Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking Statements
Certain statements in this report, including information incorporated by reference, are “forward-looking statements” defined in the Private Securities Litigation Reform Act of 1995 (“PSLRA”). The PSLRA provides a safe harbor under the Securities Act of 1933, as amended, and the Exchange Act for forward-looking statements. These statements relate to our intentions, beliefs, projections, estimations or forecasts of future events or future financial performance and involve known and unknown risks, uncertainties and other factors that may cause us or the industry’s actual results, levels of activity, or performance to be materially different from those expressed or implied by the forward-looking statements. In some cases, you may identify forward-looking statements by use of words such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “target,” “project,” “intend,” “believe,” “estimate,” “predict,” “potential,” “pro forma,” “seek,” “likely,” or “continue.” or other comparable terminology. These statements are only predictions, and we can give no assurance that such expectations will prove to be correct. We undertake no obligation, other than what federal securities laws may require, to publicly update or revise any forward-looking statements, regardless of new information, future events, or other unknowns.
Factors that could cause our actual results to differ materially from those projected, forecasted, or estimated in our forward-looking statements are discussed in further detail in Item 1A. “Risk Factors.” of this Form 10-K. These risk factors may not be exhaustive. We operate in a constantly changing business environment, and new risk factors may emerge at any time. We can neither predict these new risk factors nor assess their impact, if any, on our businesses or the extent any new factor or combination of factors may cause actual results to differ materially from any forward-looking statements. Given these risks, uncertainties, and assumptions, the forward-looking events we discuss in this report might not occur.
Introduction
We classify our business into four reportable segments:
•Standard Commercial Lines;
•Standard Personal Lines;
•E&S Lines; and
•Investments.
For more details about these segments, refer to Note 1. "Organization" and Note 12. "Segment Information" in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
We write our Standard Commercial and Standard Personal Lines products and services through nine of our insurance subsidiaries, some of which participate in the federal government's National Flood Insurance Program's ("NFIP") Write Your Own Program ("WYO"). We write our E&S products through another subsidiary, Mesa Underwriters Specialty Insurance Company, which provides us with a nationally-authorized non-admitted platform for customers who generally cannot obtain coverage in the standard marketplace. Collectively, we refer to our ten insurance subsidiaries as the "Insurance Subsidiaries".
The following is Management's Discussion and Analysis ("MD&A") of the consolidated results of operations and financial condition, as well as known trends and uncertainties, that may have a material impact in future periods. The MD&A discusses and analyzes our results in 2020 compared to 2019. Investors should read the MD&A in conjunction with Item 8. "Financial Statements." of this Form 10-K. For discussion and analysis of our 2019 results compared to 2018, refer to Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations." of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
In the MD&A, we will discuss and analyze the following:
•Critical Accounting Policies and Estimates;
•Financial Highlights of Results for Years Ended December 31, 2020, 2019, and 2018;
•Results of Operations and Related Information by Segment;
•Federal Income Taxes;
•Financial Condition, Liquidity, and Capital Resources;
•Off-Balance Sheet Arrangements; and
•Contractual Obligations, Contingent Liabilities, and Commitments.
Critical Accounting Policies and Estimates
We have identified the policies and estimates critical to our business operations and the understanding of our results of operations. In preparing our consolidated financial statements ("Financial Statements"), we are required to make estimates and
assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our Financial Statements, and the reported amounts of revenue and expenses during the reporting period. We offer no assurances that actual results will be the same as those estimates, and it is possible they will differ materially. The policies and estimates we consider most critical to the preparation of the Financial Statements involved (i) reserves for loss and loss expense, (ii) investment valuations and the allowance for credit losses on available-for-sale ("AFS") fixed income securities, (iii) reinsurance, (iv) allowance for credit losses on premiums receivable, and (v) accrual for auditable premium.
Reserves for Loss and Loss Expense
Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the claim to us, and the final settlement of the claim. To recognize liabilities for unpaid loss and loss expense, insurers establish reserves as balance sheet liabilities representing an estimate of amounts needed to pay reported and unreported net loss and loss expense. At December 31, 2020, we had recorded $4.3 billion of gross loss and loss expense reserves and $3.7 billion of net loss and loss expense reserves. At December 31, 2019, these gross and net reserves were $4.1 billion and $3.5 billion, respectively. The Insurance Subsidiaries' liability duration was approximately 3.7 years at December 31, 2020, up slightly from 3.6 years at December 31, 2019.
The following tables provide case and incurred but not reported (“IBNR”) reserves for loss and loss expenses, and reinsurance recoverable on unpaid loss and loss expense as of December 31, 2020 and 2019:
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As of December 31, 2020
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Loss and Loss Expense Reserves
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($ in thousands)
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Case
Reserves
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IBNR
Reserves
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Total
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Reinsurance Recoverable on Unpaid Loss and Loss Expense
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Net Reserves
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General liability
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$
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275,133
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1,363,508
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1,638,641
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215,136
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1,423,505
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Workers compensation
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359,344
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721,437
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1,080,781
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210,450
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870,331
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Commercial automobile
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246,428
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410,123
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656,551
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11,611
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644,940
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Businessowners' policies
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39,047
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62,517
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101,564
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6,849
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94,715
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Commercial property
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60,254
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38,228
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98,482
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21,760
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76,722
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Other
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5,247
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15,073
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20,320
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2,853
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17,467
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Total Standard Commercial Lines
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985,453
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2,610,886
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3,596,339
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468,659
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3,127,680
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Personal automobile
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60,860
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79,596
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140,456
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42,403
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98,053
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Homeowners
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15,456
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31,926
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47,382
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847
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46,535
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Other
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10,498
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30,013
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40,511
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29,589
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10,922
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Total Standard Personal Lines
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86,814
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141,535
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228,349
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72,839
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155,510
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E&S casualty lines1
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80,506
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336,596
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417,102
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12,195
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404,907
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E&S property lines2
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9,401
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9,164
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18,565
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576
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17,989
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Total E&S Lines
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89,907
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345,760
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435,667
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12,771
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422,896
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Total
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$
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1,162,174
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3,098,181
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4,260,355
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554,269
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3,706,086
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1Includes general liability (95% of net reserves) and commercial auto liability coverages (5% of net reserves).
2Includes commercial property (92% of net reserves) and commercial auto property coverages (8% of net reserves).
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December 31, 2019
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Loss and Loss Expense Reserves
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($ in thousands)
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Case
Reserves
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IBNR
Reserves
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Total
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Reinsurance Recoverable on Unpaid Loss and Loss Expense
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Net Reserves
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General liability
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$
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247,267
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1,269,643
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1,516,910
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195,830
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1,321,080
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Workers compensation
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372,104
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729,298
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1,101,402
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206,414
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894,988
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Commercial auto
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216,358
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408,371
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624,729
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14,352
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610,377
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Businessowners' policies
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35,062
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57,929
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92,991
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3,012
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89,979
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Commercial property
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63,678
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17,083
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80,761
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26,526
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54,235
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Other
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14,213
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5,357
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19,570
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9,113
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10,457
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Total Standard Commercial Lines
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948,682
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2,487,681
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3,436,363
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455,247
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2,981,116
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Personal automobile
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68,605
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80,445
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149,050
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44,104
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104,946
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Homeowners
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13,616
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21,713
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35,329
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1,182
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34,147
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Other
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11,600
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28,221
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39,821
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28,993
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10,828
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Total Standard Personal Lines
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93,821
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130,379
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224,200
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74,279
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149,921
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E&S casualty lines1
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68,042
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328,301
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396,343
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14,319
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382,024
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E&S property lines2
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3,146
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7,111
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10,257
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317
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9,940
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E&S Lines
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71,188
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335,412
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406,600
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14,636
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391,964
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Total
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$
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1,113,691
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2,953,472
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4,067,163
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544,162
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3,523,001
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1Includes general liability (94% of net reserves) and commercial auto liability coverages (6% of net reserves).
2Includes commercial property (85% of net reserves) and commercial auto property coverages (15% of net reserves).
How reserves are established
Reserves for loss and loss expense includes case reserves on reported claims and reserves known as incurred but not reported ("IBNR") reserves. Case reserves are estimated on each individual claim, and based on claim-specific facts and circumstances known at the time. The case reserves may be adjusted upward or downward as the specific facts and circumstances change. IBNR reserves are established at more aggregated levels and include provisions for (i) claims not yet reported, (ii) future development on reported claims, (iii) previously closed claims that will be reopened in the future, and (iv) anticipated salvage and subrogation recoveries. For additional information on our accounting policy for reserves for loss and loss expense, refer to Note. 2. “Summary of Significant Accounting Policies” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
Our robust reserve process relies upon internal reserve reviews performed quarterly, based upon our own loss experience, with consideration given to various internal and external factors. In addition to our internal reserve reviews, we have an external consulting actuary perform an independent review of our reserves semi-annually. We do not rely on the external consulting actuary's report for recording our reserves; however, we do review and discuss our respective observations regarding trends, key assumptions and actuarial methodologies. While not required to be performed by an independent external actuary, our independent external actuary issues the annual statutory Statements of Actuarial Opinion for our Insurance Subsidiaries.
Range of reasonable reserve estimates
We have estimated a range of reasonably possible reserve estimates for net loss and loss expense of $3,250 million to $3,893 million at December 31, 2020. This range reflects low and high reasonable reserve estimates determined by judgmentally adjusting the methods, factors and assumptions selected within the internal reserve review. This approach produces a range of reasonable reserve estimates, as opposed to a distribution of all possible outcomes. Therefore, it is possible that the final outcomes may fall above or below these amounts. The range does not include a provision for potential increases or decreases associated with asbestos, environmental, and certain other continuous exposure claims, which by their nature are more variable and, therefore, traditional actuarial techniques cannot be effectively applied.
The range of reasonable reserve estimates as of December 31, 2020 has expanded relative to December 31, 2019. This is partially due to the growth in reserves commensurate with our growth in net premiums earned ("NPE"), but also recognizes the additional risks in the reserve portfolio presented by the unique legislative, judicial, economic and social environment resulting from COVID-19. Some of these uncertainties may not be resolved for an extended period of time.
Changes in Reserve Estimates (Loss Development)
Our quarterly reserve process may lead to changes in the recorded reserves for prior accident years, which is referred to as favorable or unfavorable prior year loss and loss expense development. In 2020, we experienced net favorable prior year loss development of $72.9 million, compared to $50.3 million in 2019 and $29.9 million in 2018. The following table summarizes prior year development by line of business:
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(Favorable)/Unfavorable Prior Year Loss and Loss Expense Development
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($ in millions)
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2020
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2019
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2018
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General liability
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$
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(35.0)
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(5.0)
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(9.5)
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Commercial Automobile
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7.1
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0.7
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36.7
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Workers compensation
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(60.0)
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(68.0)
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(83.0)
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Businessowners' policies
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3.9
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1.9
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(1.5)
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Commercial property
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9.2
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5.1
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7.5
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Homeowners
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7.7
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7.5
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9.8
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Personal automobile
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(1.8)
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4.4
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3.0
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E&S casualty lines
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—
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2.0
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12.0
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E&S property lines
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(4.0)
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1.0
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(4.8)
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Other
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—
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0.1
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(0.1)
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Total
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$
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(72.9)
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(50.3)
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(29.9)
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A detailed discussion of recent reserve development by line of business follows.
Standard Market General Liability Line of Business
At December 31, 2020, our general liability line of business had recorded reserves, net of reinsurance, of $1.4 billion, which represented 38% of our total net reserves. In 2020, this line experienced favorable development of $35.0 million, attributable to lower loss severities in accident years 2017 and prior.
During 2019, this line experienced favorable development of $5.0 million, attributable to lower loss severities in accident years 2015 and 2016, partially offset by increases in the 2017 and 2018 accident year.
By its nature, this line presents a diverse set of exposures. General liability losses and loss trends are influenced by a variety of factors, including legislative enactments, judicial decisions, and economic and social inflation. Economic inflation directly impacts our claims severities, such as increasing costs of raw materials, medical procedures and labor costs. Social inflation may impact both the frequency and severity of claims by impacting (i) the propensity for a claimant to file a claim, (ii) the percentage of claimants who engage lawyers, and (iii) the nature of judicial verdicts and amount of the associated awards.
We have exposure to abuse or molestation claims through insurance policies that we (i) principally underwrite through our Community and Public Services ("CAPS") strategic business unit and (ii) issue to schools, religious institutions, day-care facilities, and other social services. Through 2017, our exposure to abuse or molestation risk had been increasing, reflective of the growth in our CAPS book. In 2018, we introduced more stringent underwriting eligibility guidelines and partnered with a third party to better assess exposure and introduce greater loss control measures. In 2019, we filed and approved significant rate increases for this exposure. These actions have limited our growth in this strategic business unit.
We also have exposure to abuse or molestation claims from recently enacted state laws that extend the statute of limitations or permit windows for abuse or molestation claims and lawsuits to be filed that statutes of limitations previously barred. Consequently, we may receive claims decades after the alleged acts occurred for policies issued by predecessor companies that will involve complex claims coverage determinations, potential litigation, and the need to collect from reinsurers under older reinsurance agreements.
To better understand our exposure to abuse or molestation, we have instituted enhanced claims coding to identify and classify abuse or molestation claims. Our claims and actuarial departments actively monitor these claims to identify changes in frequency or severity and any emerging or shifting trends. While these actions should help us better understand this rapidly evolving exposure, the ultimate impact of social, political, and legal trends remains highly uncertain, and — as a result — our loss and loss expense reserves remain highly uncertain.
The COVID-19 pandemic presents additional risk to this line in several forms. First, as businesses reopen, they may be susceptible to claims alleging customers contracting COVID-19 due to unsafe business practices. Hiring practices may also be called into question as businesses re-staff. In addition to COVID-19-specific claims, changes in claims reporting or settlement
practices may have been, and may continue to be, affected by several factors, including individual's propensity to bring a claim during the shut-down, court closures, and other behavioral and procedural changes.
Standard Market Workers Compensation Line of Business
At December 31, 2020, our workers compensation line of business recorded reserves, net of reinsurance, of $870 million, which represented 23% of our total net reserves. During 2020, this line experienced favorable development of $60.0 million, driven by accident years 2018 and prior. During 2019, this line experienced favorable development of $68.0 million, driven by accident years 2017 and prior. During both 2020 and 2019, this line experienced lower loss emergence than expected, due, in part, to: (i) lower medical inflation than originally anticipated; (ii) our proactive underwriting actions; and (iii) various significant claims initiatives that we have implemented. Because of the length of time that injured workers receive medical treatment, decreases in medical inflation can cause favorable loss development across an extended number of accident years.
While we believe the underwriting and claims operational changes improved our underwriting experience, there is also risk associated with change. Most notably, changes in operations may inherently change paid and reported development patterns. While our reserve analyses incorporate methods that adjust for these changes, there remains a greater risk of fluctuation in the estimated reserves.
In addition to the uncertainties associated with our actuarial assumptions and methodologies, the workers compensation line of business can be impacted by a variety of other issues, such as the following:
Unexpected changes in medical cost inflation - The industry is currently experiencing a period of lower claim cost inflation. Changes in our historical workers compensation medical costs, along with uncertainty regarding future medical inflation, creates the potential for additional variability in our reserves;
Changes in statutory workers compensation benefits - Benefit changes may be enacted that affect all outstanding claims, including claims that have occurred in the past. Depending upon the social and political climate, these changes may either increase or decrease associated claim costs;
Changes in utilization of the workers compensation system - These changes may be driven by economic, legislative, or other changes, such as increased use of pharmaceuticals, more complex medical procedures, changes in the life expectancy of permanently-injured workers, and availability of health insurance, among others.
COVID-19-related impacts - While we are not a major insurer of front-line workers (e.g. medical, hospital, etc.), we do have potential exposure to employees contracting COVID-19 in the course of their employment. These claims may be asserted under "presumption statutes" implemented by certain states, shifting the burden of proof from the claimant to the insurer. Furthermore, the significant impact to unemployment, coupled with injured workers delaying non-essential procedures, may extend the duration of non-COVID-19 claims.
Standard Market Commercial Automobile Line of Business
At December 31, 2020, our commercial automobile line of business had recorded reserves, net of reinsurance, of $645 million, which represented 17% of our total net reserves. In 2020, this line experienced unfavorable prior year development of $7.1 million, driven by higher loss severities in accident years 2016 through 2019 and higher than expected frequencies in accident year 2019. In 2019, this line experienced no material prior year reserve development. For both us and the industry, the commercial automobile line had experienced unfavorable trends in recent years. Increased frequencies were likely due to increased miles driven as a result of lower unemployment and lower gasoline prices, coupled with poor road quality, as well as an increase in distracted driving. The onset of the COVID-19 pandemic in early 2020, along with governmental "stay-at-home" orders, dramatically reduced miles driven and road traffic, significantly reducing claims frequency. While miles driven has increased, activity remains modestly below expected levels. Conversely, both entering the pandemic and post-pandemic, we have seen rising severities on both bodily injury and property damage claims. The average value of our bodily injury paid loss settlements has increased, which may relate to a trend we have seen of more claimants using attorneys in the claims process. Increasing property damage severities may be tied to the increased repair costs for increasingly complex vehicles that incorporate more technology. These trends may be further exacerbated during the economic slow-down, where less vehicles were on the road, but driving at higher speeds.
Over the last several years, we have taken actions to improve the profitability of this line of business, including:
•Taking meaningful rate and underwriting actions on our renewal portfolio. We will continue to leverage our predictive modeling and analytical capabilities to provide more granular insights about where we should focus our actions.
•Aggressively managing new business pricing and hazard mix, co-underwriting selected higher hazard classes by the field and home office, providing better recognition of risk drivers, and improved pricing.
•Reducing premium leakage by improving the quality of our rating information. This includes validating application information using third-party data and obtaining more detailed driver information.
•Implementing new tools to score drivers to underwrite more effectively and align rate with exposure.
Standard Market Personal Automobile Line of Business
At December 31, 2020, our personal automobile line of business had recorded reserves, net of reinsurance, of $98 million, which represented 3% of our total net reserves. In 2020, this line experienced favorable prior year reserve development of $1.8 million, mainly attributable to lower loss severities in accident year 2019. In 2019, this line experienced unfavorable prior year reserve development of $4.4 million, mainly attributable to higher loss severities in accident year 2018.
Some of the same issues affecting the commercial automobile line are also affecting this line. Furthermore, the COVID-19-related impact of reduced frequency was more pronounced in this line, with similar potential for higher average severities. Aside from the COVID-19-related temporary impacts, the underlying trends of increased miles driven and vehicle repair costs, poor road quality, and distracted driving, are likely causes of increased frequencies and rising severities. We continue to recalibrate our predictive models and refine our underwriting and pricing approaches. While we believe these changes will ultimately lead to improved profitability and greater stability, the resulting changes to our exposure profile may impact paid and reported development patterns, thereby increasing the uncertainty in the reserves in the near-term.
E&S Casualty Lines of Business
At December 31, 2020, our E&S casualty lines of business had recorded reserves, net of reinsurance, of $405 million, which represented 11% of our total net reserves. Our E&S casualty lines results have improved over recent years. Our E&S casualty lines underwriting operations have exited several targeted classes of business that historically have produced volatile results, including commercial auto liability, liquor liability, and snow removal. While we continue to build historical loss experience in this segment, its history remains more limited than for our Standard Commercial Lines segment. Furthermore, the composition of the E&S book has changed over time, which may impact loss and loss expense development patterns. These factors increase the uncertainty in the reserve estimates for this line.
Recent E&S casualty claims actions have created further casualty improvements:
•In 2020, we created a dedicated E&S claims team within our corporate claims function to bring greater expertise and consistency to E&S claims handling.
•Claims have been segregated into “litigated” and “non-litigated” categories, separate teams with specialized skill sets handling each category.
•We implemented the following operational and expense improvement initiatives for outside adjusters and legal counsel:
◦Maximized use of staff counsel, increasing staff where necessary to support claims volume;
◦Heightened focus on legal budgeting and expense management; and
◦Implemented a panel counsel review process.
We believe that these actions identify severe claims earlier, create earlier claims resolutions, and improve outcomes. However, claims operation changes can impact claims reserving and settlement patterns. Reserve estimate uncertainty increases after claims operational changes because it takes time for the patterns to stabilize.
Other impacts creating additional loss and loss expense reserve uncertainty
Claims Initiative Impacts
Consistent with our strategic imperative to optimize operational efficiency, our Claims Department is continually identifying areas for improvement and efficiency to increase our value proposition to policyholders. These improvements may lead to changes in claims practices that affect average case reserve levels and claims settlement rates, which directly impact the data used to project ultimate loss and loss expense. While these changes may increase uncertainty in our estimates in the short term, we expect refined management of the claims process to be the longer-term benefit.
COVID-19 presented some unique dynamics within our Claims department. Particularly during the early part of the pandemic, with less new claims being reported, the claims department placed greater focus on the existing claims inventory, leading to a speed-up of claim closures. This speed-up stabilized over the course of the year, with closure rates returning closer to pre-pandemic levels.
Our internal reserve analyses incorporate certain actuarial projection methods that make adjustments for changes in case reserve adequacy and claims settlement rates. These methods adjust our historical loss experience to the current level of case adequacy
or settlement rate, which provides a more consistent basis for projecting future development patterns. These methods have their own associated assumptions and judgments and, like any projection method, are not definitive in and of themselves.
Economic Inflationary Impacts
United States ("U.S.") monetary policy and global economic conditions may bring additional uncertainty related to inflationary trend. Changes in inflation affect the ultimate settlement costs for many of our lines of business, with the greatest impact in the longer-tailed lines such as general liability and workers compensation. Therefore, uncertainty about future inflation or deflation creates the potential for additional reserve variability in these lines of business.
Sensitivity analysis: Potential impact on reserve uncertainty due to changes in key assumptions
Our process to establish reserves includes a variety of key assumptions, including without limitation:
•The selection of loss and loss expense development factors;
•The weight to be applied to each individual actuarial projection method;
•Projected future loss trends; and
•Expected claim frequencies, severities, and ultimate loss and loss expense ratios for the current accident year.
The importance of any single assumption depends on several considerations, such as the line of business and the accident year. If the actual experience emerges differently than the assumptions used in the process to establish reserves, changes in our reserve estimate are possible that may be material to the results of operations in future periods. Below are sensitivity tests that highlight potential impacts to loss and loss expense reserves for the major casualty lines of business under different scenarios. These tests consider each assumption and line of business individually, without any consideration of correlation between lines of business and accident years. Therefore, the results do not constitute an actuarial range. While the figures represent possible impacts from variations in certain key assumptions, there is no assurance that future loss and loss expense emergence will be consistent with either our current or alternative sets of assumptions.
While the sources of reserve variability are generated by different internal and external trends and operational changes, they ultimately manifest themselves as changes in the expected loss and loss expense development patterns. These patterns are a key assumption in the reserving process. In addition, the current accident year expected loss and loss expense ratios are also a key assumption. These ratios are developed through a rigorous process of projecting recent accident years' experience to an ultimate settlement basis, and then adjusting them to the current accident year's pricing and loss cost levels. Impact from changes in the underwriting portfolio and to claims handling practices are also quantified and reflected where appropriate. As with all estimates, the ultimate loss and loss expense ratios may differ from those currently estimated.
The sensitivities of loss and loss expense reserves to these key assumptions are illustrated below for the major casualty lines. The first table displays estimated impacts from changes in expected reported loss and loss expense development patterns for our major casualty lines of business. It shows reserve impacts by line of business if the actual calendar year incurred amounts are greater or less than current expectations by the selected percentages. While the selected percentages by line are judgmental, they are based on the reserve range analysis and the actual historical reserve development for the line of business. The second table displays the estimated impacts from changes to the expected loss and loss expense ratios for the current accident year. It shows reserve impacts by line of business if the expected loss and loss expense ratios for the current accident year are greater or less than current expectations by the selected percentages.
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Reserve Impacts of Changes to Expected Loss and Loss Expense Reporting Patterns
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($ in millions)
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Percentage Decrease/Increase
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|
(Decrease) to Future Calendar Year Reported
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|
Increase to Future Calendar Year Reported
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General liability
|
|
10
|
|
%
|
$
|
(140)
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|
|
$
|
140
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|
Workers compensation
|
|
18
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|
|
(105)
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|
|
105
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|
Commercial automobile liability
|
|
15
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|
|
(80)
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|
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80
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|
Personal automobile liability
|
|
15
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|
|
(10)
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|
|
10
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|
E&S casualty lines
|
|
10
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|
|
(40)
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|
|
40
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Reserve Impacts of Changes to Current Year Expected Ultimate Loss and Loss Expense Ratios
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($ in millions)
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|
Percentage Decrease/Increase
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|
(Decrease) to Current Accident Year Expected Loss and Loss Expense Ratio
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Increase to Current Accident Year Expected Loss and Loss Expense Ratio
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General liability
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10
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pts
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$
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(70)
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$
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70
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Workers compensation
|
|
10
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(30)
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30
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|
Commercial automobile liability
|
|
10
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|
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(45)
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|
|
45
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Personal automobile liability
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|
10
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|
|
(10)
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|
|
10
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|
E&S casualty lines
|
|
10
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|
|
(20)
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|
|
20
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|
Note that there is some overlap between the impacts in the two tables. For example, increases in the calendar year development would ultimately impact our view of the current accident year's loss and loss expense ratios. However, these tables provide perspective on the sensitivity of each key assumption. While the changes represent outcomes based on reasonably likely changes to our underlying reserving assumptions, they do not represent a full range of possible outcomes. Our reserves could increase or decrease significantly more or significantly less than what the tables above reflect.
Asbestos and Environmental Reserves
Our general liability, excess liability, and homeowners reserves include exposure to asbestos and environmental claims. The emergence of these claims occurs over an extended period and is highly unpredictable. The total recorded net loss and loss expense reserves for these claims were $21.4 million as of December 31, 2020 and $21.6 million as of December 31, 2019.
“Environmental claims” are claims alleging bodily injury or property damage from pollution or other environmental contaminants other than asbestos. Our exposure to environmental liability is primarily due to (i) landfill exposures from policies written prior to the absolute pollution endorsement in the mid 1980s; and (ii) residential underground storage tank leaks, mainly in New Jersey. The landfill claims stem primarily from insured exposures in municipal government, and small non-manufacturing commercial risks. Some of these claims relate to specific landfill sites on the National Priorities List (“NPL”) by the United States Environmental Protection Agency (“USEPA”). We currently have reserves for six policyholders related to three NPL sites. The underground storage tank claims relate largely to our homeowners policies. In 2007, we introduced a fuel oil system exclusion on our New Jersey homeowners policies that greatly limited this exposure from that point forward.
“Asbestos claims” are claims for bodily injury alleged to have occurred from exposure to products containing asbestos. Our primary exposure arises from policies issued to various distributors of asbestos-containing products, such as electrical and plumbing materials. At December 31, 2020, asbestos claims constituted 23% of our $21.4 million net asbestos and environmental reserves, compared to 23% of our $21.6 million net asbestos and environmental reserves at December 31, 2019.
Our asbestos and environmental claims are handled in our centralized and specialized asbestos and environmental claim unit. That unit establishes case reserves on individual claims based upon the facts and circumstances known at a given point in time, which are supplemented by bulk IBNR reserves.
Estimating IBNR reserves for asbestos and environmental claims is difficult because these claims have delayed and inconsistent reporting patterns. In addition, there are significant uncertainties associated with estimating critical reserve assumptions, such as average clean-up costs, third-party costs, potentially responsible party shares, allocation of damages, litigation and coverage costs, and potential state and federal legislative changes. Prior to the introduction of the absolute pollution exclusion endorsement in the mid-1980's, we primarily wrote Standard Personal Lines, which has limited our exposure to asbestos and environmental claims.
Other Latent Exposures
We also have other latent and continuous trigger exposures in our ongoing portfolio. Examples include claims for construction defect and abuse or molestation, for which states have increased and expanded the statute of limitations. We manage our exposure to these liabilities through our underwriting and claims practices and, like asbestos and environmental claims, a dedicated claims unit handles these claims. The impact of social, political, and legal trends on these claims remains highly uncertain, so our loss and loss expense reserves on these claims remain highly uncertain. These exposures remain in our ongoing portfolio, and as such, are reserved in aggregate, with other exposures within the line of business reserves.
Investment Valuation and the Allowance for Credit Losses on AFS Fixed Income Securities
Investment Valuation
The fair value of our investment portfolio is defined under accounting guidance as the exit price or the amount that would be (i) received to sell an asset or (ii) paid to transfer a liability in an orderly transaction between market participants. When determining an exit price we must, when available, rely on observable market data. The majority of securities in our equity portfolio have readily determinable fair values and are recorded at fair value with changes in unrealized gains or losses recognized through income. Our available-for-sale ("AFS") fixed income securities portfolio is recorded at fair value, and the related unrealized gains or losses are reflected in stockholders' equity, net of tax. For our AFS fixed income securities portfolios, fair value is a key factor in the measurement of (i) losses on securities for which we have the intent to sell, and (ii) changes in the allowance for credit losses.
We have categorized our investment portfolio, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1), the next level of priority to observable data from similar securities that have traded in the marketplace, typically using matrix pricing (Level 2), and the lowest priority to unobservable inputs (Level 3).
The fair value of approximately 98% of our investments measured at fair value are classified as either Level 1 or Level 2 in the fair value hierarchy. Fair value measurements in Level 1 represent quoted prices in active markets for identical assets. The fair value of our Level 2 securities are determined by external pricing services, for which we have evaluated the pricing methodology used and determined that the inputs used are observable. Less than 2.0% of our investments measured at fair value are classified as Level 3 in the fair value hierarchy. Fair value measurements in Level 3 are based on unobservable market inputs because the related securities are not traded on a public market. For additional information regarding the valuation techniques used for our Level 3 securities, refer to item (d) of Note 2. "Summary of Significant Accounting Policies" within Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
Allowance for Credit Losses on AFS Fixed Income Securities
When fixed income securities are in an unrealized loss position and we do not intend to sell the security, we record an allowance for credit losses for the portion of the unrealized loss due to an expected credit loss. We estimate expected credit losses on these securities by performing a discounted cash flow (“DCF”). The allowance for credit losses is the excess of amortized cost over the greater of (i) our estimate of the present value of expected future cash flows, or (ii) fair value. The allowance for credit losses cannot exceed the unrealized loss and therefore it may fluctuate with changes in the fair value of the security.
Factors considered in the determination of the allowance for credit losses require significant judgment and include, but are not limited to, our evaluation of the projected cash flow stream from the security. We also consider the need to record losses on securities for which we have the intent to sell that are in an unrealized loss position.
The various COVID-19-related governmental directives impacted the financial markets, which became volatile earlier in the year. This volatility increased gross unrealized losses on our AFS fixed income securities portfolio from $7.7 million at December 31, 2019, to $116.9 million at March 31, 2020. Since the end of the first quarter, the financial markets have improved and gross unrealized losses were reduced to $11.5 million at December 31, 2020. We analyzed these unrealized losses for credit loss in accordance with our existing accounting policy, which includes performing DCF analyses on each security at the lot level and analyzing these DCFs using various economic scenarios. In performing these DCF analyses, we calculate the present value of future cash flows using various models specific to the major security types in our portfolio. These models use security-specific information and forecasted macroeconomic data to determine possible expected credit loss scenarios based on projected changes in the economy. The forecasted economic data incorporated in the models is based on the Federal Reserve Board’s annual supervisory stress test review on certain large banks and financial institutions. We also have the ability to incorporate internally-developed forecast information into the models as we deem appropriate. In developing our best estimate of the allowance for credit losses, we consider our outlook as to the probability of the various scenarios occurring.
Based on these analyses, we recorded an allowance for credit losses of $4.0 million in 2020 on our AFS fixed income portfolio. After considering the allowance for credit losses, the remaining unrealized losses on this portfolio was $11.5 million. We believe that the volatility and increased unrealized loss balance was driven by fluctuating and widening credit spreads tied to financial market uncertainty about the various COVID-19-related governmental directives. If the assumptions used in our DCF analyses or our outlook as to the occurrence probability of our DCF model scenarios were to change, our allowance for credit losses and the resulting credit loss expense could be material to our results of operations.
For additional information regarding our allowance for credit losses on AFS fixed income securities, see item (c) of Note 2. "Summary of Significant Accounting Policies" and item (i) of Note 5. "Investments" within Item 8. "Financial Statements and Supplementary Data." of this Form 10-K, respectively.
Reinsurance
Reinsurance recoverables on paid and unpaid loss and loss expense represent estimates of the portion of such liabilities that we will recover from reinsurers. Each reinsurance contract is analyzed to ensure that sufficient risk is transferred to properly record the transactions as reinsurance in the Financial Statements. Amounts recovered from reinsurers are recognized as assets contemporaneously and in a manner consistent with, the paid and unpaid losses associated with the reinsured policies. An allowance for credit losses on our reinsurance recoverable balance is recorded based on an evaluation of balances due from reinsurers and other available information. However, reinsurers often purchase and rely on their own retrocessional reinsurance programs to manage their capital position and improve their financial strength ratings. Details regarding retrocessional reinsurance programs are not always transparent, which can make it difficult to assess our reinsurers' exposure to counterparty credit risk. The credit quality of our reinsurers is also impacted by other factors, such as their reserve adequacy, investment portfolio, regulatory capital position, catastrophe aggregations, and risk management expertise. In addition, contractual language interpretations and willingness to pay valid claims can impact our allowance for estimated uncollectible reinsurance. Our allowance for estimated uncollectible reinsurance totaled $1.8 million at December 31, 2020, a decrease from $4.4 million at December 31, 2019, as we refined our methodology and implemented the new credit loss standard in 2020. We continually monitor developments that may impact recoverability from our reinsurers, for which we have contractual remedies if necessary. For further information regarding reinsurance, see the “Reinsurance” section below and Note 9. “Reinsurance” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
Allowance for Credit Losses on Premiums Receivable
We estimate an allowance for credit losses on our outstanding premiums receivable balance at each reporting date. In determining this allowance, we use a method that considers the aging of the receivable based on the effective year of the related policy and our historical credit loss experience. We also contemplate expected macroeconomic conditions over the expected receivables collection period, which is short-term in nature because most balances are collected within two years of policy issuance. We increased our allowance for credit losses to $21.0 million during 2020 from $6.4 million at December 31, 2019, to reflect (i) the higher risk of non-payment due to the significant COVID-19-related decline in economic activity, (ii) the individualized payment flexibility we offered our customers, and (iii) our suspension of the effect of policy cancellations, late payment notices, and late or reinstatement fees. Our last suspensions expired in early August 2020. It could take over a year to realize this collections process, and we expect the actual reserve write-offs to materialize over the course of 2021.
Future COVID-19-related economic instability or governmental directives could ultimately impact our estimates and assumptions for credit losses on premiums receivable. Consequently, a change in our allowance estimate may be material to our results of operations in future periods. For additional details about this estimate, see Note 8. "Allowance for Credit Losses on Premiums Receivable" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
Accrual for Auditable Premium
We estimate auditable premium, which we either bill or return on expired policies based on exposure levels (i.e. payroll or sales), when it is reasonably possible to do so based on historical trends adjusted for the uncertainty of future economic conditions. If we determine it is not reasonably possible to estimate this premium, we do not do so. In the first quarter of 2020, we recorded a $75 million return audit and mid-term endorsement premium accrual in response to the COVID-19 pandemic and the anticipated decline in payroll and sales exposures on the workers compensation and general liability lines of business. During the remainder of the year, we applied premium adjustments for endorsements and audits against our accrual, resulting in a remaining $24.8 million accrual as of December 31, 2020. We currently anticipate the balance of the return audit premiums will occur through the middle of 2021. Since April 2020, through active engagement between our underwriters, distribution partners, and insureds, we have set exposure levels to reflect our best estimate of how the current environment may impact our policies. As a result, we have not accrued for additional or return premium on any policies since that time. Further economic instability and renewed or extended COVID-19-related governmental directives ultimately could impact our estimates and assumptions, and consequently, changes in this liability estimate may be material to the results of operations in future periods. For additional details about this estimate, see Note 9. "Reinsurance" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
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|
Financial Highlights of Results for Years Ended December 31, 2020, 2019, and 20181
|
|
|
|
|
|
|
2020 vs.
2019
|
|
|
|
|
|
2019 vs.
2018
|
|
|
($ in thousands, except per share amounts)
|
|
2020
|
|
2019
|
|
|
|
|
2018
|
|
|
|
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,922,274
|
|
|
2,846,491
|
|
|
3
|
|
|
%
|
|
$
|
2,586,080
|
|
|
10
|
|
|
%
|
After-tax net investment income
|
|
184,612
|
|
|
181,161
|
|
|
2
|
|
|
|
|
160,481
|
|
|
13
|
|
|
|
After-tax underwriting income
|
|
107,716
|
|
|
129,554
|
|
|
(17)
|
|
|
|
|
95,727
|
|
|
35
|
|
|
|
Net income before federal income tax
|
|
302,988
|
|
|
336,390
|
|
|
(10)
|
|
|
|
|
211,721
|
|
|
59
|
|
|
|
Net income
|
|
246,355
|
|
|
271,623
|
|
|
(9)
|
|
|
|
|
178,939
|
|
|
52
|
|
|
|
Net income available to common stockholders
|
|
246,355
|
|
|
271,623
|
|
|
(9)
|
|
|
|
|
178,939
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key Metrics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
94.9
|
|
%
|
93.7
|
|
|
1.2
|
|
|
pts
|
|
95.0
|
|
%
|
(1.3)
|
|
|
pts
|
Invested assets per dollar of common stockholders' equity
|
|
$
|
2.96
|
|
|
3.05
|
|
|
(3)
|
|
|
%
|
|
$
|
3.33
|
|
|
(8)
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|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average common equity ("ROE")
|
|
10.4
|
|
%
|
13.6
|
|
|
(3.2)
|
|
|
pts
|
|
10.2
|
|
|
3.4
|
|
|
pts
|
Statutory premiums to surplus ratio
|
|
1.30
|
|
x
|
1.39
|
|
|
(0.09)
|
|
|
pts
|
|
1.42
|
|
(0.03)
|
|
|
pts
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Per Common Share Amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
4.09
|
|
|
4.53
|
|
|
(10)
|
|
|
|
|
$
|
3.00
|
|
|
51
|
|
|
|
Book value per share
|
|
42.38
|
|
|
36.91
|
|
|
15
|
|
|
%
|
|
30.40
|
|
|
21
|
|
|
%
|
Dividends declared per share to common stockholders
|
|
0.94
|
|
|
0.83
|
|
|
13
|
|
|
|
|
0.74
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP operating income2
|
|
$
|
249,686
|
|
|
264,418
|
|
|
(6)
|
|
|
%
|
|
$
|
218,567
|
|
|
21
|
|
|
%
|
Diluted non-GAAP operating income per common share2
|
|
4.15
|
|
|
4.40
|
|
|
(6)
|
|
|
|
|
3.66
|
|
|
20
|
|
|
|
Non-GAAP operating ROE2
|
|
10.5
|
|
%
|
13.3
|
|
|
(2.8)
|
|
|
pts
|
|
12.5
|
|
%
|
0.8
|
|
|
pts
|
1Refer to the Glossary of Terms attached to this Form 10-K as Exhibit 99.1 for definitions of terms used in this financial review.
2Non-GAAP operating income is a measure that is comparable to net income available to common stockholders with the exclusion of after-tax net realized and unrealized gains and losses on investments, and after-tax debt retirement costs. Non-GAAP operating income is used as an important financial measure by us, analysts, and investors because the realization of investment gains and losses on sales of securities in any given period is largely discretionary as to timing. In addition, net realized and unrealized investment gains and losses on investments that are charged to earnings and the debt retirement costs could distort the analysis of trends.
Reconciliations of net income available to common stockholders, net income available to common stockholders per diluted common share, and ROE to non-GAAP operating income, non-GAAP operating income per diluted common share, and non-GAAP operating ROE, respectively, are provided in the tables below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of net income available to common stockholders to non-GAAP operating income
|
|
|
|
|
|
|
($ in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Net income available to common stockholders
|
|
$
|
246,355
|
|
|
271,623
|
|
|
178,939
|
|
Net realized and unrealized losses (gains), before tax
|
|
4,217
|
|
|
(14,422)
|
|
|
54,923
|
|
Debt retirement costs, before tax
|
|
—
|
|
|
4,175
|
|
|
—
|
|
Tax on reconciling items
|
|
(886)
|
|
|
3,042
|
|
|
(15,295)
|
|
|
|
|
|
|
|
|
Non-GAAP operating income
|
|
$
|
249,686
|
|
|
264,418
|
|
|
218,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of net income available to common stockholders per diluted common share to non-GAAP operating income per diluted common share
|
|
2020
|
|
2019
|
|
2018
|
Net income available to common stockholders per diluted common share
|
|
$
|
4.09
|
|
|
4.53
|
|
|
3.00
|
|
Net realized and unrealized losses (gains), before tax
|
|
0.07
|
|
|
(0.24)
|
|
|
0.92
|
|
Debt retirement costs, before tax
|
|
—
|
|
|
0.07
|
|
|
—
|
|
Tax on reconciling items
|
|
(0.01)
|
|
|
0.04
|
|
|
(0.26)
|
|
|
|
|
|
|
|
|
Non-GAAP operating income per diluted common share
|
|
$
|
4.15
|
|
|
4.40
|
|
|
3.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of ROE to non-GAAP operating ROE
|
|
2020
|
|
2019
|
|
2018
|
ROE
|
|
10.4
|
%
|
|
13.6
|
|
|
10.2
|
|
Net realized and unrealized losses (gains), before tax
|
|
0.2
|
|
|
(0.7)
|
|
|
3.1
|
|
Debt retirement costs, before tax
|
|
—
|
|
|
0.2
|
|
|
—
|
|
Tax on reconciling items
|
|
(0.1)
|
|
|
0.2
|
|
|
(0.8)
|
|
|
|
|
|
|
|
|
Non-GAAP operating ROE
|
|
10.5
|
%
|
|
13.3
|
|
|
12.5
|
|
The components of our ROE are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ROE Components
|
|
2020
|
|
2019
|
|
Change Points
|
|
2018
|
|
Change
Points
|
Standard Commercial Lines Segment
|
|
5.1
|
%
|
|
5.8
|
|
|
(0.7)
|
|
|
4.9
|
|
|
0.9
|
|
Standard Personal Lines Segment
|
|
(0.5)
|
|
|
0.3
|
|
|
(0.8)
|
|
|
0.6
|
|
|
(0.3)
|
|
E&S Lines Segment
|
|
—
|
|
|
0.4
|
|
|
(0.4)
|
|
|
—
|
|
|
0.4
|
|
Total insurance operations
|
|
4.6
|
|
|
6.5
|
|
|
(1.9)
|
|
|
5.5
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
7.8
|
|
|
9.1
|
|
|
(1.3)
|
|
|
9.2
|
|
|
(0.1)
|
|
Net realized and unrealized (losses) gains
|
|
(0.1)
|
|
|
0.5
|
|
|
(0.6)
|
|
|
(2.3)
|
|
|
2.8
|
|
Total investments segment
|
|
7.7
|
|
|
9.6
|
|
|
(1.9)
|
|
|
6.9
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt retirement costs
|
|
—
|
|
|
(0.2)
|
|
|
0.2
|
|
|
—
|
|
|
(0.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
(1.9)
|
|
|
(2.3)
|
|
|
0.4
|
|
|
(2.2)
|
|
|
(0.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
ROE
|
|
10.4
|
%
|
|
13.6
|
|
|
(3.2)
|
|
|
10.2
|
|
|
3.4
|
|
In 2020, we generated a 10.5% non-GAAP operating ROE, which fell slightly below our 11% target for the year and our 2019 return of 13.3%. Our 2020 non-GAAP operating ROE was negatively impacted by net unrealized after-tax gains on our fixed income securities portfolio, which increased our GAAP equity and decreased our non-GAAP operating ROE by approximately 120 basis points. Nevertheless, we consider this an impressive result in the context of COVID-19, significant catastrophe loss activity, and a prolonged low interest rate environment that has continued to put downward pressure on our investment portfolio returns. The following is a more detailed discussion of these items.
COVID-19
•A $75 million return audit and mid-term endorsement premium accrual recorded in the first quarter of 2020 to reflect our estimate of reduced exposures on our March 31 inforce policies due to the significant economic slowdown and the anticipated decline in payroll and sales exposures in the workers compensation and general liability lines of business. During the remainder of the year, we recorded $50.2 million of mid-term endorsement and negative audit premium adjustments against this $75 million accrual. As of December 31, 2020, we had a remaining accrual of $24.8 million. Net of reduced losses and commissions, the earned impact of the return audit and mid-term endorsement premium accrual lowered pre-tax underwriting results by $15.3 million, in 2020.
•A $19.7 million reduction in net premiums written ("NPW") recorded in the second quarter of 2020 to reflect a then voluntary credit to our personal and commercial automobile customers with in-force policies equivalent to 15% of their April and May premiums due to the unprecedented nature of the COVID-19-related governmental directives and the associated favorable claims frequency impact. During the second quarter of 2020, the premium credits were offset by an equal reduction in loss and loss expenses, as claims frequency on our personal and commercial automobile lines of business declined due to governmental directive-induced reduced miles driven. As the number of vehicles we insure has not significantly declined, frequencies are returning closer to normal levels as the COVID-19-related governmental directives terminate and there is uncertainty about potential impacts to severities.
•A $13.5 million, pre-tax, increase to our allowance for credit losses on premiums receivable reflecting an increase in credit risk due to billing accommodations that we offered our customers, sometimes in collaboration with or at the direction of our regulators. These accommodations included individualized payment flexibility and suspended the effect of policy cancellations, late payment notices, and late or reinstatement fees. The impact of offering billing accommodations while suspending cancellations increased earned but uncollected premiums. The majority of these state regulations have expired as of the end of 2020; however, our allowance for credit losses on premiums receivable of $21.0 million is expected to cover anticipated write-offs that will occur over the corresponding collections cycle, which could last more than a year.
•A $5.0 million, pre-tax, ultimate net loss estimate for losses related to a small portion of our property policies that provide a $25,000 sub-limited coverage for specified extra expenses to clean or disinfect a property when ordered by a Board of Health.
Overall, these four items (i) reduced pre-tax underwriting results by $33.8 million, or $0.44 per diluted common share, (ii) increased the combined ratio by 1.1 points, and (iii) decreased our ROE by 1.1 points.
Offsetting these COVID-19 specific items was a lower level of reported claim frequencies due to the reduced economic activity and other factors. These lower frequencies directly impacted our property lines loss experience. The impact of these lower than expected non-catastrophe property losses (including automobile physical damage losses) resulted in an approximate 1.2 point benefit to our combined ratio. We also reduced our 2020 commercial and personal auto casualty loss costs to partially reflect these lower frequencies for these shorter-tail lines of business, which benefited the combined ratio by 0.4 points. No other casualty lines were adjusted. These modest adjustments to our casualty loss estimates recognize the ongoing inherent uncertainty presented by COVID-19, including the potential for late reported claims and higher severities. We will continue to monitor these trends as we progress through 2021. After March 2020, due to the impact of COVID-19, we suspended business travel and entertainment in most of our regions. We also deferred some projects and new hires for a period of time. These items, which we expect to revert back to more normal levels later in 2021, benefited our 2020 expense ratio by approximately 0.7 points.
In total, we estimate the impact of the lower non-catastrophe property losses, the reduction in our loss ratio due to lower miles driven, and the benefit to the expense ratio all discussed above, collectively more than offset the negative impact from the COVID-19 specific accruals. We estimate the net benefit to our 2020 combined ratio was approximately 1.2 points.
Catastrophe Losses
We experienced a significant level of catastrophe losses in 2020, driven by industry-wide U.S. catastrophe loss activity that significantly exceeded the 5- and 10-year historical means of approximately 4 points. Catastrophes included hurricanes, with several making landfall, convective storms, hail storms, wildfires, and civil unrest. Our combined ratio in 2020 included 8.0 points of catastrophe losses, which was close to our highest level in over 20 years. The $215.4 million of catastrophe losses in 2020 compared to $81.0 million in 2019 reduced net income by $106.2 million, and ROE by 4.5 points.
Investment Portfolio Returns
After-tax investment income increased 2% in 2020 compared to 2019, driven by higher returns on alternative investments in our other investment portfolio. Returns on these holdings are recorded on a one-quarter lag, and the strong capital market performance in the second and third quarters of 2020 drove the higher returns. These returns, coupled with (i) operating cash flows that were 20% of 2020 NPW and (ii) proceeds from our preferred stock offering, increased invested assets by 12% during 2020. However, the increase in invested assets did not keep pace with the increase in common stockholders' equity. Accordingly, investment leverage declined, as reflected in invested assets per dollar of common stockholders' equity, which ended 2020 at $2.96, down from $3.05 at December 31, 2019. After-tax portfolio yields also were lower than a year ago, at 2.6% for 2020 compared to 2.9% for 2019, driven by a lower interest rate environment. The reduced investment leverage, coupled with lower portfolio yields, has resulted in a lower investment income contribution to ROE, which was 7.8% in 2020 compared to 9.1% in 2019.
Despite the significant economic impacts described above, we experienced favorable prior year casualty reserve development of $85 million in 2020 compared to $61 million in 2019, which is discussed in more detail in the "Insurance Operations" section of "Results of Operations and Related Information by Segment" below.
In 2020, we generated our seventh consecutive year of double-digit non-GAAP operating ROEs, with a 10.5% non-GAAP operating ROE. We also grew book value per common share 15% in 2020 compared to 2019, reflecting $4.09 per diluted common share of net income available to common stockholders and $2.25 per diluted common share of after-tax net unrealized gains on our fixed income securities portfolio that were partially offset by $0.94 per diluted common share of dividends paid to common stockholders.
On December 2, 2020, we issued $200 million of 4.60% non-cumulative perpetual preferred stock, which marks the first preferred stock offering in our 94-year history and is a demonstration of our investors' confidence in our value proposition and our continued success. In conjunction with this offering, our Board of Directors ("Board") authorized a $100 million share repurchase program. We intend to be disciplined and opportunistic with our buyback program, repurchasing shares when we believe returns are attractive over the long-term for our shareholders.
Outlook
For 2021, we established a non-GAAP operating ROE target of 11%, which is in line with our 2020 target. We based our 2021 target on our current estimated weighted average cost of capital, the current interest rate environment, and property and casualty insurance market conditions. Our ROE target sets a high bar for our financial performance, challenges us to perform at our best, and aligns our incentive compensation structure with shareholder interests. We enter 2021 in the strongest financial position in our Company's long history, and we are very well positioned to continue delivering growth and profitability.
Looking ahead to 2021, a number of areas require our continued focus to position us for ongoing success:
•Delivering on our strategy for continued disciplined growth, driven by greater share of wallet in our agents’ offices, the addition of new agents, and geographic expansion over the longer term. We continue to work to achieve our longer-term Standard Commercial Lines 3% market share target in our 27 primary operating states, which represents an additional $3 billion premium opportunity. Our strategy is to appoint distribution partners representing approximately a 25% market share and seeking an average 12% share of wallet, or percentage of these partners' books of business. In addition, we anticipate re-starting our geographic expansion strategy. The five states that we opened during 2017 and 2018, including a new Southwest region, are all performing ahead of expectations. Over the next two years, we plan to open three additional states subject to regulatory approval, Idaho, Vermont, and Alabama, , and we plan to open others in subsequent years. Our long-term goal is to have national capabilities, although we will follow a measured and disciplined approach to identifying and opening new markets.
•Continuing to achieve written renewal pure price increases that meet or exceed expected loss trend, while delivering
on our strategy for continued disciplined growth. While we continue to navigate a challenging economic environment, we are comfortable with the overall price adequacy of our book of business.
•Delivering a superior omnichannel customer experience by offering value-added technologies and services. We have significantly enhanced our customer experience capabilities over the last several years, and we provide our customers with various digital and self-service offerings. Investing in and building out technologies that improve the customer experience journey remains a core focus for us.
•Building a culture that fosters innovation and idea generation that is centered on the values of diversity, equity and inclusion, as we seek to develop a group of specially trained leaders to take our company into the future.
For 2021, our full-year guidance is as follows:
•A GAAP combined ratio, excluding catastrophe losses, of 91.0%. This assumes no prior-year casualty reserve development;
•Catastrophe losses of 4.0 points;
•After-tax net investment income of $182 million, which includes $16 million after-tax gains from our alternative investments;
•An overall effective tax rate of approximately 20.5%, which also includes an effective tax rate of 19.0% for net investment income and 21% for all other items; and
•Weighted average shares outstanding of 60.5 million on a diluted basis.
Results of Operations and Related Information by Segment
Insurance Operations
The following table provides quantitative information for analyzing the combined ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Lines
|
|
|
|
|
|
2020
vs. 2019
|
|
|
|
2019
vs. 2018
|
|
($ in thousands)
|
|
2020
|
|
2019
|
|
|
2018
|
|
|
Insurance Operations Results:
|
|
|
|
|
|
|
|
|
|
|
|
NPW
|
|
$
|
2,773,092
|
|
|
2,679,424
|
|
|
3
|
|
%
|
$
|
2,514,286
|
|
|
7
|
|
%
|
NPE
|
|
2,681,814
|
|
|
2,597,171
|
|
|
3
|
|
|
2,436,229
|
|
|
7
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense incurred
|
|
1,635,823
|
|
|
1,551,491
|
|
|
5
|
|
|
1,498,134
|
|
|
4
|
|
|
Net underwriting expenses incurred
|
|
905,830
|
|
|
876,567
|
|
|
3
|
|
|
808,939
|
|
|
8
|
|
|
Dividends to policyholders
|
|
3,812
|
|
|
5,120
|
|
|
(26)
|
|
|
7,983
|
|
|
(36)
|
|
|
Underwriting income
|
|
$
|
136,349
|
|
|
163,993
|
|
|
(17)
|
|
%
|
$
|
121,173
|
|
|
35
|
|
%
|
Combined Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
61.0
|
|
%
|
59.7
|
|
|
1.3
|
|
pts
|
61.5
|
|
%
|
(1.8)
|
|
pts
|
Underwriting expense ratio
|
|
33.8
|
|
|
33.8
|
|
|
—
|
|
|
33.2
|
|
|
0.6
|
|
|
Dividends to policyholders ratio
|
|
0.1
|
|
|
0.2
|
|
|
(0.1)
|
|
|
0.3
|
|
|
(0.1)
|
|
|
Combined ratio
|
|
94.9
|
|
|
93.7
|
|
|
1.2
|
|
|
95.0
|
|
|
(1.3)
|
|
|
Our NPW increased 3% in 2020 compared to 2019, reflecting (i) overall renewal pure price increases of 4.3%, (ii) increased retention, and (iii) new business of $579.7 million in 2020 compared to $548.7 million in 2019. The net appointment of 42 retail agents, excluding agency consolidations, also contributed to our new business growth. This solid growth in a challenging economic environment reflects the strong relationships we have with our best-in-class distribution partners, our sophisticated underwriting and pricing tools, and excellent customer servicing capabilities.
The rate of NPW growth in 2020 was negatively impacted by approximately 4 percentage points due to the following:
•Our $75 million estimate of audit and endorsement return premium related to lower payroll and sales exposures on the workers compensation and general liability lines of business resulting from the economic impacts of the COVID-19 pandemic.
•A $19.7 million premium credit to our personal and commercial automobile policyholders. Because of the unprecedented nature of the COVID-19-related governmental directives and the associated expected short-term favorable claims frequency impact, we obtained regulatory approval during April to provide this premium credit to our personal and commercial automobile customers. The premium credit to customers with in-force policies was equivalent to 15% of their April and May premiums.
Loss and Loss Expenses
The increase in the loss and loss expense ratio in 2020, compared to 2019, was primarily the result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Non-Catastrophe Property
Loss and Loss Expenses
|
|
Catastrophe Losses
|
|
|
|
For the year ended December 31,
|
Loss and Loss Expense Incurred
|
|
Impact on Loss and Loss Expense Ratio
|
|
Loss and Loss Expense Incurred
|
|
Impact on Loss and Loss Expense Ratio
|
|
Total Impact on Loss and Loss Expense Ratio
|
(Favorable)/Unfavorable Change in Ratio
|
2020
|
$
|
410.0
|
|
|
15.3
|
|
pts
|
$
|
215.4
|
|
|
8.0
|
|
pts
|
23.3
|
|
4.4
|
|
2019
|
410.5
|
|
|
15.8
|
|
|
81.0
|
|
|
3.1
|
|
|
18.9
|
|
(1.3)
|
|
2018
|
405.6
|
|
|
16.6
|
|
|
88.0
|
|
|
3.6
|
|
|
20.2
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Favorable Prior Year Casualty Reserve Development
|
|
|
For the year ended December 31,
|
Loss and Loss
Expense Incurred
|
|
Impact on Loss and Loss Expense Ratio
|
|
(Favorable)/Unfavorable Change in Ratio
|
2020
|
(85.0)
|
|
|
(3.2)
|
|
pts
|
(0.9)
|
|
2019
|
(61.0)
|
|
|
(2.3)
|
|
|
(0.6)
|
|
2018
|
(41.5)
|
|
|
(1.7)
|
|
|
0.4
|
|
Details of the prior year casualty reserve development were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Favorable)/Unfavorable Prior Year Casualty Reserve Development
|
|
|
|
|
|
($ in millions)
|
2020
|
|
2019
|
|
2018
|
General liability
|
$
|
(35.0)
|
|
|
(5.0)
|
|
|
(9.5)
|
|
Commercial automobile
|
10.0
|
|
|
4.0
|
|
|
37.5
|
|
Workers compensation
|
(60.0)
|
|
|
(68.0)
|
|
|
(83.0)
|
|
Businessowners' policies
|
—
|
|
|
—
|
|
|
(3.0)
|
|
|
|
|
|
|
|
Total Standard Commercial Lines
|
(85.0)
|
|
|
(69.0)
|
|
|
(58.0)
|
|
|
|
|
|
|
|
Homeowners
|
—
|
|
|
—
|
|
|
1.5
|
|
Personal automobile
|
—
|
|
|
6.0
|
|
|
3.0
|
|
Total Standard Personal Lines
|
—
|
|
|
6.0
|
|
|
4.5
|
|
|
|
|
|
|
|
E&S
|
—
|
|
|
2.0
|
|
|
12.0
|
|
|
|
|
|
|
|
Total (favorable) prior year casualty reserve development
|
$
|
(85.0)
|
|
|
(61.0)
|
|
|
(41.5)
|
|
|
|
|
|
|
|
(Favorable) impact on loss ratio
|
(3.2)
|
|
pts
|
(2.3)
|
|
|
(1.7)
|
|
In addition to the prior year casualty reserve development, current year casualty loss costs were 1.7 points lower in 2020 compared to 2019, driven by decreases in frequencies reflecting reductions in miles driven due to the COVID-19-related governmental directives impacting our commercial and personal automobile lines of business.
For qualitative discussions regarding reserve development, refer to the insurance segment sections below.
Underwriting Expenses
Our underwriting expense ratio was 33.8% in 2020, which was flat compared to 2019. The expense ratio included 1.1 points of COVID-19 specific items, which included the $13.5 million addition to our allowance for credit losses on premiums receivable and lower net earned premiums from the audit premium accrual and premium credits. Excluding these COVID-19 specific items, our underlying expense ratio of 32.7% reflected our ongoing expense management initiatives, and about 70 basis points of temporary expense reductions mainly due to the lower travel, and entertainment expenses, and other expenses as a result of COVID-19.
Standard Commercial Lines Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
vs. 2019
|
|
|
|
2019
vs. 2018
|
|
($ in thousands)
|
|
2020
|
|
2019
|
|
|
2018
|
|
|
Insurance Segments Results:
|
|
|
|
|
|
|
|
|
|
|
|
NPW
|
|
$
|
2,230,636
|
|
|
2,137,071
|
|
|
4
|
|
%
|
$
|
1,975,683
|
|
|
8
|
|
%
|
NPE
|
|
2,143,184
|
|
|
2,049,614
|
|
|
5
|
|
|
1,912,222
|
|
|
7
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense incurred
|
|
1,245,627
|
|
|
1,187,856
|
|
|
5
|
|
|
1,141,038
|
|
|
4
|
|
|
Net underwriting expenses incurred
|
|
742,014
|
|
|
710,648
|
|
|
4
|
|
|
654,097
|
|
|
9
|
|
|
Dividends to policyholders
|
|
3,812
|
|
|
5,120
|
|
|
(26)
|
|
|
7,983
|
|
|
(36)
|
|
|
Underwriting income
|
|
$
|
151,731
|
|
|
145,990
|
|
|
4
|
|
%
|
$
|
109,104
|
|
|
34
|
|
%
|
Combined Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
58.1
|
|
%
|
58.0
|
|
|
0.1
|
|
pts
|
59.7
|
|
%
|
(1.7)
|
|
pts
|
Underwriting expense ratio
|
|
34.6
|
|
|
34.7
|
|
|
(0.1)
|
|
|
34.2
|
|
|
0.5
|
|
|
Dividends to policyholders ratio
|
|
0.2
|
|
|
0.2
|
|
|
—
|
|
|
0.4
|
|
|
(0.2)
|
|
|
Combined ratio
|
|
92.9
|
|
|
92.9
|
|
|
—
|
|
|
94.3
|
|
|
(1.4)
|
|
|
NPW growth in this segment in 2020 compared to 2019 reflected (i) renewal pure price increases, (ii) new business growth, and (iii) increased retention as shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
($ in millions)
|
|
2020
|
|
2019
|
|
|
|
Retention
|
|
85
|
|
%
|
83
|
|
|
|
|
Renewal pure price increases on NPW
|
|
4.4
|
|
|
3.4
|
|
|
|
|
Direct new business
|
|
$
|
421.1
|
|
|
411.2
|
|
|
|
|
Consistent with our overall insurance operations, NPW growth in 2020 was negatively impacted by approximately 4 percentage points due to the following:
•Our $75 million estimate of audit and endorsement return premium related to the impact of COVID-19 on our workers compensation and general liability lines of business.
•A $15.4 million premium credit to our commercial automobile customers related to reduced miles driven and loss frequency due to the COVID-19 pandemic.
Consistent with the fluctuations in NPW, the increase in NPE in 2020 compared to 2019 reflected the items discussed above.
The 0.1-point increase in the loss and loss expense ratio in 2020 compared to 2019 was driven by the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Non-Catastrophe Property Losses
|
|
Catastrophe Losses
|
|
|
For the year ended December 31,
|
Loss and Loss Expense Incurred
|
|
Impact on Loss and Loss Expense Ratio
|
|
Loss and Loss Expense Incurred
|
|
Impact on Loss and Loss Expense Ratio
|
|
Total Impact on Loss and Loss Expense Ratio
|
|
(Favorable)/Unfavorable
Year-Over-Year Change
|
2020
|
$
|
296.2
|
|
|
13.8
|
|
pts
|
$
|
117.8
|
|
|
5.5
|
|
pts
|
19.3
|
|
|
2.9
|
|
2019
|
283.6
|
|
|
13.8
|
|
|
54.2
|
|
|
2.6
|
|
|
16.4
|
|
|
(1.3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
(Favorable) Prior Year Casualty Reserve Development
|
|
|
(Favorable) Year-Over-Year Change
|
For the year ended December 31,
|
|
Loss and Loss Expense Incurred
|
|
Impact on Loss and Loss Expense Ratio
|
|
|
2020
|
|
$
|
(85.0)
|
|
|
(4.0)
|
|
|
pts
|
(0.6)
|
|
2019
|
|
(69.0)
|
|
|
(3.4)
|
|
|
|
(0.4)
|
|
|
|
|
|
|
|
|
|
In addition to the prior year casualty reserve development above, current year casualty loss costs were 1.2 points lower in 2020 compared to 2019, driven by decreased claim frequencies in our commercial automobile line of business reflecting reductions in miles driven due to the COVID-19-related governmental directives.
For quantitative information on the prior year development by line of business, see "Financial Highlights of Results for Years Ended December 2020, 2019, and 2018" above and for qualitative information about the significant drivers of this development, see the line of business discussions below.
The following is a discussion of our most significant Standard Commercial Lines of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Liability
|
($ in thousands)
|
|
2020
|
|
2019
|
|
2020
vs. 2019
|
|
2018
|
|
2019
vs. 2018
|
|
NPW
|
|
$
|
716,119
|
|
|
699,262
|
|
|
2
|
|
%
|
$
|
639,720
|
|
|
9
|
|
%
|
Direct new business
|
|
122,159
|
|
|
119,055
|
|
|
3
|
|
|
112,683
|
|
|
6
|
|
|
Retention
|
|
85
|
|
%
|
83
|
|
|
2
|
|
pts
|
83
|
|
%
|
—
|
|
pts
|
Renewal pure price increases
|
|
3.9
|
|
|
2.8
|
|
|
1.1
|
|
|
2.6
|
|
|
0.2
|
|
|
NPE
|
|
$
|
694,019
|
|
|
669,895
|
|
|
4
|
|
%
|
$
|
616,187
|
|
|
9
|
|
%
|
Underwriting income
|
|
103,262
|
|
|
69,932
|
|
|
48
|
|
|
70,268
|
|
|
—
|
|
|
Combined ratio
|
|
85.1
|
|
|
89.6
|
|
|
(4.5)
|
|
|
88.6
|
|
|
1.0
|
|
|
% of total standard commercial NPW
|
|
32
|
|
|
33
|
|
|
|
|
32
|
|
|
|
|
NPW in 2020 benefited from higher retention and renewal pure price increases. These items were partially offset by a $41.0 million reduction in audit and mid-term endorsement premiums, primarily driven by the COVID-19 pandemic, discussed in the "Insurance Operations" section above.
The combined ratio decreased 4.5 points in 2020, driven principally by an increase in favorable prior year casualty reserve development compared to 2019, as outlined in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
(Favorable) Prior Year Casualty Reserve Development
|
|
|
(Favorable)/Unfavorable
Year-Over-Year Change
|
For the year ended December 31,
|
|
Loss and Loss Expense Incurred
|
|
Impact on Loss and Loss Expense Ratio
|
|
|
2020
|
|
$
|
(35.0)
|
|
|
(5.0)
|
|
|
pts
|
(4.3)
|
|
2019
|
|
(5.0)
|
|
|
(0.7)
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
In 2020, the prior year reserve development was primarily attributable to favorable reserve development on loss severities in accident years 2017 and prior.
While this line experienced favorable prior year casualty reserve development in 2020, we remain cautious about the inherent uncertainty presented by COVID-19, including the potential for late reported claims and higher severities. Additionally, this line is exposed to other unfavorable trends, including social inflation and state laws enacted that extend the statute of limitations or open windows for previously time-barred actions. We will continue to monitor these trends in 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Automobile
|
|
|
|
|
|
|
2020
vs. 2019
|
|
|
|
2019
vs. 2018
|
|
($ in thousands)
|
|
2020
|
|
2019
|
|
|
2018
|
|
|
NPW
|
|
$
|
658,930
|
|
|
590,011
|
|
|
12
|
|
%
|
$
|
518,942
|
|
|
14
|
|
%
|
Direct new business
|
|
112,893
|
|
|
102,956
|
|
|
10
|
|
|
94,442
|
|
|
9
|
|
|
Retention
|
|
86
|
|
%
|
83
|
|
|
3
|
|
pts
|
83
|
|
%
|
—
|
|
pts
|
Renewal pure price increases
|
|
8.1
|
|
|
7.5
|
|
|
0.6
|
|
|
7.3
|
|
|
0.2
|
|
|
NPE
|
|
$
|
615,181
|
|
|
554,256
|
|
|
11
|
|
%
|
$
|
493,093
|
|
|
12
|
|
%
|
Underwriting loss
|
|
(3,126)
|
|
|
(43,797)
|
|
|
93
|
|
|
(77,403)
|
|
|
43
|
|
|
Combined ratio
|
|
100.5
|
|
|
107.9
|
|
|
(7.4)
|
|
|
115.7
|
|
|
(7.8)
|
|
|
% of total standard commercial NPW
|
|
30
|
|
|
28
|
|
|
|
|
26
|
|
|
|
|
The increases in NPW shown in the table above reflect 8.1% renewal pure price increases, higher retention, and an increase in new business as in-force vehicle counts increased 7%. The increase in 2020 was partially offset by a $15.4 million premium credit to our commercial automobile customers as a result of the COVID-19 pandemic.
The 7.4-point decrease in the combined ratio in 2020 compared to 2019 was primarily driven by the items in the tables below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Non-Catastrophe Property Losses
|
|
Catastrophe Losses
|
|
|
For the year ended December 31,
|
Loss and Loss Expense Incurred
|
|
Impact on Loss and Loss Expense Ratio
|
|
Loss and Loss Expense Incurred
|
|
Impact on Loss and Loss Expense Ratio
|
|
Total Impact on Loss and Loss Expense Ratio
|
|
(Favorable)
Year-Over-Year Change
|
2020
|
$
|
92.2
|
|
|
15.0
|
|
pts
|
$
|
3.4
|
|
|
0.6
|
|
pts
|
15.6
|
|
|
(3.0)
|
|
2019
|
100.8
|
|
|
18.2
|
|
|
2.1
|
|
|
0.4
|
|
|
18.6
|
|
|
(0.3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Unfavorable Prior Year Casualty Reserve Development
|
|
|
(Favorable)/ Unfavorable
Year-Over-Year Change
|
For the year ended December 31,
|
|
Loss and Loss Expense Incurred
|
|
Impact on Loss and Loss Expense Ratio
|
|
|
2020
|
|
$
|
10.0
|
|
|
1.6
|
|
|
pts
|
0.9
|
|
2019
|
|
4.0
|
|
|
0.7
|
|
|
|
(6.9)
|
|
|
|
|
|
|
|
|
|
The 2020 prior year casualty reserve development was primarily attributable to unfavorable reserve development on loss severities in accident years 2016 through 2019 and higher than expected frequencies in accident year 2019.
The lower combined ratio in 2020 also reflected a 6.7-point reduction in the current year casualty loss costs. This reduction primarily relates to the impact of strong renewal pure price increases we have earned in this line of business over the last several years and underwriting actions we have taken to improve profitability. Current year loss costs also benefited from decreases in claim frequencies reflecting reduced miles driven related to the COVID-19-related governmental directive.
This line of business remains an area of focus for us and most of the industry. Profitability challenges continue to generate
combined ratios higher than our risk-adjusted targets and the inherent uncertainty COVID-19 presents includes the potential for late reported claims and higher severities. We will continue to (i) actively implement price increases consistent with levels experienced in 2020, and (ii) enhance our underwriting tools to improve the accuracy of our rating information to prevent premium leakage. We also have been actively managing our new and renewal business, and we expect our actions will positively impact profitability through business mix improvement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers Compensation
|
|
|
|
|
|
|
2020
vs. 2019
|
|
|
|
2019
vs. 2018
|
|
($ in thousands)
|
|
2020
|
|
2019
|
|
|
2018
|
|
|
NPW
|
|
$
|
270,168
|
|
|
309,322
|
|
|
(13)
|
|
%
|
$
|
316,647
|
|
|
(2)
|
|
%
|
Direct new business
|
|
51,078
|
|
|
60,139
|
|
|
(15)
|
|
|
60,089
|
|
|
—
|
|
|
Retention
|
|
84
|
|
%
|
84
|
|
|
—
|
|
pts
|
84
|
|
%
|
—
|
|
pts
|
Renewal pure price decreases
|
|
(2.0)
|
|
|
(2.8)
|
|
|
0.8
|
|
|
(0.2)
|
|
|
(2.6)
|
|
|
NPE
|
|
$
|
278,062
|
|
|
311,370
|
|
|
(11)
|
|
%
|
$
|
317,616
|
|
|
(2)
|
|
%
|
Underwriting income
|
|
70,897
|
|
|
80,630
|
|
|
(12)
|
|
|
94,395
|
|
|
(15)
|
|
|
Combined ratio
|
|
74.5
|
|
|
74.1
|
|
|
0.4
|
|
|
70.3
|
|
|
3.8
|
|
|
% of total standard commercial NPW
|
|
12
|
|
|
14
|
|
|
|
|
16
|
|
|
|
|
In addition to the drivers in the table above, the 2020 NPW was impacted by a $28.7 million reduction in audit and mid-term endorsement premiums driven by the COVID-19 pandemic, which is discussed in the "Insurance Operations" section above.
The increase in the combined ratio in 2020 compared to 2019 was primarily driven by less favorable prior year casualty reserve development, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
(Favorable) Prior Year Casualty Reserve Development
|
|
|
Unfavorable/(Favorable)
Year-Over-Year Change
|
For the year ended December 31,
|
|
Loss and Loss Expense Incurred
|
|
Impact on Loss and Loss Expense Ratio
|
|
|
2020
|
|
$
|
(60.0)
|
|
|
(21.6)
|
|
|
pts
|
0.2
|
|
2019
|
|
(68.0)
|
|
|
(21.8)
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
The favorable reserve development for both periods was due to continued favorable medical severity trends impacting accident years 2018 and prior. Due to the length of time that injured workers can receive medical treatment, decreases in medical inflation can cause favorable loss development across an extended number of accident years.
While reported profitability on this line remains strong due to favorable emergence on prior year reserves, current accident year
margins do not support the continued negative pricing levels being set by the National Council on Compensation
Insurance and independent state rating bureaus. A reduction or reversal in the trend of favorable frequencies and severities has
the potential to significantly increase this line's combined ratio, which we monitor closely.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property
|
|
|
|
|
|
|
2020
vs. 2019
|
|
|
|
2019
vs. 2018
|
|
($ in thousands)
|
|
2020
|
|
2019
|
|
|
2018
|
|
|
NPW
|
|
$
|
413,194
|
|
|
373,809
|
|
|
11
|
|
%
|
$
|
342,027
|
|
|
9
|
|
%
|
Direct new business
|
|
94,697
|
|
|
88,527
|
|
|
7
|
|
|
76,391
|
|
|
16
|
|
|
Retention
|
|
84
|
|
%
|
82
|
|
|
2
|
|
pts
|
82
|
|
%
|
—
|
|
pts
|
Renewal pure price increases
|
|
4.6
|
|
|
3.3
|
|
|
1.3
|
|
|
3.1
|
|
|
0.2
|
|
|
NPE
|
|
$
|
388,120
|
|
|
353,834
|
|
|
10
|
|
%
|
$
|
329,660
|
|
|
7
|
|
%
|
Underwriting income (loss)
|
|
(21,296)
|
|
|
21,639
|
|
|
(198)
|
|
|
(3,211)
|
|
|
774
|
|
|
Combined ratio
|
|
105.5
|
|
|
93.9
|
|
|
11.6
|
|
|
101.0
|
|
|
(7.1)
|
|
|
% of total standard commercial NPW
|
|
19
|
|
|
17
|
|
|
|
|
17
|
|
|
|
|
NPW growth in this line in 2020 compared to 2019 was driven by (i) renewal pure price increases, (ii) new business growth, and (iii) increased retention.
Quantitative information regarding property losses is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Non-Catastrophe Property Losses
|
|
Catastrophe Losses
|
|
|
|
(Favorable)/Unfavorable Year-Over-Year Change
|
For the year ended December 31,
|
Loss and Loss Expense Incurred
|
|
Impact on Loss and Loss Expense Ratio
|
|
Loss and Loss Expense Incurred
|
|
Impact on Loss and Loss Expense Ratio
|
|
Total Impact on Loss and Loss Expense Ratio
|
|
2020
|
$
|
168.6
|
|
|
43.4
|
|
pts
|
$
|
90.2
|
|
|
23.3
|
|
pts
|
66.7
|
|
|
11.7
|
|
2019
|
149.7
|
|
|
42.3
|
|
|
44.9
|
|
|
12.7
|
|
|
55.0
|
|
|
(7.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Higher catastrophe losses in 2020 compared to 2019 were driven by the events mentioned in "Financial Highlights of Results for Years Ended December 31, 2020, 2019, and 2018" discussion above.
Standard Personal Lines Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
vs. 2019
|
|
|
|
2019
vs. 2018
|
|
($ in thousands)
|
|
2020
|
|
2019
|
|
|
2018
|
|
|
Insurance Segments Results:
|
|
|
|
|
|
|
|
|
|
|
|
NPW
|
|
$
|
295,166
|
|
|
304,592
|
|
|
(3)
|
|
%
|
$
|
309,277
|
|
|
(2)
|
|
%
|
NPE
|
|
299,140
|
|
|
307,739
|
|
|
(3)
|
|
|
304,441
|
|
|
1
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense incurred
|
|
233,260
|
|
|
211,300
|
|
|
10
|
|
|
206,752
|
|
|
2
|
|
|
Net underwriting expenses incurred
|
|
81,388
|
|
|
88,179
|
|
|
(8)
|
|
|
84,925
|
|
|
4
|
|
|
Underwriting income
|
|
$
|
(15,508)
|
|
|
8,260
|
|
|
(288)
|
|
%
|
$
|
12,764
|
|
|
(35)
|
|
%
|
Combined Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
78.0
|
|
%
|
68.6
|
|
|
9.4
|
|
pts
|
67.9
|
|
%
|
0.7
|
|
pts
|
Underwriting expense ratio
|
|
27.2
|
|
|
28.7
|
|
|
(1.5)
|
|
|
27.9
|
|
|
0.8
|
|
|
Combined ratio
|
|
105.2
|
|
|
97.3
|
|
|
7.9
|
|
|
95.8
|
|
|
1.5
|
|
|
NPW declined in 2020 compared to 2019, driven by new business that did not increase enough to compensate for the non-renewed policies reflected in our 83% retention ratio. Additionally, 2020 included a $4.3 million premium credit to our Standard Personal Lines customers as a result of the COVID-19 pandemic, which reduced the year-over-year NPW growth rate by 1 percentage point.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2020
|
|
2019
|
|
|
|
Retention
|
|
83
|
|
%
|
83
|
|
|
|
|
Renewal pure price increases on NPW
|
|
2.5
|
|
|
5.0
|
|
|
|
|
Direct new business premiums
|
|
$
|
44.7
|
|
|
40.7
|
|
|
|
|
The reduction in NPE in 2020 compared to 2019 reflects the decreases in NPW discussed above.
The loss and loss expense ratio increased 9.4 points in 2020 compared to 2019, the primary drivers of which were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Non-Catastrophe Property Losses
|
|
Catastrophe Losses
|
|
|
For the year ended December 31,
|
Loss and Loss Expense Incurred
|
|
Impact on Loss and Loss Expense Ratio
|
|
Loss and Loss Expense Incurred
|
|
Impact on Loss and Loss Expense Ratio
|
|
Total Impact on Loss and Loss Expense Ratio
|
|
Unfavorable Year-Over-Year Change
|
2020
|
$
|
86.0
|
|
|
28.7
|
|
pts
|
$
|
77.5
|
|
|
25.9
|
|
pts
|
54.6
|
|
|
13.8
|
|
2019
|
104.7
|
|
|
34.0
|
|
|
21.1
|
|
|
6.8
|
|
|
40.8
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
Unfavorable Prior Year Casualty Reserve Development
|
|
|
Unfavorable/(Favorable)
Year-Over-Year Change
|
For the year ended December 31,
|
|
Loss and Loss Expense Incurred
|
|
Impact on Loss and Loss Expense Ratio
|
|
|
2020
|
|
$
|
—
|
|
|
—
|
|
|
pts
|
(1.9)
|
|
2019
|
|
6.0
|
|
|
1.9
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
In addition to the items above, current year casualty loss costs were 2.6 points lower in 2020 as compared to 2019 driven by our personal automobile line of business reflecting decreases in claim frequencies as a result of reductions in miles driven due to the COVID-19-related governmental directives.
E&S Lines Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2020
|
|
2019
|
|
2020
vs. 2019
|
|
2018
|
|
2019
vs. 2018
|
|
Insurance Segments Results:
|
|
|
|
|
|
|
|
|
|
|
|
NPW
|
|
$
|
247,290
|
|
|
237,761
|
|
|
4
|
|
%
|
$
|
229,326
|
|
|
4
|
|
%
|
NPE
|
|
239,490
|
|
|
239,818
|
|
|
—
|
|
|
219,566
|
|
|
9
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense incurred
|
|
156,936
|
|
|
152,335
|
|
|
3
|
|
|
150,344
|
|
|
1
|
|
|
Net underwriting expenses incurred
|
|
82,428
|
|
|
77,740
|
|
|
6
|
|
|
69,917
|
|
|
11
|
|
|
Underwriting income (loss)
|
|
$
|
126
|
|
|
9,743
|
|
|
(99)
|
|
%
|
$
|
(695)
|
|
|
1,502
|
|
%
|
Combined Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense ratio
|
|
65.5
|
|
%
|
63.5
|
|
|
2.0
|
|
pts
|
68.5
|
|
%
|
(5.0)
|
|
pts
|
Underwriting expense ratio
|
|
34.4
|
|
|
32.4
|
|
|
2.0
|
|
|
31.8
|
|
|
0.6
|
|
|
Combined ratio
|
|
99.9
|
|
|
95.9
|
|
|
4.0
|
|
|
100.3
|
|
|
(4.4)
|
|
|
NPW increased 4.0% in 2020 due to increases in direct new business and renewal pure price. After two consecutive years in which we exited underperforming classes of business, our focus has shifted to profitably growing segments of our E&S book that have demonstrated underwriting profitability, and identifying new profitable segments to grow.
Quantitative information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2020
|
|
2019
|
|
Overall renewal price increases
|
|
6.2
|
|
%
|
6.0
|
|
|
Direct new business premiums
|
|
$
|
113.9
|
|
|
96.8
|
|
|
The 2.0-point increase in the loss and loss expense ratio in 2020 compared to 2019 was primarily attributable to an increase in property losses. This was partially offset by lower unfavorable prior year casualty reserve development and a decrease in current year loss costs of 3.7 points.
Quantitative information regarding our property losses and prior year casualty reserve development are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Non-Catastrophe Property Losses
|
|
Catastrophe Losses
|
|
|
For the year ended December 31,
|
Loss and Loss Expense Incurred
|
|
Impact on Loss and Loss Expense Ratio
|
|
Loss and Loss Expense Incurred
|
|
Impact on Loss and Loss Expense Ratio
|
|
Total Impact on Loss and Loss Expense Ratio
|
|
(Favorable)/Unfavorable Year-Over-Year Change
|
2020
|
$
|
27.9
|
|
|
11.6
|
|
pts
|
$
|
20.0
|
|
|
8.4
|
|
pts
|
20.0
|
|
|
8.3
|
|
2019
|
22.2
|
|
|
9.3
|
|
|
5.7
|
|
|
2.4
|
|
|
11.7
|
|
|
(3.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Unfavorable Prior Year Casualty Reserve Development
|
|
|
(Favorable)/Unfavorable
Year-Over-Year Change
|
For the year ended December 31,
|
|
Loss and Loss Expense Incurred
|
|
Impact on Loss and Loss Expense Ratio
|
|
|
2020
|
|
$
|
—
|
|
|
—
|
|
|
pts
|
(0.8)
|
|
2019
|
|
2.0
|
|
|
0.8
|
|
|
|
(4.7)
|
|
|
|
|
|
|
|
|
|
We had no prior year casualty reserve development in 2020, which was a slight improvement over 2019, when unfavorable prior year casualty reserve development was relatively minor.
The 2.0-point increase in the underwriting expense ratio in 2020 compared to 2019 was primarily driven by increases in the bad debt provision during 2020 of 1.5 points.
Reinsurance
We use reinsurance to protect our capital resources and insure against losses on property and casualty risks that we underwrite. We use two main reinsurance vehicles: (i) a reinsurance pooling agreement among our Insurance Subsidiaries through which each company agrees to share in premiums and losses based on certain specified percentages; and (ii) reinsurance contracts and arrangements with third parties that cover various policies that we issue to our customers.
Reinsurance Pooling Agreement
The primary purposes of the reinsurance pooling agreement among our Insurance Subsidiaries are to:
•Pool or share proportionately the underwriting profit and loss results of property and casualty insurance underwriting operations through reinsurance;
•Reduce administration expenses; and
•Permit all of the Insurance Subsidiaries to obtain a uniform rating from AM Best Company ("AM Best").
The following illustrates the pooling percentages by Insurance Subsidiary as of December 31, 2020:
|
|
|
|
|
|
|
|
|
Insurance Subsidiary
|
|
Pooling Percentage
|
Selective Insurance Company of America ("SICA")
|
|
32.0%
|
Selective Way Insurance Company ("SWIC")
|
|
21.0%
|
Selective Insurance Company of South Carolina ("SICSC")
|
|
9.0%
|
Selective Insurance Company of the Southeast ("SICSE")
|
|
7.0%
|
Selective Insurance Company of New York ("SICNY")
|
|
7.0%
|
Selective Casualty Insurance Company ("SCIC")
|
|
7.0%
|
Selective Auto Insurance Company of New Jersey ("SAICNJ")
|
|
6.0%
|
Mesa Underwriters Specialty Insurance Company ("MUSIC")
|
|
5.0%
|
Selective Insurance Company of New England ("SICNE")
|
|
3.0%
|
Selective Fire and Casualty Insurance Company ("SFCIC")
|
|
3.0%
|
Reinsurance Treaties and Arrangements
By entering into reinsurance treaties and arrangements, we can increase our underwriting capacity, accepting larger individual risks and aggregations of risks without directly increasing our capital or surplus. Our reinsurance program principally consists of traditional reinsurance. Under our reinsurance treaties, the reinsurer generally assumes a portion of the losses we cede to them in exchange for a portion of the premium. Amounts not reinsured below a specified dollar threshold are known as retention. Reinsurance does not legally discharge us from liability under the terms and limits of our policies, but it does make our reinsurer liable to us for the amount of liability we cede to them. Our reinsurers often rely on their own reinsurance programs, or retrocessions, to manage their large loss exposures. The size of the global reinsurance community is relatively small. If our reinsurers are unable to collect on their retrocessional programs, it may impair their ability to pay us for the amounts we cede to them.
Consequently, our reinsurers present us with direct and indirect counterparty credit risk. We attempt to mitigate this credit risk by (i) pursuing relationships with reinsurers rated “A-” or higher by AM Best and/or (ii) obtaining collateral to secure reinsurance obligations. Some of our reinsurance treaties permit us to terminate or commute them — or require the reinsurer to post collateral if the reinsurer's financial condition or rating deteriorates. We monitor our reinsurers' financial condition, and we review the quality of reinsurance recoverables and reserves for uncollectible reinsurance. For additional information regarding our reinsurance counterparty credit risk, see Note 9. "Reinsurance" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
We have reinsurance contracts that separately cover our property and casualty insurance business that can be segregated into the following key categories:
•Property Reinsurance, which includes our (i) property excess of loss treaties purchased for protection against large individual property losses and (ii) property catastrophe treaties purchased to provide protection for the overall property portfolio against severe catastrophic events. We primarily use facultative reinsurance for large individual property risks greater than our property excess of loss treaty capacity.
•Casualty Reinsurance, which provides protection for both individual large casualty losses and catastrophic casualty losses involving multiple claimants or insureds. We also may use facultative reinsurance for large individual casualty risks in excess of our treaty capacity.
•Terrorism Reinsurance, which provides a federal reinsurance backstop, behind the protection built into our property and casualty reinsurance treaties, for terrorism losses covered under the Terrorism Risk Insurance Program Reauthorization Act (“TRIPRA”). For further information about TRIPRA, see Item 1A. “Risk Factors.” of this Form 10-K.
•Flood Reinsurance, for which all of the premiums and losses related to our participation in the WYO (for which we also receive a servicing fee) are 100% ceded to the federal government.
Property Reinsurance
We renewed the property catastrophe treaty, which covers both our standard market and E&S business, effective January 1, 2021. For the main property catastrophe excess of loss treaty program, we maintained our expiring retention. We also purchased an additional $50 million in limit at the top of our program, thereby extending the coverage to $785 million in excess of a $40 million retention. We also renewed the separate catastrophe treaty of $35 million in excess of $5 million that covers events outside our 2015 22-state footprint and supports (i) our standard lines geographic expansion into Arizona, New Hampshire, Colorado, Utah, and New Mexico and (ii) our growing E&S property book. Both treaties were renewed on substantially the same terms as the expiring treaties except (i) restrictions in coverage were imposed related to the systemic perils of communicable disease and (ii) first party cybersecurity coverage, an expected result consistent with current market conditions. Consequently, the property catastrophe program now excludes coverage for communicable disease, but it retains reduced reinsurance coverage for cybersecurity risks. Despite these new limitations, coverage for traditionally covered property perils was maintained. Overall catastrophe ceded premium for 2021 increased due to three factors: (i) increases in underlying property exposures in line with our growing overall portfolio; (ii) the new additional $50 million of coverage purchased at the top of our treaty to maintain stability in our net risk profile; and (iii) a reinsurance environment characterized by higher risk-adjusted pricing, more rigorous underwriting, and reduced capacity. These dynamics were fueled by such factors as the uncertainty surrounding the impact of COVID-19, lower interest rates, and elevated catastrophe loss activity. However, on a risk-adjusted basis, the expiring layers saw modest rate increases, in line with market conditions for loss-free accounts sharing our geographic footprint.
We seek to minimize credit risk within our reinsurance program by transacting with highly-rated reinsurance partners and, where feasible, purchasing collateralized reinsurance products, particularly for high-severity, low-probability events. The current reinsurance program includes $281 million in collateralized limit, primarily in the top layer of the catastrophe program.
We continue to assess our property catastrophe exposure aggregations, modeled results, and effects of premium growth on our property portfolio. We strive to balance our exposure to individual large events against the cost of reinsurance protections.
We model various catastrophic perils, and hurricane risk continues to be our portfolio's most significant natural catastrophe peril because of the geographic location of the risks we insure. The table below illustrates the impact of the five largest hurricane losses we have experienced in the last 30 years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Actual Gross Loss
|
|
Net Loss2
|
|
Accident
Year
|
Hurricane Name
|
|
|
|
Superstorm Sandy
|
|
$125.5
|
|
45.6
|
|
2012
|
Hurricane Irene
|
|
44.8
|
|
40.2
|
|
2011
|
Hurricane Hugo
|
|
26.4
|
|
3.0
|
|
1989
|
Hurricane Isabel
|
|
25.1
|
|
15.7
|
|
2003
|
Tropical Storm Isaias
|
|
19.1 1
|
|
18.6
|
|
2020
|
1This amount represents reported and unreported gross losses estimated as of December 31, 2020.
2Net loss does not include reinstatement premiums, taxes, or flood claims handling fees.
We review our exposure to hurricane risk by examining the results of a third-party vendor model and proprietary analysis. The third-party vendor model provides a long-term view that closely relates modeled event frequency to historical hurricane activity and is adjusted to reflect assumptions for certain non-modeled costs, such as the impact of loss expenses, residual market assessments, and automobile-related losses. We believe that modeled estimates provide a range of potential outcomes, and we review multiple estimates to understand our catastrophic risk.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occurrence Exceedence Probability
|
|
Modeled Losses
|
($ in thousands)
|
|
Gross
Losses1
|
|
Net
Losses2
|
|
Net Losses
as a Percent of
GAAP Equity3
|
|
4.0% (1 in 25 year event)
|
|
$182,916
|
|
29,923
|
|
1
|
%
|
2.0% (1 in 50 year event)
|
|
304,764
|
|
34,554
|
|
1
|
|
1.0% (1 in 100 year event)
|
|
489,387
|
|
39,206
|
|
1
|
|
0.67% (1 in 150 year event)
|
|
682,261
|
|
60,220
|
|
2
|
|
0.5% (1 in 200 year event)
|
|
778,401
|
|
62,062
|
|
2
|
|
0.4% (1 in 250 year event)
|
|
899,633
|
|
107,070
|
|
4
|
|
0.2% (1 in 500 year event)
|
|
1,290,100
|
|
414,519
|
|
15
|
|
1Gross losses include uncertainty associated with damage/loss estimation, demand and storm surge, and assumptions for certain un-modeled costs, such as the impact of loss expenses, residual market assessments, and automobile-related losses, which collectively increase our gross losses by approximately 13%.
2Net losses are after-tax losses net of catastrophe reinsurance including reinstatement premiums.
3GAAP Equity as of December 31, 2020.
Our current catastrophe reinsurance program exhausts at an approximately 1 in 220 year return period, or events with 0.5% probability, based on a multi-model view of hurricane risk. Our actual gross and net losses incurred from hurricanes making U.S.-landfall will vary, perhaps materially, from our estimated modeled losses.
The property excess of loss treaty, which covers both our standard market and E&S business, was renewed on July 1, 2020, with the top layer renewed on January 1, 2021. The major terms of these treaties are consistent with the prior year.
The following table summarizes of our property reinsurance treaties and arrangements covering our Insurance Subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY REINSURANCE ON INSURANCE PRODUCTS
|
Treaty Name
|
|
Reinsurance Coverage
|
|
Terrorism Coverage
|
Property Catastrophe Excess of Loss
(covers all insurance operations)
|
|
$785 million above $40 million retention treaty that responds on per occurrence basis in four layers:
|
|
All nuclear, biological, chemical, and radioactive ("NBCR") losses are excluded regardless of whether or not they are certified under TRIPRA. Non-NBCR losses are covered to the same extent as non-terrorism losses. Please see Item 1A. “Risk Factors.” of this Form 10-K for discussion regarding TRIPRA.
|
|
- 82% of losses in excess of $40 million up to
$100 million;
|
|
|
- 97% of losses in excess of $100 million up to
$225 million;
|
|
|
- 97% of losses in excess of $225 million up to
$475 million; and
|
|
|
- 90% of losses in excess of $475 million up
to $825 million.
|
|
|
|
|
|
- The treaty provides one reinstatement in each of the first three layers and no reinstatement in the fourth layer. The annual aggregate limit is $1.1 billion, net of the Insurance Subsidiaries' co-participation.
|
|
|
In addition, our $35 million above $5 million retention treaty that responds on per occurrence basis covers 85% of losses outside of our standard lines original 22-state footprint and has an annual aggregate limit of $30 million, net of the Insurance Subsidiaries' co-participation. This layer was purchased primarily to protect the growth of our E&S property book but also provides coverage for our Standard Lines expansion states.
|
|
Property Excess of Loss
(covers all insurance operations)
|
|
$58 million above $2 million retention covering 100% in three layers. Losses other than TRIPRA certified losses are subject to the following reinstatements and annual aggregate limits:
|
|
All NBCR losses are excluded regardless of whether or not they are certified under TRIPRA. For non-NBCR losses, the treaty distinguishes between acts committed on behalf of foreign persons or foreign interests ("Foreign Terrorism") and those that are not. The treaty provides annual aggregate limits for Foreign Terrorism (other than NBCR) acts of $24 million for the first layer and $60 million for the second layer and for the third layer $40 million. Non-foreign terrorism losses (other than NBCR) are covered to the same extent as non-terrorism losses.
|
- $8 million in excess of $2 million layer
provides unlimited reinstatements;
|
- $30 million in excess of $10 million layer
provides three reinstatements, $120 million in
aggregate limits; and
|
|
- $20 million in excess of $40 million layer
provides three reinstatements, $80 million in aggregate
limits.
|
|
|
|
|
|
|
Flood
|
|
100% reinsurance by the federal government’s WYO.
|
|
None
|
Casualty Reinsurance
We renewed the casualty excess of loss treaty, which covers both our standard market and E&S Lines business, on July 1, 2020, on substantially the same terms as the treaty expiring June 30, 2020.
The following table summarizes our casualty reinsurance treaties and arrangements covering our Insurance Subsidiaries:
|
|
|
|
|
|
|
|
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CASUALTY REINSURANCE ON INSURANCE PRODUCTS
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Treaty Name
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Reinsurance Coverage
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Terrorism Coverage
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Casualty Excess of Loss
(covers all insurance operations)
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There are six layers covering 100% of $88 million in excess of $2 million. Losses other than terrorism losses are subject to the following:
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All NBCR losses are excluded. All other losses stemming from the acts of terrorism are subject to the following:
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- $3 million in excess of $2 million layer
provides 28 reinstatements, $87 million annual aggregate
limit;
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- $3 million in excess of $2 million layer with
$15 million net annual terrorism aggregate limit;
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- $7 million in excess of $5 million layer
provides six reinstatements, $49 million annual aggregate
limit;
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- $7 million in excess of $5 million layer with
$28 million net annual terrorism aggregate limit;
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- $9 million in excess of $12 million layer
provides three reinstatements; $36 million annual
aggregate limit;
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- $9 million in excess of $12 million layer with
$27 million net annual terrorism aggregate limit;
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- $9 million in excess of $21 million layer
provides one reinstatement, $18 million annual aggregate
limit;
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- $9 million in excess of $21 million layer with
$18 million net annual terrorism aggregate limit;
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- $20 million in excess of $30 million layer
provides one reinstatement, $40 million annual aggregate
limit; and
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- $20 million in excess of $30 million layer with
$40 million net annual terrorism aggregate limit; and
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- $40 million in excess of $50 million layer
provides one reinstatement, $80 million annual aggregate
limit.
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- $40 million in excess of $50 million layer with
$80 million net annual terrorism aggregate limit.
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We have other reinsurance treaties, such as our (i) Surety and Fidelity Excess of Loss Reinsurance Treaty, (ii) National Workers Compensation Reinsurance Pool Quota Share, which covers business assumed from the involuntary workers compensation pool, (iii) Endurance Specialty Quota share and Loss Development Cover, which provides protection for losses on policies written prior to the acquisition and any development on reserves established by MUSIC as of the date of acquisition, (iv) Equipment Breakdown Coverage Reinsurance Treaty, (v) Multi-line Quota Share, which covers additional personal lines coverages, and (vi) Cyber Liability Quota Share.
We regularly evaluate our overall reinsurance program, and we try to develop effective ways to manage the transfer of risk. We base our analysis on a comprehensive process that includes periodic analysis of modeling results and review of our own loss experience, aggregation of exposures, exposure growth, diversification of risks, limits written, projected reinsurance costs, reinsurer financial strength, and projected impact on earnings, equity, and statutory surplus. We strive to balance reinsurer credit quality, price, terms, and our appetite to retain a certain level of risk.
Investments Segment
The primary objective of the investment portfolio is to maximize after-tax net investment income and the overall total return of the portfolio, while maintaining a high credit quality core fixed income securities portfolio and managing our duration risk profile. The effective duration of the fixed income securities portfolio, including short-term investments, was 3.8 years as of December 31, 2020, compared to the Insurance Subsidiaries' liability duration of 3.7 years. The effective duration is monitored and managed to maximize yield while managing interest rate risk at an acceptable level. We maintain a well-diversified portfolio across sectors, with credit quality and maturities that provide ample liquidity. Purchases and sales are made with the intent of maximizing investment returns in the current market environment while balancing capital preservation.
Our fixed income securities and short-term investment portfolios represented 92% of our invested assets at December 31, 2020, and 96% of our invested assets at December 31, 2019. These portfolios had a weighted average credit rating of “ AA- ” as of both dates, with investment grade holdings representing 96% of these portfolios at December 31, 2020 and 97% as of December 31, 2019.
We have been actively engaged in monitoring and managing the exposure to credit risk in our portfolio associated with the impact of the COVID-19 pandemic and related economic conditions during 2020. We have also been managing the portfolio's exposure to floating rate securities, which reset principally to 90-day LIBOR. Given the reduction in the valuation of U.S. public equities and the significant widening of high yield credit spreads earlier in the year, we modestly increased our allocation to risk-seeking assets during 2020 as we identify attractive investment opportunities. Despite the strong performance of our portfolio, the average after-tax new money yield on fixed income purchases continued to decline as treasury rates remained low
and credit spreads continued to tighten throughout the year. Given the current environment, we continue to reinvest proceeds from the non-sale disposal activity primarily related to "AAA" rated agency-backed RMBS into other high quality, but non-AAA rated fixed income sectors, as we find the risk adjusted returns more attractive. Over the coming quarters, we expect the average credit rating will decrease to "A+" from "AA-" and remain there for the foreseeable future; however, we do not anticipate a material shift in the overall risk/return characteristics of our fixed income securities portfolio.
For further details on the composition, credit quality, and the various risks to which our portfolio is subject, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.” of this Form 10-K.
Total Invested Assets
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($ in thousands)
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|
2020
|
|
2019
|
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Change
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Total invested assets
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|
$
|
7,505,599
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|
|
6,688,654
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|
|
12
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%
|
Invested assets per dollar of common stockholders' equity
|
|
2.96
|
|
|
3.05
|
|
|
(3)
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|
Unrealized gain – before tax1
|
|
395,207
|
|
|
216,564
|
|
|
82
|
|
Unrealized gain – after tax1
|
|
312,214
|
|
|
171,085
|
|
|
82
|
|
1Includes unrealized gain on fixed income securities and equity securities.
Invested assets increased $817 million at December 31, 2020, compared to December 31, 2019, primarily driven by (i) $554.0 million in operating cash flow, (ii) a $178.6 million increase in pre-tax net unrealized gains, and (iii) $195.1 million in net proceeds from the issuance of preferred stock. For additional information regarding the issuance of preferred stock, see Note 17. "Preferred Stock" in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
The increase in unrealized gains on our fixed income securities portfolio increased our book value per common share by $2.25, and was driven principally by a significant decline in benchmark United States Treasury rates.
Net Investment Income
The components of net investment income earned were as follows:
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($ in thousands)
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2020
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2019
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|
2020
vs. 2019
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2018
|
|
2019
vs. 2018
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|
Fixed income securities
|
|
$
|
203,926
|
|
|
203,255
|
|
|
—
|
|
%
|
178,104
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|
|
14
|
|
%
|
Equity securities
|
|
9,286
|
|
|
6,996
|
|
|
33
|
|
|
7,764
|
|
|
(10)
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|
|
CMLs
|
|
844
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|
|
—
|
|
|
n/m
|
|
—
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|
|
n/m
|
|
Short-term investments
|
|
1,821
|
|
|
6,653
|
|
|
(73)
|
|
|
3,472
|
|
|
92
|
|
|
Other investments
|
|
26,922
|
|
|
18,778
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|
|
43
|
|
|
17,799
|
|
|
6
|
|
|
Investment expenses
|
|
(15,692)
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|
|
(13,139)
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|
|
(19)
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|
|
(11,803)
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|
|
(11)
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|
|
Net investment income earned – before tax
|
|
227,107
|
|
|
222,543
|
|
|
2
|
|
|
195,336
|
|
|
14
|
|
|
Net investment income tax expense
|
|
42,495
|
|
|
41,382
|
|
|
3
|
|
|
34,855
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|
|
19
|
|
|
Net investment income earned – after tax
|
|
$
|
184,612
|
|
|
181,161
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|
|
2
|
|
|
160,481
|
|
|
13
|
|
|
Effective tax rate
|
|
18.7
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%
|
|
18.6
|
|
|
0.1
|
|
pts
|
17.8
|
|
|
0.8
|
|
pts
|
Annual after-tax yield on fixed income securities
|
|
2.6
|
|
|
2.9
|
|
|
(0.3)
|
|
|
2.8
|
|
|
0.1
|
|
|
Annual after-tax yield on investment portfolio
|
|
2.6
|
|
|
2.9
|
|
|
(0.3)
|
|
|
2.8
|
|
|
0.1
|
|
|
Income on our fixed income portfolio was flat in 2020 compared to 2019, as strong operating cash flows constituting 20% of NPW, were offset by lower yields on this portfolio, as reflected in the table above. Income from alternative investments in our other investment portfolio drove the increase in investment income earned in 2020 compared to 2019. Results on these holdings are recorded on a one-quarter lag, and the strong capital market performance in the second and third quarters of 2020, which followed the significant COVID-19-related volatility in the first quarter of 2020, drove this portfolio's higher returns during the year. Additionally, there was a year-over-year decrease in income on our short-term investments.
Realized and Unrealized Investment Gains and Losses
When evaluating securities for sale, our general philosophy is to reduce our exposure to securities and sectors based on economic evaluations of whether the fundamentals for that security or sector have deteriorated or the timing is appropriate to opportunistically trade out of securities to other securities with better economic-return characteristics. Net realized and unrealized gains and losses for the indicated periods were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Net realized gains (losses) on disposals
|
|
$
|
9,148
|
|
|
26,715
|
|
|
(18,975)
|
|
Net unrealized gains (losses) on equity securities
|
|
7,939
|
|
|
(8,649)
|
|
|
(29,369)
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|
Net credit loss on fixed maturities, AFS
|
|
(5,042)
|
|
|
|
|
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Net credit benefit on fixed maturities, HTM
|
|
4
|
|
|
|
|
|
Losses on securities for which we have the intent to sell
|
|
(16,266)
|
|
|
|
|
|
Net OTTI losses recognized earnings
|
|
|
|
(3,644)
|
|
|
(6,579)
|
|
Total net realized and unrealized investment (losses) gains
|
|
$
|
(4,217)
|
|
|
14,422
|
|
|
(54,923)
|
|
Realized and unrealized investment gains (losses) were significantly impacted by COVID-19-related market volatility in the first quarter of 2020, and substantially all of the $16.3 million of losses on securities we intend to sell were recorded in that quarter to provide our investment managers flexibility to trade and optimize our investment portfolio. The majority of these losses on securities we intend to sell related to corporate securities in our AFS fixed income portfolio. Net realized gains of $9.2 million in 2020 were driven by the active management of our AFS fixed income portfolio during the year, and were lower than net gains of $26.7 million in 2019, which were driven by opportunistic sales in our equity securities portfolio.
For additional information regarding our losses on securities we intend to sell and our methodology for estimating the allowance for credit losses, see Note 2. “Summary of Significant Accounting Policies” and Note 5. "Investments" in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
Federal Income Taxes
The following table provides information regarding federal income taxes.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2020
|
|
2019
|
|
2018
|
Federal income tax expense
|
|
$
|
56.6
|
|
|
64.8
|
|
|
32.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
18.7
|
%
|
|
19.3
|
|
|
15.5
|
|
|
|
|
|
|
|
|
The effective tax rate in the table above differs from the statutory rate of 21% principally due to: (i) the benefit of tax-advantaged interest and dividend income; and (ii) the impact of excess tax benefits on our stock-based compensation awards,
partially offset by certain disallowances of executive compensation.
See Note 14. “Federal Income Taxes” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K for further information regarding the following: (i) a reconciliation of our effective tax rate to the statutory rate of 21%; and (ii) details regarding our net deferred tax liability and asset.
Financial Condition, Liquidity, and Capital Resources
Capital resources and liquidity reflect our ability to generate cash flows from business operations, borrow funds at competitive rates, and raise new capital to meet operating and growth needs. We actively managed capital resources and liquidity in 2020, as we increased liquidity early in the year out of an abundance of caution at the onset of the COVID-19 pandemic, repaid those borrowings by year-end, and issued our first preferred stock offering during the fourth quarter of 2020. These activities will be further discussed in the "Liquidity" section below.
Liquidity
We manage liquidity by focusing on generating sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. We also adjust our liquidity in light of economic or market conditions, as discussed further below.
Capital Market Activities
In the fourth quarter of 2020, we enhanced our capital structure flexibility at the Parent by issuing $200 million of 4.60% non-cumulative perpetual preferred stock. Net proceeds after issuance costs were approximately $195 million. The Parent is using these proceeds for general corporate purposes, which may include the repurchase of common stock under a $100 million share repurchase program authorized by our Board in conjunction with the preferred stock offering. No shares were repurchased under this authorization in the fourth quarter of 2020. For additional information on the preferred stock transaction, refer to Note 17. “Preferred Stock” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. The Parent had no other private or public issuances of stock or debt instruments during 2020.
Short-term Borrowings
We significantly increased liquidity at the Insurance Subsidiaries and the Parent during the first quarter of 2020 amid the COVID-19 pandemic, which was followed by a period of extreme volatility and uncertainty in the financial markets. In the aggregate, we borrowed $302 million from the FHLBNY, the FHLBI, and our Parent’s line of credit agreement out of an abundance of caution to reduce the likelihood of becoming a forced seller of invested assets to fund operations if there were a significant slowdown in premium payments as a result of the COVID-19 pandemic. We felt this was prudent given our focus on small-to-medium size business and our geographic footprint as we expected that some customers may have significant cash flow disruptions due to the COVID-19-related governmental orders and the economic slowdown. Furthermore, the ultimate viability of some of our commercial customers' businesses depend, in part, on the depth and duration of the economic slowdown, their participation in any federal fiscal stimulus packages, and whether their business is considered essential or non-essential. We routinely monitor our cash positions daily as part of our liquidity management process, and during 2020, we did not experience any material change in our daily cash collections despite the impact of the pandemic. Considering this, we repaid all of our short-term borrowings by December 31, 2020. For further information regarding these borrowings, see Note 11. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
Sources of Liquidity
Sources of cash for the Parent historically have consisted of dividends from the Insurance Subsidiaries, the investment portfolio held at the Parent, borrowings under third-party lines of credit, loan agreements with certain Insurance Subsidiaries, and the issuance of equity and debt securities. We continue to monitor these sources, giving consideration to our long-term liquidity and capital preservation strategies.
The Parent’s investment portfolio provides liquidity primarily through (i) short-term investments generally maintained in “AAA” rated money market funds approved by the National Association of Insurance Commissioners, (ii) high-quality, highly-liquid government and corporate fixed income securities, (iii) equity securities, and (iii) a cash balance. In the aggregate, Parent cash and total investments amounted to $490 million at December 31, 2020, and $278 million at December 31, 2019. The increase in 2020 compared to 2019 was primarily due to net proceeds from our preferred stock offering.
The Parent's liquidity may fluctuate based on various factors, including the amount and availability of dividends from our Insurance Subsidiaries, investment income, expenses, other Parent cash needs, such as dividends payable to shareholders, and asset allocation investment decisions. Our target for the Parent is to maintain liquidity matching at least twice its expected annual needs, which is currently estimated to be approximately $180 million.
Insurance Subsidiary Dividends
The Insurance Subsidiaries generate liquidity through insurance float, which is created by collecting premiums and earning investment income before claims are paid. The period of float can extend over many years. Our investment portfolio consists of maturity dates that continually provide a source of cash flow for claims payments in the ordinary course of business. As protection for the capital resources at the Insurance Subsidiaries, we purchase reinsurance coverage for any significantly large claims or catastrophes that may occur.
The Insurance Subsidiaries paid $105 million in dividends to the Parent in 2020. As of December 31, 2020, our allowable ordinary maximum dividend is $241 million for 2021. Any Insurance Subsidiary dividends to the Parent are (i) subject to the approval and/or review of its domiciliary state insurance regulator and (ii) generally are payable only from earned surplus reported in its statutory annual statements as of the preceding December 31. Although insurance regulators have approved past dividends historically, there is no assurance that they will approve future dividends that may be declared.
New Jersey corporate law also limits the maximum amount of dividends the Parent can pay our shareholders if either (i) the Parent would be unable to pay its debts as they became due in the usual course of business or (ii) the Parent’s total assets would be less than its total liabilities. The Parent’s ability to pay dividends to shareholders is also impacted by (i) covenants in its credit agreement (discussed below under "Line of Credit") that obligate it, among other things, to maintain a minimum consolidated net worth and a maximum ratio of consolidated debt to total capitalization, and (ii) the terms of our preferred stock that prohibit dividends to be declared or paid on our common stock if dividends are not declared and paid, or made payable, on all outstanding preferred stock for the latest completed dividend period.
For additional information regarding dividend restrictions and financial covenants, where applicable, see Note 11. “Indebtedness,” Note 17. “Preferred Stock” and Note 22. “Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds” in Item 8. “Financial Statements and Supplementary Data.” of this Form
10-K.
Line of Credit
On December 20, 2019, the Parent entered into a Credit Agreement with the lenders named therein (the “Lenders”) and the Bank of Montreal, Chicago Branch, as Administrative Agent ("Line of Credit"). Under the Line of Credit, the Lenders have agreed to provide the Parent with a $50 million revolving credit facility that can be increased to $125 million with the Lenders' consent. The Line of Credit will mature on December 20, 2022, and has a variable interest rate based on, among other factors, the Parent’s debt ratings. For additional information regarding the Line of Credit agreement and corresponding representations, warranties, and covenants, refer to Note 11. “Indebtedness” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
As the following table shows, several of our Insurance Subsidiaries are members of certain branches of the Federal Home Loan Bank ("FHLB"), which provides those subsidiaries with additional access to liquidity:
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Branch
|
Insurance Subsidiary Member
|
Federal Home Loan Bank of Indianapolis ("FHLBI")
|
SICSC1
|
SICSE1
|
Federal Home Loan Bank of New York ("FHLBNY")
|
SICA
|
SICNY
|
1These subsidiaries are jointly referred to as the "Indiana Subsidiaries" as they are domiciled in Indiana.
The Line of Credit permits aggregate borrowings from the FHLBI and the FHLBNY up to 10% of the respective member company’s admitted assets for the previous year. Additionally, as SICNY is domiciled in New York, its FHLBNY borrowings are limited by New York insurance regulations to the lower of 5% of admitted assets for the most recently completed fiscal quarter, or 10% of admitted assets for the previous year-end. All FHLBI and FHLBNY borrowings are required to be secured by investments pledged as collateral. For additional information regarding collateral outstanding, refer to Note 5. "Investments" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
The following table provides information on the remaining capacity for FHLB borrowings based on these restrictions, as well as the amount of additional FHLB stock that would need to be purchased to allow these member companies to borrow their remaining capacity:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Admitted Assets
|
|
Borrowing Limitation
|
|
Amount Borrowed
|
|
Remaining Capacity
|
|
Additional FHLB Stock Requirements
|
As of December 31, 2020
|
|
|
|
|
SICSC
|
$
|
763.2
|
|
|
$
|
76.3
|
|
|
32.0
|
|
|
44.3
|
|
|
0.3
|
|
SICSE
|
608.0
|
|
|
60.8
|
|
|
28.0
|
|
|
32.8
|
|
|
0.2
|
|
SICA
|
2,840.3
|
|
|
284.0
|
|
|
50.0
|
|
|
234.0
|
|
|
10.5
|
|
SICNY
|
527.8
|
|
|
26.4
|
|
|
—
|
|
|
26.4
|
|
|
1.2
|
|
Total
|
|
|
$
|
447.5
|
|
|
110.0
|
|
|
337.5
|
|
|
12.2
|
|
Intercompany Loan Agreements
The Parent has lending agreements with the Indiana Subsidiaries that have been approved by the Indiana Department of Insurance, which provide additional liquidity. Similar to the Line of Credit agreement, these lending agreements limit borrowings by the Parent from the Indiana Subsidiaries to 10% of the admitted assets of the respective Indiana Subsidiary. The following table provides information on the Parent’s borrowings and remaining borrowing capacity from the Indiana Subsidiaries:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Admitted Assets
as of December 31, 2020
|
|
Borrowing Limitation
|
|
Amount Borrowed
|
|
Remaining Capacity
|
As of December 31, 2020
|
|
|
|
SICSC
|
$
|
763.2
|
|
|
$
|
76.3
|
|
|
24.0
|
|
|
52.3
|
|
SICSE
|
608.0
|
|
|
60.8
|
|
|
16.0
|
|
|
44.8
|
|
Total
|
|
|
$
|
137.1
|
|
|
40.0
|
|
|
97.1
|
|
Uses of Liquidity
The Parent's liquidity generated from the sources discussed above is used, among other things, to pay dividends to our shareholders. Dividends on shares of the Parent's common and preferred stock are declared and paid at the discretion of the Board based on our operating results, financial condition, capital requirements, contractual restrictions, and other relevant factors. In October 2020, our Board approved a 9% increase in the quarterly cash dividend, to $0.25 from $0.23 per share.
Our ability to meet our interest and principal repayment obligations on our debt, as well as our ability to continue to pay dividends to our stockholders, is dependent on (i) liquidity at the Parent, (ii) the ability of the Insurance Subsidiaries to pay dividends, if necessary, and/or (iii) the availability of other sources of liquidity to the Parent. The Parent has the following upcoming principal payments due:
•$25 million to FHLBNY on July 21, 2021;
•$25 million to FHLBNY on August 16, 2021; and
•$60 million to FHLBI on December 16, 2026.
Restrictions on the ability of the Insurance Subsidiaries to declare and pay dividends, without alternative liquidity options, could materially affect our ability to service debt and pay dividends on common and preferred stock.
Capital Resources
Capital resources ensure we can pay policyholder claims, furnish the financial strength to support the business of underwriting insurance risks, and facilitate continued business growth. At December 31, 2020, we had GAAP stockholders’ equity of $2.7 billion and statutory surplus of $2.1 billion. With total debt of $550.7 million at December 31, 2020, our debt-to-capital ratio was 16.7%. For additional information on our statutory surplus, see Note 22. "Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
Our cash requirements include, without limitation, principal and interest payments on various notes payable, dividends to stockholders, payment of claims, payment of commitments under limited partnership agreements, capital expenditures, and other operating expenses, including commissions to our distribution partners, labor costs, premium taxes, general and administrative expenses, and income taxes. For further details regarding our cash requirements, refer to the section below entitled, “Contractual Obligations, Contingent Liabilities, and Commitments.”
We continually monitor our cash requirements and the amount of capital resources we maintain at the holding company and operating subsidiary levels. As part of our long-term capital strategy, we strive to maintain capital metrics that support our targeted financial strength relative to the macroeconomic environment. Based on our analysis and market conditions, we may take a variety of actions, including, without limitation, contributing capital to the Insurance Subsidiaries, issuing additional debt and/or equity securities, repurchasing existing debt, repurchasing shares of the Parent’s common stock, and increasing stockholders’ dividends.
Our capital management strategy is intended to protect the interests of the policyholders of the Insurance Subsidiaries and our stockholders, while enhancing our financial strength and underwriting capacity. We have an attractive book of business and
solid capital base, positioning us well to take advantage of market opportunities that may arise.
Book value per share increased to $42.38 as of December 31, 2020, from $36.91 as of December 31, 2019, primarily due to $4.09 in net income per diluted common share and $2.25 in unrealized gains on our fixed income securities portfolio, which was partially offset by $0.94 in dividends to our common shareholders.
Off-Balance Sheet Arrangements
At December 31, 2020 and December 31, 2019, we had no material relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Consequently, we are not exposed to any material financing, liquidity, market, or credit risk related to off-balance sheet arrangements.
Contractual Obligations, Contingent Liabilities, and Commitments
Our contractual obligations include required payments under finance and operating leases, debt obligations, and reserves for loss and loss expenses. As discussed in the “Reserve for Loss and Loss Expense” section in the "Critical Accounting Policies and Estimates" section of this MD&A and in Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K, we maintain case reserves and estimates of reserves for loss and loss expense IBNR consistent with industry practice. Using generally accepted actuarial reserving techniques, we project our estimate of ultimate loss and loss expense at each reporting date.
Given that the loss and loss expense reserves are estimates, as described in detail under the “Critical Accounting Policies and Estimates” section of this MD&A and in Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K, the payment of actual loss and loss expense is generally not fixed as to amount or timing. Due to this uncertainty, financial accounting standards prohibit us from discounting these reserves to their present value. Additionally, estimated losses as of the financial statement date do not consider the impact of estimated losses
from future business. Therefore, the projected settlement of the reserves for net loss and loss expense will differ, perhaps significantly, from actual future payments.
The projected paid amounts by year in the table below are estimates based on past experience, adjusted for the effects of current developments and anticipated trends, and include considerable judgment. There is no precise method for evaluating the impact of any specific factor on the projected timing of loss and loss expense reserve payments, so the timing and amounts of the actual payments will be affected by many factors.
Our future cash payments associated with contractual obligations pursuant to operating and finance leases, debt, interest on debt obligations, and loss and loss expense as of December 31, 2020 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
|
|
Payment Due by Period
|
|
|
|
|
Less than
1 year
|
|
1-3
years
|
|
3-5
years
|
|
More than
5 years
|
($ in millions)
|
|
Total
|
|
|
|
|
Operating leases
|
|
$
|
45.1
|
|
|
8.4
|
|
|
12.2
|
|
|
8.3
|
|
|
16.2
|
|
Finance leases
|
|
0.5
|
|
|
0.3
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
Notes payable
|
|
560.0
|
|
|
50.0
|
|
|
—
|
|
|
—
|
|
|
510.0
|
|
Interest on debt obligations
|
|
622.4
|
|
|
28.8
|
|
|
56.6
|
|
|
56.6
|
|
|
480.4
|
|
Subtotal
|
|
1,228.0
|
|
|
87.5
|
|
|
69.0
|
|
|
64.9
|
|
|
1,006.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss and loss expense payments
|
|
4,260.4
|
|
|
1,171.2
|
|
|
1,357.3
|
|
|
644.7
|
|
|
1,087.2
|
|
Ceded loss and loss expense payments
|
|
554.2
|
|
|
141.2
|
|
|
134.4
|
|
|
72.4
|
|
|
206.2
|
|
Net loss and loss expense payments
|
|
3,706.2
|
|
|
1,030.0
|
|
|
1,222.9
|
|
|
572.3
|
|
|
881.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,934.2
|
|
|
1,117.5
|
|
|
1,291.9
|
|
|
637.2
|
|
|
1,887.6
|
|
For additional information regarding: (i) cross-default provisions associated with certain of our notes payable in the table above; or (ii) our Line of Credit, see Note 11. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." in this Form 10-K.
In addition to the above, at December 31, 2020, we had certain contractual obligations that may require us to invest additional amounts into our investment portfolio, which are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Amount of Obligation
|
|
Year of Expiration of Obligation
|
Alternative and other investments
|
|
$
|
215.7
|
|
|
2036
|
Non-publicly traded collateralized loan obligations in our fixed income securities portfolio
|
|
37.7
|
|
|
2030
|
Non-publicly traded common stock within our equity portfolio
|
|
2.0
|
|
|
2021
|
Commercial mortgage loans
|
|
4.4
|
|
|
Less than 1 year
|
|
|
|
|
|
Total
|
|
$
|
259.8
|
|
|
|
There is no certainty that any such additional investment will be required, and we expect to have the capacity to repay or refinance these obligations as they come due.
We have issued no material guarantees on behalf of others and have no trading activities involving non-exchange traded contracts accounted for at fair value. We have no material transactions with related parties other than those disclosed in Note 18. “Related Party Transactions” included in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Selective Insurance Group, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Selective Insurance Group, Inc. and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2020, and the related notes and financial statement schedules I to V (collectively, the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 12, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Estimate of reserve for loss and loss expense
As discussed in Notes 2 and 10 to the consolidated financial statements, the Company estimates the reserve for loss and loss expense (reserves) through an internal reserve review that relies upon methods consistent with actuarial standards of practice supplemented with other internal and external information. The Company develops reserve estimates by line of business and, as experience emerges and other information develops, the reserve estimates are assessed in aggregate and adjusted as necessary. As of December 31, 2020, the Company recorded a liability of $4.26 billion for reserves.
We identified the evaluation of the estimate of reserves for loss and loss expense as a critical audit matter. The process to evaluate the Company’s estimate of reserves involved a high degree of subjective auditor judgment due to the inherent uncertainties in adjusting past experience for current development and anticipating trends for predicting future events. These uncertainties may be affected by a number of considerations, including internal factors, such as changes to underwriting and claims practices, supplemental data regarding claims reporting and settlement trends, exposure estimates for reported claims, potential large or complex claims, and additional trends observed by claims personnel or defense counsel, and external factors such as legislative and regulatory enactments, judicial trends and decisions, social trends, and trends in general economic conditions. Evaluating the impact of these factors on the estimate of reserves also required specialized actuarial skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. With the involvement of actuarial professionals, when appropriate, we evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s internal reserve review and determination of the Company’s best estimate of recorded reserves. We also involved actuarial professionals with specialized skills and knowledge, who assisted in:
•evaluating the Company’s actuarial methods by comparing them to methods consistent with actuarial standards of practice;
•developing an independent estimate of reserves for certain lines of business using methods consistent with actuarial standards of practice;
•for certain other lines of business, assessing the Company's internal reserve review by evaluating the assumptions and actuarial methods used;
•developing a consolidated range of reserves and comparing it to the Company's recorded reserves;
•assessing movement of the Company’s recorded reserves within the consolidated range of reserves.
/s/ KPMG LLP
We have served as the Company's auditor since 1964.
New York, New York
February 12, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets
|
|
|
|
|
December 31,
|
|
|
|
|
($ in thousands, except share amounts)
|
|
2020
|
|
2019
|
ASSETS
|
|
|
|
|
Investments:
|
|
|
|
|
Fixed income securities, held-to-maturity – at carrying value (fair value: $18,001 – 2020; $21,975 – 2019)
|
|
$
|
16,846
|
|
|
20,800
|
|
Less allowance for credit losses
|
|
(22)
|
|
|
—
|
|
Fixed income securities, held-to-maturity, net of allowance for credit losses
|
|
16,824
|
|
|
20,800
|
|
Fixed income securities, available-for-sale – at fair value
(allowance for credit losses: $3,969 – 2020; amortized cost: $6,073,517 – 2020; $5,879,986 – 2019)
|
|
6,455,928
|
|
|
6,095,620
|
|
Commercial mortgage loans – at carrying value (fair value: $47,289 – 2020)
|
|
46,306
|
|
|
—
|
|
Less: allowance for credit losses
|
|
—
|
|
|
—
|
|
Commercial mortgage loans, net of allowance for credit losses
|
|
46,306
|
|
|
—
|
|
Equity securities – at fair value (cost: $301,551 – 2020; $72,061 – 2019)
|
|
310,367
|
|
|
72,937
|
|
Short-term investments
|
|
409,852
|
|
|
282,490
|
|
Other investments
|
|
266,322
|
|
|
216,807
|
|
Total investments (Notes 5 and 7)
|
|
7,505,599
|
|
|
6,688,654
|
|
Cash
|
|
394
|
|
|
300
|
|
Restricted cash
|
|
14,837
|
|
|
7,675
|
|
Interest and dividends due or accrued
|
|
45,004
|
|
|
44,846
|
|
Premiums receivable
|
|
857,014
|
|
|
830,301
|
|
Less: allowance for credit losses (Note 8)
|
|
(21,000)
|
|
|
(6,400)
|
|
Premiums receivable, net of allowance for credit losses
|
|
836,014
|
|
|
823,901
|
|
Reinsurance recoverable
|
|
589,269
|
|
|
577,635
|
|
Less: allowance for credit losses (Note 9)
|
|
(1,777)
|
|
|
(4,400)
|
|
Reinsurance recoverable, net of allowance for credit losses
|
|
587,492
|
|
|
573,235
|
|
Prepaid reinsurance premiums (Note 9)
|
|
170,531
|
|
|
166,705
|
|
|
|
|
|
|
Deferred federal income tax (Note 14)
|
|
—
|
|
|
6,776
|
|
Property and equipment – at cost, net of accumulated
depreciation and amortization of: $240,150 – 2020; $227,566 – 2019
|
|
77,696
|
|
|
77,409
|
|
Deferred policy acquisition costs (Note 2)
|
|
288,578
|
|
|
271,186
|
|
Goodwill (Note 12)
|
|
7,849
|
|
|
7,849
|
|
Other assets
|
|
153,919
|
|
|
128,614
|
|
Total assets
|
|
$
|
9,687,913
|
|
|
8,797,150
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
Liabilities:
|
|
|
|
|
Reserve for loss and loss expense (Note 10)
|
|
$
|
4,260,355
|
|
|
4,067,163
|
|
Unearned premiums
|
|
1,618,271
|
|
|
1,523,167
|
|
|
|
|
|
|
Long-term debt (Note 11)
|
|
550,743
|
|
|
550,597
|
|
Current federal income tax
|
|
14,021
|
|
|
2,987
|
|
Deferred federal income tax (Note 14)
|
|
27,096
|
|
|
—
|
|
Accrued salaries and benefits
|
|
114,868
|
|
|
126,753
|
|
Other liabilities
|
|
363,670
|
|
|
331,547
|
|
Total liabilities
|
|
$
|
6,949,024
|
|
|
6,602,214
|
|
Stockholders’ Equity:
|
|
|
|
|
Preferred stock of $0 par value per share (Note 17):
|
|
|
|
|
Authorized shares: 5,000,000; Issued shares: 8,000 with $25,000 liquidation preference per share - 2020; no shares issued or outstanding - 2019
|
|
$
|
200,000
|
|
|
—
|
|
Common stock of $2 par value per share:
|
|
|
|
|
Authorized shares 360,000,000
|
|
|
|
|
Issued: 104,032,912 – 2020; 103,484,159 – 2019
|
|
208,066
|
|
|
206,968
|
|
Additional paid-in capital
|
|
438,985
|
|
|
418,521
|
|
Retained earnings
|
|
2,271,537
|
|
|
2,080,529
|
|
Accumulated other comprehensive income (Note 6)
|
|
220,186
|
|
|
81,750
|
|
Treasury stock – at cost (shares: 44,127,109 – 2020; 44,023,006 – 2019)
|
|
(599,885)
|
|
|
(592,832)
|
|
Total stockholders’ equity
|
|
2,738,889
|
|
|
2,194,936
|
|
Commitments and contingencies (Notes 19 and 20)
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
9,687,913
|
|
|
8,797,150
|
|
See accompanying Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Income
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
($ in thousands, except per share amounts)
|
|
2020
|
|
2019
|
|
2018
|
Revenues:
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
2,681,814
|
|
|
2,597,171
|
|
|
2,436,229
|
|
Net investment income earned
|
|
227,107
|
|
|
222,543
|
|
|
195,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized investment (losses) gains
|
|
(4,217)
|
|
|
14,422
|
|
|
(54,923)
|
|
Other income
|
|
17,570
|
|
|
12,355
|
|
|
9,438
|
|
Total revenues
|
|
2,922,274
|
|
|
2,846,491
|
|
|
2,586,080
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
Loss and loss expense incurred
|
|
1,635,823
|
|
|
1,551,491
|
|
|
1,498,134
|
|
Amortization of deferred policy acquisition costs
|
|
560,271
|
|
|
535,973
|
|
|
495,042
|
|
Other insurance expenses
|
|
366,941
|
|
|
358,069
|
|
|
331,318
|
|
Interest expense
|
|
30,839
|
|
|
33,668
|
|
|
24,419
|
|
Corporate expenses
|
|
25,412
|
|
|
30,900
|
|
|
25,446
|
|
Total expenses
|
|
2,619,286
|
|
|
2,510,101
|
|
|
2,374,359
|
|
|
|
|
|
|
|
|
Income before federal income tax
|
|
302,988
|
|
|
336,390
|
|
|
211,721
|
|
|
|
|
|
|
|
|
Federal income tax expense:
|
|
|
|
|
|
|
Current
|
|
60,059
|
|
|
60,640
|
|
|
35,012
|
|
Deferred
|
|
(3,426)
|
|
|
4,127
|
|
|
(2,230)
|
|
Total federal income tax expense
|
|
56,633
|
|
|
64,767
|
|
|
32,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
246,355
|
|
|
271,623
|
|
|
178,939
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
246,355
|
|
|
271,623
|
|
|
178,939
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders - Basic
|
|
$
|
4.12
|
|
|
4.57
|
|
|
3.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders - Diluted
|
|
$
|
4.09
|
|
|
4.53
|
|
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
($ in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Net income
|
|
$
|
246,355
|
|
|
271,623
|
|
|
178,939
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) ("OCI"), net of tax:
|
|
|
|
|
|
|
Unrealized gains (losses) on investment securities:
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during year
|
|
133,104
|
|
|
168,021
|
|
|
(97,284)
|
|
Unrealized losses on securities with credit loss recognized in earnings
|
|
(6,459)
|
|
|
—
|
|
|
—
|
|
Amounts reclassified into net income:
|
|
|
|
|
|
|
Held-to-maturity securities
|
|
(19)
|
|
|
(46)
|
|
|
87
|
|
Net realized losses on disposals and losses on intent-to-sell available-for-sale ("AFS") securities
|
|
4,247
|
|
|
530
|
|
|
31,316
|
|
Credit loss expense
|
|
3,984
|
|
|
—
|
|
|
—
|
|
Total unrealized gains (losses) on investment securities
|
|
134,857
|
|
|
168,505
|
|
|
(65,881)
|
|
|
|
|
|
|
|
|
Defined benefit pension and post-retirement plans:
|
|
|
|
|
|
|
Net actuarial gain (loss)
|
|
1,197
|
|
|
(10,898)
|
|
|
(8,906)
|
|
Amounts reclassified into net income:
|
|
|
|
|
|
|
Net actuarial loss
|
|
2,382
|
|
|
2,099
|
|
|
1,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total defined benefit pension and post-retirement plans
|
|
3,579
|
|
|
(8,799)
|
|
|
(7,226)
|
|
Other comprehensive income (loss)
|
|
138,436
|
|
|
159,706
|
|
|
(73,107)
|
|
Comprehensive income
|
|
$
|
384,791
|
|
|
431,329
|
|
|
105,832
|
|
See accompanying Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Stockholders’ Equity
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
($ in thousands, except share and per share amounts)
|
|
2020
|
|
2019
|
|
2018
|
Preferred stock:
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
Issuance of preferred stock
|
|
200,000
|
|
|
—
|
|
|
—
|
|
End of year
|
|
200,000
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
Beginning of year
|
|
206,968
|
|
|
205,697
|
|
|
204,569
|
|
Dividend reinvestment plan
|
|
58
|
|
|
44
|
|
|
47
|
|
Stock purchase and compensation plans
|
|
1,040
|
|
|
1,227
|
|
|
1,081
|
|
End of year
|
|
208,066
|
|
|
206,968
|
|
|
205,697
|
|
|
|
|
|
|
|
|
Additional paid-in capital:
|
|
|
|
|
|
|
Beginning of year
|
|
418,521
|
|
|
390,315
|
|
|
367,717
|
|
Dividend reinvestment plan
|
|
1,645
|
|
|
1,510
|
|
|
1,379
|
|
Preferred stock issuance costs
|
|
(5,416)
|
|
|
—
|
|
|
—
|
|
Stock purchase and compensation plans
|
|
24,235
|
|
|
26,696
|
|
|
21,219
|
|
End of year
|
|
438,985
|
|
|
418,521
|
|
|
390,315
|
|
|
|
|
|
|
|
|
Retained earnings:
|
|
|
|
|
|
|
Beginning of year, as previously reported
|
|
2,080,529
|
|
|
1,858,414
|
|
|
1,698,613
|
|
Cumulative effect adjustment due to adoption of equity security guidance, net of tax
|
|
—
|
|
|
—
|
|
|
30,726
|
|
Cumulative effect adjustment due to adoption of stranded deferred tax guidance
|
|
—
|
|
|
—
|
|
|
(5,707)
|
|
Cumulative effect adjustment due to adoption of lease guidance, net of tax
|
|
—
|
|
|
342
|
|
|
—
|
|
Cumulative effect adjustment due to adoption of guidance on allowance for credit losses, net of tax (Note 3)
|
|
1,435
|
|
|
—
|
|
|
—
|
|
Balance at beginning of year, as adjusted
|
|
2,081,964
|
|
|
1,858,756
|
|
|
1,723,632
|
|
Net income
|
|
246,355
|
|
|
271,623
|
|
|
178,939
|
|
Dividends to preferred stockholders
|
|
—
|
|
|
—
|
|
|
—
|
|
Dividends to common stockholders
|
|
(56,782)
|
|
|
(49,850)
|
|
|
(44,157)
|
|
End of year
|
|
2,271,537
|
|
|
2,080,529
|
|
|
1,858,414
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
Beginning of year, as previously reported
|
|
81,750
|
|
|
(77,956)
|
|
|
20,170
|
|
Cumulative effect adjustment due to adoption of equity security guidance, net of tax
|
|
—
|
|
|
—
|
|
|
(30,726)
|
|
Cumulative effect adjustment due to adoption of stranded deferred tax guidance
|
|
—
|
|
|
—
|
|
|
5,707
|
|
Balance at beginning of year, as adjusted
|
|
81,750
|
|
|
(77,956)
|
|
|
(4,849)
|
|
Other comprehensive income (loss)
|
|
138,436
|
|
|
159,706
|
|
|
(73,107)
|
|
End of year
|
|
220,186
|
|
|
81,750
|
|
|
(77,956)
|
|
|
|
|
|
|
|
|
Treasury stock:
|
|
|
|
|
|
|
Beginning of year
|
|
(592,832)
|
|
|
(584,668)
|
|
|
(578,112)
|
|
Acquisition of treasury stock
|
|
(7,053)
|
|
|
(8,164)
|
|
|
(6,556)
|
|
End of year
|
|
(599,885)
|
|
|
(592,832)
|
|
|
(584,668)
|
|
Total stockholders’ equity
|
|
$
|
2,738,889
|
|
|
2,194,936
|
|
|
1,791,802
|
|
|
|
|
|
|
|
|
Dividends declared per preferred share
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
Dividends declared per common share
|
|
$
|
0.94
|
|
|
0.83
|
|
|
0.74
|
|
|
|
|
|
|
|
|
Preferred Stock, shares outstanding:
|
|
|
|
|
|
|
Beginning of year
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuance of preferred stock
|
|
8,000
|
|
|
—
|
|
|
—
|
|
End of year
|
|
8,000
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
Common Stock, shares outstanding:
|
|
|
|
|
|
|
Beginning of year
|
|
59,461,153
|
|
|
58,948,554
|
|
|
58,495,122
|
|
Dividend reinvestment plan
|
|
28,890
|
|
|
22,087
|
|
|
23,493
|
|
Stock purchase and compensation plan
|
|
519,863
|
|
|
613,678
|
|
|
540,337
|
|
Acquisition of treasury stock
|
|
(104,103)
|
|
|
(123,166)
|
|
|
(110,398)
|
|
End of year
|
|
59,905,803
|
|
|
59,461,153
|
|
|
58,948,554
|
|
See accompanying Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
($ in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Operating Activities
|
|
|
|
|
|
|
Net income
|
|
$
|
246,355
|
|
|
271,623
|
|
|
178,939
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
59,350
|
|
|
55,205
|
|
|
44,874
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
16,227
|
|
|
19,077
|
|
|
14,507
|
|
Undistributed gains of equity method investments
|
|
(12,408)
|
|
|
(12,773)
|
|
|
(8,341)
|
|
Distributions in excess of current year income of equity method investments
|
|
3,472
|
|
|
2,807
|
|
|
2,924
|
|
Net realized and unrealized losses (gains)
|
|
4,217
|
|
|
(14,422)
|
|
|
54,923
|
|
Loss on disposal of fixed assets
|
|
22
|
|
|
42
|
|
|
63
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
Increase in reserves for loss and loss expense, net of reinsurance recoverables
|
|
181,839
|
|
|
149,232
|
|
|
168,288
|
|
Increase in unearned premiums, net of prepaid reinsurance
|
|
91,278
|
|
|
82,253
|
|
|
78,058
|
|
Decrease in net federal income taxes
|
|
7,708
|
|
|
7,721
|
|
|
2,428
|
|
Increase in premiums receivable
|
|
(13,171)
|
|
|
(53,383)
|
|
|
(23,489)
|
|
Increase in deferred policy acquisition costs
|
|
(17,392)
|
|
|
(18,574)
|
|
|
(17,557)
|
|
Increase in interest and dividends due or accrued
|
|
(158)
|
|
|
(3,226)
|
|
|
(540)
|
|
Decrease in accrued salaries and benefits
|
|
(13,264)
|
|
|
(3,748)
|
|
|
(26,418)
|
|
Increase in other assets
|
|
(27,927)
|
|
|
(39,337)
|
|
|
(372)
|
|
Increase (decrease) in other liabilities
|
|
27,897
|
|
|
34,998
|
|
|
(13,343)
|
|
Net cash provided by operating activities
|
|
554,045
|
|
|
477,495
|
|
|
454,944
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
Purchase of fixed income securities, held-to-maturity
|
|
—
|
|
|
—
|
|
|
(7,150)
|
|
Purchase of fixed income securities, available-for-sale
|
|
(1,723,818)
|
|
|
(1,856,125)
|
|
|
(2,918,203)
|
|
Purchase of commercial mortgage loans
|
|
(46,506)
|
|
|
—
|
|
|
—
|
|
Purchase of equity securities
|
|
(230,813)
|
|
|
(46,397)
|
|
|
(94,344)
|
|
Purchase of other investments
|
|
(79,598)
|
|
|
(64,908)
|
|
|
(68,578)
|
|
Purchase of short-term investments
|
|
(5,762,725)
|
|
|
(6,087,909)
|
|
|
(4,259,734)
|
|
Sale of fixed income securities, available-for-sale
|
|
487,087
|
|
|
594,743
|
|
|
2,030,664
|
|
Proceeds from commercial mortgage loans
|
|
201
|
|
|
—
|
|
|
—
|
|
Sale of short-term investments
|
|
5,635,463
|
|
|
6,129,885
|
|
|
4,101,530
|
|
Redemption and maturities of fixed income securities, held-to-maturity
|
|
3,888
|
|
|
16,149
|
|
|
12,106
|
|
Redemption and maturities of fixed income securities, available-for-sale
|
|
1,019,132
|
|
|
626,686
|
|
|
638,916
|
|
Sale of equity securities
|
|
1,320
|
|
|
137,294
|
|
|
113,339
|
|
Sale of other investments
|
|
5,375
|
|
|
17,964
|
|
|
3,497
|
|
Distributions from other investments
|
|
24,884
|
|
|
19,972
|
|
|
28,379
|
|
Fixed asset disposals
|
|
—
|
|
|
9
|
|
|
—
|
|
Purchase of property and equipment
|
|
(22,064)
|
|
|
(30,986)
|
|
|
(16,110)
|
|
Net cash used in investing activities
|
|
(688,174)
|
|
|
(543,623)
|
|
|
(435,688)
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
Dividends to preferred stockholders
|
|
—
|
|
|
—
|
|
|
—
|
|
Dividends to common stockholders
|
|
(54,486)
|
|
|
(47,675)
|
|
|
(42,097)
|
|
Acquisition of treasury stock
|
|
(7,053)
|
|
|
(8,164)
|
|
|
(6,556)
|
|
Net proceeds from stock purchase and compensation plans
|
|
8,411
|
|
|
8,243
|
|
|
7,252
|
|
Preferred stock issued, net of issuance costs
|
|
195,063
|
|
|
—
|
|
|
—
|
|
Proceeds from borrowings
|
|
587,000
|
|
|
355,757
|
|
|
130,000
|
|
Repayment of borrowings
|
|
(587,000)
|
|
|
(250,000)
|
|
|
(130,000)
|
|
|
|
|
|
|
|
|
Repayment of finance lease obligations
|
|
(550)
|
|
|
(977)
|
|
|
(5,646)
|
|
Net cash provided by (used in) financing activities
|
|
141,385
|
|
|
57,184
|
|
|
(47,047)
|
|
Net increase (decrease) in cash and restricted cash
|
|
7,256
|
|
|
(8,944)
|
|
|
(27,791)
|
|
Cash and restricted cash, beginning of year
|
|
7,975
|
|
|
16,919
|
|
|
44,710
|
|
Cash and restricted cash, end of year
|
|
$
|
15,231
|
|
|
7,975
|
|
|
16,919
|
|
See accompanying Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
Note 1. Organization
Selective Insurance Group, Inc., through its subsidiaries, (collectively referred to as “we,” “us,” or “our”) offers standard commercial, standard personal, and excess and surplus ("E&S") lines property and casualty insurance products. Selective Insurance Group, Inc. (referred to as the “Parent”) was incorporated in New Jersey in 1977 and its corporate headquarters is located in Branchville, New Jersey. The Parent’s common and preferred stock are publicly traded on the NASDAQ Global Select Market under the symbols “SIGI” and "SIGIP," respectively. We have provided a glossary of terms as Exhibit 99.1 to this Form 10-K, which defines certain industry-specific and other terms that are used in this Form 10-K.
We classify our business into four reportable segments, which are as follows:
•Standard Commercial Lines – comprised of property and casualty insurance products and services provided in the standard marketplace to commercial enterprises, which are typically businesses, non-profit organizations, and local government agencies.
•Standard Personal Lines – comprised of property and casualty insurance products and services, including flood insurance coverage, provided primarily to individuals acquiring coverage in the standard marketplace.
•E&S Lines – comprised of property and casualty insurance products and services provided to customers who have not obtained coverage in the standard marketplace.
•Investments – invests the premiums collected by our insurance operations, as well as amounts generated through our capital management strategies, which may include the issuance of debt and equity securities.
Note 2. Summary of Significant Accounting Policies
(a) Principles of Consolidation
The accompanying consolidated financial statements (“Financial Statements”) include the accounts of the Parent and its subsidiaries, and have been prepared in conformity with: (i) United States ("U.S.") generally accepted accounting principles ("GAAP"); and (ii) the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). All significant intercompany accounts and transactions are eliminated in consolidation.
(b) Use of Estimates
The preparation of our Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported financial statement balances, as well as the disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
(c) Investments
Portfolio Composition and Presentation in the Consolidated Balance Sheet
Our investment portfolio is primarily comprised of fixed income securities. We also hold equity securities, short-term investments, and other investments. In 2020, we began investing in commercial mortgage loans (“CMLs”). A description of our portfolio holdings, and the related presentation in our Consolidated Balance Sheet, is provided below.
Fixed Income Portfolio
We hold the following types of securities in our fixed income securities portfolio:
•U.S. government and government agency obligations;
•Foreign government obligations;
•State and municipal obligations, including special revenue and general obligation bonds;
•Corporate securities, which may include investment grade and below investment grade bonds, bank loan investments, redeemable preferred stock, and non-redeemable preferred stock with certain debt-like characteristics;
•Collateralized loan obligations ("CLOs") and other asset-backed securities ("ABS");
•Residential mortgage-backed securities ("RMBS"); and
•Commercial mortgage-backed securities ("CMBS").
We have designated substantially all of the holdings in our fixed income portfolio as available-for-sale ("AFS"). These securities are reported at fair value in our Consolidated Balance Sheet. The after-tax difference between fair value and cost or
amortized cost is reflected in stockholders’ equity as a component of accumulated other comprehensive income (loss) ("AOCI").
The amortized cost of fixed income securities is adjusted for the amortization of premiums and the accretion of discounts over the expected life of the security using the effective yield method. Callable debt securities held at a premium are amortized to the earliest call date. Premiums and discounts arising from the purchase of RMBS, CMBS, CLO and other ABS are amortized over the expected life of the security based on future principal payments, giving additional consideration to prepayments. These prepayments are estimated based on historical and projected cash flows. Prepayment assumptions are reviewed quarterly and adjusted to reflect actual prepayments and changes in expectations. Future amortization of any premium and/or discount is adjusted to reflect the revised assumptions.
Accrued interest on our fixed income securities is recorded as a component of “Interest and dividends due or accrued” on our Consolidated Balance Sheet. If accrued interest is due but not paid within 90 days, we reverse the delinquent amount and record this reversal through earnings as a component of “Net investment income earned” on our Consolidated Statement of Income.
Other Portfolio Holdings
CMLs are loans secured by commercial property, such as an office building, multi-family apartment complex, industrial warehouse, or shopping center. We may acquire investments in CMLs through (i) direct originations under a loan syndication arrangement or (ii) a marketplace purchase. We record our investment in CMLs on the settlement date of the loan. Our CMLs are classified as held-for-investment and reported at amortized cost, net of the applicable allowance for credit losses ("ACL"), on our Consolidated Balance Sheet. Interest is recorded using the effective yield method and accrued interest on our CMLs is recorded as a component of “Interest and dividends due or accrued” on our Consolidated Balance Sheet.
Equity securities may include common and non-redeemable preferred stocks. Equity securities with readily determinable fair values are reported at fair value. Equity securities without readily determinable fair values are reported at net asset value ("NAV") as a practical expedient.
Short-term investments may include money market instruments, savings accounts, commercial paper, and fixed income securities purchased with a maturity of less than one year. We also enter into reverse repurchase agreements that are included in short-term investments. These repurchase agreements are fully collateralized by high-quality, readily-marketable instruments that support the principal amount. At maturity, we receive principal and interest income on these agreements. Short-term investments are generally reported at fair value.
Other investments are primarily comprised of alternative investments, which are limited partnership investments in private equity, private credit, and real estate strategies. These alternative investments are accounted for using the equity method, with income typically recognized on a one-quarter lag. Because these alternative investments are recorded under the equity method of accounting, the valuation and income recognized on these investments may be impacted by volatility in the financial markets. In addition to our alternative investments, our other investment portfolio includes Federal Home Loan Bank stock (“FHLB Stock”) and tax credit investments. The FHLB Stock is reported at cost. Accounting for our tax credit investments is dependent on the type of credit we have purchased, as follows:
•Federal low income housing tax credits are accounted for under the proportional amortization method; and
•All other tax credits in our investment portfolio are accounted for using the equity method.
For federal tax credits accounted for under the equity method, we use the deferral method for recognizing the benefit of the tax credit with the related deferred revenue being recognized in our Consolidated Income Statement as a component of "Federal income tax expense" proportionately over the life of the investment.
We categorize distributions from our investments accounted for using the equity method on our Consolidated Statement of Cash Flows using the cumulative earnings approach. Under this approach, distributions received are classified as cash flows from operating activities until such time that the cumulative distributions exceed cumulative earnings for the investment. When such an excess occurs, the excess portion of the current period distribution is considered a return of investment and is classified as a cash flow from investing activities.
We evaluate the alternative investments and tax credit investments included in our other investments portfolio to determine whether those investments are variable interest entities ("VIEs") and if so, whether consolidation is required. A VIE is an entity that either has equity investors that lack certain essential characteristics of a controlling financial interest or lack sufficient
funds to finance its own activities without financial support provided by other entities. We consider several significant factors in determining if our investments are VIEs and if we are the primary beneficiary, including whether we have (i) the power to direct activities of the VIE, (ii) the ability to remove the decision maker of the VIE, (iii) the ability to participate in making decisions that are significant to the VIE, and (iv) the obligation to absorb losses and the right to receive benefits that could potentially be significant to the VIE. We have reviewed our alternative and tax credit investments and have concluded that they are VIEs, but that we are not the primary beneficiary and therefore, consolidation is not required.
Presentation in the Consolidated Statement of Income
Net Investment Income Earned
Net investment income earned on our Consolidated Statement of Income includes the following:
•Interest income, as well as amortization and accretion, on fixed income securities;
•Interest income on CMLs;
•Dividend income on equity securities;
•Interest income on our short-term investments; and
•Income recognized on our alternative and other investments accounted for under the equity method of accounting, except for federal tax credits, as discussed below.
Income related to federal tax credits (either low income housing tax credits or other federal credits) is recorded in our Consolidated Statement of Income as a component of “Federal income tax expense” proportionately over the life of the investment.
Net Realized and Unrealized Investment (Losses) Gains
Net realized and unrealized investment losses and gains on our Consolidated Statement of Income include the following:
•Realized gains and losses on the disposal of investment securities, which are determined on the basis of the cost of the specific investments sold;
•Changes in unrealized gains or losses on our equity securities;
•Losses on securities for which we have the intent to sell, which are discussed further below; and
•Net credit loss expense or benefit resulting from changes in the ACL related to our investment portfolio, which also is discussed further below.
Losses on securities for which we have the intent to sell and ACL on AFS Fixed Income Securities and Short-Term Investments
We review our fixed income securities in an unrealized loss position to determine (i) if we have the intent to sell the security, or (ii) if it is more likely than not we will be required to sell the security before its anticipated recovery. If we determine that we have the intent or likely requirement to sell the security, we write down its amortized cost to its fair value. In writing down amortized cost, any amount previously recorded as an ACL is reversed and any incremental reduction in amortized cost is recorded directly to earnings as a component of “Net realized and unrealized investment (losses) gains” on our Consolidated Statement of Income.
When fixed income securities are in an unrealized loss position and we do not record any losses on securities for which we intend to sell, we record an ACL for the portion of the unrealized loss due to an expected credit loss. We estimate expected credit losses on fixed income securities by performing a discounted cash flow (“DCF”). The ACL is the equal to the excess of amortized cost over the greater of: (i) our estimate of the present value of expected future cash flows, or (ii) fair value. The ACL is recorded as a contra-asset reflected in the carrying value of the investment on the Consolidated Balance Sheet. The initial ACL and any subsequent changes are recorded to earnings as a component of “Net realized and unrealized investment (losses) gains” on our Consolidated Statement of Income. Any remaining unrealized loss is the non-credit amount and is recorded in AOCI. The ACL cannot exceed the unrealized loss of an AFS security and therefore it may fluctuate with changes in the fair value of the security. The ACL is written off against the amortized cost basis in the period in which it is determined uncollectible.
Our DCF analyses calculate the present value of expected future cash flows using various models specific to the major security types in our portfolio. These models use security-specific information as well as forecasted macroeconomic data to determine possible expected credit loss scenarios based on projected changes in the economy. The forecasted economic data incorporated into the models is based on the Federal Reserve Board’s annual supervisory stress test review on certain large banks and financial institutions. We also have the ability to incorporate internally-developed forecast information into the models as we deem appropriate. The discount rate used in a DCF is one of the following:
•The current yield in effect at the reporting date to accrete the beneficial interest for RMBS, CMBS, CLO and other ABS that were not of high credit quality at acquisition;
•The effective interest rate in effect as of the reporting date for non-fixed rate securities; and
•The effective interest rate implicit in the security at the date of acquisition for all other securities.
DCFs may include, but are not necessarily limited to: (i) generating cash flows for each tranche considering tranche-specific data, market data, and other pertinent information, such as the historical performance of the underlying collateral, including net operating income generated by underlying properties, conditional default rate assumptions, loan loss severity assumptions, consensus projections, prepayment projections, and actual pool and collateral information; (ii) identifying applicable benchmark yields; and (iii) applying market-based tranche specific spreads to determine an appropriate yield by incorporating collateral performance, tranche-level attributes, trades, bids, and offers.
We do not record a valuation allowance on the accrued interest balance associated with our fixed income securities as we reverse delinquent amounts on a timely basis. We consider a fixed income security to be past due at the time any principal or interest payments become 90 days delinquent.
ACL on CMLs
We evaluate our CMLs on a quarterly basis for expected credit losses. If we hold a CML with a specific credit concern, we record an individual ACL on that loan. For all other CMLs, we record an ACL on the pool of loans based on lifetime expected credit losses. The ACL is recorded as a contra-asset reflected in the carrying value of our CMLs on the Consolidated Balance Sheet. Our initial ACL and any subsequent changes are recorded to earnings as a component of “Net realized and unrealized investment (losses) gains” on our Consolidated Statement of Income.
We utilize a forecasting model to estimate lifetime expected credit losses at a loan level under multiple economic scenarios. The scenarios use macroeconomic data such as unemployment and inflation to project property-specific operating income and capitalization rates that are used to estimate the value of the future operating income stream. This information, coupled with historical data about mortgage loan performance, is used to project the probability of default, the amount of loss given a default, and the resulting lifetime expected loss.
Losses on securities for which we have the intent to sell and Credit Losses on Other Investments
If we determine that we intend to sell a holding in our investment portfolio and the expected proceeds are less than the recorded value of the investment, we will record a loss on those securities we intend to sell in earnings as a component of “Net realized and unrealized investment (losses) gains” on our Consolidated Statement of Income. Additionally, we review our alternative investment portfolio for potential credit losses through, among other items, conversations with the management of the alternative investment concerning the following:
•The current investment strategy;
•Changes made or future changes to be made to the investment strategy;
•Emerging issues that may affect the success of the strategy; and
•The appropriateness of the valuation methodology used regarding the underlying investments.
Our evaluation for potential credit loss on our other investments (tax credits and FHLB Stock) include a qualitative assessment of credit indicators, which include, but are not limited to, the following:
•An adverse development of the expected receipt of remaining tax credits and other tax benefits; and
•A significant deterioration in the financial condition or liquidity of the Federal Home Loan Bank.
If we do not record a loss on a security we intend to sell, and we expect a credit loss on a holding in our other investments portfolio, we record a charge to earnings as a component of “Net realized and unrealized investment (losses) gains” on our Consolidated Statement of Income.
(d) Fair Values of Financial Instruments
Assets
The fair values of our investments are generated using various valuation techniques and are placed into the fair value hierarchy considering the following: (i) the highest priority is given to quoted prices in active markets for identical assets (Level 1); (ii) the next highest priority is given to quoted prices in markets that are not active or inputs that are observable either directly or indirectly, including quoted prices for similar assets in markets that are not active and other inputs that can be derived principally from, or corroborated by, observable market data for substantially the full term of the assets (Level 2); and (iii) the lowest priority is given to unobservable inputs supported by little or no market activity and that reflect our assumptions about the exit price, including assumptions that market participants would use in pricing the asset (Level 3). An asset’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation.
The techniques used to value our financial assets are as follows:
Level 1 Pricing
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Security Type
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Methodology
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Equity Securities; U.S. Treasury Notes
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Equity and U.S. Treasury Note prices are received from an independent pricing service that are based on observable market transactions. We validate these prices against a second external pricing service, and if established market value comparison thresholds are breached, further analysis is performed to determine the price to be used.
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Short-Term Investments
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Short-term investments are recorded at fair value. Given the liquid nature of our short-term investments, we generally validate their fair value by way of active trades within approximately one week of the financial statement close.
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Level 2 Pricing
We utilize a market approach for our Level 2 securities, using primarily matrix pricing models prepared by external pricing services. Matrix pricing models use mathematical techniques to value fixed income securities by relying on the securities' relationship to other benchmark quoted securities, and not relying exclusively on quoted prices for specific securities, as the specific securities are not always frequently traded. As a matter of policy, we consistently use one pricing service as our primary source and secondary pricing services if prices are not available from the primary pricing service. Fixed income security pricing is reviewed for reasonableness by (i) comparing our pricing to other third-party pricing services as well as benchmark indexed pricing, (ii) comparing fair value fluctuations between months for reasonableness, (iii) reviewing stale prices, and (iv) internally reviewing prices for reasonableness if a price from another third-party source is not available. If further analysis is needed, a challenge is sent to the pricing service for review and confirmation of the price.
Further information on our Level 2 asset pricing is included in the following table:
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Security Type
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Methodology
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Corporate Securities including preferred stocks classified as Fixed Income Securities, and U.S. Government and Government Agencies
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Evaluations include obtaining relevant trade data, benchmark quotes and spreads, and incorporating this information into either spread-based or price-based evaluations as determined by the observed market data. Spread-based evaluations include: (i) creating a range of spreads for relevant maturities of each issuer based on the new issue market, secondary trading, and dealer quotes; and (ii) incorporating option adjusted spreads for issues that have early redemption features. Based on the findings in (i) and (ii) above, final spreads are derived and added to benchmark curves. Price-based evaluations include matching each issue to its best-known market maker and contacting firms that transact in these securities.
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Obligations of States and Political Subdivisions
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Evaluations are based on yield curves that are developed based on factors such as: (i) benchmarks to issues with interest rates near prevailing market rates; (ii) established trading spreads over widely-accepted market benchmarks; (iii) yields on new issues; and (iv) market information from third-party sources such as reportable trades, broker-dealers, or issuers.
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RMBS, CMBS, CLO and other ABS
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Evaluations are based on a DCF, including: (i) generating cash flows for each tranche considering tranche-specific data, market data, and other pertinent information, such as historical performance of the underlying collateral, including net operating income generated by the underlying properties, conditional default rate assumptions, loan loss severity assumptions, consensus projections, prepayment projections, and actual pool and loan level collateral information; (ii) identifying applicable benchmark yields; and (iii) applying market-based tranche-specific spreads to determine an appropriate yield by incorporating collateral performance, tranche-level attributes, trades, bids, and offers.
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Foreign Government
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Evaluations are performed using a DCF model and by incorporating observed market yields of benchmarks as inputs, adjusting for varied maturities.
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Level 3 Pricing
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Security Type
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Methodology
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CMLs
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Evaluations are performed by a third-party and are based on matrix pricing. For fixed rate loans, the matrix process uses a yield build up approach to create a pricing yield, with components for base yield, credit quality spread, property type spread, and a weighted average life spread. Floating rate loans are priced with a target quality spread over the swap curve.
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In addition to our CML portfolio, certain securities in our AFS fixed income portfolio are priced using unobservable inputs. These valuations are primarily based on broker quotes, or they are received from other third-party sources, for which there is a
lack of transparency as to the inputs used to generate the valuation. The quantitative detail of these unobservable inputs is neither provided to us, nor reasonably available to us.
Liabilities
The techniques used to value our notes payable are as follows:
Level 2 Pricing
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Security Type
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Methodology
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7.25% Senior Notes; 6.70% Senior Notes;
5.375% Senior Notes
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Based on matrix pricing models prepared by external pricing services.
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Borrowings from Federal Home Loan Banks
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Evaluations are performed using a DCF model based on current borrowing rates provided by the Federal Home Loan Banks that are consistent with the remaining term of the borrowing.
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(e) Allowance for Credit Losses on Premiums Receivable
We estimate an ACL on our outstanding premiums receivable balance at each reporting date. In determining this allowance, we use a method that considers the aging of the receivable, based on the effective year of the related policy, along with our historical receivable loss experience. We also contemplate expected macroeconomic conditions over the expected collection period, which are short-term in nature because the majority of the balances are collected within two years of policy issuance.
As experienced during the COVID-19 pandemic, in contemplating our ACL on premiums receivable we also consider (i) the higher risk of non-payment due to a significant decline in economic activity, (ii) individualized payment flexibility offered to our customers, and (iii) moratoriums on policy cancellations, late payment notices, and late or reinstatement fees.
Changes in our ACL are charged to earnings as credit loss expense or benefit, which is a component of "Other insurance expenses" on our Consolidated Statements of Income, with an offsetting ACL recorded as a contra-asset reflected in the carrying value of the receivable. We charge write-offs against the allowance when we determine the account to be uncollectible after considering information obtained from our collection efforts.
(f) Share-Based Compensation
Share-based compensation consists of all share-based payment transactions in which an entity acquires goods or services by issuing (or offering to issue) its shares, share units, share options, or other equity instruments. The cost resulting from all share-based payment transactions are recognized in the Financial Statements based on the fair value of both equity and liability awards. The fair value is measured at grant date for equity awards, whereas the fair value for liability awards are remeasured at each reporting period. The fair value of both equity and liability awards is recognized over the requisite service period. The requisite service period is typically the lesser of the vesting period or the period of time from the grant date to the date of retirement eligibility. The expense recognized for share-based awards, which, in some cases, contain performance criteria, is based on the number of shares or units expected to be issued at the end of the performance period. We repurchase the Parent’s stock from our employees in connection with tax withholding obligations, as permitted under our stock-based compensation plans. This activity is disclosed in our Consolidated Statement of Stockholders' Equity.
(g) Reinsurance
The “Reinsurance recoverable” balance on our Consolidated Balance Sheet represents our estimate of amounts that will be recovered from reinsurers under our various treaties. Generally, amounts recoverable from reinsurers are recognized as assets at the same time and in a manner consistent with the paid and unpaid losses associated with the reinsured policies. We would consider a recoverable balance from a reinsurer to be past due if payment is not received by the first day following the invoice due date. We require collateral to secure reinsurance recoverable balances primarily from our reinsurance carriers that are not authorized, otherwise approved, or certified to do business in one or more of our ten insurance subsidiaries' domiciliary states. Our ten insurance subsidiaries are collectively referred to as the "Insurance Subsidiaries." The collateral received is typically in the form of a letter of credit, trust funds, or funds withheld against reinsurance recoverables.
We estimate an ACL on our outstanding reinsurance recoverable balance at each reporting date. Credit risk is mitigated to the extent we have obtained collateral. As part of our estimation of the ACL, we reduce the recoverable balance by the amount of the collateral. We then pool the uncollateralized balances by similar risk characteristics, including the financial strength rating of the reinsurer, and use a probability-of-default methodology to calculate the allowance. Historical default rates are sourced from AM Best and are coupled with severity assumptions in developing a baseline scenario. We then stress this scenario by incorporating forecasts of industry catastrophe losses and economic factors sourced through third-party data providers. In
developing our best estimate of the allowance for credit losses, we consider our outlook as to the probability of each of these scenarios occurring.
Changes in our ACL are charged to earnings as credit loss expense, which is a component of “Loss and loss expense incurred” on our Consolidated Statement of Income, with an offsetting ACL recorded as a contra-asset reflected in the carrying value of the recoverable balance. We charge write-offs against the ACL when we determine the recoverable balance to be uncollectible after considering information obtained from our efforts to collect amounts due or through a review of the financial condition of the reinsurer.
(h) Property and Equipment
Property and equipment used in operations, including certain costs incurred to develop or obtain computer software for internal use, are capitalized and recorded at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The following estimated useful lives can be considered as general guidelines:
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Asset Category
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Years
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Computer hardware
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3
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Computer software
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3
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to
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5
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Software licenses
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3
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to
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5
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Internally developed software
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5
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Furniture and fixtures
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10
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Buildings and improvements
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5
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to
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40
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We recorded depreciation expense of $21.5 million, $18.7 million, and $19.5 million for 2020, 2019, and 2018, respectively.
(i) Deferred Policy Acquisition Costs
Deferred policy acquisition costs are limited to costs directly related to the successful acquisition of insurance contracts. Costs meeting this definition typically include, among other things, sales commissions paid to our distribution partners, premium taxes, and the portion of employee salaries and benefits directly related to time spent on acquired contracts. These costs are deferred and amortized over the life of the contracts.
Accounting guidance requires a premium deficiency analysis to be performed at the level an entity acquires, services, and measures the profitability of its insurance contracts. We currently perform three premium deficiency analyses for our insurance operations, consistent with our reportable segments of Standard Commercial Lines, Standard Personal Lines, and E&S Lines. A combined ratio of over 100% does not necessarily indicate a premium deficiency, as any year's combined ratio includes a portion of underwriting expenses that are expensed at policy inception and therefore are not covered by the remaining unearned premium. In addition, investment income is not contemplated in the combined ratio calculation.
There were no premium deficiencies for any of the reported years, as the sum of the anticipated loss and loss expense, unamortized acquisition costs, policyholder dividends, and other expenses for each segment did not exceed that segment’s related unearned premium and anticipated investment income. The investment yields assumed in the premium deficiency assessment for each reporting period, which were based on our actual average investment yield before tax as of the September 30 calculation date, were 3.0% for 2020, 3.5% for 2019, and 3.3% for 2018.
(j) Goodwill
Goodwill results from business acquisitions where the cost of assets and liabilities acquired exceeds the fair value of those assets and liabilities. A quantitative goodwill impairment analysis is performed if our quarterly qualitative analysis indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Goodwill is allocated to the reporting units for purposes of these analyses. Based on our analysis at December 31, 2020, goodwill was not impaired.
(k) Reserve for Loss and Loss Expense
Reserves for loss and loss expense includes case reserves on reported claims and reserves known as incurred but not reported ("IBNR") reserves. Case reserves are estimated on each individual claim, and based on claim-specific facts and circumstances known at the time. The case reserves may be adjusted upward or downward as the specific facts and circumstances change. IBNR reserves are established at more aggregated levels and include provisions for (i) claims not yet reported, (ii) future development on reported claims, (iii) previously closed claims that will be reopened in the future, and (iv) anticipated salvage and subrogation recoveries.
We evaluate our reserves quarterly, through our comprehensive reserve review process and adjustments to recorded reserves are made accordingly. The primary input in evaluating reserve levels is the quarterly reserve review prepared by our internal actuaries, which provides comprehensive loss and loss expense projections. Our reviews are based primarily on our own loss experience, organized by line of business. Where sufficient statistical credibility exists, we may further segment the experience by coverage within line, or by geographic area. Generally accepted actuarial methodologies are applied to these reserve groups to produce ultimate loss and loss expense projections.
Typically, we organize our experience by accident year and age, which lends itself to the application of various loss development methods. These methods rely on historical claims reporting and payment patterns to project ultimate loss or expense for open accident years. Consideration is also given to the prior loss estimate, particularly for longer-tailed lines of business and the current accident year. For the current accident year, this expectation comes from our detailed actuarial planning process. The initial estimate is adjusted over time as actual experience emerges.
These methods require numerous assumptions, such as the selection of loss and loss expense development factors and the weight applied to each individual projection method, among others. Therefore, no single method can be interpreted as definitive. Instead, ultimate loss and loss expenses are selected based upon the various methods, considering the strengths and weaknesses of each as it applies to the specific line of business and accident year.
Certain liabilities, by their nature, do not lend themselves to loss development methods. Examples includes property catastrophes (low frequency/high severity, unique events), latent claims (where losses are incurred over an extended period of time), and unallocated loss expenses (loss expenses that cannot be attributed to a specific claim). Alternate development techniques are used for these liabilities, which include individual claims reviews, calendar year counts and averages, aggregate benchmark measures such as paid and incurred “survival ratios,” and others. These approaches often require additional assumptions and a greater amount of professional judgement.
The result of the reserve review is a set of ultimate loss and loss expense estimates by line of business, including the current and prior accident years. Furthermore, the selected ultimate losses are separated into their components of claim frequency and severity, along with their associated trends, to provide additional insight. While these ultimate loss and loss expense estimates serve as the primary basis for determining the recorded IBNR reserves, other internal and external factors are considered in our overall reserve review. Internal factors include (i) changes to our underwriting and claims practice, (ii) supplemental data regarding claims reporting and settlement trends, (iii) exposure estimates for reported claims, (iv) potential large or complex claims, and (v) additional trends observed by claims personnel or defense counsel. External factors considered include (i) legislative and regulatory enactments, (ii) judicial trends and decisions, (iii) social trends, including the impacts of social inflation, and (iv) trends in general economic conditions, including the effects of inflation, including impacts to medical costs, raw materials, and labor. For example, 2020 presented unique impacts related to COVID-19, such as governmental "stay-at-home" directives and their economic impacts, judicial interpretations of insurance coverages, and social and behavioral changes. While these impacts are uncertain and continue to evolve, they were key considerations in the reserving process.
The combination of the IBNR estimates along with the case reserve estimates on individual claims results in our total reserves for loss and loss expense. These reserves are expected to be sufficient for settling loss and loss expense obligations under our policies on unpaid claims, including changes in the volume of business written, claims frequency and severity, the mix of business, claims processing, and other items that management expects to affect our ultimate settlement of loss and loss expense. However, our loss and loss expense reserves are estimates of future events, the outcomes of which are not yet known. As with all estimates, they carry inherent uncertainty, which may be driven by internal factors, such as changes to our claims or underwriting operations, or external factors, such as changes in legislative, judicial, economic, or social trends. Furthermore, actual outcomes are impacted by inherent randomness, such as the actual number of accidents/incidents, or the occurrence or non-occurrence of a single large event. Because of these uncertainties, it is possible that actual outcomes will differ materially from the reserves established. While this risk cannot be eliminated, we review our reserves quarterly based upon the information available at that time, and make adjustments to our ultimate loss and loss expense estimates accordingly. These changes in our ultimate loss and loss expense estimates are reflected in the Consolidated Statements of Income for the period in which such estimates are changed. Any changes in the liability estimate could be material to the results of operations in future periods.
Loss reserves are estimates, and as such, we also consider a range of possible loss and loss expense reserve estimates. This range is determined at the beginning of each year, using prior year-end data, and reflects the fact that there is no single precise method for estimating the required reserves, due to the many factors that may influence the amounts ultimately paid.
We do not discount to present value that portion of our loss and loss expense reserves expected to be paid in future periods. Our loss and loss expense reserves implicitly include anticipated recoveries for salvage and subrogation claims.
Claims are counted at the occurrence, line of business, and policy level. For example, if a single occurrence (e.g. an automobile accident) leads to a claim under an automobile and an associated umbrella policy, they are each counted separately. Conversely, multiple claimants under the same occurrence/line/policy would contribute only a single count. The claim counts provided are on a reported basis. A claim is considered reported when a reserve is established or a payment is made. Therefore, claims closed without payment are included in the count as long as there was an associated case reserve at some point in its life cycle.
(l) Revenue Recognition
Premiums written are recognized as revenue over the period that coverage is provided using the semi-monthly pro-rata method. Unearned premiums and prepaid reinsurance premiums represent that portion of premiums written that are applicable to the unexpired terms of policies in force.
The Insurance Subsidiaries' net premiums written (“NPW”) include direct insurance policy writings, plus reinsurance assumed, less reinsurance ceded. The estimated premium on the workers compensation and general liability lines is referred to as audit premium. We estimate this premium, as it is anticipated to be either billed or returned on policies subsequent to expiration based on exposure levels (i.e. payroll or sales) when it is reasonably possible to do so based on historical trends adjusted for the uncertainty of future economic conditions. If we determine it is not reasonably possible to estimate this premium, we do not do so.
(m) Dividends to Policyholders
We establish reserves for dividends to policyholders on certain policies, most significantly workers compensation policies. These dividends are based on the policyholders' loss experience. Dividend reserves are established based on past experience, adjusted for the effects of current developments and anticipated trends. The expense for these dividends is recognized over a period that begins at policy inception and ends with the payment of the dividend. We report these dividends within "Other insurance expenses" on the Consolidated Statement of Income. We do not issue policies that entitle the policyholder to participate in the earnings or surplus of our Insurance Subsidiaries.
(n) Federal Income Tax
We use the asset and liability method of accounting for income taxes. Current federal income taxes are recognized for the estimated taxes payable or refundable on tax returns for the current year. Deferred federal income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. We consider all evidence, both positive and negative, with respect to our federal tax loss carryback availability, expected levels of pre-tax financial statement income, and federal taxable income, when evaluating whether the temporary differences will be realized. In projecting future taxable income, we begin with budgeted pre-tax income adjusted for estimated non-taxable items. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we use to manage our businesses. A valuation allowance is established when it is more likely than not that some portion of the deferred tax asset will not be realized. A liability for uncertain tax positions is recorded when it is more likely than not that a tax position will not be sustained upon examination by taxing authorities. The effect of a change in tax rates is recognized in the period of enactment. If we were to be levied interest and penalties by the Internal Revenue Service, these amounts would be recognized as a component of “Total federal income tax expense” on the Consolidated Statement of Income.
(o) Leases
We have various operating leases for office space, equipment, and fleet vehicles. In addition, we have various finance leases for computer hardware.
We determine if an arrangement is a lease on the commencement date of the contract. Lease assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. The lease asset and liability are measured by the present value of the future minimum lease payments over the lease term. Our fleet vehicle leases include a residual value guarantee; however, the residual value guarantee is not probable of being owed. Therefore, there is no impact to the lease liability or lease asset. To measure the present value, we use the discount rate in the contract. If the discount rate is not readily determinable, our incremental borrowing rate is used. The lease asset is then adjusted to exclude lease incentives. We recognize variable lease payments in the periods in which the obligations for those payments are incurred. In calculating a lease liability, we include options to extend or terminate the lease if it is reasonably certain that we will exercise such option. Lease expense is calculated using the straight-line method. In addition, we have adopted accounting policy elections to: (i) aggregate lease and non-lease components into a single lease component; and (ii) expense short-term leases on a straight-line basis over the lease term.
(p) Pension
Our pension obligations and related costs are calculated using actuarial methods, within the framework of GAAP. Our pension benefit obligation is determined as the actuarial present value of the vested benefits to which employees are currently entitled, based on the average life expectancy of the employees. Our funding policy provides that payments to our pension trust shall be equal to the minimum funding requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"), plus additional amounts that the Board of Directors ("Board") of Selective Insurance Company of America (“SICA”) may approve from time to time.
Two key assumptions, the discount rate and the expected return on plan assets, are important elements of expense and/or liability measurement. We evaluate these key assumptions annually unless facts indicate that a more frequent review is required. The discount rate enables us to state expected future cash flows at their present value on the measurement date. The purpose of the discount rate is to determine the interest rates inherent in the price at which pension benefits could be effectively settled. Our discount rate selection is based on high-quality, long-term corporate bonds. To determine the expected long-term rate of return on the plan assets, we consider the current and expected asset allocation, as well as historical and expected returns on each plan asset class. Other assumptions involve demographic factors such as retirement age and mortality. A portion of our plan assets is allocated to a liability hedging strategy through which we have an expectation that our plan assets will move in tandem with a portion of the plan liabilities, helping to mitigate funding ratio volatility.
Note 3. Adoption of Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-13, Financial Instruments - Credit Losses, and subsequent additional implementation guidance (collectively referred to as “ASU 2016-13”) that changes the way entities recognize impairment of financial assets. The new guidance requires immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets through the establishment of an ACL. The ACL is a measurement of expected losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Additionally, ASU 2016-03 requires the presentation of the impacted financial assets on the Consolidated Balance Sheet net of the ACL.
We adopted this guidance on January 1, 2020, applied a modified retrospective approach for the adoption, and recorded a net cumulative-effect adjustment to increase the opening balance of 2020 retained earnings by $1.4 million, after tax. As prescribed in ASU 2016-13, we did not adjust the amortized cost basis of any securities for which we previously had recorded other-than-temporary impairment ("OTTI") losses. The cumulative-effect increase to retained earnings represents the net adjustment required to (i) establish the ACL on our held-to-maturity ("HTM") debt securities and (ii) re-estimate the ACL on our premiums receivables and reinsurance recoverables under ASU 2016-13. See Note 2. "Summary of Significant Accounting Policies" of this Form 10-K for accounting policy updates related to ASU 2016-13. Additionally, see Note 5. "Investments," Note 8. "Allowance for Credit Losses on Premiums Receivable," and Note 9. "Reinsurance" of this Form 10-K for additional information regarding expected credit losses related to the respective financial assets.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing certain disclosures, and modifying and adding disclosure requirements. The additional disclosure requirements include (i) the change in unrealized gains and losses for the period included in other comprehensive income (“OCI”) for recurring Level 3 fair value measurements held at the end of the reporting period, and (ii) the range and weighted average of significant observable inputs used to develop Level 3 fair value measurements. We adopted the provisions related to removed disclosures in the fourth quarter of 2019 and adopted the remaining disclosure requirements in the first quarter of 2020. As it requires disclosure only, ASU 2018-13 has no impact on our financial condition or results of operations.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a cloud computing hosting service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted this guidance prospectively on January 1, 2020, and it did not have a material impact on our financial condition or results of operations.
Pronouncements to be effective in the future
In December 2019, the FASB issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (“ASU 2019-12”). Among other items, ASU 2019-12 simplifies the accounting treatment of tax law changes and year-to-date losses in interim periods. An entity generally recognizes the effects of a change in tax law in the period of enactment; however, there is an exception for tax laws with delayed effective dates. Under current guidance, an entity may not adjust its annual effective tax
rate for a tax law change until the period in which the law is effective. ASU 2019-12 provides that all effects of a tax law change, including adjustment of the estimated annual effective tax rate, are recognized in the period of enactment.
For year-to-date losses in interim periods, an entity is required currently to estimate its annual effective tax rate for the full fiscal year at the end of each interim period and use that rate to calculate its income taxes on a year-to-date basis. When an interim period loss exceeds the anticipated loss for the year, the income tax benefit is limited to the amount that would be recognized if the year-to-date loss were the anticipated loss for the full year. ASU 2019-12 removes this limitation and allows an entity to compute its income tax benefit at each interim period based on its estimated annual effective tax rate.
We will adopt this guidance on January 1, 2021 and it will not have a material impact to our financial condition, cash flows, or results of operations upon adoption.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions to the guidance in GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. Companies can elect to adopt ASU 2020-04 as of the beginning of the interim period that includes March 2020, or any date thereafter through December 31, 2022. We are currently evaluating the impact of this guidance on our financial condition and results of operations.
Note 4. Statements of Cash Flows
Supplemental cash flow information for the years ended December 31, 2020, 2019, and 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Cash paid during the period for:
|
|
|
|
|
|
|
Interest
|
|
$
|
30,464
|
|
|
25,089
|
|
|
23,992
|
|
Federal income tax
|
|
47,000
|
|
|
55,825
|
|
|
29,193
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
9,498
|
|
|
8,138
|
|
|
—
|
|
Operating cash flows from financing leases
|
|
15
|
|
|
16
|
|
|
—
|
|
Financing cash flows from finance leases
|
|
550
|
|
|
977
|
|
|
5,646
|
|
|
|
|
|
|
|
|
Non-cash items:
|
|
|
|
|
|
|
Corporate actions related to fixed income securities, AFS1
|
|
55,446
|
|
|
61,369
|
|
|
52,277
|
|
Corporate actions related to fixed income securities, HTM1
|
|
2,589
|
|
|
—
|
|
|
—
|
|
Corporate actions related to equity securities1
|
|
10,890
|
|
|
14,250
|
|
|
944
|
|
Assets acquired under finance lease arrangements
|
|
324
|
|
|
824
|
|
|
4,119
|
|
Assets acquired under operating lease arrangements
|
|
22,390
|
|
|
13,808
|
|
|
—
|
|
Non-cash purchase of property and equipment
|
|
590
|
|
|
89
|
|
|
291
|
|
1Examples of corporate actions include exchanges, non-cash acquisitions, and stock-splits.
The following table provides a reconciliation of cash and restricted cash reported within the Consolidated Balance Sheets that equate to the amount reported in the Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
Cash
|
|
$
|
394
|
|
|
300
|
|
Restricted cash
|
|
14,837
|
|
|
7,675
|
|
Total cash and restricted cash shown in the Statements of Cash Flows
|
|
$
|
15,231
|
|
|
7,975
|
|
Amounts included in restricted cash represent cash received from the National Flood Insurance Program ("NFIP"), which is restricted to pay flood claims under the Write Your Own Program.
Note 5. Investments
(a) Net unrealized gains on investments included in OCI by asset class were as follows for the years ended December 31, 2020, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2020
|
|
2019
|
|
2018
|
AFS securities:
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
386,380
|
|
|
215,634
|
|
|
2,302
|
|
|
|
|
|
|
|
|
Total AFS securities
|
|
386,380
|
|
|
215,634
|
|
|
2,302
|
|
|
|
|
|
|
|
|
HTM securities:
|
|
|
|
|
|
|
Fixed income securities
|
|
7
|
|
|
31
|
|
|
89
|
|
Total HTM securities
|
|
7
|
|
|
31
|
|
|
89
|
|
|
|
|
|
|
|
|
Short-term securities
|
|
6
|
|
|
23
|
|
|
—
|
|
|
|
|
|
|
|
|
Total net unrealized gains
|
|
386,393
|
|
|
215,688
|
|
|
2,391
|
|
Deferred income tax
|
|
(81,142)
|
|
|
(45,294)
|
|
|
(502)
|
|
Net unrealized gains, net of deferred income tax
|
|
305,251
|
|
|
170,394
|
|
|
1,889
|
|
|
|
|
|
|
|
|
Cumulative effect adjustment due to accounting change for equity unrealized1
|
|
—
|
|
|
—
|
|
|
30,726
|
|
Cumulative effect adjustment due to accounting changes for stranded tax assets1
|
|
—
|
|
|
—
|
|
|
(17,920)
|
|
Increase (decrease) in net unrealized gains in OCI, net of deferred income tax
|
|
$
|
134,857
|
|
|
168,505
|
|
|
(65,881)
|
|
1Upon adoption of ASU 2016-01, we recognized a $30.7 million cumulative-effect adjustment to the opening balance of AOCI, which represents the after-tax net unrealized gain on our equity portfolio as of December 31, 2018. Additionally, upon adoption of ASU 2018-02, we recognized a one-time reclassification from AOCI to retained earnings for $17.9 million representing the stranded tax assets related to our investment portfolio that were created in AOCI from the enactment of the Tax Cuts and Jobs Act of 2017.
(b) Information regarding our AFS securities as of December 31, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost/
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Allowance for
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
($ in thousands)
|
|
Cost
|
|
Credit Losses
|
|
Gains
|
|
Losses
|
|
Value
|
AFS fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies
|
|
$
|
110,038
|
|
|
—
|
|
|
6,239
|
|
|
(137)
|
|
|
116,140
|
|
Foreign government
|
|
16,801
|
|
|
(1)
|
|
|
1,569
|
|
|
(3)
|
|
|
18,366
|
|
Obligations of states and political subdivisions
|
|
1,159,588
|
|
|
(4)
|
|
|
87,564
|
|
|
(11)
|
|
|
1,247,137
|
|
Corporate securities
|
|
2,152,203
|
|
|
(2,782)
|
|
|
180,971
|
|
|
(2,340)
|
|
|
2,328,052
|
|
CLO and other ABS
|
|
1,014,820
|
|
|
(592)
|
|
|
20,166
|
|
|
(7,843)
|
|
|
1,026,551
|
|
RMBS
|
|
999,485
|
|
|
(561)
|
|
|
53,065
|
|
|
(201)
|
|
|
1,051,788
|
|
CMBS
|
|
620,582
|
|
|
(29)
|
|
|
48,348
|
|
|
(1,007)
|
|
|
667,894
|
|
Total AFS fixed income securities
|
|
$
|
6,073,517
|
|
|
(3,969)
|
|
|
397,922
|
|
|
(11,542)
|
|
|
6,455,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Cost/
|
|
|
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
($ in thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
AFS fixed income securities:
|
|
|
|
|
|
|
|
|
U.S. government and government agencies
|
|
$
|
112,680
|
|
|
3,506
|
|
|
—
|
|
|
116,186
|
|
Foreign government
|
|
18,011
|
|
|
533
|
|
|
(2)
|
|
|
18,542
|
|
Obligations of states and political subdivisions
|
|
1,168,185
|
|
|
62,175
|
|
|
(270)
|
|
|
1,230,090
|
|
Corporate securities
|
|
1,866,881
|
|
|
81,906
|
|
|
(1,310)
|
|
|
1,947,477
|
|
CLO and other ABS
|
|
790,517
|
|
|
7,929
|
|
|
(5,434)
|
|
|
793,012
|
|
RMBS
|
|
1,409,003
|
|
|
43,421
|
|
|
(455)
|
|
|
1,451,969
|
|
CMBS
|
|
514,709
|
|
|
23,902
|
|
|
(267)
|
|
|
538,344
|
|
Total AFS fixed income securities
|
|
$
|
5,879,986
|
|
|
223,372
|
|
|
(7,738)
|
|
|
6,095,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a roll forward of the allowance for credit losses on our AFS fixed income securities for 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Beginning Balance
|
|
Current Provisions for Securities without Prior Allowance
|
|
Increase (Decrease) on Securities with Prior Allowance, excluding intent (or Requirements) to Sell Securities
|
|
Reductions for Securities Sold
|
|
Reductions for Securities Identified as Intent (or Requirement) to Sell during the Period
|
|
Ending Balance
|
Foreign Government
|
$
|
—
|
|
|
19
|
|
|
—
|
|
|
(18)
|
|
|
—
|
|
|
1
|
|
Obligations of states and political subdivisons
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Corporate Securities
|
—
|
|
|
3,645
|
|
|
—
|
|
|
(781)
|
|
|
(82)
|
|
|
2,782
|
|
CLO and other ABS
|
—
|
|
|
722
|
|
|
—
|
|
|
(113)
|
|
|
(17)
|
|
|
592
|
|
RMBS
|
—
|
|
|
623
|
|
|
—
|
|
|
(62)
|
|
|
—
|
|
|
561
|
|
CMBS
|
—
|
|
|
29
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
29
|
|
Total AFS fixed income securities
|
$
|
—
|
|
|
5,042
|
|
|
—
|
|
|
(974)
|
|
|
(99)
|
|
|
3,969
|
|
During 2020, we did not have any write-offs or recoveries of our AFS fixed income securities and we did not purchase any assets with credit deterioration, so these items are not included in the table above.
As disclosed in Note 2. "Summary of Significant Accounting Policies," we do not evaluate accrued interest on our AFS
securities for expected credit loss as we write-off these balances in a timely manner. As of December 31, 2020, accrued interest
on AFS securities amounted to $43.8 million and we did not record any write-offs of accrued interest during 2020.
(c) Quantitative information about unrealized losses on our AFS portfolio is provided below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
($ in thousands)
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
AFS fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies
|
|
$
|
11,519
|
|
|
(137)
|
|
|
—
|
|
|
—
|
|
|
11,519
|
|
|
(137)
|
|
Foreign government
|
|
1,122
|
|
|
(3)
|
|
|
—
|
|
|
—
|
|
|
1,122
|
|
|
(3)
|
|
Obligations of states and political subdivisions
|
|
2,223
|
|
|
(11)
|
|
|
—
|
|
|
—
|
|
|
2,223
|
|
|
(11)
|
|
Corporate securities
|
|
65,187
|
|
|
(2,152)
|
|
|
2,400
|
|
|
(188)
|
|
|
67,587
|
|
|
(2,340)
|
|
CLO and other ABS
|
|
261,746
|
|
|
(2,995)
|
|
|
165,661
|
|
|
(4,848)
|
|
|
427,407
|
|
|
(7,843)
|
|
RMBS
|
|
18,227
|
|
|
(194)
|
|
|
1,181
|
|
|
(7)
|
|
|
19,408
|
|
|
(201)
|
|
CMBS
|
|
55,482
|
|
|
(616)
|
|
|
16,093
|
|
|
(391)
|
|
|
71,575
|
|
|
(1,007)
|
|
Total AFS fixed income securities
|
|
$
|
415,506
|
|
|
(6,108)
|
|
|
185,335
|
|
|
(5,434)
|
|
|
600,841
|
|
|
(11,542)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
($ in thousands)
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
AFS fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign government
|
|
1,416
|
|
|
(2)
|
|
|
—
|
|
|
—
|
|
|
1,416
|
|
|
(2)
|
|
Obligations of states and political subdivisions
|
|
35,838
|
|
|
(270)
|
|
|
—
|
|
|
—
|
|
|
35,838
|
|
|
(270)
|
|
Corporate securities
|
|
84,832
|
|
|
(480)
|
|
|
20,182
|
|
|
(830)
|
|
|
105,014
|
|
|
(1,310)
|
|
CLO and other ABS
|
|
205,191
|
|
|
(1,938)
|
|
|
204,385
|
|
|
(3,496)
|
|
|
409,576
|
|
|
(5,434)
|
|
RMBS
|
|
126,089
|
|
|
(425)
|
|
|
5,375
|
|
|
(30)
|
|
|
131,464
|
|
|
(455)
|
|
CMBS
|
|
62,893
|
|
|
(264)
|
|
|
828
|
|
|
(3)
|
|
|
63,721
|
|
|
(267)
|
|
Total AFS fixed income securities
|
|
$
|
516,259
|
|
|
(3,379)
|
|
|
230,770
|
|
|
(4,359)
|
|
|
747,029
|
|
|
(7,738)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We do not currently intend to sell any of the securities in the tables above, nor will we be required to sell any of these securities. Considering these factors and our review of these securities under our credit loss policy as described in Note 2. “Summary of Significant Accounting Policies” of this Form 10-K, we have concluded that no ACL is required on these balances. This conclusion reflects our current judgment as to the financial position and future prospects of the entity that issued the investment security and underlying collateral.
(d) Fixed income securities at December 31, 2020, by contractual maturity are shown below. Mortgage-backed securities are included in the maturity tables using the estimated average life of each security. Expected maturities may differ from
contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Listed below are the contractual maturities of fixed income securities at December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS
|
|
HTM
|
($ in thousands)
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
Due in one year or less
|
|
$
|
433,241
|
|
|
1,132
|
|
|
1,149
|
|
Due after one year through five years
|
|
3,639,658
|
|
|
15,692
|
|
|
16,852
|
|
Due after five years through 10 years
|
|
1,910,480
|
|
|
—
|
|
|
—
|
|
Due after 10 years
|
|
472,549
|
|
|
—
|
|
|
—
|
|
Total fixed income securities
|
|
$
|
6,455,928
|
|
|
16,824
|
|
|
18,001
|
|
(e) The following table summarizes our other investment portfolio by strategy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Investments
|
|
December 31, 2020
|
|
December 31, 2019
|
($ in thousands)
|
|
Carrying
Value
|
|
Remaining
Commitment
|
|
Maximum
Exposure to Loss1
|
|
Carrying
Value
|
|
Remaining
Commitment
|
|
Maximum
Exposure to Loss1
|
Alternative Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity
|
|
$
|
157,276
|
|
|
100,905
|
|
|
258,181
|
|
|
118,352
|
|
|
93,138
|
|
|
211,490
|
|
Private credit
|
|
54,017
|
|
|
98,330
|
|
|
152,347
|
|
|
42,532
|
|
|
105,340
|
|
|
147,872
|
|
Real assets
|
|
19,659
|
|
|
16,493
|
|
|
36,152
|
|
|
23,256
|
|
|
20,741
|
|
|
43,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total alternative investments
|
|
230,952
|
|
|
215,728
|
|
|
446,680
|
|
|
184,140
|
|
|
219,219
|
|
|
403,359
|
|
Other securities
|
|
35,370
|
|
|
—
|
|
|
35,370
|
|
|
32,667
|
|
|
—
|
|
|
32,667
|
|
Total other investments
|
|
$
|
266,322
|
|
|
215,728
|
|
|
482,050
|
|
|
216,807
|
|
|
219,219
|
|
|
436,026
|
|
1In addition to the amounts in this table, previously recognized tax credits are subject to the risk of recapture. We do not consider this significant and therefore do not include in this table.
We have reviewed various investments included in the table above and have concluded that they are VIEs, but that we are not the primary beneficiary and therefore, consolidation is not required. We do not have a future obligation to fund losses or debts on behalf of these investments; however, we are contractually committed to make additional investments up to the remaining commitment outlined above. We did not provide any non-contractual financial support at any time during 2020 or 2019.
The following is a description of our alternative investment strategies:
Our private equity strategy includes the following:
•Primary Private Equity: This strategy makes private equity investments, primarily in established large and middle market companies across diverse industries globally, with an emphasis on North America.
•Secondary Private Equity: This strategy purchases seasoned private equity funds from investors desiring liquidity prior to normal fund termination. Investments are made across all sectors of the private equity market, including leveraged buyouts ("LBO"), venture capital, distressed securities, mezzanine financing, real estate, and infrastructure.
•Venture Capital: In general, these investments are made principally by investing in equity securities of startup companies and small-to-medium sized privately-held corporations with strong long-term growth potential. This strategy makes private equity investments in seed stage, early stage, late stage, and growth equity partnerships.
Our private credit strategy includes the following:
•Direct Lending: This strategy provides privately negotiated loans to U.S. middle market companies. Typically, these are floating rate, senior secured loans diversified across industries. Loans are made to companies that may or may not have private equity sponsors to finance LBOs, recapitalizations, and acquisitions.
•Mezzanine Financing: This strategy provides privately-negotiated fixed income securities, generally with an equity component, to LBO firms and private and publicly-traded large, mid, and small-cap companies to finance LBOs, recapitalizations, and acquisitions.
•Opportunistic and Distressed Debt: This strategy makes investments in debt and equity securities of companies that are experiencing financial distress, operational issues, or dislocated pricing of publicly-traded securities. Investments
include buying indebtedness of bankrupt or financially-troubled companies, small balance loan portfolios, special situations and capital structure arbitrage trades, commercial real estate mortgages, and similar non-U.S. securities and debt obligations.
Our real assets strategy includes the following:
•Infrastructure: This strategy invests in the equity or debt of cash flow generating assets, diversified across a variety of industries, including transportation, energy infrastructure, renewable power, such as wind and solar, social infrastructure, power generation, water, telecom, and other regulated entities principally located in North America and Western Europe.
•Real Estate: This strategy invests in real estate in North America, Europe, and Asia via direct property ownership, joint ventures, mortgages, and investments in equity and debt instruments.
Our alternative investment strategies may employ leverage and may use hedging to reduce foreign exchange or interest rate volatility. At this time, our alternative investment strategies do not include hedge funds. We typically cannot redeem our investments with the general partners of these investments; however, occasionally these partnerships can be traded on the secondary market. Once liquidation is triggered by clauses within the limited partnership agreements or at the funds’ stated end date, we will receive our final allocation of capital and any earned appreciation of the underlying investments, assuming we have not divested ourselves of our partnership interests prior to that time. We currently receive distributions from these alternative investments through the realization of the underlying investments or income generated in the limited partnerships.
The following tables show gross summarized financial information for our other investments portfolio, including the portion we do not own. The investments are carried under the equity method of accounting. The last line in the income statement information table below reflects our portion of the aggregate results that are included in our Financial Statements. As the majority of these investments report results to us on a one quarter lag, the summarized financial statement information is as of, and for the 12-month period ended, September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Information
|
|
|
|
|
December 31,
|
|
|
|
|
($ in millions)
|
|
2020
|
|
2019
|
Investments
|
|
$
|
55,145
|
|
|
43,857
|
|
Total assets
|
|
58,819
|
|
|
45,432
|
|
Total liabilities
|
|
6,744
|
|
|
5,670
|
|
Total partners’ capital
|
|
52,075
|
|
|
39,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement Information
|
|
|
|
|
|
|
12 months ended September 30,
|
|
|
|
|
|
|
($ in millions)
|
|
2020
|
|
2019
|
|
2018
|
Net investment (loss) income
|
|
$
|
(26)
|
|
|
(8)
|
|
|
134
|
|
Realized gains
|
|
1,452
|
|
|
695
|
|
|
1,981
|
|
Net change in unrealized appreciation
|
|
4,898
|
|
|
5,543
|
|
|
1,303
|
|
Net income before tax
|
|
$
|
6,324
|
|
|
6,230
|
|
|
3,418
|
|
|
|
|
|
|
|
|
Alternative investment income included in "Net investment income earned" on our Consolidated Statements of Income
|
|
26.5
|
|
|
17.9
|
|
|
17.6
|
|
(f) We did not have exposure to any credit concentration risk of a single issuer greater than 10% of our stockholders' equity, other than certain U.S. government agencies, as of December 31, 2020 or December 31, 2019.
(g) We have pledged certain AFS fixed income securities as collateral related to our relationships with the Federal Home Loan Bank of Indianapolis ("FHLBI") and the Federal Home Loan Bank of New York ("FHLBNY"). In addition, certain securities were on deposit with various state and regulatory agencies at December 31, 2020 to comply with insurance laws. We retain all rights regarding all securities pledged as collateral.
The following table summarizes the market value of these securities at December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
FHLBI Collateral
|
|
FHLBNY Collateral
|
|
State and Regulatory Deposits
|
|
Total
|
U.S. government and government agencies
|
|
$
|
—
|
|
|
—
|
|
|
20.1
|
|
|
20.1
|
|
Obligations of states and political subdivisions
|
|
—
|
|
|
—
|
|
|
5.1
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
RMBS
|
|
125.0
|
|
|
178.1
|
|
|
—
|
|
|
303.1
|
|
CMBS
|
|
7.0
|
|
|
36.3
|
|
|
—
|
|
|
43.3
|
|
Total pledged as collateral
|
|
$
|
132.0
|
|
|
214.4
|
|
|
25.2
|
|
|
371.6
|
|
(h) The components of pre-tax net investment income earned were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Fixed income securities
|
|
$
|
203,926
|
|
|
203,255
|
|
|
178,104
|
|
CMLs
|
|
844
|
|
|
—
|
|
|
—
|
|
Equity securities
|
|
9,286
|
|
|
6,996
|
|
|
7,764
|
|
Short-term investments
|
|
1,821
|
|
|
6,653
|
|
|
3,472
|
|
Other investments
|
|
26,922
|
|
|
18,778
|
|
|
17,799
|
|
Investment expenses
|
|
(15,692)
|
|
|
(13,139)
|
|
|
(11,803)
|
|
Net investment income earned
|
|
$
|
227,107
|
|
|
222,543
|
|
|
195,336
|
|
(i) The following tables summarize net realized and unrealized investment gains and losses for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Gross gains on sales
|
|
$
|
18,893
|
|
|
31,910
|
|
|
28,672
|
|
Gross losses on sales
|
|
(9,745)
|
|
|
(5,195)
|
|
|
(47,647)
|
|
Net realized gains (losses) on disposals
|
|
9,148
|
|
|
26,715
|
|
|
(18,975)
|
|
Net unrealized gains (losses) on equity securities
|
|
7,939
|
|
|
(8,649)
|
|
|
(29,369)
|
|
Net credit loss (expense) benefit on fixed maturities, AFS
|
|
(5,042)
|
|
|
|
|
|
Net credit loss benefit (expense) on fixed maturities, HTM
|
|
4
|
|
|
|
|
|
Losses on securities for which we have the intent to sell
|
|
(16,266)
|
|
|
|
|
|
Net OTTI losses recognized in earnings
|
|
|
|
(3,644)
|
|
|
(6,579)
|
|
Net realized and unrealized gains (losses)
|
|
$
|
(4,217)
|
|
|
14,422
|
|
|
(54,923)
|
|
Unrealized (losses) recognized in income on equity securities, as reflected in the table above, include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Unrealized gains (losses) recognized in income on equity securities:
|
|
|
|
|
|
|
On securities remaining in our portfolio at end of period
|
|
$
|
7,936
|
|
|
1,219
|
|
|
(3,098)
|
|
On securities sold in period
|
|
3
|
|
|
(9,868)
|
|
|
(26,271)
|
|
Total unrealized (losses) recognized in income on equity securities
|
|
$
|
7,939
|
|
|
(8,649)
|
|
|
(29,369)
|
|
Proceeds from the sales of AFS fixed income securities were $487.1 million, $594.7 million, and $2,030.7 million in 2020, 2019, and 2018, respectively. Proceeds from the sales of equity securities were $1.3 million, $137.3 million, and $113.3 million in 2020, 2019, and 2018, respectively.
Net realized gains (losses) on disposals in the table above were driven by the following:
•2020: Active management of the fixed income securities portfolio.
•2019: Opportunistic sales in our equity portfolio.
•2018: Higher trading volume driven by opportunistic sales in both our fixed income securities and equity portfolios.
Losses on securities for which we have the intent to sell of $16.3 million were recorded in 2020 to provide our investment managers flexibility to trade and optimize our investment portfolio. Corporate securities accounted for $12.1 million of the losses on securities for which we have the intent to sell.
Note 6. Comprehensive Income
(a) The components of comprehensive income, both gross and net of tax, for 2020, 2019, and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
|
($ in thousands)
|
|
Gross
|
|
Tax
|
|
Net
|
Net income
|
|
$
|
302,988
|
|
|
56,633
|
|
|
246,355
|
|
Components of OCI:
|
|
|
|
|
|
|
Unrealized gains (losses) on investment securities:
|
|
|
|
|
|
|
Unrealized holding gains during the year
|
|
168,487
|
|
|
35,383
|
|
|
133,104
|
|
Unrealized losses on securities with credit loss recognized in earnings
|
|
(8,176)
|
|
|
(1,717)
|
|
|
(6,459)
|
|
Amounts reclassified into net income:
|
|
|
|
|
|
|
HTM securities
|
|
(24)
|
|
|
(5)
|
|
|
(19)
|
|
|
|
|
|
|
|
|
Net realized losses on disposals and losses on intent-to-sell AFS securities
|
|
5,376
|
|
|
1,129
|
|
|
4,247
|
|
Credit loss expense
|
|
5,042
|
|
|
1,058
|
|
|
3,984
|
|
Total unrealized gains on investment securities
|
|
170,705
|
|
|
35,848
|
|
|
134,857
|
|
Defined benefit pension and post-retirement plans:
|
|
|
|
|
|
|
Net actuarial gain
|
|
1,515
|
|
|
318
|
|
|
1,197
|
|
Amounts reclassified into net income:
|
|
|
|
|
|
|
Net actuarial loss
|
|
3,015
|
|
|
633
|
|
|
2,382
|
|
Total defined benefit pension and post-retirement plans
|
|
4,530
|
|
|
951
|
|
|
3,579
|
|
Other comprehensive income
|
|
175,235
|
|
|
36,799
|
|
|
138,436
|
|
Comprehensive income
|
|
$
|
478,223
|
|
|
93,432
|
|
|
384,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
($ in thousands)
|
|
Gross
|
|
Tax
|
|
Net
|
Net income
|
|
$
|
336,390
|
|
|
64,767
|
|
|
271,623
|
|
Components of OCI:
|
|
|
|
|
|
|
Unrealized gains (losses) on investment securities:
|
|
|
|
|
|
|
Unrealized holding gains during the year
|
|
212,683
|
|
|
44,662
|
|
|
168,021
|
|
|
|
|
|
|
|
|
Amounts reclassified into net income:
|
|
|
|
|
|
|
HTM securities
|
|
(58)
|
|
|
(12)
|
|
|
(46)
|
|
|
|
|
|
|
|
|
Realized losses on disposals and OTTI of AFS securities
|
|
671
|
|
|
141
|
|
|
530
|
|
Total unrealized gains on investment securities
|
|
213,296
|
|
|
44,791
|
|
|
168,505
|
|
Defined benefit pension and post-retirement plans:
|
|
|
|
|
|
|
Net actuarial loss
|
|
(13,795)
|
|
|
(2,897)
|
|
|
(10,898)
|
|
Amounts reclassified into net income:
|
|
|
|
|
|
|
Net actuarial loss
|
|
2,657
|
|
|
558
|
|
|
2,099
|
|
Total defined benefit pension and post-retirement plans
|
|
(11,138)
|
|
|
(2,339)
|
|
|
(8,799)
|
|
Other comprehensive income
|
|
202,158
|
|
|
42,452
|
|
|
159,706
|
|
Comprehensive income
|
|
$
|
538,548
|
|
|
107,219
|
|
|
431,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
($ in thousands)
|
|
Gross
|
|
Tax
|
|
Net
|
Net income
|
|
$
|
211,721
|
|
|
32,782
|
|
|
178,939
|
|
Components of OCI:
|
|
|
|
|
|
|
Unrealized (losses) gains on investment securities:
|
|
|
|
|
|
|
Unrealized holding losses during the year
|
|
(123,145)
|
|
|
(25,861)
|
|
|
(97,284)
|
|
|
|
|
|
|
|
|
Amounts reclassified into net income:
|
|
|
|
|
|
|
HTM securities
|
|
110
|
|
|
23
|
|
|
87
|
|
|
|
|
|
|
|
|
Realized losses on disposals and OTTI of AFS securities
|
|
39,641
|
|
|
8,325
|
|
|
31,316
|
|
Total unrealized losses on investment securities
|
|
(83,394)
|
|
|
(17,513)
|
|
|
(65,881)
|
|
Defined benefit pension and post-retirement plans:
|
|
|
|
|
|
|
Net actuarial loss
|
|
(11,273)
|
|
|
(2,367)
|
|
|
(8,906)
|
|
Amounts reclassified into net income:
|
|
|
|
|
|
|
Net actuarial loss
|
|
2,127
|
|
|
447
|
|
|
1,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total defined benefit pension and post-retirement plans
|
|
(9,146)
|
|
|
(1,920)
|
|
|
(7,226)
|
|
Other comprehensive loss
|
|
(92,540)
|
|
|
(19,433)
|
|
|
(73,107)
|
|
Comprehensive income
|
|
$
|
119,181
|
|
|
13,349
|
|
|
105,832
|
|
(b) The balances of, and changes in, each component of AOCI (net of taxes) as of December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized (Losses) Gains on Investment Securities
|
|
Defined Benefit Pension and Post-retirement Plans
|
|
|
($ in thousands)
|
|
|
|
Credit Loss Related1
|
|
HTM Related
|
|
All Other
|
|
Investments Subtotal
|
|
|
Total AOCI
|
Balance, December 31, 2018
|
|
|
|
$
|
(71)
|
|
|
71
|
|
|
1,888
|
|
|
1,888
|
|
|
(79,844)
|
|
|
(77,956)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCI before reclassifications
|
|
|
|
—
|
|
|
—
|
|
|
168,021
|
|
|
168,021
|
|
|
(10,898)
|
|
|
157,123
|
|
Amounts reclassified from AOCI
|
|
|
|
—
|
|
|
(46)
|
|
|
530
|
|
|
484
|
|
|
2,099
|
|
|
2,583
|
|
Net current period OCI
|
|
|
|
—
|
|
|
(46)
|
|
|
168,551
|
|
|
168,505
|
|
|
(8,799)
|
|
|
159,706
|
|
Balance, December 31, 2019
|
|
|
|
(71)
|
|
|
25
|
|
|
170,439
|
|
|
170,393
|
|
|
(88,643)
|
|
|
81,750
|
|
OCI before reclassifications
|
|
|
|
(6,459)
|
|
|
—
|
|
|
133,104
|
|
|
126,645
|
|
|
1,197
|
|
|
127,842
|
|
Amounts reclassified from AOCI
|
|
|
|
3,984
|
|
|
(19)
|
|
|
4,247
|
|
|
8,212
|
|
|
2,382
|
|
|
10,594
|
|
Net current period OCI
|
|
|
|
(2,475)
|
|
|
(19)
|
|
|
137,351
|
|
|
134,857
|
|
|
3,579
|
|
|
138,436
|
|
Balance, December 31, 2020
|
|
|
|
$
|
(2,546)
|
|
|
6
|
|
|
307,790
|
|
|
305,250
|
|
|
(85,064)
|
|
|
220,186
|
|
1Represents change in unrealized loss on securities with credit loss recognized in earnings.
The reclassifications out of AOCI are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Year ended December 31, 2020
|
|
Year ended December 31, 2019
|
|
Affected Line Item in the Consolidated Statements of Income
|
HTM related
|
|
|
|
|
|
|
Unrealized gains on HTM disposals
|
|
$
|
(16)
|
|
|
(46)
|
|
|
Net realized and unrealized investment (losses) gains
|
Amortization of net unrealized gains on HTM securities
|
|
(8)
|
|
|
(12)
|
|
|
Net investment income earned
|
|
|
(24)
|
|
|
(58)
|
|
|
Income before federal income tax
|
|
|
5
|
|
|
12
|
|
|
Total federal income tax expense
|
|
|
(19)
|
|
|
(46)
|
|
|
Net income
|
Net realized losses on disposals and losses on intent-to-sell AFS securities
|
|
|
|
|
|
|
Net realized losses on disposals and losses on intent-to-sell AFS securities
|
|
5,376
|
|
|
671
|
|
|
Net realized and unrealized investment (losses) gains
|
|
|
5,376
|
|
|
671
|
|
|
Income before federal income tax
|
|
|
(1,129)
|
|
|
(141)
|
|
|
Total federal income tax expense
|
|
|
4,247
|
|
|
530
|
|
|
Net income
|
Credit loss related
|
|
|
|
|
|
|
Credit loss expense
|
|
5,042
|
|
|
—
|
|
|
Net realized and unrealized investment (losses) gains
|
|
|
5,042
|
|
|
—
|
|
|
Income before federal income tax
|
|
|
(1,058)
|
|
|
—
|
|
|
Total federal income tax expense
|
|
|
3,984
|
|
|
—
|
|
|
Net income
|
Defined benefit pension and post-retirement life plans
|
|
|
|
|
|
|
Net actuarial loss
|
|
647
|
|
|
582
|
|
|
Loss and loss expense incurred
|
|
|
2,368
|
|
|
2,075
|
|
|
Other insurance expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total defined benefit pension and post-retirement life
|
|
3,015
|
|
|
2,657
|
|
|
Income before federal income tax
|
|
|
(633)
|
|
|
(558)
|
|
|
Total federal income tax expense
|
|
|
2,382
|
|
|
2,099
|
|
|
Net income
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
10,594
|
|
|
2,583
|
|
|
Net income
|
Note 7. Fair Value Measurements
The financial assets in our investment portfolio are primarily measured at fair value as disclosed on the Consolidated Balance Sheets. The following table presents the carrying amounts and estimated fair values of our financial liabilities as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
($ in thousands)
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
7.25% Senior Notes
|
|
$
|
49,914
|
|
|
66,148
|
|
|
49,910
|
|
|
66,365
|
|
6.70% Senior Notes
|
|
99,499
|
|
|
127,886
|
|
|
99,480
|
|
|
123,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.375% Senior Notes
|
|
294,241
|
|
|
383,669
|
|
|
294,157
|
|
|
357,025
|
|
1.61% Borrowings from FHLBNY
|
|
25,000
|
|
|
25,182
|
|
|
25,000
|
|
|
24,901
|
|
1.56% Borrowings from FHLBNY
|
|
25,000
|
|
|
25,198
|
|
|
25,000
|
|
|
24,875
|
|
3.03% Borrowings from FHLBI
|
|
60,000
|
|
|
67,513
|
|
|
60,000
|
|
|
63,002
|
|
Subtotal long-term debt
|
|
553,654
|
|
|
695,596
|
|
|
553,547
|
|
|
659,272
|
|
Unamortized debt issuance costs
|
|
(3,419)
|
|
|
|
|
(3,687)
|
|
|
|
Finance lease obligations
|
|
508
|
|
|
|
|
737
|
|
|
|
Total long-term debt
|
|
$
|
550,743
|
|
|
|
|
$
|
550,597
|
|
|
|
For discussion regarding the fair value techniques of our financial instruments, refer to Note 2. "Summary of Significant Accounting Policies" of this Form 10-K.
The following tables provide quantitative disclosures of our financial assets that were measured and recorded at fair value at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
Fair Value Measurements Using
|
($ in thousands)
|
|
Assets Measured at Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets/ Liabilities
(Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Description
|
|
|
|
|
|
|
|
|
Measured on a recurring basis:
|
|
|
|
|
|
|
|
|
AFS fixed income securities:
|
|
|
|
|
|
|
|
|
U.S. government and government agencies
|
|
$
|
116,140
|
|
|
40,960
|
|
|
75,180
|
|
|
—
|
|
Foreign government
|
|
18,366
|
|
|
—
|
|
|
18,366
|
|
|
—
|
|
Obligations of states and political subdivisions
|
|
1,247,137
|
|
|
—
|
|
|
1,244,243
|
|
|
2,894
|
|
Corporate securities
|
|
2,328,052
|
|
|
—
|
|
|
2,257,352
|
|
|
70,700
|
|
CLO and other ABS
|
|
1,026,551
|
|
|
—
|
|
|
970,176
|
|
|
56,375
|
|
RMBS
|
|
1,051,788
|
|
|
—
|
|
|
1,051,788
|
|
|
—
|
|
CMBS
|
|
667,894
|
|
|
—
|
|
|
667,894
|
|
|
—
|
|
Total AFS fixed income securities
|
|
6,455,928
|
|
|
40,960
|
|
|
6,284,999
|
|
|
129,969
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
Common stock1
|
|
308,632
|
|
|
261,846
|
|
|
—
|
|
|
—
|
|
Preferred stock
|
|
1,735
|
|
|
1,735
|
|
|
—
|
|
|
—
|
|
Total equity securities
|
|
310,367
|
|
|
263,581
|
|
|
—
|
|
|
—
|
|
Short-term investments
|
|
409,852
|
|
|
405,400
|
|
|
4,452
|
|
|
—
|
|
Total assets measured at fair value
|
|
$
|
7,176,147
|
|
|
709,941
|
|
|
6,289,451
|
|
|
129,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
Fair Value Measurements Using
|
($ in thousands)
|
|
Assets Measured at Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets/ Liabilities
(Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Description
|
|
|
|
|
|
|
|
|
Measured on a recurring basis:
|
|
|
|
|
|
|
|
|
AFS fixed income securities:
|
|
|
|
|
|
|
|
|
U.S. government and government agencies
|
|
$
|
116,186
|
|
|
41,083
|
|
|
75,103
|
|
|
—
|
|
Foreign government
|
|
18,542
|
|
|
—
|
|
|
18,542
|
|
|
—
|
|
Obligations of states and political subdivisions
|
|
1,230,090
|
|
|
—
|
|
|
1,230,090
|
|
|
—
|
|
Corporate securities
|
|
1,947,477
|
|
|
—
|
|
|
1,930,426
|
|
|
17,051
|
|
CLO and other ABS
|
|
793,012
|
|
|
3,635
|
|
|
772,343
|
|
|
17,034
|
|
RMBS
|
|
1,451,969
|
|
|
—
|
|
|
1,451,969
|
|
|
—
|
|
CMBS
|
|
538,344
|
|
|
—
|
|
|
538,344
|
|
|
—
|
|
Total AFS fixed income securities
|
|
6,095,620
|
|
|
44,718
|
|
|
6,016,817
|
|
|
34,085
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
Common stock1
|
|
69,900
|
|
|
32,145
|
|
|
—
|
|
|
—
|
|
Preferred stock
|
|
3,037
|
|
|
3,037
|
|
|
—
|
|
|
—
|
|
Total equity securities
|
|
72,937
|
|
|
35,182
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
282,490
|
|
|
265,306
|
|
|
17,184
|
|
|
—
|
|
Total assets measured at fair value
|
|
$
|
6,451,047
|
|
|
345,206
|
|
|
6,034,001
|
|
|
34,085
|
|
1Investments amounting to $46.8 million and $37.8 million at December 31, 2020 and December 31, 2019, respectively, were measured at fair value using the net asset value per share (or its practical expedient) and have not been classified in the fair value hierarchy. These investments are not redeemable and the timing of liquidations of the underlying assets is unknown at each reporting period. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to total assets measured at fair value.
The following table provides a summary of the changes in the fair value of securities measured using Level 3 inputs and related quantitative information during 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Obligations of states and political subdivisions
|
|
|
|
Corporate Securities
|
|
|
|
CLO and Other ABS
|
|
|
|
|
|
Total
|
Fair value, December 31, 2019
|
$
|
—
|
|
|
|
|
17,051
|
|
|
|
|
17,034
|
|
|
|
|
|
|
34,085
|
|
Total net (losses) gains for the period included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCI
|
4
|
|
|
|
|
(785)
|
|
|
|
|
1,883
|
|
|
|
|
|
|
1,102
|
|
Net realized and unrealized (losses) gains
|
—
|
|
|
|
|
(1,046)
|
|
|
|
|
(237)
|
|
|
|
|
|
|
(1,283)
|
|
Net investment income earned
|
—
|
|
|
|
|
21
|
|
|
|
|
6
|
|
|
|
|
|
|
27
|
|
Purchases
|
—
|
|
|
|
|
46,150
|
|
|
|
|
25,785
|
|
|
|
|
|
|
71,935
|
|
Sales
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
|
|
—
|
|
Issuances
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
|
|
—
|
|
Settlements
|
—
|
|
|
|
|
(283)
|
|
|
|
|
(2,638)
|
|
|
|
|
|
|
(2,921)
|
|
Transfers into Level 3
|
2,890
|
|
|
|
|
9,592
|
|
|
|
|
31,520
|
|
|
|
|
|
|
44,002
|
|
Transfers out of Level 3
|
—
|
|
|
|
|
—
|
|
|
|
|
(16,978)
|
|
|
|
|
|
|
(16,978)
|
|
Fair value, December 31, 2020
|
$
|
2,894
|
|
|
|
|
70,700
|
|
|
|
|
56,375
|
|
|
|
|
|
|
129,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized (losses) gains for the period included in earnings for assets held at period end
|
—
|
|
|
|
|
(1,046)
|
|
|
|
|
(237)
|
|
|
|
|
|
|
(1,283)
|
|
Change in unrealized gains (losses) for the period included in OCI for assets held at period end
|
4
|
|
|
|
|
(785)
|
|
|
|
|
1,883
|
|
|
|
|
|
|
1,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Corporate Securities
|
|
CLO and Other ABS
|
|
Total
|
Fair value, December 31, 2018
|
|
|
—
|
|
|
7,409
|
|
|
7,409
|
|
Total net (losses) gains for the period included in:
|
|
|
|
|
|
|
|
OCI
|
|
|
(118)
|
|
|
(261)
|
|
|
(379)
|
|
Net realized and unrealized (losses) gains
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net investment income earned
|
|
|
—
|
|
|
245
|
|
|
245
|
|
Purchases
|
|
|
—
|
|
|
21,282
|
|
|
21,282
|
|
Sales
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuances
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
|
|
—
|
|
|
(279)
|
|
|
(279)
|
|
Transfers into Level 3
|
|
|
17,169
|
|
|
18,853
|
|
|
36,022
|
|
Transfers out of Level 3
|
|
|
—
|
|
|
(30,215)
|
|
|
(30,215)
|
|
Fair value, December 31, 2019
|
|
|
17,051
|
|
|
17,034
|
|
|
34,085
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) for the period included in earnings for assets held at period end
|
|
|
—
|
|
|
—
|
|
|
—
|
|
The following tables provide quantitative information regarding our financial assets and liabilities that were not measured, but were disclosed at fair value at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
Fair Value Measurements Using
|
($ in thousands)
|
|
Assets/Liabilities Disclosed at
Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets/Liabilities
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Financial Assets
|
|
|
|
|
|
|
|
|
HTM:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
4,795
|
|
|
—
|
|
|
4,795
|
|
|
—
|
|
Corporate securities
|
|
13,206
|
|
|
—
|
|
|
13,206
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total HTM fixed income securities
|
|
$
|
18,001
|
|
|
—
|
|
|
18,001
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
CMLs
|
|
$
|
47,289
|
|
|
—
|
|
|
—
|
|
|
47,289
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
7.25% Senior Notes
|
|
$
|
66,148
|
|
|
—
|
|
|
66,148
|
|
|
—
|
|
6.70% Senior Notes
|
|
127,886
|
|
|
—
|
|
|
127,886
|
|
|
—
|
|
5.375% Senior Notes
|
|
383,669
|
|
|
—
|
|
|
383,669
|
|
|
—
|
|
1.61% Borrowings from FHLBNY
|
|
25,182
|
|
|
—
|
|
|
25,182
|
|
|
—
|
|
1.56% Borrowings from FHLBNY
|
|
25,198
|
|
|
—
|
|
|
25,198
|
|
|
—
|
|
3.03% Borrowings from FHLBI
|
|
67,513
|
|
|
—
|
|
|
67,513
|
|
|
—
|
|
Total long-term debt
|
|
$
|
695,596
|
|
|
—
|
|
|
695,596
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
Fair Value Measurements Using
|
($ in thousands)
|
|
Assets/Liabilities Disclosed at
Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets/Liabilities
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Financial Assets
|
|
|
|
|
|
|
|
|
HTM:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
4,921
|
|
|
—
|
|
|
4,921
|
|
|
—
|
|
Corporate securities
|
|
17,054
|
|
|
—
|
|
|
17,054
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total HTM fixed income securities
|
|
$
|
21,975
|
|
|
—
|
|
|
21,975
|
|
|
—
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
7.25% Senior Notes
|
|
$
|
66,365
|
|
|
—
|
|
|
66,365
|
|
|
—
|
|
6.70% Senior Notes
|
|
123,104
|
|
|
—
|
|
|
123,104
|
|
|
—
|
|
5.375% Senior Notes
|
|
357,025
|
|
|
—
|
|
|
357,025
|
|
|
—
|
|
1.61% Borrowings from FHLBNY
|
|
24,901
|
|
|
—
|
|
|
24,901
|
|
|
—
|
|
1.56% Borrowings from FHLBNY
|
|
24,875
|
|
|
—
|
|
|
24,875
|
|
|
—
|
|
3.03% Borrowings from FHLBI
|
|
63,002
|
|
|
—
|
|
|
63,002
|
|
|
—
|
|
Total long-term debt
|
|
$
|
659,272
|
|
|
—
|
|
|
659,272
|
|
|
—
|
|
Note 8. Allowance for Credit Losses on Premiums Receivable
The following table provides a roll forward of the ACL on our premiums receivable balance for 2020:
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
December 31, 2020
|
Balance at beginning of year
|
|
|
|
$
|
6,400
|
|
Cumulative effect adjustment1
|
|
|
|
1,058
|
|
Balance at beginning of year, as adjusted
|
|
|
|
$
|
7,458
|
|
Current period provision for expected credit losses
|
|
|
|
16,751
|
|
|
|
|
|
|
Write-offs charged against the allowance for credit losses
|
|
|
|
(3,754)
|
|
Recoveries
|
|
|
|
545
|
|
ACL, end of year
|
|
|
|
$
|
21,000
|
|
1See Note 3. "Adoption of Accounting Pronouncements" above for additional information regarding our adoption of ASU 2016-13.
In 2020, we recognized an additional allowance for credit losses of $13.5 million, net of write-offs and recoveries. We based this increase on an evaluation of the recoverability of our premiums receivable in light of (i) the billing accommodations we announced during the first quarter of 2020, and (ii) the impact of certain state regulations that provided for deferral of payments without cancellation for a period up to 90 days and increased earned but uncollected premiums. The billing accommodations included individualized payment flexibility and suspending the effect of policy cancellations, late payment notices, and late or reinstatement fees.
Note 9. Reinsurance
Our Financial Statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to the acceptance of certain insurance risks that other insurance entities have underwritten. Ceded reinsurance involves transferring certain insurance risks (along with the related written and earned premiums) that we have underwritten to other insurance companies that agree to share these risks. The primary purpose of ceded reinsurance is to protect the Insurance Subsidiaries from potential losses in excess of the amount that we are prepared to accept. Our major treaties covering property, property catastrophe, and casualty business are excess of loss contracts. In addition, we have an intercompany quota share (proportional) pooling arrangement and other minor reinsurance treaties.
As a Standard Commercial Lines and E&S Lines writer, we are subject to the Terrorism Risk Insurance Program Reauthorization Act ("TRIPRA"), which was extended by Congress to December 31, 2027. TRIPRA requires private insurers and the U. S. government to share the risk of loss on future acts of terrorism certified by the U.S. Secretary of the Treasury. Under TRIPRA, each participating insurer is responsible for paying a deductible of specified losses before federal assistance is available. This deductible is based on a percentage of the prior year’s applicable Standard Commercial Lines and E&S Lines premiums. In 2021, our deductible, before tax, is approximately $369 million. For losses above the deductible, the federal government will pay 80% of losses to an industry limit of $100 billion, and the insurer retains 20%.
The Insurance Subsidiaries remain liable to policyholders to the extent that any reinsurer becomes unable to meet their contractual obligations. In addition to this direct counterparty credit risk, we have indirect counterparty credit risk as our reinsurers often enter into their own reinsurance programs, or retrocessions, as part of managing their exposure to large losses and improving their financial strength ratings. The credit quality of our reinsurers is also impacted by other factors, such as their reserve adequacy, investment portfolio, regulatory capital position, catastrophe aggregations, and risk management expertise. We evaluate and monitor the financial condition of our reinsurers under voluntary reinsurance arrangements to minimize our exposure to significant losses from reinsurer insolvencies. Contractual language interpretations and willingness to pay valid claims can impact our allowance for estimated uncollectible reinsurance.
The following table provides (i) a disaggregation of our reinsurance recoverable balance by financial strength rating, and (ii) an aging analysis of our past due reinsurance recoverable balances as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
($ in thousands)
|
|
Current
|
|
Past Due
|
|
Total Reinsurance Recoverables
|
Financial strength rating of rated reinsurers
|
|
|
|
|
|
|
A++
|
|
$
|
37,464
|
|
|
$
|
102
|
|
|
$
|
37,566
|
|
A+
|
|
354,846
|
|
|
2,452
|
|
|
357,298
|
|
A
|
|
105,652
|
|
|
415
|
|
|
106,067
|
|
A-
|
|
2,139
|
|
|
—
|
|
|
2,139
|
|
B++
|
|
56
|
|
|
324
|
|
|
380
|
|
B+
|
|
—
|
|
|
—
|
|
|
—
|
|
Total rated reinsurers
|
|
$
|
500,157
|
|
|
$
|
3,293
|
|
|
$
|
503,450
|
|
|
|
|
|
|
|
|
Non-rated reinsurers
|
|
|
|
|
|
|
Federal and state pools
|
|
$
|
82,575
|
|
|
$
|
—
|
|
|
$
|
82,575
|
|
Other than federal and state pools
|
|
2,676
|
|
|
568
|
|
|
3,244
|
|
Total non-rated reinsurers
|
|
$
|
85,251
|
|
|
$
|
568
|
|
|
$
|
85,819
|
|
|
|
|
|
|
|
|
Total reinsurance recoverable, gross
|
|
$
|
585,408
|
|
|
$
|
3,861
|
|
|
$
|
589,269
|
|
Less: ACL
|
|
|
|
|
|
(1,777)
|
|
Total reinsurance recoverable, net
|
|
|
|
|
|
$
|
587,492
|
|
The following table provides a rollforward of the allowance for credit losses on our reinsurance recoverable balance for 2020:
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
December 31, 2020
|
Balance at beginning of year
|
|
|
|
$
|
4,400
|
|
Cumulative effect adjustment1
|
|
|
|
(2,903)
|
|
Balance at beginning of year, as adjusted
|
|
|
|
$
|
1,497
|
|
Current period provision for expected credit losses
|
|
|
|
280
|
|
|
|
|
|
|
Write-offs charged against the allowance for credit losses
|
|
|
|
—
|
|
Recoveries
|
|
|
|
—
|
|
ACL, end of year
|
|
|
|
$
|
1,777
|
|
1See Note 3. "Adoption of Accounting Pronouncements" for additional information regarding our adoption of ASU 2016-13.
The following table represents our total reinsurance balances segregated by reinsurer to illustrate our concentration of risk throughout our reinsurance portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2020
|
|
As of December 31, 2019
|
($ in thousands)
|
|
Reinsurance Balances
|
|
% of Reinsurance Balance
|
|
Reinsurance Balances
|
|
% of Reinsurance Balance
|
Total reinsurance recoverables
|
|
$
|
587,492
|
|
|
|
|
$
|
573,235
|
|
|
|
Total prepaid reinsurance premiums
|
|
170,531
|
|
|
|
|
166,705
|
|
|
|
Total reinsurance balance
|
|
758,023
|
|
|
|
|
739,940
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal and state pools1:
|
|
|
|
|
|
|
|
|
NFIP
|
|
178,532
|
|
|
25
|
%
|
|
175,472
|
|
|
24 %
|
New Jersey Unsatisfied Claim Judgment Fund
|
|
52,053
|
|
|
6
|
|
|
53,732
|
|
|
6 %
|
Other
|
|
1,625
|
|
|
—
|
|
|
2,449
|
|
|
1
|
|
Total federal and state pools
|
|
232,210
|
|
|
31
|
|
|
231,653
|
|
|
31
|
|
Remaining reinsurance balance
|
|
$
|
525,813
|
|
|
69
|
|
|
$
|
508,287
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
Munich Re Group (AM Best rated "A+")
|
|
$
|
116,885
|
|
|
15
|
|
|
$
|
119,748
|
|
|
16
|
|
Hannover Ruckversicherungs AG (AM Best rated "A+")
|
|
115,084
|
|
|
15
|
|
|
107,474
|
|
|
15
|
|
AXIS Reinsurance Company (AM Best rated "A")
|
|
78,090
|
|
|
10
|
|
|
73,009
|
|
|
10
|
|
Swiss Re Group (AM Best rated "A+")
|
|
33,179
|
|
|
4
|
|
|
37,190
|
|
|
5
|
|
Transatlantic Reinsurance Company (AM Best rated “A+”)
|
|
24,320
|
|
|
3
|
|
|
21,824
|
|
|
3
|
|
All other reinsurers
|
|
158,255
|
|
|
22
|
|
|
149,042
|
|
|
20
|
|
Total reinsurers
|
|
525,813
|
|
|
69
|
%
|
|
508,287
|
|
|
69
|
%
|
Less: collateral2
|
|
(130,169)
|
|
|
|
|
(110,549)
|
|
|
|
Reinsurers, net of collateral
|
|
$
|
395,644
|
|
|
|
|
$
|
397,738
|
|
|
|
1Considered to have minimal risk of default.
2Includes letters of credit, trust funds, and funds held against reinsurance recoverables.
Under our reinsurance arrangements, which are prospective in nature, reinsurance premiums ceded are recorded as prepaid reinsurance and amortized over the remaining contract period in proportion to the reinsurance protection provided, or recorded periodically, as per the terms of the contract, in a direct relationship to the gross premium recording. Reinsurance recoveries are recognized as gross losses are incurred.
The following table contains a listing of direct, assumed, and ceded reinsurance amounts for premiums written, premiums earned, and loss and loss expense incurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Premiums written:
|
|
|
|
|
|
|
Direct
|
|
$
|
3,204,512
|
|
|
3,084,451
|
|
|
2,890,633
|
|
Assumed
|
|
24,288
|
|
|
24,339
|
|
|
26,250
|
|
Ceded
|
|
(455,708)
|
|
|
(429,366)
|
|
|
(402,597)
|
|
Net
|
|
$
|
2,773,092
|
|
|
2,679,424
|
|
|
2,514,286
|
|
|
|
|
|
|
|
|
Premiums earned:
|
|
|
|
|
|
|
Direct
|
|
$
|
3,108,687
|
|
|
2,993,157
|
|
|
2,808,764
|
|
Assumed
|
|
25,010
|
|
|
24,399
|
|
|
25,831
|
|
Ceded
|
|
(451,883)
|
|
|
(420,385)
|
|
|
(398,366)
|
|
Net
|
|
$
|
2,681,814
|
|
|
2,597,171
|
|
|
2,436,229
|
|
|
|
|
|
|
|
|
Loss and loss expense incurred:
|
|
|
|
|
|
|
Direct
|
|
$
|
1,822,034
|
|
|
1,714,880
|
|
|
1,706,951
|
|
Assumed
|
|
17,201
|
|
|
22,879
|
|
|
21,469
|
|
Ceded
|
|
(203,412)
|
|
|
(186,268)
|
|
|
(230,286)
|
|
Net
|
|
$
|
1,635,823
|
|
|
1,551,491
|
|
|
1,498,134
|
|
Direct premiums written ("DPW") increased by 4% in 2020 compared to an increase of 7% in 2019. The decline in our DPW growth rate was primarily attributable to the following:
i.Audit and endorsement premiums that decreased by $82.5 million compared to the prior year. This decrease was primarily due to lower payroll and sales exposures on the workers compensation and general liability lines of business resulting from the economic impacts of the COVID-19 pandemic and includes the impact of the $75 million accrual that was recorded in the first quarter of 2020, $24.8 million of which remained an accrual at December 31, 2020.
ii.A $19.7 million premium credit to our personal and commercial automobile policyholders. Because of the unprecedented nature of the COVID-19-related governmental directives and the associated expected short-term favorable claims frequency impact, we obtained regulatory approval during April to provide this premium credit to our personal and commercial automobile customers. The premium credit to customers with in-force policies was equivalent to 15% of their April and May premiums.
Consistent with the fluctuations in DPW, the increase in direct premiums earned in 2020 compared to 2019 was muted by the items discussed above.
Direct and ceded loss and loss expenses incurred in 2020 were primarily impacted by increased catastrophe losses. The increase was due to the severity of the storms and individual claims that met the retention for our property excess of loss treaty. Net catastrophe losses were $215.4 million in 2020 compared to $81.0 million in 2019.
The ceded premiums and losses related to our participation in the NFIP, under which 100% of our flood premiums and loss and loss expense are ceded to the NFIP, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded to NFIP ($ in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Ceded premiums written
|
|
$
|
(274,042)
|
|
|
(266,925)
|
|
|
(248,053)
|
|
Ceded premiums earned
|
|
(271,598)
|
|
|
(259,119)
|
|
|
(244,238)
|
|
Ceded loss and loss expense incurred
|
|
(78,993)
|
|
|
(71,676)
|
|
|
(144,967)
|
|
Note 10. Reserve for Loss and Loss Expense
(a) The table below provides a roll forward of reserves for loss and loss expense for beginning and ending reserve balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Gross reserves for loss and loss expense, at beginning of year
|
|
$
|
4,067,163
|
|
|
3,893,868
|
|
|
3,771,240
|
|
Less: reinsurance recoverable on unpaid loss and loss expense, at beginning of year1
|
|
547,066
|
|
|
537,388
|
|
|
585,855
|
|
Net reserves for loss and loss expense, at beginning of year
|
|
3,520,097
|
|
|
3,356,480
|
|
|
3,185,385
|
|
Incurred loss and loss expense for claims occurring in the:
|
|
|
|
|
|
|
Current year
|
|
1,708,755
|
|
|
1,601,780
|
|
|
1,527,997
|
|
Prior years
|
|
(72,932)
|
|
|
(50,289)
|
|
|
(29,863)
|
|
Total incurred loss and loss expense
|
|
1,635,823
|
|
|
1,551,491
|
|
|
1,498,134
|
|
Paid loss and loss expense for claims occurring in the:
|
|
|
|
|
|
|
Current year
|
|
642,586
|
|
|
579,527
|
|
|
573,718
|
|
Prior years
|
|
807,248
|
|
|
805,443
|
|
|
753,321
|
|
Total paid loss and loss expense
|
|
1,449,834
|
|
|
1,384,970
|
|
|
1,327,039
|
|
Net reserves for loss and loss expense, at end of year
|
|
3,706,086
|
|
|
3,523,001
|
|
|
3,356,480
|
|
Add: Reinsurance recoverable on unpaid loss and loss expense, at end of year
|
|
554,269
|
|
|
544,162
|
|
|
537,388
|
|
Gross reserves for loss and loss expense at end of year
|
|
$
|
4,260,355
|
|
|
4,067,163
|
|
|
3,893,868
|
|
1Includes an adjustment of $2.9 million related to our adoption of ASU 2016-13. Refer to Note 3. "Adoption of Accounting Pronouncements" for additional
information.
Our net loss and loss expense reserves increased by $183.1 million in 2020, $166.5 million in 2019, and $171.1 million in 2018. The loss and loss expense reserves are net of anticipated recoveries for salvage and subrogation claims, which amounted to $80.9 million for 2020, $76.7 million for 2019, and $67.7 million for 2018. The increase in net loss and loss expense reserves in 2020 was primarily driven by increases in exposure due to premium growth.
This increase in our net loss and loss expense reserves was partially offset by favorable prior year loss development. In 2020, we experienced overall net favorable prior year loss development of $72.9 million, compared to $50.3 million in 2019 and $29.9 million in 2018.
The following table summarizes the prior year reserve development by line of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Favorable)/Unfavorable Prior Year Development
|
|
|
|
|
|
|
($ in millions)
|
|
2020
|
|
2019
|
|
2018
|
General Liability
|
|
$
|
(35.0)
|
|
|
(5.0)
|
|
|
(9.5)
|
|
Commercial Automobile
|
|
7.1
|
|
|
0.7
|
|
|
36.7
|
|
Workers Compensation
|
|
(60.0)
|
|
|
(68.0)
|
|
|
(83.0)
|
|
Businessowners' Policies
|
|
3.9
|
|
|
1.9
|
|
|
(1.5)
|
|
Commercial Property
|
|
9.2
|
|
|
5.1
|
|
|
7.5
|
|
Homeowners
|
|
7.7
|
|
|
7.5
|
|
|
9.8
|
|
Personal Automobile
|
|
(1.8)
|
|
|
4.4
|
|
|
3.0
|
|
E&S Casualty Lines
|
|
—
|
|
|
2.0
|
|
|
12.0
|
|
E&S Property Lines
|
|
(4.0)
|
|
|
1.0
|
|
|
(4.8)
|
|
Other
|
|
—
|
|
|
0.1
|
|
|
(0.1)
|
|
Total
|
|
$
|
(72.9)
|
|
|
(50.3)
|
|
|
(29.9)
|
|
The Insurance Subsidiaries had $72.9 million of favorable prior accident year reserve development during 2020, which included $85.0 million of net favorable casualty reserve development and $12.1 million of unfavorable property reserve development. The net favorable casualty reserve development was largely driven by the workers compensation and general liability lines of business. Workers compensation was impacted by continued favorable medical trends in accident years 2018 and prior, and general liability development was attributable to lower loss severities in accident years 2017 and prior. Partially offsetting this net favorable reserve development was $10 million of unfavorable casualty reserve development in the commercial auto line of business ($7.1 million net of property reserve development), driven by unfavorable reserve development on loss severities in accident years 2016 through 2019, and higher than expected frequencies in accident year 2019.
The Insurance Subsidiaries had $50.3 million of favorable prior accident year reserve development during 2019, which included $61.0 million of net favorable casualty reserve development and $10.7 million of unfavorable property reserve development. The net favorable casualty reserve development was largely driven by the workers compensation line of business, reflecting continued favorable medical trends in accident years 2017 and prior.
The Insurance Subsidiaries had $29.9 million of favorable prior accident year reserve development during 2018, which included $41.5 million of net favorable casualty reserve development and $11.6 million of unfavorable property reserve development. The net favorable casualty reserve development was largely driven by the workers compensation line of business, reflecting continued favorable medical trends in accident years 2017 and prior. Partially offsetting this net favorable reserve development was $37.5 million of unfavorable casualty reserve development in the commercial automobile line of business, driven by increases in frequencies and severities in accident years 2015 through 2017. In addition, our E&S casualty lines experienced unfavorable reserve development of $12.0 million in 2018.
(b) We have exposure to abuse or molestation claims within our general liability line of business through insurance policies that we issue to schools, religious institutions, daycares, and other social services. We also have exposure to abuse or molestation claims from recently enacted state laws that extend the statute of limitations or permit windows to be opened for abuse or molestation claims and lawsuits that were previously barred by statutes of limitations. The emergence of these claims is slow and highly unpredictable. There are significant uncertainties in estimating our exposure to abuse or molestation claims (for both case and IBNR reserves) resulting from (i) lack of relevant historical data, (ii) the delayed and inconsistent reporting patterns associated with these claims, (iii) the obligation of an insurer to defend a claim, (iv) the extent to which a party can prove the existence of coverage, and (v) uncertainty as to the number and identity of claimants. It is possible, as a result, that we may receive claims decades after the allegations occurred from coverages provided by us, including predecessor companies, that will require complex claims coverage determinations, potential litigation, and the need to collect from reinsurers under older reinsurance agreements. We do not discount to present value that portion of our loss and loss expense reserves expected to be paid in future periods.
(c) Reserves established for liability insurance include exposure to asbestos and environmental claims. These claims have arisen primarily from insured exposures in municipal government, small non-manufacturing commercial risk, and homeowners policies. The emergence of these claims is slow and highly unpredictable. There are significant uncertainties in estimating our exposure to asbestos and environmental claims (for both case and IBNR reserves) resulting from (i) lack of relevant historical data, (ii) the delayed and inconsistent reporting patterns associated with these claims, and (iii) uncertainty as to the number and identity of claimants and complex legal and coverage issues. Legal issues that arise in asbestos and environmental cases include federal or state venue, choice of law, causation, admissibility of evidence, allocation of damages and contribution among joint defendants, successor and predecessor liability, and whether direct action against insurers can be maintained.
Coverage issues that arise in asbestos and environmental cases include the interpretation and application of policy exclusions, the determination and calculation of policy limits, the determination of the ultimate amount of a loss, the extent to which a loss is covered by a policy, if at all, the obligation of an insurer to defend a claim, and the extent to which a party can prove the existence of coverage. Courts have reached different and sometimes inconsistent conclusions on these legal and coverage issues.
Traditional accident year loss development methods cannot be applied because past loss history is not necessarily indicative of future behavior. Instead, we review the experience by calendar year and rely on alternative metrics, such as paid and incurred survival ratios. As a result, reserves for asbestos and environmental require a high degree of judgment. Because of the significant uncertainty in the estimate, we do not calculate an asbestos and environmental loss range.
The following table details our loss and loss expense reserves for various asbestos and environmental claims:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
($ in millions)
|
|
Gross
|
|
Net
|
Asbestos
|
|
$
|
6.3
|
|
|
5.0
|
|
Landfill sites
|
|
12.7
|
|
|
8.0
|
|
Underground storage tanks
|
|
9.5
|
|
|
8.4
|
|
Total
|
|
$
|
28.5
|
|
|
21.4
|
|
Historically, our asbestos and environmental claims have been significantly lower in volume than many other standard commercial lines carriers since, prior to the introduction of the absolute pollution exclusion endorsement in the mid-1980’s, we primarily wrote Standard Personal Lines, and therefore, our exposure to asbestos and environmental claims has been limited.
The following table provides a roll forward of gross and net asbestos and environmental incurred loss and loss expense and related reserves thereon:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
($ in thousands)
|
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
Asbestos
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for loss and loss expense at beginning of year
|
|
$
|
6,288
|
|
|
5,057
|
|
|
7,328
|
|
|
6,097
|
|
|
7,577
|
|
|
6,346
|
|
Incurred loss and loss expense
|
|
320
|
|
|
320
|
|
|
(375)
|
|
|
(375)
|
|
|
—
|
|
|
—
|
|
Less: loss and loss expense paid
|
|
(354)
|
|
|
(354)
|
|
|
(665)
|
|
|
(665)
|
|
|
(249)
|
|
|
(249)
|
|
Reserves for loss and loss expense at the end of year
|
|
$
|
6,254
|
|
|
5,023
|
|
|
6,288
|
|
|
5,057
|
|
|
7,328
|
|
|
6,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for loss and loss expense at beginning of year
|
|
$
|
22,413
|
|
|
16,532
|
|
|
22,692
|
|
|
16,686
|
|
|
20,838
|
|
|
14,866
|
|
Incurred loss and loss expense
|
|
(447)
|
|
|
(474)
|
|
|
723
|
|
|
609
|
|
|
3,059
|
|
|
2,877
|
|
Less: loss and loss expense paid
|
|
310
|
|
|
340
|
|
|
(1,002)
|
|
|
(763)
|
|
|
(1,205)
|
|
|
(1,057)
|
|
Reserves for loss and loss expense at the end of year
|
|
$
|
22,276
|
|
|
16,398
|
|
|
22,413
|
|
|
16,532
|
|
|
22,692
|
|
|
16,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Asbestos and Environmental Claims
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for loss and loss expense at beginning of year
|
|
$
|
28,701
|
|
|
21,589
|
|
|
30,020
|
|
|
22,783
|
|
|
28,415
|
|
|
21,212
|
|
Incurred loss and loss expense
|
|
(127)
|
|
|
(154)
|
|
|
348
|
|
|
234
|
|
|
3,059
|
|
|
2,877
|
|
Less: loss and loss expense paid
|
|
(44)
|
|
|
(14)
|
|
|
(1,667)
|
|
|
(1,428)
|
|
|
(1,454)
|
|
|
(1,306)
|
|
Reserves for loss and loss expense at the end of year
|
|
$
|
28,530
|
|
|
21,421
|
|
|
28,701
|
|
|
21,589
|
|
|
30,020
|
|
|
22,783
|
|
(d) The following is information about incurred and paid claims development as of December 31, 2020, net of reinsurance, as well as cumulative claim frequency and the associated IBNR liabilities. During the experience period, we implemented a series of underwriting and claims-related initiatives, as well as, claims management changes. These initiatives focused on exiting underperforming books of business, claims handling and reserving, medical claims costs, and loss expenses. As a result of these initiatives, several historical patterns have changed and may no longer be appropriate to use as the sole basis for projections.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Lines
(in thousands, except for claim counts)
|
|
|
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
|
|
As of
December 31, 2020
|
Accident Year
|
Unaudited
|
|
|
IBNR
|
Cumulative Number of Reported Claims
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020
|
|
2011
|
$
|
1,042,576
|
|
1,061,667
|
|
1,062,233
|
|
1,056,107
|
|
1,033,518
|
|
1,023,726
|
|
1,019,351
|
|
1,013,115
|
|
1,013,175
|
|
1,009,162
|
|
|
36,641
|
|
105,039
|
2012
|
|
1,065,437
|
|
1,071,290
|
|
1,020,655
|
|
998,028
|
|
973,089
|
|
973,644
|
|
973,411
|
|
968,536
|
|
962,091
|
|
|
41,426
|
|
104,343
|
2013
|
|
|
1,044,142
|
|
1,062,045
|
|
1,047,230
|
|
1,021,007
|
|
1,002,316
|
|
987,763
|
|
984,858
|
|
973,739
|
|
|
57,866
|
|
91,539
|
2014
|
|
|
|
1,107,513
|
|
1,133,798
|
|
1,146,990
|
|
1,124,014
|
|
1,104,218
|
|
1,100,208
|
|
1,089,529
|
|
|
60,028
|
|
95,366
|
2015
|
|
|
|
|
1,114,081
|
|
1,130,513
|
|
1,144,830
|
|
1,138,313
|
|
1,119,441
|
|
1,108,860
|
|
|
77,855
|
|
94,594
|
2016
|
|
|
|
|
|
1,188,608
|
|
1,203,634
|
|
1,227,142
|
|
1,199,734
|
|
1,180,829
|
|
|
126,935
|
|
95,203
|
2017
|
|
|
|
|
|
|
1,270,110
|
|
1,313,372
|
|
1,313,585
|
|
1,288,526
|
|
|
206,627
|
|
98,918
|
2018
|
|
|
|
|
|
|
|
1,413,800
|
|
1,461,603
|
|
1,457,415
|
|
|
342,256
|
|
105,772
|
2019
|
|
|
|
|
|
|
|
|
1,483,945
|
|
1,523,041
|
|
|
539,113
|
|
101,631
|
2020
|
|
|
|
|
|
|
|
|
|
1,591,972
|
|
|
820,762
|
|
85,549
|
|
|
|
|
|
|
|
|
|
Total
|
12,185,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Lines
(in thousands)
|
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
|
Accident Year
|
Unaudited
|
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020
|
2011
|
$
|
391,944
|
|
585,867
|
|
692,730
|
|
782,655
|
|
852,202
|
|
901,801
|
|
924,111
|
|
940,626
|
|
950,836
|
|
957,391
|
|
2012
|
|
378,067
|
|
555,819
|
|
651,544
|
|
743,742
|
|
810,135
|
|
856,195
|
|
879,372
|
|
898,269
|
|
905,816
|
|
2013
|
|
|
335,956
|
|
518,872
|
|
644,475
|
|
748,758
|
|
833,823
|
|
872,331
|
|
891,841
|
|
904,825
|
|
2014
|
|
|
|
405,898
|
|
614,075
|
|
736,154
|
|
855,959
|
|
936,425
|
|
981,868
|
|
1,002,157
|
|
2015
|
|
|
|
|
376,641
|
|
581,203
|
|
725,385
|
|
845,868
|
|
929,222
|
|
967,857
|
|
2016
|
|
|
|
|
|
387,272
|
|
617,958
|
|
764,331
|
|
892,390
|
|
983,852
|
|
2017
|
|
|
|
|
|
|
433,440
|
|
678,453
|
|
829,134
|
|
954,792
|
|
2018
|
|
|
|
|
|
|
|
511,271
|
|
779,466
|
|
942,893
|
|
2019
|
|
|
|
|
|
|
|
|
510,091
|
|
781,462
|
|
2020
|
|
|
|
|
|
|
|
|
|
572,302
|
|
|
|
|
|
|
|
|
|
|
Total
|
8,973,347
|
|
|
|
|
|
|
All outstanding liabilities before 2011, net of reinsurance
|
364,395
|
|
|
|
|
|
Liabilities for loss and loss expenses, net of reinsurance
|
3,576,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Liability
(in thousands, except for claim counts)
|
|
|
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
|
|
As of
December 31, 2020
|
Accident Year
|
Unaudited
|
|
|
IBNR
|
Cumulative Number of Reported Claims
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020
|
|
2011
|
$
|
227,769
|
|
228,720
|
|
239,480
|
|
230,785
|
|
217,256
|
|
211,196
|
|
212,011
|
|
211,500
|
|
213,485
|
|
209,846
|
|
|
13,501
|
|
11,691
|
2012
|
|
238,979
|
|
245,561
|
|
215,083
|
|
194,144
|
|
175,305
|
|
175,268
|
|
180,659
|
|
182,085
|
|
178,285
|
|
|
15,055
|
|
10,034
|
2013
|
|
|
250,609
|
|
251,421
|
|
239,776
|
|
225,709
|
|
210,785
|
|
203,831
|
|
202,697
|
|
195,697
|
|
|
19,110
|
|
10,397
|
2014
|
|
|
|
244,312
|
|
249,946
|
|
257,132
|
|
239,333
|
|
234,082
|
|
237,125
|
|
229,679
|
|
|
29,018
|
|
10,652
|
2015
|
|
|
|
|
254,720
|
|
245,710
|
|
246,990
|
|
233,249
|
|
219,204
|
|
214,176
|
|
|
38,182
|
|
10,537
|
2016
|
|
|
|
|
|
277,214
|
|
272,048
|
|
277,986
|
|
263,245
|
|
252,733
|
|
|
61,329
|
|
10,753
|
2017
|
|
|
|
|
|
|
293,747
|
|
293,128
|
|
301,384
|
|
289,883
|
|
|
114,160
|
|
11,096
|
2018
|
|
|
|
|
|
|
|
317,934
|
|
336,326
|
|
345,224
|
|
|
182,931
|
|
11,350
|
2019
|
|
|
|
|
|
|
|
|
347,150
|
|
356,363
|
|
|
248,289
|
|
10,531
|
2020
|
|
|
|
|
|
|
|
|
|
361,554
|
|
|
311,657
|
|
6,990
|
|
|
|
|
|
|
|
|
|
Total
|
2,633,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Liability
(in thousands)
|
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
|
Accident Year
|
Unaudited
|
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020
|
2011
|
$
|
13,924
|
|
42,692
|
|
73,643
|
|
102,978
|
|
135,377
|
|
159,768
|
|
170,525
|
|
181,856
|
|
187,276
|
|
190,650
|
|
2012
|
|
13,030
|
|
35,241
|
|
56,580
|
|
89,008
|
|
109,448
|
|
130,866
|
|
144,451
|
|
156,186
|
|
158,397
|
|
2013
|
|
|
12,789
|
|
35,113
|
|
72,127
|
|
104,587
|
|
139,114
|
|
153,628
|
|
163,764
|
|
169,847
|
|
2014
|
|
|
|
14,901
|
|
46,825
|
|
79,972
|
|
121,969
|
|
154,957
|
|
179,192
|
|
187,352
|
|
2015
|
|
|
|
|
14,665
|
|
39,978
|
|
78,668
|
|
116,804
|
|
144,216
|
|
157,071
|
|
2016
|
|
|
|
|
|
15,684
|
|
46,549
|
|
89,431
|
|
133,757
|
|
164,136
|
|
2017
|
|
|
|
|
|
|
17,366
|
|
49,470
|
|
92,355
|
|
131,980
|
|
2018
|
|
|
|
|
|
|
|
19,531
|
|
60,784
|
|
108,421
|
|
2019
|
|
|
|
|
|
|
|
|
18,097
|
|
58,284
|
|
2020
|
|
|
|
|
|
|
|
|
|
21,858
|
|
|
|
|
|
|
|
|
|
|
Total
|
1,347,996
|
|
|
|
|
|
|
All outstanding liabilities before 2011, net of reinsurance
|
95,458
|
|
|
|
|
|
Liabilities for loss and loss expenses, net of reinsurance
|
1,380,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers Compensation
(in thousands, except for claim counts)
|
|
|
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
|
|
As of
December 31, 2020
|
Accident Year
|
Unaudited
|
|
|
IBNR
|
Cumulative Number of Reported Claims
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020
|
|
2011
|
$
|
205,238
|
|
218,973
|
|
214,743
|
|
215,114
|
|
210,591
|
|
205,708
|
|
200,674
|
|
194,821
|
|
192,863
|
|
191,875
|
|
|
21,900
|
|
11,863
|
2012
|
|
203,864
|
|
208,036
|
|
199,360
|
|
195,197
|
|
188,596
|
|
187,359
|
|
183,314
|
|
178,774
|
|
177,658
|
|
|
23,181
|
|
11,624
|
2013
|
|
|
199,794
|
|
194,318
|
|
187,658
|
|
173,160
|
|
166,662
|
|
162,787
|
|
159,767
|
|
157,645
|
|
|
23,321
|
|
11,382
|
2014
|
|
|
|
199,346
|
|
187,065
|
|
182,579
|
|
172,515
|
|
164,420
|
|
160,646
|
|
159,604
|
|
|
25,582
|
|
10,495
|
2015
|
|
|
|
|
193,729
|
|
194,639
|
|
183,604
|
|
179,642
|
|
176,242
|
|
172,572
|
|
|
22,368
|
|
10,551
|
2016
|
|
|
|
|
|
196,774
|
|
184,946
|
|
176,248
|
|
166,009
|
|
156,540
|
|
|
29,220
|
|
10,582
|
2017
|
|
|
|
|
|
|
195,202
|
|
184,306
|
|
175,853
|
|
162,672
|
|
|
34,474
|
|
10,808
|
2018
|
|
|
|
|
|
|
|
193,894
|
|
193,818
|
|
181,151
|
|
|
48,883
|
|
11,111
|
2019
|
|
|
|
|
|
|
|
|
188,625
|
|
188,596
|
|
|
69,909
|
|
10,267
|
2020
|
|
|
|
|
|
|
|
|
|
168,643
|
|
|
97,510
|
|
7,017
|
|
|
|
|
|
|
|
|
|
Total
|
1,716,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers Compensation
(in thousands)
|
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
|
Accident Year
|
Unaudited
|
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020
|
2011
|
$
|
42,941
|
|
90,836
|
|
118,847
|
|
134,646
|
|
139,232
|
|
149,269
|
|
154,320
|
|
158,535
|
|
161,696
|
|
163,554
|
|
2012
|
|
40,911
|
|
86,909
|
|
108,211
|
|
122,755
|
|
132,052
|
|
139,477
|
|
143,281
|
|
146,739
|
|
148,750
|
|
2013
|
|
|
36,829
|
|
74,568
|
|
96,376
|
|
109,739
|
|
118,669
|
|
124,130
|
|
126,822
|
|
129,224
|
|
2014
|
|
|
|
35,924
|
|
78,944
|
|
100,876
|
|
113,626
|
|
119,392
|
|
124,077
|
|
127,858
|
|
2015
|
|
|
|
|
33,857
|
|
77,320
|
|
98,195
|
|
112,601
|
|
120,097
|
|
124,046
|
|
2016
|
|
|
|
|
|
34,525
|
|
78,531
|
|
98,037
|
|
109,166
|
|
115,159
|
|
2017
|
|
|
|
|
|
|
40,375
|
|
82,216
|
|
100,645
|
|
110,645
|
|
2018
|
|
|
|
|
|
|
|
41,122
|
|
84,780
|
|
105,903
|
|
2019
|
|
|
|
|
|
|
|
|
37,826
|
|
77,878
|
|
2020
|
|
|
|
|
|
|
|
|
|
29,559
|
|
|
|
|
|
|
|
|
|
|
Total
|
1,132,576
|
|
|
|
|
|
|
All outstanding liabilities before 2011, net of reinsurance
|
243,766
|
|
|
|
|
|
Liabilities for loss and loss expenses, net of reinsurance
|
828,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Automobile
(in thousands, except for claim counts)
|
|
|
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
|
|
As of
December 31, 2020
|
Accident Year
|
Unaudited
|
|
|
IBNR
|
Cumulative Number of Reported Claims
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020
|
|
2011
|
$
|
174,006
|
|
183,044
|
|
182,325
|
|
178,421
|
|
172,617
|
|
174,882
|
|
174,514
|
|
173,507
|
|
173,401
|
|
172,684
|
|
|
205
|
|
25,651
|
2012
|
|
179,551
|
|
191,947
|
|
183,527
|
|
184,289
|
|
184,367
|
|
186,128
|
|
184,633
|
|
185,357
|
|
184,477
|
|
|
811
|
|
24,295
|
2013
|
|
|
188,289
|
|
205,282
|
|
209,197
|
|
207,994
|
|
210,410
|
|
207,975
|
|
209,602
|
|
208,040
|
|
|
1,694
|
|
25,886
|
2014
|
|
|
|
200,534
|
|
212,725
|
|
216,824
|
|
219,925
|
|
218,172
|
|
217,334
|
|
216,461
|
|
|
2,096
|
|
27,896
|
2015
|
|
|
|
|
220,994
|
|
240,958
|
|
253,074
|
|
259,495
|
|
260,565
|
|
261,386
|
|
|
2,729
|
|
29,590
|
2016
|
|
|
|
|
|
255,187
|
|
274,367
|
|
285,302
|
|
285,304
|
|
290,359
|
|
|
8,469
|
|
31,465
|
2017
|
|
|
|
|
|
|
301,274
|
|
329,389
|
|
324,291
|
|
322,197
|
|
|
22,447
|
|
32,775
|
2018
|
|
|
|
|
|
|
|
347,908
|
|
352,487
|
|
345,547
|
|
|
47,298
|
|
35,418
|
2019
|
|
|
|
|
|
|
|
|
385,212
|
|
398,346
|
|
|
111,327
|
|
35,703
|
2020
|
|
|
|
|
|
|
|
|
|
381,654
|
|
|
195,279
|
|
28,366
|
|
|
|
|
|
|
|
|
|
Total
|
2,781,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Automobile
(in thousands)
|
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
|
Accident Year
|
Unaudited
|
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020
|
2011
|
$
|
69,849
|
|
99,196
|
|
121,576
|
|
142,507
|
|
157,291
|
|
166,082
|
|
170,000
|
|
170,913
|
|
172,365
|
|
172,413
|
|
2012
|
|
73,316
|
|
105,371
|
|
127,235
|
|
148,669
|
|
168,114
|
|
176,656
|
|
179,501
|
|
181,353
|
|
183,098
|
|
2013
|
|
|
76,469
|
|
109,893
|
|
140,015
|
|
169,850
|
|
189,626
|
|
200,750
|
|
202,622
|
|
205,064
|
|
2014
|
|
|
|
80,810
|
|
117,169
|
|
148,884
|
|
180,701
|
|
202,821
|
|
209,655
|
|
212,481
|
|
2015
|
|
|
|
|
91,347
|
|
132,260
|
|
175,866
|
|
211,515
|
|
238,142
|
|
249,905
|
|
2016
|
|
|
|
|
|
106,022
|
|
155,720
|
|
200,701
|
|
233,939
|
|
264,858
|
|
2017
|
|
|
|
|
|
|
117,287
|
|
178,823
|
|
220,422
|
|
262,349
|
|
2018
|
|
|
|
|
|
|
|
134,867
|
|
193,788
|
|
243,713
|
|
2019
|
|
|
|
|
|
|
|
|
149,538
|
|
221,590
|
|
2020
|
|
|
|
|
|
|
|
|
|
139,016
|
|
|
|
|
|
|
|
|
|
|
Total
|
2,154,487
|
|
|
|
|
|
|
All outstanding liabilities before 2011, net of reinsurance
|
3,848
|
|
|
|
|
|
Liabilities for loss and loss expenses, net of reinsurance
|
630,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Businessowners' Policies
(in thousands, except for claim counts)
|
|
|
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
|
|
As of
December 31, 2020
|
Accident Year
|
Unaudited
|
|
|
IBNR
|
Cumulative Number of Reported Claims
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020
|
|
2011
|
$
|
54,469
|
|
57,083
|
|
51,047
|
|
58,242
|
|
59,256
|
|
58,966
|
|
58,456
|
|
58,735
|
|
58,948
|
|
58,697
|
|
|
516
|
|
4,961
|
2012
|
|
54,342
|
|
48,029
|
|
46,303
|
|
44,172
|
|
44,077
|
|
43,747
|
|
43,418
|
|
43,717
|
|
43,444
|
|
|
117
|
|
5,545
|
2013
|
|
|
49,617
|
|
42,618
|
|
41,005
|
|
40,624
|
|
41,369
|
|
39,709
|
|
39,699
|
|
39,358
|
|
|
554
|
|
3,483
|
2014
|
|
|
|
55,962
|
|
60,949
|
|
62,548
|
|
59,806
|
|
58,517
|
|
58,093
|
|
57,302
|
|
|
616
|
|
4,066
|
2015
|
|
|
|
|
52,871
|
|
53,768
|
|
57,245
|
|
55,925
|
|
54,454
|
|
52,325
|
|
|
1,178
|
|
3,963
|
2016
|
|
|
|
|
|
52,335
|
|
53,792
|
|
54,993
|
|
53,835
|
|
53,367
|
|
|
1,877
|
|
3,847
|
2017
|
|
|
|
|
|
|
46,624
|
|
48,698
|
|
51,524
|
|
48,067
|
|
|
5,981
|
|
3,885
|
2018
|
|
|
|
|
|
|
|
55,024
|
|
57,202
|
|
62,427
|
|
|
12,432
|
|
4,229
|
2019
|
|
|
|
|
|
|
|
|
53,531
|
|
59,466
|
|
|
12,872
|
|
3,541
|
2020
|
|
|
|
|
|
|
|
|
|
71,836
|
|
|
17,392
|
|
5,019
|
|
|
|
|
|
|
|
|
|
Total
|
546,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Businessowners' Policies
(in thousands)
|
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
|
Accident Year
|
Unaudited
|
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020
|
2011
|
$
|
27,884
|
|
37,362
|
|
41,011
|
|
46,444
|
|
52,114
|
|
55,856
|
|
57,045
|
|
57,365
|
|
57,380
|
|
57,385
|
|
2012
|
|
22,199
|
|
31,833
|
|
35,089
|
|
37,215
|
|
38,766
|
|
40,627
|
|
41,326
|
|
41,356
|
|
42,075
|
|
2013
|
|
|
17,412
|
|
26,592
|
|
30,845
|
|
34,760
|
|
37,993
|
|
38,464
|
|
39,085
|
|
39,212
|
|
2014
|
|
|
|
28,914
|
|
40,584
|
|
44,911
|
|
49,460
|
|
52,940
|
|
55,458
|
|
55,708
|
|
2015
|
|
|
|
|
24,189
|
|
36,014
|
|
42,710
|
|
46,571
|
|
49,073
|
|
49,839
|
|
2016
|
|
|
|
|
|
24,655
|
|
36,848
|
|
39,973
|
|
45,308
|
|
48,786
|
|
2017
|
|
|
|
|
|
|
21,865
|
|
31,337
|
|
36,950
|
|
40,359
|
|
2018
|
|
|
|
|
|
|
|
29,995
|
|
39,791
|
|
44,316
|
|
2019
|
|
|
|
|
|
|
|
|
27,718
|
|
41,587
|
|
2020
|
|
|
|
|
|
|
|
|
|
43,376
|
|
|
|
|
|
|
|
|
|
|
Total
|
462,643
|
|
|
|
|
|
|
All outstanding liabilities before 2011, net of reinsurance
|
7,773
|
|
|
|
|
|
Liabilities for loss and loss expenses, net of reinsurance
|
91,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property
(in thousands, except for claim counts)
|
|
|
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
|
|
As of
December 31, 2020
|
Accident Year
|
Unaudited
|
|
|
IBNR
|
Cumulative Number of Reported Claims
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020
|
|
2011
|
$
|
136,954
|
|
131,667
|
|
130,942
|
|
131,282
|
|
131,353
|
|
131,113
|
|
131,049
|
|
131,009
|
|
131,002
|
|
130,994
|
|
|
9
|
|
9,038
|
2012
|
|
118,464
|
|
114,224
|
|
115,375
|
|
116,658
|
|
117,102
|
|
117,170
|
|
117,225
|
|
117,220
|
|
117,200
|
|
|
6
|
|
8,517
|
2013
|
|
|
88,101
|
|
90,639
|
|
90,103
|
|
90,005
|
|
90,436
|
|
90,278
|
|
90,218
|
|
90,486
|
|
|
11
|
|
5,715
|
2014
|
|
|
|
141,192
|
|
136,249
|
|
136,820
|
|
138,751
|
|
138,155
|
|
136,212
|
|
136,237
|
|
|
13
|
|
6,516
|
2015
|
|
|
|
|
110,270
|
|
109,513
|
|
111,750
|
|
111,566
|
|
112,496
|
|
112,582
|
|
|
24
|
|
6,406
|
2016
|
|
|
|
|
|
121,927
|
|
126,185
|
|
125,937
|
|
124,487
|
|
123,567
|
|
|
60
|
|
6,741
|
2017
|
|
|
|
|
|
|
138,773
|
|
149,106
|
|
149,044
|
|
153,664
|
|
|
(289)
|
|
6,900
|
2018
|
|
|
|
|
|
|
|
183,177
|
|
190,834
|
|
192,558
|
|
|
(841)
|
|
8,280
|
2019
|
|
|
|
|
|
|
|
|
173,826
|
|
177,075
|
|
|
(738)
|
|
7,262
|
2020
|
|
|
|
|
|
|
|
|
|
232,060
|
|
|
37,050
|
|
9,494
|
|
|
|
|
|
|
|
|
|
Total
|
1,466,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property
(in thousands)
|
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
|
Accident Year
|
Unaudited
|
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020
|
2011
|
$
|
94,538
|
|
127,580
|
|
129,579
|
|
130,681
|
|
131,060
|
|
131,115
|
|
131,089
|
|
131,100
|
|
131,092
|
|
131,083
|
|
2012
|
|
81,528
|
|
108,834
|
|
111,503
|
|
114,699
|
|
116,291
|
|
116,625
|
|
116,671
|
|
116,674
|
|
116,673
|
|
2013
|
|
|
60,244
|
|
87,874
|
|
90,446
|
|
90,350
|
|
90,840
|
|
90,696
|
|
90,646
|
|
90,917
|
|
2014
|
|
|
|
101,131
|
|
132,909
|
|
136,634
|
|
137,883
|
|
137,418
|
|
136,008
|
|
135,928
|
|
2015
|
|
|
|
|
79,048
|
|
106,182
|
|
109,829
|
|
110,994
|
|
110,969
|
|
112,117
|
|
2016
|
|
|
|
|
|
83,966
|
|
118,789
|
|
122,930
|
|
123,828
|
|
123,601
|
|
2017
|
|
|
|
|
|
|
99,047
|
|
142,338
|
|
148,589
|
|
152,018
|
|
2018
|
|
|
|
|
|
|
|
135,416
|
|
184,813
|
|
192,698
|
|
2019
|
|
|
|
|
|
|
|
|
130,891
|
|
172,768
|
|
2020
|
|
|
|
|
|
|
|
|
|
164,613
|
|
|
|
|
|
|
|
|
|
|
Total
|
1,392,416
|
|
|
|
|
|
|
All outstanding liabilities before 2011, net of reinsurance
|
175
|
|
|
|
|
|
Liabilities for loss and loss expenses, net of reinsurance
|
74,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Automobile
(in thousands, except for claim counts)
|
|
|
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
|
|
As of
December 31, 2020
|
Accident Year
|
Unaudited
|
|
|
IBNR
|
Cumulative Number of Reported Claims
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020
|
|
2011
|
$
|
113,232
|
|
116,164
|
|
113,686
|
|
112,993
|
|
114,241
|
|
113,830
|
|
113,988
|
|
113,921
|
|
114,056
|
|
114,038
|
|
|
31
|
|
22,700
|
2012
|
|
113,771
|
|
114,921
|
|
109,832
|
|
109,324
|
|
110,294
|
|
110,300
|
|
109,795
|
|
109,701
|
|
109,634
|
|
|
78
|
|
22,333
|
2013
|
|
|
108,417
|
|
109,620
|
|
106,225
|
|
106,703
|
|
107,759
|
|
107,680
|
|
107,916
|
|
107,803
|
|
|
121
|
|
22,376
|
2014
|
|
|
|
102,250
|
|
109,325
|
|
106,757
|
|
107,452
|
|
106,821
|
|
107,104
|
|
107,106
|
|
|
(42)
|
|
22,508
|
2015
|
|
|
|
|
96,387
|
|
99,698
|
|
100,214
|
|
99,570
|
|
98,718
|
|
98,588
|
|
|
295
|
|
20,865
|
2016
|
|
|
|
|
|
92,727
|
|
98,032
|
|
100,202
|
|
101,140
|
|
99,544
|
|
|
452
|
|
19,824
|
2017
|
|
|
|
|
|
|
101,880
|
|
105,139
|
|
103,653
|
|
103,260
|
|
|
1,607
|
|
20,739
|
2018
|
|
|
|
|
|
|
|
111,594
|
|
113,569
|
|
112,030
|
|
|
5,597
|
|
22,668
|
2019
|
|
|
|
|
|
|
|
|
114,043
|
|
115,688
|
|
|
13,260
|
|
22,804
|
2020
|
|
|
|
|
|
|
|
|
|
95,625
|
|
|
30,333
|
|
16,309
|
|
|
|
|
|
|
|
|
|
Total
|
1,063,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Automobile
(in thousands)
|
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
|
Accident Year
|
Unaudited
|
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020
|
2011
|
$
|
61,323
|
|
82,102
|
|
93,878
|
|
105,068
|
|
111,085
|
|
112,732
|
|
113,551
|
|
113,664
|
|
113,856
|
|
113,996
|
|
2012
|
|
63,704
|
|
82,729
|
|
94,842
|
|
102,977
|
|
107,890
|
|
109,355
|
|
109,447
|
|
109,482
|
|
109,554
|
|
2013
|
|
|
61,384
|
|
80,861
|
|
92,637
|
|
100,528
|
|
105,131
|
|
106,679
|
|
106,876
|
|
107,419
|
|
2014
|
|
|
|
62,519
|
|
83,739
|
|
92,589
|
|
99,173
|
|
104,055
|
|
105,709
|
|
106,478
|
|
2015
|
|
|
|
|
58,725
|
|
76,470
|
|
87,163
|
|
92,102
|
|
95,997
|
|
97,275
|
|
2016
|
|
|
|
|
|
57,961
|
|
76,823
|
|
86,752
|
|
94,372
|
|
98,080
|
|
2017
|
|
|
|
|
|
|
62,854
|
|
82,730
|
|
91,479
|
|
97,628
|
|
2018
|
|
|
|
|
|
|
|
69,721
|
|
89,628
|
|
99,982
|
|
2019
|
|
|
|
|
|
|
|
|
69,699
|
|
92,162
|
|
2020
|
|
|
|
|
|
|
|
|
|
53,407
|
|
|
|
|
|
|
|
|
|
|
Total
|
975,981
|
|
|
|
|
|
|
All outstanding liabilities before 2011, net of reinsurance
|
6,902
|
|
|
|
|
|
Liabilities for loss and loss expenses, net of reinsurance
|
94,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowners
(in thousands, except for claim counts)
|
|
|
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
|
|
As of
December 31, 2020
|
Accident Year
|
Unaudited
|
|
|
IBNR
|
Cumulative Number of Reported Claims
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020
|
|
2011
|
$
|
103,804
|
|
98,211
|
|
97,761
|
|
94,167
|
|
94,543
|
|
94,183
|
|
94,378
|
|
94,587
|
|
94,572
|
|
94,524
|
|
|
37
|
|
15,111
|
2012
|
|
87,260
|
|
82,744
|
|
86,560
|
|
86,667
|
|
86,271
|
|
86,330
|
|
86,483
|
|
86,567
|
|
86,519
|
|
|
44
|
|
16,942
|
2013
|
|
|
73,670
|
|
72,528
|
|
71,494
|
|
72,145
|
|
71,714
|
|
72,148
|
|
72,318
|
|
71,948
|
|
|
49
|
|
7,749
|
2014
|
|
|
|
80,111
|
|
82,461
|
|
83,637
|
|
83,844
|
|
83,539
|
|
83,824
|
|
83,525
|
|
|
442
|
|
8,773
|
2015
|
|
|
|
|
76,637
|
|
76,400
|
|
76,559
|
|
74,723
|
|
74,978
|
|
74,673
|
|
|
483
|
|
7,750
|
2016
|
|
|
|
|
|
60,105
|
|
60,931
|
|
62,391
|
|
61,723
|
|
61,735
|
|
|
442
|
|
6,892
|
2017
|
|
|
|
|
|
|
59,167
|
|
67,978
|
|
70,365
|
|
70,064
|
|
|
1,822
|
|
7,385
|
2018
|
|
|
|
|
|
|
|
62,961
|
|
68,526
|
|
69,832
|
|
|
3,129
|
|
7,596
|
2019
|
|
|
|
|
|
|
|
|
64,306
|
|
72,772
|
|
|
2,765
|
|
6,970
|
2020
|
|
|
|
|
|
|
|
|
|
109,033
|
|
|
16,218
|
|
9,003
|
|
|
|
|
|
|
|
|
|
Total
|
794,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowners
(in thousands)
|
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
|
Accident Year
|
Unaudited
|
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020
|
2011
|
$
|
71,668
|
|
89,963
|
|
91,718
|
|
92,185
|
|
93,312
|
|
93,720
|
|
94,007
|
|
94,412
|
|
94,458
|
|
94,452
|
|
2012
|
|
69,056
|
|
79,584
|
|
82,720
|
|
84,250
|
|
85,196
|
|
85,562
|
|
85,642
|
|
85,897
|
|
85,899
|
|
2013
|
|
|
50,664
|
|
65,528
|
|
67,838
|
|
69,775
|
|
71,776
|
|
72,197
|
|
72,433
|
|
72,446
|
|
2014
|
|
|
|
61,561
|
|
76,007
|
|
79,751
|
|
81,664
|
|
82,583
|
|
82,836
|
|
82,831
|
|
2015
|
|
|
|
|
52,589
|
|
70,078
|
|
72,202
|
|
72,927
|
|
74,079
|
|
74,052
|
|
2016
|
|
|
|
|
|
42,252
|
|
57,333
|
|
59,546
|
|
60,082
|
|
61,187
|
|
2017
|
|
|
|
|
|
|
45,466
|
|
63,290
|
|
67,193
|
|
67,767
|
|
2018
|
|
|
|
|
|
|
|
49,430
|
|
64,137
|
|
65,348
|
|
2019
|
|
|
|
|
|
|
|
|
49,680
|
|
67,631
|
|
2020
|
|
|
|
|
|
|
|
|
|
83,838
|
|
|
|
|
|
|
|
|
|
|
Total
|
755,451
|
|
|
|
|
|
|
All outstanding liabilities before 2011, net of reinsurance
|
4,985
|
|
|
|
|
|
Liabilities for loss and loss expenses, net of reinsurance
|
44,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E&S Casualty Lines
(in thousands, except for claim counts)
|
|
|
|
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
|
|
As of
December 31, 2020
|
Accident Year
|
|
|
Unaudited
|
|
|
IBNR
|
Cumulative Number of Reported Claims
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020
|
|
2011
|
$
|
8,127
|
|
$
|
7,102
|
|
9,853
|
|
12,207
|
|
10,273
|
|
9,652
|
|
10,228
|
|
12,119
|
|
11,554
|
|
13,344
|
|
|
408
|
|
1,337
|
2012
|
|
42,367
|
|
42,621
|
|
43,175
|
|
46,149
|
|
46,165
|
|
45,988
|
|
46,444
|
|
44,622
|
|
44,348
|
|
|
2,126
|
|
2,055
|
2013
|
|
|
55,468
|
|
60,309
|
|
67,099
|
|
69,112
|
|
67,647
|
|
68,972
|
|
68,451
|
|
68,029
|
|
|
13,032
|
|
2,299
|
2014
|
|
|
|
55,316
|
|
63,505
|
|
69,929
|
|
71,719
|
|
71,206
|
|
71,153
|
|
70,846
|
|
|
2,352
|
|
2,101
|
2015
|
|
|
|
|
75,498
|
|
76,432
|
|
82,404
|
|
90,488
|
|
90,355
|
|
90,126
|
|
|
12,518
|
|
2,844
|
2016
|
|
|
|
|
|
94,451
|
|
96,416
|
|
104,655
|
|
105,120
|
|
104,730
|
|
|
25,507
|
|
2,925
|
2017
|
|
|
|
|
|
|
91,438
|
|
95,783
|
|
99,866
|
|
99,395
|
|
|
26,778
|
|
2,727
|
2018
|
|
|
|
|
|
|
|
98,324
|
|
103,004
|
|
103,184
|
|
|
41,204
|
|
2,637
|
2019
|
|
|
|
|
|
|
|
|
117,087
|
|
118,298
|
|
|
78,482
|
|
2,278
|
2020
|
|
|
|
|
|
|
|
|
|
103,872
|
|
|
90,970
|
|
1,138
|
|
|
|
|
|
|
|
|
|
Total
|
816,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E&S Casualty Lines
(in thousands)
|
|
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
|
Accident
Year
|
|
|
Unaudited
|
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020
|
2011
|
$
|
—
|
|
$
|
806
|
|
3,200
|
|
6,445
|
|
9,954
|
|
9,912
|
|
10,256
|
|
9,819
|
|
9,604
|
|
10,744
|
|
2012
|
|
3,722
|
|
7,914
|
|
16,430
|
|
25,064
|
|
32,343
|
|
36,278
|
|
38,298
|
|
39,832
|
|
40,615
|
|
2013
|
|
|
2,715
|
|
9,470
|
|
21,980
|
|
35,200
|
|
46,108
|
|
51,142
|
|
54,974
|
|
55,988
|
|
2014
|
|
|
|
2,353
|
|
12,234
|
|
25,571
|
|
43,877
|
|
53,780
|
|
60,092
|
|
64,698
|
|
2015
|
|
|
|
|
3,036
|
|
13,057
|
|
29,389
|
|
50,712
|
|
64,529
|
|
71,421
|
|
2016
|
|
|
|
|
|
3,720
|
|
16,195
|
|
33,950
|
|
56,581
|
|
69,448
|
|
2017
|
|
|
|
|
|
|
5,057
|
|
14,672
|
|
34,179
|
|
53,238
|
|
2018
|
|
|
|
|
|
|
|
5,509
|
|
21,337
|
|
39,174
|
|
2019
|
|
|
|
|
|
|
|
|
4,422
|
|
17,812
|
|
2020
|
|
|
|
|
|
|
|
|
|
3,695
|
|
|
|
|
|
|
|
|
|
|
Total
|
426,833
|
|
|
|
|
|
|
All outstanding liabilities before 2011, net of reinsurance
|
121
|
|
|
|
|
|
|
Liabilities for loss and loss expenses, net of reinsurance
|
389,460
|
|
In 2011, the Parent purchased Mesa Underwriters Specialty Insurance Company ("MUSIC"), a wholly-owned E&S Lines subsidiary of Montpelier Re Holdings, Ltd. Under the terms of the purchase agreement, the Parent acquired net loss and loss reserves amounting to approximately $15 million. All development on this acquired business was fully reinsured as of the acquisition date.
(e) The reconciliation of the net incurred and paid claims development tables to the liability for loss and loss expenses in the consolidated statement of financial position is as follows:
|
|
|
|
|
|
(in thousands)
|
December 31, 2020
|
Net outstanding liabilities:
|
|
Standard Commercial Lines
|
|
General liability
|
$
|
1,380,902
|
|
Workers compensation
|
828,146
|
|
Commercial automobile
|
630,512
|
|
Businessowners' policies
|
91,419
|
|
Commercial property
|
74,182
|
|
Other Standard Commercial Lines
|
16,359
|
|
Total Standard Commercial Lines net outstanding liabilities
|
3,021,520
|
|
|
|
Standard Personal Lines
|
|
Personal automobile
|
94,237
|
|
Homeowners
|
44,159
|
|
Other Standard Personal Lines
|
10,751
|
|
Total Standard Personal Lines net outstanding liabilities
|
149,147
|
|
|
|
E&S Lines
|
|
Casualty lines
|
389,460
|
|
Property lines
|
16,085
|
|
Total E&S Lines net outstanding liabilities
|
405,545
|
|
|
|
Total liabilities for unpaid loss and loss expenses, net of reinsurance
|
3,576,212
|
|
|
|
Reinsurance recoverable on unpaid claims:
|
|
Standard Commercial Lines
|
|
General liability
|
215,136
|
|
Workers compensation
|
210,450
|
|
Commercial automobile
|
11,611
|
|
Businessowners' policies
|
6,849
|
|
Commercial property
|
21,760
|
|
Other Standard Commercial Lines
|
2,853
|
|
Total Standard Commercial Lines reinsurance recoverable on unpaid loss
|
468,659
|
|
|
|
Standard Personal Lines
|
|
Personal automobile
|
42,403
|
|
Homeowners
|
847
|
|
Other Standard Personal Lines
|
29,589
|
|
Total Standard Personal Lines reinsurance recoverable on unpaid loss
|
72,839
|
|
|
|
E&S Lines
|
|
Casualty lines
|
12,195
|
|
Property lines
|
576
|
|
Total E&S Lines reinsurance recoverable on unpaid loss
|
12,771
|
|
|
|
Total reinsurance recoverable on unpaid loss
|
554,269
|
|
|
|
Unallocated loss expenses
|
129,874
|
|
|
|
Total gross liability for unpaid loss and loss expenses
|
$
|
4,260,355
|
|
(f) The table below reflects the historical average annual percentage payout of incurred claims by age. For example, the general liability line of business averages payout of 6.3% of its ultimate losses in the first year, 12.2% in the second year, and so forth. The following is supplementary information about average historical claims duration as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
|
Years
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
|
10
|
General liability
|
6.3%
|
12.2
|
15.7
|
17.0
|
14.9
|
9.8
|
6.0
|
5.1
|
2.0
|
1.8
|
Workers compensation
|
21.8
|
25.6
|
13.5
|
8.1
|
4.3
|
3.6
|
3.5
|
2.0
|
1.6
|
1.2
|
Commercial automobile
|
37.5
|
17.3
|
14.1
|
12.7
|
10.0
|
4.6
|
1.6
|
0.8
|
0.9
|
0.3
|
Businessowners’ policies
|
48.6
|
19.4
|
8.5
|
8.9
|
6.7
|
3.7
|
1.5
|
0.2
|
0.2
|
0.2
|
Commercial property
|
70.0
|
25.7
|
2.8
|
1.0
|
0.4
|
—
|
0.1
|
0.1
|
0.1
|
0.1
|
Personal automobile
|
58.4
|
18.8
|
9.6
|
6.7
|
4.2
|
1.3
|
0.5
|
0.2
|
0.2
|
0.1
|
Homeowners
|
71.9
|
20.4
|
3.3
|
1.7
|
1.7
|
0.3
|
0.1
|
0.1
|
0.1
|
0.3
|
E&S Lines - casualty
|
4.1
|
12.0
|
17.4
|
21.7
|
13.5
|
9.0
|
7.2
|
3.5
|
2.0
|
2.0
|
Note 11. Indebtedness
The table below provides a summary of our outstanding debt at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Debt
|
|
|
|
|
|
|
|
|
|
2020
|
|
Carry Value
|
|
|
|
Issuance Date
|
|
Maturity Date
|
|
Interest Rate
|
|
Original Amount
|
|
Unamortized Issuance Costs
|
Debt Discount
|
|
December 31, 2020
|
|
December 31, 2019
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Senior Notes
|
|
3/1/2019
|
|
3/1/2049
|
|
5.375
|
%
|
|
300,000
|
|
|
$
|
2,934
|
|
5,759
|
|
|
291,307
|
|
|
291,010
|
|
|
(2) FHLBI
|
|
12/16/2016
|
|
12/16/2026
|
|
3.03
|
%
|
|
60,000
|
|
|
—
|
|
—
|
|
|
60,000
|
|
|
60,000
|
|
|
(3) FHLBNY
|
|
8/15/2016
|
|
8/16/2021
|
|
1.56
|
%
|
|
25,000
|
|
|
—
|
|
—
|
|
|
25,000
|
|
|
25,000
|
|
|
(3) FHLBNY
|
|
7/21/2016
|
|
7/21/2021
|
|
1.61
|
%
|
|
25,000
|
|
|
—
|
|
—
|
|
|
25,000
|
|
|
25,000
|
|
|
(4) Senior Notes
|
|
11/3/2005
|
|
11/1/2035
|
|
6.70
|
%
|
|
100,000
|
|
|
319
|
|
501
|
|
|
99,180
|
|
|
99,125
|
|
|
(5) Senior Notes
|
|
11/16/2004
|
|
11/15/2034
|
|
7.25
|
%
|
|
50,000
|
|
|
166
|
|
86
|
|
|
49,748
|
|
|
49,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
508
|
|
|
737
|
|
|
Total long-term debt
|
|
|
|
|
|
|
|
|
|
$
|
3,419
|
|
6,346
|
|
|
550,743
|
|
|
550,597
|
|
|
Short-term Debt Activity
Short-term debt activity included the following in 2020:
•On February 18, 2020, SICA borrowed short-term funds of $85 million from the FHLBNY at an interest rate of 1.81%. This borrowing was refinanced upon its maturity on March 18, 2020, at a lower interest rate of 0.68% and was subsequently repaid on September 18, 2020.
•On March 12, 2020, SICA borrowed $100 million from the FHLBNY at an interest rate of 0.78%. This borrowing was refinanced upon its maturity on (i) September 14, 2020, at a lower interest rate of 0.36%, and again on (ii) November 16, 2020, at a lower interest rate of 0.33%. This borrowing was repaid on December 16, 2020.
•On March 19, 2020, Selective Insurance Company of South Carolina ("SICSC") and Selective Insurance Company of the Southeast ("SICSE") borrowed $39 million and $28 million, respectively, from the FHLBI at an interest rate of 0.58%. These borrowings were repaid on December 14, 2020.
•On March 24, 2020, the Parent borrowed $50 million on its line of credit issued by the Bank of Montreal at an interest rate of 2.244%. This borrowing was repaid on May 8, 2020.
On December 20, 2019, the Parent entered into a Credit Agreement (the “Line of Credit”) among the Parent, the lenders named therein (the “Lenders”), and Bank of Montreal, Chicago Branch, as Administrative Agent. Under the Line of Credit, the Lenders have agreed to provide the Parent with a $50 million revolving credit facility, which can be increased to $125 million with the consent of the Lenders. The Line of Credit will mature on December 20, 2022 and has an interest rate, which varies and is based on, among other factors, the Parent’s debt ratings. Prior to this Line of Credit, the Parent, as borrower, was a party to a Credit Agreement, dated December 1, 2015, for a $30 million revolving credit facility, which could be increased to $50 million with the consent of the lenders, with the lenders named therein, and Wells Fargo Bank, National Association, as Administrative Agent (“Wells Fargo”). This agreement was terminated on December 30, 2019.
Our Line of Credit contains representations, warranties, and covenants that are customary for credit facilities of this type, including, without limitation, financial covenants under which we are obligated to maintain a minimum consolidated net worth, a maximum ratio of consolidated debt to total capitalization, and covenants limiting our ability to: (i) merge or liquidate; (ii) incur debt or liens; (iii) dispose of assets; (iv) make investments and acquisitions; and (v) engage in transactions with affiliates.
The table below outlines information regarding certain covenants in the Line of Credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Required as of
|
|
Actual as of
|
|
|
December 31, 2020
|
|
December 31, 2020
|
Consolidated net worth1
|
|
Not less than
|
$1.6 billion
|
|
$2.5 billion
|
Debt to total capitalization ratio1
|
|
Not to exceed
|
35%
|
|
17.9%
|
1Calculated in accordance with the Line of Credit.
In addition to the above requirements, the Line of Credit contains a cross-default provision that provides that the Line of Credit will be in default if we fail to comply with any condition, covenant, or agreement (including payment of principal and interest when due on any debt with an aggregate principal amount of at least $20 million), which causes or permits the acceleration of principal. Additionally, the Line of Credit limits borrowings from the FHLBI and the FHLBNY to 10% of the respective member company's admitted assets for the previous year.
Long-term Debt Activity
(1) In the first quarter of 2019, we issued $300 million of 5.375% Senior Notes due 2049 at a discount of $5.9 million which, when coupled with debt issuance costs of approximately $3.3 million, resulted in net proceeds from the offering of $290.8 million. The 5.375% Senior Notes pay interest on March 1 and September 1 of each year. The first payment was made on September 1, 2019. A portion of the proceeds from this debt issuance was used to fully redeem the $185 million aggregate principal amount of our 5.875% Senior Notes due 2043, with the remaining $106 million being used for general corporate purposes. The 5.875% Senior Notes had pre-tax debt retirement costs of $4.2 million, or $3.3 million after tax, which was recorded in Interest expense on the Consolidated Statements of Income in the first quarter of 2019. There are no financial debt covenants to which we are required to comply in regards to the 5.375% Senior Notes.
(2) In the first quarter of 2009, SICSC and SICSE, which are collectively referred to as the "Indiana Subsidiaries" as they are domiciled in Indiana, joined, and invested in, the FHLBI, which provides them with access to additional liquidity. The Indiana Subsidiaries’ aggregate investment in the FHLBI was $5.7 million at December 31, 2020 and $2.8 million at December 31, 2019. Our investment provides us the ability to borrow approximately 20 times the total amount of the FHLBI common stock purchased with additional collateral, at comparatively low borrowing rates. The proceeds from the FHLBI borrowing on December 16, 2016 of $60 million were used to repay a $45 million borrowing from the FHLBI that was outstanding at the time, with the remaining $15 million used for general corporate purposes. All borrowings from the FHLBI require security. There are no financial debt covenants to which we are required to comply with in regards to these borrowings. For information on investments that are pledged as collateral for these borrowings, see Note 5. "Investments" above.
(3) In the fourth quarter of 2015, SICA and Selective Insurance Company of New York ("SICNY") joined, and invested in, the FHLBNY, which provides them with access to additional liquidity. The aggregate investment for both subsidiaries was $3.1 million at December 31, 2020 and December 31, 2019. Our investment provides us the ability to borrow approximately 20 times the total amount of the FHLBNY common stock purchased with additional collateral, at comparatively low borrowing rates. In 2016, SICA borrowed the following amounts from the FHLBNY: (i) $25 million in August 2016 at an interest rate of 1.56%, which is due on August 16, 2021; and (ii) $25 million in July 2016 at an interest rate of 1.61%, which is due on July 21, 2021. All borrowings from the FHLBNY require security. There are no financial debt covenants to which we are required to comply with in regards to these borrowings. For information on investments that are pledged as collateral for these borrowings, see Note 5. "Investments" above.
(4) In November 2005, we issued $100 million of 6.70% Senior Notes due 2035. These notes were issued at a discount of $0.7 million resulting in an effective yield of 6.754%. Net proceeds of approximately $50 million were used to fund an irrevocable trust that subsequently funded certain payment obligations in respect of our outstanding debt. The remainder of the proceeds was used for general corporate purposes. The agreements covering these notes contain a standard default cross-acceleration provision that provides the 6.70% Senior Notes will enter a state of default upon the failure to pay principal when due or upon any event or condition that results in an acceleration of principal of any other debt instrument in excess of $10 million that we have outstanding concurrently with the 6.70% Senior Notes. There are no financial debt covenants to which we are required to comply in regards to these notes.
(5) In November 2004, we issued $50 million of 7.25% Senior Notes due 2034. These notes were issued at a discount of $0.1 million, resulting in an effective yield of 7.27%. We contributed $25 million of the bond proceeds to the Insurance Subsidiaries as capital. The remainder of the proceeds was used for general corporate purposes. The agreements covering these notes contain a standard default cross-acceleration provision that provides the 7.25% Senior Notes will enter a state of default upon the failure to pay principal when due or upon any event or condition that results in an acceleration of principal of any other debt instrument in excess of $10 million that we have outstanding concurrently with the 7.25% Senior Notes. There are no financial debt covenants to which we are required to comply in regards to these notes.
Note 12. Segment Information
We evaluate the results of our four reportable segments as follows:
•Our Standard Commercial Lines, Standard Personal Lines, and E&S Lines are evaluated based on before and after-tax underwriting results (net premiums earned, incurred loss and loss expense, policyholders dividends, policy acquisition costs, and other underwriting expenses), return on equity ("ROE") contribution, and combined ratios.
•Our Investments segment is primarily evaluated after-tax net investment income and its ROE contribution. After-tax net realized and unrealized gains and losses, which are not included in non-GAAP operating income, are also included in our Investment segment results.
In computing each segment's results, we do not make adjustments for interest expense or corporate expenses. No segment has a separate investment portfolio or allocated assets.
Our combined insurance operations are subject to certain geographic concentrations, particularly in the Eastern region of the country. In 2020, approximately 18% of NPW were related to insurance policies written in New Jersey. We also had a goodwill balance of $7.8 million at both December 31, 2020 and 2019 on our Consolidated Balance Sheet that relates to our Standard Commercial Lines reporting unit.
The following summaries present revenues (net investment income and net realized and unrealized gains and losses on investments in the case of the Investments segment) and pre-tax income for the individual segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by Segment
|
|
Years ended December 31,
|
($ in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Standard Commercial Lines:
|
|
|
|
|
|
|
Net premiums earned:
|
|
|
|
|
|
|
Commercial automobile
|
|
$
|
615,181
|
|
|
554,256
|
|
|
493,093
|
|
Workers compensation
|
|
278,062
|
|
|
311,370
|
|
|
317,616
|
|
General liability
|
|
694,019
|
|
|
669,895
|
|
|
616,187
|
|
Commercial property
|
|
388,120
|
|
|
353,834
|
|
|
329,660
|
|
Businessowners’ policies
|
|
110,210
|
|
|
105,252
|
|
|
103,412
|
|
Bonds
|
|
36,742
|
|
|
35,726
|
|
|
33,991
|
|
Other
|
|
20,850
|
|
|
19,281
|
|
|
18,263
|
|
Miscellaneous income
|
|
15,512
|
|
|
10,889
|
|
|
8,180
|
|
Total Standard Commercial Lines revenue
|
|
2,158,696
|
|
|
2,060,503
|
|
|
1,920,402
|
|
Standard Personal Lines:
|
|
|
|
|
|
|
Net premiums earned:
|
|
|
|
|
|
|
Personal automobile
|
|
165,020
|
|
|
172,606
|
|
|
168,250
|
|
Homeowners
|
|
125,405
|
|
|
127,543
|
|
|
128,961
|
|
Other
|
|
8,715
|
|
|
7,590
|
|
|
7,230
|
|
Miscellaneous income
|
|
2,058
|
|
|
1,466
|
|
|
1,257
|
|
Total Standard Personal Lines revenue
|
|
301,198
|
|
|
309,205
|
|
|
305,698
|
|
E&S Lines:
|
|
|
|
|
|
|
Net premiums earned:
|
|
|
|
|
|
|
Casualty lines
|
|
174,408
|
|
|
182,864
|
|
|
164,313
|
|
Property lines
|
|
65,082
|
|
|
56,954
|
|
|
55,253
|
|
Miscellaneous income
|
|
—
|
|
|
—
|
|
|
1
|
|
Total E&S Lines revenue
|
|
239,490
|
|
|
239,818
|
|
|
219,567
|
|
Investments:
|
|
|
|
|
|
|
Net investment income
|
|
227,107
|
|
|
222,543
|
|
|
195,336
|
|
Net realized and unrealized investment (losses) gains
|
|
(4,217)
|
|
|
14,422
|
|
|
(54,923)
|
|
Total Investments revenues
|
|
222,890
|
|
|
236,965
|
|
|
140,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
2,922,274
|
|
|
2,846,491
|
|
|
2,586,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before and After Federal Income Tax
|
|
Years ended December 31,
|
($ in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Standard Commercial Lines:
|
|
|
|
|
|
|
Underwriting gain, before federal income tax
|
|
$
|
151,731
|
|
|
145,990
|
|
|
109,104
|
|
Underwriting gain, after federal income tax
|
|
119,867
|
|
|
115,332
|
|
|
86,192
|
|
Combined ratio
|
|
92.9
|
%
|
|
92.9
|
%
|
|
94.3
|
%
|
ROE contribution
|
|
5.1
|
%
|
|
5.8
|
|
|
4.9
|
|
|
|
|
|
|
|
|
Standard Personal Lines:
|
|
|
|
|
|
|
Underwriting (loss) gain, before federal income tax
|
|
(15,508)
|
|
|
8,260
|
|
|
12,764
|
|
Underwriting (loss) gain, after federal income tax
|
|
(12,251)
|
|
|
6,525
|
|
|
10,084
|
|
Combined ratio
|
|
105.2
|
%
|
|
97.3
|
%
|
|
95.8
|
%
|
ROE contribution
|
|
(0.5)
|
%
|
|
0.3
|
|
|
0.6
|
|
|
|
|
|
|
|
|
E&S Lines:
|
|
|
|
|
|
|
Underwriting gain (loss), before federal income tax
|
|
126
|
|
|
9,743
|
|
|
(695)
|
|
Underwriting gain (loss), after federal income tax
|
|
100
|
|
|
7,697
|
|
|
(549)
|
|
Combined ratio
|
|
99.9
|
%
|
|
95.9
|
%
|
|
100.3
|
%
|
ROE contribution
|
|
—
|
%
|
|
0.4
|
|
|
—
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
Net investment income
|
|
$
|
227,107
|
|
|
222,543
|
|
|
195,336
|
|
Net realized and unrealized investment (losses) gains
|
|
(4,217)
|
|
|
14,422
|
|
|
(54,923)
|
|
Total investment segment income, before federal income tax
|
|
222,890
|
|
|
236,965
|
|
|
140,413
|
|
Tax on investment segment income
|
|
41,609
|
|
|
45,301
|
|
|
19,560
|
|
Total investment segment income, after federal income tax
|
|
$
|
181,281
|
|
|
191,664
|
|
|
120,853
|
|
ROE contribution of after-tax net investment income
|
|
7.8
|
%
|
|
9.6
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Segment Results to Income Before Federal Income Tax
|
|
Years ended December 31,
|
($ in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Underwriting gain (loss)
|
|
|
|
|
|
|
Standard Commercial Lines
|
|
$
|
151,731
|
|
|
145,990
|
|
|
109,104
|
|
Standard Personal Lines
|
|
(15,508)
|
|
|
8,260
|
|
|
12,764
|
|
E&S Lines
|
|
126
|
|
|
9,743
|
|
|
(695)
|
|
Investment income
|
|
222,890
|
|
|
236,965
|
|
|
140,413
|
|
Total all segments
|
|
359,239
|
|
|
400,958
|
|
|
261,586
|
|
Interest expense
|
|
(30,839)
|
|
|
(33,668)
|
|
|
(24,419)
|
|
Corporate expenses
|
|
(25,412)
|
|
|
(30,900)
|
|
|
(25,446)
|
|
Income, before federal income tax
|
|
$
|
302,988
|
|
|
336,390
|
|
|
211,721
|
|
Note 13. Earnings per Share
The following table provides a reconciliation of the numerators and denominators of basic and diluted earnings per share ("EPS"):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
Income
|
|
Shares
|
|
Per Share
|
($ in thousands, except per share amounts)
|
|
(Numerator)
|
|
(Denominator)
|
|
Amount
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
246,355
|
|
|
59,862
|
|
|
$
|
4.12
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Stock compensation plans
|
|
—
|
|
|
431
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
246,355
|
|
|
60,293
|
|
|
$
|
4.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
Income
|
|
Shares
|
|
Per Share
|
($ in thousands, except per share amounts)
|
|
(Numerator)
|
|
(Denominator)
|
|
Amount
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
271,623
|
|
|
59,421
|
|
|
$
|
4.57
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Stock compensation plans
|
|
—
|
|
|
583
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
271,623
|
|
|
60,004
|
|
|
$
|
4.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
Income
|
|
Shares
|
|
Per Share
|
($ in thousands, except per share amounts)
|
|
(Numerator)
|
|
(Denominator)
|
|
Amount
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
178,939
|
|
|
58,950
|
|
|
$
|
3.04
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Stock compensation plans
|
|
—
|
|
|
763
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
178,939
|
|
|
59,713
|
|
|
$
|
3.00
|
|
Note 14. Federal Income Taxes
(a) A reconciliation of federal income tax on income at the corporate rate (21%) to the effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Tax at statutory rate
|
|
$
|
63,627
|
|
|
70,642
|
|
|
44,461
|
|
Tax-advantaged interest
|
|
(4,730)
|
|
|
(4,909)
|
|
|
(5,518)
|
|
Dividends received deduction
|
|
(514)
|
|
|
(443)
|
|
|
(647)
|
|
Executive compensation
|
|
2,246
|
|
|
2,985
|
|
|
2,279
|
|
Stock-based compensation
|
|
(1,846)
|
|
|
(3,253)
|
|
|
(3,093)
|
|
|
|
|
|
|
|
|
Other
|
|
(2,150)
|
|
|
(255)
|
|
|
(4,700)
|
|
Federal income tax expense
|
|
$
|
56,633
|
|
|
64,767
|
|
|
32,782
|
|
(b) The tax effects of the significant temporary differences that gave rise to deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
|
Net loss reserve discounting
|
|
$
|
54,240
|
|
|
48,193
|
|
Net unearned premiums
|
|
60,842
|
|
|
57,004
|
|
Employee benefits
|
|
8,943
|
|
|
10,646
|
|
Long-term incentive compensation plans
|
|
5,472
|
|
|
5,727
|
|
Temporary investment write-downs
|
|
6,037
|
|
|
1,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
7,195
|
|
|
6,478
|
|
Total deferred tax assets
|
|
142,729
|
|
|
129,107
|
|
Deferred tax liabilities:
|
|
|
|
|
Deferred policy acquisition costs
|
|
60,601
|
|
|
56,949
|
|
Unrealized gains on investment securities
|
|
81,142
|
|
|
45,294
|
|
Other investment-related items, net
|
|
14,760
|
|
|
7,576
|
|
Accelerated depreciation and amortization
|
|
13,322
|
|
|
12,512
|
|
Total deferred tax liabilities
|
|
169,825
|
|
|
122,331
|
|
Net deferred federal income tax (liability) asset
|
|
$
|
(27,096)
|
|
|
6,776
|
|
Net deferred federal income tax decreased by $33.9 million in 2020, which was primarily driven by a decrease in interest rates resulting in a $35.8 million increase in gross deferred tax liabilities associated with unrealized gains on our fixed income securities portfolio.
After considering all evidence, both positive and negative, with respect to our federal tax loss carryback availability, expected levels of pre-tax financial statement income, and federal taxable income, we believe it is more likely than not that the existing deductible temporary differences will reverse during periods in which we generate net federal taxable income or have adequate federal carryback availability. As a result, we had no valuation allowance recognized for federal deferred tax assets at December 31, 2020 or 2019. We do not have unrecognized tax expense or benefit as of December 31, 2020.
We have analyzed our tax positions in all open tax years, which as of December 31, 2020 were 2017 through 2020. The 2018 tax year is currently under audit. We do not expect any material adjustments to arise out of the 2018 audit.
We believe our tax positions will more likely than not be sustained upon examination, including related appeals or litigation. In the event we had a tax position that did not meet the more likely than not criteria, any tax, interest, and penalties incurred related to such a position would be reflected in "Total federal income tax expense" on our Consolidated Statements of Income.
Note 15. Retirement Plans
(a) Selective Insurance Retirement Savings Plan (“Retirement Savings Plan”) and the Selective Insurance Company of America Deferred Compensation Plan ("Deferred Compensation Plan")
SICA offers a voluntary defined contribution 401(k) plan that is available to most of our employees and is a tax-qualified retirement plan subject to ERISA. In addition, SICA offers a Deferred Compensation Plan to a group of management or highly compensated employees as a method of recognizing and retaining such employees. Expenses recorded for these plans were $18.6 million in 2020, $17.3 million in 2019, and $16.2 million in 2018.
(b) Retirement Income Plan
SICA maintains a defined benefit pension plan, the Retirement Income Plan for Selective Insurance Company of America (the "Pension Plan"). This qualified, noncontributory plan is closed to new entrants and existing participants ceased accruing benefits after March 31, 2016.
The following tables provide details on the Pension Plan for 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Pension Plan
|
($ in thousands)
|
|
2020
|
|
2019
|
Change in Benefit Obligation:
|
|
|
|
|
Benefit obligation, beginning of year
|
|
$
|
391,021
|
|
|
334,679
|
|
Interest cost
|
|
11,312
|
|
|
13,506
|
|
Actuarial losses
|
|
35,276
|
|
|
54,478
|
|
Benefits paid
|
|
(12,448)
|
|
|
(11,642)
|
|
|
|
|
|
|
Benefit obligation, end of year
|
|
$
|
425,161
|
|
|
391,021
|
|
|
|
|
|
|
Change in Fair Value of Assets:
|
|
|
|
|
Fair value of assets, beginning of year
|
|
$
|
385,087
|
|
|
331,680
|
|
Actual return on plan assets, net of expenses
|
|
60,077
|
|
|
63,949
|
|
Contributions by the employer to funded plans
|
|
—
|
|
|
1,100
|
|
Benefits paid
|
|
(12,448)
|
|
|
(11,642)
|
|
Fair value of assets, end of year
|
|
$
|
432,716
|
|
|
385,087
|
|
|
|
|
|
|
Funded status
|
|
$
|
7,555
|
|
|
(5,934)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in the Consolidated Balance Sheet:
|
|
|
|
|
Assets
|
|
$
|
7,555
|
|
|
—
|
|
Liabilities
|
|
—
|
|
|
(5,934)
|
|
Net pension assets (liabilities), end of year
|
|
$
|
7,555
|
|
|
(5,934)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in AOCI:
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
101,414
|
|
|
107,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Information as of December 31:
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
425,161
|
|
|
391,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Liability Assumptions as of December 31:
|
|
|
|
|
Discount rate
|
|
2.68
|
%
|
|
3.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
($ in thousands)
|
|
2020
|
|
2019
|
|
2018
|
Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost (Benefit):
|
|
|
|
|
|
|
Interest cost
|
|
$
|
11,312
|
|
|
13,506
|
|
|
12,428
|
|
Expected return on plan assets
|
|
(21,907)
|
|
|
(21,114)
|
|
|
(22,767)
|
|
|
|
|
|
|
|
|
Amortization of unrecognized actuarial loss
|
|
2,817
|
|
|
2,575
|
|
|
1,981
|
|
|
|
|
|
|
|
|
Total net periodic pension cost (benefit)1
|
|
$
|
(7,778)
|
|
|
(5,033)
|
|
|
(8,358)
|
|
|
|
|
|
|
|
|
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income:
|
|
|
|
|
|
|
Net actuarial (gain) loss
|
|
$
|
(2,894)
|
|
|
11,643
|
|
|
12,600
|
|
Reversal of amortization of net actuarial loss
|
|
(2,817)
|
|
|
(2,575)
|
|
|
(1,981)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income
|
|
$
|
(5,711)
|
|
|
9,068
|
|
|
10,619
|
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and other comprehensive income
|
|
$
|
(13,489)
|
|
|
4,035
|
|
|
2,261
|
|
1The components of net periodic pension cost (benefit) are included within "Loss and loss expense incurred" and "Other insurance expenses" on the Consolidated Statements of Income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
|
2020
|
|
2019
|
|
2018
|
Weighted-Average Expense Assumptions for the years ended December 31:
|
|
|
|
|
|
|
Discount rate
|
|
3.33
|
%
|
|
4.46
|
|
|
3.78
|
|
Expected return on plan assets
|
|
5.80
|
|
|
6.50
|
|
|
6.36
|
|
Our latest measurement date was December 31, 2020, at which time we decreased our expected return on plan assets to 5.40%, due to lower expected returns within our longer-dated fixed income portfolio, as interest rates declined significantly year-over-year.
When determining the most appropriate discount rate to be used in the valuation, we consider, among other factors, our expected payout patterns of the Pension Plan's obligations as well as our investment strategy, and we ultimately select the rate that we believe best represents our estimate of the inherent interest rate at which our pension benefits can be effectively settled. The approach we utilize discounts the individual expected cash flows using the applicable spot rates derived from the yield curve over the projected cash flow period. Our discount rate decreased 65 basis points, to 2.68%, as of December 31, 2020, compared to 3.33% as of December 31, 2019, which drove the increase in the benefit obligation for the period. The weighted average discount rate used to determine 2021 interest cost was 2.06%.
Pension Plan Assets
Assets of the Pension Plan are invested to adequately support the liability associated with the Pension Plan's defined benefit obligation. Our return objective is to exceed the returns of the plan's policy benchmark, which is the return the plan would have earned if the assets were invested according to the target asset class weightings and earned index returns shown below. In 2021, we will continue to phase in adjustments to the asset allocation to steadily close the gap between the duration of the assets and the duration of the liabilities, provided certain improved funding targets are achieved. Over time, the target and actual asset allocations may change based on the funded status of the Pension Plan and market return expectations.
The Pension Plan’s target ranges, as well as the actual weighted average asset allocation by strategy, at December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Target Percentage
|
|
Actual Percentage
|
|
Actual Percentage
|
|
|
Minimum
|
Maximum
|
|
|
|
|
Return seeking assets1
|
|
50
|
%
|
70%
|
|
64
|
%
|
|
59
|
%
|
Liability hedging assets
|
|
70
|
%
|
80%
|
|
35
|
%
|
|
38
|
%
|
Short-term investments
|
|
-
|
-
|
|
1
|
%
|
|
3
|
%
|
Total
|
|
100
|
%
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
1Includes limited partnerships.
The use of derivative instruments is permitted under certain circumstances for the Pension Plan portfolio, but may not be used for unrelated speculative purposes or to create exposures that are not permitted in the Pension Plan's investment guidelines. We currently invest in a U.S. Treasury overlay derivative strategy, within the funds in our liability hedging assets, to manage the interest rate duration mismatch between the assets and liabilities of the Pension Plan to help insulate the funded status of the plan. Considering the impact of this derivative overlay, the liability hedging assets provide for an approximate 65% hedge against the projected benefit obligation.
The Pension Plan had no investments in the Parent’s common stock as of December 31, 2020 or 2019. For information regarding investments in funds of our related parties, refer to Note 18. "Related Party Transactions" below.
The techniques used to determine the fair value of the Pension Plan's invested assets that appear on the following page are as follows:
•The investments in the equities and liability hedging funds include collective investment funds and fund of funds that utilize a market approach wherein the published prices in the active market for identical assets are used. These investments are traded at their net asset value per share. These investments are classified as Level 1 in the fair value hierarchy.
•The investments in private limited partnerships are valued utilizing net asset value as a practical expedient for fair value. These investments are not classified in the fair value hierarchy.
•Short-term investments are recorded at fair value. Given that these investments are listed on active exchanges, coupled with their liquid nature, these investments are classified as Level 1 in the fair value hierarchy.
•The deposit administration contract is recorded at cost, which approximates fair value. Given the liquid nature of the underlying investments in overnight cash deposits and other short-term duration products, we have determined that a correlation exists between the deposit administration contract and other short-term investments, such as money market funds. As such, this investment is classified as Level 2 in the fair value hierarchy.
For discussion regarding the levels within the fair value hierarchy, see Note 2. "Summary of Significant Accounting Policies."
In addition, refer to Note 5. "Investments" for discussion regarding the limited partnership investment strategies, excluding the secondary private equity and direct lending strategies as these investments are currently not part of the Pension Plan's investment portfolio.
The following tables provide quantitative disclosures of the Pension Plan’s invested assets that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
Fair Value Measurements at 12/31/20 Using
|
($ in thousands)
|
|
Assets Measured at Fair Value At 12/31/20
|
|
Quoted Prices in Active Markets for Identical Assets/ Liabilities
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Description
|
|
|
|
|
|
|
|
|
Return seeking assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities:
|
|
|
|
|
|
|
|
|
Global equity
|
|
$
|
142,320
|
|
|
142,320
|
|
|
—
|
|
|
—
|
|
Diversified credit
|
|
73,762
|
|
|
73,762
|
|
|
—
|
|
|
—
|
|
Real assets
|
|
61,585
|
|
|
61,585
|
|
|
—
|
|
|
—
|
|
Total equities
|
|
277,667
|
|
|
277,667
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Limited partnerships (at net asset value)1:
|
|
|
|
|
|
|
|
|
Real assets
|
|
73
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Private equity
|
|
400
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Private credit
|
|
29
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total limited partnerships
|
|
502
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return seeking assets
|
|
278,169
|
|
|
277,667
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Liability hedging assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income
|
|
99,490
|
|
|
99,490
|
|
|
—
|
|
|
—
|
|
U.S. Treasury overlay
|
|
52,756
|
|
|
52,756
|
|
|
—
|
|
|
—
|
|
Total liability hedging assets
|
|
152,246
|
|
|
152,246
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments:
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
3,273
|
|
|
3,273
|
|
|
—
|
|
|
—
|
|
Deposit administration contracts
|
|
2,073
|
|
|
—
|
|
|
2,073
|
|
|
—
|
|
Total cash and short-term investments
|
|
5,346
|
|
|
3,273
|
|
|
2,073
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total invested assets
|
|
$
|
435,761
|
|
|
433,186
|
|
|
2,073
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
Fair Value Measurements at 12/31/19 Using
|
($ in thousands)
|
|
Assets Measured at Fair Value At 12/31/19
|
|
Quoted Prices in Active Markets for Identical Assets/ Liabilities
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Description
|
|
|
|
|
|
|
|
|
Return seeking assets:
|
|
|
|
|
|
|
|
|
Equities:
|
|
|
|
|
|
|
|
|
Global equity
|
|
$
|
113,212
|
|
|
$
|
113,212
|
|
|
—
|
|
|
—
|
|
Diversified credit
|
|
59,009
|
|
|
59,009
|
|
|
—
|
|
|
—
|
|
Real assets
|
|
57,414
|
|
|
57,414
|
|
|
—
|
|
|
—
|
|
Total equities
|
|
229,635
|
|
|
229,635
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partnerships (at net asset value)1:
|
|
|
|
|
|
|
|
|
Real assets
|
|
228
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Private equity
|
|
583
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Private credit
|
|
43
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total limited partnerships
|
|
854
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return seeking assets
|
|
230,489
|
|
|
229,635
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability hedging assets:
|
|
|
|
|
|
|
|
|
Fixed income
|
|
114,395
|
|
|
114,395
|
|
|
—
|
|
|
—
|
|
U.S. Treasury overlay
|
|
30,997
|
|
|
30,997
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total liability hedging assets
|
|
145,392
|
|
|
145,392
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments:
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
8,824
|
|
|
8,824
|
|
|
—
|
|
|
—
|
|
Deposit administration contracts
|
|
2,215
|
|
|
—
|
|
|
2,215
|
|
|
—
|
|
Total cash and short-term investments
|
|
11,039
|
|
|
8,824
|
|
|
2,215
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total invested assets
|
|
$
|
386,920
|
|
|
383,851
|
|
|
2,215
|
|
|
—
|
|
1In accordance with ASU 2015-07, certain investments that are measured at fair value using the net asset value per share (or its practical expedient) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to total Pension Plan invested assets.
Contributions
We presently do not anticipate contributing to the Pension Plan in 2021, as we have no minimum required contribution amounts.
Benefit Payments
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Pension Plan
|
Benefits Expected to be Paid in Future
|
|
|
Fiscal Years:
|
|
|
2021
|
|
$
|
14,658
|
|
2022
|
|
15,213
|
|
2023
|
|
16,408
|
|
2024
|
|
17,439
|
|
2025
|
|
18,440
|
|
2026-2030
|
|
105,076
|
|
Note 16. Share-Based Payments
Active Plans
As of December 31, 2020, the following four plans were available for the issuance of share-based payment awards:
•The 2014 Omnibus Stock Plan, As Amended and Restated Effective as of May 2, 2018 (the "Stock Plan");
•The Cash Incentive Plan, As Amended and Restated as of May 1, 2014 (the "Cash Plan");
•The Employee Stock Purchase Plan (2009) ("ESPP"); and
•The Amended and Restated Stock Purchase Plan for Independent Insurance Agencies (2010), Amended and Restated as of November 1, 2020 (the "Agent Plan").
The following table provides information regarding the approval of these plans:
|
|
|
|
|
|
Plan
|
Approvals
|
Stock Plan
|
Approved effective as of May 1, 2014 by stockholders on April 23, 2014.
Most recently amended and restated plan was approved effective May 2, 2018 by stockholders on May 2, 2018.
|
Cash Plan
|
Approved effective April 1, 2005 by stockholders on April 27, 2005.
Most recently amended and restated plan was approved effective May 1, 2014 by stockholders on April 23, 2014.
|
ESPP
|
Approved by stockholders on April 29, 2009 effective July 1, 2009.
|
Agent Plan
|
Approved by stockholders on April 26, 2006.
Most recently amended, effective November 1, 2020, by the Salary and Employee Benefits Committee of the Parent's Board on October 26, 2020.
|
The types of awards that can be issued under each of these plans are as follows:
|
|
|
|
|
|
Plan
|
Types of Share-Based Payments Issued
|
Stock Plan
|
Qualified and nonqualified stock options, stock appreciation rights ("SARs"), restricted stock, restricted stock units ("RSUs"), stock grants, and other awards valued in whole or in part by reference to the Parent's common stock. The maximum exercise period for an option grant under this plan is 10 years from the date of the grant. Dividend equivalent units ("DEUs") are earned during the vesting period on RSU grants. The DEUs are reinvested in the Parent's common stock at fair value on each dividend payment date. The requisite service period for grants to employees under this plan is the lesser of: (i) the stated vested date, which is typically three years from issuance; or (ii) the date the employee becomes eligible to retire.
|
Cash Plan
|
Cash incentive units (“CIUs”). The initial dollar value of each CIU will be adjusted to reflect the percentage increase or decrease in the total shareholder return on the Parent's common stock over a specified performance period. In addition, for certain grants, the number of CIUs granted will be increased or decreased to reflect our performance on specified performance indicators compared to targeted peer companies. The requisite service period for grants under this plan is the lesser of: (i) the stated vested date, which is typically three years from issuance; or (ii) the date the employee becomes eligible to retire.
|
ESPP
|
Enables employees to purchase shares of the Parent’s common stock. The purchase price is the lower of: (i) 85% of the closing market price at the time the option is granted; or (ii) 85% of the closing price at the time the option is exercised. Shares are generally issued on June 30 and December 31 of each year.
|
Agent Plan
|
Quarterly offerings to purchase the Parent's common stock at a 10% discount with a one-year restricted period during which the shares purchased cannot be sold or transferred. Only our independent retail insurance agencies and wholesale general agencies, and certain eligible persons associated with the agencies, are eligible to participate in this plan.
|
Shares authorized and available for issuance as of December 31, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
Authorized
|
Available for Issuance
|
Awards Outstanding
|
Stock Plan
|
4,750,000
|
|
2,959,819
|
|
686,325
|
|
ESPP
|
1,500,000
|
|
257,088
|
|
—
|
|
Agent Plan
|
3,000,000
|
|
1,659,233
|
|
—
|
|
Retired Plans
The following plans are closed for the issuance of new awards, although awards outstanding continue in effect according to the terms of the applicable award agreements:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
Types of Share-Based Payments Issued
|
Reserve Shares
|
Awards Outstanding1
|
Plan
|
2005 Omnibus Stock Plan ("2005 Stock Plan")
|
Qualified and nonqualified stock options, SARs, restricted stock, RSUs, phantom stock, stock bonuses, and other awards in such amounts and with such terms and conditions as it determined, subject to the provisions of the 2005 Stock Plan. The maximum exercise period for an option grant under this plan is 10 years from the date of the grant. DEUs are earned during the vesting period on RSU grants. The DEUs are reinvested in the Parent's common stock at fair value on each dividend payment date.
|
1,958,306
|
|
32,906
|
|
Parent's Stock Compensation Plan for Non-employee Directors ("Directors Stock Compensation Plan")
|
Directors could elect to receive a portion of their annual compensation in shares of the Parent's common stock.
|
44,468
|
|
44,468
|
|
1Awards outstanding under the 2005 Stock Plan represent shares deferred by our non-employee directors.
RSU Transactions
A summary of the RSU transactions under our share-based payment plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Unvested RSU awards at December 31, 2019
|
|
746,725
|
|
|
$
|
53.48
|
|
Granted in 2020
|
|
247,680
|
|
|
62.91
|
|
Vested in 2020
|
|
(311,951)
|
|
|
44.50
|
|
Forfeited in 2020
|
|
(14,780)
|
|
|
60.30
|
|
Unvested RSU awards at December 31, 2020
|
|
667,674
|
|
|
$
|
61.02
|
|
As of December 31, 2020, total unrecognized compensation expense related to unvested RSU awards granted under our Stock Plan was $9.2 million. That expense is expected to be recognized over a weighted-average period of 1.7 years. The total intrinsic value of RSUs vested was $20.6 million for 2020, $22.0 million for 2019, and $18.0 million for 2018. In connection with vested RSUs, the total value of the DEUs that vested was $0.7 million in 2020 and $0.8 million in 2019 and 2018.
Option Transactions
A summary of the stock option transactions under our 2005 Stock Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life in Years
|
|
Aggregate
Intrinsic Value
($ in thousands)
|
Outstanding at December 31, 2019
|
|
26,823
|
|
|
$
|
16.71
|
|
|
|
|
|
Granted in 2020
|
|
—
|
|
|
—
|
|
|
|
|
|
Exercised in 2020
|
|
26,823
|
|
|
16.71
|
|
|
|
|
|
Forfeited or expired in 2020
|
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
—
|
|
|
$
|
—
|
|
|
0.00
|
|
$
|
—
|
|
Exercisable at December 31, 2020
|
|
—
|
|
|
$
|
—
|
|
|
0.00
|
|
$
|
—
|
|
The total intrinsic value of options exercised was $1.3 million in 2020, $5.2 million in 2019, and $4.5 million in 2018.
CIU Transactions
The liability recorded in connection with our Cash Plan was $8.2 million at December 31, 2020 and $8.6 million at December 31, 2019. The remaining cost associated with the CIUs is expected to be recognized over a weighted average period of 1.2 years. The CIU payments made were $2.3 million in 2020, $18.4 million in 2019, and $20.2 million in 2018. The decrease of $16.1 million in payments in 2020 compared to 2019 was primarily due to the structural changes we made to our Cash Plan in early 2017.
ESPP and Agent Plan Transactions
A summary of ESPP and Agent Plan share issuances is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
ESPP Issuances
|
99,141
|
|
72,952
|
|
70,448
|
|
Agent Plan Issuances
|
69,238
|
|
47,888
|
|
41,134
|
|
Fair Value Measurements
The grant date fair value of RSUs is based on the market price of our common stock on the grant date, adjusted for the present value of our expected dividend payments. The expense recognized for share-based awards is based on the number of shares or units expected to be issued at the end of the performance period and the grant date fair value.
The grant date fair value of each option award is estimated using the Black Scholes option valuation model ("Black Scholes"). The following are the significant assumptions used in applying Black Scholes: (i) the risk-free interest rate, which is the implied yield currently available on U.S. Treasury zero-coupon issues with an equal remaining term; (ii) the expected term, which is based on historical experience of similar awards; (iii) the dividend yield, which is determined by dividing the expected per share dividend during the coming year by the grant date stock price; and (iv) the expected volatility, which is based on the volatility of the Parent's stock price over a historical period comparable to the expected term. In applying Black Scholes, we use the weighted average assumptions illustrated in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESPP
|
|
|
2020
|
|
2019
|
|
2018
|
Risk-free interest rate
|
|
0.76
|
%
|
|
2.33
|
|
|
1.88
|
|
Expected term
|
|
6 months
|
|
6 months
|
|
6 months
|
Dividend yield
|
|
1.6
|
%
|
|
1.2
|
|
|
1.3
|
|
Expected volatility
|
|
37
|
%
|
|
26
|
|
|
18
|
|
The weighted-average fair value of options and stock per share, including RSUs granted under the Parent's stock plans, during 2020, 2019, and 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
RSUs
|
|
$
|
62.91
|
|
|
63.60
|
|
|
55.96
|
|
ESPP:
|
|
|
|
|
|
|
Six month option
|
|
4.82
|
|
|
4.32
|
|
|
2.67
|
|
Discount of grant date market value
|
|
8.61
|
|
|
9.99
|
|
|
8.50
|
|
Total ESPP
|
|
13.43
|
|
|
14.31
|
|
|
11.17
|
|
Agent Plan:
|
|
|
|
|
|
|
Discount of grant date market value
|
|
5.73
|
|
|
7.00
|
|
|
5.99
|
|
The fair value of the CIU liability is remeasured at each reporting period through the settlement date of the awards, which is three years from the date of grant based on an amount expected to be paid. A Monte Carlo simulation is performed to approximate the projected fair value of the CIUs that, in accordance with the CIU agreements established under the Cash Plan, is adjusted to reflect our performance on specified indicators compared to targeted peer companies.
Expense Recognition
The following table provides share-based compensation expense in 2020, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2020
|
|
2019
|
|
2018
|
Share-based compensation expense, pre-tax
|
|
$
|
19.8
|
|
|
24.5
|
|
|
19.3
|
|
Income tax benefit, including the benefit related to stock grants that vested during the year
|
|
(5.7)
|
|
|
(8.2)
|
|
|
(7.0)
|
|
|
|
|
|
|
|
|
Share-based compensation expense, after-tax
|
|
$
|
14.1
|
|
|
16.3
|
|
|
12.3
|
|
Note 17. Preferred Stock
We have 5,000,000 shares of preferred stock authorized, with no par value, of which (i) 300,000 shares are designated Series A junior preferred stock, which have not been issued, and (ii) 8,000 shares have been issued as Series B in 2020 as discussed below.
On December 2, 2020, we issued 8.0 million depository shares, each representing a 1/1,000th interest in a share of our perpetual 4.60% Non-Cumulative Preferred Stock, Series B, without par value, with a liquidation preference of $25,000 per share (equivalent to $25.00 per depository share) (“Preferred Stock”), for net proceeds of $194.6 million. Dividends are recorded when declared and, if declared are payable quarterly in arrears on the 15th day of March, June, September, and December. If a dividend is not declared and paid or made payable on all outstanding shares of the Preferred Stock for the latest completed dividend period, no dividends may be declared or paid on our common stock and we may not purchase, redeem, or otherwise acquire our outstanding common stock.
The Preferred Stock is redeemable at our option in whole or in part, from time to time, on or after December 15, 2025 at a redemption price equal to $25,000 per share of Preferred Stock (equivalent to $25.00 per depository share), plus unpaid dividends attributable to the then current dividend period. Prior to December 15, 2025, the Preferred Stock is redeemable at the Company’s option, in whole but not in part, within 90 days of the occurrence of (a) a rating agency event at a redemption price equal to $25,500 per share of Preferred Stock (equivalent to $25.50 per depository share), plus unpaid dividends attributable to the current dividend period in circumstances where a rating agency changes its criteria used to assign equity credit to securities like the Preferred Stock; or (b) a regulatory capital event at a redemption price equal to $25,000 per share of Preferred Stock
(equivalent to $25.00 per depository share), plus unpaid dividends attributable to the current dividend period in circumstances where a capital regulator such as a state insurance regulator changes or proposes to change capital adequacy rules.
Note 18. Related Party Transactions
William M. Rue, a Director of the Parent, is Chairman of, and owns more than 10% of the equity of Rue Holding Company, which owns 100% of Chas. E. Rue & Son, Inc., t/a Rue Insurance, a general independent retail insurance agency ("Rue Insurance"). Rue Insurance is an appointed distribution partner of the Insurance Subsidiaries on terms and conditions similar to those of our other distribution partners, which includes the right to participate in the Agent Plan. Mr. Rue’s son is President, and an employee, of Rue Insurance, and owns more than 10% of the equity of Rue Holding Company. Mr. Rue’s daughter is an employee of Rue Insurance and owns less than 10% of the equity of Rue Holding Company. Our relationship with Rue Insurance has existed since 1928.
Rue Insurance placed insurance policies with the Insurance Subsidiaries for its customers and itself. Direct premiums written associated with these policies were $11.0 million in both 2020 and 2019, and $10.1 million in 2018. In return, the Insurance Subsidiaries paid standard market commissions, including supplemental commissions, to Rue Insurance of $1.8 million in 2020, $2.0 million in 2019, and $2.1 million in 2018. Amounts due to Rue Insurance at December 31, 2020 and December 31, 2019 were $0.2 million and $0.3 million, respectively. All contracts and transactions with Rue Insurance were consummated in the ordinary course of business on an arm's-length basis.
In 2005, we established a private foundation, now named The Selective Insurance Group Foundation (the "Foundation"), under Section 501(c)(3) of the Internal Revenue Code. The Board of the Foundation is comprised of some of the Parent's officers. We made $0.5 million of contributions to the Foundation in 2020 and 2018, and $1.3 million in 2019.
BlackRock, Inc., a leading publicly-traded investment management firm (“BlackRock”), has purchased our common shares in the ordinary course of its investment business and has previously filed Schedules 13G/A with the SEC. On January 27, 2021, BlackRock filed a Schedule 13G/A reporting beneficial ownership as of December 31, 2020, of 11.2% of our common stock. In connection with purchasing our common shares, BlackRock filed the necessary filings with insurance regulatory authorities. On the basis of those filings, BlackRock is deemed not to be a controlling person for the purposes of applicable insurance law.
We are required to disclose related party information for our transactions with BlackRock. BlackRock is highly regulated, serves its clients as a fiduciary, and has a diverse platform of active (alpha) and index (beta) investment strategies across asset classes that enables it to tailor investment outcomes and asset allocation solutions for clients. BlackRock also offers the BlackRock Solutions® investment and risk management technology platform, Aladdin®, risk analytics, advisory, and technology services and solutions to a broad base of institutional and wealth management investors. We incurred expenses related to BlackRock for services rendered of $2.0 million in 2020, $2.2 million in 2019, and $2.0 million in 2018. Amounts payable for such services at December 31, 2020 and December 31, 2019, were $1.3 million and $1.1 million, respectively.
As part of our overall investment diversification, we invest in various BlackRock funds from time to time. These funds accounted for less than 1% of our invested assets at December 31, 2020 and December 31, 2019, and are predominately reflected in Equity securities on our Consolidated Balance Sheet. During 2020, with regard to BlackRock funds, we (i) purchased $62.2 million, (ii) recognized net unrealized losses of $0.2 million, and (iii) recorded in $0.4 million income. We did not make any sales for BlackRock funds in 2020. During 2019, we purchased $21.7 million in securities, (ii) sold $59.5 million, (iii) recognized net realized and unrealized gains of $5.7 million, and (iv) recorded $0.8 million in income. During 2018, we purchased $41.4 million in securities and recognized a net realized and unrealized loss of $3.6 million. There were no amounts payable on the settlement of these investment transactions at December 31, 2020 and December 31, 2019.
Our Pension Plan's investment portfolio contained investments in BlackRock funds of $191.8 million at December 31, 2020 and $144.2 million at December 31, 2019. During 2020, with regard to BlackRock funds, the Pension Plan (i) purchased $56.7 million, (ii) sold $44.9 million, and (iii) recorded net investment income of $35.8 million. In 2019, with regard to BlackRock funds, the Pension Plan (i) purchased $19.7 million, (ii) sold $44.1 million, and (iii) recorded net investment income of $36.7 million. In 2018, with regard to BlackRock funds, the Pension Plan (i) purchased $132.5 million, (ii) sold $125.6 million, and (iii) recorded net investment income of $9.3 million. In addition, our Deferred Compensation Plan and Retirement Savings Plan may offer our employees the option to invest in various BlackRock funds. All contracts and transactions with BlackRock were consummated in the ordinary course of business on an arm's-length basis.
NOTE 19. Leases
We have various operating leases for office space, equipment, and fleet vehicles. In addition, we have various finance leases for computer hardware. Such lease agreements, which expire at various dates through 2030, are generally renewed or replaced by similar leases.
The components of lease expense for the year ended December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2020
|
|
2019
|
Operating lease cost, included in Other insurance expenses on the Consolidated Statements of Income
|
|
$
|
9,498
|
|
|
8,808
|
|
Finance lease cost:
|
|
|
|
|
Amortization of assets, included in Other insurance expenses on the Consolidated Statements of Income
|
|
550
|
|
|
984
|
|
Interest on lease liabilities, included in Interest expense on the Consolidated Statements of Income
|
|
15
|
|
|
16
|
|
Total finance lease cost
|
|
565
|
|
|
1,000
|
|
|
|
|
|
|
Variable lease cost, included in Other insurance expenses on the Consolidated Statements of Income
|
|
758
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term lease cost, included in Other insurance expenses on the Consolidated Statements of Income
|
|
$
|
2,011
|
|
|
2,165
|
|
The following table provides supplemental information regarding our operating and finance leases.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Weighted-average remaining lease term
|
|
|
|
|
Operating leases
|
8
|
|
6
|
years
|
Finance leases
|
2
|
|
2
|
|
Weighted-average discount rate
|
|
|
|
|
Operating leases
|
2.3
|
|
|
3.4
|
|
%
|
Finance leases
|
1.6
|
|
|
2.1
|
|
|
Operating and finance lease asset and liability balances are included within the following line items on the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
December 31, 2020
|
|
December 31, 2019
|
Operating leases
|
|
|
|
Other assets
|
$
|
40,215
|
|
|
26,535
|
|
Other liabilities
|
41,674
|
|
|
27,506
|
|
Finance leases
|
|
|
|
Property and equipment - at cost, net of accumulated depreciation and amortization
|
502
|
|
|
731
|
|
Long-term debt
|
$
|
508
|
|
|
737
|
|
At December 31, 2020, the maturities of our lease liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Finance Leases
|
|
Operating Leases
|
|
Total
|
Year ended December 31,
|
|
|
|
|
|
|
2021
|
|
$
|
330
|
|
|
8,372
|
|
|
8,702
|
|
2022
|
|
127
|
|
|
6,788
|
|
|
6,915
|
|
2023
|
|
56
|
|
|
5,411
|
|
|
5,467
|
|
2024
|
|
—
|
|
|
4,690
|
|
|
4,690
|
|
2025
|
|
—
|
|
|
3,572
|
|
|
3,572
|
|
Thereafter
|
|
—
|
|
|
16,234
|
|
|
16,234
|
|
Total lease payments
|
|
513
|
|
|
45,067
|
|
|
45,580
|
|
Less: imputed interest
|
|
5
|
|
|
3,393
|
|
|
3,398
|
|
Less: leases that have not yet commenced
|
|
—
|
|
|
—
|
|
|
—
|
|
Total lease liabilities
|
|
$
|
508
|
|
|
41,674
|
|
|
42,182
|
|
At December 31, 2019, the maturities of our lease liabilities for capital and operating leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Finance Leases
|
|
Operating Leases
|
|
Total
|
Year ended December 31,
|
|
|
|
|
|
|
2020
|
|
$
|
451
|
|
|
8,244
|
|
|
8,695
|
|
2021
|
|
248
|
|
|
6,168
|
|
|
6,416
|
|
2022
|
|
54
|
|
|
4,590
|
|
|
4,644
|
|
2023
|
|
—
|
|
|
3,329
|
|
|
3,329
|
|
2024
|
|
—
|
|
|
2,920
|
|
|
2,920
|
|
Thereafter
|
|
—
|
|
|
8,638
|
|
|
8,638
|
|
Total lease payments
|
|
753
|
|
|
33,889
|
|
|
34,642
|
|
Less: imputed interest
|
|
16
|
|
|
2,995
|
|
|
3,011
|
|
Less: leases that have not yet commenced
|
|
—
|
|
|
3,388
|
|
|
3,388
|
|
Total lease liabilities
|
|
$
|
737
|
|
|
27,506
|
|
|
28,243
|
|
Refer to Note. 4 "Statements of Cash Flows" in this Form 10-K for supplemental cash and non-cash transactions included in the measurement of operating and finance lease liabilities.
Note 20. Commitments and Contingencies
(a) We purchase annuities from life insurance companies to fulfill obligations under claim settlements that provide for periodic future payments to claimants. As of December 31, 2020, we had purchased such annuities with a present value of $29.1 million for settlement of claims on a structured basis for which we are contingently liable. To our knowledge, there are no material defaults from any of the issuers of such annuities.
(b) As of December 31, 2020, we have made commitments that may require us to invest additional amounts into our investment portfolio, which are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Amount of Obligation
|
|
Year of Expiration of Obligation
|
Alternative and other investments
|
|
$
|
215.7
|
|
|
2036
|
Non-publicly traded collateralized loan obligations in our fixed income securities portfolio
|
|
37.7
|
|
|
2030
|
Non-publicly traded common stock within our equity portfolio
|
|
2.0
|
|
|
2021
|
Commercial mortgage loans
|
|
4.4
|
|
|
Less than 1 year
|
|
|
|
|
|
Total
|
|
$
|
259.8
|
|
|
|
There is no certainty that any such additional investment will be required. We expect to have the capacity to repay or refinance these obligations as they come due.
Note 21. Litigation
As of December 31, 2020, we do not believe we are involved in any legal action that could have a material adverse effect on our consolidated financial condition, results of operations, or cash flows.
In the ordinary course of conducting business, we are parties in various legal actions. Most are claims litigation involving our Insurance Subsidiaries as (i) liability insurers defending or providing indemnity for third-party claims brought against our customers; (ii) insurers defending first-party coverage claims brought against them, or (iii) liability insurers seeking declaratory judgment on our insurance coverage obligations. We account for such activity through the establishment of unpaid loss and loss expense reserves. In ordinary course claims litigation, we expect that any potential ultimate liability, after consideration of provisions made for potential losses and costs of defense, will not be material to our consolidated financial condition, results of operations, or cash flows.
All of our commercial property and businessowners' policies require direct physical loss of or damage to property by a covered cause of loss. It also is our practice to include in, or attach to, all standard lines commercial property and businessowners' policies an exclusion that states that all loss or property damage caused by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness, or disease is not a covered cause of loss ("Virus Exclusion"). Whether COVID-19 related contamination, the existence of COVID-19 pandemic, and the resulting COVID-19 related government shutdown orders cause physical loss of or damage to property is the subject of much public debate and first-party coverage litigation against some insurers, including us. The Virus Exclusion also is the subject of first-party coverage litigation against some insurers, including us. We cannot predict the outcome of litigation over these two coverage issues, including interpretation of provisions similar or identical to those in our insurance policies.
From time to time, our Insurance Subsidiaries also are named as defendants in other legal actions, some of which assert claims for substantial amounts. Plaintiffs may style these actions as putative class actions and seek judicial certification of a state or national class for allegations involving our business practices, such as improper reimbursement of medical providers paid under workers compensation and personal and commercial automobile insurance policies or improper reimbursement for automobile parts. Similarly, our Insurance Subsidiaries can be named in individual actions seeking extra-contractual damages, punitive damages, or penalties, often alleging bad faith in the handling of insurance claims. We believe that we have valid defenses to these allegations and we account for such activity through the establishment of unpaid loss and loss expense reserves. In these other legal actions, we expect that any potential ultimate liability, after consideration of provisions made for estimated losses, will not be material to our consolidated financial condition. Nonetheless, litigation outcomes are inherently unpredictable and, because the amounts sought in certain of these actions are large or indeterminate, it is possible that any adverse outcomes could have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods.
Note 22. Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds
(a) Statutory Financial Information
The Insurance Subsidiaries prepare their statutory financial statements in accordance with accounting principles prescribed or permitted by the various state insurance departments of domicile. Prescribed statutory accounting principles include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (“NAIC"). Permitted statutory accounting principles encompass all accounting principles that are not prescribed; such principles differ from state to state, may differ from company to company within a state and may change in the future. The Insurance Subsidiaries do not utilize any permitted statutory accounting principles that affect the determination of statutory surplus, statutory net income, or risk-based capital (“RBC”). As of December 31, 2020, the various state insurance departments of domicile have adopted the March 2020 version of the NAIC Accounting Practices and Procedures manual in its entirety, as a component of prescribed or permitted practices.
The following table provides statutory data for each of our Insurance Subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State of Domicile
|
|
Unassigned Surplus
|
|
Statutory Surplus
|
|
Statutory Net Income
|
($ in millions)
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2018
|
SICA
|
|
New Jersey
|
|
$
|
574.2
|
|
|
525.9
|
|
|
739.4
|
|
|
680.1
|
|
|
81.8
|
|
|
113.9
|
|
|
78.0
|
|
Selective Way Insurance Company ("SWIC")
|
|
New Jersey
|
|
374.0
|
|
|
339.2
|
|
|
430.0
|
|
|
388.2
|
|
|
54.0
|
|
|
59.2
|
|
|
47.5
|
|
SICSC
|
|
Indiana
|
|
148.6
|
|
|
132.6
|
|
|
182.8
|
|
|
163.8
|
|
|
20.8
|
|
|
23.9
|
|
|
16.5
|
|
SICSE
|
|
Indiana
|
|
115.9
|
|
|
103.1
|
|
|
143.5
|
|
|
128.7
|
|
|
16.8
|
|
|
18.5
|
|
|
12.9
|
|
SICNY
|
|
New York
|
|
111.7
|
|
|
99.4
|
|
|
139.4
|
|
|
127.1
|
|
|
15.3
|
|
|
17.0
|
|
|
12.0
|
|
Selective Insurance Company of New England ("SICNE")
|
|
New Jersey
|
|
30.0
|
|
|
25.3
|
|
|
61.2
|
|
|
55.4
|
|
|
6.8
|
|
|
7.8
|
|
|
5.6
|
|
Selective Auto Insurance Company of New Jersey ("SAICNJ")
|
|
New Jersey
|
|
70.0
|
|
|
62.5
|
|
|
114.9
|
|
|
105.4
|
|
|
12.9
|
|
|
14.9
|
|
|
9.9
|
|
MUSIC
|
|
New Jersey
|
|
34.4
|
|
|
27.1
|
|
|
103.9
|
|
|
95.6
|
|
|
11.4
|
|
|
13.2
|
|
|
9.4
|
|
Selective Casualty Insurance Company ("SCIC")
|
|
New Jersey
|
|
71.1
|
|
|
58.2
|
|
|
147.5
|
|
|
132.7
|
|
|
16.2
|
|
|
16.8
|
|
|
13.3
|
|
Selective Fire and Casualty Insurance Company ("SFCIC")
|
|
New Jersey
|
|
29.2
|
|
|
23.5
|
|
|
62.1
|
|
|
55.4
|
|
|
6.4
|
|
|
7.5
|
|
|
5.5
|
|
Total
|
|
|
|
$
|
1,559.1
|
|
|
1,396.8
|
|
|
2,124.7
|
|
|
1,932.4
|
|
|
242.4
|
|
|
292.7
|
|
|
210.6
|
|
(b) Capital Requirements
The Insurance Subsidiaries are required to maintain certain minimum amounts of statutory surplus to satisfy the requirements of their various state insurance departments of domicile. RBC requirements for property and casualty insurance companies are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. The Insurance Subsidiaries' combined total adjusted capital exceeded the authorized control level RBC, as defined by the NAIC based on their 2020 statutory financial statements. In addition to statutory capital requirements, we are impacted by various rating agency requirements related to certain rating levels. These required capital levels may be more than statutory requirements.
(c) Restrictions on Dividends and Transfers of Funds
Our ability to declare and pay dividends on the Parent's common stock is dependent on liquidity at the Parent coupled with the ability of the Insurance Subsidiaries to declare and pay dividends, if necessary, and/or the availability of other sources of liquidity to the Parent.
In addition to regulatory restrictions on the availability of dividends that our Insurance Subsidiaries can pay to the Parent, the maximum amount of dividends the Parent can pay our shareholders is limited by certain New Jersey corporate law provisions that limit dividends if either: (i) the Parent would be unable to pay its debts as they became due in the usual course of business; or (ii) the Parent’s total assets would be less than its total liabilities. The Parent’s ability to pay dividends to shareholders also
are impacted by (i) covenants in its Line of Credit that obligate it, among other things, to maintain a minimum consolidated net worth and a maximum ratio of consolidated debt to total capitalization, and (ii) the terms of our preferred stock that prohibit dividends to be declared or paid on our common stock if dividends are not declared and paid, or made payable, on all outstanding preferred stock for the latest completed dividend period.
As of December 31, 2020, the Parent had an aggregate of $490.2 million in investments and cash available to fund future dividends and interest payments. These amounts are not subject to any regulatory restrictions other than the standard state insolvency restrictions noted above, whereas our consolidated retained earnings of $2.3 billion are predominately restricted due to the regulation associated with our Insurance Subsidiaries. In 2021, the Insurance Subsidiaries have the ability to provide for $241.0 million in annual dividends to the Parent; however, as regulated entities, these dividends are subject to certain restrictions, which are further discussed below. The Parent also has available to it other potential sources of liquidity, such as: (i) borrowings from our Indiana Subsidiaries; (ii) debt issuances; (iii) common and preferred stock issuances; and (iv) borrowings under our Line of Credit. Borrowings from our Indiana Subsidiaries are governed by approved intercompany lending agreements with the Parent that provide for additional capacity of $97.1 million as of December 31, 2020, based on restrictions in these agreements that limit borrowings to 10% of the admitted assets of the Indiana Subsidiaries. For additional restrictions on the Parent's debt, see Note 11. "Indebtedness" in this Form 10-K.
Insurance Subsidiaries Dividend Restrictions
As noted above, the restriction on our net assets and retained earnings is predominantly driven by our Insurance Subsidiaries' ability to pay dividends to the Parent under applicable laws and regulations. Under the insurance laws of the domiciliary states of the Insurance Subsidiaries, New Jersey, Indiana, and New York, an insurer can potentially make an ordinary dividend payment if its statutory surplus following such dividend is reasonable in relation to its outstanding liabilities, is adequate to its financial needs, and the dividend does not exceed the insurer's unassigned surplus. In general, New Jersey defines an ordinary dividend as a dividend whose fair market value, together with other dividends made within the preceding 12 months, is less than the greater of 10% of the insurer's statutory surplus as of the preceding December 31, or the insurer's net income (excluding capital gains) for the 12-month period ending on the preceding December 31. Indiana's ordinary dividend calculation is consistent with New Jersey's, except that it does not exclude capital gains from net income. In general, New York defines an ordinary dividend as a dividend whose fair market value, together with other dividends made within the preceding 12 months, is less than the lesser of 10% of the insurer's statutory surplus, or 100% of adjusted net investment income.
New Jersey and Indiana require notice of the declaration of any ordinary dividend distribution. During the notice period, the relevant state regulatory authority may disallow all or part of the proposed dividend if it determines that the dividend is not appropriate given the above considerations. New York does not require notice of ordinary dividends. Dividend payments exceeding ordinary dividends are referred to as extraordinary dividends and require review and approval by the applicable domiciliary insurance regulatory authority prior to payment.
The table below provides the following information: (i) quantitative data regarding all Insurance Subsidiaries' dividends paid to the Parent in 2020, which was used for debt service, shareholder dividends, and general operating purposes; and (ii) the maximum ordinary dividends that can be paid to the Parent by the Insurance Subsidiaries in 2021, based on the 2020 statutory financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
Twelve Months ended December 31, 2020
|
|
2021
|
|
|
|
|
($ in millions)
|
|
State of Domicile
|
|
Ordinary Dividends Paid
|
|
Maximum Ordinary Dividends
|
|
|
|
|
SICA
|
|
New Jersey
|
|
$
|
46.6
|
|
|
$
|
81.8
|
|
|
|
|
|
SWIC
|
|
New Jersey
|
|
22.5
|
|
|
54.1
|
|
|
|
|
|
SICSC
|
|
Indiana
|
|
7.5
|
|
|
20.8
|
|
|
|
|
|
SICSE
|
|
Indiana
|
|
5.3
|
|
|
16.8
|
|
|
|
|
|
SICNY
|
|
New York
|
|
3.0
|
|
|
13.9
|
|
|
|
|
|
SICNE
|
|
New Jersey
|
|
2.2
|
|
|
6.7
|
|
|
|
|
|
SAICNJ
|
|
New Jersey
|
|
5.9
|
|
|
12.9
|
|
|
|
|
|
MUSIC
|
|
New Jersey
|
|
6.0
|
|
|
11.4
|
|
|
|
|
|
SCIC
|
|
New Jersey
|
|
5.2
|
|
|
16.2
|
|
|
|
|
|
SFCIC
|
|
New Jersey
|
|
0.8
|
|
|
6.4
|
|
|
|
|
|
Total
|
|
|
|
$
|
105.0
|
|
|
$
|
241.0
|
|
|
|
|
|
Note 23. Quarterly Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
(unaudited, $ in thousands, except per share data)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net premiums earned
|
|
$
|
651,703
|
|
|
632,573
|
|
|
630,671
|
|
|
642,619
|
|
|
694,541
|
|
|
653,620
|
|
|
704,899
|
|
|
668,359
|
|
Net investment income earned
|
|
55,967
|
|
|
50,618
|
|
|
34,444
|
|
|
58,505
|
|
|
68,185
|
|
|
55,826
|
|
|
68,511
|
|
|
57,594
|
|
Net realized and unrealized (losses) gains
|
|
(44,666)
|
|
|
13,451
|
|
|
12,649
|
|
|
4,027
|
|
|
7,721
|
|
|
(2,183)
|
|
|
20,079
|
|
|
(873)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
1,825
|
|
|
2,320
|
|
|
4,683
|
|
|
3,053
|
|
|
6,119
|
|
|
3,162
|
|
|
4,943
|
|
|
3,820
|
|
Total revenues
|
|
664,829
|
|
|
698,962
|
|
|
682,447
|
|
|
708,204
|
|
|
776,566
|
|
|
710,425
|
|
|
798,432
|
|
|
728,900
|
|
Income before federal income taxes
|
|
15,997
|
|
|
73,694
|
|
|
42,693
|
|
|
90,225
|
|
|
85,257
|
|
|
71,178
|
|
|
159,041
|
|
|
101,293
|
|
Net income
|
|
15,236
|
|
|
61,348
|
|
|
34,183
|
|
|
72,266
|
|
|
69,875
|
|
|
56,150
|
|
|
127,061
|
|
|
81,859
|
|
Net income available to common stockholders
|
|
15,236
|
|
|
61,348
|
|
|
34,183
|
|
|
72,266
|
|
|
69,875
|
|
|
56,150
|
|
|
127,061
|
|
|
81,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
0.26
|
|
|
1.04
|
|
|
0.57
|
|
|
1.22
|
|
|
1.17
|
|
|
0.94
|
|
|
2.12
|
|
|
1.38
|
|
Diluted
|
|
0.25
|
|
|
1.02
|
|
|
0.57
|
|
|
1.21
|
|
|
1.16
|
|
|
0.93
|
|
|
2.10
|
|
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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The addition of all quarters may not agree to annual amounts on the Financial Statements due to rounding.