter of 1999 were reduced by $9.0
million, after reinsurance and taxes, due to higher losses incurred from weather
related storms.

5. -See Note 5(b)(3) and Note 10 to the consolidated financial statements and
Financial Review for a discussion of dividend restrictions.

6. -These ranges of high and low prices of the Company's common stock, as
reported by The Nasdaq National Market, represent actual transactions. All price
quotations do not include retail markups, markdowns and commissions. The range
of high and low prices for common stock for the period beginning January 1,
2001, and ending January 31, 2001 was $213/4 to $257/8 and the last sale price
on January 31, 2001, was $221/16.


                                       59

<PAGE>   40

Corporate Directory
Selective Insurance Group, Inc.


Directors

Paul D. Bauer, 1998 (2,3) Retired, formerly Executive Vice President and Chief
Financial Officer, Tops Markets, Inc.

A. David Brown, 1996 (1,4,5) Managing Director, Whitehead Mann Pendleton James

William A. Dolan, II, 1988 (3,4) Attorney, Of Counsel to  Michael C. Gaus, Esq.

William C. Gray, D.V.M., 1992 (5,6) Retired, formerly President, Newton
Veterinary Hospital, Inc.

C. Edward Herder, CPCU, 1978 (1,4,6) President, Chester H. Herder & Son, Inc.,
general insurance agency

William M. Kearns, Jr., 1975 (2,5) Vice Chairman, Keefe Managers, Inc., money
management, and President, W. M. Kearns & Co., Inc., a private investment
company

Joan M. Lamm-Tennant, Ph.D., 1993 (2,3) Senior Vice President, General
Reinsurance and Thomas G. Labrecque Endowed Chair in Business and Professor of
Finance at Villanova University

S. Griffin McClellan III, 1980 (1,2,4) Consultant, formerly Chairman, Crestmont
Federal Savings and Loan Association Gregory E. Murphy, 1997 (1,2) Chairman,
Chief Executive Officer and President, Selective Insurance Group, Inc.

William M. Rue, CPCU, 1977 (1,2,5) President, Chas. E. Rue & Son, Inc., T/A Rue
Insurance, general insurance agency

Thomas D. Sayles, Jr., 1988 (1,2,3,5) Retired, formerly Chairman and Chief
Executive Officer, The Summit Bancorporation

J. Brian Thebault, 1996 (2,6) Chairman and Chief Executive Officer, L. P.
Thebault Company, graphic communications

Officers

Gregory E. Murphy Chairman, President and Chief Executive Officer

Thornton R. Land Executive Vice President Administration and General Counsel

Jamie Ochiltree, III Executive Vice President Insurance Operations

James W. Coleman, Jr. Executive Vice President Diversified Insurance Services
Group

Richard F. Connell Executive Vice President and Chief Information Officer

Dale A. Thatcher Senior Vice President Finance and  Chief Financial Officer

Robert P. Rank Senior Vice President and Chief Investment Officer

Carl R. Luthman Senior Vice President Facilities

Ronald J. Zaleski, Sr. Senior Vice President and Chief Actuary

Keith T. Shoemaker Vice President and Controller

Sharon R. Cooper Vice President Director of Communications

Frances M. MacKillop Vice President Management Development

Debra P. Carter Vice President Human Resources

Kerry A. Guthrie Vice President Investments

John P. Whitehead Vice President

Cynthia J. Bresney Assistant Vice President and Director of Internal Audit and
Compliance

Malcolm G. Franklin Assistant Vice President and General Counsel Diversified
Insurance Services Group

Michele Nieroda Schumacher Assistant Vice President Corporate Secretary and
Corporate Counsel

Date after name indicates year of original election
<TABLE>
<S>                                               <C>
(1) Member of the Executive Committee             (4) Member of the Salary and Employee Benefits Committee
(2) Member of the Finance Committee               (5) Member of the Committee on Directors
(3) Member of the Audit Committee                 (6) Member of the Conflict of Interest Committee
</TABLE>


                                       60

<PAGE>   41




Subsidiaries

Alta Services LLC
Consumer Health Network    Plus, LLC
FloodConnect, LLC
Niagara Exchange Corporation
PDA Software Services, Inc.
SelecTech, LLC
Selective HR Solutions, Inc.
Selective Insurance Company    of America
Selective Insurance Company     of New York
Selective Insurance Company    of South Carolina
Selective Insurance Company    of the Southeast
Selective Specialty Lines Brokerage, LLC
Selective Technical Administrative Resources, Inc.
Selective Way Insurance Company
SRM Insurance Brokerage, LLC
Wantage Avenue Holding Company, Inc.


Regional Offices

Chesapeake Region Hunt Valley, Maryland 6 North Park Drive, Suite 200 Scott A.
Hewitt, Vice President

Mid-America Region Columbus, Ohio 8415 Pulsar Place, Suite 300 Timothy J.
Violand, Vice President

New Jersey Region Trenton, New Jersey One AAA Drive Edward F. Drag, II, Vice
President

Northeast Region Branchville, New Jersey 40 Wantage Avenue Gregory J. Massey,
Vice President

Pennsylvania Region Lehigh Valley, Pennsylvania 5050 Tilghman Street, Suite 250
William F. Igoe, III, Vice President

Southern Region Charlotte, North Carolina 3 Coliseum Centre 2550 West Tyvola
Road, Suite 400 Margaret C. Davis, Vice President

Service Center Office

Richmond, Virginia 1100 Boulders Parkway, Suite 601 Craig G. Borens, Vice
President

Information Technology Offices

Glastonbury, Connecticut 500 Winding Brook Drive Bradford S. Allen, Vice
President

Mansfield, Ohio 380 North Main Street, Suite 101 Roby L. Musick, Manager


Subsidiary Offices

Alta Services LLC IBIS Plaza 3525 Quakerbridge Road Hamilton, New Jersey 08619

Consumer Health Network Plus, LLC One Cragwood Road South Plainfield, New Jersey
07080

FloodConnect, LLC 4 Gail Court Sparta, New Jersey 07871

PDA Software Services, Inc. 7701 College Boulevard Overland Park, Kansas 66210

Selective HR Solutions, Inc. 6920 Professional Parkway East Sarasota, Florida
34240

Properties

Situated on approximately 137 acres in Branchville, New Jersey, is our 315,000
square foot facility owned by Wantage Avenue Holding Company, Inc. All regional,
information technology, service center, and subsidiary office locations, as
indicated above, are leased.

                                       61

<PAGE>   42



Glossary of Terms

AGENT (INDEPENDENT INSURANCE AGENT) -- an insurance consultant who recommends
and markets insurance to individuals and businesses; usually represents several
insurance companies. Insurance companies pay agents commission.

ALTERNATIVE MARKET -- any risk transfer mechanism where the customer assumes
some or all financial responsibility for an insurable exposure.

CATASTROPHE LOSS -- a severe loss, usually involving many risks from one
occurrence such as fire, hurricane, earthquake, windstorm, explosion and other
similar events.

DIVERSIFIED INSURANCE SERVICES -- a strategic combination of various
inter-related services that are closely associated with the insurance business
and will allow for the Company as a whole to bring an integrated business
solution to our customers by offering a broader array of products and services.

DIVIDENDS TO POLICYHOLDERS RATIO -- a measurement of dividends paid to workers'
compensation policyholders to premiums earned.

EBITDA -- This measure of income differs from net income by the exclusion of
non-controllable expenses which include interest, taxes, depreciation and
amortization of goodwill.

GAAP COMBINED RATIO -- a measure of underwriting profitability determined by
dividing the sum of all GAAP expenses (losses, loss adjustment expenses,
underwriting expenses, and dividends to policyholders) by GAAP net premiums
earned for the period.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP") -- accounting practices set by
the Financial Accounting Standards Board. Public companies follow these
practices when preparing financial statements.

INCURRED BUT NOT REPORTED ("IBNR") RESERVES -- reserves for estimated losses
which have been incurred by insureds but not yet reported to the insurer.

LOSS EXPENSES -- expenses incurred in the process of evaluating, defending and
paying claims.

LOSS AND LOSS EXPENSE RATIO -- the ratio of net loss and loss expenses to net
premiums earned.

LOSS AND LOSS EXPENSE RESERVES -- the amount of money an insurance company
expects to pay for claim obligations and related expenses resulting from losses
which have occurred that are covered by insurance policies it has sold.

MANAGED CARE -- a method of controlling health care costs by using a network of
medical professionals to provide care consistent with cost-efficient guidelines
and protocols.

OPERATING INCOME -- this measure of income differs from net income by the
exclusion of net realized gains or losses. This measure is used by management
and analysts to evaluate the profitability of recurring operations and is not
intended to replace GAAP net income.

PREMIUMS EARNED -- earned premiums refer to premiums an insurance company has
recorded as revenues during a specific accounting period. For example, a
one-year policy sold January 1 would produce just three months' worth of "earned
premium" in the first quarter of the year.

PREMIUMS WRITTEN -- the cost of insurance coverage, often described as
"written." Written premiums refer to premiums for all policies sold during a
specific accounting period.

REINSURANCE -- insurance coverage that insurance companies buy from reinsurance
companies to limit their potential claim losses on a particular risk or on a
group of risks. All or part of a policy can be reinsured, as can entire types of
business. Reinsurance "spreads the risk" among a number of insurance companies,
reducing the impact of losses on individual companies and thereby allowing them
to provide more insurance than they otherwise would be able to sell.

RETURN ON REVENUE -- a measurement of profitability that is calculated by
dividing net income by total revenue.

RISK -- has two distinct and frequently used meanings in insurance. First, it
can describe the chance that a claim loss will occur (similar to the commonly
understood meaning of the word "risk"). Second, it can refer to the person or
thing insured and is sometimes used as a synonym for "policyholder."

STATUTORY ACCOUNTING -- accounting practices prescribed or permitted by state
insurance departments. Insurance companies follow these practices when preparing
annual statements. Statutory accounting stresses evaluation of a company's
solvency.

STATUTORY COMBINED RATIO -- a measurement commonly used within the property and
casualty insurance industry to measure underwriting profit or loss. It is a
combination of an underwriting expense ratio, a loss and loss expense ratio and
dividends to policyholders ratio.

STATUTORY PREMIUMS TO SURPLUS RATIO -- a statutory measure of solvency risk that
is calculated by dividing the net statutory premiums written for the year by the
ending statutory surplus. For example, a ratio of 1.5:1 means that for every
dollar of surplus, the Company wrote $1.50 in premiums.

STATUTORY UNDERWRITING EXPENSE RATIO -- measures the ratio of statutory
underwriting expenses (salaries, commissions, premium taxes, etc.) to net
premiums written.

STATUTORY SURPLUS -- the amount left after an insurance company's liabilities
are subtracted from assets. Statutory surplus is not a figure based upon
"generally accepted accounting principles" (GAAP). Rather, it is based upon
"statutory" accounting practices prescribed or permitted by state and foreign
insurance regulators.


                                       62
<PAGE>   43




TREATY REINSURANCE -- a contract between two insurance companies for sharing the
insurance coverage for a group of risks.

UNDERWRITING -- the insurer's process of reviewing applications submitted for
insurance coverage, deciding whether to accept all or part of the coverage
requested, and determining the applicable premiums.

UNDERWRITING RESULT -- may be underwriting profit or underwriting loss and
represents premiums earned less insurance losses and loss adjustment expenses
and underwriting expenses (determined on a GAAP or statutory basis). Also
referred to as GAAP underwriting result or statutory underwriting result. This
measure of performance is used by management and analysts to evaluate the
profitability of underwriting operations and is not intended to replace GAAP net
income.

UNEARNED PREMIUMS -- the portion of a premium representing the unexpired amount
of the contract term as of a certain date. For example, a one-year policy sold
January 1 would record nine months of unearned premium after the first quarter
of the year.

WORKSITE EMPLOYEE -- the PEO contractually assumes substantial employer rights,
responsibilities and risks of its clients' employees; they are considered
co-employees.





                                       62
<PAGE>   44





Investor Information

Annual Meeting

Friday, May 4, 2001 Selective Insurance Group, Inc. 40 Wantage Avenue
Branchville, New Jersey 07890

Investor Relations

Dale A. Thatcher Senior Vice President, Finance and Chief Financial Officer
(973) 948-1774 dale.thatcher@selective.com

Website

Contact us at www.selective.com for information about Selective, including our
latest financial news.

Dividend Reinvestment Plan

Selective Insurance Group, Inc. makes available to holders of its common stock
an automatic dividend reinvestment and stock purchase plan.

For Information Contact:
First Chicago Trust Company of New York, a division of EquiServe

Stockholders' Information

Executive Office 40 Wantage Avenue Branchville, New Jersey 07890-1000 Telephone
(973) 948-3000

Registrar and Transfer Agent First Chicago Trust Company of New York, a division
of EquiServe P.O. Box 2500 Jersey City, New Jersey 07303-2500 Telephone (800)
446-2617

Auditors KPMG LLP 757 Third Avenue New York, New York 10017



Common Stock Information

The Company's common stock trades on The Nasdaq National Market under the
symbol: SIGI. As of December 31, 2000, there were approximately 4,487 registered
stockholders.

Form 10-K

A copy of Form 10-K, as filed with the Securities and Exchange Commission,
excluding exhibits, will be provided without charge (exhibits will be furnished
to stockholders upon payment of reproduction and mailing expenses) upon request
to:

Dale A. Thatcher Senior Vice President, Finance and Chief Financial Officer
dale.thatcher@selective.com

Website

Contact us at www.selective.com for information about Selective, including our
latest financial news.


                                Inside back cover







</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>4
<FILENAME>y47342ex21.txt
<DESCRIPTION>SUBSIDIARIES
<TEXT>

<PAGE>   1

                                                                      EXHIBIT 21

SELECTIVE INSURANCE GROUP, INC., SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                                                         PERCENTAGE
                                                        JURISDICTION                                                     VOTING
                                                        IN WHICH                                                         SECURITIES
NAME                                                    ORGANIZED          PARENT                                        OWNED
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                <C>                                              <C>
ALTA Services LLC                                       New Jersey         Selective Insurance Group, Inc.                  100%

Consumer Health Network Plus, LLC                       New Jersey         Selective Insurance Group, Inc.                  100%

Flood Connect, LLC                                      New Jersey         Selective Insurance Group, Inc.                  100%

Niagara Exchange Corporation                            Delaware           Selective Insurance Group, Inc.                  100%

PDA Software Services Inc                               Kansas             Selective Insurance Group, Inc.                  100%

SelecTech, LLC                                          New Jersey         Selective Way Insurance Company                   75%
                                                                           Selective Insurance Company of the Southeast      25%

Selective HR Solutions, Inc.                            Florida            Selective Insurance Group, Inc.                  100%

Selective Insurance Company of America                  New Jersey         Selective Insurance Group, Inc                   100%

Selective Insurance Company of New York                 New York           Niagara Exchange Corp.                           100%

Selective Insurance Company of South Carolina           South Carolina     Selective Insurance Group, Inc.                  100%

Selective Insurance Company of the Southeast            North Carolina     Selective Insurance Group, Inc.                  100%

Selective Specialty Lines Brokerage, LLC                New Jersey         Selective Insurance Group, Inc.                   50%

Selective Technical Administrative Resources, Inc.      New Jersey         Selective Insurance Group, Inc.                  100%

Selective Way Insurance Company                         New Jersey         Selective Insurance Group, Inc.                  100%

SRM Insurance Brokerage, LLC                            New Jersey         Selective Way Insurance Company                   75%
                                                                           Selective Insurance Company of the Southeast      25%

Wantage Avenue Holding Company Inc                      New Jersey         Selective Insurance. Company of America          100%
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>5
<FILENAME>y47342ex23.txt
<DESCRIPTION>CONSENT AND OPINION OF INDEPENDENT AUDITORS
<TEXT>

<PAGE>   1

                                                                      EXHIBIT 23

                         CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Selective Insurance Group, Inc.:

The audits referred to in our report dated February 6, 2001 incorporated by
reference in the December 31, 2000 annual report on Form 10-K, included the
related financial statement schedules as of December 31, 2000, and for each of
the years in the three-year period ended December 31, 2000. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits. In our opinion, such 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.

We consent to incorporation by reference in the registration statements (No.'s
333-10477, 33-22450, 333-37501 and 333-10465) on Form S-8, and the registration
statements (No.'s 2-80881 and 33-30833) on Form S-3 of Selective Insurance
Group, Inc. and its subsidiaries of our reports dated February 6, 2001, relating
to the consolidated balance sheets of Selective Insurance Group, Inc. and its
subsidiaries as of December 31, 2000 and 1999, 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, 2000, and all related schedules,
which reports appear in, or are incorporated by reference in, the December 31,
2000 annual report on Form 10-K of Selective Insurance Group, Inc. and its
subsidiaries.


/s/ KPMG LLP

New York, New York
March 30, 2000

</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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