A.M. Best Affirms FSR, Debt Ratings of Selective Insurance

April 30, 2003

A.M. Best Co. has affirmed the financial strength rating of A+ (Superior) of New Jersey-based Selective Insurance Group.

The rating applies to the group’s five intercompany pool members led by Selective Insurance Company of America. Concurrently, A.M. Best has affirmed the “a-” senior debt rating of Selective’s senior unsecured convertible notes and “bbb+” rating of its convertible subordinated debentures. The outlook for all the ratings is stable.

The ratings reflect Selective’s solid capitalization, quality management team, well controlled execution capabilities, stable balance sheet and strong regional market presence within the small account commercial lines business segment assisted by the leveraging of its agency relationships.

Furthermore, the ratings recognize Selective’s disciplined underwriting culture, conservative investment philosophy and prudent capital management, which have contributed to consistent operating profitability. Selective’s financial leverage of 22.6 percent is moderate and includes funds held in trust ensuring partial payment of outstanding senior notes over the next three years. Earnings to fixed charges are strong at an estimated five times for 2003, while holding company cash flow is just sufficient to cover interest expense and shareholder dividends.

Partially offsetting these positive factors is the continued escalation in net underwriting leverage, the emergence of unfavorable prior year loss reserve development in 2001 and 2002 – primarily in auto liability and other liability lines – depressed operating performance in recent years and Selective’s continued relatively high geographic concentration in New Jersey.

While A.M. Best recognizes the improvements achieved through management’s diversification initiatives, Selective still generates approximately 40 percent of its premium in New Jersey.

Despite these challenges and weakened first quarter 2003 results attributable to winter storm losses, A.M. Best believes Selective’s improved underwriting and operating earnings (as evidenced in 2002) will trend still higher due to the continued re-underwriting and aggressive pricing of its predominant commercial lines book as well as the more favorable competitive and regulatory environments that have recently developed.

Since late 2001, Selective and other New Jersey automobile writers have benefited from more regulatory flexibility regarding rate filings and proposals for more accurate tiering and pricing of automobile risks. These positive changes, coupled with continued strong commercial lines performance, raise A.M. Best’s expectations for further earnings improvement in 2003.

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