(1) Title
of each class of securities to which transaction applies:
(2) Aggregate
number of securities to which transactions applies:
(3) Per
unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN
BENEFICIAL OWNERS
Security Ownership of Management
The following table shows as of February 19, 2016:
|
§
|
The number
of shares of Selective common stock beneficially owned by each director, the Chairman
of the Board and Chief Executive Officer (the “Chief Executive Officer” or
“CEO”), the Chief Financial Officer, and the other named executive officers,
as described in our Compensation Discussion and Analysis in this Proxy Statement; and
|
|
§
|
The number
of shares of Selective common stock beneficially owned by our directors and executive
officers as a group.
|
|
Number
of Shares
|
|
Name
of Beneficial Owner
|
Common
Stock
|
Options
Exercisable
Within 60 Days of
February 19, 2016
|
Total
Shares
Beneficially
Owned
(1)
|
Percent
of
Class
|
Bauer,
Paul D.
|
73,982
|
33,871
|
107,853
|
*
|
Brown,
A. David
|
17,974
|
28,840
|
46,814
|
*
|
Burville,
John C.
|
68,920
|
33,871
|
102,791
|
*
|
Doherty,
Robert Kelly
|
10,000
|
0
|
10,000
|
*
|
Lanza,
Michael H.
|
37,622
|
0
|
37,622
|
*
|
Marchioni,
John J.
|
150,868
|
17,107
|
167,975
|
*
|
Morrissey,
Michael J.
|
16,737
|
11,565
|
28,302
|
*
|
Murphy,
Gregory E.
|
366,553
|
20,587
|
387,140
|
1%
|
Nicholson,
Cynthia S.
|
30,355
|
7,953
|
38,308
|
*
|
O’Kelley,
Ronald L.
|
45,542
|
33,871
|
79,413
|
*
|
Rue,
William M.
|
419,712
(2)
|
33,871
|
453,583
|
1%
|
Scheid,
John S.
|
6,120
|
0
|
6,120
|
*
|
Thatcher,
Dale A.
|
119,630
|
12,953
|
132,583
|
*
|
Thebault,
J. Brian
|
87,153
(3)
|
33,871
|
121,024
|
*
|
Urban,
Philip H.
|
6,362
|
0
|
6,362
|
*
|
All
directors and executive officers, as a group (15 persons)
|
1,457,530
|
268,360
|
1,725,890
|
3%
|
* Less than 1% of the common stock
outstanding.
(1)
No directors or executive
officers hold Selective common stock in margin accounts or have Selective common stock pledged for a loan or stock purchase.
(2)
Includes: (i) 42,122
shares held by Chas. E. Rue & Son, Inc. t/a Rue Insurance (“Rue Insurance”), an independent insurance agency of
which Mr. Rue is Chairman and owner of more than a 10% equity interest (see the section entitled, “Transactions with Related
Persons” of this Proxy Statement for more information); and (ii) 5,226 shares held by Mr. Rue’s wife.
(3)
Includes 102 shares
held in custody for, and 115 shares held by, a daughter of Mr. Thebault.
Security Ownership of Certain Beneficial Owners
The following table lists the only persons or groups known to Selective
to be the beneficial owners of more than 5% of any class of Selective’s voting securities as of December 31, 2015, based
on Schedules 13G/A filed by the beneficial owners on January 27, 2016, February 9, 2016, and February 11, 2016, respectively,
with the SEC.
Title
of Class
|
Name and Address
of Beneficial
Owner
|
Amount
and Nature
of Beneficial
Ownership
|
Percent
of Class
|
Common
Stock
|
BlackRock, Inc.
55 East 52nd
Street
New York, NY
10055
|
5,473,631 shares
of common stock
|
9.6%
|
Common
Stock
|
Dimensional Fund
Advisors LP
Building One
6300 Bee Cave
Road
Austin, TX 78746
|
4,860,057 shares
of common stock
|
8.5%
|
Common
Stock
|
The Vanguard
Group, Inc.
100 Vanguard
Blvd.
Malvern, PA 19355
|
4,007,763 shares
of common stock
|
7.0%
|
EXECUTIVE OFFICERS
The names of our executive officers and their
ages, positions, and biographies are set forth below. Our executive officers are appointed by, and serve at the discretion of,
our board of directors.
EXECUTIVE
OFFICERS
|
Gregory E. Murphy
, 60
Chairman and Chief Executive Officer
|
§
For
information regarding Mr. Murphy, please see the section entitled, “Information about Proposal 1 – Director
Nominees” of this Proxy Statement.
|
John J. Marchioni
, 46
President and Chief Operating Officer
|
§
Present
position since 2013.
§
Executive
Vice President, Insurance Operations, Selective, 2010 to 2013.
§
Executive
Vice President, Chief Underwriting and Field Operations Officer, Selective, 2008 to 2010.
§
Executive
Vice President, Chief Field Operations Officer, Selective, 2007 to 2008.
§
Senior
Vice President, Director of Personal Lines, Selective, 2005 to 2007.
§
Various
insurance operation and government affairs positions, Selective, 1998 to 2005.
§
Director,
Consumer Agent Portal, LLC, since 2011.
§
Director,
Commerce and Industry Association of New Jersey, since November 2015.
§
Chartered
Property Casualty Underwriter (CPCU).
§
Princeton
University (B.A.).
§
Harvard
University (Advanced Management Program).
|
EXECUTIVE OFFICERS
|
Dale A. Thatcher
, 54
Executive Vice President, Chief Financial Officer and Treasurer
|
§
Present
position 2003 to 2010 and since March 2016.
§
Executive
Vice President and Chief Financial Officer, Selective, 2010 to March 2016.
§
Senior
Vice President, Chief Financial Officer and Treasurer, Selective, 2000 to 2003.
§
Certified
Public Accountant (Ohio) (Inactive).
§
Chartered
Property and Casualty Underwriter (CPCU).
§
Chartered
Life Underwriter (CLU).
§
Member,
American Institute of Certified Public Accountants.
§
Member,
Ohio Society of Certified Public Accountants.
§
Member,
Financial Executives Institute.
§
Member,
Insurance Accounting and Systems Association.
§
Member,
National Investor Relations Institute.
§
Member,
Society of Chartered Property and Casualty Underwriters.
§
Member,
American Society of Chartered Life Underwriters.
§
University
of Cincinnati (B.B.A. and M.B.A.).
§
Harvard
University (Advanced Management Program).
|
Michael H. Lanza
, 54
Executive Vice President, General Counsel, and Chief Compliance
Officer
|
§
Present
position since 2007.
§
Senior
Vice President and General Counsel, Selective, 2004 to 2007.
§
Trustee,
Newton Medical Center Foundation, since 2014.
§
Member,
Society of Corporate Secretaries and Corporate Governance Professionals.
§
Member,
National Investor Relations Institute.
§
University
of Connecticut (B.A.).
§
University
of Connecticut School of Law (J.D.).
|
TRANSACTIONS WITH RELATED PERSONS
William M. Rue, Director, is Chairman, and owns more than 10% of
the equity, of Rue Insurance, a general independent retail insurance agency. Rue Insurance has been an appointed independent agent
of Selective’s insurance subsidiaries since 1928, and Selective expects that relationship to continue in 2016. The appointment
of Rue Insurance as an independent agent was made on similar terms and conditions as other Selective agents and includes the right
to participate in the Amended and Restated Selective Insurance Group, Inc. Stock Purchase Plan for Independent Insurance Agencies
(2010). Mr. Rue’s son is President, and an employee, of Rue Insurance and Mr. Rue’s daughter is an employee of Rue
Insurance. In 2015, Rue Insurance placed insurance policies with Selective’s insurance subsidiaries. Direct premiums written
associated with these policies was $9.6 million in 2015. In return, Selective’s insurance subsidiaries paid standard market
commissions to Rue Insurance of $1.7 million. For additional information regarding Mr. Rue, see the section entitled, “Information
about Proposal 1 – Director Nominees” of this Proxy Statement.
Review, Approval, or Ratification of Transactions with
Related Persons
Selective has a written Related Person Transactions Policy and
Procedures (the “Related Person Policy”).
The Related Person Policy defines “Related Person Transactions”
as any transaction, arrangement, or relationship in which Selective or any of its subsidiaries was, is, or will be a participant
and the amount involved exceeds $20,000, and in which any “Related Person” had, has, or will have a direct or indirect
interest. A “Related Person” under the Related Person Policy is generally: (i) any director, executive officer, or
nominee to become director of Selective or an immediate family member of such person; (ii) a beneficial owner of more than 5%
of Selective’s common stock or an immediate family member of such beneficial owner; and (iii) any firm, corporation, or
other entity in which any person included in (i) or (ii) is employed or is a general partner or principal or in a similar position
or in which such person has a 5% or greater beneficial ownership interest in Selective’s common stock.
Under the Related Person Policy, the Audit Committee (or Chairperson
of the Audit Committee if between meetings) must approve Related Person Transactions. In its review, the Audit Committee considers
all available relevant facts and circumstances of the proposed transaction, including: (i) the benefits to Selective; (ii) the
impact on a director’s independence; (iii) the availability of other sources for comparable products and services; (iv)
the terms of the transaction; and (v) the terms available to unrelated third parties or to employees generally. No Audit Committee
member may participate in any review, consideration, or approval of any Related Person Transaction in which such director or any
of his or her immediate family members is the Related Person. The Audit Committee only approves those Related Person Transactions
that it considers are in, or not inconsistent with, the best interests of Selective and its stockholders.
Director Independence
The Board of Directors has determined that all directors are independent
under NASDAQ and SEC rules and regulations – except Messrs. Murphy and Rue. In making its determination, the Board considered
various transactions, relationships, or arrangements that relate to the directors. For a description of the transactions, relationships,
or arrangements related to Mr. Rue, see the section entitled, “Transactions with Related Persons.”
When the Board determined the independence of Ronald L. O’Kelley,
it considered that two of his daughters and a son-in-law are employed with companies with which we do business. As: (i) Mr. O’Kelley,
his daughters, and son-in-law have no involvement in such transactions; (ii) the relationships with such companies pre-date the
employment of his daughters with these companies and his daughter’s marriage to the above-mentioned son-in-law; and (iii)
the amount of revenue involved in such arrangements is immaterial to the business of such entities, the Board determined that
these arrangements do not affect Mr. O’Kelley’s independence under applicable NASDAQ and SEC rules and regulations.
In 2013, a daughter of Mr. O’Kelley became employed by Liberty
Mutual Insurance Company (“Liberty Mutual”) as a personal lines homeowners claims special projects implementation
manager. One of our insurance subsidiaries has had an agreement since 2011 with a Liberty Mutual subsidiary that provides long-term
disability insurance and long-term, short-term and related disability management services to Selective and its employees. The
aggregate annual premium Selective pays for these services is approximately $652,000, including approximately $253,000
of
contributions by Selective’s employees for supplemental disability insurance coverage. Liberty Mutual’s aggregate
revenues for 2015 were approximately $37.6 billion. Mr. O’Kelley’s daughter has no involvement with Selective’s
insurance program with Liberty Mutual. In 2014, another daughter of Mr. O’Kelley became Managing Director of State Street
Global Markets, LLC, a subsidiary of State Street Corporation (“State Street”). Selective paid State Street Bank and
Trust Company, a subsidiary of State Street, approximately $233,000 in 2015 for security custodial and banking services, and approximately
$138,000 to Princeton Financial Systems, another subsidiary of State Street, for use of a software system. State Street’s
aggregate revenues for 2015 were approximately $10.4 billion. Mr. O’Kelley’s daughter has no involvement with these
transactions. This same daughter married the Vice President, Executive Relationship Manager – US / Canada of American International
Group, Inc. (“AIG”). AIG is a capital contributor to a Lloyd’s syndicate, Ascot Underwriting, that participated
on certain layers of our 2015 casualty reinsurance treaty, and received approximately $80,000 in ceded premiums in 2015 related
to such participation. In addition, National Union Fire Insurance Company of Pittsburgh (“National Union”), a subsidiary
of AIG, participated in our 2008 national workers compensation reinsurance pool quota share treaty. In 2015, we received approximately
$44,000 in recovered net losses under that treaty from National Union. Neither Mr. O’Kelley’s daughter, nor his son-in-law,
has any involvement with these payments under these treaties.
When the Board determined the independence of John S. Scheid, it
considered that we currently provide insurance coverage to the Messmer Catholic Schools (“Messmer”), a charitable
organization that supports Wisconsin independent schools of which Mr. Scheid has been a Director since 2013 and Chairman since
January 2016. We provide the insurance coverage to Messmer on terms no more favorable than to other third parties. As Mr. Scheid
has no involvement in the securing of such insurance policy coverage, and his relationship with Messmer pre-dates his membership
on our Board, the Board determined that these arrangements do not affect Mr. Scheid’s independence under applicable NASDAQ
and SEC rules and regulations.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE
Section 16(a) of the Exchange Act, requires Selective’s directors
and executive officers, and persons who beneficially own more than 10% of a registered class of Selective’s equity securities,
to file with the SEC initial reports of beneficial ownership and reports of changes in beneficial ownership of Selective’s
equity securities. Directors, executive officers, and greater than 10% stockholders are required by SEC regulations to furnish
Selective with copies of all Section 16(a) Exchange Act reports they file. Based solely on Selective’s review of the provided
copies of Forms 3, 4, and 5, or written representations from certain reporting persons that Forms 5 were not required, Selective
believes that all directors, executive officers, and greater than 10% beneficial owners timely met all reporting requirements
under Section 16(a) for the fiscal year ended December 31, 2015.
CORPORATE GOVERNANCE
Corporate Governance Guidelines
Selective has established Corporate Governance Guidelines that
are available for review in the Corporate Governance subsection of the Investors section of Selective’s website,
www.selective.com
.
These guidelines provide for the election of a Lead Independent Director, who supervises meetings of Selective’s independent
directors that occur at least semi-annually. Paul D. Bauer is presently the Lead Independent Director. In 2015, Selective’s
independent directors met four times outside the presence of management.
All members of the Audit Committee, the Corporate Governance and
Nominating Committee, and the Salary and Employee Benefits Committee are independent directors under NASDAQ and SEC rules and
regulations.
Majority Voting for Directors in Uncontested Elections
Selective’s Board of Directors has adopted a majority voting
policy for uncontested elections of incumbent directors. To be re-elected to the Board, an incumbent director must receive a majority
vote by stockholders, unless the Corporate Secretary determines that the number of nominees exceeds the number of directors to
be elected. If any incumbent director nominee receives less than a majority of votes cast, the following process must be followed:
|
§
|
The incumbent
director must tender his or her resignation to the Chairman of the Board within five
days following certification of the meeting’s election results.
|
|
§
|
Within 45 days
after the stockholders’ meeting, the Corporate Governance and Nominating Committee
will make a recommendation to the Board regarding whether to accept the director’s
resignation. In determining and making its recommendation to the Board, the committee
may consider any factors it deems relevant and a range of possible alternatives concerning
the director’s tendered resignation.
|
|
§
|
Within 90 days
after the stockholders’ meeting, the Board of Directors shall formally act on the
Corporate Governance and Nominating Committee’s recommendation and, within four
business days of doing so, shall file with the SEC a Form 8-K in which it discloses its
decision, the rationale for its decision, and the process it followed in reaching the
decision to accept or reject the director’s tendered resignation.
|
|
§
|
Any incumbent
director who fails to receive a majority of votes cast and tenders resignation may not
participate or vote in the deliberations of the Corporate Governance and Nominating Committee
or the Board related to his or her resignation. If every member of the Corporate Governance
and Nominating Committee fails to receive a majority vote at the same stockholders’
meeting, then the independent directors who received a majority vote and any independent
directors who did not stand for re-election must appoint from themselves an ad hoc Board
committee to consider the tendered resignations and make a recommendation to the Board
whether it should accept them. If fewer than three directors would constitute an ad hoc
committee, the entire Board (other than the individual director whose resignation is
being considered) will make the determination to accept or reject the director’s
resignation.
|
Stock Ownership and Retention Requirements and Hedging
Selective believes that stock ownership by directors and management
encourages the enhancement of stockholder value. Selective’s stock ownership guidelines, which are based on prevailing corporate
governance practices, are included in our Corporate Governance Guidelines, which are available in the Corporate Governance subsection
of the Investors section of
www.selective.com
.
The following table shows the common stock ownership guidelines
for our directors and certain officers. Each director must meet the guidelines within five years of his/her first election to
the Board and each officer must meet the guidelines on the later of March 31, 2015 or within six years of attaining the specified
position:
Position
|
Requirement
|
Directors
|
5 x annual
retainer
|
Chairman
and CEO
|
4 x base
salary
|
Chief
Operating Officer
|
3.5 x base
salary
|
Senior
Executive Vice Presidents and Executive Vice Presidents
|
2.5 x base
salary
|
Senior
Vice Presidents or equivalent job grade
|
1.5 x base
salary
|
In calculating ownership under the guidelines:
|
§
|
Shares of
Selective common stock currently owned, awards of restricted stock or restricted stock
units (including related dividend equivalent units) not yet vested, and shares of Selective
common stock held in benefit plan investments (i.e., 401(k) plan) are counted;
|
|
§
|
Unexercised
stock options are not counted; and
|
|
§
|
Deferred shares
of Selective common stock held in accounts of directors are counted.
|
Officers are required to retain direct ownership of at least 75%
of the shares acquired under an equity award granted under any company equity compensation plan or other written compensatory
arrangements that pays out after July 27, 2011, net of taxes and transaction costs, unless the officer has met his or her applicable
stock ownership requirement as set forth above. Our directors and officers have met, or are on track to meet, the required ownership
guidelines.
Selective officers, directors, and employees are prohibited from
entering into hedging or monetization transactions, such as zero-cost collars and forward sale contracts, involving Selective
common stock. These transactions would allow an officer, director, or employee to hold Selective securities without the full risks
and rewards of ownership. When that occurs, the officer, director, or employee may no longer have the same objectives as Selective’s
other stockholders. For this reason, such hedging or monetization transactions are prohibited.
BOARD MEETINGS AND COMMITTEES
The Board of Directors held five meetings in 2015. All directors
attended 75% or more of the aggregate of the meetings of the Board of Directors and their respective committees for the period
during which they were directors in 2015. Selective expects all Directors to attend the Annual Meeting, and all Directors serving
on the Board on April 29, 2015 attended the 2015 Annual Meeting.
The Board has five standing committees:
|
§
|
Corporate
Governance and Nominating Committee;
|
|
§
|
Salary and
Employee Benefits Committee.
|
The following tables provide information on each of the five committees:
Audit Committee
|
Written
Charter is available in the Corporate Governance subsection of the Investors section of
www.selective.com
|
2015
Meetings: 5
|
Responsibilities
:
§
Oversee
the accounting and financial reporting processes and the audits of the financial statements.
§
Review
and discuss with Selective’s management and independent auditors Selective’s financial statements, reports,
and other information provided to the public and filed with the SEC.
§
Monitor
the activities of Selective’s Internal Audit Department and review and concur in the appointment, compensation,
replacement, reassignment, or dismissal of the Chief Audit Executive.
§
Monitor
Selective’s internal controls regarding finance, accounting, and legal compliance.
§
Discuss
significant financial risk exposures and the steps management has taken to monitor, control, and report such exposures.
§
Assist
the Board in overseeing Selective’s enterprise risk management function. Discuss with management Selective’s
major financial, operational, or other risk exposures and steps management has taken to monitor and manage such exposures.
§
Appoint
Selective’s independent registered public accounting firm and supervise the relationship between Selective and its
independent auditors, including reviewing their performance, making decisions with respect to their compensation, retention
and removal, reviewing and approving in advance their audit services and permitted non-audit services, and confirming
the independence of the independent auditors.
|
Director
Members:
|
Independent
|
Ronald
L. O’Kelley, Chairperson and designated Audit Committee financial expert
|
Yes
|
Paul
D. Bauer
|
Yes
|
John
C. Burville
|
Yes
|
Robert
Kelly Doherty
|
Yes
|
John
S. Scheid
|
Yes
|
Philip
H. Urban
|
Yes
|
Corporate
Governance and Nominating Committee
|
Written
Charter is available in the Corporate Governance subsection of the Investors section of
www.selective.com
|
2015
Meetings: 4
|
Responsibilities
:
§
Establish
criteria for director selection and identify and recommend nominees for director to the Board.
§
Review
and assess Selective’s Corporate Governance Guidelines and recommend changes to the Board.
§
Recommend
to the Board directors to serve as members of the various Board committees, chairpersons of the various committees, and
Lead Independent Director.
§
Advise
the Board regarding Board composition, procedures, and committees.
§
Review
and update Selective’s Code of Conduct and review conflicts of interest or other issues that may arise under the
Code of Conduct involving Selective’s officers or directors.
§
Oversee
the self-evaluations of the Board and its various committees.
§
Review,
jointly with the Salary and Employee Benefits Committee, CEO and executive management succession planning and professional
development.
§
Make
a recommendation to the Board as to whether to accept an incumbent director’s tendered resignation if the director
fails to receive a majority vote in an uncontested election of directors.
|
Director Members:
|
Independent
|
J.
Brian Thebault, Chairperson
|
Yes
|
Paul
D. Bauer
|
Yes
|
A.
David Brown
|
Yes
|
Cynthia
S. Nicholson
|
Yes
|
John
S. Scheid
|
Yes
|
Executive
Committee
|
No
Charter. Responsibilities defined in By-Laws.
|
2015
Meetings: 0
|
Responsibilities
:
§
Authorized
by By-Laws to exercise the Board of Directors’ powers and authority in the management of Selective’s business
and affairs between Board meetings.
§
Has
the right and authority to exercise all the powers of the Board of Directors on all matters brought before it, except
concerning Selective’s investments or as prohibited by law.
|
Director
Members:
|
Independent
|
Gregory
E. Murphy, Chairperson
|
No
|
Paul
D. Bauer
|
Yes
|
John
C. Burville
|
Yes
|
Michael
J. Morrissey
|
Yes
|
Ronald
L. O’Kelley
|
Yes
|
J.
Brian Thebault
|
Yes
|
Finance
Committee
|
Written
Charter is available in the Corporate Governance subsection of the Investors section of
www.selective.com
|
2015
Meetings: 4
|
Responsibilities
:
§
Review
and approve changes to Selective’s investment policies, strategies, and programs.
§
Review
investment transactions made on behalf of Selective and review the performance of Selective’s investment portfolio
and external investment managers.
§
Review
matters relating to the investment portfolios of the benefit plans of Selective and its subsidiaries, including the administration
and performance of such portfolios.
§
Review
Selective’s reinsurance program, including structure, pricing, and financial strength of participating reinsurers
on the program.
§
Appoint
members of Selective’s Management Investment Committee.
§
Review
and make recommendations to the Board regarding payment of dividends.
§
Review
Selective’s capital structure and significant expenditures, and provide recommendations to the Board regarding financial
policies and matters of corporate finance.
|
Director
Members:
|
Independent
|
Michael
J. Morrissey, Chairperson
|
Yes
|
Paul
D. Bauer
|
Yes
|
Robert
Kelly Doherty
|
Yes
|
Ronald
L. O’Kelley
|
Yes
|
William
M. Rue
|
No
|
John
S. Scheid
|
Yes
|
Salary and
Employee Benefits Committee
|
Written
Charter is available in the Corporate Governance subsection of the Investors section of
www.selective.com
|
2015
Meetings: 7
|
Responsibilities
:
§
Oversee,
review, and administer compensation, equity, and employee benefit plans and programs related to the employees and management
of Selective and its subsidiaries.
§
Review
annually and approve corporate goals and objectives relevant to executive compensation and evaluate performance in light
of those goals.
§
Review
annually and approve Selective’s compensation strategy for employees.
§
Review
annually and determine the individual elements of total compensation for the CEO and other members of senior management.
§
Review,
jointly with the Corporate Governance and Nominating Committee, CEO and executive management succession planning and professional
development.
§
Review
and approve compensation for non-employee directors.
§
Review
the independence and engagement of the independent executive compensation consultant.
|
Director
Members:
|
Independent
|
John
C. Burville, Chairperson
|
Yes
|
A.
David Brown
|
Yes
|
Michael
J. Morrissey
|
Yes
|
Cynthia
S. Nicholson
|
Yes
|
J.
Brian Thebault
|
Yes
|
Philip
H. Urban
|
Yes
|
RISK MANAGEMENT
Board Leadership Structure
Our two principal Board leadership positions are: (i) Chairman
of the Board; and (ii) Lead Independent Director, which was established in 2004. The Lead Independent Director position is defined
in our Corporate Governance Guidelines and is very similar to the role of an independent non-executive Chairman. We believe that
our current Board leadership structure provides effective oversight of management and strong leadership of the independent directors.
The Corporate Governance and Nominating Committee also conducts annual self-assessments of the Board and its various committees
and evaluates their effectiveness.
The Lead Independent Director is responsible for coordinating the
activities of the independent directors and performing various other duties. The Lead Independent Director’s general authority
and responsibilities are as follows:
|
§
|
Presiding
at all meetings of independent directors, as appropriate, and providing prompt feedback
to the Chairman and CEO;
|
|
§
|
Serving as
a point of contact for Board members to raise issues that they may not be able to readily
address with the Chairman and CEO;
|
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§
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Ensuring that
matters of importance to the Directors are placed on the Board’s meeting agendas;
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§
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Assuring that
the Chairman and CEO understands the Board’s views on all critical matters;
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§
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Assuring that
the Board understands the Chairman and CEO's views on all critical matters; and
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§
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Calling executive
sessions of the independent directors and serving as chairman of such meetings.
|
Our Lead Independent Director is Paul D. Bauer, who was appointed
in 2013 and has served on our Board since 1998. Our Chairman of the Board since 2000 is Gregory E. Murphy, our Chief Executive
Officer. At this time, we believe there is a benefit to having Mr. Murphy serve as both Chairman of the Board and Chief Executive
Officer. As the executive with primary responsibility for managing our day-to-day operations, he is best positioned to chair regular
Board meetings and to ensure that key business issues and risks are brought to the attention of our Board or its appropriate committee.
Enterprise Risk Management
Our Board oversees our overall enterprise risk management process,
which follows, among other things, the 2004
Enterprise Risk Management – Integrated Framework
of the Treadway Commission
of the Committee of Sponsoring Organizations. We began our formal enterprise risk management process over 15 years ago. Its key
components include identification and measurement, reporting, and monitoring of major risks, and the development of appropriate
responses.
In addition to the Board’s oversight of overall risk and
the enterprise risk management process, various committees of the Board oversee risks specific to their areas of supervision and
report their activities and findings to the Board:
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§
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The Audit
Committee, on operational, financial, and compliance risks;
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§
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The Corporate
Governance and Nominating Committee, on governance and certain compliance risks;
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§
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The Finance
Committee, on investment risk, non-investment credit risk, including reinsurance risk,
insurance leverage, and associated financial risk; and
|
|
§
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The Salary
and Employee Benefits Committee, on employee, human capital, and compensation strategy
risks.
|
The Chief Executive Officer, who is the executive ultimately responsible
for risk, and the Executive Risk Committee are responsible for the holistic evaluation and supervision of our aggregated risk
profile and determination of future risk management actions in support of our overall risk appetite. The Executive Risk Committee
uses various management committees for detailed analysis and management of individual major risks. The Executive Risk Committee
primarily consists of the Chief Executive Officer, his direct reports and key operational leaders, each of whom is responsible
for management of risk in his or her respective area, and a Chief Risk Officer, who reports to the Chief Financial Officer. The
Executive Risk Committee meets at least quarterly and reviews and discusses various aspects and the interrelation of Selective’s
major risks, including, but not limited to, capital modeling results, capital adequacy, risk metrics, emerging risks, and sensitivity
analysis. The Executive Risk Committee provides a structured forum for consideration of risks that either may preclude us from
achieving our strategic goals or may provide potential opportunities to be pursued. Consistent with the requirements of state
insurance regulators, our insurance subsidiaries annually file their Own Risk and Solvency Assessment report, which is an internal
assessment of our insurance subsidiaries’ solvency. The Chief Risk Officer develops the report in coordination with members
of the Executive Risk Committee, and the report is provided to the Selective Board. The first filing of this report occurred in
2015. The Chief Risk Officer reports on the Executive Risk Committee’s activities, analyses, and findings to the Board or
the appropriate Board committee, and provides a quarterly update on certain risk metrics.
In overseeing the analysis and management of risk, the Board regularly
receives, analyzes, and makes due inquiry regarding reports from its various committees and management. We believe our Board’s
leadership structure and the Lead Independent Director position supports the Board’s ability to effectively evaluate and
manage risk.
Compensation Risk Assessment
We do not believe that risks arising from our compensation policies
and practices are reasonably likely to have a material adverse effect on our operations or results. To make this determination,
we conducted an internal risk assessment of our compensation policies and programs. In performing the risk assessment, we considered
that we operate in an industry based almost entirely on managing risk, and we believe that our risk management function is
robust. We also analyzed the issues set forth in the proxy disclosure
rules and gave close consideration to the following points:
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§
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The compensation
policies and practices for employees of our operating segments are similar and no operating
segment carries a disproportionate portion of our corporate risk profile. For example,
our insurance segments, which sell property and casualty insurance products, are subject
to, among other things, risks related to significant competition and extensive losses
from catastrophic events and acts of terrorism, while our investment segment, which invests
premiums collected by the insurance segments and proceeds from capital transactions,
is subject to, among other things, global economic risks, such as adverse impacts from
governmental monetary policies, and risks inherent in the equity and debt markets; and
|
|
§
|
Our compensation
policies are consistent with our overall risk structure and a significant portion of
our senior officers’ compensation is awarded on the accomplishment of financial
performance goals that are measured over a three-year period of time.
|
We also considered our overall compensation program, including:
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§
|
The features
of our compensation program and whether those features align with our compensation philosophy;
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§
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The compensation
program has multiple financial and strategic measures that balance profitability and
growth. Our financial goals are based on a statutory combined ratio, which is an accepted
insurance industry standard of profitability, return on equity, statutory net premium
written (“NPW”) growth, and statutory operating return on policyholder surplus,
and our strategic goals are based on, among other things, pricing, retention, and profitability
of business, that are intended to incentivize profitable growth;
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§
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The maximum
potential payments under our compensation plans;
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§
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The mix of
fixed versus variable compensation;
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§
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The balance
between cash and equity compensation;
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§
|
The ratio
of compensation based on long-term versus short-term performance metrics; and
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§
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The timing
of equity award grants and vesting.
|
We also considered that we adjust our compensation programs from
time-to-time as risks in our industry and operating segments change to help ensure that compensation and risk remain appropriately
aligned.
Finally, we reviewed our various risk mitigation strategies in
the compensation context, including:
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§
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The stock
ownership and retention requirements for management, as outlined in the section entitled,
“Stock Ownership and Retention Requirements and Hedging” of this Proxy Statement;
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§
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The independent
oversight of compensation programs by the Salary and Employee Benefits Committee of the
Board, including oversight of goals and performance measures; and
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§
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The Board’s
role in risk oversight, which includes receiving, analyzing, and making due inquiry regarding
reports from its various committees, including the Salary and Employee Benefits Committee,
and management’s Executive Risk Committee.
|
STOCKHOLDER COMMUNICATIONS
Stockholders may send communications to the Board of Directors
or individual directors in writing c/o Corporate Secretary, Selective Insurance Group, Inc., 40 Wantage Avenue, Branchville, New
Jersey 07890 or by e-mail to corporate.governance@selective.com. The Board has instructed the Corporate Secretary to use discretion
in forwarding unsolicited advertisements, invitations to conferences, or other promotional material.
CODE OF CONDUCT
Selective has adopted a Code of Conduct that sets out guiding business
ethics principles for all Selective personnel, including executive officers. The Code of Conduct can be found in the Investors
section of Selective’s website,
www.selective.com
. Any amendment to or waiver from the provisions of the Code of
Conduct that applies to Selective’s senior executive officers will be posted to Selective’s website.
EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
EXECUTIVE SUMMARY
Purpose of Compensation Discussion and Analysis
The purpose of this Compensation Discussion and Analysis is to
provide relevant information to our stockholders regarding our 2015 compensation program for the following individuals who are
designated by the Board of Directors as Selective’s named executive officers (“NEOs”):
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§
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Gregory E.
Murphy, Chairman and Chief Executive Officer (“CEO”);
|
|
§
|
Dale A. Thatcher,
Executive Vice President, Chief Financial Officer and Treasurer;
|
|
§
|
John J. Marchioni,
President and Chief Operating Officer; and
|
|
§
|
Michael H.
Lanza, Executive Vice President, General Counsel and Chief Compliance Officer.
|
In connection with succession planning and Mr. Marchioni’s
appointment as President and Chief Operating Officer, certain reporting relationships were reorganized and Messrs. Thatcher, Marchioni,
and Lanza became Mr. Murphy’s only direct reports. Effective December 31, 2014, our Board of Director designated the CEO
and his three direct reports as Selective’s “executive officers” under Section 16 of the Exchange Act and no
other individuals are deemed “executive officers” for Exchange Act purposes.
Consideration of 2015 Say-on-Pay Advisory Vote Results
At our 2015 Annual Meeting of Stockholders, our stockholders voted
on an advisory basis to approve the compensation of our NEOs. As they did in 2014, our stockholders overwhelmingly supported our
compensation decisions, with approximately 96% of votes cast voting in favor of the proposal. We considered these results, and
we believe they indicate stockholders are supportive of our compensation decisions. Accordingly, we did not make any material
changes in our 2015 compensation decisions and policies, and we have maintained our emphasis on short- and long-term incentive
compensation that we believe reward our executives for delivering stockholder value.
2015 Corporate Performance Highlights
In 2015, we continued to build on the successful and aggressive
three-year plan that we announced in 2012. We generated operating return on equity
2
(“OROE”) of 11.8%, compared to 10.3% for 2014 and an A.M. Best Company expected 2015 industry return
on surplus of 8.6%, a proxy for OROE for the full industry. We produced a company record low statutory combined ratio
3
of 92.4% in 2015, including catastrophe losses, and 89.4% excluding catastrophe losses, compared to an A.M. Best
Company expected 2015 industry statutory combined ratio of 98.0%, which includes a catastrophe loss assumption of 3.1 points.
STATUTORY COMBINED RATIO
In addition to the significant combined ratio improvements, other
key accomplishments for 2015 include the following:
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§
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Our stock
price ended 2015 at $33.58, an increase of 24% from year-end 2014, while our total shareholder
return (“TSR”), which is determined using the change in Selective’s
common stock price and reinvested dividends, was 26%, compared to the Standard &
Poor’s 500 Index total return of 1.4%;
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|
§
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We produced
fully diluted operating earnings per share of $2.70, an increase of 24% over 2014;
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|
§
|
We achieved
3.4% in overall renewal pure price increases, consisting of: (i) 3.0% for standard commercial
lines; (ii) 5.8% for standard personal lines; and (iii) 1.5% for excess and surplus (“E&S”)
lines, resulting in our attaining 27 consecutive quarters of positive standard commercial
lines renewal pure price increases in the fourth quarter of 2015;
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|
§
|
We increased
our retention rate for standard commercial lines to 83%;
|
2
Operating return on equity is calculated as follows: operating income from the performance
period / (stockholders’ equity at the beginning of the performance period + stockholders’ equity at the end of the
year) / 2. Operating income differs from net income by the exclusion of realized gains or losses on investments and the results
of discontinued operations. It is used as an important financial measure by management, analysts, and investors, because the realization
of investment gains and losses on sales in any given period is largely discretionary as to timing. In addition, these investment
gains and losses, as well as other-than-temporary investment impairments that are charged to earnings and the results of discontinued
operations, could distort the analysis of trends. Operating income is not intended as a substitute for net income prepared in
accordance with generally accepted accounting principles.
3
The statutory combined ratio is the property and casualty insurance industry standard
measure of underwriting profitability. A statutory combined ratio under 100% generally indicates that an insurance company is
generating an underwriting profit and a statutory combined ratio over 100% generally indicates that an insurance company is generating
an underwriting loss.
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§
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We significantly
increased overall NPW in 2015 by 10% compared to the prior year, which is 2.5 times the
projected industry growth rate;
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|
§
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We achieved
significant progress in our workers compensation line of business, improving the 2015
accident year combined ratio by 5.6 points, and restructured our workers compensation
claims operation resulting in improved claims outcomes;
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§
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We received
a score of 8.6 out of 10 on an independently administered agency satisfaction survey;
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§
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We completed
the assessment of our omni-channel customer service and communication capabilities and
created an implementation plan, and improved our mobile applications; and
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§
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We successfully
renewed our 2015 property reinsurance program, adding a new multi-year collateralized
catastrophe layer and an additional property per risk treaty layer.
|
In May 2015, A.M. Best Company, a worldwide insurance rating company,
affirmed our “A (Excellent)” (with a stable outlook) financial strength rating, citing our excellent level of risk-adjusted
capitalization, our established position in targeted regional markets, disciplined underwriting focus, consistently profitable
operating performance (that in recent years has generally outperformed the commercial casualty composite average), strong independent
retail agency relationships, and consistently stable loss reserves. Other actions by rating agencies in 2015 included Fitch Ratings’
reaffirmation in December of our “A+” rating (with a stable outlook), Standard & Poor’s Ratings Services’
reaffirmation in October of our “A-” rating (with a positive outlook), and Moody’s Investors Service’s
reaffirmation in May of our “A2” rating (with a change in outlook from negative to stable).
CEO Pay for Performance
The following table sets forth Mr. Murphy’s compensation
over the past four years, its actual dollar and percentage change from the prior year, and Selective’s TSR for the one,
three, and five year periods. We believe the tables below demonstrate the correlation between changes in Selective’s TSR
and Mr. Murphy’s compensation, which is consistent with, and reflects our philosophy of, aligning compensation with the
interests of stockholders and long-term performance.
|
2011
|
2012
|
2013
|
2014
|
2015
|
CEO Total Compensation (Salary, ACIP & LTIP – defined below)
|
$2,800,001
|
$3,000,014
|
$3,900,019
|
$3,925,011
|
$4,440,002
|
$ Change from Prior Year
|
+$99,914
|
+$200,013
|
+$900,005
|
+$24,992
|
+$514,991
|
% Change from Prior Year
|
+3.7%
|
+7.1%
|
+30.0%
|
+0.6%
|
+13.1%
|
One-Year TSR
|
+0.8%
|
+11.9%
|
+43.5%
|
+2.6%
|
+26.0%
|
Three-Year TSR
|
-14.6%
|
+28.6%
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+61.9%
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+64.9%
|
+85.5%
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Five-Year TSR
|
-28.6%
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-2.4%
|
+37.1%
|
+89.4%
|
+109.3%
|
* Note: The value of “Indexed
Total Shareholder Return (TSR)” at the end of each year shown above is based on the then-current value of an assumed $100
investment in Selective stock on December 31, 2010, and reflects changes in stock price and assumes that dividends paid to stockholders
are reinvested in Selective stock.
Role and Function of the Salary and Employee Benefits
Committee
The Salary and Employee Benefits Committee of the Board of Directors
(“SEBC”) oversees executive compensation. The SEBC retains an independent executive compensation consultant, Exequity
LLP (“Compensation Consultant”), to advise it on executive compensation issues. Representatives of the Compensation
Consultant: (i) review senior executive compensation; (ii) prepare comprehensive competitive compensation analyses for our NEOs;
(iii) provide counsel to the SEBC regarding award metrics, components of compensation, amounts allocated to those components,
and the total compensation opportunities for the CEO and the other NEOs; and (iv) attend SEBC meetings, as requested by the SEBC.
The Compensation Consultant has served the SEBC since 2007. The
Compensation Consultant’s only business with Selective is to advise the SEBC on executive compensation matters. The SEBC
has determined, in light of the factors set forth in SEC and NASDAQ rules, that the Compensation Consultant’s services do
not raise a conflict of interest.
The SEBC has full autonomy in determining executive compensation
and makes all final determinations regarding CEO and other NEO compensation, incorporating information provided by the Compensation
Consultant. The CEO also makes compensation recommendations to the SEBC regarding the NEOs based on the CEO’s assessment
of each individual’s annual performance, contributions to Selective, and potential for advancement. In making its compensation
decisions, the SEBC also considers pay levels at companies with which we compete for business and executive talent (discussed
below) and pre-established guidelines regarding award amounts, Selective’s performance, executive retention issues, internal
compensation parity, and advancement in abilities, experience, and responsibilities. The Executive Vice President and Chief Human
Resources Officer and certain other human resources officers, as part of their usual duties and responsibilities, provide the
SEBC with information regarding the overall design of the executive compensation program and its individual components.
DESIGN CONSIDERATIONS OF SELECTIVE’S EXECUTIVE COMPENSATION
PROGRAM
Selective’s Executive Compensation Program Objective
and Philosophy
The objective of our executive compensation program is to attract,
retain, and motivate executive talent who will drive the organization’s success by creating stockholder value through profitable
growth and effective risk management.
Our compensation program is designed to: (i) reward the achievement
of our business objectives; (ii) recognize our executives for their individual achievements by motivating them to execute their
duties and responsibilities in a manner not reasonably likely to have a material adverse effect on our operations or results;
and (iii) promote long-term relationships with our executives. We aim to provide these highly talented and qualified executives
with compensation that is competitive, both in value and mix of short-term and long-term cash and stock-based components, with
the total compensation paid by other property and casualty insurance companies, and other companies with which we compete for
executive talent.
Consistent with our pay-for-performance philosophy, we link our
annual incentive awards to pre-determined financial and strategic business objectives and individual contributions, and we align
our long-term compensation to the achievement of pre-determined specific performance measures that impact the generation of long-term
stockholder value.
Compensation Elements
Our executive compensation program consists of the following key
elements selected to: (i) address the market-based realities of attracting and retaining quality executives; and (ii) align the
executives’ compensation with our stockholders’ interests:
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§
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Annual cash
incentive program (“ACIP”) payments; and
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§
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Long-term
incentive program (“LTIP”) awards in the form of performance-based restricted
stock units and performance-based cash incentive units.
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Compensation Best Practices
Selective primarily uses the following compensation structures
and practices:
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§
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Fixed and
variable compensation components;
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§
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Issuances
of performance-based equity and annual cash bonus awards to NEOs;
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§
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Stock ownership
and retention requirements;
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§
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Limited perquisites;
and
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§
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Double triggers
for cash and equity award payments upon a change in control under employment agreements.
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Benchmarking
When making compensation decisions, the SEBC believes it is important
to be informed of compensation practices at multiple comparator groups of publicly-traded companies and property and casualty
insurance holding companies. The SEBC believes that:
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§
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Benchmarking
provides the SEBC with relevant information to make appropriate compensation decisions
that will help attract, retain, and motivate the key talent required to drive company
performance and long-term stockholder value;
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§
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Measuring
our compensation against practices from these two benchmark sources helps ensure that
the SEBC has an ample and robust assessment of our competitive compensation posture;
and
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§
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Considering
multiple market references offsets inaccuracies inherent in a single market data point
and enhances the SEBC’s decisions by allowing it to rely on a more comprehensive
set of market-competitive pay boundaries than just a single benchmark.
|
Accordingly, the SEBC receives from, and reviews with, the Compensation
Consultant the following benchmarking information:
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§
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Benchmarking
analyses of base salaries, annual cash incentives, total cash compensation, long-term
incentives, and total compensation we pay our NEOs compared to a proxy peer group; and
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§
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Benchmark
data provided by a third-party vendor for our NEOs against a group of 54 property and
casualty insurance organizations.
|
As one reference point in setting 2015 target total compensation
for the NEOs, in late 2014, the Compensation Consultant furnished the SEBC with the most recent NEO compensation information available
as of that time from two market reference sources as follows:
Proxy
Peers
Organizations with which we compete in the sale of
products and services and for talent
|
Third-party
Vendor Surveys
|
§
Argo
Group International Holdings, Ltd.
§
The
Chubb Corporation
§
Cincinnati
Financial Corporation
§
CNA
Financial Corporation
§
EMC
Insurance Group Inc.
§
The
Hanover Insurance Group, Inc.
§
The
Hartford Financial Services Group, Inc.
|
§
Navigators
Group, Inc.
§
OneBeacon
Insurance Group, Ltd.
§
State
Auto Financial Corporation
§
Tower
Group International, Ltd.
§
United
Fire Group, Inc.
§
W.
R. Berkley Corporation
|
§
Property
and Casualty Insurance Compensation Survey
|
For purposes of re-evaluating its earlier 2015 NEO compensation
decisions and in establishing compensation parameters for 2016, in late 2015 and early 2016, the SEBC reviewed the most recent
NEO compensation information available as of that time from these two market reference sources, but eliminated data relating to
The Chubb Corporation and Tower Group International, Ltd. because of their acquisitions by third parties.
Information for the Proxy Peers in the above table (collectively,
the “Proxy Peer Group”) was obtained from proxy statements and other materials filed with the SEC. This information
includes data on compensation components and analysis of the overall financial performance of the organizations in the group.
We analyze our performance in relation to them. The Proxy Peer Group is composed of organizations that provide similar products,
have a similar geographic market scope, and compete with us for executive talent. The Property and Casualty Insurance Compensation
Survey provides supplemental data from organizations of various sizes. This information is divided into segments that most accurately
reflect the size of our organization. Because we strive to engage the best talent, which may require us to recruit from organizations
larger than us, we look at data from the overall property and casualty insurance industry, as reported in the Property and Casualty
Insurance Compensation Survey. The Property and Casualty Insurance Compensation Survey data reviewed by the SEBC in late 2015
and early 2016 reflected data
from 54 organizations having an annual median direct written premium
of $2.6 billion and annual median revenues of $2.4 billion.
In 2015, our aggregate NEO total compensation was 28% above the
total average median of the reference market sources. The SEBC deemed the positioning to market to be appropriate based on Selective’s
2015 performance. The components comprising total compensation differed to varying degrees from market. Specifically, base salary
was above the total average median by 12% and annual incentive awards were 74% above the total average median, resulting in annual
total cash compensation that was above the total average median by 45%. The grant date fair value of our 2015 long-term incentive
awards was 20% above the total average median. The SEBC felt that each NEO’s compensation was appropriately positioned relative
to market considering their individual accomplishments and contributions, the degree to which we achieved our 2015 goals, and
Selective’s performance in relation to industry performance expected by A.M. Best Company.
2015 ELEMENTS OF COMPENSATION AND ALLOCATION BETWEEN CURRENT
AND LONG-TERM COMPENSATION
The table below shows the percentage of total variable and total
fixed compensation for the CEO, Chief Financial Officer, and the other NEOs that is short-term incentive compensation (ACIP) versus
long-term incentive compensation (LTIP), and fixed (base salary) versus variable (ACIP and LTIP). When evaluating 2015 compensation
for our CEO and other NEOs, the SEBC considered: (i) our overall results compared to budget and projected industry results; (ii)
our ability to obtain renewal pure price increases on our insurance business that allowed us to achieve our statutory combined
ratio targets; (iii) our ability to profitably grow NPW to meet or exceed budgeted targets; (iv) our investment income performance
compared to both budget and benchmark targets; (v) significant claims improvement initiatives; and (vi) retention of top talent.
These factors were viewed in light of the relative competitive positioning of the compensation of our CEO and the other NEOs.
As the table indicates, the 2015 compensation allocation aligns
closely with our compensation philosophy, which is designed to motivate executives to achieve short-term and long-term corporate
objectives consistent with our stockholders’ economic interests. We strive to achieve a balance between pay incentive vehicles
and performance time horizons, generally placing the most weight on achievement of long-term success that increases long-term
stockholder value.
|
Variable Compensation
|
Fixed Compensation
|
NEOs
|
2015 Short-Term
(ACIP)
|
2015 Long-Term
(LTIP)
|
2015 Total Variable
(ACIP & LTIP)
|
2015 Base Salary
|
Gregory E. Murphy
|
42%
|
37%
|
79%
|
21%
|
Dale A. Thatcher
|
40%
|
31%
|
71%
|
29%
|
John J. Marchioni
|
43%
|
32%
|
75%
|
25%
|
Michael H. Lanza
|
34%
|
31%
|
65%
|
35%
|
The charts below reflect the allocation of 2015 compensation to
LTIP, ACIP, and base salary for the CEO and an average for all other NEOs:
Base Salary
Our base salary compensation is intended to provide stable, competitive
compensation while taking into account each executive’s scope of responsibility, relevant background, training, and experience.
In setting base salaries, the SEBC considers both competitive market data for positions with comparable job content and overall
market demand for each position. The SEBC generally believes that base salaries should be aligned with market trends for executives
with similar responsibilities at comparable companies. When establishing the base salaries of NEOs, the SEBC also considers:
|
§
|
The functional
role of the executive’s position;
|
|
§
|
The executive’s
level of responsibility;
|
|
§
|
The executive’s
growth in the position, including skills and competencies;
|
|
§
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The executive’s
contribution and performance; and
|
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§
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The organization’s
ability to replace the executive.
|
Based on these considerations and on their respective accomplishments
and contributions as described below in the section entitled, “2015 Compensation Actions for the CEO and Other NEOs,”
the SEBC increased the base salaries of the CEO and the other NEOs in early 2015 during our regular salary review process, as
follows: Mr. Murphy, 3.3%; Mr. Thatcher, 4.3%; Mr. Marchioni, 4.8%; and Mr. Lanza, 4.0%.
Annual Cash Incentive Program (ACIP)
Our ACIP is intended to link a meaningful portion of annual cash
compensation to one or more pre-established near-term strategic and/or financial organizational performance goals. For 2015, all
of the NEOs were eligible to participate in the ACIP. ACIP awards are granted under the Selective Insurance Group, Inc. Cash Incentive
Plan As Amended and Restated as of May 1, 2014 (the “Cash Incentive Plan”). ACIP awards made to our NEOs are intended
to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”).
2015 ACIP Measures for NEOs
In order for the 2015 ACIP awards to the NEOs, who are covered
under Code Section 162(m), to qualify as performance-based compensation, the SEBC determined in January 2015 that the 2015 ACIP
awards for covered employees would fund at each individual’s maximum based on our achievement in 2015 of a single performance
measure; namely positive net income as defined under generally accepted accounting principles. The maximum award opportunity established
by the SEBC for each of our NEOs under the ACIP is shown below under the section entitled, “2015 ACIP Payment Opportunities
and Awards for NEOs.” If we did not achieve positive net income in 2015, the maximum ACIP awards for executive officers
would have been determined based entirely on the degree of achievement of the general corporate financial and strategic performance
goals used in determining the funding of ACIP awards for employees other than covered employees (the “Corporate ACIP Measures”).
As we achieved positive net income of $165.9 million in 2015, the
performance requirements under Code Section 162(m) were met, and the SEBC could pay up to the individual maximum amounts for the
2015 ACIP awards or exercise negative discretion from these maximum amounts. Based on our strong performance and the CEO’s
outstanding leadership in 2015, the SEBC awarded the CEO the maximum ACIP award. ACIP payments were awarded to the other NEOs
within the range but not at the maximum award established for such individuals based on their individual performance and the degree
of achievement of the Corporate ACIP Measures.
2015 Corporate ACIP Measures
Our Corporate ACIP Measures are established to encourage our employees
to remain focused on particular financial and strategic objectives, even in the face of especially challenging circumstances in
a performance year. For 2015, the SEBC determined that the Corporate ACIP funding opportunity would be between 0% and 132% of
target, based on attainment of the Corporate ACIP Measures. Zero percent (0%) to 82% of this target percentage was attributable
to a financial performance goal of achieving a statutory combined ratio of between 90% and 100%, and 0% to 50% of this target
percentage was attributable to the achievement of 17 measures related to six strategic initiatives. The table below reflects total
potential Corporate ACIP percentages at various statutory combined ratio percentages if all six strategic initiatives were met
and all potential premium points were achieved:
Statutory Combined Ratio
(%)
|
Corporate ACIP Measures
|
Financial (%)
|
Strategic (%)
|
Total (%)
|
100
|
0
|
50
|
50
|
99
|
10
|
50
|
60
|
98
|
18
|
50
|
68
|
97
|
26
|
50
|
76
|
96
|
34
|
50
|
84
|
95
|
42
|
50
|
92
|
94
|
50
|
50
|
100
|
93
|
58
|
50
|
108
|
92
|
66
|
50
|
116
|
91
|
74
|
50
|
124
|
90
|
82
|
50
|
132
|
2015 Corporate ACIP Measure Results
The 2015 Corporate ACIP Measure results are as follows:
Strategic Initiatives Results
2015
Strategic Initiatives
|
Measures
|
Value
|
2015
Results
|
1. Growth
|
Generate
a specified amount of new commercial lines and bond premium.
|
0-4
pts
|
Achieved
4 pts
|
Generate
a specified amount of new personal lines premium.
|
0-2
pts
|
Achieved
0 pts
|
Achieve
a specified net renewal budget in commercial lines.
|
0-3
pts
|
Achieved
3 pts
|
Generate
a specified amount of new E&S lines premium from Selective retail agents.
|
0-3
pts
|
Achieved
1.2 pts
|
2. Profit
Improvement
|
Achieve
specified underwriting improvement through targeted region-specific underwriting profitability improvement plans.
|
0-3
pts
|
Achieved
3 pts
|
Achieve
a specified increase in standard personal lines rate changes effective in 2015.
|
0-3
pts
|
Achieved
2.4 pts
|
Achieve
a specified commercial lines pure rate target on standard renewal business.
|
0-3
pts
|
Achieved
1.0 pt
|
Produce
a specified increase of new workers compensation direct premium written for particular hazard grades on a governing class
basis.
|
0-3
pts
|
Achieved
0 pts
|
3. Customer
Experience
|
Assessment
of customer service and communication capabilities (omni-channel) and create implementation plan as scheduled.
|
0-2
pts
|
Achieved
2 pts
|
Implement
designated additional functions to mobile platform as scheduled.
|
0-2
pts
|
Achieved
2 pts
|
4. Claims
|
Achieve
specified 2015 workers compensation indemnity claim accident year closure rate at 11 months.
|
0-2
pts
|
Achieved
2 pts
|
Achieve
specified 2014 workers compensation indemnity claim accident year closure rate at 23 months.
|
0-2
pts
|
Achieved
2 pts
|
Achieve
specified improvement in workers compensation network penetration in designated states.
|
0-4
pts
|
Achieved
4 pts
|
5. Operational
Efficiency
|
Beat
overall controllable expense budget target.
|
0-8
pts
|
Achieved
8 pts
|
6. Major
Projects
|
Update
commercial lines forms and documents systems as scheduled.
|
0-2
pts
|
Achieved
2 pts
|
Build
and deploy two new commercial lines predictive models as scheduled.
|
0-2
pts
|
Achieved
2 pts
|
Implementation
of E&S and standard lines billing systems as scheduled.
|
0-2
pts
|
Achieved
0 pts
|
TOTAL
ACHIEVED
|
|
|
38.6
pts
|
As reflected in the above table, we fully achieved three, and partially
achieved three, of the six 2015 strategic initiatives, which equates to the strategic performance goal component under the Corporate
ACIP Measures generating funding at 38.6%.
Financial Performance Results
For 2015, our overall statutory combined ratio was 92.4%, which
included 3.0
points of catastrophe losses. Accordingly, the financial performance component of the Corporate ACIP Measures
generated funding at 62.8%.
2015 Corporate ACIP Measure Results
For 2015, our Corporate ACIP Measures, both strategic initiatives
and financial performance, resulted in total funding opportunity of 101.4%.
2015 ACIP Payment Opportunities and Awards for NEOs
The ACIP payment opportunities for the NEOs earned in 2015 and
paid in 2016 were based on competitive market levels and set as a percentage of annual base salary. The following table sets forth
for each NEO the 2015 minimum and maximum ACIP opportunities, the SEBC’s actual 2015 award as a percentage of base salary,
and the percentage increase or decrease in ACIP from 2014 to 2015:
NEO
|
Minimum 2015
ACIP Opportunity
as % of Base
Salary
|
Maximum 2015
ACIP Opportunity
as % of Base
Salary
|
Actual 2015 ACIP
as % of Base
Salary
|
% Change in ACIP
from 2014 to 2015
|
Gregory E. Murphy
|
0%
|
200%
|
200%
|
31%
|
Dale A. Thatcher
|
0%
|
150%
|
142%
|
31%
|
John J. Marchioni
|
0%
|
175%
|
171%
|
30%
|
Michael H. Lanza
|
0%
|
150%
|
96%
|
28%
|
ELEMENTS OF LONG-TERM COMPENSATION
Design Elements
Our long-term incentive opportunities are intended to reward our
leaders and encourage their long-term retention. By aligning financial rewards with the economic interests of our stockholders,
leaders are motivated to achieve our long-term strategic objectives and increase stockholder value. We use both cash and non-cash
vehicles under our LTIP to deliver long-term compensation, which is consistent with the market practices of the companies included
in our Proxy Peer Group. We establish a dollar denominated target for each employee eligible to participate in the LTIP, including
the NEOs. All individual target award amounts are aggregated to determine the total LTIP award pool.
LTIP awards are granted in overlapping three-year cycles and are
allocated among performance-based restricted stock units and performance-based cash incentive units. By granting performance-based
restricted stock units and performance-based cash incentive units with three-year performance periods, our goal is to encourage
executive officers to continue their tenure with us and align their economic interests with those of our stockholders.
Long-Term Incentive Program Award Grants
Performance goals for the long-term incentive awards granted in
2013 through 2015 are as follows:
Performance
Period
|
Restricted
Stock Unit Performance Measures
|
Cash
Incentive Unit Performance Measures
|
01/01/13
– 12/31/15
|
Cumulative OROE (excluding
unrealized gains), cumulative growth in policy count, or growth in NPW
|
TSR/NPW growth/statutory
combined ratio
|
01/01/14
– 12/31/16
|
Cumulative OROE (excluding
unrealized gains or losses), cumulative growth in policy count, or growth in NPW
|
TSR/NPW growth/cumulative
statutory operating return on policyholder surplus
(1)
|
01/01/15
– 12/31/17
|
Cumulative OROE (excluding
unrealized gains or losses), cumulative growth in policy count, or growth in NPW
|
TSR/NPW growth/cumulative
statutory operating return on policyholder surplus
|
(1)
Statutory operating
return on policyholder surplus is a measurement of profitability that reflects the amount of operating income generated by dividing
operating income by the average policyholder surplus during the period.
In determining the amount of LTIP awards granted to the NEOs in
2015, the SEBC considered several factors, including: (i) each NEOs ability to drive and impact our performance over the three-year
performance period; (ii) each NEOs performance during the previous year, including the achievement of departmental goals and other
projects and endeavors accomplished throughout the year, as outlined below; (iii) each NEOs total compensation in comparison to
our Proxy Peer Group and Property and Casualty Insurance Compensation Survey data; and (iv) our desire for long-term retention
of high-performing executives.
Performance-Based Restricted Stock Units
Sixty percent (60%) of the total grant date fair value of each
NEO’s LTIP award made in 2015 consisted of performance-based restricted stock units granted under the Selective Insurance
Group, Inc. 2014 Omnibus Stock Plan (the “2014 Omnibus Stock Plan”). The 2015 performance-based grants are directly
linked to the interests of stockholders based on, and subject to, the following conditions:
|
§
|
Three-year
vesting period; and
|
|
§
|
Achievement
at the end of any calendar year during the three-year period beginning on January 1,
2015 and ending on December 31, 2017 of either: (i) a cumulative OROE of at least 12%
(computed by excluding from the determination of average equity any unrealized gain or
loss occurring after December 31, 2014); or (ii) a 5% cumulative growth in policy count
or a 5% growth in statutory NPW.
|
Dividend equivalent units (“DEUs”) are credited on
performance-based restricted stock units at the same time and at the same dividend rate paid to all Selective stockholders. Payment
of DEUs, which are payable in shares of Selective common stock, remains subject to the same vesting conditions and performance
measures applicable to the underlying restricted stock units. This use of performance-based restricted stock units aligns this
component of our NEOs’ compensation with overall corporate performance and stockholder interests.
Performance-Based Cash Incentive Units
The remaining forty percent (40%) of the grant date fair value
of the NEO’s LTIP award granted in 2015 consisted of performance-based cash incentive units granted under the Cash Incentive
Plan. Performance-based cash incentive units granted in 2015 are directly linked to the interests of stockholders based on, and
subject to, the following terms:
|
§
|
Three-year
performance period;
|
|
§
|
The value
of each cash incentive unit, initially awarded at $100 per unit, increases or decreases
to reflect the TSR of Selective common stock over the three-year performance period for
the award; and
|
|
§
|
The number
of cash incentive units ultimately earned increases or decreases based on the performance
criteria in the following table:
|
Cumulative
3-Year
Statutory
Net Premium
Growth
Relative to
Peer Index
|
>=80%
|
100%
|
117%
|
133%
|
150%
|
167%
|
183%
|
200%
|
70%
|
83%
|
100%
|
117%
|
133%
|
150%
|
167%
|
183%
|
60%
|
67%
|
83%
|
100%
|
117%
|
133%
|
150%
|
167%
|
50%
|
50%
|
67%
|
83%
|
100%
|
117%
|
133%
|
150%
|
40%
|
33%
|
50%
|
67%
|
83%
|
100%
|
117%
|
133%
|
30%
|
17%
|
33%
|
50%
|
67%
|
83%
|
100%
|
117%
|
<=20%
|
0%
|
17%
|
33%
|
50%
|
67%
|
83%
|
100%
|
|
<=20%
|
30%
|
40%
|
50%
|
60%
|
70%
|
>=80%
|
Cumulative
3-Year Statutory Operating Return on Policyholder Surplus
Relative to Peer Index
|
In establishing the peer group (the “Cash Incentive Unit
Peer Group”) for 2015 for comparing performance and determining the ultimate number of performance-based cash incentive
units earned, the SEBC strived to include companies that have a similar mix of products, operate in the same geographic regions,
have similar premium volume, and distribute their products through independent agents. The Cash Incentive Unit Peer Group differs
from the Proxy Peer Group, as the Proxy Peer Group also includes companies with which we compete for executive talent. The Cash
Incentive Unit Peer Group consists of the following companies:
§
Auto-Owners
Insurance Group
§
Cincinnati
Financial Corporation
§
CNA
Financial Corporation
§
Donegal
Insurance Group
§
The
Hanover Insurance Group, Inc.
§
Liberty
Mutual Group Inc.
|
§
Main
Street America (National Grange)
§
State
Auto Financial Corporation
§
United
Fire Group, Inc.
§
Utica
National Insurance Group
§
Westfield
Group
|
Timing of LTIP Awards
Restricted stock unit and cash incentive unit awards are generally
granted each year following the release of Selective’s year-end earnings results.
2012 Long-Term Incentive Program Award Grant Results
The following table summarizes the achievement of the performance
metrics for the 2012 LTIP award grants and the corresponding payout in 2015:
Performance
Metrics
|
Actual
Performance Versus
Performance Metrics
|
Percentage
Achieved
|
2012
Grant Results
|
|
|
Restricted Stock Units
Generate a cumulative OROE of at least 12% (computed by
excluding from the determination of average equity any unrealized gain occurring after December 31, 2011), or achieve
a 5% cumulative growth in policy count at any calendar year end during the performance period.
|
Achieved
12% cumulative policy count growth in 2012
|
100%
|
Cash Incentive Units
(1)
TSR over the three-year performance period, and cumulative
three-year statutory NPW growth and statutory combined ratio relative to peer index for the period of January 1, 2012
to December 31, 2014.
|
Achieved
a TSR factor of 164.88%, a statutory combined ratio of 99.2%, and NPW growth of 26%
|
167%
of units at $164.88
|
(1)
Cash incentive unit awards are denominated in units with an initial value of $100. Appreciation or depreciation is based
on TSR, which is determined using the change in Selective’s common stock price and reinvested dividends over the three-year
performance period for the award. The number of units ultimately earned increases or decreases based on: (i) cumulative three-year
statutory NPW growth relative to the Cash Incentive Unit Peer Group index; and (ii) cumulative three-year statutory combined ratio
relative to this peer group index.
2015 COMPENSATION ACTIONS FOR THE CEO AND OTHER NEOS
In making its 2015 compensation decisions for our CEO and the other
NEOs, with respect to base salary, ACIP awards, and LTIP awards, the SEBC considered the overall and individual accomplishments
and contributions of each NEO. The ACIP and LTIP components of our compensation program are limited by the required achievement
of pre-determined financial and strategic goals. We structure our reward programs to retain and motivate our best-performing employees
and those in critical positions. In balancing our strategic results achieved with ongoing price competition, the SEBC made the
following compensation decisions in 2015:
|
§
|
For the CEO,
Mr. Murphy’s:
|
|
o
|
Base
salary increased by 3.3%;
|
|
o
|
ACIP
payment for 2015 was 31% higher than his 2014 ACIP payment;
|
|
o
|
LTIP
award granted in February 2015 was 3% greater than his grant in the previous year; and
|
|
o
|
Total
compensation based on salary, ACIP payment, and LTIP increased by 13% in 2015 compared
to 2014.
|
In making its compensation decisions for Mr. Murphy, the SEBC reviewed
our overall corporate performance, and a comprehensive written performance appraisal completed by non-employee members of Selective’s
Board of Directors. Mr. Murphy, as CEO, has ultimate responsibility for the achievement of all financial, strategic, and investment
goals. Accordingly, with respect to 2015 compensation decisions for Mr. Murphy, the SEBC considered the following:
|
§
|
We produced
a company record low statutory combined ratio of 92.4% in 2015, including catastrophe
losses, and 89.4% excluding catastrophe losses, compared to an A.M. Best Company expected
2015 industry statutory combined ratio of 98.0%, which includes a catastrophe loss assumption
of 3.1 points;
|
|
§
|
Our stock
price rose 24% in 2015 and our 2015 TSR was 26% compared to an average 12% TSR for the
peer companies included in the performance graph in Part II, Item 5. Market For Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,
in Selective’s Annual Report on Form 10-K for the year ended December 31, 2015;
|
|
§
|
We produced
fully diluted operating earnings per share of $2.70, an increase of 24% over 2014;
|
|
§
|
We generated
total operating income for 2015 of $157.3 million, compared to $124.5 million for 2014;
|
|
§
|
We generated
OROE of 11.8%, which was above our target return of 300 basis points above our weighted
average cost of capital, compared to 10.3% for 2014 and an A.M. Best Company expected
2015 industry return on surplus of 8.6%;
|
|
§
|
We achieved
a 3.4% overall renewal pure price increase, consisting of: (i) 3.0% for standard commercial
lines; (ii) 5.8% for standard personal lines; and (iii) 1.5% for E&S lines, resulting
in our attaining 27 consecutive quarters of positive standard commercial lines renewal
pure price increases in the fourth quarter of 2015;
|
|
§
|
We increased
our retention rate for standard commercial lines to 83%;
|
|
§
|
We increased
overall NPW in 2015 by 10% compared to the prior year growth;
|
|
§
|
We received
a score of 8.6 out of 10 on an independently administered agency satisfaction survey;
|
|
§
|
We successfully
renewed our property catastrophe reinsurance program in 2015, including a new multi-year
collateralized catastrophe layer and an additional property per risk treaty layer; and
|
|
§
|
Our net investment
income, after-tax, was $93.8 million for 2015, which underperformed our original 2015
net investment income guidance range by approximately 11%.
|
Based on the achievement of positive net income, the degree of
achievement of the Corporate ACIP Measures, the factors noted above, and guidance provided by the Compensation Consultant regarding
CEO pay trends, the SEBC determined that Mr. Murphy’s 2015 ACIP would be set at 200% of base salary. This compares to his
initial ACIP opportunity range of 0-200% of base salary. This is an increase of 31% compared to his 2014 ACIP payment. As the
ACIP component of Mr. Murphy’s compensation is tied to our annual financial and strategic goals, including net income, the
2015 ACIP payment reflects the exceptional results achieved by our Insurance Operations. The SEBC determined that Mr. Murphy’s
ACIP payment was appropriate and consistent with Selective’s pay-for-performance philosophy.
Our other NEOs were critical in executing Selective’s 2015
strategic goals and key accomplishments. In light of these accomplishments, the SEBC made the following compensation decisions
in 2015 for the other NEOs:
|
§
|
Base salaries
paid to Messrs. Thatcher, Marchioni, and Lanza increased in 2015 by 4.3%, 4.8%, and 4.0%,
respectively;
|
|
§
|
LTIP awards
granted in February 2015 for Messrs. Thatcher, Marchioni, and Lanza, increased by 9%,
11%, and 7%, respectively, compared to LTIP payments for 2014;
|
|
§
|
ACIP payments
for Messrs. Thatcher, Marchioni, and Lanza for 2015 increased by 30.8%, 30.0%, and 28.2%,
respectively; and
|
|
§
|
Total compensation
based on salary, ACIP payment, and LTIP awards for Messrs. Thatcher, Marchioni, and Lanza
increased in 2015 compared to 2014 by approximately 15%, 17%, and 12%, respectively.
|
In making compensation decisions regarding base salary and LTIP
for the other NEOs, the SEBC considered the following for each NEO:
Mr. Thatcher
– In addition to his general management
responsibility as a member of the executive management team, Mr. Thatcher, as Executive Vice President, Chief Financial Officer
and Treasurer, has primary responsibility for all financial matters, including financial accounting, investor relations, tax,
capital and capital management planning, treasury, investment operations, enterprise risk management, internal audit, reinsurance,
contracts and procurement, and corporate communications. Mr. Thatcher’s major contributions in 2015 included:
|
§
|
Maintaining
2015 Finance and Investment Operations controllable expenses below budget;
|
|
§
|
Overseeing
a management committee to develop a plan to reduce the organization’s expense ratio;
|
|
§
|
Completing
numerous tax credit transactions;
|
|
§
|
Exceeding
metrics for accounts receivable collections;
|
|
§
|
Executing
2015 property reinsurance program renewal, including a new multi-year collateralized
catastrophe layer and an additional property per risk treaty layer;
|
|
§
|
Overseeing
the execution of our investment strategy resulting in achievement of 88% of budgeted
net investment income target in a challenging investment environment;
|
|
§
|
Successfully
onboarding a new Director of Communications;
|
|
§
|
Successfully
extending our credit facility arrangement;
|
|
§
|
Completing
the implementation of a new billing system for the E&S Operations;
|
|
§
|
Engaging in
significant enterprise risk management activities, including active participation in
industry discussions on capital standards and models, and successfully completing and
filing with regulators Selective’s 2015 Own Risk and Solvency Assessment; and
|
|
§
|
Overseeing
various communications initiatives and programs to promote employee understanding of
corporate strategies and goals.
|
Based on the achievement of positive net income, the degree of
achievement of the Corporate ACIP Measures, and the factors noted above, the SEBC approved the CEO’s recommendation that
Mr. Thatcher’s 2015 ACIP payment would be set at 142% of his base salary. This compares to his initial ACIP payment opportunity
range of 0-150% of base salary. Mr. Thatcher’s 2015 ACIP payment was 31% higher than his 2014 ACIP payment. This award aligns
with our pay-for-performance philosophy that is intended to reward and retain key performers in critical positions.
Mr. Marchioni
– As President and Chief Operating Officer,
Mr. Marchioni is responsible for our Insurance Operations, Strategy, Actuarial, Human Resources, and Information Technology areas.
Mr. Marchioni plays a key role in developing strategies that enhance profitability, growth, and competitive strength, including
managing agency relations, claims, underwriting, customer service, and all regional operations. Mr. Marchioni also serves as a
member of our key management committees.
Mr. Marchioni has primary responsibilities for the achievement
of the 2015 Corporate ACIP strategic measures and many of his accomplishments are closely tied to these measures. Under Mr. Marchioni’s
leadership, our Insurance Operations continue to focus on granular pricing and sophisticated underwriting, as well as significant
improvement in claims outcomes, that we believe give us a competitive advantage. Mr. Marchioni’s major contributions in
2015 included:
|
§
|
Producing
a company record low statutory combined ratio of 92.4% in 2015, including catastrophe
losses, and 89.4% excluding catastrophe losses, compared to an A.M. Best Company expected
2015 industry statutory combined ratio of 98.0%, which includes a catastrophe loss assumption
of 3.1 points;
|
|
§
|
Improving
underwriting profitability on designated standard commercial and personal lines through
rate changes, loss improvement efforts, and retention actions;
|
|
§
|
Significantly
increasing overall NPW in 2015 by 10% compared to 2014, and commercial lines new business
by 26% compared to 2014;
|
|
§
|
Restructuring
of the E&S claims operations and claims handling processes to improve claims outcomes;
|
|
§
|
Achieving
a retention rate for standard commercial lines of 83%;
|
|
§
|
Achieving
a 3.4% overall renewal pure price increase, consisting of: (i) 3.0% for standard commercial
lines; (ii) 5.8% for standard personal lines; and (iii) 1.5% for E&S lines, resulting
in our attaining 27 consecutive quarters of positive standard commercial lines renewal
pure price increases in the fourth quarter of 2015;
|
|
§
|
Achieving
significant progress in our workers compensation line of business, improving the 2015
accident year combined ratio by 5.6 points, and restructuring our workers compensation
claims operation resulting in improved claims outcomes;
|
|
§
|
Maintaining
Insurance Operations controllable expenses below budget;
|
|
§
|
Completing
the assessment of omni-channel customer service and communication capabilities and creating
an implementation plan, improving mobile applications, and developing an overall digital
strategy;
|
|
§
|
Developing
and implementing new staffing models for claims and underwriting operations and initiating
staffing analyses for Personal Lines, Flood, and Information Technology operations;
|
|
§
|
Developing
and executing plans to increase independent insurance agencies’ utilization of
technology;
|
|
§
|
Successfully
onboarding new senior human resources and marketing executives; and
|
|
§
|
Receiving
a score of 8.6 out of 10 on an independently administered agency satisfaction survey.
|
Based on the achievement of positive net income, the degree of
achievement of the Corporate ACIP Measures and the factors noted above, the SEBC approved the CEO’s recommendation that
Mr. Marchioni’s 2015 ACIP would be set at 171% of base salary. This compares to his initial ACIP opportunity range of 0-175%
of base salary. Mr. Marchioni’s 2015 ACIP payment was 30% higher than his 2014 ACIP payment. We believe this award aligns
with our pay-for-performance philosophy that is intended to reward and retain key performers in critical positions.
Mr. Lanza
– In addition to his general management
responsibility as a member of the executive management team, Mr. Lanza, as Executive Vice President, General Counsel and Chief
Compliance Officer, has primary responsibility for all legal, corporate governance, government affairs, state filings, regulatory,
and compliance matters. Mr. Lanza’s major 2015 contributions were:
|
§
|
Overseeing
and providing legal advice on the filing of over 800 commercial and personal lines standard
rate and product filings;
|
|
§
|
Providing
advice on various records retention and records management matters;
|
|
§
|
Providing
advice on flood claims and litigation related to Superstorm Sandy;
|
|
§
|
Preparing
and filing a shelf registration statement;
|
|
§
|
Providing
significant counsel on finance, investment, tax, securities, and corporate transaction
matters;
|
|
§
|
Providing
significant counsel on corporate management, compliance, and disclosure matters;
|
|
§
|
Providing
timely and appropriate legal advice on the expansion of standard commercial, standard
personal, and E&S products;
|
|
§
|
Directing
the transition of, and assumed leadership positions on, various trade association activities
relating to flood insurance and capital standards;
|
|
§
|
Supervising
various government affairs activities for rate and form filings and complex claims issues,
including those relating to Superstorm Sandy; and
|
|
§
|
Providing
counsel to the claims operations on large loss, complex claims and extra-contractual
matters, utilization of staff counsel and panel counsel, alternate fee arrangements,
operational metrics, and claims organizational changes.
|
Based on the achievement of positive net income, the degree of
achievement of the Corporate ACIP Measures, and the factors noted above, the SEBC approved the CEO’s recommendation that
Mr. Lanza’s 2015 ACIP would be set at 96% of base salary. This compares to his initial ACIP payment opportunity range of
0-150% of base salary. Mr. Lanza’s 2015 ACIP payment was 28% higher than his 2014 ACIP payment. This award aligns with our
pay-for-performance philosophy that is intended to reward and retain key performers in critical positions.
PERQUISITES
NEO perquisites are limited to tax preparation services, which
is a prevailing industry practice. Messrs. Murphy and Lanza used this perquisite in 2015 and were reimbursed $3,000 and $2,255,
respectively.
RETIREMENT AND DEFERRED COMPENSATION PLANS
Selective Insurance Company of America (“SICA”), a
wholly-owned subsidiary of Selective, employs all of our personnel, including all of the NEOs. We strive to provide a competitive
retirement benefit program that allows us to attract and retain talent for the organization. This includes a defined contribution
program, a nonqualified deferred compensation plan (“Deferred Compensation Plan”) for our highly compensated officers,
including the NEOs, and depending on date of hire, a defined benefit program, in which all of the NEOs participate. These plans
are consistent with benefits provided by many of the companies with which we compete for executive talent.
SICA offers a tax-qualified defined contribution plan named the
Selective Insurance Retirement Savings Plan (the “Retirement Savings Plan”) to employees, including the NEOs, who
meet eligibility requirements. Participants, other than highly compensated employees, as defined by the Internal Revenue Service,
could contribute 50% of their defined compensation to the Retirement Savings Plan, up to $18,000 in 2015. Under the Retirement
Savings Plan, participant contributions are matched at 100% to the first 3% of the employee’s defined compensation and 50%
up to the next 3% of the employee’s defined compensation.
Participants over the age of 50, including certain of the NEOs,
were eligible in 2015 to make an additional $6,000 catch-up contribution to the Retirement Savings Plan, pursuant to the Code.
As of April 5, 2013, in conjunction with the amendment of the Retirement Income Plan for Selective Insurance Company of America
(the “Retirement Income Plan”) and the related supplemental employee retirement plan, discussed further below, to
curtail the accrual of additional benefits under these plans after March 31, 2016, all eligible participants in the Retirement
Savings Plan, including the NEOs, began receiving a non-elective contribution of 4% of base salary.
Under the Deferred Compensation Plan, certain executives and employees,
including the NEOs may, subject to certain limitations, defer: (i) up to 50% of their base salary; (ii) up to 100% of their annual
bonus (subject to certain limitations to provide for required tax withholding); and/or (iii) all or a percentage of such other
compensation as otherwise designated by the administrator of the Deferred Compensation Plan. To the extent not matched in the
Retirement Savings Plan due to the limitations under the Code and the provisions of the Retirement Savings Plan, contributions
to the Deferred Compensation Plan by participants of up to 6% of base salary were matched by SICA
as follows: 100% of the first 3% of the NEOs’ defined compensation
and 50% up to the next 3% of the NEOs’ defined compensation. Additionally, to the extent that non-elective contributions
to the Retirement Savings Plan are limited due to the provisions of the Code and the Retirement Savings Plan, non-elective contributions
of 4% of base salary are made by SICA to participants’ Deferred Compensation Plan accounts. Additional information regarding
the Deferred Compensation Plan is included in the section entitled, “Nonqualified Deferred Compensation” of this Proxy
Statement.
As referenced above, SICA also has maintained a non-contributory
defined benefit pension program consisting of a tax-qualified defined benefit pension plan, the Retirement Income Plan, and a
supplemental employee retirement plan for certain executives and employees. The accrual of additional benefits under the pension
program will cease as of March 31, 2016. The pension program is more fully described in the section entitled, “Pension Benefits”
of this Proxy Statement.
In addition, SICA maintains health and welfare benefit plans in
which eligible employees, including the NEOs, participate.
EMPLOYMENT AGREEMENTS
SICA has entered into employment agreements with its key executive
officers, including the NEOs, which provide for severance in the event of termination: (i) due to death or disability; (ii) without
“Cause”
4
; (iii) due
to resignation for “Good Reason”
5
by (A) the CEO at any time, or (B) other executives within two years following a change in control; (iv) due to resignation
of the NEO within two years of the company first imposing a requirement, without the consent of the NEO, that relocates the NEO’s
business location more than 50 miles; and (v) within two years following a change in control. The SEBC believes that these agreements
are important for recruitment and retention of key executives and was advised by its Compensation Consultant that the terms of
these agreements were market competitive within our peer group when they were executed. In the event of a change in control, uncertainty
may arise among our key executives as to their continued employment after or in connection with such event, which may result in
the departure or distraction of our key executives. The purpose of the employment agreements is to retain our key executives and
reinforce and encourage their continued attention and dedication during such a potentially critical time, even if they fear that
their position will be terminated after or in connection with the change in control.
With respect to severance payments, outstanding awards under our
stock and cash plans, and continued insurance coverages, the change in control provision of the employment agreements requires
that the executive’s employment be terminated within two years following a change in control. This double trigger ensures
such a payout does not automatically occur upon a change in control only. The employment agreements are described in the section
entitled, “Employment Agreements and Potential Payments upon Termination or Change in Control” of this Proxy Statement.
This section includes information on multipliers used in calculating the severance payment and duration of benefit coverage provided
to individual executives upon termination. We believe these multipliers are consistent with the level and value of the position
to the organization.
4
“Cause” is defined in the employment agreements, but generally means the
executive: (i) was convicted of or pled guilty to a felony; (ii) breached a material provision of the executive’s employment
agreement; or (iii) engaged in misconduct which constitutes fraud in the performance of the executive’s duties and obligations
to the company.
5
“Good Reason” is defined in the employment agreements, but generally means:
(i) a material reduction in salary; (ii) a material negative change in the executive’s benefits; (iii) a material reduction
of the executive’s position, duties, responsibilities, and status with the company or material negative change in title
or office; (iv) requiring the executive to be based at a location in excess of 50 miles from the location of the executive’s
office prior to a change in control; (v) failure of a counterparty to a transaction resulting in a change in control to assume
the employment agreement; or (vi) a breach of the employment agreement by SICA within two years after a change in control.
TAX TREATMENT AND ACCOUNTING
The SEBC generally seeks to preserve deductibility under the Code
for performance-based compensation paid to its executive officers as practicable. Code Section 162(m) prohibits publicly-owned
companies from deducting compensation paid to certain of its executive officers as expense to the extent that the officer’s
compensation in excess of $1 million is not performance-based and is not paid pursuant to a stockholder approved plan.
Awards to NEOs for 2015 were granted under two performance-based
stockholder approved plans: (i) the 2014 Omnibus Stock Plan; and (ii) the Cash Incentive Plan. While the SEBC generally seeks
to preserve deductibility under Code Section 162(m), there may be situations where the SEBC makes compensation decisions it believes
to be in the best interests of the company in which certain compensation would not be deemed deductible under Code Section 162(m).
In January 2015, the SEBC approved a single performance measure under our Cash Incentive Plan to allow annual cash awards to our
executives, including our NEOs, to qualify as performance-based compensation under Code Section 162(m). The single performance
measure is positive net income determined in accordance with generally accepted accounting principles. In determining actual annual
cash awards to our executive officers under the Cash Incentive Plan, the SEBC may adjust the maximum possible payout downwards,
based upon the respective accomplishments and contributions of the executives and the Corporate ACIP Measures, as described more
fully in the sections above entitled, “2015 ACIP Payment Opportunities and Awards for NEOs” and “2015 Compensation
Actions for the CEO and Other NEOs.” This arrangement does not result in any duplication of payouts.
Generally accepted accounting principles require compensation expense
to be measured on the income statement for all share-based payments at grant date fair value for equity instruments (including
employee stock options and restricted stock unit awards) and at market value on the day of vesting for liability instruments (including
cash incentive unit awards). The SEBC has considered the impact of generally accepted accounting principles on our use of stock-based
compensation as a retention tool. The SEBC has determined that the current estimated costs of continuing to use stock-based compensation
relative to the benefits they provide are appropriate and do not warrant any change to our current incentive framework.
We have designed our compensation programs and awards to executive
officers to comply with the provisions of Section 409A of the Code, where applicable. For example, payments made to our executive
officers under our nonqualified deferred compensation plans on account of the executives’ separation from service are not
payable before the first day of the seventh month following the date of separation from service.
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table reflects the compensation
earned by or paid to the NEOs during 2013, 2014, and 2015.
Name and Principal Position
|
Year
|
Salary
($)
|
Stock
Awards
($)
(1)
|
Non-Equity
Incentive Plan
Compensation
($)
(2)
|
Change in Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
(3)
|
All
Other
Compen-
sation
($)
(4)
|
Total
($)
|
Gregory E. Murphy
Chairman and CEO
|
2015
2014
2013
|
925,385
900,000
900,000
|
1,650,002
1,600,011
1,500,019
|
1,860,000
1,425,000
1,500,000
|
20,286
1,205,255
-168,141
|
81,962
70,842
70,142
|
4,537,635
5,201,108
3,802,020
|
Dale A. Thatcher
Executive Vice President, Chief Financial Officer and Treasurer
|
2015
2014
2013
|
596,154
571,154
544,616
|
637,400
583,541
550,277
|
850,000
650,000
650,000
|
50,381
230,845
3,675
|
50,138
42,825
41,265
|
2,184,073
2,078,365
1,789,833
|
John J. Marchioni
President and Chief Operating Officer
|
2015
2014
2013
|
754,615
725,000
592,308
|
961,694
863,406
1,112,286
|
1,300,000
1,000,000
800,000
|
75,537
252,794
12,683
|
63,968
52,712
44,879
|
3,155,814
2,893,912
2,562,156
|
Michael H. Lanza
Executive Vice President, General Counsel and Chief Compliance Officer
|
2015
2014
2013
|
516,923
496,923
477,692
|
462,844
431,703
421,075
|
500,000
390,000
400,000
|
43,010
143,254
10,197
|
45,594
40,011
38,194
|
1,568,371
1,501,891
1,347,158
|
(1)
This column reflects the aggregate grant date fair value of the 2015, 2014, and 2013 grants of performance-based restricted
stock unit awards, and 2015, 2014, and 2013 grants of performance-based cash incentive unit awards. For Mr. Marchioni, this column
also includes $562,009 of time-based restricted stock units awarded to him in 2013 in conjunction with his election as President
and Chief Operating Officer. The 2015 grants of performance-based restricted stock units were made pursuant to the 2014 Omnibus
Stock Plan and the 2014 and 2013 grants of performance-based restricted stock units were made pursuant to the 2005 Omnibus Stock
Plan. Such units vest three years from the date of grant, conditioned upon the attainment of certain predetermined performance
goals. Mr. Marchioni’s time-based restricted stock unit award vests three years from date of grant. Grants of performance-based
cash incentive unit awards were made pursuant to the Cash Incentive Plan, and such units vest at the payment date, which is as
soon as practicable in the calendar year following the end of the calendar year coincident with the end of the three-year performance
period. The value of each cash incentive unit initially awarded increases or decreases to reflect TSR on Selective common stock
over the three-year performance period for the award. For the 2013 performance-based cash incentive unit awards, the number of
cash incentive units ultimately earned increases or decreases based on: (i) cumulative three-year statutory NPW growth relative
to the Cash Incentive Unit Peer Group discussed in the “Elements of Long-Term Compensation” section of the Compensation
Discussion and Analysis; and (ii) cumulative three-year statutory combined ratio relative to the Cash Incentive Unit Peer Group.
For the 2014 and 2015 performance-based cash incentive unit awards, the number of cash incentive units ultimately earned increases
or decreases based on: (i) cumulative three-year statutory NPW growth relative to the Cash Incentive Unit Peer Group; and (ii)
cumulative three-year statutory operating return on policyholder surplus relative to the Cash Incentive Unit Peer Group. Restricted
stock unit and cash incentive unit awards are subject to forfeiture should the grantee resign or be terminated for cause prior
to vesting.
The grant date fair values for the
performance-based restricted stock unit and performance-based cash incentive unit awards granted to the NEOs are as follows:
Name
|
Year
|
Performance-Based
Restricted Stock Units
($)
|
Performance-Based
Cash Incentive Units
($)
|
Gregory
E. Murphy
|
2015
2014
2013
|
990,002
960,011
900,019
|
660,000
640,000
600,000
|
Dale
A. Thatcher
|
2015
2014
2013
|
377,400
343,541
320,277
|
260,000
240,000
230,000
|
John
J. Marchioni
|
2015
2014
2013
|
561,694
503,406
320,277
|
400,000
360,000
230,000
|
Michael
H. Lanza
|
2015
2014
2013
|
272,844
251,703
245,075
|
190,000
180,000
176,000
|
The aggregate grant date fair value
reported in this column assumes the following: (i) the predetermined performance goals for the restricted stock unit grants are
probable of being attained; (ii) initial per unit values for the cash incentive unit awards of $100; and (iii) a 100% peer group
unit multiplier for cash incentive unit awards. The maximum value assuming the highest level of performance conditions for the
performance-based restricted stock units are consistent with the amounts above. Although the maximum number of performance-based
cash incentive units potentially issuable is 200% of the original grant, the ultimate maximum value of the 2014 and 2015 grants
cannot be determined due to the fact that, as stated above, the initial value of each unit is adjusted based on the TSR of Selective
common stock over the grant’s three-year performance period, the maximum value of which is not determinable at this time.
For the performance-based cash incentive unit awards granted in 2013, the applicable peer group factor is not available yet.
(2)
Amounts in this column
include awards to the NEOs earned in 2015 and paid in 2016, earned in 2014 and paid in 2015, and earned in 2013 and paid in 2014.
These awards were granted under the Cash Incentive Plan.
(3)
Amounts in this column
reflect the actuarial increase in the present value of each NEOs pension benefits under all defined benefit pension plans of SICA,
determined using the same interest rate and mortality assumptions as those used for financial statement reporting purposes. There
were no changes to the benefit formulas under the defined pension benefit plans in 2015. The changes in pension values reported
in this column are attributable, in part, to fluctuations in the discount rate used to calculate present value, an increase in
the years of service of the NEOs, and the impact of adopting the RP2014 Fully Generational Mortality Table that was approved by
the U.S. Society of Actuaries in the fourth quarter of 2014. There were no above-market or preferential earnings on deferred compensation
under SICA’s nonqualified deferred compensation program.
(4)
For 2015, amounts in
this column for each NEO reflect the following:
|
§
|
Mr.
Murphy: $29,717 of company matching contributions and $25,600 of non-elective contributions
to his Deferred Compensation Plan account, $11,925 of company matching contributions
and $10,600 of non-elective contributions to his 401(k) plan account, and $3,000 for
tax preparation services.
|
|
§
|
Mr.
Thatcher: $14,902 of company matching contributions and $12,446 of non-elective contributions
to his Deferred Compensation Plan account, and $11,925 of company matching contributions
and $10,600 of non-elective contributions to his 401(k) plan account.
|
|
§
|
Mr.
Marchioni: $22,033 of company matching contributions and $18,600 of non-elective contributions
to his Deferred Compensation Plan account, and $11,925 of company matching contributions
and $10,600 of non-elective contributions to his 401(k) plan account, and $810 for imputed
income related to life insurance.
|
|
§
|
Mr.
Lanza: $11,337 of company matching contributions and $9,477 of non-elective contributions
to his Deferred Compensation Plan account, $11,925 of company matching contributions
and $10,600 of non-elective contributions to his 401(k) plan account, and $2,255 for
tax preparation services.
|
GRANTS OF PLAN-BASED AWARDS
The following table shows the grants of plan-based awards to our
NEOs in 2015:
Name
|
Grant
Date
|
Estimated Future
Payouts under Non-
Equity Incentive Plan
Awards
(1)
|
Estimated Future Payouts under Equity
Incentive Plan Awards
(2)
|
Grant Date Fair Value
of Cash Incentive Unit,
Restricted Stock Units,
and Option Awards
(4)
($)
|
Cash Incentive Unit
Awards
(3)
|
Restricted
Stock Unit
Awards
(#)
|
Thres-
hold
($)
|
Maximum
($)
|
Thres-
hold
(#)
|
Target
(#)
|
Max-
imum
(#)
|
Maximum
(#)
|
Gregory E. Murphy
|
2/2/2015
|
|
|
|
|
|
38,077
|
990,002
|
2/2/2015
|
|
|
2,178
|
6,600
|
13,200
|
|
660,000
|
–
|
0
|
1,860,000
|
|
|
|
|
–
|
Dale A. Thatcher
|
2/2/2015
|
|
|
|
|
|
15,000
|
377,400
|
2/2/2015
|
|
|
858
|
2,600
|
5,200
|
|
260,000
|
–
|
0
|
900,000
|
|
|
|
|
–
|
John J. Marchioni
|
2/2/2015
|
|
|
|
|
|
23,077
|
561,694
|
2/2/2015
|
|
|
1,320
|
4,000
|
8,000
|
|
400,000
|
–
|
$0
|
1,330,000
|
|
|
|
|
–
|
Michael H. Lanza
|
2/2/2015
|
|
|
|
|
|
10,962
|
272,844
|
2/2/2015
|
|
|
627
|
1,900
|
3,800
|
|
190,000
|
–
|
0
|
780,000
|
|
|
|
|
–
|
(1)
Amounts represent
minimum and maximum potential ACIP awards under our Cash Incentive Plan for 2015. Maximum awards reflect the maximum ACIP award
established by the SEBC. Actual payouts of the above-referenced awards are included in the Non-Equity Incentive Plan Compensation
column of the Summary Compensation Table. For information regarding the ACIP, see the section of the Compensation Discussion and
Analysis entitled, “Annual Cash Incentive Program.”
(2)
Performance-based cash
incentive unit awards were granted under the Cash Incentive Plan, and performance-based restricted stock unit awards were granted
under the 2014 Omnibus Stock Plan. For a description of the material terms of such awards, see the section of the Compensation
Discussion and Analysis entitled, “Elements of Long-Term Compensation.”
(3)
The number of performance-based
cash incentive units paid can range from 0-200%, and therefore, the amount payable could be $0. The threshold selected represents
the 30th percentile of the Cash Incentive Unit Peer Group; the target represents the 50th percentile of the Cash Incentive Unit
Peer Group; and the maximum represents greater than or equal to the 80th percentile of the Cash Incentive Unit Peer Group.
(4)
This column includes
the grant date fair value of restricted stock unit awards and cash incentive unit awards with an initial value of $100 per unit.
No stock option awards were granted in 2015.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR
END
The following table shows the unexercised options and unvested
stock awards of our NEOs as of December 31, 2015:
|
Option Awards
|
Stock Awards
|
Name
|
No. of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
Option
Exercise
Price
($/Sh)
(1)
|
Option
Expiration
Date
|
No. of
Shares or
Units of
Stock
That Have
Not
Vested
(#)
(2)
|
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)
|
Equity
Incentive Plan
Awards: No.
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
(#)
|
Equity Incentive
Plan Awards:
Market or
Payout Value of
Unearned
Shares, Units or
Other Rights
That Have Not
Vested
($)
(10)
|
Gregory E. Murphy
|
3,480
|
27.44
|
1/30/2017
|
44,313
(3)
|
1,488,040
|
6,000
(7)
|
2,226,360
|
|
4,154
|
24.07
|
2/6/2018
|
44,020
(4)
|
1,478,185
|
6,400
(8)
|
1,654,912
|
|
6,514
|
15.35
|
1/30/2019
|
38,818
(5)
|
1,303,500
|
6,600
(9)
|
1,662,540
|
|
6,439
|
15.53
|
2/5/2020
|
|
|
|
|
Dale A. Thatcher
|
6,514
|
15.35
|
1/30/2019
|
16,987
(3)
|
570,423
|
2,300
(7)
|
853,438
|
|
6,439
|
15.53
|
2/5/2020
|
16,508
(4)
|
554,346
|
2,400
(8)
|
620,592
|
|
|
|
|
15,292
(5)
|
513,499
|
2,600
(9)
|
654,940
|
John J. Marchioni
|
4,154
|
24.07
|
2/6/2018
|
16,987
(3)
|
570,423
|
2,300
(7)
|
853,438
|
|
6,514
|
15.35
|
1/30/2019
|
24,761
(4)
|
831,484
|
3,600
(8)
|
930,888
|
|
6,439
|
15.53
|
2/5/2020
|
23,526
(5)
|
790,001
|
4,000
(9)
|
1,007,600
|
|
|
|
|
25,834
(6)
|
867,508
|
|
|
Michael H. Lanza
|
-
|
-
|
-
|
12,998
(3)
|
436,486
|
1,760
(7)
|
653,066
|
|
|
|
|
12,381
(4)
|
415,742
|
1,800
(8)
|
465,444
|
|
|
|
|
11,175
(5)
|
375,265
|
1,900
(9)
|
478,610
|
(1)
The exercise price of option grants made under the 2005 Omnibus Stock Plan is the closing market price on the date of
the grant.
(2)
In the event of a termination of employment on or after an individual attains Early Retirement Age, as defined under the
Retirement Income Plan (the “RIP Early Retirement Age”): (i) holders of performance-based restricted stock unit awards
granted in 2013 and 2014 are vested in such awards subject only to the attainment of applicable performance measures; and (ii)
Mr. Marchioni’s time-based restricted stock unit award granted in 2013 would fully vest. The respective dates upon which
each NEO attained, or is anticipated to attain, his RIP Early Retirement Age are as follows: Mr. Murphy, October 27, 2002; Mr.
Thatcher, December 4, 2015; Mr. Marchioni, September 14, 2018; and Mr. Lanza, December 16, 2016. In the event of a termination
of employment on or after an individual attains Early Retirement Age, as defined under the 2015 restricted stock unit award agreement
(the “2015 Award Early Retirement Age”), holders of performance-based restricted stock unit awards granted in 2015
are vested in such awards subject only to the attainment of applicable performance measures. The respective dates upon which each
NEO attained, or is anticipated to attain, his 2015 Award Early Retirement Age are as follows: Mr. Murphy, April 11, 2010; Mr.
Thatcher, July 26, 2016; Mr. Marchioni, May 28, 2024; and Mr. Lanza, December 16, 2016.
(3)
Reflects number of performance-based restricted stock units initially granted on February 4, 2013 and the related accrued
DEUs, which will vest and be payable, subject to the attainment of applicable performance measures, on February 4, 2016.
(4)
Reflects number of performance-based restricted stock units initially granted on February 3, 2014 and the related accrued
DEUs, which will vest and be payable, subject to the attainment of applicable performance measures, on February 3, 2017.
(5
)
Reflects number of performance-based restricted stock units initially granted on February 2, 2015 and the related accrued
DEUs, which will vest and be payable, subject to the attainment of applicable performance measures, on February 2, 2018.
(6)
Reflects number of time-based restricted stock units initially granted September 17, 2013 and the related accrued DEUs,
which will vest and be payable on September 17, 2016.
(7)
Reflects number of performance-based cash incentive units initially granted on February 4, 2013 to the NEOs for the three-year
performance period ending December 31, 2015. In the event of a termination of employment on or after an individual’s RIP
Early Retirement Age, holders of such awards are vested in such awards, with the initial number of units and the value of each
unit subject to adjustment, based on the attainment of specified performance measures. RIP Early Retirement Age dates for the
NEOs are set forth in footnote 2. Settlement of the 2013 cash incentive unit awards will be made as soon as practicable in the
2016 calendar year, following the determination of the attainment of the applicable performance measures.
(8)
Reflects number of
performance-based cash incentive units initially granted on February 3, 2014 to the NEOs for the three-year performance period
ending December 31, 2016. In the event of a termination of employment on or after an individual’s RIP Early Retirement Age,
holders of such awards are vested in such awards, with the initial number of units and the value of each unit subject to adjustment,
based on the attainment of specified performance measures. RIP Early Retirement Age dates for the NEOs are set forth in footnote
2. Settlement of the 2014 cash incentive unit awards will be made as soon as practicable in the 2017 calendar year, following
the determination of the attainment of the applicable performance measures.
(9)
Reflects number of performance-based cash incentive units initially granted on February 2, 2015 to the NEOs for the three-year
performance period ending December 31, 2017. In the event of a termination of employment on or after an individual’s 2015
Award Early Retirement Age, holders of such awards are vested in such awards, with the initial number of units and the value of
each unit subject to adjustment, based on the attainment of specified performance measures. 2015 Award Early Retirement Age dates
for the NEOs are set forth in footnote 2. Settlement of the 2015 cash incentive unit awards will be made as soon as practicable
in the 2018 calendar year, following the determination of the attainment of the applicable performance measures.
(10)
The amounts in this
column reflect: (i) a $185.53 per unit value for the February 4, 2013 cash incentive unit grant, a $129.29 per unit value for
the February 3, 2014 cash incentive unit grant, and a $125.95 per unit value for February 2, 2015 cash incentive unit grant based
on the TSR of Selective common stock at December 31, 2015; and (ii) a 200% unit multiplier for the number of cash incentive units
granted on February 4, 2013, February 3, 2014, and February 2, 2015, respectively, based on performance against the Cash Incentive
Unit Peer Group. This unit multiplier reflects the maximum performance measure for all three grants. This multiplier is appropriate
considering: (i) each grant’s performance has exceeded the threshold performance measure; and (ii) the maximum multiplier
of 200% is above the actual performance of 183%, 167%, and 133% for the 2013, 2014, and 2015 grants, respectively. The performance
measures are identified for the February 2, 2015 grant in the Grants of Plan-Based Awards table.
OPTION EXERCISES AND STOCK VESTED
The following table shows the option exercises and stock vesting
of grants of plan-based awards by our NEOs in 2015:
|
Option Awards
|
Stock Awards
|
Name
|
Number of Shares
Acquired on Exercise
(#)
|
Value Realized
on Exercise
($)
|
Number of Shares
Acquired on Vesting
(#)
(1)
|
Value Realized on
Vesting
($)
(2)
|
Gregory E. Murphy
|
3,480
|
9,744
|
53,529
|
2,676,703
|
Dale A. Thatcher
|
11,114
|
95,694
|
19,559
|
978,028
|
John J. Marchioni
|
3,644
|
13,954
|
19,559
|
978,028
|
Michael H. Lanza
|
11,114
|
54,033
|
16,883
|
844,211
|
(1)
Amounts in this column include performance-based restricted stock units that vested in 2015 as well as performance-based
cash incentive units paid in 2015. The amounts reflected in the table attributable to performance-based restricted stock units
are as follows: Mr. Murphy, 44,845; Mr. Thatcher, 16,386; Mr. Marchioni, 16,386; and Mr. Lanza, 14,144. The amounts reflected
in the table attributable to performance-based cash incentive units are as follows: Mr. Murphy, 8,684; Mr. Thatcher, 3,173; Mr.
Marchioni, 3,173; and Mr. Lanza, 2,739.
(2)
Amounts in this column include the value of performance-based restricted stock units that vested in 2015 as well as the
amount paid for performance-based cash incentive units in 2015. The amounts reflected in the table attributable to performance-based
restricted stock units are as follows: Mr. Murphy, $1,244,885; Mr. Thatcher, $454,864; Mr. Marchioni, $454,864; and Mr. Lanza,
$392,638. The amounts reflected in the table attributable to performance-based cash incentive units are as follows: Mr. Murphy,
$1,431,818; Mr. Thatcher, $523,164; Mr. Marchioni, $523,164; and Mr. Lanza, $451,573.
PENSION BENEFITS
SICA maintains a tax qualified non-contributory defined benefit
pension plan, the Retirement Income Plan. Many SICA employees, including the NEOs and certain former employees whose employment
commenced on or before December 31, 2005, are eligible to receive benefits under the Retirement Income Plan. SICA also maintains
the unfunded Selective Insurance Supplemental Pension Plan (“SERP”), as permitted under the Employee Retirement Income
Security Act of 1974, as amended, to provide payments to certain executives and other participants in the Retirement Income Plan
equal to the difference between: (i) the benefit payment to a participant under the Retirement Income Plan calculated without
regard to the Employee Retirement Income Security Act of 1974, as amended, and Code limitations on annual amounts payable under
the Retirement Income Plan; and (ii) the benefit payable to the participant pursuant to such limitations.
The Retirement Income Plan and the SERP were amended in the first
quarter of 2013 to curtail the accrual of additional benefits under these plans for all eligible employees as of March 16, 2016.
The Retirement Income Plan was amended as of July 1, 2002 to provide
for different calculations based on age and company service as of that date. Monthly benefits payable at normal retirement age
under the Retirement Income Plan and SERP for the NEOs are computed as follows. Defined terms used in this section, but not defined
in this Proxy Statement, have the meanings given to them in the Retirement Income Plan.
|
1.
|
If a participant: (i) completed at least five years of Vesting
Service on or before July 1, 2002; and (ii) the sum of a participant’s age and
Vesting Service is 55 or more on or before July 1, 2002, a participant’s benefit
is equal to the sum of: (a) 2% of Average Monthly Compensation, less 1 3/7% of Primary
Social Security benefit multiplied by the number of years of Benefit Service through
June 30, 2002 (up to 35 years) reduced by the monthly amount, if any, of retirement annuity
payable under the group annuity contract issued by AXA Equitable Life Insurance Company
that was purchased under a prior terminated defined benefit pension plan, based on Benefit
Service as of June 30, 2002, but including compensation earned after such date; and (b)
1.2% of Average Monthly Compensation multiplied by the number of years of Benefit Service
after June 30, 2002.
|
|
2.
|
If a participant first became eligible for the plan before July
1, 2002, but did not qualify for either 1 or 2 above, the participant’s benefit
is equal to the greater of: (i) the benefit accrued as of June 30, 2002 equal to 2% of
Average Monthly Compensation less 1 3/7% of Primary Social Security Benefit multiplied
by years of Benefit Service reduced by the monthly amount, if any of retirement annuity
payable under the group annuity contract issued by AXA Equitable Life Insurance Company
that was purchased under a prior terminated defined benefit pension plan, based on Benefit
Service as of June 30, 2002, but including compensation earned after such date for purposes
of determining the participant’s Average Monthly compensation; and (ii) 1.2% of
Average Monthly Compensation multiplied by years of Benefit Service.
|
|
3.
|
If a participant first became a participant in the plan after
July 1, 2002, the benefit is equal to 1.2% of Average Monthly Compensation multiplied
by years of Benefit Service.
|
The earliest retirement age is 55 with 10 years of service or the
attainment of 70 points (age plus years of service). If a participant chooses to begin receiving benefits before his or her 65th
birthday, the amount of the monthly benefit will be reduced as follows:
|
§
|
By 1/180th
for each complete calendar month for the first 60 months by which the first early retirement
benefit payment precedes the attainment of Normal Retirement Age (age 65);
|
|
§
|
By 1/360th
for each complete calendar month for the next 60 months by which the first early retirement
benefit payments precede Normal Retirement Age; and
|
|
§
|
By 40% plus
1/600th per month for each month prior to age 55.
|
At retirement, participants receive monthly pension payments. There
are four optional forms of payments that can be chosen as alternatives to the normal form of payment, which for a married participant
is an automatic 50% joint and surviving spouse annuity, and for an unmarried participant is a single life annuity.
The following table shows information regarding the pension benefits
of our NEOs:
Name
|
Early
Retirement
Eligible
|
Plan Name
|
Number of
Years Credited
Service
(#)
(1)
|
Present Value of
Accumulated
Benefit
($)
(2)
|
Payments
During Last
Fiscal Year
($)
|
Gregory E. Murphy
|
Yes
|
Retirement Income Plan
|
34.58
|
1,432,712
|
0
|
|
|
SERP
|
34.58
|
3,970,879
|
0
|
Dale A. Thatcher
|
Yes
|
Retirement Income Plan
|
14.67
|
352,635
|
0
|
|
|
SERP
|
14.67
|
400,797
|
0
|
John J. Marchioni
|
No
|
Retirement Income Plan
|
17.00
|
285,442
|
0
|
|
|
SERP
|
17.00
|
378,544
|
0
|
Michael H. Lanza
|
No
|
Retirement Income Plan
|
10.42
|
245,713
|
0
|
|
|
SERP
|
10.42
|
217,603
|
0
|
(1)
The Retirement Income Plan imposes a one-year waiting period for plan participation, which year is not included in years
of credited service.
(2)
Present value as of December 31, 2015 is calculated on the basis of Normal Retirement Age of 65 using a 4.69% discount rate.
For further discussion, see Note 14. “Retirement Plans” in Item 8. “Financial Statements and Supplementary Data.”
of Selective’s Annual Report on Form 10-K for the year ended December 31, 2015.
NONQUALIFIED DEFERRED COMPENSATION
The Deferred Compensation Plan allows participants to defer receipt
of up to 50% of base salary and up to 90% of their ACIP payments. Participant accounts are credited with a notional rate of return
(positive or negative) based on the performance of investment options selected by the participant from a menu of investment options.
Participants can elect to schedule in-service withdrawals or withdrawals at separation of service.
SICA makes matching contributions to a participant’s Deferred
Compensation Plan account to supplement matching contributions under the Retirement Savings Plan. For 2015, such matching contributions
consisted of 100% of the first 3% of base salary and 50% of the next 3% of base salary deferred to the Retirement Savings Plan
and the Deferred Compensation Plan, minus any matching contribution made to a participant’s Retirement Savings Plan account.
In addition, effective January 1, 2010, the Deferred Compensation Plan was amended for participants ineligible to participate
in the Retirement Income Plan to provide a non-elective contribution to the extent not made to a participant’s Retirement
Savings Plan account due to the limitations under the Code and the Retirement Savings Plan. The non-elective contribution is equal
to 4% of base salary, minus any non-elective contribution made to the Retirement Savings Plan. In conjunction with the amendment
of the Retirement Income Plan and the SERP to curtail the accrual of benefits under these plans, all participants affected by
the curtailment, including the NEOs, became eligible for the non-elective contribution effective April 5, 2013.
The following table shows information regarding nonqualified deferred
compensation of our NEOs:
Name
|
Executive
Contributions
in 2015
($)
(1)
|
Company
Contributions
in 2015
($)
(2)
|
Aggregate
Earnings in 2015
($)
(3)
|
Aggregate
Withdrawals/
Distributions
($)
|
Aggregate Balance
at December 31,
2015
($)
(4)
|
Gregory E. Murphy
|
37,015
|
55,317
|
(13,829)
|
0
|
1,693,654
|
Dale A. Thatcher
|
59,615
|
27,348
|
(16,493)
|
(13,088)
|
887,250
|
John J. Marchioni
|
37,731
|
40,633
|
(4,266)
|
0
|
383,108
|
Michael H. Lanza
|
20,677
|
20,814
|
(9,509)
|
0
|
224,157
|
(1)
Amounts in this column are attributable to 2015 salary deferred by Messrs. Murphy, Thatcher, Marchioni, and Lanza, and are
included in the Salary column of the Summary Compensation Table.
(2)
All amounts in this column are included in the All Other Compensation column of the Summary Compensation Table.
(3)
Amounts in this column are not included in the Summary Compensation Table because such earnings are not above market earnings.
(4)
Amounts in this column include the following aggregate contributions of the NEOs and SICA to the Deferred Compensation Plan
in 2015, which amounts are included in the Summary Compensation Table:
|
§
|
For
2013: Mr. Murphy, $74,025; Mr. Thatcher, $67,494; Mr. Marchioni, $44,794; and Mr. Lanza,
$24,352.
|
|
§
|
For
2014: Mr. Murphy, $91,292; Mr. Thatcher, $77,840; Mr. Marchioni, $58,802; and Mr. Lanza,
$35,108.
|
|
§
|
For
2015: Mr. Murphy, $92,332; Mr. Thatcher, $86,963; Mr. Marchioni, $78,364; and Mr. Lanza,
$41,491.
|
EMPLOYMENT AGREEMENTS AND POTENTIAL PAYMENTS
UPON
TERMINATION OR CHANGE IN CONTROL
SICA entered into amended employment agreements with Messrs. Murphy,
Thatcher, and Lanza, as of December 23, 2008, and with Mr. Marchioni as of September 10, 2013 in connection with his election
as President and Chief Operating Officer (collectively, the “Employment Agreements”). The following table summarizes
the principal provisions of the Employment Agreements.
Term
|
Initial three-year term, automatically renewed for additional one-year periods unless terminated by either party with written notice.
(1)
|
Compensation
|
Base salary.
(2)
|
Benefits
|
Eligible to participate in incentive compensation plan, stock plan, 401(k) plan, defined benefit pension plan and any other stock option, stock appreciation right, stock bonus, pension, group insurance, retirement, profit sharing, medical, disability, accident, life insurance, relocation plan or policy, or any other plan, program, policy or arrangement of Selective or SICA intended to benefit SICA’s employees generally.
|
Vacation and Reimbursements
|
Vacation time and reimbursements for ordinary travel and entertainment expenses in accordance with SICA’s policies.
|
Perquisites
|
Suitable offices, secretarial and other services, and other perquisites to which other executives of SICA are generally entitled.
|
Severance and Benefits on Termination without Change in Control
|
§
For
Cause or Resignation by NEO other than for Good Reason
: Salary and benefits accrued through termination date.
§
Death
or Disability
: Multiple
(3)
of: (i) NEOs salary; plus (ii) average of three most recent annual cash incentive
payments; provided that any such severance payments be reduced by life or disability insurance payments under policies
with respect to which SICA paid premiums, paid in 12 equal installments.
§
Without
Cause by SICA, Relocation of Office over 50 Miles (without NEOs consent), Resignation for Good Reason by CEO
:
o
Multiple
(3)
of: (i) NEOs salary; plus (ii) average of three most recent annual cash incentive payments paid in 12 equal installments.
o
Medical,
dental, vision, disability, and life insurance coverage in effect for NEO and dependents until the earlier of specified
period of months
(4)
following termination or commencement of equivalent benefits from a new employer.
§
Stock
Awards
: Except for termination for Cause or resignation by the NEO other than for relocation of office over 50 miles
(without NEOs consent), immediate vesting and possible extended exercise period, as applicable, for any previously granted
stock options, stock appreciation rights, cash incentive units, restricted stock, restricted stock units, and stock bonuses.
Such immediate vesting and possible extended exercise periods shall also apply to a resignation by the CEO for Good Reason.
|
Severance and Benefits on Termination after Change in Control
|
For termination without Cause or resignation for Good Reason by:
(i) CEO at any time; or (ii) other NEO within two years following a Change in Control (as defined in the Employment Agreement),
NEO is entitled to:
§
Severance
payment equal to multiple
(5)
of the greater of: (i) NEOs salary plus target annual cash incentive payment; or (ii) NEOs
salary plus the average of NEOs annual cash incentive payments for the three calendar years prior to the calendar year in which
the termination occurs, paid in lump sum.
§
Medical,
dental, vision, disability, and life insurance coverage in effect for NEO and dependents until the earlier of period of months
(6)
following termination or commencement of equivalent benefits from a new employer.
§
Stock
awards, same as above, except that the initial number of cash incentive units is multiplied by 150%.
§
Tax
gross-up payment, if necessary, to offset any excise tax imposed on NEO (other than Mr. Marchioni, whose 2013 employment agreement
does not contain this provision) for such payments or benefits.
|
Release; Confidentiality and Non-Solicitation
|
§
Receipt
of severance payments and benefits conditioned upon:
o
Entry
into release of claims; and
o
No
disclosure of confidential or proprietary information, or solicitation of employees to leave Selective or its subsidiaries for
a period of two years following the termination of the Employment Agreement, and for Mr. Marchioni, assignment of intellectual
property rights.
|
(1)
The Employment Agreements automatically renewed for additional one-year periods on April 25, 2015 for Mr. Murphy, on July
26, 2015 for Mr. Lanza, on July 31, 2015 for Mr. Thatcher, and for a new initial three year period for Mr. Marchioni on September
10, 2013.
(2)
As of February 22, 2016, the annual base salaries for the NEOs were as follows: Mr. Murphy, $950,000; Mr. Thatcher, $625,000;
Mr. Marchioni, $800,000; and Mr. Lanza, $540,000.
(3)
For Messrs. Murphy and Marchioni the multiple is 2 and for Messrs. Thatcher and Lanza, the multiple is 1.5.
(4)
For Messrs. Murphy and Marchioni the period is 24 months and for Messrs. Thatcher and Lanza, the period is 18 months.
(5)
For Messrs. Murphy and Marchioni the multiple is 2.99 and for Messrs. Thatcher and Lanza, the multiple is 2.
(6)
For Messrs. Murphy and Marchioni the period is 36 months and for Messrs. Thatcher and Lanza the period is 24 months.
The following table shows information regarding payments and benefits
to which our NEOs would be entitled under the scenarios shown as of December 31, 2015:
Name
|
Resignation
(1)
or
Termination For
Cause
($)
|
Retirement
($)
(2)
|
Death or
Disability
($)
(3)
|
Termination without
Cause or Resignation with
Good Reason
($)
(4)
|
Termination
Following
Change in
Control
($)
(5)
|
Gregory E. Murphy
|
-
|
7,041,632
|
11,384,965
|
11,409,450
|
23,053,623
|
Dale A. Thatcher
|
-
|
2,702,753
|
4,477,753
|
4,496,117
|
7,996,772
|
John J. Marchioni
|
-
|
4,455,379
|
7,475,379
|
7,497,109
|
9,730,756
|
Michael H. Lanza
|
-
|
2,026,052
|
3,341,052
|
3,358,671
|
6,354,156
|
(1)
Other than a resignation for Good Reason.
(2)
This column includes the value of unvested performance-based restricted stock units granted under the 2005 Omnibus Stock
Plan and the 2014 Omnibus Stock Plan and any related accrued DEUs. These performance based awards would normally vest upon: (i)
retirement or continuation in service through the end of the applicable performance period; and (ii) the achievement of the specified
performance goals applicable to each such award, and be payable following the end of the applicable three-year performance period.
This column also includes the value of unvested time-based restricted stock units granted to Mr. Marchioni in connection with
his election as President and Chief Operating Officer in September 2013 (“September 2013 Grant”) under the 2005 Omnibus
Stock Plan and any related accrued DEUs. These time-based restricted units awarded to Mr. Marchioni would normally vest upon retirement
or continuation in service through the end of the applicable performance period, and be payable following the end of the applicable
three-year performance period. Also included in this column is the value of performance-based cash incentive units awarded under
the Cash Incentive Plan to the NEOs. The value of such awards is calculated using: (i) the target 100% unit multiplier for the
number of cash incentive units granted; and (ii) the per unit value at December 31, 2015. Under the Cash Incentive Plan,
participants’
awards, including the NEOs’ awards, would fully vest upon retirement or continuation in service through the end of the payment
date and be payable following the end of the applicable three-year performance period.
(3)
This column includes the value of unvested performance-based restricted stock units granted under the 2005 Omnibus Stock
Plan and the 2014 Omnibus Stock Plan and any related accrued DEUs. In the event of total disability, these performance based awards
would normally vest for all participants, including the NEOs, upon the achievement of the specified performance goals applicable
to each such award, and be payable following the end of the applicable three-year performance period. This column also includes
the value of the September 2013 Grant and any related DEUs. In the event of his total disability, these time-based units would
vest and become payable. In the event of death, both the performance-based and time-based awards are immediately vested and payable
for all participants, including the NEOs. Also included in this column is the value of performance-based cash incentive units
awarded under the Cash Incentive Plan to the NEOs. The value of such awards is calculated using: (i) the target 100% unit multiplier
for the number of cash incentive units granted; and (ii) the per unit value at December 31, 2015. Under the Cash Incentive Plan,
participants’ awards, in the event of total disability, including the NEOs’ awards, would fully vest and be payable
following the end of the applicable three-year performance period. This column also includes the severance payment provided for
in each NEOs Employment Agreement. Payments in this column will be reduced by life or disability insurance payments under policies
with respect to which SICA paid premiums.
(4)
This column includes the value of unvested performance-based restricted stock units granted under the 2005 Omnibus Stock
Plan and the 2014 Omnibus Stock Plan and any related accrued DEUs. These performance based awards would normally vest upon: (i)
a termination without Cause or Resignation for Good Reason; and (ii) the achievement of the specified performance goals applicable
to each such award, and be payable following the end of the applicable three-year performance period. This column also includes
the value of the September 2013 Grant and any related DEUs. In the event of termination without Cause or Resignation for Good
Reason, these time-based units would vest and become payable. Also included in this column is the value of performance-based cash
incentive units awarded under the Cash Incentive Plan to the NEOs. The value is calculated using: (i) the target 100% unit multiplier
for the number of cash incentive units granted; and (ii) the per unit value at December 31, 2015. The awards would fully vest
and be payable following the end of the applicable three-year performance period. Also included in this column are the severance
payment and the value of medical, dental, vision, disability, and life insurance coverage, all as provided for in each NEOs Employment
Agreement.
(5)
This column includes the value of unvested performance-based restricted stock units granted under the 2005 Omnibus Stock
Plan and the 2014 Omnibus Stock Plan, the September 2013 Grant, and any related accrued DEUs, which would immediately vest and
be payable upon a termination of employment following a change in control. This column also includes the value of performance-based
cash incentive units awarded under the Cash Incentive Plan to the NEOs, all of which would vest upon a termination of employment
following a change in control. The value of such awards is calculated using: (i) a 150% per unit multiplier; and (ii) the per
unit value at December 31, 2015. Also included in this column are the severance payment and the value of medical, dental, vision,
disability, and life insurance coverage, all as provided for in each NEOs Employment Agreement. This column also includes the
value of any tax gross-up payment necessary to offset any excise tax imposed for the payment and benefits disclosed in this column,
other than for Mr. Marchioni whose 2013 employment agreement does not contain this provision.