Summary of SELECTIVE INSURANCE GROUP INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
In this Quarterly Report on Form 10-Q, we discuss and make statements regarding our intentions, beliefs, current expectations, and projections regarding our company's future operations and performance. Such statements are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are often identified by words such as "anticipates," "believes," "expects," "will," "should," and "intends" and their negatives. We caution prospective investors that such forward-looking statements are not guarantees of future performance. Risks and uncertainties are inherent in our future performance. Factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to, those discussed under Item 1A. "Risk Factors" below. These risk factors may not be exhaustive. We operate in a continually changing business environment and new risk factors may emerge from time to time. We can neither predict such new risk factors nor can we assess the impact, if any, of such new risk factors on our businesses or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied in any forward-looking statements in this report. In light of these risks, uncertainties, and assumptions, the forward-looking events discussed in this report might not occur. We make forward-looking statements based on currently available information and assume no obligation to update these statements due to changes in underlying factors, new information, future developments, or otherwise.
Introduction
We offer property and casualty insurance products and human resource administration outsourcing services through our various subsidiaries. We classify our businesses into three operating segments: (i) Insurance Operations, which consists of commercial lines ("Commercial Lines") and personal lines, including our flood line of business ("Personal Lines"); (ii) Investments; and
(iii) Human Resource Administration Outsourcing ("HR Outsourcing"). These segments reflect a change from our historical segments of: Insurance Operations, Investments, and Diversified Insurance Services (which included federal flood insurance administrative services ("Flood") and HR Outsourcing). In the process of periodically reviewing our operating segments, we have considered the provisions set forth in accordance with Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("FAS 131"), and have reclassified our Flood operations to be included within our Insurance Operations segment, which reflects the way we are now managing this business. These reporting changes will better enable investors to view us the way our management views our operations as well as provide more consistency with how our peers report their business. Our revised segments are reflected throughout this report for all periods presented. The purpose of the Management's Discussion and Analysis ("MD&A") is to provide an understanding of the consolidated results of operations and financial condition and known trends and uncertainties that may have a material impact in future periods. Consequently, investors should read the MD&A in conjunction with the consolidated financial statements in our Annual report on Form 10-K for the year ended December 31, 2008 ("2008 Annual Report"). In the MD&A, we will discuss and analyze the following:
• Critical Accounting Policies and Estimates;

• Financial Highlights of Results for First Quarter 2009 and First Quarter 2008;

• Results of Operations and Related Information by Segment;

• Federal Income Taxes;

• Financial Condition, Liquidity, and Capital Resources;

• Off-Balance Sheet Arrangements; and

• Contractual Obligations and Contingent Liabilities and Commitments.

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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 consolidated financial statements. Those estimates and judgments that were most critical to the preparation of the 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 2008 Annual Report, pages 43 through 51, provides a discussion of each of these critical accounting policies.
Financial Highlights of Results for First Quarter 2009 and First Quarter 2008

                                                           Unaudited                 Change
                                                    Quarter ended March 31,           % or
($ in thousands, except per share amounts)            2009             2008          Points

Total revenues                                    $    369,565         439,047            (16 )%
Net (loss) income                                      (12,877 )        20,503           (163 )
Diluted net (loss) income per share                      (0.25 )          0.38           (166 )
Diluted weighted-average outstanding shares 1           52,352          53,882             (3 )
GAAP combined ratio                                      100.8 %          99.5            1.3  pts
Statutory combined ratio                                 100.2            98.3            1.9
Annualized return on average equity                       (5.7 )           7.7          (13.4 )

1 Diluted weighted-average shares outstanding represents weighted-average common shares outstanding adjusted for the impact of dilutive common stock equivalents, if any.

Net income decreased in First Quarter 2009 to a net loss of $12.9 million from net income of $20.5 million in First Quarter 2008 due to the following:
• Pre-tax realized losses on investment securities of $24.0 million in First Quarter 2009 compared to realized gains of $1.5 million in First Quarter 2008. This decrease reflects non-cash other-than-temporary impairment ("OTTI") charges of $27.1 million in First Quarter 2009 due to continuing market volatility and credit deterioration. There were no OTTI charges recorded in First Quarter 2008. For additional information regarding our realized gains and losses, including the OTTI charges, refer to the section below entitled "Investments."

• Net investment income earned of $15.7 million, pre-tax, in First Quarter 2009 compared to $37.9 million in First Quarter 2008. Reduced income levels in First Quarter 2009 were primarily driven by losses on our other investments portfolio, which includes alternative investments. The negative returns on our alternative investments, compared to modest returns a year ago, resulted from the continued volatility in the capital markets, the dislocation of the credit markets, and reduced values of financial assets globally that has been ongoing since the third quarter of 2008. Our alternative investments, which are accounted for under the equity method, primarily consist of investments in limited partnerships that report results to us, for the most part, on a one quarter lag and, as a result, the First Quarter 2009 pre-tax loss of $20.5 million reflects the performance for the majority of these investments through December 31, 2008.

• Underwriting losses of $3.0 million, pre-tax, in First Quarter 2009 compared to underwriting gains of $1.8 million, pre-tax, in First Quarter 2008. The underwriting loss in First Quarter 2009 compared to last year primarily reflects increased non-catastrophe property losses and higher loss costs on our casualty lines of business, partially offset by favorable prior year development on our workers compensation and personal automobile lines of business.

• The aforementioned pre-tax items, as well as a lower expected tax rate in 2009, resulted in a reduction in tax expense of $14.0 million in First Quarter 2009 compared to First Quarter 2008.

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Results of Operations and Related Information by Segment Insurance Operations
Our Insurance Operations segment writes property and casualty insurance business through seven insurance subsidiaries (the "Insurance Subsidiaries"). Our Insurance Operations segment sells property and casualty insurance products and services primarily in 22 states in the Eastern and Midwestern U.S. through approximately 950 independent insurance agencies. Our Insurance Operations segment consists of two components: (i) Commercial Lines, which markets primarily to businesses, and represents approximately 86% of net premium written ("NPW"), and (ii) Personal Lines, which markets primarily to individuals and represents approximately 14% of NPW. The underwriting performance of these lines is 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 2008 Annual Report. As mentioned above in the section entitled, "Introduction," effective First Quarter 2009, the results of our Flood operations are now included within our Insurance Operations segment, consistent with our management of these operations. This change to our segment reporting is reflected throughout this report for all periods presented.

Summary of Insurance Operations

                                                   Unaudited               Change
     All Lines                              Quarter ended March 31,         % or
     ($ in thousands)                         2009             2008        Points
     GAAP Insurance Operations Results:
     NPW                                  $    375,783         391,954          (4 )%

     Net premium earned ("NPE")                363,873         383,387          (5 )
     Less:
     Losses and loss expenses incurred         252,194         253,076           -
     Net underwriting expenses incurred        114,177         127,977         (11 )
     Dividends to policyholders                    465             535         (13 )

     Underwriting (loss) income           $     (2,963 )         1,799        (265 )%

     GAAP Ratios:
     Loss and loss expense ratio                  69.3 %          66.0         3.3  pts
     Underwriting expense ratio                   31.4 %          33.4        (2.0 )
     Dividends to policyholders ratio              0.1 %           0.1           -

     Combined ratio                              100.8 %          99.5         1.3

     Statutory Ratios:
     Loss and loss expense ratio                  69.3 %          65.9         3.4
     Underwriting expense ratio                   30.8 %          32.3        (1.5 )
     Dividends to policyholders ratio              0.1 %           0.1           -

     Combined ratio                              100.2 %          98.3         1.9  pts

• NPW decreased in First Quarter 2009 compared to First Quarter 2008 due to an insurance marketplace that is still very competitive and the economic recession. These factors are evidenced by the following:

• A $14.4 million decrease in endorsement and audit activity; and

• A $4.6 million decrease in net renewals, reflecting a one-point drop in retention to 77% in our Commercial Lines.

Partially offsetting these items was an improvement in new business, which has increased $7.2 million, to $81.9 million in First Quarter 2009 compared to First Quarter 2008.
Although renewal premiums are down year over year, we are experiencing a slowdown in the magnitude of Commercial Lines renewal pure price decreases, which amounted to 0.8% in First Quarter 2009 compared to 3.0% in First Quarter 2008. These price decreases were significantly less than current industry average decreases, which were reported at approximately 8% for the quarter. In addition, during the month of March, we saw our first month since April 2005 in which renewal pure price changes were not negative, but held steady at 0%.

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• NPE decreased in First Quarter 2009 compared to First Quarter 2008, consistent with the fluctuation in NPW for the twelve-month period ended March 31, 2009 as compared to the 12-month period ended March 31, 2008.

• The 3.3-point increase in the GAAP loss and loss expense ratio in First Quarter 2009 compared to First Quarter 2008 was primarily attributable to an increase of $8.0 million, or 3.0 points, in property losses, including approximately $6 million, or 1.7 points in prior year development, coupled with higher loss cost trends on our casualty lines of business. The increase in property losses were primarily non-catastrophe in nature, as catastrophe losses decreased $3.4 million, or 0.8 points, to $1.3 million in First Quarter 2009 compared to First Quarter 2008. Partially offsetting these items were: (i) continued profitability improvements in our workers compensation line of business due to the execution of our strategic initiatives on this line, which has led to favorable prior year development of approximately $7 million, or 1.9 points, in First Quarter 2009 compared to approximately $4 million, or 1.0 points, in First Quarter 2008; and (ii) increased favorable prior year development in First Quarter 2009 of approximately $3 million, or 0.8 points, from our personal automobile line of business related to a claim incurred prior to the establishment of the New Jersey Unsatisfied Claim and Judgment Fund ("UCJF").

• The decrease in the GAAP underwriting expense ratio in First Quarter 2009 compared to First Quarter 2008 was primarily attributable to several expense initiatives that we implemented in 2008 and during First Quarter 2009, including, but not limited to: (i) workforce reductions in 2008, which amounted to $3.4 million in First Quarter 2008; (ii) the re-domestication of two of the Insurance Subsidiaries to Indiana in June 2008; (iii) targeted changes to agency commissions that were implemented in most states in July 2008; and (iv) the elimination of retiree life insurance benefits for current employees amounting to a benefit of $4.2 million, pre-tax, in First Quarter 2009.

Insurance Operations Outlook
In 2009, we have begun to see a trend toward price moderation in our Insurance Operations segment. Our Commercial Lines renewal pure pricing decreased 0.8% for First Quarter 2009, an improvement compared to the 3.1% decrease for the full year 2008. As mentioned above, the price decreases that we were able to achieve were significantly less than current industry average decreases of approximately 8% for the quarter. In addition, as mentioned above, our pure renewal pricing on Commercial Lines remained flat during the month of March, which was the first time in almost three years that we did not experience a decrease in these rates. Early indications are that the industry experienced an average rate decrease of approximately 7% for the month of March. We believe these price decreases, achieved while maintaining a delicate balance with retention, demonstrate the overall strength of the relationships that we have with our independent agents, even in difficult economic times.
Regardless of the encouraging trend in pricing, premium growth continues to be a challenge due to the current difficulties brought on by the current recession and its impact on payrolls, gross receipts, and property values. In lieu of growing premiums at the expense of profitability, we continue to believe that the cycle management tools we have in place are performing as they were intended in these market conditions. These tools protect us from writing business that we believe will ultimately be unprofitable and will, over the long run as pricing and exposures improve, better position us to return to targeted return on equity levels.
Evidence of current soft market conditions can be seen in industry-wide projections for 2009. In its report entitled, "U.S. Property/Casualty - Review & Preview," A.M. Best projected the property and casualty industry-wide combined ratio in 2009 to be 101.1%. Conning Research & Consulting, Inc. ("Conning") has recently provided an industry forecast projecting the property and casualty industry-wide combined ratio to be 101.5% and premiums to decline 1.0% for 2009. Conning believes that it is unlikely that the industry-wide combined ratio will dip below 100% on a quarterly basis through 2010 unless catastrophe losses are abnormally low.
In addition, for 2009, Fitch Ratings ("Fitch") is projecting an industry-wide statutory combined ratio of 104.0%, reflecting their belief that underwriting results will not improve significantly as premiums are projected to grow by less than 1%. In addition, Fitch anticipates that underwriting results will be adversely impacted by higher expense ratios and less favorable reserve development, partially offset by a return to historical average catastrophe loss experience.

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Our Commercial Lines business reported a statutory combined ratio of 99.1%, and our Personal Lines business reported a statutory combined ratio of 107.0% for First Quarter 2009. In an effort to write profitable business 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.
Our focus for 2009 includes the following:
• Ongoing expense management initiatives including, among other things, the elimination of retiree life insurance benefits for current employees and controlled hiring practices, along with several initiatives taken in 2008 such as our workforce reduction initiatives, changes to agent commission programs, and the re-domestication of two of the Insurance Subsidiaries to Indiana, serve to benefit our expense ratio this year, and the ongoing impact of these initiatives will continue to benefit expenses going forward.

• Claims Strategic Initiative program underway with a focus on enhancing areas of: (i) workers compensation best practices and targeted case management; (ii) litigation management; (iii) enhanced potential fraud and recovery recognition through use of advanced systems analytics;
(iv) advanced claims automation; and (v) enhanced vendor management.

• Sales management efforts, including our market planning tools and leads program. Our market planning tools allow us to identify and strategically appoint additional independent agencies in and hire AMSs for underpenetrated territories. We have continued to expand our independent agency count, which now stands at approximately 950 agencies across our footprint. These independent insurance agencies are serviced by approximately 100 field-based AMSs who make hands-on underwriting decisions on a daily basis. In addition, we use our predictive modeling tools to help agents identify potential new customers.

• Technology that allows agents and our field teams to input business seamlessly into our systems, including our One & Done® small business system and our xSELerate® straight-through processing system. Premiums of approximately $295,000 per workday were processed through our One & Done® small business system during First Quarter 2009, up 9% from the same period last year.

• Strategically expanding our business in our footprint states, including Tennessee, in which we began operations in June 2008. In the first ten months of operations in this state, we wrote premium of $8.8 million.

For 2009, giving consideration to the impact of including our Flood business in our GAAP combined ratio through the segment change that was discussed earlier, we are providing updated combined ratio guidance with our expectation for the year being below 103% on a GAAP basis, down from our previous expectation that included a GAAP combined ratio below 103.5%, both of which reflect catastrophe losses of 1.4 points.

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Review of Underwriting Results by Line of Business

Commercial Lines Results

                                                   Unaudited               Change
     Commercial Lines                       Quarter ended March 31,         % or
     ($ in thousands)                         2009             2008        Points
     GAAP Insurance Operations Results:
     NPW                                  $    325,441         342,200          (5 )%

     NPE                                       311,545         332,091          (6 )
     Less:
     Losses and loss expenses incurred         211,745         213,189          (1 )
     Net underwriting expenses incurred         99,507         112,805         (12 )
     Dividends to policyholders                    465             535         (13 )

     Underwriting (loss) income           $       (172 )         5,562        (103 )%

     GAAP Ratios:
     Loss and loss expense ratio                  68.0 %          64.2         3.8  pts
     Underwriting expense ratio                   32.0 %          33.9        (1.9 )
     Dividends to policyholders ratio              0.1 %           0.2        (0.1 )

     Combined ratio                              100.1 %          98.3         1.8

     Statutory Ratios:
     Loss and loss expense ratio                  67.9 %          64.2         3.7
     Underwriting expense ratio                   31.1 %          32.5        (1.4 )
     Dividends to policyholders ratio              0.1 %           0.2        (0.1 )

     Combined ratio                               99.1 %          96.9         2.2  pts

• NPW decreased in First Quarter 2009 compared to First Quarter 2008 due to the very competitive insurance marketplace and the economic recession, which are primarily impacting our contractors business, which represents 42% of our Commercial Lines operations. These factors are evidenced by the following:

• A $13.9 million decrease in Commercial Lines endorsement and audit activity to a net return premium of $17.2 million; and

• A $6.4 million decrease in Commercial Lines net renewals, which includes a one-point decrease in retention, to 77%, coupled with Commercial Lines renewal pure price decreases of 0.8% in First Quarter 2009 compared to renewal pure price decreases of 3.0% in First Quarter 2008. As mentioned above, our First Quarter 2009 pure price decrease far surpasses the estimated industry pure price decrease of approximately 8%.

Partially offsetting these items was an improvement in new business, which has increased 12%, to $71.3 million, in First Quarter 2009 compared to First Quarter 2008.
• NPE decreased in First Quarter 2009 compared to First Quarter 2008, consistent with the fluctuation in NPW for the twelve-month period ended March 31, 2009 as compared to the twelve-month period ended March 31, 2008.

• The 3.8-point increase in the GAAP loss and loss expense ratio in First Quarter 2009 compared to First Quarter 2008 was primarily attributable to an increase of 2.9 points in non-catastrophe weather-related property losses, and an increase in casualty loss costs that have outpaced premium. Partially offsetting these items are: (i) continued profitability improvements in our workers compensation line of business due to the execution of our strategic initiatives on this line, which has led to favorable prior year development of approximately $7 million, or 2.2 points, in First Quarter 2009 compared to approximately $4 million, or 1.2 points, in First Quarter 2008; and (ii) a decrease in catastrophe losses of $2.7 million, or 0.8 points, to $0.9 million in First Quarter 2009 compared to First Quarter 2008.

• The 1.9-point improvement in the GAAP underwriting expense ratio in First Quarter 2009 compared to First Quarter 2008 was primarily attributable to the expense initiatives that we implemented in 2008 and First Quarter 2009 as mentioned above. In First Quarter 2009, we recognized a benefit of $2.5 million related to the elimination of retiree life insurance benefits that, when combined with the $2.9 million restructuring charge in First Quarter 2008, contributed to the year over year improvement in the underwriting ratio.

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

General Liability

                                                   Unaudited                Change
                                            Quarter ended March 31,          % or
    ($ in thousands)                          2009             2008         Points

    Statutory NPW                         $     99,804         111,283          (10 )%
    Statutory NPE                               94,224         103,269           (9 )
    Statutory combined ratio                     104.4 %          97.1          7.3  pts
    % of total statutory commercial NPW             31 %            33

The decrease in NPW in First Quarter 2009 compared to First Quarter 2008 was primarily driven by: (i) a $6.7 million decrease in endorsement and audit activity to a net return premium of $6.4 million; and (ii) a $3.9 million, or 4%, decrease in net renewals, reflecting a two-point decrease in retention to 74% in First Quarter 2009 compared to First Quarter 2008. These decreases are primarily driven by the competitive nature of the insurance marketplace and the current economic recession including a decline in the construction industry, in general. As of March 31, 2009, approximately 59% of our premium is subject to audit whereby actual exposure units (usually sales or payroll) are compared to estimates and a return premium, or additional premium, transaction occurs. We are experiencing the highest level of competition in our middle market and large account business. However, there have been indications of rate stabilization in the general liability line of business, which experienced renewal pure price decreases of only 0.4% in First Quarter 2009 compared to decreases of 2.5% in First Quarter 2008. This line of business experienced approximately $3 million of adverse prior year development in First Quarter 2009, adding 3.2 points to the statutory combined ratio. We continue to concentrate on our long-term strategies of improving profitability, focusing on diversifying our mix of business by writing more non-contractor classes of business, which typically experience lower volatility during economic cycles.

Workers Compensation
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