• Financial Highlights of Results for Third Quarter 2008 and Nine Months 2008;

• Results of Operations and Related Information by Segment;

• Financial Condition, Liquidity, and Capital Resources;

• Off-Balance Sheet Arrangements;

• Contractual Obligations and Contingent Liabilities and Commitments; and

• Federal Income Taxes.

Critical Accounting Policies and Estimates These unaudited interim consolidated financial statements include amounts based on our informed estimates and judgments for those transactions that are not yet complete. Such estimates and judgments affect the reported amounts in the financial statements. Those estimates and judgments that were most critical to the preparation of the consolidated financial statements involved the following:
(i) reserves for losses and loss expenses; (ii) deferred policy acquisition costs; (iii) pension and postretirement benefit plan actuarial assumptions;
(iv) other-than-temporary investment impairments; (v) goodwill; and
(vi) reinsurance. These estimates and judgments require the use of assumptions about matters that are highly uncertain and, therefore, are subject to change as facts and circumstances develop. If different estimates and judgments had been applied, materially different amounts might have been reported in the financial statements. Our 2007 Annual Report, pages 37 through 44, provides a discussion of each of these critical accounting policies.

Financial Highlights of Results for Third Quarter 2008 and Nine Months 2008

                                                        Unaudited                                              Unaudited
                                                      Quarter ended               Change                   Nine Months ended               Change
Financial Highlights                                  September 30,                % or                      September 30,                  % or
($ in thousands, except per share amounts)        2008            2007            Points                2008              2007             Points

Revenues                                        $ 417,116         455,469               (8 )%        $ 1,315,581         1,379,617               (5 )%
Net income                                          8,992          37,119              (76 )              58,146           110,258              (47 )
Diluted net income per share                         0.17            0.66              (74 )                1.09              1.92              (43 )
Diluted weighted-average outstanding shares        52,994          56,434               (6 )              53,397            58,017               (8 )
GAAP combined ratio                                 101.5 %          98.6              2.9  pts            100.9 %            98.7              2.2  pts
Statutory combined ratio                             97.6 %          96.2              1.4                  98.2 %            96.3              1.9
Annualized return on average equity                   3.6 %          14.5            (10.9 ) pts             7.5 %            13.9             (6.4 ) pts

Net income decreased in Third Quarter and Nine Months 2008 compared to the same periods last year due to:
• A decrease in pre-tax net realized gains on investment securities of: (i) $25.4 million, to a net loss of $22.6 million, in Third Quarter 2008; and
(ii) $46.3 million, to a net loss of $19.1 million, in Nine Months 2008. These decreases reflect non-cash OTTI charges of $34.9 million in Third Quarter 2008 and $44.6 million in Nine Months 2008 due to the continuing market volatility and unprecedented collateral deterioration across the credit markets. For additional information regarding these OTTI charges, refer to the section below entitled, "Investments."

• A decrease in pre-tax underwriting results from our Insurance Operations segment of: (i) $10.9 million, to an underwriting loss of $5.7 million, in Third Quarter 2008, and (ii) $25.1 million, to an underwriting loss of $10.4 million, in Nine Months 2008. These deteriorations were primarily driven by increased catastrophe losses of $10.9 million, to $12.8 million, for Third Quarter 2008 and $16.9 million, to $30.9 million, for Nine Months 2008. These increased catastrophe losses were mainly related to 2008 storm activity in our southern and mid-western states, including an estimated $8.5 million of losses and loss adjustment expenses related to Hurricane Ike. In the quarter, we had an increase of $2 million, to $7 million, in favorable prior year development, while in Nine Months 2008, we had a $2 million decrease in favorable prior year development, to $10 million.

• A decrease in pre-tax net investment income of: (i) $7.5 million, to $36.1 million, in Third Quarter 2008; and (ii) $11.7 million, to $112.5 million, in Nine Months 2008. These decreases were primarily due to lower returns on our other investments portfolio, which includes alternative investments, as well as losses on our externally managed equity trading portfolio. These lower returns, compared to strong returns a year ago, resulted from falling financial asset values due to the general weakness in the financial markets and the significant slowdown in merger and acquisition activity stemming from the current tight credit environment. Our equity trading portfolio has experienced losses due to the sell off in the equity markets, as well as the collapse in commodity prices in Third Quarter 2008.

• Federal income taxes decreased by: (i) $16.0 million in Third Quarter 2008, to a benefit of $6.4 million; and (ii) $26.3 million in Nine Months 2008, to an expense of $7.1 million. These decreases reflect the tax impact of reduced underwriting results and realized losses recognized mainly due to non-cash OTTI charges.

Diluted net income per share decreased in Third Quarter and Nine Months 2008 compared to Third Quarter and Nine Months 2007 due to the items described above, partially offset by the reduction in diluted weighted-average shares during the 12-month period ending September 30, 2008. During that period, we repurchased approximately 1.8 million shares under our authorized repurchase programs and net-share settled our outstanding senior convertible notes resulting in the issuance of approximately 1.2 million shares as well as the elimination of approximately 3.2 million common stock equivalents.

Results of Operations and Related Information by Segment Insurance Operations
Our Insurance Operations segment writes property and casualty insurance business through our Insurance Subsidiaries. Our Insurance Operations segment sells property and casualty insurance products and services primarily in 22 states in the Eastern and Midwestern United States through approximately 940 independent insurance agencies. Our Insurance Operations segment consists of two components:
(i) commercial lines ("Commercial Lines"), which markets primarily to businesses, and represents approximately 86% of net premiums written ("NPW"), and (ii) personal lines ("Personal Lines"), which markets primarily to individuals, and represents approximately 14% of NPW. The underwriting performances of these lines are generally measured by four different statutory ratios: (i) loss and loss expense ratio; (ii) underwriting expense ratio;
(iii) dividend ratio; and (iv) combined ratio. For further details regarding these ratios see the discussion in the "Insurance Operations Results" section of Item 1. "Business." of our 2007 Annual Report. Effective June 30, 2008, two of our Insurance Subsidiaries, Selective Insurance Company of the Southeast and Selective Insurance Company of South Carolina, changed their regulatory state of domicile from North Carolina and South Carolina, respectively, to Indiana. This change will help us achieve certain operational efficiencies that will generate ongoing pre-tax savings of approximately $2 million annually. Summary of Insurance Operations

                                 Unaudited                                        Unaudited
                               Quarter ended             Change               Nine Months ended             Change
All Lines                      September 30,              % or                  September 30,                % or
($ in thousands)            2008           2007          Points             2008             2007           Points
GAAP Insurance
Operations Results:
NPW                       $ 400,541        409,523           (2) %         1,177,610        1,231,631            (4 )%

NPE                         372,510        378,260            (2 )         1,128,872        1,134,624            (1 )
Less:
Losses and loss
expenses incurred           255,446        246,759             4             762,276          744,288             2
Net underwriting
expenses incurred           121,651        124,939            (3 )           373,772          371,694             1
Dividends to
policyholders                 1,151          1,440           (20 )             3,265            3,949           (17 )

Underwriting
(loss) income             $  (5,738 )        5,122          (212 )%          (10,441 )         14,693          (171 )%

GAAP Ratios:
Loss and loss expense
ratio                          68.6 %         65.2           3.4  pts           67.5 %           65.6           1.9  pts
Underwriting expense
ratio                          32.6 %         33.0          (0.4 )              33.1 %           32.8           0.3
Dividends to
policyholders ratio             0.3 %          0.4          (0.1 )               0.3 %            0.3             -

Combined ratio                101.5 %         98.6           2.9               100.9 %           98.7           2.2

Statutory Ratios:1
Loss and loss expense
ratio                          67.9 %         64.9           3.0                67.0 %           65.1           1.9
Underwriting expense
ratio                          29.4 %         30.9          (1.5 )              30.9 %           30.9             -
Dividends to
policyholders ratio             0.3 %          0.4          (0.1 )               0.3 %            0.3             -

Combined ratio                 97.6 %         96.2           1.4  pts           98.2 %           96.3           1.9  pts

1 The
statutory
ratios
include the
flood line
of business,
which is
included in
the
Diversified
Insurance
Services
Segment on a
GAAP basis
and
therefore
excluded
from the
GAAP ratios.
The total
statutory
combined
ratio
excluding
flood was
98.5% for
Third
Quarter 2008
and 98.9%
for Nine
Months 2008
compared to
96.8% for
Third
Quarter 2007
and 97.0%
for Nine
Months 2007.

• NPW decreased in Third Quarter and Nine Months 2008 compared to the same periods last year due to the highly competitive insurance marketplace and the slowing economy. These factors are evidenced in our new business, which decreased by $8.1 million, to $84.5 million, in Third Quarter 2008 and $36.1 million, to $233.6 million, in Nine Months 2008. Endorsement and audit activity decreased by $1.6 million, to a net premium return to policyholders of $0.9 million in Third Quarter 2008 and $23.2 million, to a net premium return to policyholders of $9.0 million, in Nine Months 2008. In addition, there were reductions in assumed business from voluntary school board and mandatory commercial automobile pools in both the quarter and year-to-date periods.

In addition to the items noted above, we have seen pressure on renewal pricing. Renewal price decreases, including exposure, were 2.0% in Third Quarter 2008 and 1.2% in Nine Months 2008 compared to renewal prices that remained flat in Third Quarter and Nine Months 2007. Despite this renewal pricing pressure, net renewals, excluding endorsement activity, increased by $10.2 million, to $329.4 million, in Third Quarter 2008 and $17.7 million, to $990.2 million, in Nine Months 2008 compared to the same periods last year. These renewals include retention that was relatively flat in both the quarter and year-to-date periods. In response to the highly competitive marketplace, our agents are actively managing our books of business by renewing accounts as much as 60 days in advance of the policy expiration date.

• As the result of decreased NPW over the last 12 months, NPE declined in Third Quarter and Nine Months 2008 compared to the same periods last year.

• The GAAP loss and loss expense ratio increased 3.4 points in Third Quarter and 1.9 points in Nine Months 2008 compared to same periods last year, reflecting increased catastrophe losses related to 2008 storm activity primarily in our southern and mid-western regions. These storms, including Hurricane Ike in Third Quarter 2008, added a total of $12.8 million, or 3.4 points, to losses in Third Quarter 2008 and $30.9 million, or 2.7 points, in Nine Months 2008. For the comparable periods last year, catastrophe losses added $1.9 million, or 0.5 points, and $14.0 million, or 1.2 points, respectively.

While this type of loss activity is part of the normal volatility in our property lines of business, we continue to manage our claims process in an effort to reduce our loss and loss expense ratio. To that end, we have instituted a number of initiatives that are focused on best practices in the following areas:

• Claims automation;

• Claims quality and control;

• Litigation management;

• Compliance and bill review;

• Workers compensation review; and

• Salvage and subrogation.

We anticipate that these initiatives will reduce cycle time and improve workflows, resulting in the quicker establishment of case reserves, thus leading to lower ultimate loss costs through reduced legal and loss adjustment expenses. The quicker establishment of loss reserves inflates our severity statistics in the near term, but we expect the longer-term benefit to be a refined management of the claims process.

• The reduction in the GAAP underwriting expense ratio in Third Quarter 2008 compared to Third Quarter 2007 is primarily driven by lower expected payments of profit-based incentives to our agents and employees, reflecting lower NPW and underwriting results during 2008, and benefits realized from our cost containment initiatives including: (i) targeted changes to our agency commission program implemented in July 2008 and expected to generate annual savings of $7 million, pre-tax; (ii) the re-domestication of two of our insurance subsidiaries effective June 30, 2008, to achieve operational efficiencies with an anticipated pre-tax savings of $2 million annually; and (iii) our workforce reduction in the first quarter of 2008.

The increase in the GAAP underwriting expense ratio in Nine Months 2008 compared to Nine Months 2007 is primarily attributable to a pre-tax restructuring charge of $3.6 million, or 0.3 points, in the first quarter of 2008 related to our workforce reduction, coupled with reductions in NPE as compared to last year. Partially offsetting these increases are the benefits realized from the cost containment initiatives mentioned above.

In both the quarter and year-to-date periods, the underwriting expense ratio is higher on a GAAP basis than on a statutory basis. This is due to the fact that the impact of our cost containment initiatives, while recognized immediately on a statutory basis, is recognized on a GAAP basis over a 12-month period. However, improvements in the underwriting expense ratio resulting from these initiatives could potentially be offset by reduced premium levels.

Insurance Operations Outlook
Historically, the results of the property and casualty insurance industry have experienced significant fluctuations due to competition, economic conditions, interest rates, loss cost trends, and other factors. Since 2006, the industry has been experiencing a softening market under which both personal and commercial lines pricing are declining. In the first six months of 2008, premiums within the U.S. property and casualty insurance industry declined approximately $1.6 billion, or 0.7%. The industry's overall combined ratio deteriorated to 102.1%, according to A.M. Best's "U.S. Property/Casualty - 6-Month Financial Review" report dated September 23, 2008. This combined ratio deterioration was mainly due to continued price softening, challenging market conditions, unusually high catastrophe losses, and significant underwriting losses reported by mortgage and financial guaranty insurers. A.M. Best believes competitive pressures will continue in virtually all lines of business and top-line growth will continue to be under pressure for the U.S. property and casualty industry. We believe this pressure will put further stress on bottom line results. In its report entitled, "A.M. Best Revises Year-End 2008 Projections for the U.S. P/C Industry," A.M. Best increased its projection for the property and casualty industry-wide combined ratio for 2008 to 103.2% up from its initial projection of 98.6%, with commercial and personal lines projected to end the year at 104.0% and 102.5%, respectively. The initial projections for these lines were 97.5% and 99.5%, respectively. In an effort to grow our business profitably in the current commercial and personal lines market conditions, we have implemented a clearly defined plan to improve risk selection and mitigate higher frequency and severity trends to complement our strong agency relationships and unique field-based model. Some of the tools we use to lower frequency and severity are our business analytics initiatives, including knowledge management and predictive modeling, safety management, managed care, and enhanced claims review.
We also have developed market-planning tools that allow us to identify and strategically appoint additional independent agencies and agency management specialists ("AMSs") in under-penetrated territories with classes of business in which we historically have been profitable. During Nine Months 2008, the Insurance Subsidiaries added about 90 independent insurance agencies, bringing our total agency count to approximately 940. These independent insurance agencies are serviced by approximately 100 field-based AMSs who make hands-on underwriting decisions on a daily basis.
In addition to this "high touch" component of our business model, we have developed technology that allows agents and the Insurance Subsidiaries' field teams to input business seamlessly into our systems, which, with our business analytic tools, also allows them to select and price accounts at optimal levels. In 2008, we received the Commercial Lines Interface Carrier of the Year award from the Applied Systems Client Net ("ASCnet"), the user group for Applied Systems® agency management technology. We received this award in recognition of our superior download and real-time interface technology with our independent agents.
Technology that allows for the seamless placement of business into our systems includes our One & Done® small business system and our xSELerate® straight-through processing system. Premiums of approximately $270,000 per workday were processed through our One & Done® small business system during Nine Months 2008, up 12% from the same period in 2007. We have set a multi-year small business growth target of $350,000 in One & Done®business per work day, and in 2008 our efforts are centered on: (i) better managing price points and scale;
(ii) implementing a more comprehensive marketing and branding strategy; and
(iii) updating the distribution model to address agent and customer needs. Although overall commercial lines new business was down 17% in Nine Months 2008 compared to Nine Months 2007, our One & Done® new business was up 12% for the same comparable periods. We also continue to pursue our organic growth strategy. In June 2008, we entered our 22nd footprint state, Tennessee, where we initially appointed 11 agencies and started writing Commercial Lines business. We expect to begin writing Personal Lines business in Tennessee in the fourth quarter of 2008. We are taking note of opportunities that marketplace competition may be creating and do not rule out making an opportunistic acquisition.

Review of Underwriting Results by Line of Business

Commercial Lines Results

                                 Unaudited                                        Unaudited
                               Quarter ended             Change               Nine Months ended             Change
Commercial Lines               September 30,              % or                  September 30,                % or
($ in thousands)            2008           2007          Points             2008             2007           Points
GAAP Insurance
Operations Results:
NPW                       $ 344,309        355,669            (3 )%        1,015,433        1,077,394            (6 )%

NPE                         319,651        327,981            (3 )           972,660          982,958            (1 )
Less:
Losses and loss
expenses incurred           213,859        209,430             2             643,181          629,753             2
Net underwriting
expenses incurred           104,058        108,161            (4 )           321,345          320,719             -
Dividends to
policyholders                 1,151          1,440           (20 )             3,265            3,949           (17 )

Underwriting income       $     583          8,950           (93 )%            4,869           28,537           (83 )%

GAAP Ratios:
Loss and loss expense
ratio                          66.9 %         63.9           3.0  pts           66.1 %           64.1           2.0  pts
Underwriting expense
ratio                          32.5 %         33.0          (0.5 )              33.1 %           32.6           0.5
Dividends to
policyholders ratio             0.4 %          0.4             -                 0.3 %            0.4          (0.1 )

Combined ratio                 99.8 %         97.3           2.5                99.5 %           97.1           2.4

Statutory Ratios:
Loss and loss expense
ratio                          66.5 %         63.4           3.1                65.6 %           63.7           1.9
Underwriting expense
ratio                          29.8 %         31.6          (1.8 )              31.5 %           31.0           0.5
Dividends to
policyholders ratio             0.4 %          0.4             -                 0.3 %            0.4          (0.1 )

Combined ratio                 96.7 %         95.4           1.3  pts           97.4 %           95.1           2.3  pts

• NPW decreased in Third Quarter and Nine Months 2008 compared to the same periods last year due to the highly competitive insurance marketplace and the slowing economy. These factors are evidenced in total Commercial Lines new business, which decreased by $8.6 million, to $73.5 million, in Third Quarter 2008 and $41.8 million, to $199.7 million, in Nine Months 2008. Endorsement and audit activity decreased by $1.5 million, to a net premium return to policyholders of $1.1 million in Third Quarter 2008 and $23.1 million, to a net premium return to policyholders of $9.9 million in Nine Months 2008. In addition, there were reductions in assumed business from voluntary school board and mandatory commercial automobile pool assumptions in both the quarter and year-to-date periods.

We also have seen pressure on renewal pricing which decreased, including exposure, 2.0% in Third Quarter 2008 and 1.2% in Nine Months 2008. These renewal prices remained flat in both Third Quarter and Nine Months 2008. Despite the pricing pressure, net renewals, excluding endorsement activity, increased by $8.9 million, to $283.4 million, in Third Quarter 2008 and $16.2 million, to $858.8 million, in Nine Months 2008 compared to the same periods last year. These renewals include retention that was relatively flat in both the quarter and year-to-date periods. In response to the highly competitive marketplace, our agents are actively managing our books of business by renewing accounts as much as 60 days in advance of the policy expiration date.

• The GAAP loss and loss expense ratio increased 3.0 points in Third Quarter 2008 and 2.0 points in Nine Months 2008 compared to the same periods last year, reflecting an increase in catastrophe losses. These losses, which in 2008 are the result of storms in our southern and mid-west regions, added $10.5 million, or 3.2 points, to the loss and loss expense ratio in Third Quarter 2008 and $25.5 million, or 2.6 points, in Nine Months 2008. For the comparable periods last year, catastrophe losses added $1.6 million, or 0.5 points, and $11.0 million, or 1.1 points, respectively.

• The reduction in the GAAP underwriting expense ratio in Third Quarter 2008 . . .