Wholesale General Agents
Our distribution partners for our E&S Lines are written almost exclusively through 8590 wholesale general agents and 9 wholesale brokers with a combined 245300 office locations, who are our distribution partners in the E&S market.locations. We have granted limited binding authority to thethese wholesale general agents for businessrisks that meetsmeet our prescribed underwriting and pricing guidelines. The wholesale brokers submit brokerage business to us for risk acceptability, terms and conditions, and pricing.
Marketing
Our primary marketing strategy is to:
•Use an empowered field underwriting model to provide our Standard Commercial Lines retail distribution partners with resources within close geographic proximity to their businesses and our mutual customers. For further discussion on this model, see the “Field Model“Technology, Innovation, and Technology”Field Model” section below.
•Develop close relationships with each distribution partner, as well asparticularly their principals and producers:producers, by (i) by soliciting their feedback on products and services;services, (ii) by advising them concerningof our product developments;development efforts, and (iii) throughproviding education and development focusingprograms focused on producer recruitment, sales training, enhancing customer experience, online marketing, and distribution operations.operations, all of which are designed to help them profitably grow and succeed in today's market.
•Develop annual goals with each distribution partner, and then carefully monitor annualthese goals regarding:regarding (i) types and mix of risks placed with us;us, (ii) amount of premium or number of policies placed with us;new business and renewal retention expectations, (iii) customer service, (iv) pricing of their in-force book and retention levels;changes in renewal prices, and (iv)(v) profitability of business placed with us.
•Develop brand recognition with our customers through our marketing efforts to be recognized as a proactive risk manager which include advertising,that provides the unique value-added products and services that customers seek. These unique products and services, along with our proactive communication and providing exceptional products and services thatfocus on a superior customer experience, help position us as a leader in the marketplace.
Technology, Innovation, and Field Model and Technology
We use the service mark “High-tech x High-touch = HT2 SM”continue to describe our business strategy. “High-tech” refers toevolve our technology thatand field model by maintaining a strong focus on innovation. This allows us to provide our customers with "around the clock" digital access to account information and transactional capabilities. While many insurers offer such digital customer solutions in personal lines, we usestrive to make it easy forbe a digital and customer experience leader in all three segments of our distribution partners and customers to do business with us. “High-touch” refers to the close relationships that we have with our distribution partners and customers through our field business model.insurance operations.
We leverage the use of technology in our business. We have made significant investments in information technologyIT platforms, integrated systems, internet-basedand Internet-based applications, and have utilized predictive modeling initiatives. models for over 15 years in our Standard Commercial Lines underwriting.
We do thismake these technology investments to provide:
•Our distribution partners and customers with access to accurate business information and the ability to easily process certainpolicy transactions from their locations,that seamlessly integrating those transactionsintegrate into our systems;systems. During 2020, we were recognized as a "Five-Star Carrier" by Insurance Business America (IBA) for superior performance in seven of the eight key categories, one of which was technology and automation.
•Our service representatives with a customer-centric view of our policyholders, as opposed to a traditional policy-centric view, which helps us to respond faster to customer inquiries and complements our on-demand access to digital transactional capabilities.
•Our underwriters with targetedadvanced underwriting and pricing tools tothat enhance profitability while growingand enable premium growth by providing pricing guidance and automating the business;retrieval of relevant public information on existing policyholders and potential customers.
•Our workers compensation claims adjusters with predictive tools tothat indicate whenwhich claims are likely to escalate, or result in fraud, subrogation, or litigation.
As part of our digital strategy, we provide our Standard Commercial Lines and Standard Personal Lines customers with a mobile application and a web-based portal, both of which we encourage policyholders to better serve our customers;adopt for on-demand self-service
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We manage our information technologyIT projects through an Enterprise Project Management Office (“EPMO”) governance model.. The EPMO is supported by certified project managers who apply methodologies to:to (i) communicate project management standards;standards, (ii) provide project management training and tools;tools, (iii) manage projects;projects, (iv) review project status, including external and cost;internal costs and any projected net present value of project benefits, and (v) provide non-technology project management consulting services to the rest of the organization. The EPMO, which includes senior management representatives from all major business areas,and corporate functions, and information technology,areas, meets regularly to review all major initiatives and receives reports on the status of other projects. We believe theThe EPMO is an important factor in the success of our business strategy and technology implementation.implementations.
Our primary technology operations are located in Branchville, New Jersey and Glastonbury, Connecticut. WeTo augment our internal resources, we have agreements with multiple consulting, information technology,IT, and service providers for supplemental staffing services.service providers. Collectively, these mainly U.S.-based providers supply approximately 47%54% of our skilled technology capacity and are principally based in the U.S., although we do contract with some service providers who are based, or utilize resources, outside the U.S.capacity. We retain management oversight of all projects and ongoing information technologyIT production operations. We believeIf we wouldwere to terminate an existing technology service provider, we have procedures in place to be able to manage an efficient transition to new vendors without significant impact to our operations ifoperations.
Innovation
To advance (i) an organizational culture of innovation, (ii) our nimbleness, (iii) our digital and customer experience initiatives, and (iv) our long-term value proposition to our customers and distribution partners, we terminatedhave undertaken several important strategic actions. We:
•Created a team dedicated to innovation and continuous improvement under a chief innovation officer. This team was established to (i) apply proven innovation techniques and methods for identifying, prioritizing, and advancing strategic innovative ideas and opportunities, (ii) stay abreast of the key industry and insurance technology trends that impact our customers, distribution partners, and employees, and (iii) further expand our culture of innovation by providing training and skill-building opportunities, facilitating departmental and cross-functional strategy and innovation sessions, and leading relevant communities of interest that intersect with the lifecycle of innovation;
•Opened an existing vendor.innovation lab at our corporate headquarters to spur innovation generally and further our efforts to identify and deploy product, agency and customer experience, and operational efficiency improvements; and
These efforts position us to offer customers an improved service experience and better position us to demonstrate our long-term value proposition to our customers and distribution partners.
Our digital and customer experience initiatives have helped us introduce the following solutions:
•SelectiveGOSM - a free-to-customer driving mobile application that we launched in late 2020 to our Standard Personal Lines customers in certain states, which provides driver performance features to help customers improve their driving with detailed feedback on speeding, harsh braking, rapid acceleration, and more.
•Selective® Drive - a free-to-customer, commercial vehicle fleet management tool that we launched in 2019 that detects unsafe driving behaviors and provides additional information to help our customers manage their vehicles and drivers.
In addition, during the second half of 2020, we began rolling out a new platform within our Standard Commercial Lines segment designed to streamline the quoting and issuance of new small business policies for our distribution partners. We generally consider small business to be lower hazard business in specific industry classifications with premiums less than $25,000. Writing small business has always been a core part of our strategy. Technology, as well as the number of market participants in this space, has been advancing rapidly in recent years. We launched a multi-year strategy with an emphasis on improving the ease and speed of writing small business, and are reinforcing our commitment to our distribution partners in this market by offering a best-in-class small business experience. We are advancing the user experience of our rating platform by streamlining the amount of information required to generate a quote. This new small business platform has been deployed for
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our businessowners' policies and commercial automobile lines of business. The enhanced system allows our agents to quote and issue over 400 businessowners' classes, including Professional Offices, Florists, Technology, and Funeral Homes. Our plans include adding additional capabilities and more lines of business in 2021 to help us maximize new business growth and share of small business with our distribution partners.
Field Model
To support our independent distribution partners, we employ a unique field model for bothin which (i) our Standard Commercial Lines underwriting and claims, with various employeessafety management personnel are located in the geographic territories they serve and (ii) our claims operation is organized regionally by claim specialty with local resources who manage our customer relationships. This field usually working from home offices near our distribution partners. We believe that we buildmodel builds better and stronger relationships with our independent distribution partners because of thedue to our field employees' close proximity of our field employees, and the resulting direct interaction with them and our distribution partnerscustomers. We enhance the field model with our sophisticated tools and customers.technologies to inform underwriting, pricing, safety management, and claims decisions. At December 31, 2017,2020, we had approximately 2,2602,400 employees, of which 560 workedwhom 675 are normally home-based, 950 are in the field, 860 worked in one of our regional offices, and the remainder workedare in our corporate office. Currently, as a result of the COVID-19 pandemic, the majority of our office-based employees are temporarily working remotely from home.
Underwriting Process
Our underwriting process requires communication and interaction among:by segment is as follows:
•Standard Commercial Lines:Our Regions, together with our corporate underwriting and actuarial departments, jointly establish and execute upon the following for our Standard Commercial Lines business: (i) annual premiumcorporate underwriting department oversees our underwriting guidelines and pricing goals; (ii) specific newphilosophy for each industry segment and line of business. The Chief Underwriting Officer ("CUO") delegates underwriting authority throughout the organization through formal letters of authority based on an individual underwriter's job grade and industry and line of business targets by distribution partner; and (iii) profit improvement plans as needed across lines, states, and/or distribution partners;
expertise. Our corporate underwriting department which developsalso coordinates with our underwriting appetite, products, policy forms, pricing, and underwriting guidelines for our standard market business;
Under the determinationauthorities delegated by the CUO, our regional underwriting operations make the majority of rateindividual underwriting and pricing levels, while monitoring pricing and profitability along with the Regions, corporate underwriting department, anddecisions. New business intelligence staff for our standard and E&S market business;
Our field technical coordinators, who are responsible for technology assistance and training to aid our employees and standard market distribution partners;
•Risk evaluation, and virtual and on-site improvement surveys intended to evaluate potential exposures and provide solutions for mitigation; (ii) internet-based
•Internet-based safety management educational resources, including a large library of coverage-specific safety materials, videos and online courses, such as defensive driving and employee educational safety courses; (iii) thermographic
•Thermographic infrared surveys aimed at identifyingused to identify potential electrical hazards; and (iv)
•Occupational Safety and Health Administration construction and general industry certification training. Risk improvement efforts
We brand these services as “Safety Management: Solutions for existing customers are designed to improve loss experience and policyholder retention through valuable ongoing consultative service. Oura safer workplace.”SMWe have 83 safety management goalspecialists supporting policyholders in the field. These specialists regularly interact with customers and prospective accounts. They provide advice on risk mitigation for perils such as property damage as well as liability risks, including how to avoid abuse claims. By understanding our customers' exposures and recommending safety enhancements to reduce the risk from those exposures, our safety management specialists help us make better new and renewal underwriting decisions, while helping customers improve the safety of their operations.
To further our safety management efforts, over the past two years we have embarked on initiatives to proactively service policyholders with notifications and alerts, risk identification and mitigation of potential loss occurrence, and tools and technologies that can reduce losses and improve safety. Examples include:
•Vehicle recall notifications to our policyholders and distribution partners;
•Weather preparation notices for large storms or hurricanes, including guides on structural improvements, roof and drainage maintenance, and measures to prevent plumbing from freezing or clogging; and
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•Food and product recall notifications to policyholders in food manufacturing, distribution, or preparation.
•Standard Personal Lines: Our Standard Personal Lines underwriting operations are centralized and highly automated. The majority of our new and renewal business is underwritten and priced through an automated system reflecting our filed rates and rules. Exceptions are approved under the direction of our Standard Personal Lines CUO. For long-term growth in this segment, we are actively repositioning our Standard Personal Lines business to workprovide our insurance products to a customer base that is less price sensitive, and more focused on insurance product coverage and service.
•E&S Lines: Our E&S territory managers focus on marketing our product capabilities, training on our guidelines and automation and collection of market intelligence with our customerswholesale general agents. In return, our wholesale general agents provide front-line underwriting for new business and renewals pursuant to identify, mitigate,our prescribed guidelines. Our underwriters review all exceptions submitted by our wholesale general agents for approval, revision or declination based on individual account risk characteristics.
Our USC services certain Standard Commercial Lines and eliminate potential loss exposures.Standard Personal Lines accounts designated by our independent distribution partners. All of our USC employees are licensed agents who respond to policyholder inquiries about insurance coverage, billing transactions, and other matters. For the convenience of our handling of USC transactions, our distribution partners agree to receive a slightly lower than standard commission on the associated premium. As of December 31, 2020, our USC was servicing NPW of $85.5 million, which represents 3% of our total NPW.
Claims Management
•Claims handling by technical areas of expertise, such as auto liability, general liability, property, and workers compensation;
•Claims customer managers and agency executives ("CAEs") who have responsibility for enhancing the relationship among our policyholders, agents, and our claims operation. The CAEs provide a single point-of-contact for our large account customers and distribution partners. They work with our regional underwriters to ensure appropriate claims service delivery, communicate trends, and discuss results and client services;
•Cost-effective delivery of claims services and control of loss and loss expense; and (ii) maintenance of timely
•Timely and adequate claims reserves. In connectionreserving and resolution.
We deploy specialized claims handling as follows:
•Liability claims with high severity or technically complex losses are handled by the Complex Claims and Litigation Unit ("CCU"). The CCU specialists handle losses based on injury type or with expected severities greater than $250,000 in our Standard Commercial Lines and Standard Personal Lines.
•Litigated matters not meeting the CCU criteria are handled within our litigation unit, where regional litigation managers supervise teams of litigation adjusters aligned by jurisdiction and technical experience.
•E&S claims are handled by a dedicated group with specific expertise in E&S coverages, which differ from and often provide more limited coverages than Standard Lines we achieve better claim outcomes throughofferings.
•Workers compensation claims are handled by a field model that locates claim representativescentralized team in close proximityCharlotte, North Carolina. Medical-only and lost-time adjusters, who are aligned and trained by jurisdiction, manage non-complex workers compensation claims within our footprint. Claims with high exposure or significant escalation risk are referred to our customers and distribution partners.the workers compensation strategic case management unit.
•The Large Loss Unit ("LLU") handles complex property claims, typically those greater than $100,000.
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•We centralize the following claims to align the highest level of expertise: (i) asbestos and environmental claims; (ii) construction defect claims; and (iii) other latent claims, including those related to abuse or molestation.
The CSC is co-located with the USC in Richmond, Virginia. The CSC receives first notices of loss from our customers and claimants related to ourabout Standard Commercial Lines, and Standard Personal Lines, and E&S Lines claims and manages routine, non-injury automobile and property claims with no injuries.claims. The CSC, which assigns claims to our specialized claims handling groups as warranted by complexity, is designed to help: (i) reduce theorganized to:
•Reduce claims settlement timetimes on first- and third-party automobile property damage claims; (ii) increase
•Increase the use of body shops, glass repair shops, and car rental agencies thatwith which we have contracted with us atnegotiated discounted rates and specified service levels; (iii) handle
•Handle and settle small property claims; and (iv) investigate
•Investigate and negotiate auto liability claims.
The CSC as appropriate, will assignuses a virtual automobile appraisal process managed by our team of appraisers from remote locations. This allows the CSC to process automobile physical damage claims to the appropriate regional claims office or other specialized area within our claims organization.
Insurance Operations Competition
We face substantial competition in the insurance operations face competitionmarketplace, including from public, private, and mutual insurance companies, some of which may have lower operating costsbetter brand recognition and/or lower cost of capital than we do. Some,capital. Many of our competitors, like us, rely on independent partners for the distribution of their products and services and have competition within their distribution channel, making growth in market share difficult.services. Other insurance carriers either employ their own agents who only represent them, or use a combination of distribution partners, captive agents, and direct marketing. The following provides information on the competition facing
Within each of our insurance operations:
Our insurance operations are heavily regulated. The primary public policy behind insurance regulation isInvestments segment seeks to generate net investment income by investing the protection of policyholders and claimants over all other constituencies, including shareholders. By virtue of the McCarran-Ferguson Act, Congress has largely delegated insurance regulation to the various states. The primary market conduct and financial regulators of our Insurance Subsidiaries are the departments of insurance in the states in which they are organized and are licensed. The types of activities that are regulated by the states include:
The primary objective of our investment portfolio consisted of the following:
| Category of Investment | ||||||
| ($ in millions, except invested assets per dollar of stockholders' equity) | Carrying Value | % of Investment Portfolio | ||||
| Fixed income securities | $ | 5,204.6 | 92 | |||
| Equity securities | 182.7 | 3 | ||||
| Short-term investments | 165.6 | 3 | ||||
| Other investments, including alternatives | 132.3 | 2 | ||||
| Total | $ | 5,685.2 | 100 | |||
| Invested assets per dollar of stockholders' equity | $ | 3.32 | ||||
is to maximize after-tax net investment income subject to our risk appetite, market conditions, and our desire for long-term growth in book value. Our investment philosophy includesstrategy and objectives are managed by our Management Investment Committee, and are executed by our internal investment team and relationships with multiple external investment managers. This committee is comprised of senior management and is responsible for setting and implementing the investment objectives and the asset allocation, administering investment policies, selecting qualified external investment managers and advisors, and monitoring performance, transactions, and certain return and risk objectives formetrics, in the fixed income, equity, and other investment portfolios. After-tax yield and income generation are key objectivesexecution of our investment strategy, although we also focus on the total returnstrategy. Members of the portfolio. In 2016, we determined that a more active management approachthis committee are appointed by our Board's Finance Committee. The Finance Committee reviews and makes recommendations to our fixed income portfolio was appropriateBoard with respect to maximize the risk-adjusted after-tax incomecertain financial affairs and total return of the portfolio, while maintaining a similar level of credit qualityour policies, including, but not limited to, investments and duration risk. To execute on this revised approach, we hired several new investment managers who were on-boarded in the fourth quarter of 2016. Since then, through active security selection, we have increased the book yield of our fixed income portfolio, which resulted in a higher level of net investment income in 2017, while maintaining the overall credit qualitypolicies and duration of the portfolio. In addition, we have continued to diversifyguidelines, financial planning, capital structure and have modestly increased our exposure to risk assets to 8% while moving towards a long-term target risk allocation of approximately 10% of total invested assets. Risk assets principally include public equities, high-yield fixed income securities,management, dividend policy and private assets. Our core investment philosophy has not changed. We remain focused on diversification, capital preservation, investment quality,dividends, share repurchases, and liquidity to meet our needsstrategic plans and obligations.transactions.
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For further information regarding our risks associated with the overall investment portfolio, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.” and Item 1A. “Risk Factors.” of this Form 10-K. For additional information about investments, see the section entitled, “Investments Segment,” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” and Note 5. "Investments" included in Item 8. “Financial Statements and Supplementary Data.” Note 5. of this Form 10-K.
Regulation
Primary Oversight by the States in Which We Operate
Insurance is regulated, primarily at the state level, because of the McCarran-Ferguson Act. The primary public policy behind insurance regulation is protecting policyholders and claimants over all other constituencies, including shareholders. Insurance activities regulated by the states include the following:
•Our ability to meet financial requirements to be able to pay claimants: Oversight of matters such as: minimum capital; surplus; solvency standards; accounting methods; form and content of statutory financial statements and other reports; loss and loss expense reserves; investments; reinsurance; dividend payments and other distributions to shareholders; security deposits; and periodic financial examinations.
•Protection of policyholders: Related to our property and casualty insurance business, oversight of matters such as: certificates of authority and other insurance company licenses; licensing and compensation of distribution partners; premium rates (required to not be excessive, inadequate, or unfairly discriminatory); policy forms; policy terminations; claims handling and related practices; cybersecurity; data protection and customer privacy; reporting of premium and loss statistical information; periodic market conduct examinations; unfair trade practices; mandatory participation in shared market mechanisms, such as assigned risk pools and reinsurance pools; mandatory participation in state guaranty funds; and mandated continuing workers compensation coverage post-termination of employment.
•Protection of policyholders, claimants, and shareholders: Related to our ownership of the Insurance Subsidiaries, oversight of matters such as: registration of insurance holding company systems in states where we have domiciled insurance subsidiaries, reporting about intra-holding company system developments, and required pre-approval of certain transactions that may materially affect the operations, management, or financial condition of the insurers, including dividends and change in control.
NAIC Financial Monitoring Tools
Our various state insurance regulators are members of the National Association of Insurance Commissioners ("NAIC"). The NAIC has established statutory accounting principles ("SAP") and other accounting reporting formats and model insurance laws and regulations governing insurance companies. The adoption of certain NAIC model laws and regulations is a key aspect of the NAIC Financial Regulations Standards and Accreditation Program, under which state insurance departments recognize the financial examinations and reviews done by other state insurance departments, which benefits insurance companies operating in multiple states by avoiding overlapping examinations. However, an NAIC model statute only becomes a law after a state legislature enacts it, and an NAIC model rule only becomes a regulation after a state insurance department promulgates it.
The following are among the NAIC's various financial monitoring tools, most predicated on NAIC model laws and regulations that are material to the regulators in states in which our Insurance Subsidiaries are organized:
•The Insurance Regulatory Information System ("IRIS"). IRIS identifies 13 industry financial ratios and specifies “usual values” for each ratio. Departure from the usual values on four or more of the financial ratios can lead to inquiries from individual state insurance departments about certain aspects of an insurer's business. Our Insurance Subsidiaries have consistently met the majority of the IRIS ratio tests.
•Risk-Based Capital ("RBC"). RBC is measured by four major areas of risk to which property and casualty insurers are exposed: (i) asset risk; (ii) credit risk; (iii) underwriting risk; and (iv) off-balance sheet risk. Regulators increase their scrutiny, up to and including intervention, as an insurer's total adjusted capital declines below three times its "Authorized Control Level." Based on our 2020 statutory financial statements prepared in accordance with SAP, the total adjusted capital for each of our Insurance Subsidiaries substantially exceeded three times their Authorized Control Level.
•Annual Financial Reporting Regulation (referred to as the "Model Audit Rule"). The Model Audit Rule, based closely on the Sarbanes-Oxley Act of 2002, as amended ("Sarbanes-Oxley Act"), regulates (i) auditor independence, (ii) corporate governance, and (iii) internal control over financial reporting. As permitted under the Model Audit Rule, the
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Audit Committee of the Board of the Parent can also serve as the audit committee of each of our Insurance Subsidiaries, even if the Parent is not an insurance entity.
•Own Risk and Solvency Assessment ("ORSA"). ORSA requires an insurer to maintain a framework for identifying, assessing, monitoring, managing, and reporting on the “material and relevant risks” associated with the insurers' (or insurance groups') current and future business plans. ORSA, which the state insurance regulators of our Insurance Subsidiaries have adopted, requires an insurer to annually file an internal assessment of its solvency. For more information on our internal process of assessing our major risks, refer to the "Enterprise Risk Management" section below.
NRSROs
Rating agencies, although not formal regulators, also monitor our capital adequacy. Two are (i) AM Best Company, with its Capital Adequacy Ratio ("BCAR"), and (ii) S&P, with its capital model. Both examine the strength of an insurer's balance sheet and compare available capital to estimated required capital at various probability or rating levels. BCAR and the S&P model differ from the NAIC financial monitoring tools, particularly RBC. While RBC, BCAR, and the S&P capital model all show similar direction as circumstances change, they react differently to changes in economic conditions, underwriting and investment portfolio mix, and capital. Rating agencies also update and change their capital adequacy models and requirements more frequently than the NAIC does its financial monitoring tools. We analyze this divergence in capital adequacy models as we manage our capital, risk profile, and growth objectives.
Federal Regulation
While primarily regulated at the state level, our business is subject to certain federal laws and regulations, including:
•The McCarran-Ferguson Act;
•The Terrorism Risk Insurance Program Reauthorization Act ("TRIPRA");
•The NFIP, which is overseen by the Mitigation Division of the Federal Emergency Management Agency ("FEMA");
•The Medicare, Medicaid, and SCHIP Extension Act of 2007, which subjects our workers compensation business to Mandatory Medicare Secondary Payer Reporting;
•The economic and trade sanctions of the Office of Foreign Assets Control (“OFAC”);
•Various privacy laws related to possession of personal non-public information, including the following:
◦Gramm-Leach-Bliley Act;
◦Fair Credit Reporting Act;
◦Drivers Privacy Protection Act; and
◦Health Insurance Portability and Accountability Act.
•The Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), which govern, among other things, publicly-traded companies and require or permit national stock exchanges or associations, such as the Nasdaq Stock Market LLC, where our securities are listed, to mandate certain governance practices of their listed companies.
The Dodd-Frank Act, enacted in 2010 in response to the 2008 and 2009 financial markets crises, provided for some public company corporate governance reforms and some oversight of the business of insurance, including:
•Establishing the Federal Insurance Office (“FIO”) under the U.S. Department of the Treasury; and
•Granting the Federal Reserve oversight of financial services firms designated as systemically important.
The FIO, consistent with its Dodd-Frank Act (i) negotiated a covered agreement with the European Union that, among other things, impacted reinsurance collateral requirements for foreign reinsurers, and (ii) has been gathering insurance market data.
For additional information on the potential impact of regulation and changes in regulation on our business, refer to the risk factor related to regulation within Item 1A. “Risk Factors.” of this Form 10-K.
Enterprise Risk Management
As a property and casualty holding company, our Insurance Subsidiaries are in the business of assumingtaking risk. We categorize our major risks into the following fivesix broad categories:
•Asset risk, which stems primarily from our investment portfolio and reinsurance recoverables and includes credit and market risk;
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•Underwriting risk, which is the risk that theour insured losses are higher thanexceed our expectations, including lossesincluding:
◦Losses from inadequate loss reserves, largerreserves;
◦Larger than expected non-catastrophe current accident year losses; and
◦Catastrophe losses and catastrophe losses;that exceed our expectations or our reinsurance treaty limits.
•Liquidity risk, which is the risk we will be unable to meet contractual obligations as they become due because we are unable to liquidate assets or obtain adequate funding without incurring unacceptable losses;investment losses or borrowing expense;
•Other risks, which are new and known but evolving risks that may have a significant impact on our financial strength, reputation, or long-term strategy; and
•Emerging risks, which include risks in each of the other five categories, but are new, rapidly evolving, or increasing substantially compared to historical levels. For example, we consider the increased frequency and systems.intensity of severe wildfires, the exposures created by the legalization of cannabis, the recent passage of reviver statutes for victims of abuse, the various potential impacts from climate change, and the significant economic and societal impacts from the COVID-19 pandemic, all to be emerging risks.
Our internal control framework operates with the three linesdeploys three-lines of defense model. defense:
•The first line of defense consists ofare the individual business functions that deliberately assume, risks and own, and manage ourthe risk on a day-to-day and businessdaily operational basis.
•The second line of defense is responsible for risk oversight and also supports the first line to understand and manage risk. A dedicated risk team led by theOur Chief Risk Officer, is responsible for this second line andwho reports to the Chief Financial Officer. Officer, leads a dedicated risk team responsible for this second line.
•The third line of defense is our Internal Audit team whichthat, with oversight from our Board's audit committee, provides independent, objective assurance as to the assessment of the adequacy and effectiveness of our internal control environment. ItInternal Audit also coordinates risk-based audits, and compliance reviews, and other specific initiatives to evaluate and address risk within targeted areas of our business.
We use Enterprise Risk Management (“ERM”) as part of our governance and control process to take an entity-wide view of our major risks and their potential impact. OurWe designed our ERM framework is designed to identify, measure, report, and monitor our major risks and develop appropriate responses to support successful execution of our business strategy.strategies.
Our Board oversees our enterprise risk managementERM process, and sets our overall risk appetite, while the Executive Risk Committee is responsible for the holistic evaluation and supervision of our aggregated risk profile and determination of future risk management actions in support of overall risk appetite. In addition to the Board’s oversight of the overall risk and the ERM process, various Board committees of the Board oversee risks specific to their areas of supervision and report their activities and findings to the full Board. TheManagement has formed an Executive Risk Committee uses various management committees("ERC") that is responsible for detailed analysisthe holistic monitoring and management of specific major risks.our risk profile. The Executive Risk Committee primarilyERC consists of the Chief Executive Officer, his direct reports and key operational and financial leaders, each of whom is responsible for management of risk in his or her respective area, andincluding the Chief Risk Officer.
High-quality, effective ERM is best achieved when it isas a shared organizational cultural value throughout the organization. We consider ERM to be a key process that is the responsibility of every employee. We have developed processes and use tools and processes that we believe support a culture of risk management and create a robust framework oforganizational ERM within our organization. In addition,framework. We also designed our compensation policies and practices, as well as our governance framework including our Board'sand Board leadership structure, are designed to support our overall risk appetite and strategy. We believe that ourOur ERM processes and practices help us to identify potential events that may affect us, and quantify, evaluate, and manage the significant risks to which we are exposed, and provide reasonable assurance regarding the achievement of our objectives.face.
We rely on quantitative and qualitative tools to identify, prioritize, and manage our major risks, including proprietary and third-party computer modeling as well asand various other analyses. The Executive Risk CommitteeERC meets at least quarterly to review and reviews and discussesdiscuss various aspectstopics and the interrelation of Selective’sour major risks, including, but not limited to,without limitation, capital modeling results, capital adequacy, risk metrics, emerging risks, and sensitivity analysis. Consistent with the requirements of state insurance regulators,When appropriate, we engage subject matter experts, such as external actuaries, third-party risk modeling firms, and IT and cybersecurity consultants. Annually, our Insurance Subsidiaries annually file their ORSA report, an internal solvency assessment developed by the Chief Risk Officer in coordination with the ERC, with their domiciliary regulator after review by our Board.
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COVID-19 has been a significant emerging risk and a focus of the ERC in 2020, and will continue to remain a focus into 2021. To monitor and manage COVID-19-related developments, our ERC met daily in March, multiple times a week through April, transitioned to weekly meetings in May, June, and July, and since has met monthly. The ERC continues to actively review and address all significant operational, compliance, and financial risk matters related to COVID-19. This oversight includes matters such as employee health and safety, facilities matters, operational business continuity, IT including third-party vendors, regulatory developments, premium collections, past due accounts, investments, liquidity, capital, cash flow, claims activity, and other key business metrics. Our Management Investment Committee, which has oversight of our investment portfolio, also met weekly in the early days of the COVID-19-related financial market disruption, transitioned to meeting every two weeks, and now meets monthly. This committee has carefully reviewed detailed portfolio metrics and market projections and, during the crisis, has communicated and met regularly with our portfolio managers, allowing it to make proactive investment decisions on an informed basis. Our Board met weekly with senior executives through April, transitioned to bi-weekly meetings in May, June, and July, and since has met monthly to ensure appropriate corporate governance and oversight.
We have not had to modify our existing internal controls or processes in any significant way in response to the pandemic and we have not experienced any material impact to our internal control environment over financial reporting despite having the majority of our employees working remotely in response to the pandemic. We are continually monitoring and assessing COVID-19-related current events to minimize their potential impact on our internal controls and their design and operating effectiveness.
Given the COVID-19-related governmental actions and directives, remote access to critical systems is required. For several years, our IT security strategy has emphasized endpoint controls for cloud computing and employee mobility. This strategy leveraged a virtual private network with multi-factor authentication that is supplemented by a virtual desktop infrastructure, where necessary or appropriate, to create a highly-available and centrally-managed end-user environment. The technology supporting this strategy was already in use by our 675 home-based employees, as well as anyone working remotely on an ad hoc basis. As a result, our cybersecurity program was well-positioned to support increased remote working arrangements and respond to an increase in attempted attacks to exploit the COVID-19 outbreak without rolling back controls. Our cybersecurity strategy also has always included an information security education and awareness program that combines training with testing aligned to key security exposures, including phishing and social engineering, which is an internal assessment ofongoing challenge for our Insurance Subsidiaries' solvency.employees and vendors. We recently strengthened our phishing risk management by deploying multiple technology-driven controls that include malicious content checks, malicious link blocking, and reputation-based rules. The Chief Risk Officer develops the reportcybersecurity program also anticipated an increase in coordination with members of the Executive Risk Committee,attempts to disrupt our information systems and the report is provideddeployed safeguards to the Board. The Chief Risk Officer reports on the Executive Risk Committee's activities, analyses,prevent interruption to key customer and findings to the Board or the appropriate Board Committee, and provides a quarterly update on certain risk metrics.agent-facing technologies.
Reports to Security Holders
We file with the SECU.S. Securities and Exchange Commission ("SEC") all required disclosures, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements, and other required information underany amendments to these reports that we file or furnish pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”)., which can be accessed on the SEC's website, www.SEC.gov. We also provide access to these filed materials on our Internet website, www.Selective.com.
Item 1A. Risk Factors.
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Risks Related to COVID-19
Governmental actions to contain or delay the spread of the COVID-19 pandemic since early March 2020 have disrupted ordinary business commerce and impacted financial markets. These governmental actions, for which we cannot predict the extent, duration, and possible alteration based on future COVID-19-related developments, could materially and adversely affect our results of operations, financial position, and liquidity.
These actions generally have:
•Negatively impacted the global and United States domestic economies, with some sectors such as travel and leisure, retail, energy, and real estate more significantly affected than others;
•Increased unemployment;
•Increased international, federal, state, and local government budget deficits, which has led to adverse rating actions against certain governmental units and increased the general risk of government debt default that could impact the value of related fixed income securities;
•Induced significant volatility in financial markets;
•Decreased valuations in markets for equity, fixed income, and alternative investments in certain sectors;
•Impacted individual income and business revenue, and increased the number of individuals and businesses experiencing financial distress with the potential for insolvency;
•Decreased premium collections, late payment fees, and reinstatement fees;
•Generated state and federal legislative or executive branch proposals to (i) require insurance policies to retroactively cover COVID-19-related losses expressly excluded under the terms of some property insurance policies, and (ii) presume that COVID-19 is a work-related illness for certain employees under workers compensation policies;
•Generated state insurance department bulletins or orders requesting or mandating premium credits and rebates on certain insurance policies that may exceed actual COVID-19-related frequency experience decreases;
•Disrupted commerce, supply chains, and travel to varying degrees;
•Increased expense management focus by individuals and all-sized businesses;
•Increased the demand for and/or limited the availability of certain types of medical resources; and
•Increased e-commerce, video, phone, and other methods of remote trade and business transaction.
The economic impacts of the COVID-19-related governmental actions may impact our revenue, loss and loss expense, liquidity, or regulatory capital and surplus, and operations, particularly as these relate, without limitation, to the following:
Impact on Our Insurance Operations
•Because our general liability and workers compensation policies provide for premium audit to assure pricing for actual risk exposure, we must estimate return premium that we may owe policyholders for revenues and payrolls lowered by the extent and duration of the COVID-19-related governmental directives and related economic contraction. Such return premiums could be significant and will impact our underwriting results. Our results include the impact of a $75 million return audit and mid-term endorsement premium accrual recorded in the first quarter of 2020, which reflects our estimate of reduced exposures on the in-force workers compensation and general liability portfolio as of March 31, 2020. As of December 31, 2020, we had a remaining accrual of $24.8 million.
•In the second quarter of 2020, we offered a credit equal to 15% of insureds’ premiums for our standard lines commercial automobile and personal automobile lines of insurance for April and May totaling $19.7 million. This two-month premium credit was based on a limited amount of claims reporting data reflecting the impact of the COVID-19-related governmental directives on miles driven, which has reduced claims frequencies. Due to the sudden and dynamic nature of these impacts, we did not rely upon traditional actuarial analysis to support these credits. We will not know the actual impact of the COVID-19-related governmental actions until some point in the future. Should the various governmental directives be extended or reinstated due to increased infection rates, we may give further premium credit to our customers to the extent supported by further analysis. Based on the continued COVID-19-related economic impact, state insurance commissioners may take other regulatory actions requiring additional premium credits in commercial and personal automobile and other lines, and we face the risk that we may be required to return more premium than is warranted by our filed rating plans and actual loss experience.
•All of our commercial property and businessowners' policies require direct physical loss of or damage to property by a covered cause of loss to trigger a business interruption claim. Whether COVID-19-related contamination, the existence of a pandemic, and/or the resulting government shutdown orders cause physical loss of or damage to property continues to be the subject of much debate and litigation. We cannot predict the outcome of that litigation. Our practice is to include in, or attach to, all standard lines commercial property and businessowners' policies an
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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. We offer some limited coverages that could apply in COVID-19-related claims and circumstances, primarily tied to clean-up and food-contamination that are subject to sub-limits. Approximately 95% of our commercial property and businessowners' policies include the very specific and regulatory approved virus exclusion.
•We purchase a significant amount of reinsurance, including a property catastrophe reinsurance program and property and casualty excess of loss reinsurance treaties. In response to the COVID-19 pandemic and recent increased catastrophic loss activity, the reinsurance industry is seeking to tighten contractual terms and conditions, reduce reinsurance capacity, and increase its pricing for reinsurance protection. Tightened terms and conditions include introducing new coverage exclusions, such as excluding losses related to communicable diseases, particularly for business interruption losses in property treaties and, to a lesser extent, in casualty treaties. To the extent we are exposed to losses on our primary policies from risks, such as communicable disease, these losses will most likely be excluded from coverage under our new reinsurance treaties, and we now face increased underwriting risk. This increased underwriting risk could increase our net loss and loss expenses and increase the volatility in our underwriting results. We experienced risk-adjusted reinsurance price increases at our January 1, 2021 renewals that were at rates higher than we are likely able to generate on the underlying insurance policies we sell.
•In response to the COVID-19 pandemic, there currently are various public policy debates and legislative and regulatory proposals at both the federal and state levels:
◦Certain states have proposed legislation that would impose liability (including retroactively) for COVID-19-related business interruption losses on policies that do not provide such coverage terms. We cannot predict the outcome of such proposals. We believe that if any of these proposals were enacted, they could impair future commercial activity and would likely be determined unconstitutional after being challenged through litigation. Nonetheless, if such proposals were enacted and upheld as constitutional, they could have a material impact on our profitability, liquidity, and overall financial condition and results of operations.
◦We are aware of four future pandemic insurance proposals being discussed in Washington, D.C., only one of which has been introduced as proposed legislation. Three of the proposals provide for insurer participation and put insurer capital at risk to various degrees. If any of the proposals involving insurer at risk capital were enacted, it could have a material impact on our profitability, liquidity, and overall financial condition and results of operations.
◦Certain state insurance departments have indicated that they currently (i) will not approve the filing of rate increases or decreases related – or unrelated – to COVID-19, and (ii) are suspending, limiting, or restricting the approval or attachment of new virus-related exclusions. To the extent any of these regulatory actions do not permit us to modify our rating plans, they could have a material impact on our profitability, liquidity, and overall financial condition and results of operations.
•Limited medical resources availability could result in medical inflation and complicate, delay and/or extend medical treatment that could impact exposure on workers compensation, general liability, and personal and commercial automobile claims.
•Economic inflation could increase our loss and loss expense reserves, particularly associated with our longer tail lines of business.
•We may have increased workers compensation loss and loss expenses if policyholders' employees in high-risk roles of essential businesses contracted COVID-19 in the workplace. We may experience higher frequency of workers compensation claims, particularly as state legislative or executive order proposals are enacted that create presumptions that the contraction of COVID-19 by an essential business employee who interacted with the public is work-related. We also may see an extension of workers compensation benefits if employees do not have jobs to which they can return.
•We may experience an increase in liability claims against our policyholders related to business practices as remote-office work-from-home employees return to their pre-COVD-19 office and business locations. This may be exacerbated by an active plaintiffs’ bar seeking to generate COVID-19-related claim activity.
•Loss frequency and severity could increase related to our auto and property coverages due to, among other things,
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disruptions in supply chains and changes in business practices and individual behaviors resulting from the shelter-in-place and social distancing measures, such as arson and fraud.
•Due to the COVID-19-related governmental orders, we may experience delayed reporting of losses, settlement negotiations, and trial of disputed claims that may disrupt our normal claims resolution processes and trends.
•Service levels could deteriorate if significant numbers of our (i) employees were to be simultaneously infected by COVID-19, whether working remotely or in one of our offices, and/or (ii) remote employees or key business partners are unable to work effectively while sheltering-in-place. Examples of potential work impacts include local internet disruption that prevents access to our virtual private network or similar unavoidable events. Because our employees are working remotely, it also is possible that we will be subject to increased cybersecurity attacks from bad actors.
Impact on our Investment Operations
•The COVID-19 pandemic and the related governmental orders may result in further significant equity and debt market volatility that could impact our net investment income due to the following:
◦Financial market volatility is reflected in our alternative investment portfolio performance;
◦A change in spreads on fixed income securities may create mark-to-market investment valuation losses and volatility in unrealized capital gains, which will impact GAAP equity;
◦Losses on securities that we intend to sell may increase, as we give our third-party investment managers flexibility to take advantage of the spread widening in fixed income securities, particularly in asset classes more significantly impacted by COVID-19-related governmental directives and to which the Federal Reserve Board is providing liquidity and structural support;
◦Economic inflation related to COVID-19 issues could be higher or lower than our expectations and impact our investment returns; and
◦A potential increase in credit risk associated with municipal bonds for which repayment is supported by dedicated revenue streams that may be impacted by COVID-19.
Impact on our Capital Position, Liquidity and Financial Leverage
•Out of an abundance of caution, we significantly increased our short-term debt during the first quarter of 2020 to enhance our liquidity and provide us with additional financial flexibility due to the market volatility and economic uncertainty from the COVID-19 pandemic. These short-term borrowings totaled $302 million, and we invested the proceeds in high-quality money market funds and fixed income securities. In addition to the $302 million of short-term borrowings, our GAAP equity decreased from $2.2 billion at December 31, 2019 to $2.1 billion at March 31, 2020, driven by a reduction in net unrealized gains in our investment portfolio. The combination of the additional borrowings and lower GAAP equity resulted in an increase in our debt to total capitalization ratio from 20.1% at December 31, 2019 to 28.9% at March 31, 2020, above our longer term target of 25%.
•We subsequently repaid these short-term borrowings by December 31, 2020.The reduction in the short-term borrowings, as well as an increase in our GAAP equity to $2.7 billion at December 31, 2020, inclusive of our issuance on December 2, 2020, of $200.0 million of 4.60% non-cumulative preferred stock ("Preferred Stock"), has decreased our debt to total capitalization ratio to 16.7% at December 31, 2020.
Despite the improvement in our capital position and a reduction in our debt to total capitalization since the first quarter of 2020, the ongoing COVID-19 pandemic, in future periods, could cause a reduction in our GAAP income or equity, decrease our liquidity, and result in an increase in our debt to total capitalization.This could impact our financial strength ratings and impair our business.
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Risks Related to our Insurance Operations
We are subject to losses from catastrophic events.
The United Nation’s Intergovernmental Panel on Climate Change (“IPCC”) is an international body responsible for assessing climate change science. In 2018, the IPCC reported in its "Special Report on Global Warming of terrorism.
Our insurance operations are concentrated geographicallyprimarily write risks in the Eastern, Midwestern, and MidwesternSouthwestern regions of the country. In 2017, approximately 20% of NPW were related to insurance policies written in New Jersey. Catastrophes inU.S. Our most significant catastrophe exposures are (i) hurricanes impacting the Eastern U.S., (ii) terrorism events, (iii) severe convective storms, including hailstorms and Midwestern regions of the U.S.tornadoes, and (iv) winter storms. Single storms could adversely impact our financial results, but it is also possible that we could experience more than one severe catastrophic event in any given calendar year. We track our severe weather and catastrophe losses using definitions and information we obtain from ISO’s Property Claim Services unit, an internationally recognized expert on U.S. storm losses.
Certain factors can impact our estimates of ultimate costs for catastrophes, including:
i.Inability to access portions of the impacted areas following a catastrophic event;
ii.Scarcity of necessary labor and materials that delay repairs and increase our loss costs;
iii.Regulatory uncertainties, including new or expanded interpretations of coverage;
iv.Residual market assessment-related increases in our catastrophe losses;
v.Potential fraud and inflated repair costs, partly driven by (a) demand surge post-event, and (b) opportunistic service providers;
vi.Higher loss adjustment expenses due to shortages of claims adjusters available to appraise damage;
vii.Late claims reporting;
viii.Escalation of business interruption costs due to infrastructure disruption; and
ix.Whether the U.S. Secretary of Treasury certifies a terrorist event as wasan act of terrorism under TRIPRA.
An increase in catastrophe losses likely will reduce our net income and stockholders’ equity and could have a material adverse effect on our liquidity, financial strength, and debt ratings. The closer a catastrophe occurs to the caseend of a reporting period, the more likely it is we have limited information to estimate loss and loss expense reserves, adding greater uncertainty to our estimates. More detailed claims information available after the end of a reporting period may result in 2010, 2011,reserve changes in subsequent periods.
Our loss and 2012.loss expense reserves may not be adequate to cover actual losses and expenses.
We maintain reserves for our estimated liability for loss and loss expense associated with reported and unreported insurance claims. We base our loss and loss expense reserve estimates on known facts and circumstances, including our expectations of ultimate settlement and claim administration expenses, trends in claims severity and frequency, medical inflation trends, predictions of future events, and other subjective factors relating to our in-force insurance policies. There is no method for precisely estimating the ultimate liability for the settlement of claims.
Reserve estimates may be impacted by a variety of broad economic, political, social, and legal developments or trends, such as inflation, judicial tort decisions, and various state legislative initiatives. Because we cannot predict the timing and impact of these economic, political, social, and legal developments or trends, and estimating loss and loss expense reserves is inherently uncertain, we cannot be sure the reserves we establish are adequate or will be so in the future.
We review our reserve position quarterly and adjust the reserve position accordingly. An increase in reserves (i) reduces net income and stockholders’ equity, and (ii) could have a material adverse effect on our liquidity, financial strength, and debt
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ratings. As we underwrite new business and renew existing business, we estimate future loss cost trends in pricing our products to generate an adequate risk-adjusted return. If our estimate of future loss cost trends proves to be understated, our pricing of future new and renewal business may be inadequate to meet estimated loss costs trends, understating our future loss and loss expense reserves.
The COVID-19 pandemic is an example of how loss and loss expense reserves might be affected by economic, political, social, or legal developments or trends. Two additional examples are:
•If economic inflation, including medical inflation, is higher than our assumptions, our loss and loss expense reserves associated with our longer tail lines of business may prove to be insufficient. In particular, our workers compensation line of business is susceptible to this risk, given its extended payment pattern and the current low medical inflationary environment compared to long-term medical inflation rates, which have historically been higher.
•Several states have expanded or are exploring expanding the statute of limitations for civil actions alleging sexual abuse. By retroactively permitting claims for previously time-barred acts, these “reviver” laws may result in insurance claims that could significantly increase loss costs and require re-evaluation of previously-established reserves or the creation of new reserves. Since reviver statutes have been enacted, we have received notices of claims or potential claims for acts alleged to have occurred as far back as the 1950s. Without prior experience, we cannot estimate how many "reviver" claims notices we may receive. Most notices we have received are sent on behalf of claimants by attorneys unsure of what insurer or policy (if any) may have covered the alleged assailant or supervising entity and may not implicate insurance policies issued by us or a predecessor. For notices we have determined implicate an insured under a policy issued by us or a predecessor, we (i) have investigated or are investigating facts, (ii) have evaluated policy terms, and (iii) believe we have appropriate coverage defenses and reinsurance protections that have been considered in establishing our reserves. As coverage positions may be challenged through litigation or otherwise, we face litigation risks further discussed below in the Risk Factor entitled, “Incidental to our insurance operations, we are engaged in ordinary routine legal proceedings that, because litigation outcomes are inherently unpredictable, could impact our reputation and/or have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods.”
For further discussion on our loss and loss expense reserves, please see the “Critical Accounting Policies and Estimates” section of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” and Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
Our ability to reduce our risk exposure depends on the availability and cost of reinsurance.
We transfer a significant portion of our underwriting risk exposure - specifically a portion of our loss and loss expense - to reinsurance companies in exchange for a specified portion of premiums. Most of our reinsurance contracts have annual terms. The availability, amount, and cost of reinsurance depend on market conditions, including retrocessional reinsurance market capacity. This may fluctuate significantly and not necessarily correlate to the loss experience of our specific book of business. In general, we can consider catastrophe reinsurance expense in our filed rates and rating plans. Any other disproportionate increase in our reinsurance expense that we cannot include in our filed rates and rating plans will reduce our earnings. If we do not obtain expected reinsurance amounts or terms, our reinsurance expenses could increase, we may assume increased risk for individual or aggregate losses, and our ability to write future business could be adversely affected.
Catastrophes impact many property and casualty insurance lines, most of our historical catastrophe-related claims have been frombut commercial property and homeowners coverages. In an effort tocoverages historically have accounted for most of our catastrophe-related claims. To limit our exposure to catastrophe losses, we purchase catastrophe reinsurance. CatastropheIt is possible that our reinsurance coverage could provebe inadequate, particularly if: (i)
•We do not purchase sufficient amounts of reinsurance because of defects or inaccuracies in the various modeling software programs that we use to analyze theour Insurance Subsidiaries’ risk result in an inadequate purchase of reinsurance by us; (ii) aSubsidiaries' risk;
•A major catastrophe loss exceeds the purchased reinsurance limit or is within the reinsurers’limits, but exceeds the financial capacity;capacity of one or (iii) themore of our reinsurers;
•The frequency of catastrophe losses results inincreases and our Insurance Subsidiaries' insured losses exceed the aggregate limits of the catastrophe reinsurance treaty or our Insurance Subsidiaries exceeding the aggregate limits provided by the catastropheexperience an aggregation of losses that fall below our per occurrence reinsurance treaty. Even after consideringretention; or
•Our reinsurance counterparties (a) are unable to access their reinsurance markets, or retrocessions, (b) suffer significant financial losses, (c) are sold, (d) cease writing reinsurance business, or (e) are unable or unwilling to satisfy their contractual obligations to us.
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Typically, our reinsurance protection,contracts align with our primary insurance policies. For example, if our primary insurance policies provide coverage for a loss, then our reinsurance contracts typically provide coverage as well (subject to any specific exclusions the reinsurance contracts may contain).
In response to the COVID-19 pandemic and recent increased catastrophic loss activity, the reinsurance industry has sought to tighten contractual terms and conditions, reduce reinsurance capacity, and increase pricing. Tightened terms and conditions include introducing new coverage exclusions, such as excluding losses related to cyber risk and communicable diseases, particularly for business interruption losses in property treaties and, to a lesser extent, in casualty treaties. To the extent we are exposed to losses on our primary policies from risks, such as cyber and communicable disease, that are now principally excluded from coverage under our reinsurance treaties, we face increased underwriting risk. The increased underwriting risk could increase our net loss and loss expenses and increase the volatility in our underwriting results. Decreased reinsurance capacity also would increase our underwriting risk if we cannot fully place our existing reinsurance treaties upon renewal. We experienced risk-adjusted reinsurance price increases at our January 1, 2021 renewals that were at rates higher than we are likely to generate on the underlying insurance policies we sell. This will negatively impact our underwriting profitability in 2021.
Even with the benefits of reinsurance, our exposure to catastrophe risks could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings.
We are required to maintain loss and loss expense reserves for our estimated liability for loss and loss expense associated with reported and unreported insurance claims. Our estimates of reserve amounts are based on facts and circumstances that we know, including our expectations of the ultimate settlement and claim administration expenses, trends in claims severity and frequency, including inflationary trends particularly regarding medical costs, predictions of future events, and other subjective factors relating to our insurance policies in force. There is no method for precisely estimating the ultimate liability for
Under TRIPRA, terrorism coverage is mandatory for all primary workers compensation policies. TRIPRA also applies to cyber liability insurance policies reported under a Terrorism Risk Insurance Program-eligible line of insurance. Insureds with non-workers compensation commercial policies have the option to accept or decline our terrorism coverage or negotiate with us for other terms. In 2017, 90%2020, 86% of our Standard Commercial Lines non-workers compensation policyholders purchased terrorism coverage that included nuclear, biological, chemical, and radioactive ("NBCR") events. Terrorism coverage is mandatory for all primary workers compensation policies, so the TRIPRA back-stop applies to these policies. A risk exists that, if the U.S. Secretary of Treasury does not certify certain future terrorist events, we would be required to pay related covered losses without TRIPRA's risk sharing benefits. Examples of this potential risk are the 2013 Boston Marathon bombing and the 2015 shootings in San Bernardino, California, neither of which were certified as terrorism events.
We are exposed to credit risk.
We are exposed toface credit risk in several areas of our insurance operations, including from:
•Our reinsurers, whowhich are obligated to make payments to us under our reinsurance agreements. Amounts recoverable from our reinsurersReinsurance credit risk can increase quickly and significantlyfluctuate over time, increasing during periods of high industry catastrophe losses. Reinsurers generally manage their large loss activity, so our credit risk related to our reinsurance relationships can increase significantly and will fluctuate over time. In addition, our reinsurers often rely onexposure through their own reinsurance programs, or retrocessions, as part of managing their exposure to large losses. Givenabout which we do not always have the relatively small size of the global reinsurance community, the inability offull details. If our reinsurers to collecthave difficulty collecting on their retrocession program,programs or their inability to reinstate theirin reinstating retrocession coverage after a large loss, we may impair their ability to pay us for the amounts we cede to them. Accordingly,not receive timely or full payment of our reinsurance claims. This means that we have direct and indirect counterparty credit risk fromto our reinsurers. We attempt to mitigate this credit risk by: (i) pursuing relationships with reinsurers rated “A-” or higher by A.M. Best; and/or (ii) obtaining collateral to secureand the reinsurance obligations.industry, which is global but relatively small.
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•Certain life insurance companies obligated to our policyholders or claimants under annuities we purchased as part of structured claims settlements, if they fail to fulfill their obligations to those customers for whom we have purchased annuities under structured settlement agreements.annuity contract obligations.
•Some of our independent distribution partners, who collect premiums due us from our customers.policyholders for us.
•Some of our customers, who are responsiblepolicyholders directly obligated to us for payment of premiumspremium and/or deductibles directly to us.deductible payments, the timing of which may be impacted by mandated payment moratoriums.
Our exposure to credit risk could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings.
We market and sell our insurance products through independent, non-employee distribution partners. Insurance law and regulation makes us responsible for the business practices and customer interactions of our distribution partners. Independent distribution partners have, and we expect will continue to have, a significant role in global capitaloverall insurance industry premium production. While our customers find advantages in using independent distribution partners, our reliance on independent distribution partners presents risks and challenges, including:
•Competition in our distribution channel, as independent distribution partners have access to products from multiple carriers and markets, and we must market our products and services to our distribution partners before they sell them to our mutual customers.
•Challenges in developing brand recognition that require us to closely coordinate with our distribution partners, as some customers cannot differentiate their insurance agent from their insurance carrier.
•Our market share growth is tied to the economygrowth in market share controlled by our distribution partners. Independent retail insurance agencies control 85% of standard commercial lines business and 36% of standard personal lines business in the U.S. Consequently, expansion of our Standard Personal Lines market opportunity could be more limited than our Standard Commercial Lines business. More competitors have focused on lower-cost "direct-to-the-customer" distribution models that emphasize digital ease and technological efficiencies to address the discrepancy in agency control of Standard Personal Lines business. Continued advancements in "direct-to-the-customer" distribution models may impact the overall market share controlled by our independent distribution partners and make it more difficult for us to grow, or require us to establish relationships with more distribution partners.
•Aggregation and consolidation of our independent distribution partners and their market share, as some publicly-traded and private equity-backed independent distribution partners have deployed consolidation strategies to acquire other independent distribution partners and increase their market share ("Aggregators") over the last decade. If more of our independent distribution partners become Aggregators, or are acquired by Aggregators, Aggregator demands and influence on our business could increase. For example, Aggregators could develop and implement strategies to consolidate their business with fewer insurers and demand higher base and supplemental commissions. Aggregators accounted for approximately 33% of our DPW at December 31, 2020, up from 20% three years ago. Currently, no one distribution partner is responsible for 10% or more of our combined insurance operations' premium.
Our financial condition and results of operations are impacted by our independent distribution partners' success in marketing and selling our products and services.
National and global economic conditions could adversely and materially affect our business, results of operations, financial condition, and growth.
Unfavorable economic developments, such as those that occurred during the COVID-19 pandemic, could adversely affect our revenueearnings if our policyholders need less insurance coverage, cancel existing insurance policies, modify coverage, or choose not to renew with us. An economic downturn also could lead to increased credit and profitabilitypremium receivable risk, failure of reinsurance counterparties and harmother financial institutions, limitations on our business,ability to issue new debt, reduced liquidity, and these conditions may not improvedeclines in the near future.
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A downgrade or a potential downgrade in our financial strength or credit ratings could result in a loss of business and could have a material adverse effect on our financial condition and results of operations.
A significant financial strength rating downgrade, particularly from A.M.AM Best, would affect our ability to write new or renewal business with customers, some of whombusiness. Most policyholders are required underby various third partythird-party agreements to maintain insurance withuse a carrier with a specified minimum AM Best or S&P rating. In addition,Downgrades in our $30 million line of credit ("Line of Credit") requiresratings also could make it more expensive for us to access capital markets. We cannot predict the possible rating actions NRSROs might take that could adversely affect our Insurance Subsidiaries to maintain an A.M. Best rating of at least “A-” (one level belowbusiness or our current rating) and a default could lead to acceleration of any outstanding principal. Such an event could trigger default provisions under certain of our other debt instruments and negatively impact our ability to borrowpotential actions in the future. As a result, anyresponse. Any significant downgrade in our financial strength and credit ratings could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. Refer to Item 1. "Business" forFor additional information on our current financial strength ratings.and credit ratings, refer to "Overview" in Item 1. "Business." of this Form 10-K.
We offer our long-term debt creditworthiness. Credit ratings indicate the ability of debt issuers to meet debt obligationsinsurance products and services in a timely mannerhighly competitive market characterized by aggressive price competition and are important factorsdownward pressure on gross margins, introduction of new products and services, evolving industry standards, continual improvement in our overall funding profileproduct pricing based on performance characteristics, rapid competitor adoption of technological advancements, and consumer and business price sensitivity. Our ability to access certain types of liquidity. Our current senior credit ratings are as follows:
We have many competitors and potential competitors.
The Internet has emerged as a significant place of new competition, both fromcompetitive marketplace for existing competitors and new competitors. NewEstablished insurance competitors, emerging under thissuch as The Progressive Corporation, are beginning to explore broader digital platform include, but are not limitedofferings on the Internet, while new competitors, such as Lemonade, Root, Metromile, and Next, continue to Lemonadeemerge. Because the Internet makes it easier and Attune. Reinsurersless expensive to bundle products and services, it also have entered certain primary propertyis possible that companies conducting business on the Internet, in the future, could enter the insurance business or form strategic alliances with insurers. Changes in competitors and casualty insurance markets to diversify their operations and compete with us. Further new competition, particularly on the Internet, could cause changes in the supply or demand for insurance and adversely affect our business.
The increasing importance of the Internet, technology, and digital strategy in our industry also highlights our need to attract and retain employees in difficult-to-fill data science, advanced analytics, and IT roles – and the potential negative impact if we fail in so doing.
We have less loss experience data than our larger competitors.
Insurers rely on their abilityaccess to access reliable data about their customerspolicyholders and loss experience to build complex analytics and predictive models tothat assess therisk profitability, of risks, as well as the potential forreserve adequacy, adverse claim development potential, recovery opportunities, fraudulent activities, and customer buying habits. TheBecause we use and rely on the aggregated industry loss data assembled by rating bureaus under the anti-trust exemptions of the McCarran-Ferguson Act, we likely would be at a competitive disadvantage to larger insurers if Congress repealed the McCarran-Ferguson Act.
We expect the use of data science and analytics willto continue to increase and become more complex and accurate. Theaccurate, particularly with larger sets of relevant data. Some larger competitors have significantly more data about the performance of their underwritten risks. In comparison, we may not have sufficient volumes of loss experience from our insurance operations may not be large or granular enough in all circumstancesdata to analyze and project our future costs. In addition,costs as accurately or granularly. To supplement our data, we have more limiteduse industry loss experience data related to our E&S business, which we purchased in 2011. We use data from ISO, AAIS, NCCI, and NCCI to obtainother publicly available sources. While relevant, industry loss experience to supplement our own data. While statistically relevant, that data ismay not specificcorrelate specifically to the performance of risks we have underwritten. Larger competitors, particularly national carriers, have a significantly larger volume of data regarding the performance of risks that they have underwritten. The analytics of their loss experience data may be more predictive of profitability of their risks than our analysis using, in part, general industry loss experience. For the same reason, should Congress repeal the McCarran-Ferguson Act, which provides an anti-trust exemption for the aggregation of loss data, and we are unable to access data from ISO, AAIS, and NCCI, we will be at a competitive disadvantage to larger insurers who have more loss experience data on their own customersunderwritten and may not need aggregated industry loss data.be as predictive as data on a larger book of our own business.
We depend on distribution partners.
We rely on complex financial and other statistical models, developed internally and by third parties, that predict (i) underwriting results on individual risks and our overall portfolio, (ii) claims fraud and other claims impacts, such as escalation, (iii) impacts from catastrophes, (iv) enterprise risk management capital scenarios, and (v) investment portfolio changes. We rely on these financial and other statistical models to analyze historical loss costs and pricing, trends in claims severity and frequency, the occurrence of operations, liquidity,catastrophe losses, determining reinsurance attachment and exhaustion points, investment performance, portfolio risk, and our economic capital position. Flaws in these financial condition, financial strength, and debt ratings.
other statistical models, or in the embedded assumptions, could lead to increased losses. We believe that statistical models are heavily regulatedextremely valuable in monitoring and changes in regulation may reduce our profitability, increase our capital requirements, and/or limit our growth.
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Risks Related to Our InvestmentInvestments Segment
We depend on income from our investment portfolio.
Additionally, we are exposed to interest rate risk, primarily related to the terms of the securities. In addition,market price, and cash flow variability associated with changes in interest rates. Consequently, the financial market environmentvalue and sentiment regarding the broad economy may impact the credit spreads demanded by fixed income investors, which in turn may negatively impact the fair market valueliquidity of our fixed income securities. At December 31, 2017, our fixed incomecash, cash equivalents, and marketable and non-marketable securities portfolio represented approximately 92% of our total invested assets, of which approximately 97% were investment grade and 3% were below investment grade rated, resulting in an average credit rating of AA- of the fixed income securities portfolio. Our spread duration, which is reflective of the sensitivity of our fixed income portfolio to changes in credit spread is currently 4.6 years. Over time, our exposure to below investment grade securities and other credit sensitive risk assets may fluctuate as we continue
Significant future declines in investment value also could require further losses recorded on securities we intend to sell and our intent and ability to hold securities that have declined in value until recovery. If we reposition or realign portions of the portfolio so that we determine not to hold certain securities in an unrealized loss position to recovery, we will incur an OTTI charge.credit losses. For furthermore information regarding market interest rate, credit, and interest rateequity price risk, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.” of this Form 10-K.
As of December 31, 2020, approximately 13% of our portfolio.
We are subject to the types of risks inherent in investing in private limited partnerships.
Our other investments include investments in private limited partnerships that invest in various strategies, such as private equity, private credit, and real assets. SinceThe primary assets and liabilities underlying the investments in these partnerships’ underlying investments consist primarily of assets or liabilities for which there are nolimited partnerships generally do not have quoted prices in active markets for the same or similar assets, theso their valuation of interests in these partnerships is subject to a higher level of subjectivity and unobservable inputs than substantially all of our other investments and as such, is subject to greater scrutiny and reconsideration from one reporting period to the next. Asinvestments. Because these limited partnership investments are recorded under the equity method of accounting, any valuation decreases in the valuation of these investments wouldcould negatively impact our results of operations. We currently expect to increase our allocation to these investments, which may result inproduce additional variability in our net investment income.
The determination of the amount of impairmentscredit losses taken on our investments is highly subjective and could materially impact our results of operations or our financial position.
The determination of the amount of impairmentscredit losses taken on our investments is based on our periodic evaluation and assessment of our investments and known and inherent risks associated with the various asset classes. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates its evaluations regularly and reflects changes in impairments as such evaluations are revised.credit losses at the time of evaluation. There can be no assurance that management has accurately assessed the level of impairmentscredit losses taken as reflected in our Financial Statements. Furthermore, additional impairments may need to be taken in the future. It is possible that interest rates, which are at historic lows, will increase which will result in a reduction in net unrealized gains and may result in net unrealized losses associated with declines in value strictly related to such interest rate movements. It is possible that this could result in realized losses if we sell such securities or possibly more OTTI if we determine we do not have the ability and intent to hold those securities until they recover in value. In addition, we recently hired several new investment managers and expect them to take a more active approach to managing our fixed income securities portfolio. As a result, we expect our OTTI to increase in coming periods based on an increase in securities that we may intend to sell despite being in an unrealized loss position. Historical trends may not be indicative of future impairments. For further information regardingabout our evaluation and considerations for determining whether a security is other-than-temporarily impaired,has a credit loss, please refer to “Critical Accounting Policies and Estimates” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” of this Form 10-K.
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Risks Related to Evolving Laws, Regulation, and Public Policy Debates
We are subject to complex and changing laws, regulations, and public policy debates that expose us to regulatory scrutiny, potential liabilities, increased costs, reputational harm, and other adverse effects on our business.
Our operations are subject to complex and changing state and federal laws, regulations, and public policy debates on subjects, including, without limitation, the following:
•Pricing and underwriting practices;
•Claims practices;
•Loss and loss adjustment expense reserves;
•Exiting geographic markets and/or canceling or non-renewing policies;
•Environmental, social, and governance ("ESG") issues, including ESG investment mandates;
•Assessments for guaranty funds and second-injury funds, and other mandatory assigned risks and reinsurance;
•The types, quality, and concentration of investments we make;
•Minimum capital requirements for the Insurance Subsidiaries;
•Dividends from our Insurance Subsidiaries to the Parent;
•Privacy and data security;
•Tax;
•Antitrust;
•Consumer protection;
•Advertising;
•Sales;
•Billing and e-commerce;
•Intellectual property ownership and infringement;
•Digital platforms;
•Internet, telecommunications, and mobile communications;
•Media and digital content;
•Availability of third-party software applications and services;
•Labor and employment;
•Anti-money laundering; and
•Workplace environmental, health, and safety issues.
We continue to monitor and engage in industry and public policy discussions about related legislative and regulatory changes. Changes in tax law couldto laws and regulations can adversely affect our investments results.business by increasing our costs, limiting our ability to offer a product or service to customers, requiring changes to our business practices, or otherwise making our products and services less attractive to customers.
If Congress enacted a law directly regulating insurance, particularly insurer solvency oversight, and state regulators remained responsible for rate approval, we could be subject to a conflicting and inconsistent regulatory framework that could impact our profitability and capital adequacy.
While we underwrite risks only in the taxU.S., international regulatory developments, particularly in the European Union (“EU”) related to global capital standards, may influence U.S. regulators as they develop or revise domestic regulatory standards. The International Association of Insurance Supervisors proposed Basic Capital Standards for Global Systemically Important Insurers and a uniform capital framework for internationally active insurers in 2014. Two years later, the EU enacted Solvency II, which established new insurer capital adequacy and risk management requirements intended to reduce the possibility of consumer loss or market disruption by European insurers. Despite these international regulatory changes and continued public policy discussion, RBC remains the NAIC capital adequacy standard. The FIO, in coordination with the Federal Reserve, state regulators, and other regulatory bodies, has been exploring group capital standards. In the fourth quarter of 2020, the NAIC's Group Capital Calculation Working Group adopted the basic structure of its new Group Capital Calculation, along with the model law changes necessary to incorporate it as a requirement for U.S. insurance groups in state law.
We have implemented policies and procedures designed to ensure compliance with applicable laws and regulations. However, we can provide no assurance that our employees, contractors, or independent distribution partners will not violate such laws and regulations of U.S. federal, state,or our policies and local governmentsprocedures. To some degree, we have multiple regulators whose authority may adversely impact us. Our investment portfolio benefits from tax exemptionsoverlap and certain other tax laws, including, non-exhaustively those governing dividends received deductions, and tax-advantaged municipal bond interest. Future federalmay have different interpretations and/or state tax lawregulations related to the same legal issues. This creates the risk that one regulator's position or interpretation may conflict with another regulator on the same issue. The cost of complying with various, potentially conflicting laws and regulations, and changes could lessen or eliminate some or all of these favorable tax advantages, negatively impact the value of our investment portfolio,in those laws and materially and adversely impact our results of operations. In addition, the elimination of the state and local tax deduction (the "SALT deduction") for U.S. taxpayers filing Federal income tax returnsregulations, could have negative consequences to the financial strength of issuers of state and local municipal securities of which we have invested in, which could reduce the value of our investment portfolio, and materially and adversely impact our results of operations. The elimination of the SALT deduction, as well as the lower $750,000 mortgage capa material adverse effect on the deductibility of mortgage interest for U.S. taxpayers, could reduce the value of residential real estate, which could have negative financial consequences to various classes of investments that we have invested in, such as residential mortgage backed securities, and other asset classes backed by mortgages or real estate, and this could reduce the value of our investment portfolio, and materially and adversely impact our results of operations.
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Insurers are subject to certain debt-to-capitalizationintense regulatory, political, and media scrutiny. We are subject to government market conduct review and investigations, legal actions, and penalties. There can be no assurance that our business will not be materially adversely affected by the outcomes of such examinations, investigations, or media scrutiny in the future. If we are found to have violated laws and regulations, it could materially adversely affect our reputation, financial condition, and operating results.
Our business is subject to a variety of state, federal, and other laws, rules, policies, and other obligations regarding data protection.
We are subject to federal, state, and international laws relating to the collection, use, retention, security, and transfer of personally identifiable information (“PII”). Federal laws include the Gramm-Leach-Bliley Act, the Fair Credit Reporting Act, the Drivers Privacy Protection Act, the Health Insurance Portability and Accountability Act, and Federal Trade Commission policies. Several states, like New York, Nevada, and California, have passed laws in this area, and other jurisdictions are considering imposing additional restrictions or creating new rights concerning PII. These laws continue to develop and net worth covenantsmay be inconsistent from jurisdiction to jurisdiction. Complying with emerging and changing requirements may cause us to incur substantial costs or require us to change our business practices. Noncompliance could result in significant reputational harm, penalties, and legal liability.
In the same year that it adopted Solvency II, the EU adopted the General Data Protection Regulation ("GDPR"). Effective since 2018 after a significant declinetwo-year implementation period, GDPR regulates data protection and privacy in investment value could impact. Significantthe EU and transfers of personal data outside the EU. GDPR’s main tenet is to give individuals primary control over their personal data. While GDPR has no direct impact on U.S. companies like us without an EU presence, it and any future declines in investment value also could require further OTTI charges. DependingEU data privacy actions may influence U.S. regulators over time.
We make statements about our use and disclosure of PII through our privacy policy, information provided on future market conditions, such as an extreme prolonged market event like the global credit crisis,our website, and other public statements. If we fail to comply with these public statements or federal, state, and international privacy-related and data protection laws and regulations, we could incur additional realizedbe subject to litigation or governmental actions. Such proceedings could impact our reputation and unrealized lossesresult in future periodspenalties, including ongoing audit requirements and significant legal liability.
We are engaged in ordinary routine legal proceedings incidental to our insurance operations that, because litigation outcomes are inherently unpredictable, could adversely impact our reputation and/or have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods.
We are engaged in ordinary routine legal proceedings incidental to our insurance operations that include:
•Defense of or indemnity for third-party suits brought against our insureds;
•Defense of actions brought against us by our insureds who disagree with our coverage decisions, some of which allege bad faith claims handling and seek extra-contractual damages, punitive damages, or other penalties;
•Actions we file, primarily for declaratory judgment, seeking confirmation that we have made appropriate coverage decisions under our insurance contracts;
•Actions brought against us or competitors alleging improper business practices and sometimes seeking class status. Such actions historically have included issues and allegations, without limitation, related to (i) unfairly discriminatory underwriting practices, including the impact of credit score usage, (ii) managed care practices, such as provider reimbursement, and (iii) automobile claims practices; and
•Actions we file against third parties and other insurers for subrogation and recovery of other amounts we paid on behalf of our insureds.
From time-to-time, legal proceedings in which we are involved may receive media attention based on their perceived newsworthiness and/or relationship to a variety of broad economic, political, social, and legal developments or trends. Such media stories could negatively impact our reputation.
We expect that any potential ultimate liability for ordinary routine legal proceedings incidental to our insurance business will not be material to our consolidated financial condition debt and financial strength ratings, andafter considering estimated loss provisions. Litigation outcomes, however, are inherently unpredictable even with meritorious defenses. The time a case is in litigation also is unpredictable, as state court dockets are increasingly overcrowded. Generally, the longer a case is in litigation the more expensive it can become. Because the amounts sought in certain of these actions are large or indeterminate, any adverse outcomes could have a material adverse effect on our ability to access capital markets.consolidated results of operations or cash flows in particular quarterly or annual periods.
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Risks Related to Our Corporate Structure and Governance
We are a holding company, and our ability to declare dividends to our shareholders, pay indebtedness, and enter into affiliate transactions may be limited because our Insurance Subsidiaries are regulated.
Restrictions on theour Insurance Subsidiaries' ability of the Insurance Subsidiaries to pay dividends, make loans or advances to us,the Parent, or enter into transactions with affiliates may materially affect our ability to pay dividends on our preferred stock and common stock, or repay our indebtedness.
The Parent’s ability to pay dividends to its common stockholders is also impacted by covenants in its credit agreement (the “Line of Credit”) among the Parent, the lenders named therein (the “Lenders”), and the Bank of Montreal, Chicago Branch, as Administrative Agent, that obligate it to, among other things, maintain a minimum consolidated net worth and a maximum ratio of debt to capitalization. Under the terms of our Preferred Stock, the Parent's ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, shares of its common stock or any shares of the Parent that rank junior to, or on parity with, the Preferred Stock will be subject to certain restrictions if the Parent does not declare and pay (or set aside) dividends on the Preferred Stock for the last preceding dividend period. For additional details about the Line of Credit’s financial covenants, see Note 11. “Indebtedness” in Item 8. "Financial Statements and Supplementary Data" of this Form 10-K. For additional details about conditions related to our Preferred Stock, see Note 17. "Preferred Stock" in Item 8. "Financial Statements and Supplementary Data" of this Form 10-K.
Because we are a New Jersey corporation and an insurance holding company, and a New Jersey corporation, we may be less attractive to potential acquirers and the value of our common stock could be adversely affected.
These provisions of our Amended and Restated Certificate of Incorporation and New Jersey law could have the effect of deprivingdeprive our stockholderscommon shareholders of an opportunity to receive a premium over our common stock’sthe prevailing market price in the event of a hostile takeover and may adversely affect the value of our common stock.
Because we own insurance subsidiaries, any party seeking to acquire 10% or more of our common stock must seek prior approval from the subsidiaries' domiciliary insurance regulators and file extensive information about their business operations and finances.
Risks Related to Evolving LegislationOur General Operations
We, face risks regarding our flood business because of uncertainties regarding the NFIP.
Our business heavily relies on IT and application systems that enacted legislation might significantly change insurance regulationmay be accessed from, or are connected to, the Internet. Consequently, a malicious cyber-attack could affect us. Our systems also contain proprietary and adversely impactsconfidential information, including PII, about our business, financial condition, and/operations, employees, agents, and customers and their employees and property. A malicious cyber-attack on (i) our systems, (ii) our distribution partners or the resultstheir key operating systems, and (iii) any other of operations.
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We have implemented systems and processes, through encryption and authentication technologies, intended to address corporate governancemitigate or secure our IT systems and control issues identifiedprevent unauthorized access to, or loss of, sensitive data. Our security measures may not be sufficient for all eventualities, as cyber-attacks are continuing to evolve daily. We may be vulnerable to hacking, employee error, malfeasance, system error, faulty password management, or other irregularities. Any disruption or breach of our systems or data security could damage our reputation, result in the financial crises in 2008monetary damages that are difficult to quantify, and 2009 and the non-insurance subsidiaries of American International Group, Inc. One of the key Dodd-Frank Act provisions created the FIO as part of the U.S. Department of Treasury to advise the federal government on insurance issues. Another Dodd-Frank Act provision requires the Federal Reserve, through the Financial Services Oversight Council (“FSOC”), to supervise financial service firms designated as systemically important financial institutions ("SIFI"). We are not and do not expect to be designated ashave a SIFI. Included among Dodd-Frank's corporate governance reforms for public companies were proxy access, say-on-pay, and other compensation and governance issues. A number of Dodd-Frank reform bills have been introduced, but it is uncertain whether any proposal will pass into law.
As an insurance provider, it is our business to take oninsurer, we assume risk from our customers.policyholders. Our long-term strategy includes the use of above averageabove-average operational leverage, which can be measured as the ratio of NPW to our equity or policyholderspolicyholders' surplus. We balance and mitigate our operational leverage risk with a number ofseveral risk management strategies within our insurance operations to achieve a balance of growth and profit, andincluding purchasing significant amounts of reinsurance, a disciplined approach to reduce our exposure. These strategies include, but are not limited to, the following:
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our mainheadquarters occupy a 315,000 square foot building located on a 56-acre site zoned for office is locatedand professional use in Branchville, New Jersey, on aand is also the home to our solar facility. The site is owned by a subsidiary with approximately 114 acres and 315,000 square feet of operational space.that also owns abutting property in Frankford, New Jersey. We lease all of our other facilities.facilities from unrelated parties. The principal office locations related toof our insurance operations are describedlisted in the “Geographic Markets” section of Item 1. “Business.” of this Form 10-K. We believe ourOur Investments operations are principally located in leased space in Farmington, Connecticut. Our facilities provide adequate space for our present needs and, thatif additional space ifis needed, wouldshould be available on reasonable terms.
Item 3. Legal Proceedings.
For additional information regarding our legal risks, refer to Item 1A. “Risk Factors.” and Note 21. "Litigation" included in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. As of December 31, 2017,2020, we do not believe the Company or any of the Insurance Subsidiaries was a defendant in anyhave no material pending legal actionproceedings that could have a material adverse effect on our consolidated financial condition, results of operations, or cash flows.
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
(a) Market Information
Our common stock is traded on the NASDAQ Global Select Market under the symbol “SIGI.” The following table sets forth the high and low sales prices, as reported on the NASDAQ Global Select Market, for our common stock for each full quarterly period within the two most recent fiscal years:
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| 2017 | 2016 | ||||||||||||
| High | Low | High | Low | ||||||||||
| First quarter | $ | 49.05 | 38.50 | 36.92 | 29.27 | ||||||||
| Second quarter | 53.75 | 44.65 | 38.67 | 33.60 | |||||||||
| Third quarter | 54.05 | 46.28 | 41.30 | 35.90 | |||||||||
| Fourth quarter | 62.40 | 53.55 | 44.00 | 34.95 | |||||||||
(b) Holders
We had 3,1973,051 common stockholders of record as of February 9, 20184, 2021, according to the records maintained by our transfer agent.
(c) Dividends
Dividends on shares of our common stock are declared and paid at the discretion of the Board of Directors (the "Board") based on our results of operations, financial condition, capital requirements, contractual restrictions, and other relevant factors. On October 25, 2017, the Board of Directors approved a 13% increase in our dividend to $0.18 per share. In addition, on February 1, 2018, the Board of Directors declared a $0.18 per share quarterly cash dividend on common stock that is payable March 1, 2018, to stockholders of record as of February 15, 2018. The following table provides information on the dividends declared for each quarterly period within our two most recent fiscal years:
| Dividend Per Share | 2017 | 2016 | |||||
| First quarter | $ | 0.16 | 0.15 | ||||
| Second quarter | 0.16 | 0.15 | |||||
| Third quarter | 0.16 | 0.15 | |||||
| Fourth quarter | 0.18 | 0.16 | |||||
On October 28, 2020, the Board approved a 9% increase in our common stock dividend to $0.25 per share. In addition, on Dividends and TransfersJanuary 28, 2021, the Board declared a $0.25 per share quarterly cash dividend on common stock that is payable March 1, 2021, to stockholders of Funds" in Item 8. "Financial Statements and Supplementary Data."record as of this Form 10-K.February 12, 2021.
(d) Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information about our common stock authorized for issuance under equity compensation plans as of December 31, 2017:2020:
| (a) | (b) | (c) | |||||||||||||||||||||
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))1 | ||||||||||||||||||||
| Equity compensation plans approved by security holders | — | $ | — | 4,876,140 | |||||||||||||||||||
| (a) | (b) | (c) | |||||||||
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||||||
| Equity compensation plans approved by security holders | 229,864 | 1 | $ | 15.38 | 4,833,993 | 2 | |||||
1Weighted average remaining contractual life of options is 1.50 years.
(e) Performance Graph
The following chart, produced by Research Data Group, Inc., depicts our performance for the period beginning December 31, 20122015, and ending December 31, 2017,2020, as measured by total stockholder return on our common stock compared with the total return of the NASDAQ Composite Index and a select group of peer companies comprised of NASDAQ-listed companies in SIC Code 6330-6339, Fire, Marine, and Casualty Insurance.
This performance graph is not incorporated into any other filing we have made with the U.S. Securities and Exchange Commission ("SEC") and will not be incorporated into any future filing we may make with the SEC unless we so specifically
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incorporate it by reference. This performance graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC unless we specifically request so or specifically incorporate it by reference in any filing we make with the SEC.
(f) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information regarding our purchases of our common stock in the fourth quarter of 2017:2020:
| Period | Total Number of Shares Purchased1 | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs2 | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Announced Programs2 | ||||||||||||||||||||||
| October 1 – 31, 2020 | — | $ | — | — | — | |||||||||||||||||||||
| November 1 – 30, 2020 | — | — | — | — | ||||||||||||||||||||||
| December 1 – 31, 2020 | 215 | 66.98 | — | — | ||||||||||||||||||||||
| Total | 215 | $ | 66.98 | — | $100 million | |||||||||||||||||||||
| Period | Total Number of Shares Purchased1 | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs | Maximum Number of Shares that May Yet Be Purchased Under the Announced Programs | |||||||||
| October 1 – 31, 2017 | 193 | $ | 54.95 | — | — | ||||||||
| November 1 – 30, 2017 | — | — | — | — | |||||||||
| December 1 – 31, 2017 | — | — | — | — | |||||||||
| Total | 193 | $ | 54.95 | — | — | ||||||||
1During the fourth quarter of 2017, 193We purchased these shares were purchased from employees in connection with the vesting of restricted stock units. These repurchases were made to satisfy tax withholding obligations associated with respectthe vesting of their restricted stock units.
2On December 2, 2020, we announced that our Board authorized a $100 million share repurchase program, which has no set expiration or termination date. Our repurchase program does not obligate us to those employees. These shares were not purchased as partacquire any particular amount of our common stock, and the repurchase program may be suspended or discontinued at any time at our discretion. The timing and amount of any publicly announced program. The shares were purchasedshare repurchases under the authorization will be determined by management at fairits discretion and based on market value as defined in the Stock Plan.conditions and other considerations.
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Item 6. Selected Financial Data.
Five-Year Financial Highlights1 | ||||||||||||||||||||||||||||||||||||||
| (All presentations are in accordance with Generally Accepted Accounting Principles ("GAAP") unless noted otherwise; number of weighted average shares and dollars in thousands, except per share amounts) | ||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||
| Net premiums written | $ | 2,773,092 | 2,679,424 | 2,514,286 | 2,370,641 | 2,237,288 | ||||||||||||||||||||||||||||||||
| Net premiums earned | 2,681,814 | 2,597,171 | 2,436,229 | 2,291,027 | 2,149,572 | |||||||||||||||||||||||||||||||||
| Net investment income earned | 227,107 | 222,543 | 195,336 | 161,882 | 130,754 | |||||||||||||||||||||||||||||||||
Net realized and unrealized investment (losses) gains2 | (4,217) | 14,422 | (54,923) | 6,359 | (4,937) | |||||||||||||||||||||||||||||||||
| Total revenues | 2,922,274 | 2,846,491 | 2,586,080 | 2,469,984 | 2,284,270 | |||||||||||||||||||||||||||||||||
| Catastrophe losses | 215,378 | 81,001 | 88,023 | 67,299 | 59,735 | |||||||||||||||||||||||||||||||||
| Underwriting income | 136,349 | 163,993 | 121,173 | 154,336 | 151,933 | |||||||||||||||||||||||||||||||||
| Net income available to common stockholders | 246,355 | 271,623 | 178,939 | 168,826 | 158,495 | |||||||||||||||||||||||||||||||||
| Comprehensive income | 384,791 | 431,329 | 105,832 | 204,946 | 151,970 | |||||||||||||||||||||||||||||||||
| Total assets | 9,687,913 | 8,797,150 | 7,952,729 | 7,686,431 | 7,355,848 | |||||||||||||||||||||||||||||||||
| Long-term debt | 550,743 | 550,597 | 439,540 | 439,116 | 438,667 | |||||||||||||||||||||||||||||||||
| Stockholders’ equity | 2,738,889 | 2,194,936 | 1,791,802 | 1,712,957 | 1,531,370 | |||||||||||||||||||||||||||||||||
| Statutory premiums to surplus ratio | 1.30 | x | 1.39 | 1.42 | 1.42 | 1.41 | ||||||||||||||||||||||||||||||||
| Combined ratio | 94.9 | % | 93.7 | 95.0 | 93.3 | 92.9 | ||||||||||||||||||||||||||||||||
| Impact of catastrophe losses on combined ratio | 8.0 | pts | 3.1 | 3.6 | 2.9 | 2.8 | ||||||||||||||||||||||||||||||||
| Invested assets per dollar of common stockholders' equity | $ | 2.96 | 3.05 | 3.33 | 3.32 | 3.50 | ||||||||||||||||||||||||||||||||
| Yield on investments, after tax | 2.6 | % | 2.9 | 2.8 | 2.1 | 1.9 | ||||||||||||||||||||||||||||||||
| Debt to capitalization ratio | 16.7 | 20.1 | 19.7 | 20.4 | 22.3 | |||||||||||||||||||||||||||||||||
| Return on average common equity | 10.4 | 13.6 | 10.2 | 10.4 | 10.8 | |||||||||||||||||||||||||||||||||
Non-GAAP operating income3 | $ | 249,686 | 264,418 | 218,567 | 184,898 | 161,704 | ||||||||||||||||||||||||||||||||
Non-GAAP operating income per common share (diluted)3 | 4.15 | 4.40 | 3.66 | 3.11 | 2.75 | |||||||||||||||||||||||||||||||||
Non-GAAP operating return on average common equity3 | 10.5 | % | 13.3 | 12.5 | 11.4 | 11.0 | ||||||||||||||||||||||||||||||||
| Per common share data: | ||||||||||||||||||||||||||||||||||||||
| Net income available to common stockholders: | ||||||||||||||||||||||||||||||||||||||
| Basic | $ | 4.12 | 4.57 | 3.04 | 2.89 | 2.74 | ||||||||||||||||||||||||||||||||
| Diluted | 4.09 | 4.53 | 3.00 | 2.84 | 2.70 | |||||||||||||||||||||||||||||||||
| Dividends paid per common share | $ | 0.94 | 0.83 | 0.74 | 0.66 | 0.61 | ||||||||||||||||||||||||||||||||
| Book value per common share | 42.38 | 36.91 | 30.40 | 29.28 | 26.42 | |||||||||||||||||||||||||||||||||
| Price range of common stock: | ||||||||||||||||||||||||||||||||||||||
| High | 70.89 | 81.35 | 67.17 | 62.40 | 44.00 | |||||||||||||||||||||||||||||||||
| Low | 37.05 | 58.06 | 53.55 | 38.50 | 29.27 | |||||||||||||||||||||||||||||||||
| Close | 66.98 | 65.19 | 60.94 | 58.70 | 43.05 | |||||||||||||||||||||||||||||||||
| Number of weighted average common shares: | ||||||||||||||||||||||||||||||||||||||
| Basic | 59,862 | 59,421 | 58,950 | 58,458 | 57,889 | |||||||||||||||||||||||||||||||||
| Diluted | 60,293 | 60,004 | 59,713 | 59,357 | 58,747 | |||||||||||||||||||||||||||||||||
1Refer to the Glossary of Terms attached to this Form 10-K as Exhibit 99.1 for definitions of terms used in these financial highlights.
2Beginning in 2018, changes in unrealized gains and losses on our equity portfolio are recognized in income through "Net realized and unrealized investment (losses) gains" on our Consolidated Statements of Income.
3Non-GAAP measure. Refer to the "Financial Highlights of Results Years Ended December 31, 2020, 2019, and 2018" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K for the definition.
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| Five-Year Financial Highlights | ||||||||||||||||||
| (All presentations are in accordance with GAAP unless noted otherwise, number of weighted average shares and dollars in thousands, except per share amounts) | ||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||
| Net premiums written | $ | 2,370,641 | 2,237,288 | 2,069,904 | 1,885,280 | 1,810,159 | ||||||||||||
| Net premiums earned | 2,291,027 | 2,149,572 | 1,989,909 | 1,852,609 | 1,736,072 | |||||||||||||
| Net investment income earned | 161,882 | 130,754 | 121,316 | 138,708 | 134,643 | |||||||||||||
| Net realized gains (losses) | 6,359 | (4,937 | ) | 13,171 | 26,599 | 20,732 | ||||||||||||
| Total revenues | 2,469,984 | 2,284,270 | 2,131,852 | 2,034,861 | 1,903,741 | |||||||||||||
| Catastrophe losses | 67,299 | 59,735 | 59,055 | 59,971 | 47,415 | |||||||||||||
| Underwriting income | 154,336 | 151,933 | 149,029 | 78,143 | 38,766 | |||||||||||||
| Net income | 168,826 | 158,495 | 165,861 | 141,827 | 106,418 | |||||||||||||
| Comprehensive income | 204,946 | 151,970 | 136,648 | 136,764 | 77,229 | |||||||||||||
| Total assets | 7,686,431 | 7,355,848 | 6,904,433 | 6,574,942 | 6,262,585 | |||||||||||||
| Short-term debt | — | — | 60,000 | — | 13,000 | |||||||||||||
| Long-term debt | 439,116 | 438,667 | 328,192 | 372,689 | 371,829 | |||||||||||||
| Stockholders’ equity | 1,712,957 | 1,531,370 | 1,398,041 | 1,275,586 | 1,153,928 | |||||||||||||
| Statutory premiums to surplus ratio | 1.4 | 1.4 | 1.5 | 1.4 | 1.4 | |||||||||||||
| Combined ratio | 93.3 | % | 92.9 | 92.5 | 95.8 | 97.8 | ||||||||||||
| Impact of catastrophe losses on combined ratio | 2.9 | pts | 2.8 | 3.0 | 3.2 | 2.7 | ||||||||||||
| Invested assets per dollar of stockholders' equity | $ | 3.32 | 3.50 | 3.64 | 3.77 | 3.97 | ||||||||||||
| Yield on investments, before tax | 2.9 | % | 2.5 | 2.5 | 3.0 | 3.0 | ||||||||||||
| Debt to capitalization ratio | 20.4 | 22.3 | 21.7 | 22.6 | 25.0 | |||||||||||||
| Return on average equity | 10.4 | 10.8 | 12.4 | 11.7 | 9.5 | |||||||||||||
| Per share data: | ||||||||||||||||||
| Net income from continuing operations: | ||||||||||||||||||
| Basic | $ | 2.89 | 2.74 | 2.90 | 2.52 | 1.93 | ||||||||||||
| Diluted | 2.84 | 2.70 | 2.85 | 2.47 | 1.89 | |||||||||||||
| Net income: | ||||||||||||||||||
| Basic | $ | 2.89 | 2.74 | 2.90 | 2.52 | 1.91 | ||||||||||||
| Diluted | 2.84 | 2.70 | 2.85 | 2.47 | 1.87 | |||||||||||||
| Dividends to stockholders | $ | 0.66 | 0.61 | 0.57 | 0.53 | 0.52 | ||||||||||||
| Stockholders’ equity | 29.28 | 26.42 | 24.37 | 22.54 | 20.63 | |||||||||||||
| Price range of common stock: | ||||||||||||||||||
| High | 62.40 | 44.00 | 37.91 | 27.65 | 28.31 | |||||||||||||
| Low | 38.50 | 29.27 | 25.49 | 21.38 | 19.53 | |||||||||||||
| Close | 58.70 | 43.05 | 33.58 | 27.17 | 27.06 | |||||||||||||
| Number of weighted average shares: | ||||||||||||||||||
| Basic | 58,458 | 57,889 | 57,212 | 56,310 | 55,638 | |||||||||||||
| Diluted | 59,357 | 58,747 | 58,156 | 57,351 | 56,810 | |||||||||||||
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” as that term is 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 may be identified by use of the words such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “target,” “project,” “intend,” “believe,” “estimate,” “predict,” “potential,” “pro forma,” “seek,” “likely,” or “continue”“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 as may be required under thewhat federal securities laws may require, to publicly update or revise any forward-looking statements, whether as a resultregardless of new information, future events, or otherwise.other unknowns.
Factors that could cause our actual results to differ materially from those we have 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 continuallyconstantly changing business environment, and new risk factors may emerge from time-to-time.at any time. We can neither predict suchthese new risk factors nor can we assess thetheir impact, if any, of such new risk factors on our businesses or the extent to which any new factor or combination of factors may cause actual results to differ materially from those expressed or implied in any forward-looking statements in this report. In light ofstatements. Given these risks, uncertainties, and assumptions, the forward-looking events discussedwe discuss in this report might not occur.
Introduction
We classify our business into four reportable segments, which are as follows:segments:
•Standard Commercial Lines - comprised of insurance products and services provided in the standard marketplace to our commercial enterprises, which are typically businesses, non-profit organizations, and local government agencies.Lines;
•Standard Personal Lines - comprisedLines;
•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 insurance products and services, including flood insurance coverage, provided primarily to individuals acquiring coverage in the standard marketplace.this Form 10-K.
The following is Management’sManagement's Discussion and Analysis (“("MD&A”&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, 2017, 2016,2020, 2019, and 2015;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; andCommitments.
Critical Accounting Policies and Estimates
We have identified the policies and estimates described below as critical to our business operations and the understanding of theour results of operations. In preparing our operations. Our preparation of the consolidated financial statements ("Financial Statements requires usStatements"), we are required to make estimates and
37
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. There can beWe offer no assuranceassurances that actual results will notbe the same as those estimates, and it is possible they will differ from those estimates. Thosematerially. The policies and estimates that werewe consider most critical to the preparation of the Financial Statements involved the following: (i) reserves for loss and loss expense;expense, (ii) pensioninvestment valuations and post-retirement benefit plan actuarial assumptions;the allowance for credit losses on available-for-sale ("AFS") fixed income securities, (iii) investment valuationreinsurance, (iv) allowance for credit losses on premiums receivable, and other-than-temporary-impairments (“OTTI”); and (iv) reinsurance.(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 lossclaim to the insurer,us, and the insurer’s paymentfinal settlement of that loss.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. WeAt December 31, 2020, we had accrued $3.8recorded $4.3 billion of gross loss and loss expense reserves and $3.2$3.7 billion of net loss and loss expense reserves at December 31, 2017.reserves. At December 31, 2016,2019, these gross and net reserves were $3.7$4.1 billion and $3.1$3.5 billion, respectively. The Insurance Subsidiaries' liability duration was approximately 3.7 years at December 31, 2020, up slightly from 3.6 years at December 31, 2019.
The following tables provide case and incurred but not reported (“IBNR”) reserves for loss and loss expenses, and reinsurance recoverable on unpaid loss and loss expense as of December 31, 20172020 and 2016: 2019:
| As of December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||
| As of December 31, 2020 | As of December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| Losses and Loss Expense Reserves | Loss and Loss Expense Reserves | |||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | Case Reserves | IBNR Reserves | Total | Reinsurance Recoverable on Unpaid Loss and Loss Expense | Net Reserves | ($ in thousands) | Case Reserves | IBNR Reserves | Total | Reinsurance Recoverable on Unpaid Loss and Loss Expense | Net Reserves | |||||||||||||||||||||||||||||||||||||
| General liability | $ | 260,605 | 1,046,261 | 1,306,866 | 175,276 | 1,131,590 | General liability | $ | 275,133 | 1,363,508 | 1,638,641 | 215,136 | 1,423,505 | |||||||||||||||||||||||||||||||||||
| Workers compensation | 427,955 | 756,609 | 1,184,564 | 218,024 | 966,540 | Workers compensation | 359,344 | 721,437 | 1,080,781 | 210,450 | 870,331 | |||||||||||||||||||||||||||||||||||||
| Commercial automobile | 200,409 | 291,681 | 492,090 | 16,745 | 475,345 | Commercial automobile | 246,428 | 410,123 | 656,551 | 11,611 | 644,940 | |||||||||||||||||||||||||||||||||||||
| Businessowners' policies | 31,758 | 58,522 | 90,280 | 3,926 | 86,354 | Businessowners' policies | 39,047 | 62,517 | 101,564 | 6,849 | 94,715 | |||||||||||||||||||||||||||||||||||||
| Commercial property | 64,192 | 13,420 | 77,612 | 24,387 | 53,225 | Commercial property | 60,254 | 38,228 | 98,482 | 21,760 | 76,722 | |||||||||||||||||||||||||||||||||||||
| Other | 5,018 | 8,787 | 13,805 | 2,287 | 11,518 | Other | 5,247 | 15,073 | 20,320 | 2,853 | 17,467 | |||||||||||||||||||||||||||||||||||||
| Total Standard Commercial Lines | 989,937 | 2,175,280 | 3,165,217 | 440,645 | 2,724,572 | Total Standard Commercial Lines | 985,453 | 2,610,886 | 3,596,339 | 468,659 | 3,127,680 | |||||||||||||||||||||||||||||||||||||
| Personal automobile | 76,895 | 73,356 | 150,251 | 53,129 | 97,122 | Personal automobile | 60,860 | 79,596 | 140,456 | 42,403 | 98,053 | |||||||||||||||||||||||||||||||||||||
| Homeowners | 15,477 | 18,763 | 34,240 | 999 | 33,241 | Homeowners | 15,456 | 31,926 | 47,382 | 847 | 46,535 | |||||||||||||||||||||||||||||||||||||
| Other | 51,646 | 27,029 | 78,675 | 69,333 | 9,342 | Other | 10,498 | 30,013 | 40,511 | 29,589 | 10,922 | |||||||||||||||||||||||||||||||||||||
| Total Standard Personal Lines | 144,018 | 119,148 | 263,166 | 123,461 | 139,705 | Total Standard Personal Lines | 86,814 | 141,535 | 228,349 | 72,839 | 155,510 | |||||||||||||||||||||||||||||||||||||
Casualty lines1 | 53,764 | 273,607 | 327,371 | 21,360 | 306,011 | |||||||||||||||||||||||||||||||||||||||||||
Property lines2 | 6,586 | 8,900 | 15,486 | 389 | 15,097 | |||||||||||||||||||||||||||||||||||||||||||
E&S casualty lines1 | E&S casualty lines1 | 80,506 | 336,596 | 417,102 | 12,195 | 404,907 | ||||||||||||||||||||||||||||||||||||||||||
E&S property lines2 | E&S property lines2 | 9,401 | 9,164 | 18,565 | 576 | 17,989 | ||||||||||||||||||||||||||||||||||||||||||
| Total E&S Lines | 60,350 | 282,507 | 342,857 | 21,749 | 321,108 | Total E&S Lines | 89,907 | 345,760 | 435,667 | 12,771 | 422,896 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 1,194,305 | 2,576,935 | 3,771,240 | 585,855 | 3,185,385 | Total | $ | 1,162,174 | 3,098,181 | 4,260,355 | 554,269 | 3,706,086 | |||||||||||||||||||||||||||||||||||
1Includes general liability (95% of net reserves) and commercial auto liability coverages (5% of net reserves).
2Includes commercial property (90%(92% of net reserves) and commercial auto property coverages (10%(8% of net reserves).
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| December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2019 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||
| Losses and Loss Expense Reserves | Loss and Loss Expense Reserves | |||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | Case Reserves | IBNR Reserves | Total | Reinsurance Recoverable on Unpaid Loss and Loss Expense | Net Reserves | ($ in thousands) | Case Reserves | IBNR Reserves | Total | Reinsurance Recoverable on Unpaid Loss and Loss Expense | Net Reserves | |||||||||||||||||||||||||||||||||||||
| General liability | $ | 235,329 | 1,053,400 | 1,288,729 | 179,997 | 1,108,732 | General liability | $ | 247,267 | 1,269,643 | 1,516,910 | 195,830 | 1,321,080 | |||||||||||||||||||||||||||||||||||
| Workers compensation | 463,523 | 745,590 | 1,209,113 | 223,327 | 985,786 | Workers compensation | 372,104 | 729,298 | 1,101,402 | 206,414 | 894,988 | |||||||||||||||||||||||||||||||||||||
| Commercial auto | 170,380 | 259,861 | 430,241 | 17,373 | 412,868 | Commercial auto | 216,358 | 408,371 | 624,729 | 14,352 | 610,377 | |||||||||||||||||||||||||||||||||||||
| Businessowners' policies | 40,018 | 56,894 | 96,912 | 7,012 | 89,900 | Businessowners' policies | 35,062 | 57,929 | 92,991 | 3,012 | 89,979 | |||||||||||||||||||||||||||||||||||||
| Commercial property | 50,757 | 7,910 | 58,667 | 13,615 | 45,052 | Commercial property | 63,678 | 17,083 | 80,761 | 26,526 | 54,235 | |||||||||||||||||||||||||||||||||||||
| Other | 5,243 | 9,647 | 14,890 | 2,613 | 12,277 | Other | 14,213 | 5,357 | 19,570 | 9,113 | 10,457 | |||||||||||||||||||||||||||||||||||||
| Total Standard Commercial Lines | 965,250 | 2,133,302 | 3,098,552 | 443,937 | 2,654,615 | Total Standard Commercial Lines | 948,682 | 2,487,681 | 3,436,363 | 455,247 | 2,981,116 | |||||||||||||||||||||||||||||||||||||
| Personal automobile | 78,512 | 72,435 | 150,947 | 55,223 | 95,724 | Personal automobile | 68,605 | 80,445 | 149,050 | 44,104 | 104,946 | |||||||||||||||||||||||||||||||||||||
| Homeowners | 24,779 | 19,845 | 44,624 | 3,206 | 41,418 | Homeowners | 13,616 | 21,713 | 35,329 | 1,182 | 34,147 | |||||||||||||||||||||||||||||||||||||
| Other | 64,314 | 26,198 | 90,512 | 82,625 | 7,887 | Other | 11,600 | 28,221 | 39,821 | 28,993 | 10,828 | |||||||||||||||||||||||||||||||||||||
| Total Standard Personal Lines | 167,605 | 118,478 | 286,083 | 141,054 | 145,029 | Total Standard Personal Lines | 93,821 | 130,379 | 224,200 | 74,279 | 149,921 | |||||||||||||||||||||||||||||||||||||
Casualty lines1 | 50,337 | 241,473 | 291,810 | 25,741 | 266,069 | |||||||||||||||||||||||||||||||||||||||||||
Property lines2 | 8,253 | 7,021 | 15,274 | 468 | 14,806 | |||||||||||||||||||||||||||||||||||||||||||
E&S casualty lines1 | E&S casualty lines1 | 68,042 | 328,301 | 396,343 | 14,319 | 382,024 | ||||||||||||||||||||||||||||||||||||||||||
E&S property lines2 | E&S property lines2 | 3,146 | 7,111 | 10,257 | 317 | 9,940 | ||||||||||||||||||||||||||||||||||||||||||
| E&S Lines | 58,590 | 248,494 | 307,084 | 26,209 | 280,875 | E&S Lines | 71,188 | 335,412 | 406,600 | 14,636 | 391,964 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 1,191,445 | 2,500,274 | 3,691,719 | 611,200 | 3,080,519 | Total | $ | 1,113,691 | 2,953,472 | 4,067,163 | 544,162 | 3,523,001 | |||||||||||||||||||||||||||||||||||
1Includes general liability (97%(94% of net reserves) and commercial auto liability coverages (3%(6% of net reserves).
2Includes commercial property (93%(85% of net reserves) and commercial auto property coverages (7%(15% of net reserves).
How reserves are established
Our robust reserve process relies upon internal reserve reviews performed quarterly, based upon our own loss experience, with consideration given to reliably determine the extent of the change until sometime later. There is no precise method for subsequently evaluating the impact of any specific factor on the adequacy of reserves because the eventual deficiency or redundancy is affected by manyvarious internal and external factors. The changes in these estimates, resulting from the continuous review process and the differences between estimates and ultimate payments, are reflected in the Consolidated Statements of Income for the period in which such estimates are changed. Any changes in the liability estimate may be material to the results of operations in future periods. In addition to our internal review, statutory regulation requires us toreserve reviews, we have a Statement of Actuarial Opinion issued annually on our statutory reserve adequacy. We engage 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 issue this opinion based on theirbe performed by an independent review.external actuary, our independent external actuary issues the annual statutory Statements of Actuarial Opinion for our Insurance Subsidiaries.
Range of reasonable reservesreserve estimates
We have estimated a range of reasonably possible reservesreserve estimates for net loss and loss expense claims to be $2,899of $3,250 million to $3,361$3,893 million at December 31, 2017, which compares to $2,780 million to $3,237 million at December 31, 2016. These ranges reflect2020. This range reflects low and high reasonable reserve estimates which weredetermined by judgmentally adjusting the methods, factors and assumptions selected primarily by consideringwithin the internal reserve review. This approach produces a range of indications calculated using generally accepted actuarial techniques. Such techniques assume that past experience, adjusted for the effectsreasonable reserve estimates, as opposed to a distribution of current developments and anticipated trends, are an appropriate basis for predicting future events. Although these reflect ranges of reasonable estimates,all possible outcomes. Therefore, it is possible that the final outcomes may fall above or below these amounts. The ranges dorange does not include a provision for potential increases or decreases associated with asbestos, environmental, and certain other continuous exposure claims, aswhich by their nature are more variable and, therefore, traditional actuarial techniques cannot be effectively applied to these exposures.applied.
The Insurance Subsidiaries are multi-state, multi-line property and casualty insurance companies and, as such, are subject to reserve uncertainty stemming from a variety of sources. These uncertainties are considered at each step in the process of establishing loss and loss expense reserves. As market conditions change, certain developments may occur that increase or decrease the amount of uncertainty. These developments include impacts within our own paid and reported loss and loss expense experience, as well as other internal and external factors that have not yet manifested within our data, but may do so in the future. All of these developments are considered when establishing loss and loss expense reserves, and in estimating the range of reasonable reserves.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.
39
Changes in Reserve Estimates (Loss Development)
| (Favorable)/Unfavorable Prior Year Loss and Loss Expense 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) | ||||||||||||||||
| (Favorable)/Unfavorable Prior Year Loss and Loss Expense Development | ||||||||||
| ($ in millions) | 2017 | 2016 | 2015 | |||||||
| General liability | $ | (48.3 | ) | (45.0 | ) | (51.0 | ) | |||
| Workers compensation | (52.3 | ) | (56.0 | ) | (37.0 | ) | ||||
| Commercial automobile | 35.6 | 25.3 | 2.4 | |||||||
| Businessowners' policies | 1.9 | 1.8 | 2.2 | |||||||
| Commercial property | 8.7 | 0.3 | (3.0 | ) | ||||||
| Personal automobile | 6.7 | 1.0 | 0.4 | |||||||
| Homeowners | 0.4 | 1.7 | 1.5 | |||||||
| E&S casualty lines | 10.0 | 6.0 | 16.0 | |||||||
| Other | (1.9 | ) | (0.9 | ) | (0.5 | ) | ||||
| Total | $ | (39.2 | ) | (65.8 | ) | (69.0 | ) | |||
A detailed discussion of recent reserve developments,development by line of business follows.
Standard Market General Liability Line of Business
At December 31, 2017,2020, our general liability line of business had recorded reserves, net of reinsurance, of $1.1$1.4 billion, which represented 36%38% of our total net reserves. In 2017,2020, this line experienced favorable development of $48.3$35.0 million, attributable to lower than expected frequencies andloss severities mainly in accident years 20162017 and prior.
During 2016,2019, this line experienced favorable development of $45.0$5.0 million, attributable mainly to lower than anticipated claimsloss severities in accident years 2008 through 20132015 and 2015.2016, partially offset by increases in the 2017 and 2018 accident year.
By its nature, this line presents a diverse set of exposures,exposures. General liability losses and therefore can beloss trends are influenced by a variety of factors.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 recent years,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 line has been favorably impactedstatute 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 decreasing frequenciespredecessor companies that will involve complex claims coverage determinations, potential litigation, and relatively benign severity trends. As the economy continuesneed to improve it is possible thatcollect 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 trends will be affected. Our actuarial department actively monitors these trends within our reserve review data, and holds frequent discussions with claims to identify changes in frequency or severity and any potential shiftsemerging 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 these trends.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
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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, 2017,2020, our workers compensation line of business recorded reserves, net of reinsurance, of $966.5$870 million, which represented 30%23% of our total net reserves. During 2017,2020, this line experienced favorable development of $52.3$60.0 million, driven by accident years 20162018 and prior. During 2016,2019, this line experienced favorable development of $56.0$68.0 million, driven by accident years 20142017 and prior. During 2017,both 2020 and 2019, this line again showedexperienced lower loss emergence than expected, due, in part, to: (i) lower medical inflation than originally anticipated; (ii) our proactive underwriting actions in recent years;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 thesethe underwriting and claims operational changes are significant drivers ofimproved our improved lossunderwriting experience, there is alwaysalso risk associated with change. Most notably, these changes in operations may inherently change paid and reported development patterns. While our reserve analyses incorporate methods that adjust for these changes, there nevertheless remains a greater risk of fluctuation in the estimated reserves.
In addition to the uncertainties associated with our actuarial assumptions and methodologies, described above, 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, regardless of havingincluding 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. For example, this includeschanges, such as increased use of pharmaceuticals, and more complex medical procedures.procedures, changes in the life expectancy of permanently-injured workers, and availability of health insurance, among others.
Standard Market Commercial Automobile Line of Business
At December 31, 2017,2020, our commercial automobile line of business had recorded reserves, net of reinsurance, of $475$645 million, which represented 15%17% of our total net reserves. In 2017,2020, this line experienced unfavorable prior year development of $35.6$7.1 million, which was mainly driven by increaseshigher loss severities in accident years 20122016 through 2016, due to2019 and higher than expected frequency and severity.
frequencies in accident year 2019. In 2016,2019, this line experienced unfavorable development of $25.3 million, which was mainly driven by higher severity in accidentno material prior year 2014reserve development. For both us and higher frequency and severity in 2015.
unemployment and lower gasoline prices, coupled with poor road quality, as well as an increase in distracted driving. RisingThe 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 result of the increasing complexity of vehicles and the technology they incorporate, which results in increased repair costs.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.
•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 as toabout where best towe 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.
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•Reducing premium leakage by improving the quality of our rating information. This includes validating application information using third partythird-party data and obtaining more detailed driver information.
Standard Market Personal Automobile Line of Business
At December 31, 2017,2020, our personal automobile line of business had recorded reserves, net of reinsurance, of $97$98 million, which represented 3% of our total net reserves. In 2017,2020, this line experienced unfavorablefavorable prior year reserve development of $6.7$1.8 million, mainly attributable to an increaselower loss severities in accident years 2011 through 2016. Thisyear 2019. In 2019, this line experienced unfavorable prior year reserve development of $1.0$4.4 million, mainly attributable to higher loss severities in 2016.accident year 2018.
Some of the driverssame issues affecting the commercial automobile line are also affecting this line. Increased usageFurthermore, 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, coupled with social trends such aspoor road quality, and distracted driving, are likely causes of increased frequencies and rising severities. We continue to recalibrate our predictive models as well asand refine our underwriting and pricing approaches. While we believe these changes will ultimately lead to improved profitability and greater stability, theythe 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, 2017,2020, our E&S casualty lines of business had recorded reserves, net of reinsurance, of $306$405 million, which represented 10%11% of our total net reserves. In 2017, this line experienced unfavorable developmentOur E&S casualty lines results have improved over recent years. Our E&S casualty lines underwriting operations have exited several targeted classes of $10.0 million, mostly associated with accident years 2014business that historically have produced volatile results, including commercial auto liability, liquor liability, and 2015. In 2016, this line experienced unfavorable development of $6.0 million, mostly associated with accident year 2014. Sincesnow removal. While we have limitedcontinue to build historical loss experience in this segment, our reserve estimates are subject to somewhat greater uncertaintyits history remains more limited than the comparablefor our Standard Commercial and Personal Line segments. In addition, by its nature,Lines segment. Furthermore, the composition of thisthe E&S book changeshas changed over time, which may impact loss and loss expense development patterns. These factors increase the uncertainty in the reserve estimates for this line.
•In 2020, we created a dedicated E&S claims team within our target return. In ordercorporate claims function to improve outcomes, we have taken the following actions relatedbring greater expertise and consistency to E&S casualty claims:claims handling.
•Claims have been segregated into “litigated” versus “non-litigated.” Separate claim handlingand “non-litigated” categories, separate teams have been created, with the requiredspecialized skill sets to appropriately handle these two types of claims.handling each category.
•We implemented the following operational and expense improvement initiatives regardingfor 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 thethese actions above will not only lead to earlier identification ofidentify severe claims but alsoearlier, create earlier claims resolutions, with improvedand improve outcomes. With that said,However, claims operation changes in claims operations can result in changes toimpact claims reserving and settlement patterns. OverReserve estimate uncertainty increases after claims operational changes because it takes time we expect thesefor the patterns to stabilize, but in the near term these operational changes increase the uncertainty in reserve estimates.stabilize.
Other impacts creating additional loss and loss expense reserve uncertainty
Claims Initiative Impacts
Our internal reserve analyses incorporate certain actuarial projection methods whichthat 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
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or settlement rate, which provides a more consistent basis for projecting future development patterns. These methods have their own associated assumptions and judgments associated with them, so as withand, like any projection method, they are not definitive in and of themselves. Furthermore, given that the expected benefits from our claims initiatives take time to fully manifest, we do not take full credit for the anticipated benefit in establishing our loss and loss expense reserves. These initiatives may prove more or less beneficial than currently reflected, which will affect development in future years. Our various projection methods provide an indication of these potential future impacts. These impacts would be greatest within our larger reserve lines of workers compensation, general liability, and commercial automobile liability, within the more recent accident years.
Economic Inflationary Impacts
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 but not limited to, the following: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 andthat may be material to the results of operations in future periods. Set forth belowBelow are sensitivity tests that highlight potential impacts to loss and loss expense reserves under different scenarios, for the major casualty lines of business.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 in the tables below do not constitute an actuarial range. While the figures represent possible impacts from variations in certain key assumptions, as identified by management, there is no assurance that the future emergence of our loss and loss expense experienceemergence will be consistent with either our current or alternative sets of assumptions.
While the sources of reserve variability discussed above 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, to the expected development patterns, thecurrent accident year expected loss and loss expense ratios are anotheralso a key assumption in the reserving process.assumption. These expected ratios are developed through a rigorous process of projecting recent accident years' experience to an ultimate settlement basis, and then adjusting itthem to the current accident year's pricing and loss cost levels. Impact from changes in the underwriting portfolio and changes into claims handling practices are also quantified and reflected where appropriate. As is the case 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 shows thedisplays estimated impacts from changes in expected reported loss and loss expense development patterns.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 uponon the reserve range analysis as well asand the actual historical reserve development for the line of business. The second table showsdisplays 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.
| Reserve Impacts of Changes to Expected Loss and Loss Expense Reporting Patterns | ||||||||||||||||||||
| ($ in millions) | Percentage Decrease/Increase | (Decrease) to Future Calendar Year Reported | Increase to Future Calendar Year Reported | |||||||||||||||||
| General liability | 10 | % | $ | (140) | $ | 140 | ||||||||||||||
| Workers compensation | 18 | (105) | 105 | |||||||||||||||||
| Commercial automobile liability | 15 | (80) | 80 | |||||||||||||||||
| Personal automobile liability | 15 | (10) | 10 | |||||||||||||||||
| E&S casualty lines | 10 | (40) | 40 | |||||||||||||||||
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| Reserve Impacts of Changes to Expected Loss and Loss Expense Reporting Patterns | |||||||||||||||||||||||||||||||
| Reserve Impacts of Changes to Current Year Expected Ultimate Loss and Loss Expense Ratios | Reserve Impacts of Changes to Current Year Expected Ultimate Loss and Loss Expense Ratios | ||||||||||||||||||||||||||||||
| ($ in millions) | Percentage Decrease/Increase | (Decrease) to Future Calendar Year Reported | Increase to Future Calendar Year Reported | ($ in millions) | Percentage Decrease/Increase | (Decrease) to Current Accident Year Expected Loss and Loss Expense Ratio | Increase to Current Accident Year Expected Loss and Loss Expense Ratio | ||||||||||||||||||||||||
| General liability | 7 | % | $ | (80 | ) | $ | 80 | General liability | 10 | pts | $ | (70) | $ | 70 | |||||||||||||||||
| Workers compensation | 10 | (70 | ) | 70 | Workers compensation | 10 | (30) | 30 | |||||||||||||||||||||||
| Commercial automobile liability | 12 | (50 | ) | 50 | Commercial automobile liability | 10 | (45) | 45 | |||||||||||||||||||||||
| Personal automobile liability | 15 | (10 | ) | 10 | Personal automobile liability | 10 | (10) | 10 | |||||||||||||||||||||||
| E&S casualty lines | 10 | (35 | ) | 35 | E&S casualty lines | 10 | (20) | 20 | |||||||||||||||||||||||
| Reserve Impacts of Changes to Current Year Expected Ultimate Loss and Loss Expense Ratios | ||||||||||
| ($ in millions) | Percentage Decrease/Increase | (Decrease) to Current Accident Year Expected Loss and Loss Expense Ratio | Increase to Current Accident Year Expected Loss and Loss Expense Ratio | |||||||
| General liability | 10 | pts | $ | (60 | ) | $ | 60 | |||
| Workers compensation | 10 | (35 | ) | 35 | ||||||
| Commercial automobile liability | 10 | (35 | ) | 35 | ||||||
| Personal automobile liability | 10 | (10 | ) | 10 | ||||||
| E&S casualty lines | 10 | (15 | ) | 15 | ||||||
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. Nevertheless,However, these tables provide perspective intoon 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 these key assumptions.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. 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) underground storage tank leaks mainly from New Jersey homeowners policies. These environmental claims stem primarily from insured exposures in municipal government, small non-manufacturing commercial risks, and homeowners policies.
“Environmental claims” are claims alleging bodily injury or property damage from pollution or other environmental contaminants other than asbestos. These claims include landfillsOur 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 leaking(ii) residential underground storage tanks. Our landfill exposure lies largely in policies written for municipal governments, in their operation or maintenance of certain public lands. In addition to landfill exposures, in recent years, we have experienced a relatively consistent level of reported losses in the homeowners line of business related to claims for groundwater contamination from leaking underground heating oil storage tankstank 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 institutedintroduced a fuel oil system exclusion on our New Jersey homeowners policies that limits ourgreatly limited this exposure from that point forward.
“Asbestos claims” are claims for bodily injury alleged to have occurred from exposure to leaking underground storage tanks for certain customers.products containing asbestos. Our primary exposure arises from policies issued to various distributors of asbestos-containing products, such as electrical and plumbing materials. At that time, existing customers were offered a one-time opportunityDecember 31, 2020, asbestos claims constituted 23% of our $21.4 million net asbestos and environmental reserves, compared to buy back oil tank liability coverage. The exclusion applies to all new homeowners policies in New Jersey. These customers are eligible for the buy-back option only if the tank meets specific eligibility criteria.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. CaseThat unit establishes case reserves for these exposureson individual claims based upon the facts and circumstances known at a given point in time, which are evaluated on a claim-by-claim basis. The ability to assess potential exposure often improves as a claim develops, including judicial determinations of coverage issues. As a result, reserves are adjusted accordingly.supplemented by bulk IBNR reserves.
Estimating IBNR reserves for asbestos and environmental claims is difficult because of thethese claims have delayed and inconsistent reporting patterns associated with these claims.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. Normal historically-based actuarial approaches cannot be applied to asbestos and environmental claims because past loss history is not indicative of future potential loss emergence. In addition, while certain alternative models can be applied, such models can produce significantly different results with small changes in assumptions. As a result, we do not calculate an asbestos and environmental loss range. Historically, our asbestos and environmental claims have been significantly lower in volume, with less volatility and uncertainty than many of our competitors in the Standard Commercial Lines industry. Prior to the introduction of the absolute pollution exclusion endorsement in the mid-1980's, we were primarily awrote Standard Personal Lines, carrier and therefore do not have broadwhich has limited our exposure to asbestos and environmental claims. Additionally, we are the primary insurance carrier on the majority of these
Other Latent Exposures
We also have other latent and continuous trigger exposures which provides more certainty in our reserve position comparedongoing 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 othersthese 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 the insurance marketplace.
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Investment Valuation and OTTIthe 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:be (i) received to sell an asset;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 uponon 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 carriedrecorded at fair value, and the related unrealized gains or losses are reflected in stockholders' equity, net of tax. For both our AFS and held-to-maturity ("HTM")fixed income securities portfolios, fair value is a key factor in the evaluationmeasurement of a security(i) losses on securities for OTTI.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 99%98% of our investment portfolio isinvestments 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. Fair value measurements in Level 2 represent prices determined using observable data from similar securities that have traded in the marketplace, typically using matrix pricing. The fair value of our Level 2 securities are determined by external pricing services. Weservices, for which we have evaluated the pricing methodology used for these Level 2 prices and have determined that the inputs used are observable. For additional information regarding the valuation techniques used, refer to item (e) of Note 2. "Summary of Significant Accounting Policies" within Item 8. "Financial Statements and Supplementary Data." of this Annual Report.
Less than 1%2.0% of our investment portfolio isinvestments 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 (e)(d) of Note 2. "Summary of Significant Accounting Policies" within Item 8. "Financial Statements and Supplementary Data." of this Annual Report.Form 10-K.
Factors considered in the determination of whether or not a decline is other than temporarythe allowance for credit losses require significant judgment and include, but are not limited to, the financial condition of the issuer, the expected near-term and long-term prospects of the issuer, and 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.
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For additional information regarding our OTTI process and OTTI charges recorded,allowance for credit losses on AFS fixed income securities, see item (d)(c) of Note 2. "Summary of Significant Accounting Policies" and item (j)(i) of Note 5. "Investments" within Item 8. "Financial Statements and Supplementary Data." of this Annual Report,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 be recoveredrecover from reinsurers. Each reinsurance contract is analyzed to ensure that the transfer ofsufficient risk existsis transferred to properly record the transactions as reinsurance in the Financial Statements. Amounts recovered from reinsurers are recognized as assets at the same timecontemporaneously and in a manner consistent with, the paid and unpaid losses associated with the reinsured policies. An allowance for estimated uncollectiblecredit losses on our reinsurance recoverable balance is recorded based on an evaluation of balances due from reinsurers and other available information. ThisHowever, 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 $4.6$1.8 million at December 31, 2017 and $5.52020, a decrease from $4.4 million at December 31, 2016.2019, 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, andfor which we have available to us contractually providedcontractual remedies if necessary. For further information regarding reinsurance, see the “Reinsurance” section below and Note 8.9. “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 $24.8 million accrual as of December 31, 2020. We currently anticipate the balance of the return audit premiums will occur through the middle of 2021. Since April 2020, through active engagement between our underwriters, distribution partners, and insureds, we have set exposure levels to reflect our best estimate of how the current environment may impact our policies. As a result, we have not accrued for additional or return premium on any policies since that time. Further economic instability and renewed or extended COVID-19-related governmental directives ultimately could impact our estimates and assumptions, and consequently, changes in this liability estimate may be material to the results of operations in future periods. For additional details about this estimate, see Note 9. "Reinsurance" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
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Financial Highlights of Results for Years Ended December 31, 2017, 2016, and 20151 | |||||||||||||||||||||
2017 vs. 2016 | 2016 vs. 2015 | ||||||||||||||||||||
| ($ in thousands, except per share amounts) | 2017 | 2016 | 2015 | ||||||||||||||||||
| Revenues | $ | 2,469,984 | 2,284,270 | 8 | % | $ | 2,131,852 | 7 | % | ||||||||||||
| After-tax net investment income | 118,520 | 98,405 | 20 | 93,836 | 5 | ||||||||||||||||
| After-tax underwriting income | 100,318 | 98,756 | 2 | 96,869 | 2 | ||||||||||||||||
| Net income before federal income tax | 261,968 | 219,955 | 19 | 232,692 | (5 | ) | |||||||||||||||
| Net income | 168,826 | 158,495 | 7 | 165,861 | (4 | ) | |||||||||||||||
| Diluted net income per share | $ | 2.84 | 2.70 | 5 | $ | 2.85 | (5 | ) | |||||||||||||
| Diluted weighted-average outstanding shares | 59,357 | 58,747 | 1 | 58,156 | 1 | ||||||||||||||||
| Combined ratio | 93.3 | % | 92.9 | 0.4 | pts | 92.5 | % | 0.4 | pts | ||||||||||||
| Invested assets per dollar of stockholders' equity | $ | 3.32 | 3.50 | (5 | ) | % | $ | 3.64 | (4 | ) | % | ||||||||||
| After-tax yield on investments | 2.1 | % | 1.9 | 0.2 | pts | 1.9 | % | — | pts | ||||||||||||
| Return on average equity ("ROE") | 10.4 | 10.8 | (0.4 | ) | 12.4 | (1.6 | ) | ||||||||||||||
| Non-GAAP operating income | $ | 184,898 | 161,704 | 14 | % | $ | 157,300 | 3 | % | ||||||||||||
| Diluted non-GAAP operating income per share | 3.11 | 2.75 | 13 | 2.70 | 2 | ||||||||||||||||
| Non-GAAP operating ROE | 11.4 | % | 11.0 | 0.4 | pts | 11.8 | % | (0.8 | ) | pts | |||||||||||
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) | % | |||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||||||||||
| 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:
| 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 | ||||||||||||||||
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| Reconciliation of net income to non-GAAP operating income | ||||||||||
| ($ in thousands) | 2017 | 2016 | 2015 | |||||||
| Net income | $ | 168,826 | 158,495 | 165,861 | ||||||
| Exclude: Net realized (gains) losses | (6,359 | ) | 4,937 | (13,171 | ) | |||||
| Exclude: Tax on net realized gains (losses) | 2,226 | (1,728 | ) | 4,610 | ||||||
| Exclude: Tax reform impact | 20,205 | — | — | |||||||
| Non-GAAP operating income | $ | 184,898 | 161,704 | 157,300 | ||||||
| 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 | ||||||||||||||||||||||||||
| Reconciliation of net income per share to non-GAAP operating income per share | 2017 | 2016 | 2015 | |||||||
| Diluted net income per share | $ | 2.84 | 2.70 | 2.85 | ||||||
| Exclude: Net realized (gains) losses per share | (0.11 | ) | 0.08 | (0.23 | ) | |||||
| Exclude: Tax on net realized gains (losses) per share | 0.04 | (0.03 | ) | 0.08 | ||||||
| Exclude: Tax reform impact per share | 0.34 | — | — | |||||||
| Diluted non-GAAP operating income per share | $ | 3.11 | 2.75 | 2.70 | ||||||
| Reconciliation of ROE to non-GAAP operating ROE | 2017 | 2016 | 2015 | ||||||
| Insurance operations | 6.2 | % | 6.7 | 7.3 | |||||
| Investment income | 7.3 | 6.7 | 7.0 | ||||||
| Other | (2.1 | ) | (2.4 | ) | (2.5 | ) | |||
| Net realized gains (losses) | 0.4 | (0.3 | ) | 1.0 | |||||
| Tax on net realized (gains) losses | (0.2 | ) | 0.1 | (0.4 | ) | ||||
| Tax reform impact | (1.2 | ) | — | — | |||||
| ROE | 10.4 | 10.8 | 12.4 | ||||||
| Exclude: Net realized (gains) losses | (0.4 | ) | 0.3 | (1.0 | ) | ||||
| Exclude: Tax on net realized gains (losses) | 0.2 | (0.1 | ) | 0.4 | |||||
Exclude: Tax reform impact | 1.2 | — | — | ||||||
| Non-GAAP operating ROE | 11.4 | % | 11.0 | 11.8 | |||||
COVID-19
•A $75 million return audit and mid-term endorsement premium accrual recorded in the first quarter of 2020 to reflect our efforts to: (i) drive renewal pure price increases atestimate of reduced exposures on our March 31 inforce policies due to the account level within our Standard Commercialsignificant economic slowdown and Standard Personal Lines segments as well as our E&S segment; (ii) generate new businessthe anticipated decline in payroll and grow oursales 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;written ("NPW") recorded in the second quarter of 2020 to reflect a then voluntary credit to our personal and (iii) improve the underlying profitabilitycommercial automobile customers with in-force policies equivalent to 15% of our book of business through various underwritingtheir April and claims initiatives. Our NPW growth of 6% in 2017 and 8% in 2016 was driven by our strong franchise value with our "ivy league" distribution partners. In addition, for more than eight years our Standard Commercial Lines renewal pure price increases have cumulatively outperformed the Willis Towers Watson Commercial Lines Pricing (or CLIPs) survey by approximately 2,100 basis points, while maintaining high retention rates, which has helped improve underlying results. Additionally, in 2017, we appointed 102 retail agents, which is exclusive of 26 agents that have been appointed in our new states of Arizona and New Hampshire, as we continue to seek ways to increase our market share.
•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 been unprofitableexpired 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.
48
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 recent yearsan approximate 1.2 point benefit to our combined ratio. We also reduced our 2020 commercial and remain areaspersonal auto casualty loss costs to partially reflect these lower frequencies for these shorter-tail lines of focusbusiness, 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 taking stepsrecorded 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 improve profitability2.9% for 2019, driven by a lower interest rate environment. The reduced investment leverage, coupled with lower portfolio yields, has resulted in these lines of business. In 2017,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 recorded unfavorableexperienced 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 increases toRelated Information by Segment" below.
In 2020, we generated our currentseventh consecutive year loss costs for these lines. We will continue to seek to actively implement renewal pure price increases in these lines, which have averaged 6.7% in 2017 for commercial auto and 4.1% for personal auto, to improve the level of profitability of these lines of business, which have not met our risk adjusted return expectations in recent years. We have also been managing our commercial auto in-force book of business in targeted industry segments and we have been reducing exposures to higher hazard commercial auto classes to improve the underlying profitability of this business.
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 private assets, represented 8%is a demonstration of our total invested assets at December 31, 2017.investors' confidence in our value proposition and our continued success. In conjunction with this offering, our Board of Directors ("Board") authorized a $100 million share repurchase program. We intend to be disciplined and opportunistic with our buyback program, repurchasing shares when we believe returns are attractive over the long-term for our shareholders.
Outlook
For 2021, we established a non-GAAP operating ROE target of 11.4% in 2017,11%, which is in line with our long-term goal of generating a non-GAAP operating ROE that is 300 basis points in excess of2020 target. We based our weighted average cost of capital. Our long-term financial2021 target for 2017 was 11.5%, based on anour current estimated weighted average cost of capital, the current interest rate environment, and property and casualty insurance market conditions. Our ROE target sets a high bar for our financial performance, challenges us to perform at our best, and aligns our incentive compensation structure with shareholder interests. We enter 2021 in the strongest financial position in our Company's long history, and we are very well positioned to continue delivering growth and profitability.
49
Looking ahead to 2021, a number of 8.5%. Our non-GAAP operating ROE was 11.0%areas require our continued focus to position us for 2016, compared to our target of 11.7%, which was basedongoing success:
•Delivering on our weighted average coststrategy for continued disciplined growth, driven by greater share of capital of 8.7%. Underwriting profitability, coupled with the performance of our investment portfolio, contributed to this achievement.
| All Lines | 2017 vs. 2016 | 2016 vs. 2015 | ||||||||||||||||
| ($ in thousands) | 2017 | 2016 | 2015 | |||||||||||||||
| Insurance Operations Results: | ||||||||||||||||||
| Net premiums written ("NPW") | $ | 2,370,641 | 2,237,288 | 6 | % | $ | 2,069,904 | 8 | % | |||||||||
| Net premiums earned ("NPE") | 2,291,027 | 2,149,572 | 7 | 1,989,909 | 8 | |||||||||||||
| Less: | ||||||||||||||||||
| Loss and loss expense incurred | 1,345,074 | 1,234,797 | 9 | 1,148,541 | 8 | |||||||||||||
| Net underwriting expenses incurred | 786,983 | 759,194 | 4 | 686,120 | 11 | |||||||||||||
| Dividends to policyholders | 4,634 | 3,648 | 27 | 6,219 | (41 | ) | ||||||||||||
| Underwriting income | $ | 154,336 | 151,933 | 2 | % | $ | 149,029 | 2 | % | |||||||||
| Combined Ratios: | ||||||||||||||||||
| Loss and loss expense ratio | 58.7 | % | 57.4 | 1.3 | pts | 57.7 | % | (0.3 | ) | pts | ||||||||
| Underwriting expense ratio | 34.4 | 35.3 | (0.9 | ) | 34.5 | 0.8 | ||||||||||||
| Dividends to policyholders ratio | 0.2 | 0.2 | — | 0.3 | (0.1 | ) | ||||||||||||
| Combined ratio | 93.3 | 92.9 | 0.4 | 92.5 | 0.4 | |||||||||||||
| (Favorable)/Unfavorable Prior Year Casualty Reserve Development | ||||||||||
| ($ in millions) | 2017 | 2016 | 2015 | |||||||
| General liability | $ | (48.3 | ) | (45.0 | ) | (51.0 | ) | |||
| Commercial automobile | 36.0 | 25.0 | 3.0 | |||||||
| Workers compensation | (52.3 | ) | (56.0 | ) | (37.0 | ) | ||||
| Businessowners' policies | — | 0.5 | 4.0 | |||||||
| Other | (2.0 | ) | (2.0 | ) | — | |||||
| Total Standard Commercial Lines | (66.6 | ) | (77.5 | ) | (81.0 | ) | ||||
| Homeowners | 1.0 | 1.5 | (2.0 | ) | ||||||
| Personal automobile | 7.0 | 1.0 | — | |||||||
| Total Standard Personal Lines | 8.0 | 2.5 | (2.0 | ) | ||||||
| E&S casualty lines | 10.0 | 6.0 | 16.0 | |||||||
| Total favorable prior year casualty reserve development | $ | (48.6 | ) | (69.0 | ) | (67.0 | ) | |||
| (Favorable) impact on loss ratio | (2.1 | ) | pts | (3.2 | ) | (3.4 | ) | |||
| Catastrophe Losses | |||||||||
| ($ in millions) | (Favorable)/Unfavorable Year-Over-Year Change | ||||||||
| For the Year ended December 31, | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio | |||||||
| 2017 | $ | 67.3 | 2.9 | pts | 0.1 | ||||
| 2016 | 59.7 | 2.8 | (0.2 | ) | |||||
| 2015 | 59.1 | 3.0 | (0.2 | ) | |||||
| Non-Catastrophe Property Losses | |||||||||
| ($ in millions) | (Favorable)/Unfavorable Year-Over-Year Change | ||||||||
| For the Year ended December 31, | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio | |||||||
| 2017 | $ | 303.7 | 13.3 | pts | 0.3 | ||||
| 2016 | 279.2 | 13.0 | (0.3 | ) | |||||
| 2015 | 265.4 | 13.3 | (2.2 | ) | |||||
longer term. We continue to execute successfully on several important objectives that have set the table forwork to achieve our performance in 2018, including: (i) achievinglonger-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 2.9% for full-year 2017 and 2.8% in January 2018; (ii) improving renewal underwriting quality while maintaining strong and stable retention; (iii) targeting underwriting actions in our E&S Lines to improve profitability in this segment; and (iv) achieving strong investment results with after-tax new money rates of 2.1% and strong operating cash flow that was 16% of NPW in 2017. All of these achievements will help drive our future financial performance in 2018 and beyond.
•Delivering a superior omnichannel customer experience by offering value-added technologies and services. We have significantly enhanced our customer experience capabilities over the industry for 2018 of 100.0% and an estimated after-tax return on surplus of 5.8%. In addition, A.M. Best estimates that property and casualty loss and loss adjustment expense reserve adequacy peakedlast several years, ago and reserve adequacy has been declining since.
•Building a culture that our customers' expectations on how they engage with us are rapidly evolvingfosters innovation and we continue to strive towards providing best-in-class customer service in a 24-hour, 365-day environment. Our goals in this area areidea generation that is centered around leveraging technology to improve customer retention rates, which should, over time, enhance the quality of our business.
For 2018, we expect to generate the following results:2021, our full-year guidance is as follows:
•A GAAP combined ratio, excluding catastrophe losses, of approximately 91.0%. This assumes no prior yearprior-year casualty reserve development;
•Catastrophe losses of 3.54.0 points;
•After-tax net investment income of $144$182 million, which includes $10$16 million of after-tax net investment incomegains from our alternative investments;
•An overall effective tax rate of approximately 18%20.5%, which also includes an effective tax rate of 17%19.0% for net investment income inclusive of tax-advantaged municipal securities' tax rate of 5.25%, and approximately 21% for all other items; and
•Weighted average shares outstanding of 59.6 million.60.5 million on a diluted basis.
50
Results of Operations and Related Information by Segment
Insurance Operations
2017 vs. 2016 | 2016 vs. 2015 | |||||||||||||||||
| ($ in thousands) | 2017 | 2016 | 2015 | |||||||||||||||
| Insurance Segments Results: | ||||||||||||||||||
| NPW | $ | 1,858,735 | 1,745,782 | 6 | % | $ | 1,596,965 | 9 | % | |||||||||
| NPE | 1,788,499 | 1,665,483 | 7 | 1,529,442 | 9 | |||||||||||||
| Less: | ||||||||||||||||||
| Loss and loss expense incurred | 1,008,150 | 913,506 | 10 | 819,573 | 11 | |||||||||||||
| Net underwriting expenses incurred | 626,201 | 601,894 | 4 | 539,154 | 12 | |||||||||||||
| Dividends to policyholders | 4,634 | 3,648 | 27 | 6,219 | (41 | ) | ||||||||||||
| Underwriting income | $ | 149,514 | 146,435 | 2 | % | $ | 164,496 | (11 | ) | % | ||||||||
| Combined Ratios: | ||||||||||||||||||
| Loss and loss expense ratio | 56.3 | % | 54.8 | 1.5 | pts | 53.6 | % | 1.2 | pts | |||||||||
| Underwriting expense ratio | 35.0 | 36.2 | (1.2 | ) | 35.2 | 1.0 | ||||||||||||
| Dividends to policyholders ratio | 0.3 | 0.2 | 0.1 | 0.4 | (0.2 | ) | ||||||||||||
| Combined ratio | 91.6 | 91.2 | 0.4 | 89.2 | 2.0 | |||||||||||||
| 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 this segment of our business has reflected:2020 compared to 2019, reflecting (i) overall renewal pure price increases;increases of 4.3%, (ii) increased retention, and (iii) new business growth;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 (iii) stable retention. Quantitative informationpricing 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 $75 million estimate of audit and endorsement return premium related to lower payroll and sales exposures on these drivers is as follows:the workers compensation and general liability lines of business resulting from the economic impacts of the COVID-19 pandemic.
| For the Year Ended December 31, | |||||||||||
| ($ in millions) | 2017 | 2016 | 2015 | ||||||||
| Retention | 83 | % | 83 | 83 | |||||||
| Renewal pure price increases on NPW | 2.9 | 2.6 | 3.0 | ||||||||
| Direct new business | $ | 368.2 | 357.6 | 339.6 | |||||||
•A $19.7 million premium credit to our personal and commercial automobile policyholders. Because of the unprecedented nature of the COVID-19-related governmental directives and the associated expected short-term favorable claims frequency impact, we obtained regulatory approval during April to provide this premium credit to our personal and commercial automobile customers. The premium credit to customers with in-force policies was equivalent to 15% of their April and May premiums.
Loss and Loss Expenses
| ($ 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 | ||||||||||||||
51
Details of the prior year casualty reserve development coupledwere 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 | ||||||||||||||||||||
52
Consistent with higher property losses, as displayedour 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 $15.4 million premium credit to our commercial automobile customers related to reduced miles driven and loss frequency due to the COVID-19 pandemic.
Consistent with the fluctuations in NPW, the increase in NPE in 2020 compared to 2019 reflected the items discussed above.
The 0.1-point increase in the tables below. loss and loss expense ratio in 2020 compared to 2019 was driven by the following:
| ($ 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 2017, 2016,2020, 2019, and 2015"2018" above and for qualitative information about the significant drivers of this development, see the line of business discussions below.
| ($ in millions) | |||||||||||
| (Favorable) Prior Year Casualty Reserve Development | Unfavorable/(Favorable) Year-Over-Year Change | ||||||||||
| For the year ended December 31, | Losses and Loss Expense Incurred | Impact on Losses and Loss Expense Ratio | |||||||||
| 2017 | $ | (66.6 | ) | (3.7 | ) | pts | 1.0 | ||||
| 2016 | (77.5 | ) | (4.7 | ) | 0.6 | ||||||
| 2015 | (81.0 | ) | (5.3 | ) | (2.1 | ) | |||||
| ($ in millions) | Non-Catastrophe Property Losses | Catastrophe Losses | |||||||||||||||||
| For the year ended December 31, | Losses and Loss Expense Incurred | Impact on Losses and Loss Expense Ratio | Losses and Loss Expense Incurred | Impact on Losses and Loss Expense Ratio | Total Impact on Losses and Loss Expense Ratio | Unfavorable/(Favorable) Year-Over-Year Change | |||||||||||||
| 2017 | $ | 204.9 | 11.5 | pts | $ | 40.0 | 2.2 | pts | 13.7 | 0.6 | |||||||||
| 2016 | 182.4 | 11.0 | 35.0 | 2.1 | 13.1 | 0.8 | |||||||||||||
| 2015 | 154.7 | 10.1 | 34.1 | 2.2 | 12.3 | (3.1 | ) | ||||||||||||
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 | ||||||||||||||||||||||||||||||||
| General Liability | ||||||||||||||||||
| ($ in thousands) | 2017 | 2016 | 2017 vs. 2016 | 2015 | 2016 vs. 2015 | |||||||||||||
| NPW | $ | 594,816 | 553,579 | 7 | % | $ | 505,891 | 9 | % | |||||||||
| Direct new business | 110,069 | 105,961 | 4 | 99,938 | 6 | |||||||||||||
| Retention | 83 | % | 83 | — | pts | 83 | % | — | pts | |||||||||
| Renewal pure price increases | 2.6 | 1.8 | 0.8 | 2.7 | (0.9 | ) | ||||||||||||
| NPE | $ | 569,217 | 527,859 | 8 | % | $ | 483,291 | 9 | % | |||||||||
| Underwriting income | 98,229 | 79,120 | 24 | 86,015 | (8 | ) | ||||||||||||
| Combined ratio | 82.7 | 85.0 | (2.3 | ) | 82.2 | 2.8 | ||||||||||||
| % of total standard commercial NPW | 32 | 32 | 32 | |||||||||||||||
The combined ratio decreased 4.5 points in 20172020, driven principally by 2.3 points driven by: (i) a decrease in supplemental commission to our distribution partners of 0.4 points; (ii) a decrease in pension expense of 0.3 points; and (iii) a decrease in current year loss costs of approximately 0.4 points. Favorable prior year development was consistent with 2016 at 8.5 points.
| ($ 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 | ||||||||||||||||||||
53
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 was as follows:
| 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 decreasesunfavorable reserve development on loss severities in accident years 2016 through 2019 and prior, driven by lowerhigher than expected frequencies and severities.in accident year 2019.
| Commercial Automobile | ||||||||||||||||||
2017 vs. 2016 | 2016 vs. 2015 | |||||||||||||||||
| ($ in thousands) | 2017 | 2016 | 2015 | |||||||||||||||
| NPW | $ | 465,621 | 422,013 | 10 | % | $ | 376,064 | 12 | % | |||||||||
| Direct new business | 78,869 | 77,255 | 2 | 70,556 | 9 | |||||||||||||
| Retention | 84 | % | 84 | — | pts | 83 | % | 1 | pts | |||||||||
| Renewal pure price increases | 6.7 | 4.9 | 1.8 | 3.8 | 1.1 | |||||||||||||
| NPE | $ | 442,818 | 398,942 | 11 | % | $ | 358,909 | 11 | % | |||||||||
| Underwriting loss | (65,267 | ) | (43,163 | ) | (51 | ) | (7,794 | ) | (454 | ) | ||||||||
| Combined ratio | 114.7 | 110.8 | 3.9 | 102.2 | 8.6 | |||||||||||||
| % of total standard commercial NPW | 25 | 24 | 24 | |||||||||||||||
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 pure price increases; (ii) new business, growth; and (iii) stable retention.we expect our actions will positively impact profitability through business mix improvement.
54
| 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 $28.7 million reduction in audit and mid-term endorsement premiums driven by the COVID-19 pandemic, which is discussed in the "Insurance Operations" section above.
The 3.9-point increase in the combined ratio in 20172020 compared to 20162019 was primarily driven by a 5.4-point increase in the loss and loss expense ratio, which was attributable to the following: (i) an increase in the current year loss reserve estimate of 4.6 points reflecting higher casualty claim frequency; and (ii) unfavorableless favorable prior year casualty reserve development, as follows:
| ($ 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 increasedinjured 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, by 1.8 pointswhich 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 last year. The increase in the loss and loss expense ratio was partially offset by a 1.3-point decrease in the underwriting expense ratio.
| Workers Compensation | ||||||||||||||||||
| 2017 vs. 2016 | 2016 vs. 2015 | |||||||||||||||||
| ($ in thousands) | 2017 | 2016 | 2015 | |||||||||||||||
| NPW | $ | 323,263 | 319,807 | 1 | % | $ | 299,686 | 7 | % | |||||||||
| Direct new business | 66,616 | 67,102 | (1 | ) | 68,971 | (3 | ) | |||||||||||
| Retention | 84 | % | 84 | — | pts | 83 | % | 1 | pts | |||||||||
| Renewal pure price increases | — | 1.2 | (1.2 | ) | 2.6 | (1.4 | ) | |||||||||||
| NPE | $ | 317,982 | 308,233 | 3 | % | $ | 290,075 | 6 | % | |||||||||
| Underwriting income | 61,693 | 56,118 | 10 | 33,399 | 68 | |||||||||||||
| Combined ratio | 80.6 | 81.8 | (1.2 | ) | 88.5 | (6.7 | ) | |||||||||||
| % of total standard commercial NPW | 17 | 18 | 19 | |||||||||||||||
| ($ in millions) | |||||||||||
| (Favorable) Prior Year Casualty Reserve Development | Unfavorable/(Favorable) Year-Over-Year Change | ||||||||||
| For the year ended December 31, | Losses and Loss Expense Incurred | Impact on Losses and Loss Expense Ratio | |||||||||
| 2017 | $ | (52.3 | ) | (16.4 | ) | pts | 1.8 | ||||
| 2016 | (56.0 | ) | (18.2 | ) | (5.4 | ) | |||||
| 2015 | (37.0 | ) | (12.8 | ) | 12.8 | ||||||
| Commercial Property | ||||||||||||||||||
2017 vs. 2016 | 2016 vs. 2015 | |||||||||||||||||
| ($ in thousands) | 2017 | 2016 | 2015 | |||||||||||||||
| NPW | $ | 322,343 | 308,140 | 5 | % | $ | 282,731 | 9 | % | |||||||||
| Direct new business | 73,951 | 74,901 | (1 | ) | 72,118 | 4 | ||||||||||||
| Retention | 82 | % | 82 | — | pts | 82 | % | — | pts | |||||||||
| Renewal pure price increases | 1.7 | 2.4 | (0.7 | ) | 2.8 | (0.4 | ) | |||||||||||
| NPE | $ | 311,932 | 293,438 | 6 | % | $ | 269,022 | 9 | % | |||||||||
| Underwriting income | 31,976 | 42,270 | (24 | ) | 47,674 | (11 | ) | |||||||||||
| Combined ratio | 89.7 | 85.6 | 4.1 | 82.3 | 3.3 | |||||||||||||
| % of total standard commercial NPW | 17 | 18 | 18 | |||||||||||||||
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.
55
| ($ in millions) | Non-Catastrophe Property Losses | Catastrophe Losses | Unfavorable/(Favorable) Year-Over-Year Change | ||||||||||||||
| For the year ended December 31, | Losses and Loss Expense Incurred | Impact on Losses and Loss Expense Ratio | Losses and Loss Expense Incurred | Impact on Losses and Loss Expense Ratio | Total Impact on Losses and Loss Expense Ratio | ||||||||||||
| 2017 | $ | 109.5 | 35.1 | pts | $ | 34.2 | 11.0 | pts | 46.1 | 5.3 | |||||||
| 2016 | 95.9 | 32.7 | 23.7 | 8.1 | 40.8 | 2.1 | |||||||||||
| 2015 | 78.4 | 29.1 | 25.8 | 9.6 | 38.7 | (16.3 | ) | ||||||||||
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 | ||||||||||||||||||||||||||||||
2017 vs. 2016 | 2016 vs. 2015 | |||||||||||||||||
| ($ in thousands) | 2017 | 2016 | 2015 | |||||||||||||||
| Insurance Segments Results: | ||||||||||||||||||
| NPW | $ | 296,775 | 281,822 | 5 | % | $ | 283,926 | (1 | ) | % | ||||||||
| NPE | 289,701 | 280,607 | 3 | 288,134 | (3 | ) | ||||||||||||
| Less: | ||||||||||||||||||
| Loss and loss expense incurred | 189,294 | 177,749 | 6 | 200,237 | (11 | ) | ||||||||||||
| Net underwriting expenses incurred | 89,303 | 90,439 | (1 | ) | 86,561 | 5 | ||||||||||||
| Underwriting income | $ | 11,104 | 12,419 | (11 | ) | % | $ | 1,336 | 830 | % | ||||||||
| Combined Ratios: | ||||||||||||||||||
| Loss and loss expense ratio | 65.4 | % | 63.3 | 2.1 | pts | 69.5 | % | (6.2 | ) | pts | ||||||||
| Underwriting expense ratio | 30.8 | 32.3 | (1.5 | ) | 30.0 | 2.3 | ||||||||||||
| Combined ratio | 96.2 | 95.6 | 0.6 | 99.5 | (3.9 | ) | ||||||||||||
NPW declined in this segment increased 5% in 20172020 compared to 2016 as shown in the table above. As illustrated in the table below, the increase in 2017 was primarily due to increases in2019, driven by new business and improving retention. In 2016,that did not increase enough to compensate for the non-renewed policies reflected in our 83% retention ratio. Additionally, 2020 included a $4.3 million premium credit to our Standard Personal Lines customers as a result of the COVID-19 pandemic, which reduced the year-over-year NPW decreasedgrowth rate by 1 percentage point.
| ($ 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 2015 reflecting2019 reflects the highly competitive market.decreases in NPW discussed above.
| ($ in millions) | 2017 | 2016 | 2015 | ||||||||
| Retention | 84 | % | 82 | 82 | |||||||
| Renewal pure price increases on NPW | 3.0 | 4.8 | 5.8 | ||||||||
| Direct new business premiums | $ | 50.9 | 39.7 | 32.9 | |||||||
The loss and loss expense ratio increased 2.19.4 points in 20172020 compared to 2016, primarily2019, 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 unfavorable prior year casualty reserve development. Despiteour 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.
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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 2016 as compared to 2015, the overall combined ratio improved almost 4 points primarily as a resultcurrent year loss costs of improved3.7 points.
Quantitative information regarding our property results. The details of thelosses and prior year casualty reserve development catastrophe losses and non-catastrophe property losses for all of the years presented wereare 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) | Non-Catastrophe Property Losses | Catastrophe Losses | |||||||||||||||||
| For the year ended December 31, | Losses and Loss Expense Incurred | Impact on Losses and Loss Expense Ratio | Losses and Loss Expense Incurred | Impact on Losses and Loss Expense Ratio | Total Impact on Losses and Loss Expense Ratio | (Favorable)/Unfavorable Year-Over-Year Change | |||||||||||||
| 2017 | $ | 76.2 | 26.3 | pts | $ | 16.1 | 5.6 | pts | 31.9 | — | |||||||||
| 2016 | 71.2 | 25.4 | 18.2 | 6.5 | 31.9 | (5.9 | ) | ||||||||||||
| 2015 | 87.2 | 30.3 | 21.7 | 7.5 | 37.8 | 0.9 | |||||||||||||
| ($ 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) | ||||||||||||||||||||
| ($ in millions) | |||||||||||
| (Favorable)/Unfavorable Prior Year Casualty Reserve Development | Unfavorable Year-Over-Year Change | ||||||||||
| For the year ended December 31, | Losses and Loss Expense Incurred | Impact on Losses and Loss Expense Ratio | |||||||||
| 2017 | $ | 8.0 | 2.8 | pts | 1.9 | ||||||
| 2016 | 2.5 | 0.9 | 1.6 | ||||||||
| 2015 | (2.0 | ) | (0.7 | ) | 2.2 | ||||||
The prior year development in both 2017 and 2016 primarily related to our personal automobile book of business.
| ($ in thousands) | 2017 | 2016 | 2017 vs. 2016 | 2015 | 2016 vs. 2015 | |||||||||||||
| Insurance Segments Results: | ||||||||||||||||||
| NPW | $ | 215,131 | 209,684 | 3 | % | $ | 189,013 | 11 | % | |||||||||
| NPE | 212,827 | 203,482 | 5 | 172,333 | 18 | |||||||||||||
| Less: | ||||||||||||||||||
| Loss and loss expense incurred | 147,630 | 143,542 | 3 | 128,731 | 12 | |||||||||||||
| Net underwriting expenses incurred | 71,479 | 66,861 | 7 | 60,405 | 11 | |||||||||||||
| Underwriting loss | $ | (6,282 | ) | (6,921 | ) | 9 | % | $ | (16,803 | ) | 59 | % | ||||||
| Combined Ratios: | ||||||||||||||||||
| Loss and loss expense ratio | 69.4 | % | 70.5 | (1.1 | ) | pts | 74.7 | % | (4.2 | ) | pts | |||||||
| Underwriting expense ratio | 33.6 | 32.9 | 0.7 | 35.1 | (2.2 | ) | ||||||||||||
| Combined ratio | 103.0 | 103.4 | (0.4 | ) | 109.8 | (6.4 | ) | |||||||||||
| ($ in millions) | 2017 | 2016 | 2015 | ||||||
| Overall new/renewal price increases | 5.0 | % | 4.9 | 2.9 | |||||
| Direct new business premiums | $ | 90.5 | 100.0 | 99.6 | |||||
| ($ in millions) | Non-Catastrophe Property Losses | Catastrophe Losses | |||||||||||||||||
| For the year ended December 31, | Losses and Loss Expense Incurred | Impact on Losses and Loss Expense Ratio | Losses and Loss Expense Incurred | Impact on Losses and Loss Expense Ratio | Total Impact on Losses and Loss Expense Ratio | Unfavorable Year-Over-Year Change | |||||||||||||
| 2017 | $ | 22.6 | 10.6 | pts | $ | 11.2 | 5.3 | pts | 15.9 | 0.1 | |||||||||
| 2016 | 25.6 | 12.6 | 6.5 | 3.2 | 15.8 | 0.2 | |||||||||||||
| 2015 | 23.6 | 13.7 | 3.2 | 1.9 | 15.6 | 1.5 | |||||||||||||
| ($ in millions) | Unfavorable Prior Year Casualty Reserve Development | Unfavorable/(Favorable) Year-Over-Year Change | |||||||||
| For the year ended December 31, | Losses and Loss Expense Incurred | Impact on Losses and Loss Expense Ratio | |||||||||
| 2017 | $ | 10.0 | 4.7 | pts | 1.8 | ||||||
| 2016 | 6.0 | 2.9 | (6.4 | ) | |||||||
| 2015 | 16.0 | 9.3 | 5.2 | ||||||||
Reinsurance
We use reinsurance to protect our capital resources and insure us 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.
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Reinsurance Pooling Agreement
The primary purposes of the reinsurance pooling agreement among our Insurance Subsidiaries are the following: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 A.M. Best.AM Best Company ("AM Best").
The following illustrates the pooling percentages by Insurance Subsidiary as of December 31, 2017:
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 are able tocan increase our underwriting capacity, and acceptaccepting larger individual risks and a larger aggregationaggregations 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 an attachment pointa 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. In addition, ourOur reinsurers often rely on their own reinsurance programs, or retrocession, as part of managingretrocessions, to manage their exposure to large losses. Given the relatively smallloss exposures. The size of the global reinsurance community the inability ofis relatively small. If our reinsurers are unable to collect on their retrocession programretrocessional programs, it may impair their ability to pay us for the amounts we cede to them. Accordingly, we have
Consequently, our reinsurers present us with direct and indirect counterparty credit risk from our reinsurers.risk. We attempt to mitigate this credit risk by:by (i) pursuing relationships with reinsurers rated “A-” or higher by A.M. Best;AM Best and/or (ii) obtaining collateral to secure reinsurance obligations. Some of our reinsurance contracts include provisions thattreaties permit us to terminate or commute them — or require the reinsurance treatyreinsurer to post collateral if the reinsurer's financial condition or rating deteriorates or otherwise require our reinsurers to post collateral.deteriorates. We monitor theour reinsurers' financial condition, of our reinsurers and we review the quality of reinsurance recoverables and reserves for uncollectible reinsurance. For additional information regarding our reinsurance counterparty credit risk, with our reinsurers, see Note 8.9. "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. Available reinsurancebusiness 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 our(ii) property catastrophe treaties purchased to provide protection for the overall property portfolio against severe catastrophic events. FacultativeWe primarily use facultative reinsurance is used for large individual property risks that are ingreater than our property excess of ourloss treaty capacity.
•Casualty Reinsurance - purchased to provide, which provides protection for both individual large casualty losses and catastrophic casualty losses involving multiple claimants or customers. Facultativeinsureds. We also may use facultative reinsurance is also used for large individual casualty risks that are in excess of our treaty capacity.
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•Terrorism Reinsurance - in addition to, which provides a federal reinsurance backstop, behind the protection built into our property and casualty reinsurance treaties, terrorism protection is available as a federal backstop related tofor terrorism losses as providedcovered under the Terrorism Risk Insurance Program Reauthorization Act (“TRIPRA”). For further information regarding this legislation,about TRIPRA, see Item 1A. “Risk Factors.” of this Form 10-K.
•Flood Reinsurance - as a servicing carrier, for which all of the premiums and losses related to our participation in the WYO Program,(for which we also receive a fee for writing flood business, for which the related premiums and lossesservicing fee) are 100% ceded to the federal government.
Property Reinsurance
We continue to assess our property catastrophe exposure aggregations, modeled results, and effects of premium growth on our property portfolio, andportfolio. We strive to managebalance our exposure to individual large events balanced against the cost of reinsurance protections.
| ($ in millions) | Actual Gross Loss | Net Loss2 | Accident Year | |||||||||||||||||
| Hurricane Name | ||||||||||||||||||||
| Superstorm Sandy | $125.5 | 45.6 | 2012 | |||||||||||||||||
| Hurricane Irene | 44.8 | 40.2 | 2011 | |||||||||||||||||
| Hurricane Hugo | 26.4 | 3.0 | 1989 | |||||||||||||||||
| Hurricane Isabel | 25.1 | 15.7 | 2003 | |||||||||||||||||
| Tropical Storm Isaias | 19.1 1 | 18.6 | 2020 | |||||||||||||||||
| ($ in millions) | Actual Gross Loss | Net Loss2 | Accident Year | |||
| Hurricane Name | ||||||
| Superstorm Sandy | 125.5 1 | 45.6 | 2012 | |||
| Hurricane Irene | 44.9 | 40.2 | 2011 | |||
| Hurricane Hugo | 26.4 | 3.0 | 1989 | |||
| Hurricane Isabel | 25.1 | 15.7 | 2003 | |||
| Hurricane Floyd | 14.5 | 14.5 | 1999 | |||
1This amount represents reported and unreported gross losses estimated as of December 31, 2017.2020.
2Net loss does not include reinstatement premiums, taxes, or flood claims handling fees.
We usereview our exposure to hurricane risk by examining the results of the Risk Management Solutionsa third-party vendor model and AIR Worldwide models in our review of exposure to hurricane risk. Each of these third party vendors provide two views of the modeled results as follows: (i)proprietary analysis. The third-party vendor model provides a long-term view that closely relates modeled event frequency to historical hurricane activity;activity and (ii) a medium-term view that adjusts historical frequenciesis adjusted to reflect expectationsassumptions for certain non-modeled costs, such as the impact of hurricane activity in the near future.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 for purposes of understandingto understand our catastrophic risk. The following table provides modeled hurricane results based on a blended view of the four models for the Insurance Subsidiaries' combined property book as of July 2017:
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| Occurrence Exceedence Probability | Four-Model Blend | Occurrence Exceedence Probability | Modeled Losses | ||||||||||||||||||||||||||
| ($ in thousands) | Gross Losses1 | Net Losses2 | Net Losses as a Percent of Equity3 | ($ in thousands) | Gross Losses1 | Net Losses2 | Net Losses as a Percent of GAAP Equity3 | ||||||||||||||||||||||
| 4.0% (1 in 25 year event) | $139,419 | 36,229 | 2% | 4.0% (1 in 25 year event) | $182,916 | 29,923 | 1 | % | |||||||||||||||||||||
| 2.0% (1 in 50 year event) | 251,195 | 40,431 | 2 | 2.0% (1 in 50 year event) | 304,764 | 34,554 | 1 | ||||||||||||||||||||||
| 1.0% (1 in 100 year event) | 436,963 | 47,750 | 3 | 1.0% (1 in 100 year event) | 489,387 | 39,206 | 1 | ||||||||||||||||||||||
| 0.67% (1 in 150 year event) | 586,317 | 57,892 | 3 | 0.67% (1 in 150 year event) | 682,261 | 60,220 | 2 | ||||||||||||||||||||||
| 0.5% (1 in 200 year event) | 710,461 | 62,863 | 4 | 0.5% (1 in 200 year event) | 778,401 | 62,062 | 2 | ||||||||||||||||||||||
| 0.4% (1 in 250 year event) | 791,029 | 82,601 | 5 | 0.4% (1 in 250 year event) | 899,633 | 107,070 | 4 | ||||||||||||||||||||||
| 0.2% (1 in 500 year event) | 1,170,133 | 374,353 | 22 | 0.2% (1 in 500 year event) | 1,290,100 | 414,519 | 15 | ||||||||||||||||||||||
1 IncludeGross 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 an estimatedapproximately 13%.
2 LossesNet losses are after a 21% Federal income tax benefit and include applicableafter-tax losses net of catastrophe reinsurance including reinstatement premiums.
3GAAP Equity as of December 31, 2017.2020.
Our current catastrophe reinsurance program exhausts at an approximately 1 in 250220 year return period, or events with 0.4%0.5% probability, based on a multi-model view of hurricane risk. Our actual gross and net losses incurred from U.S. landfalling 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, 20172020, with the top layer renewed on January 1, 2018.2021. The major terms of these treaties are consistent with the prior year.
The following is a summarytable 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) | $ | 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. | ||||||||||||
| - $100 million; | ||||||||||||||
| - $225 million; | ||||||||||||||
| - $475 million; and | ||||||||||||||
| - 90% of losses in excess of $475 million up to | ||||||||||||||
| - The treaty provides | ||||||||||||||
| 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 | ||||||||||||||
| 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 | ||||||||||||
| - $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 limits. | ||||||||||||||
| Flood | 100% reinsurance by the federal government’s | None | ||||||||||||
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Casualty Reinsurance
The following is a summary oftable summarizes our casualty reinsurance treaties and arrangements covering our Insurance Subsidiaries:
| CASUALTY REINSURANCE ON INSURANCE PRODUCTS | ||||||||||||||
| Treaty Name | Reinsurance Coverage | Terrorism Coverage | ||||||||||||
| Casualty Excess of Loss (covers all insurance operations) | There are six layers covering 100% of $88 million in excess of $2 million. Losses other than terrorism losses are subject to the | All NBCR losses are excluded. All other losses stemming from the acts of terrorism are subject to the | ||||||||||||
| - $3 million in excess of $2 million layer provides 28 reinstatements, $87 million annual aggregate limit; | - $3 million in excess of $2 million layer with $15 million net annual terrorism aggregate limit; | |||||||||||||
| - $7 million in excess of $5 million layer provides six reinstatements, $49 million annual aggregate limit; | - $7 million in excess of $5 million layer with $28 million net annual terrorism aggregate limit; | |||||||||||||
| - $9 million in excess of $12 million layer provides three reinstatements; $36 million annual aggregate limit; | - $9 million in excess of $12 million layer with $27 million net annual terrorism aggregate limit; | |||||||||||||
| - $9 million in excess of $21 million layer provides one reinstatement, $18 million annual aggregate limit; | - $9 million in excess of $21 million layer with $18 million net annual terrorism aggregate limit; | |||||||||||||
| - $20 million in excess of $30 million layer provides one reinstatement, $40 million annual aggregate limit; and | - $20 million in excess of $30 million layer with $40 million net annual terrorism aggregate limit; and | |||||||||||||
| - $40 million in excess of $50 million layer provides one reinstatement, $80 million annual aggregate limit. | - $40 million in excess of $50 million layer with $80 million net annual terrorism aggregate limit. | |||||||||||||
We have other reinsurance treaties, that we do not consider core to our reinsurance program, 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, our(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 our Data Compromise Reinsurance Treaty.(vi) Cyber Liability Quota Share.
We regularly reevaluateevaluate our overall reinsurance program, and we try to develop effective ways to manage the transfer of risk. OurWe base our analysis is based 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, of reinsurers, and projected impact on earnings, equity, and statutory surplus. We strive to balance sometimes opposing considerations of reinsurer credit quality, price, terms, and our appetite for retainingto 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. Our investment philosophy includes certain return and risk objectives for the fixed income, equity, and other investment portfolios. After-tax yield and income generation are key drivers to our investment strategy, which we believe will be obtained through more active management of the portfolio.
| ($ in thousands) | 2017 | 2016 | Change | |||||||
| Total invested assets | $ | 5,685,179 | 5,364,947 | 6 | % | |||||
| Invested assets per dollar of stockholders' equity | 3.32 | 3.50 | (5 | ) | ||||||
| Unrealized gain – before tax | 124,679 | 64,803 | 92 | |||||||
| Unrealized gain – after tax | 80,575 | 42,122 | 91 | |||||||
| As of December 31, | 2017 | 2016 | ||
| Fixed income securities: | ||||
| U.S. government obligations | 1 | % | 2 | |
| Foreign government obligations | — | 1 | ||
| State and municipal obligations | 29 | 27 | ||
Corporate securities1 | 28 | 37 | ||
| Mortgage-backed securities (“MBS”) | 20 | 15 | ||
| Collateralized loan obligations ("CLO") and other asset-backed securities ("ABS") | 14 | 10 | ||
| Total fixed income securities | 92 | 92 | ||
| Equity securities: | ||||
| Common stock | 3 | 2 | ||
Preferred stock1 | — | — | ||
| Total equity securities | 3 | 2 | ||
| Short-term investments | 3 | 4 | ||
| Other investments | 2 | 2 | ||
| Total | 100 | % | 100 | |
The effective duration of the fixed income securities portfolio, including short-term investments, was 3.8 years as of December 31, 2017 was 3.8 years,2020, compared to the Insurance Subsidiaries’Subsidiaries' liability duration of approximately 3.83.7 years. The currenteffective duration of the fixed income securities portfolio is within our historical range, and 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 affords usprovide ample liquidity. Every purchase or sale isPurchases and sales are made with the intent of maximizing risk-adjusted investment returns in the current market environment while balancing capital preservation. Over time, we may seek to increase or decrease the duration and overall credit quality of the portfolio based on market conditions.
Our fixed income securities portfolio maintainedand 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, 20172019.
We have been actively engaged in monitoring and managing the exposure to credit risk in our portfolio associated with 97%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, withinwhich 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, being investment gradethe average after-tax new money yield on fixed income purchases continued to decline as treasury rates remained low
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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, at both December 31, 2017but 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 December 31, 2016. 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 how we manage overallthe 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.
| ($ in thousands) | 2020 | 2019 | Change | |||||||||||||||||
| Total invested assets | $ | 7,505,599 | 6,688,654 | 12 | % | |||||||||||||||
| Invested assets per dollar of common stockholders' equity | 2.96 | 3.05 | (3) | |||||||||||||||||
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 were in an unrealized/unrecognized loss position of $0.1and equity securities.
Invested assets increased $817 million at December 31, 2017. AFS fixed income securities that were in an unrealized loss position at2020, compared to December 31, 20172019, primarily driven by contractual maturity are shown below. MBS are included(i) $554.0 million in operating cash flow, (ii) a $178.6 million increase in pre-tax net unrealized gains, and (iii) $195.1 million in net proceeds from the maturity tables using the estimated average lifeissuance of each security. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
| Contractual Maturities | ||||||||||
| ($ in thousands) | ||||||||||
| Available-for-sale ("AFS") fixed income securities: | Amortized Cost | Fair Value | Unrealized Loss | |||||||
| One year or less | $ | 66,353 | 66,217 | (136 | ) | |||||
| Due after one year through five years | 353,822 | 351,951 | (1,871 | ) | ||||||
| Due after five years through ten years | 469,452 | 466,530 | (2,922 | ) | ||||||
| Due after ten years | 20,686 | 20,554 | (132 | ) | ||||||
| Total | $ | 910,313 | 905,252 | (5,061 | ) | |||||
The increase in unrealized gains on our fixed income securities portfolio increased our book value per common share by $2.25, and was driven principally by a significant decline in benchmark United States Treasury rates.
Net Investment Income
The components of net investment income earned were as follows:
| ($ in thousands) | 2020 | 2019 | 2020 vs. 2019 | 2018 | 2019 vs. 2018 | ||||||||||||||||||||||||||||||
| Fixed income securities | $ | 203,926 | 203,255 | — | % | 178,104 | 14 | % | |||||||||||||||||||||||||||
| Equity securities | 9,286 | 6,996 | 33 | 7,764 | (10) | ||||||||||||||||||||||||||||||
| CMLs | 844 | — | n/m | — | n/m | ||||||||||||||||||||||||||||||
| Short-term investments | 1,821 | 6,653 | (73) | 3,472 | 92 | ||||||||||||||||||||||||||||||
| Other investments | 26,922 | 18,778 | 43 | 17,799 | 6 | ||||||||||||||||||||||||||||||
| Investment expenses | (15,692) | (13,139) | (19) | (11,803) | (11) | ||||||||||||||||||||||||||||||
| 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 | 19 | ||||||||||||||||||||||||||||||
| Net investment income earned – after tax | $ | 184,612 | 181,161 | 2 | 160,481 | 13 | |||||||||||||||||||||||||||||
| Effective tax rate | 18.7 | % | 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 | ||||||||||||||||||||||||||||||
| ($ in thousands) | 2017 | 2016 | 2015 | |||||||
| Fixed income securities | $ | 153,230 | 129,306 | 123,230 | ||||||
| Equity securities | 6,442 | 7,368 | 9,161 | |||||||
| Short-term investments | 1,526 | 686 | 112 | |||||||
| Other investments | 12,871 | 2,940 | (1,890 | ) | ||||||
| Investment expenses | (12,187 | ) | (9,546 | ) | (9,297 | ) | ||||
| Net investment income earned – before tax | 161,882 | 130,754 | 121,316 | |||||||
| Net investment income tax expense | 43,362 | 32,349 | 27,480 | |||||||
| Net investment income earned – after tax | $ | 118,520 | 98,405 | 93,836 | ||||||
| Effective tax rate | 26.8 | % | 24.7 | 22.7 | ||||||
| Annual after-tax yield on fixed income securities | 2.2 | 2.0 | 2.1 | |||||||
| Annual after-tax yield on investment portfolio | 2.1 | 1.9 | 1.9 | |||||||
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Realized and Unrealized Investment Gains and Losses
securities with better economic returneconomic-return characteristics. Net realized and unrealized gains (losses)and losses for the indicated periods were as follows:
| ($ 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) | |||||||||||||||||
| Net credit loss on fixed maturities, AFS | (5,042) | |||||||||||||||||||
| 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) | ||||||||||||||||
| ($ in thousands) | 2017 | 2016 | 2015 | |||||||
| Net realized gains, excluding OTTI | $ | 11,204 | 3,562 | 31,537 | ||||||
| OTTI | (4,845 | ) | (8,499 | ) | (18,366 | ) | ||||
| Total net realized gains (losses) | $ | 6,359 | (4,937 | ) | 13,171 | |||||
For additional information regarding our realized gainslosses on securities we intend to sell and losses as well as our OTTI 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.
| ($ in millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Federal income tax expense | $ | 56.6 | 64.8 | 32.8 | ||||||||||||||||
| Effective tax rate | 18.7 | % | 19.3 | 15.5 | ||||||||||||||||
| ($ in millions) | 2017 | 2016 | 2015 | |||||||
| Federal income tax expense | $ | 93.1 | 61.5 | 66.8 | ||||||
| Exclude: Tax reform impact | 20.2 | — | — | |||||||
| Federal income tax expense, excluding tax reform impact | 72.9 | 61.5 | 66.8 | |||||||
| Effective tax rate | 35.6 | % | 27.9 | 28.7 | ||||||
| Effective tax rate without tax reform impact | 27.8 | 27.9 | 28.7 | |||||||
partially offset by certain disallowances of executive compensation.
See Note 13.14. “Federal Income Taxes” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K for further information regarding the following: (i) the implementation of Tax Reform; (ii) a reconciliation of our effective tax rate to the statutory rate of 35%21%; and (iii)(ii) details regarding our net deferred tax assets.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 with a focusby focusing on generating sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. Our cashWe 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 short-term investment positionSupplementary Data.” of $166 million at December 31, 2017 was comprisedthis Form 10-K. The Parent had no other private or public issuances of $25 million at Selective Insurance Group, Inc. (the “Parent”) and $141 millionstock or debt instruments during 2020.
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Short-term Borrowings
We significantly increased liquidity at the Insurance Subsidiaries. Short-term investments are generally maintainedSubsidiaries 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 "AAA" rated money market funds approvedthe 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 the National Association of Insurance Commissioners ("NAIC"). The Parent maintains an investment portfolio containing high-quality, highly-liquid government and corporate fixed income securities. This portfolio amounted to $90 million at December 31, 2017, compared to $74 million at December 31, 2016. In total, we had $114 million2020. For further information regarding these borrowings, see Note 11. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." of cash and investments at the Parent at December 31, 2017 compared to $92 million at December 31, 2016. We expect to continue to increase the level of cash and invested assets at the Parent over time, although there will be fluctuations in these cash and invested asset balances, based on factors including the amount and availability of dividends from our Insurance Subsidiaries, investment income, expenses and other needs of the Parent. Our target is to increase the cash and liquidity at the Parent to two years of its expected annual needs.this Form 10-K.
Sources of Liquidity
Sources of cash for the Parent historically have historically consisted of dividends from the Insurance Subsidiaries, the investment portfolio discussed above,held at the Parent, borrowings under third-party lines of credit, and loan agreements with certain Insurance Subsidiaries, and the issuance of stockequity 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 lossesclaims are paid. The period of the 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. The effective duration of the fixed income securities portfolio, as well as the liabilities of the Insurance Subsidiaries, was 3.8 years as of December 31, 2017. As protection for the capital resources at the Insurance Subsidiaries, we purchase reinsurance coverage for any significantly large claims or catastrophes that may occur duringoccur.
The Insurance Subsidiaries paid $105 million in dividends to the year.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.
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Line of Credit
For additional information regarding the Line of Credit agreement and corresponding representations, warranties, and covenants, refer to Note 10.11. “Indebtedness” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
| 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, this company'sits FHLBNY borrowings from the FHLBNY 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.
year-end. All borrowings from both the FHLBI and the 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 Federal Home Loan BankFHLB 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:
| ($ 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 | ||||||||||||||||||||||||
| ($ in millions) | Admitted Assets | Borrowing Limitation | Amount Borrowed | Remaining Capacity | Additional Stock Requirements | |||||||||||
| As of December 31, 2017 | ||||||||||||||||
| SICSC | $ | 648.0 | $ | 64.8 | 32.0 | 32.8 | 1.4 | |||||||||
| SICSE | 507.5 | 50.8 | 28.0 | 22.8 | 1.0 | |||||||||||
| SICA | 2,434.9 | 243.5 | 50.0 | 193.5 | 8.7 | |||||||||||
| SICNY | 442.5 | 22.1 | — | 22.1 | 1.0 | |||||||||||
| Total | $ | 381.2 | 110.0 | 271.2 | 12.1 | |||||||||||
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 to the Parent.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:
| ($ 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 | |||||||||||||||||||
| ($ in millions) | Admitted Assets as of December 31, 2017 | Borrowing Limitation | Amount Borrowed | Remaining Capacity | |||||||||
| As of December 31, 2017 | |||||||||||||
| SICSC | $ | 648.0 | $ | 64.8 | 27.0 | 37.8 | |||||||
| SICSE | 507.5 | 50.8 | 18.0 | 32.8 | |||||||||
| Total | $ | 115.6 | 45.0 | 70.6 | |||||||||
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 of Directors based on our operating results, financial condition, capital requirements, contractual restrictions, and other relevant factors. In October 2017,2020, our Board of Directors approved ana 9% increase in the quarterly cash dividend, to $0.18$0.25 from $0.16$0.23 per share.
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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, coupled with(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. Our next twoThe Parent has the following upcoming principal repayments, each in the amount of $25payments due:
•$25 million are due in 2021, with the next following principal payment due into FHLBNY on July 21, 2021;
•$25 million to FHLBNY on August 16, 2021; and
•$60 million to FHLBI on December 16, 2026. We have $185 million of Senior Notes due February 9, 2043 that became callable on February 8, 2018. We may elect to call these Senior Notes, in whole or in part, at any time on or after February 8, 2018. If we were to call and redeem these Senior Notes we would write-off the associated unamortized debt issuance costs. The balance of the unamortized debt issuance costs associated with our $185 million of Senior Notes was $4.6 million at December 31, 2017.
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 provide protection for policyholders,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, 2017,2020, we had GAAP stockholders’ equity of $2.7 billion and statutory surplus of $1.7$2.1 billion. With total debt of $439$550.7 million at December 31, 2020, our debt-to-capital ratio was approximately 20%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, but are not limited to,without limitation, principal and interest payments on various notes payable, dividends to stockholders, payment of claims, payment of commitments under limited partnership agreements, and capital expenditures, as well asand other operating expenses, which includeincluding 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 that we maintain at the holding company and operating subsidiary levels. As part of our long-term capital strategy, we strive to maintain capital metrics relative to the macroeconomic environment, that support our targeted financial strength.strength relative to the macroeconomic environment. Based on our analysis and market conditions, we may take a variety of actions, including, but not limited to,without limitation, contributing capital to the Insurance Subsidiaries, in our insurance
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 $29.28$42.38 as of December 31, 2017,2020, from $26.42$36.91 as of December 31, 2016,2019, primarily due to $2.84$4.09 in net income per diluted common share and a $0.66 per share increase$2.25 in unrealized gains related toon our investment portfolio. These increases werefixed income securities portfolio, which was partially offset by $0.66 paid$0.94 in dividends per share to our common shareholders.
Off-Balance Sheet Arrangements
At December 31, 20172020 and December 31, 2016,2019, we did not have anyhad no material relationships with unconsolidated entities or financial partnerships, such entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitatingto facilitate off-balance sheet arrangements or for other contractually narrow or limited purposes. As such,Consequently, we are not exposed to any material financing, liquidity, market, or credit risk that could arise if we had engaged in such relationships.related to off-balance sheet arrangements.
Contractual Obligations, Contingent Liabilities, and Commitments
Our contractual obligations include required payments under capitalfinance and operating leases, debt obligations, and reserves for loss and loss expenses. As discussed in the “Reserves“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 in accordanceconsistent 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 lossesloss 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
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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 by year 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 when loss and loss expense reserves will be paid and as a result,reserve payments, so the timing and amounts of the actual payments will be affected by many factors. Care must be taken to avoid misinterpretation by those unfamiliar with this information or familiar with other data commonly reported by the insurance industry.
Our future cash payments associated with contractual obligations pursuant to operating and capitalfinance leases, debt, interest on debt obligations, and loss and loss expense as of December 31, 20172020 are summarized below:
| Contractual Obligations | Payment Due by Period | Contractual Obligations | Payment Due by Period | |||||||||||||||||||||||||||||||||||||||||||||
Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | Total | ($ in millions) | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Operating leases | $ | 31.9 | 10.0 | 13.5 | 5.8 | 2.6 | Operating leases | $ | 45.1 | 8.4 | 12.2 | 8.3 | 16.2 | |||||||||||||||||||||||||||||||||||
| Capital leases | 2.4 | 2.3 | 0.1 | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Finance leases | Finance leases | 0.5 | 0.3 | 0.2 | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Notes payable | 445.0 | — | — | 50.0 | 395.0 | Notes payable | 560.0 | 50.0 | — | — | 510.0 | |||||||||||||||||||||||||||||||||||||
| Interest on debt obligations | 476.6 | 23.8 | 47.7 | 46.6 | 358.5 | Interest on debt obligations | 622.4 | 28.8 | 56.6 | 56.6 | 480.4 | |||||||||||||||||||||||||||||||||||||
| Subtotal | 955.9 | 36.1 | 61.3 | 102.4 | 756.1 | Subtotal | 1,228.0 | 87.5 | 69.0 | 64.9 | 1,006.6 | |||||||||||||||||||||||||||||||||||||
| Gross losses and loss expense payments | 3,771.2 | 1,005.7 | 1,155.3 | 568.4 | 1,041.8 | |||||||||||||||||||||||||||||||||||||||||||
| Ceded losses and loss expense payments | 585.8 | 174.0 | 134.5 | 71.4 | 205.9 | |||||||||||||||||||||||||||||||||||||||||||
| Net losses and loss expense payments | 3,185.4 | 831.7 | 1,020.8 | 497.0 | 835.9 | |||||||||||||||||||||||||||||||||||||||||||
| Gross loss and loss expense payments | 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 | Ceded loss and loss expense payments | 554.2 | 141.2 | 134.4 | 72.4 | 206.2 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss and loss expense payments | Net loss and loss expense payments | 3,706.2 | 1,030.0 | 1,222.9 | 572.3 | 881.0 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 4,141.3 | 867.8 | 1,082.1 | 599.4 | 1,592.0 | Total | $ | 4,934.2 | 1,117.5 | 1,291.9 | 637.2 | 1,887.6 | |||||||||||||||||||||||||||||||||||
| ($ 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. 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 16.18. “Related Party Transactions” included in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
The fair value of our assets and liabilities are subject to market risk,risks — primarily interest rate risk, credit risk, and equity price risk, and liquidity risk related to our investment portfolio as well as— and fluctuations in the value of our alternative investment portfolio. The allocation of our portfolio was 92%86% fixed income securities, 3%1% commercial mortgage loans, 4% equity securities, 3%5% short-term investments, and 2%4% other investments as of December 31, 2017.2020. We do not directly hold derivativederivatives, commodities, or commodity investments. Foreignother investments are made on a limited basis, and all fixed income transactions are denominated in U.S.foreign currency. We have minimal foreign currency fluctuation risk.risk within our alternative investment portfolio. For a discussion of our investment objective and philosophy, see the "Investments""Investments Segment" section of Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." of this Form 10-K.
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We manage our investment portfolio to mitigate risks associated with various financial market scenarios. We, however, will however, takeassume prudent risk to enhance our overall long-term results while managing a conservative, well-diversified investment portfolio to support our underwriting activities.
Interest Rate Risk
Investment Portfolio
We invest in interest rate-sensitive securities, mainly fixed income securities. Our fixed income securities portfolio is comprised of primarily investment grade (investments receiving S&P or an equivalent rating of BBB-BBB+ or above) corporate securities, U.S. government and agency securities, municipal obligations, CLOcollateralized loan obligations ("CLO") and other ABS,asset-backed securities ("ABS"), and MBS.mortgage-backed securities ("MBS"). As of December 31, 2020, approximately 13% of our fixed income securities portfolio was comprised of floating rate securities where the base rate is primarily tied to the U.S. dollar-denominated London Interbank Offered Rate ("LIBOR"). Our strategy to manage interest rate risk is to purchase intermediate-term fixed income investments that are attractively priced in relation to perceived credit risks.
Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates. As our fixed income securities portfolio contains interest rate-sensitive instruments, it may be adversely affected by changes in interest rates resulting from governmental monetary policies, domestic and international economic and political conditions, and other factors beyond our control. Recent economic data points to increased U.S. and global economic growth, continued low levels of unemployment and signs of rising wages, which compounded with the potential for the pro-growth benefits of Tax Reform and the potential for higher Federal budget deficits, has recently led to rising U.S. interest rates. AAll else being equal, a rise in interest rates will decrease the fair value of our existing fixed income investments, and a decline in interest rates will result in an increase in the fair value of our existing fixed income investments. However, new and reinvested money used to purchase fixed income securities would benefit from rising interest rates and would be negatively impacted by falling interest rates.
We seek to mitigate our interest rate risk associated with holding fixed income investments by monitoring and maintainingmanaging the effective duration of our portfolio with a view toward achieving an adequate after-tax return without subjecting the portfolio to an unreasonable level of interest rate risk. The effective duration of the fixed income securities portfolio at December 31, 2017 and December 31, 2016 was 3.8 years. The current duration is within our historical range, and is monitored and managed to maximize yield while managing interest rate risk at an acceptable level. The effective duration of the fixed income securities portfolio, including short term investments, at December 31, 2020, was 3.8 years, which is within our historical range. The Insurance Subsidiaries’ liability duration iswas approximately 3.8 years.3.7 years at December 31, 2020.
We use an interest rate sensitivity analysis to measure the potential loss or gain in future earnings, fair values, or cash flows of market sensitive fixed income securities. The sensitivity analysis hypothetically assumes an instant parallel 200 basis point shift in interest rates up and down in 100 basis point increments from the date of the Financial Statements. We use fair values to measure the potential loss. This analysis is not intended to provide a precise forecast of the effect of changes in market interest rates and equity prices on our income or stockholders’ equity. Further, theThese calculations also do not take into accountconsider (i) any actions we may take in response to market fluctuations and do not take into account(ii) changes to credit spreads, liquidity spreads, and other risk factors whichthat may also impact the value of the fixed income securities portfolio.
The following table presents the sensitivity analysis of interest rate risk as of December 31, 2017:2020:
| 2020 Interest Rate Shift in Basis Points | |||||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | ($ in thousands) | -200 | -100 | — | 100 | 200 | |||||||||||||||||||||||||||||||||||||||||||||
| 2017 Interest Rate Shift in Basis Points | |||||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | -200 | -100 | 0 | 100 | 200 | ||||||||||||||||||||||||||||||||||||||||||||||
| HTM fixed income securities | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value of HTM fixed income securities portfolio | $ | 46,202 | 45,231 | 44,100 | 43,021 | 41,988 | |||||||||||||||||||||||||||||||||||||||||||||
| Fixed income securities | Fixed income securities | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value of fixed income securities portfolio | Fair value of fixed income securities portfolio | $ | 6,832,056 | 6,695,209 | 6,473,929 | 6,227,449 | 5,980,988 | ||||||||||||||||||||||||||||||||||||||||||||
| Fair value change | 2,102 | 1,131 | (1,079 | ) | (2,112 | ) | Fair value change | 358,127 | 221,279 | (246,480) | (492,941) | ||||||||||||||||||||||||||||||||||||||||
| Fair value change from base (%) | 4.77 | % | 2.56 | % | (2.45 | )% | (4.79 | )% | Fair value change from base (%) | 5.5 | % | 3.4 | % | (3.8) | % | (7.6) | % | ||||||||||||||||||||||||||||||||||
| AFS fixed income securities | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value of AFS fixed income securities portfolio | $ | 5,526,150 | 5,357,189 | 5,162,522 | 4,962,328 | 4,763,513 | |||||||||||||||||||||||||||||||||||||||||||||
| Fair value change | 363,628 | 194,667 | (200,194 | ) | (399,009 | ) | |||||||||||||||||||||||||||||||||||||||||||||
| Fair value change from base (%) | 7.04 | % | 3.77 | % | (3.88 | )% | (7.73 | )% | |||||||||||||||||||||||||||||||||||||||||||
Credit Risk
Our most significant credit risk is within our fixed income securitysecurities portfolio, which had an overall credit quality of “AA-” as of both December 31, 20172020, and December 31, 2016.2019. Exposure to non-investment grade bonds represented approximately 3%5% of the total fixed income securities portfolio at both December 31, 20172020, and 2016.4% at December 31, 2019.
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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 qualitiesrating 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.
Details on the credit quality of our invested assets at December 31, 20172020 are provided below:
| December 31, 2020 | Credit Rating | ||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | Amortized Cost | Fair Value | % of Invested Assets | Yield to Worst | Effective Duration in Years | Average Life in Years | AAA | AA | A | BBB | Non-Investment Grade | Not Rated | |||||||||||||||||||||||||||||||||||
| Short-term investments | $ | 410 | $ | 410 | 5.5 | % | 0.1 | % | 0.00 | 0.00 | $ | 382 | $ | 27 | $ | — | $ | 1 | $ | 1 | $ | — | |||||||||||||||||||||||||
| Fixed income securities: | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. government obligations | 110 | 116 | 1.5 | 0.7 | 4.5 | 6.3 | 113 | 3 | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Foreign government obligations | 17 | 18 | 0.2 | 1.3 | 5.0 | 5.8 | — | 2 | 9 | 7 | — | — | |||||||||||||||||||||||||||||||||||
| State and municipal obligations | 1,164 | 1,252 | 16.7 | 1.0 | 5.4 | 5.0 | 225 | 613 | 354 | 60 | — | — | |||||||||||||||||||||||||||||||||||
| Corporate securities | 2,165 | 2,341 | 31.2 | 1.7 | 4.7 | 6.2 | 14 | 123 | 881 | 1,092 | 232 | — | |||||||||||||||||||||||||||||||||||
| MBS: | |||||||||||||||||||||||||||||||||||||||||||||||
| RMBS: | |||||||||||||||||||||||||||||||||||||||||||||||
| Agency RMBS | 904 | 954 | 12.7 | 1.0 | 2.5 | 3.2 | 954 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Non-agency RMBS | 95 | 98 | 1.3 | 1.7 | 1.0 | 2.7 | 44 | 5 | 47 | 1 | — | — | |||||||||||||||||||||||||||||||||||
| Total RMBS | 999 | 1,052 | 14.0 | 1.0 | 2.3 | 3.2 | 998 | 5 | 47 | 1 | — | — | |||||||||||||||||||||||||||||||||||
| Commercial mortgage-backed securities ("CMBS") | 621 | 668 | 8.9 | 1.6 | 4.6 | 5.9 | 586 | 40 | 31 | 11 | — | — | |||||||||||||||||||||||||||||||||||
| Total mortgage-backed securities | 1,620 | 1,720 | 22.9 | 1.3 | 3.2 | 4.2 | 1,584 | 45 | 78 | 12 | — | — | |||||||||||||||||||||||||||||||||||
| CLO and other ABS: | |||||||||||||||||||||||||||||||||||||||||||||||
| Auto | 43 | 45 | 0.6 | 0.5 | 2.4 | 2.3 | 35 | 6 | 3 | — | 1 | — | |||||||||||||||||||||||||||||||||||
| Aircraft | 53 | 51 | 0.7 | 6.0 | 3.2 | 3.6 | — | 1 | 16 | 31 | 3 | — | |||||||||||||||||||||||||||||||||||
| CLOs | 659 | 661 | 8.8 | 3.0 | 1.1 | 4.5 | 357 | 206 | 32 | 16 | 48 | 1 | |||||||||||||||||||||||||||||||||||
| Credit cards | 17 | 17 | 0.2 | 0.3 | 1.4 | 1.4 | 17 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Other ABS | 243 | 253 | 3.4 | 2.4 | 3.4 | 5.3 | 68 | 9 | 139 | 28 | 9 | 1 | |||||||||||||||||||||||||||||||||||
| Total CLOs and Other ABS | 1,015 | 1,027 | 13.7 | 2.8 | 1.8 | 4.5 | 477 | 222 | 190 | 75 | 62 | 2 | |||||||||||||||||||||||||||||||||||
| Total securitized assets | 2,635 | 2,746 | 36.6 | 1.8 | 2.7 | 4.3 | 2,062 | 267 | 268 | 87 | 62 | 2 | |||||||||||||||||||||||||||||||||||
| Total fixed income securities and short-term investments | 6,500 | 6,884 | 91.7 | 1.5 | 3.8 | 4.9 | 2,795 | 1,034 | 1,512 | 1,247 | 295 | 2 | |||||||||||||||||||||||||||||||||||
| Total fixed income securities and short-term investments by credit rating percentage | 40.6 | % | 15.0 | % | 22.0 | % | 18.1 | % | 4.3 | % | — | % | |||||||||||||||||||||||||||||||||||
| Commercial mortgage loans | 46 | 47 | 0.6 | 3.8 | 2.8 | 7.0 | — | — | 27 | 20 | — | — | |||||||||||||||||||||||||||||||||||
| Equity securities: | |||||||||||||||||||||||||||||||||||||||||||||||
Common stock1 | 300 | 309 | 4.1 | — | — | — | — | — | — | — | — | 309 | |||||||||||||||||||||||||||||||||||
| Preferred stock | 2 | 2 | — | — | — | — | — | — | — | 1 | 1 | — | |||||||||||||||||||||||||||||||||||
| Total equity securities | 302 | 310 | 4.1 | — | — | — | — | — | — | 1 | 1 | 309 | |||||||||||||||||||||||||||||||||||
| Other investments: | |||||||||||||||||||||||||||||||||||||||||||||||
| Alternative investments: | |||||||||||||||||||||||||||||||||||||||||||||||
| Private equity | 157 | 157 | 2.1 | — | — | — | — | — | — | — | — | 157 | |||||||||||||||||||||||||||||||||||
| Private credit | 54 | 54 | 0.7 | — | — | — | — | — | — | — | — | 54 | |||||||||||||||||||||||||||||||||||
| Real assets | 20 | 20 | 0.3 | — | — | — | — | — | — | — | — | 20 | |||||||||||||||||||||||||||||||||||
| Total alternative investments | 231 | 231 | 3.1 | — | — | — | — | — | — | — | — | 231 | |||||||||||||||||||||||||||||||||||
| Other investments | 35 | 35 | 0.5 | — | — | — | — | — | — | — | — | 35 | |||||||||||||||||||||||||||||||||||
| Total other investments | 266 | 266 | 3.5 | — | — | — | — | — | — | — | — | 266 | |||||||||||||||||||||||||||||||||||
| Total invested assets | $ | 7,114 | $ | 7,508 | 100 | — | — | — | $ | 2,795 | $ | 1,034 | $ | 1,539 | $ | 1,268 | $ | 295 | $ | 576 | |||||||||||||||||||||||||||
1Includes investments in exchange traded funds, mutual funds, business development corporations, and real estate investment trusts.
Amounts may not foot due to rounding.
On a quarterly basis, we review our invested assets for concentrations of credit risk. The sectors representing more than 10% of our invested assets at December 31, 2016:2020 were (i) special revenue bonds within our state and municipal obligations portfolio (13%), (ii) the financial sector within corporate securities (14%), and (iii) agency-backed securities within our RMBS portfolio (13%). Each of these sector holdings are discussed in more detail below.
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| December 31, 2017 ($ in millions) | Fair Value | Carry Value | Unrealized/ Unrecognized Gain (Loss) | Weighted Average Credit Quality | ||||||||
| U.S. government obligations | $ | 49.7 | 49.7 | 0.4 | AAA | |||||||
| Foreign government obligations | 18.6 | 18.6 | 0.5 | A | ||||||||
| State and municipal obligations | 1,609.2 | 1,608.2 | 44.8 | AA | ||||||||
| Corporate securities | 1,635.3 | 1,634.4 | 30.0 | BBB+ | ||||||||
| CLO and Other ABS | 795.5 | 795.5 | 6.3 | AA | ||||||||
| CMBS | 383.4 | 383.4 | 0.7 | AA+ | ||||||||
| RMBS | 714.9 | 714.9 | 5.1 | AA+ | ||||||||
| Total fixed income portfolio | $ | 5,206.6 | 5,204.7 | 87.8 | AA- | |||||||
| December 31, 2016 ($ in millions) | Fair Value | Carry Value | Unrealized/ Unrecognized Gain (Loss) | Weighted Average Credit Quality | ||||||||
| U.S. government obligations | $ | 77.3 | 77.3 | 2.2 | AAA | |||||||
| Foreign government obligations | 26.9 | 26.9 | 0.3 | A | ||||||||
| State and municipal obligations | 1,459.5 | 1,457.4 | 15.7 | AA | ||||||||
| Corporate securities | 2,021.8 | 2,020.3 | 22.6 | A- | ||||||||
| CLO and Other ABS | 529.0 | 529.0 | 1.1 | AA+ | ||||||||
| CMBS | 258.0 | 258.0 | 0.5 | AAA | ||||||||
| RMBS | 525.2 | 525.2 | 0.2 | AA+ | ||||||||
| Total fixed income portfolio | $ | 4,897.7 | 4,894.1 | 42.6 | AA- | |||||||
State and Municipal Obligations
Our state and municipal obligations represented 17% of our invested assets at December 31, 2020. The following table details the top 10 state exposures of the municipal bond portion of our fixed income portfolio at December 31, 2017:2020:
| State Exposures of Municipal Bonds | General Obligation | Special Revenue | Fair Value | Weighted Average Credit Quality | ||||||||||||||||||||||||||||||||||
| ($ in thousands) | State & Local | % of Total | ||||||||||||||||||||||||||||||||||||
| New York | $ | 9,605 | 141,563 | 151,168 | 12% | AA- | ||||||||||||||||||||||||||||||||
| California | 49,197 | 83,733 | 132,930 | 11% | AA- | |||||||||||||||||||||||||||||||||
Texas1 | 39,450 | 50,090 | 89,540 | 7% | AA | |||||||||||||||||||||||||||||||||
| New Jersey | — | 68,201 | 68,201 | 5% | A | |||||||||||||||||||||||||||||||||
| Florida | 3,071 | 49,902 | 52,973 | 4% | AA- | |||||||||||||||||||||||||||||||||
| Pennsylvania | — | 52,953 | 52,953 | 4% | AA- | |||||||||||||||||||||||||||||||||
| Washington | 20,533 | 30,704 | 51,237 | 4% | AA | |||||||||||||||||||||||||||||||||
| Massachusetts | 902 | 41,802 | 42,704 | 3% | AA | |||||||||||||||||||||||||||||||||
| Colorado | 4,680 | 36,102 | 40,782 | 3% | A+ | |||||||||||||||||||||||||||||||||
| Ohio | 2,321 | 33,154 | 35,475 | 3% | A+ | |||||||||||||||||||||||||||||||||
| Other | 100,569 | 322,253 | 422,822 | 34% | AA- | |||||||||||||||||||||||||||||||||
| 230,328 | 910,457 | 1,140,785 | 91% | AA- | ||||||||||||||||||||||||||||||||||
| Pre-refunded/escrowed to maturity bonds | 41,044 | 70,104 | 111,148 | 9% | AAA | |||||||||||||||||||||||||||||||||
| Total | $ | 271,372 | 980,561 | 1,251,933 | 100% | AA- | ||||||||||||||||||||||||||||||||
| % of Total Municipal Portfolio | 22 | % | 78 | % | 100 | % | ||||||||||||||||||||||||||||||||
| % of Total Investment Portfolio | 4 | % | 13 | % | 17 | % | ||||||||||||||||||||||||||||||||
| State Exposures of Municipal Bonds | General Obligation | Special Revenue | Fair Value | Weighted Average Credit Quality | |||||||||||||
| ($ in thousands) | Local | State | % of Total | ||||||||||||||
| New York | $ | 22,477 | — | 127,128 | 149,605 | 9% | AA- | ||||||||||
| California | 27,997 | 14,718 | 101,178 | 143,893 | 9% | AA- | |||||||||||
Texas1 | 42,544 | 18,573 | 61,696 | 122,813 | 8% | AA | |||||||||||
| New Jersey | — | — | 76,668 | 76,668 | 5% | A | |||||||||||
| Washington | 20,187 | 12,814 | 38,882 | 71,883 | 4% | AA | |||||||||||
| Pennsylvania | — | 16,467 | 55,371 | 71,838 | 4% | A+ | |||||||||||
| Florida | 5,290 | 8,953 | 51,067 | 65,310 | 4% | AA | |||||||||||
| Arizona | 11,139 | — | 53,379 | 64,518 | 4% | AA | |||||||||||
| Massachusetts | — | 906 | 51,465 | 52,371 | 3% | AA | |||||||||||
| Ohio | 5,672 | 5,263 | 30,700 | 41,635 | 3% | AA- | |||||||||||
| Other | 160,698 | 58,517 | 434,564 | 653,779 | 41% | AA | |||||||||||
| 296,004 | 136,211 | 1,082,098 | 1,514,313 | 94% | AA- | ||||||||||||
| Pre-refunded/escrowed to maturity bonds | 23,073 | 18,581 | 53,264 | 94,918 | 6% | AA | |||||||||||
| Total | $ | 319,077 | 154,792 | 1,135,362 | 1,609,231 | 100% | AA | ||||||||||
| % of Total Municipal Portfolio | 20 | % | 10 | % | 70 | % | 100 | % | |||||||||
1Of the $42.5$39.5 million in state and local Texas general obligation bonds, $23.9$19 million represents investments in Texas Permanent School Fund bonds, which are considered to have lower risk as a result of the bond guarantee programs that support these bonds.
Special revenue fixed income securities of municipalities (referred to as “special revenue bonds”) represent 13% of our total invested assets at December 31, 2020. These securities generally do not have the “full faith and credit” backing of the municipal or state governments, as do general obligation bonds, but special revenue bonds have a dedicated revenue stream for repayment. For our special revenue bonds, 81%67% of the dedicated revenue stream is comprised of the following: (i) essential services (46%(53%), which is comprised of transportation, water and sewer, and electric; and (ii) education (11%(14%), which includes school districts and higher education, including state-wide university systems; and (iii) special tax (24%), which are backed by a dedicated lien on a tax or other revenue repayment source.systems. As such, we believe our special revenue bond portfolio is appropriate for the current environment.
Corporate Securities
Our corporate securities represented 31% of our invested assets at December 31, 2020. For investment-grade corporate bonds, we address the risk of an individual issuers'issuer's default by maintaining a diverse portfolio of holdings. The primary risk related to non-investment grade corporate bonds is credit risk. A weak financial profile can lead to rating downgrades from the credit rating agencies,downgrades, which can put further downward pressure on bond prices. Valuations on these bonds are related more directly to underlying operating performance than to general interest rates. Our holdings of non-investment grade corporate bonds, which typically exhibit weaker credit profiles and are subject to more risk of credit loss, represent less than 3% of our overall investment portfolio.
The tables below provide details on our corporate bond holdings at December 31, 20172020 and December 31, 2016:2019:
| December 31, 2020 | Fair Value | Carry Value | Unrealized/ Unrecognized Gain (Loss) | Weighted Average Credit Quality | ||||||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||||||||
| Investment grade | $ | 2,109.2 | 2,108.3 | 173.8 | A- | |||||||||||||||||||||
| Non-investment grade | 232.1 | 232.1 | 5.7 | B+ | ||||||||||||||||||||||
| Total corporate securities | $ | 2,341.3 | 2,340.4 | 179.5 | BBB+ | |||||||||||||||||||||
| December 31, 2019 | Fair Value | Carry Value | Unrealized/ Unrecognized Gain (Loss) | Weighted Average Credit Quality | ||||||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||||||||
| Investment grade | $ | 1,775.9 | 1,775.0 | 79.8 | A- | |||||||||||||||||||||
| Non-investment grade | 188.7 | 188.7 | 1.7 | B+ | ||||||||||||||||||||||
| Total corporate securities | $ | 1,964.6 | 1,963.7 | 81.5 | BBB+ | |||||||||||||||||||||
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| December 31, 2017 | Fair Value | Carry Value | Unrealized/ Unrecognized Gain (Loss) | Weighted Average Credit Quality | ||||||||
| ($ in millions) | ||||||||||||
| Investment grade | $ | 1,505.0 | 1,504.1 | 27.5 | A- | |||||||
| Non-investment grade | 130.3 | 130.3 | 2.5 | B | ||||||||
| Total corporate securities | $ | 1,635.3 | 1,634.4 | 30.0 | BBB+ | |||||||
| December 31, 2016 | Fair Value | Carry Value | Unrealized/ Unrecognized Gain (Loss) | Weighted Average Credit Quality | ||||||||
| ($ in millions) | ||||||||||||
| Investment grade | $ | 1,892.4 | 1,890.9 | 21.0 | A- | |||||||
| Non-investment grade | 129.4 | 129.4 | 1.6 | B+ | ||||||||
| Total corporate securities | $ | 2,021.8 | 2,020.3 | 22.6 | A- | |||||||
| December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||
| ($ in millions) | Fair Value | Weighted Average Credit Rating | % of Fixed Income Portfolio | Fair Value | Weighted Average Credit Rating | % of Fixed Income Portfolio | ||||||||||||||||||||||||||||||||
| Financials | 1,048.5 | A- | 16 | % | $ | 925.2 | A- | 15 | % | |||||||||||||||||||||||||||||
| Consumer non-cyclicals | 281.3 | BBB+ | 4 | 259.7 | BBB+ | 4 | ||||||||||||||||||||||||||||||||
| Communications | 150.2 | BBB+ | 2 | 129.8 | BBB+ | 2 | ||||||||||||||||||||||||||||||||
Consumer cyclicals1 | 144.5 | BBB- | 2 | 136.0 | BBB | 2 | ||||||||||||||||||||||||||||||||
| Technology | 109.0 | BBB+ | 2 | 81.6 | BBB+ | 1 | ||||||||||||||||||||||||||||||||
| Energy | 100.5 | BBB | 2 | 104.7 | BBB | 2 | ||||||||||||||||||||||||||||||||
| Utilities | 76.4 | BBB+ | 1 | 37.6 | BBB+ | 1 | ||||||||||||||||||||||||||||||||
| Bank loans | 71.4 | B | 1 | 65.6 | B | 1 | ||||||||||||||||||||||||||||||||
| Basic materials | 40.0 | BBB- | 1 | 26.7 | BBB- | — | ||||||||||||||||||||||||||||||||
| Other industrials | 204.9 | BBB | 3 | 158.5 | BBB | 3 | ||||||||||||||||||||||||||||||||
| Other | 114.6 | BBB+ | 2 | 39.2 | BBB+ | 1 | ||||||||||||||||||||||||||||||||
| Total corporate securities | 2,341.3 | BBB+ | 36 | 1,964.6 | BBB+ | 32 | ||||||||||||||||||||||||||||||||
1Included in consumer cyclicals are travel and leisure, as well as retail exposures.
As illustrated in the table above, within our allocation to corporate securities, financials is our most significant industry concentration at 16% of our fixed income securities portfolio at December 31, 2016:2020.The corporate securities portfolio allocation to financials is well-diversified by issuer and has a weighted average credit rating of “A-”. No individual issuer comprised more than 1% of our fixed income securities portfolio at December 31, 2020.
| December 31, 2017 | Fair Value | Carry Value | Unrealized/ Unrecognized Gain (Loss) | Weighted Average Credit Quality | ||||||||
| ($ in millions) | ||||||||||||
| Investment grade: | ||||||||||||
| CLO | $ | 572.5 | 572.5 | 2.1 | AA+ | |||||||
| Other ABS | 202.2 | 202.2 | 2.9 | AA- | ||||||||
| Total investment grade | 774.7 | 774.7 | 5.0 | AA+ | ||||||||
| Non-investment grade: | ||||||||||||
| CLO | 20.8 | 20.8 | 1.3 | BB- | ||||||||
| Other ABS | — | — | — | — | ||||||||
| Total non-investment grade | 20.8 | 20.8 | 1.3 | BB- | ||||||||
| Total CLO and other ABS | $ | 795.5 | 795.5 | 6.3 | AA | |||||||
•Travel: $39.0 million fair value, $0.8 million net unrealized loss, “BBB” weighted average credit rating;
•Leisure: $20.4 million fair value, $1.0 million net unrealized gain, “BB” weighted average credit rating; and
| December 31, 2016 | Fair Value | Carry Value | Unrealized/ Unrecognized Gain (Loss) | Weighted Average Credit Quality | ||||||||
| ($ in millions) | ||||||||||||
| Investment grade: | ||||||||||||
| CLO | $ | 341.9 | 341.9 | 0.1 | AAA | |||||||
| Other ABS | 170.2 | 170.2 | 0.2 | AA+ | ||||||||
| Total investment grade | 512.1 | 512.1 | 0.3 | AA+ | ||||||||
| Non-investment grade: | ||||||||||||
| CLO | 16.9 | 16.9 | 0.8 | BB- | ||||||||
| Other ABS | — | — | — | — | ||||||||
| Total non-investment grade | 16.9 | 16.9 | 0.8 | BB- | ||||||||
| Total CLO and other ABS | $ | 529.0 | 529.0 | 1.1 | AA+ | |||||||
| ($ in millions) | December 31, 2020 | December 31, 2019 | ||||||||||||
| Consumer cyclicals | $ | 7.5 | 4.7 | |||||||||||
| Energy | $ | 7.6 | 3.8 | |||||||||||
While these sectors are not material to our fixed income securities portfolio, we continue to monitor them in light of the impact of the COVID-19 pandemic.
Mortgage-Backed Securities (RMBS and CMBS Portfolios)
Mortgage-backed securities represent our most significant exposure to real estate, and further breakdown of this exposure is provided in the table above. Agency RMBS represented 91% of our RMBS allocation, and 13% of our invested assets, as of December 31, 2020.These securities are rated “AAA" and had an unrealized gain of approximately $50 million as of December 31, 2020.
To additionally manage and mitigate exposure on our MBS portfolio (CMBSRMBS and RMBS),CMBS portfolios, we perform analysis both at the time of purchase and as part of the ongoing portfolio evaluation. This analysis includes review of loan-to-value ratios, geographic spread of the assets securing the bond, delinquencies in payments foron the underlying mortgages, gains/losses on sales, evaluations of projected cash flows, as well as other information that aids in determination of the health of the underlying assets. We consider the overall credit environment, economic conditions, the investment's total projected return, on the investment, and overall portfolio asset allocation of the portfolio in our decisionsdeciding to purchase or sell MBS.these securities.
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CLO and Other ABS Portfolio
For CLO and other ABS, the primary risk is credit risk. We manage this risk by evaluating a number of factors, including the deal's structure, the credit quality of underlying loans or assets, the composition of the underlying portfolio, and the portfolio manager's track record and capabilities. We monitor key performance metrics, including over-collateralization, interest coverage, and cash flows, on an on-going basis. We consider the overall credit environment, economic conditions, the investment's total projected return, and overall portfolio asset allocation in our deciding to purchase or sell CLO and other ABS. Other ABS includes structured note obligations and securities collateralized by loans and other financial assets, including, without limitation, auto loans, credit card receivables, equipment leases, and student loans.
The tables below provide details on our CLO and other ABS holdings at December 31, 2020, and December 31, 2019:
| December 31, 2020 | Fair Value | Carry Value | Unrealized/ Unrecognized Gain (Loss) | Weighted Average Credit Quality | ||||||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||||||||
| Investment grade: | ||||||||||||||||||||||||||
| CLO | $ | 611.6 | 611.6 | 4.1 | AA+ | |||||||||||||||||||||
| Other ABS | 351.9 | 351.9 | 10.4 | A+ | ||||||||||||||||||||||
| Total investment grade | 963.5 | 963.5 | 14.5 | AA | ||||||||||||||||||||||
| Non-investment grade: | ||||||||||||||||||||||||||
| CLO | 49.2 | 49.2 | (2.3) | BB- | ||||||||||||||||||||||
| Other ABS | 13.9 | 13.9 | 0.1 | B | ||||||||||||||||||||||
| Total non-investment grade | 63.1 | 63.1 | (2.2) | BB- | ||||||||||||||||||||||
| Total CLO and other ABS | $ | 1,026.6 | 1,026.6 | 12.3 | AA- | |||||||||||||||||||||
| December 31, 2019 | Fair Value | Carry Value | Unrealized/ Unrecognized Gain (Loss) | Weighted Average Credit Quality | ||||||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||||||||
| Investment grade: | ||||||||||||||||||||||||||
| CLO | $ | 496.7 | 496.7 | (2.4) | AA | |||||||||||||||||||||
| Other ABS | 274.1 | 274.1 | 5.8 | A+ | ||||||||||||||||||||||
| Total investment grade | 770.8 | 770.8 | 3.4 | AA | ||||||||||||||||||||||
| Non-investment grade: | ||||||||||||||||||||||||||
| CLO | 14.7 | 14.7 | (0.8) | B+ | ||||||||||||||||||||||
| Other ABS | 7.5 | 7.5 | (0.1) | B+ | ||||||||||||||||||||||
| Total non-investment grade | 22.2 | 22.2 | (0.9) | B+ | ||||||||||||||||||||||
| Total CLO and other ABS | $ | 793.0 | 793.0 | 2.5 | AA- | |||||||||||||||||||||
Equity Price Risk
Our equity securities portfolio is exposed to risk arising from potential volatility in equity market prices. We attempt to minimize the exposure to equity price risk exposure by maintaining a diversified portfolio and limiting concentrations in any one company or industry. The following table presents the hypothetical increases and decreases in 10% increments in market value of the equity portfolio as of December 31, 2017:2020:
| Change in Equity Values in Percent | Change in Equity Values in Percent | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | (30)% | (20)% | (10)% | 0% | 10% | 20% | 30% | ($ in thousands) | (30)% | (20)% | (10)% | 0% | 10% | 20% | 30% | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value of AFS equity portfolio | $ | 127,893 | 146,164 | 164,434 | 182,705 | 200,976 | 219,246 | 237,517 | Fair value of AFS equity portfolio | $ | 217,257 | 248,294 | 279,330 | 310,367 | 341,404 | 372,440 | 403,477 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Fair value change | (54,812 | ) | (36,541 | ) | (18,271 | ) | 18,271 | 36,541 | 54,812 | Fair value change | (93,110) | (62,073) | (31,037) | 31,037 | 62,073 | 93,110 | ||||||||||||||||||||||||||||||||||||||||||||||||||
In addition to our equity securities, we invest in certain other investments that are also subject to price risk. Our other investments primarily include alternative investments in private limited partnerships that invest in various strategies such as private equity, energy/power generation, middle marketdirect lending, mezzanine debt,financing, distressed debt, infrastructure, and real estate. As of December 31, 2017,2020, other investments represented 2%4% of our total invested assets and 8%10% of our stockholders’ equity. These investments are subject to the risks arising from the fact that their valuation is inherently subjective. The general partner of each of these partnerships usually reports the change in the value of the interests in the partnership on a one quarter lag because of the nature of the underlying assets or liabilities. Since these partnerships' underlying investments consist primarily of assets or liabilities for which there are no quoted prices in active markets for the same or similar assets, the valuation of interests in these
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partnerships are subject to a higher level of subjectivity and unobservable inputs than substantially all of our other investments. Each of these general partners is required to determine the partnerships' value by the price obtainable for the sale of the interest at the time of determination. Valuations based on unobservable inputs are subject to greater scrutiny and reconsideration from one reporting period to the next, and therefore, may be subject to significant fluctuations, which could lead to significant decreases from one reporting period to the next. As we record our investments in these various partnerships under the equity method of accounting, any decreases in the valuation of these investments would negatively impact our results of operations. For additional information regarding these alternative investment strategies, see Note 5. “Investments” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
As a property and casualty insurer, our liquidity needs are generally met through the cash flow provided by our on-going operations, as premium collections and investment income generated from our portfolio provide a significant flow of cash to the above,support policyholder claims and other payment obligations. Additionally, we purchase substantial reinsurance at low retention levels to mitigate exposure to significant loss events and we have a defined benefit pension plan with $363.1 million in invested assets as of December 31, 2017, of which approximately 60% was invested in assets subjectaccess to equity price risk. The value of these invested assets is an important element of expensevarious borrowing facilities if the need to raise capital were to arise. See the "Financial Condition, Liquidity, and liability measurement for our pension plan. For additional information regarding the fair value of our pension assets, refer to Note 14. "Retirement Plans"Capital Resources" section in Item 8. “Financial Statements7. "Management's Discussion and Supplementary Data.”Analysis of Financial Condition and Results of Operations" of this Form 10-K for additional information regarding our available borrowing capacity. In addition to this, we monitor our investment portfolio's liquidity profile to ensure it meets our operational liquidity needs. The liquidity characteristics of our portfolio are illustrated below:
| Asset Category | Percentage of Invested Assets | ||||||||||
| Highly-liquid assets | 68 | % | |||||||||
Generally liquid assets, may become less liquid with market stress1 | 27 | ||||||||||
Generally illiquid assets2 | 5 | ||||||||||
| Total | 100 | % | |||||||||
1These exposures are concentrated within CMBS, CLO and other ABS.
2These exposures include our alternative investments and other non-publicly traded securities.
Indebtedness
(a) Long-Term Debt
As of December 31, 2017,2020, we had outstanding long-term debt of $439.1$550.7 million that matures as shown in the following table:
| 2017 | 2020 | ||||||||||||||||||||||||||||
| ($ in thousands) | Year of Maturity | Carrying Amount | Fair Value | ($ in thousands) | Year of Maturity | Carrying Amount | Fair Value | ||||||||||||||||||||||
| Financial liabilities | Financial liabilities | ||||||||||||||||||||||||||||
| Long-term debt | Long-term debt | ||||||||||||||||||||||||||||
| 1.61% Borrowings from FHLBNY | 2021 | $ | 25,000 | 24,270 | 1.61% Borrowings from FHLBNY | 2021 | $ | 25,000 | 25,182 | ||||||||||||||||||||
| 1.56% Borrowings from FHLBNY | 2021 | 25,000 | 24,210 | 1.56% Borrowings from FHLBNY | 2021 | 25,000 | 25,198 | ||||||||||||||||||||||
| 3.03% Borrowings from FHLBI | 2026 | 60,000 | 60,334 | 3.03% Borrowings from FHLBI | 2026 | 60,000 | 67,513 | ||||||||||||||||||||||
| 7.25% Senior Notes | 2034 | 49,904 | 61,391 | 7.25% Senior Notes | 2034 | 49,914 | 66,148 | ||||||||||||||||||||||
| 6.70% Senior Notes | 2035 | 99,446 | 116,597 | 6.70% Senior Notes | 2035 | 99,499 | 127,886 | ||||||||||||||||||||||
| 5.875% Senior Notes | 2043 | 185,000 | 186,332 | ||||||||||||||||||||||||||
| 5.375% Senior Notes | 5.375% Senior Notes | 2049 | 294,241 | 383,669 | |||||||||||||||||||||||||
| Subtotal | 444,350 | 473,134 | Subtotal | 553,654 | 695,596 | ||||||||||||||||||||||||
| Unamortized debt issuance costs | (5,234 | ) | Unamortized debt issuance costs | (3,419) | |||||||||||||||||||||||||
| Finance lease obligations | Finance lease obligations | 508 | |||||||||||||||||||||||||||
| Total notes payable | $ | 439,116 | Total notes payable | $ | 550,743 | ||||||||||||||||||||||||
The weighted average effective interest rate for our outstanding long-term debt was 5.3%5.2% at December 31, 2017.2020. Our debt is not exposed to material changes in interest rates because the interest rates are fixed. Our $185 million of Senior Notes due 2043 became callable on February 8, 2018. We may elect to call these Senior Notes, in whole or in part, at any time on or after February 8, 2018. If we were to call and redeem these Senior Notes we would write-off the associated unamortized debt issuance costs. The balance of the unamortized debt issuance costs associated with our $185 million of Senior Notes was $4.6 million at December 31, 2017.
Refer to Note 10.11. "Indebtedness", within in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K for discussioninformation on our debt covenant provisions.
(b) Short-Term Debt
Lenders' consent. The Line of Credit provides the Parent with an additional source of short-term liquidity. Thewill mature on December 20, 2022 and has a variable interest rate on our Line of Credit varies and is based on, among other factors, the Parent’s debt ratings. TheFor additional information regarding the Line of Credit expiresagreement and corresponding representations,
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warranties, and covenants, refer to Note 11. “Indebtedness” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
Refer to Note 11. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K for additional information on December 1, 2020. There were no balances outstanding under this Line of Credit or the previous credit facility at December 31, 2017 or at any time during 2017.our short-term borrowing activity.
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
Selective Insurance Group, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Selective Insurance Group, Inc. and its subsidiaries (the “Company”"Company") as of December 31, 20172020 and 2016, and2019, 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, 2017,2020, and the related notes and financial statement schedules I to V (collectively, the "financial"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, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017,2020, in conformity with U.S. generally accepted accounting principles.In connection with our audits of the consolidated financial statements, we also have audited financial statement schedules I to V. Also in our opinion, the related consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
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, 2017,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, (COSO), and our report dated February 19, 2018,12, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal controlscontrol over financial reporting.
Basis for Opinion
These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements financial statement schedules 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 auditsaudit 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 riskrisks 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 supportingregarding 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 statement presentation.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.
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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 19, 201812, 2021
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| Consolidated Balance Sheets | |||||||
| December 31, | |||||||
| ($ in thousands, except share amounts) | 2017 | 2016 | |||||
| ASSETS | |||||||
| Investments: | |||||||
| Fixed income securities, held-to-maturity – at carrying value (fair value: $44,100 – 2017; $105,211 – 2016) | $ | 42,129 | 101,556 | ||||
| Fixed income securities, available-for-sale – at fair value (amortized cost: $5,076,716 – 2017; $4,753,759 – 2016) | 5,162,522 | 4,792,540 | |||||
| Equity securities, available-for-sale – at fair value (cost: $143,811 – 2017; $120,889 – 2016) | 182,705 | 146,753 | |||||
| Short-term investments (at cost which approximates fair value) | 165,555 | 221,701 | |||||
| Other investments | 132,268 | 102,397 | |||||
| Total investments (Notes 5 and 7) | 5,685,179 | 5,364,947 | |||||
| Cash | 534 | 458 | |||||
| Interest and dividends due or accrued | 40,897 | 40,164 | |||||
| Premiums receivable, net of allowance for uncollectible accounts of: $10,000 – 2017; $5,980 – 2016 | 747,029 | 681,611 | |||||
| Reinsurance recoverable, net of allowance for uncollectible accounts of: $4,600 – 2017; $5,500 – 2016 (Note 8) | 594,832 | 621,537 | |||||
| Prepaid reinsurance premiums (Note 8) | 153,493 | 146,282 | |||||
| Current federal income tax (Note 13) | 3,243 | 2,486 | |||||
| Deferred federal income tax (Note 13) | 31,990 | 84,840 | |||||
| Property and equipment – at cost, net of accumulated depreciation and amortization of: $213,227 – 2017; $198,729 – 2016 | 63,959 | 69,576 | |||||
| Deferred policy acquisition costs (Note 2) | 235,055 | 222,564 | |||||
| Goodwill (Note 11) | 7,849 | 7,849 | |||||
| Other assets | 122,371 | 113,534 | |||||
| Total assets | $ | 7,686,431 | 7,355,848 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
| Liabilities: | |||||||
| Reserve for loss and loss expense (Note 9) | $ | 3,771,240 | 3,691,719 | ||||
| Unearned premiums | 1,349,644 | 1,262,819 | |||||
| Long-term debt (Note 10) | 439,116 | 438,667 | |||||
| Accrued salaries and benefits | 131,850 | 132,880 | |||||
| Other liabilities | 281,624 | 298,393 | |||||
| Total liabilities | $ | 5,973,474 | 5,824,478 | ||||
| Stockholders’ Equity: | |||||||
| Preferred stock of $0 par value per share: | |||||||
| Authorized shares 5,000,000; no shares issued or outstanding | $ | — | — | ||||
| Common stock of $2 par value per share: | |||||||
| Authorized shares 360,000,000 | |||||||
| Issued: 102,284,564 – 2017; 101,620,436 – 2016 | 204,569 | 203,241 | |||||
| Additional paid-in capital | 367,717 | 347,295 | |||||
| Retained earnings | 1,698,613 | 1,568,881 | |||||
| Accumulated other comprehensive income (loss) (Note 6) | 20,170 | (15,950 | ) | ||||
| Treasury stock – at cost (shares: 43,789,442 – 2017; 43,653,237 – 2016) | (578,112 | ) | (572,097 | ) | |||
| Total stockholders’ equity | 1,712,957 | 1,531,370 | |||||
| Commitments and contingencies (Notes 17 and 18) | |||||||
| Total liabilities and stockholders’ equity | $ | 7,686,431 | 7,355,848 | ||||
| Consolidated Statements of Income | ||||||||||
| December 31, | ||||||||||
| ($ in thousands, except per share amounts) | 2017 | 2016 | 2015 | |||||||
| Revenues: | ||||||||||
| Net premiums earned | $ | 2,291,027 | 2,149,572 | 1,989,909 | ||||||
| Net investment income earned | 161,882 | 130,754 | 121,316 | |||||||
| Net realized gains (losses): | ||||||||||
| Net realized investment gains | 11,204 | 3,562 | 31,537 | |||||||
| Other-than-temporary impairments | (4,809 | ) | (8,509 | ) | (18,366 | ) | ||||
| Other-than-temporary impairments on fixed income securities recognized in other comprehensive income | (36 | ) | 10 | — | ||||||
| Total net realized gains (losses) | 6,359 | (4,937 | ) | 13,171 | ||||||
| Other income | 10,716 | 8,881 | 7,456 | |||||||
| Total revenues | 2,469,984 | 2,284,270 | 2,131,852 | |||||||
| Expenses: | ||||||||||
| Loss and loss expense incurred | 1,345,074 | 1,234,797 | 1,148,541 | |||||||
| Amortization of deferred policy acquisition costs | 469,236 | 450,328 | 399,436 | |||||||
| Other insurance expenses | 333,097 | 321,395 | 300,359 | |||||||
| Interest expense | 24,354 | 22,771 | 22,428 | |||||||
| Corporate expenses | 36,255 | 35,024 | 28,396 | |||||||
| Total expenses | 2,208,016 | 2,064,315 | 1,899,160 | |||||||
| Income before federal income tax | 261,968 | 219,955 | 232,692 | |||||||
| Federal income tax expense: | ||||||||||
| Current | 62,184 | 48,581 | 45,347 | |||||||
| Deferred | 30,958 | 12,879 | 21,484 | |||||||
| Total federal income tax expense | 93,142 | 61,460 | 66,831 | |||||||
| Net income | $ | 168,826 | 158,495 | 165,861 | ||||||
| Earnings per share: | ||||||||||
| Basic net income | $ | 2.89 | 2.74 | 2.90 | ||||||
| Diluted net income | $ | 2.84 | 2.70 | 2.85 | ||||||
| Dividends to stockholders | $ | 0.66 | 0.61 | 0.57 | ||||||
| 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) | 0 | ||||||||||||
| 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 | 0 | ||||||||||||
| Less: allowance for credit losses | 0 | 0 | ||||||||||||
| Commercial mortgage loans, net of allowance for credit losses | 46,306 | 0 | ||||||||||||
| 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) | 0 | 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 | 0 | ||||||||||||
| 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; 0 shares issued or outstanding - 2019 | $ | 200,000 | 0 | |||||||||||
| 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) | 0 | 0 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 9,687,913 | 8,797,150 | |||||||||||
See accompanying Notes to Consolidated Financial Statements.
76
| Consolidated Statements of Comprehensive Income | ||||||||||
| December 31, | ||||||||||
| ($ in thousands) | 2017 | 2016 | 2015 | |||||||
| Net income | $ | 168,826 | 158,495 | 165,861 | ||||||
| Other comprehensive income (loss), net of tax: | ||||||||||
| Unrealized gains (losses) on investment securities: | ||||||||||
| Unrealized holding gains (losses) arising during year | 43,015 | (5,977 | ) | (26,143 | ) | |||||
| Non-credit portion of other-than-temporary impairments recognized in other comprehensive income | 23 | (6 | ) | — | ||||||
| Amounts reclassified into net income: | ||||||||||
| Held-to-maturity securities | (116 | ) | (92 | ) | (377 | ) | ||||
| Non-credit other-than-temporary impairments | 68 | 138 | 232 | |||||||
| Realized (gains) losses on available for sale securities | (4,537 | ) | 3,064 | (9,110 | ) | |||||
| Total unrealized gains (losses) on investment securities | 38,453 | (2,873 | ) | (35,398 | ) | |||||
| Defined benefit pension and post-retirement plans: | ||||||||||
| Net actuarial (loss) gain | (3,700 | ) | (7,852 | ) | 1,585 | |||||
| Amounts reclassified into net income: | ||||||||||
| Net actuarial loss | 1,367 | 4,200 | 4,600 | |||||||
| Total defined benefit pension and post-retirement plans | (2,333 | ) | (3,652 | ) | 6,185 | |||||
| Other comprehensive income (loss) | 36,120 | (6,525 | ) | (29,213 | ) | |||||
| Comprehensive income | $ | 204,946 | 151,970 | 136,648 | ||||||
| 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 | 0 | 0 | 0 | |||||||||||||||||
| 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.
77
| Consolidated Statements of Stockholders’ Equity | ||||||||||
| December 31, | ||||||||||
| ($ in thousands, except share amounts) | 2017 | 2016 | 2015 | |||||||
| Common stock: | ||||||||||
| Beginning of year | $ | 203,241 | 201,723 | 199,896 | ||||||
| Dividend reinvestment plan (shares: 28,607 – 2017; 38,741 – 2016; 50,013 – 2015) | 57 | 77 | 100 | |||||||
| Stock purchase and compensation plans (shares: 635,521 – 2017; 720,323 – 2016; 863,426 – 2015) | 1,271 | 1,441 | 1,727 | |||||||
| End of year | 204,569 | 203,241 | 201,723 | |||||||
| Additional paid-in capital: | ||||||||||
| Beginning of year | 347,295 | 326,656 | 305,385 | |||||||
| Dividend reinvestment plan | 1,395 | 1,389 | 1,374 | |||||||
| Stock purchase and compensation plans | 19,027 | 19,250 | 19,897 | |||||||
| End of year | 367,717 | 347,295 | 326,656 | |||||||
| Retained earnings: | ||||||||||
| Beginning of year | 1,568,881 | 1,446,192 | 1,313,440 | |||||||
| Net income | 168,826 | 158,495 | 165,861 | |||||||
| Dividends to stockholders ($0.66 per share – 2017; $0.61 per share – 2016; $0.57 per share – 2015) | (39,094 | ) | (35,806 | ) | (33,109 | ) | ||||
| End of year | 1,698,613 | 1,568,881 | 1,446,192 | |||||||
| Accumulated other comprehensive income (loss): | ||||||||||
| Beginning of year | (15,950 | ) | (9,425 | ) | 19,788 | |||||
| Other comprehensive income (loss) | 36,120 | (6,525 | ) | (29,213 | ) | |||||
| End of year | 20,170 | (15,950 | ) | (9,425 | ) | |||||
| Treasury stock: | ||||||||||
| Beginning of year | (572,097 | ) | (567,105 | ) | (562,923 | ) | ||||
| Acquisition of treasury stock (shares: 136,205 – 2017; 152,595 – 2016; 147,461 – 2015) | (6,015 | ) | (4,992 | ) | (4,182 | ) | ||||
| End of year | (578,112 | ) | (572,097 | ) | (567,105 | ) | ||||
| Total stockholders’ equity | $ | 1,712,957 | 1,531,370 | 1,398,041 | ||||||
| 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) | 0 | 0 | |||||||||||||||||
| 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 | 0 | 0 | |||||||||||||||||
| 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.
78
| Consolidated Statements of Cash Flows | ||||||||||
| December 31, | ||||||||||
| ($ in thousands) | 2017 | 2016 | 2015 | |||||||
| Operating Activities | ||||||||||
| Net income | $ | 168,826 | 158,495 | 165,861 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
| Depreciation and amortization | 52,100 | 61,671 | 59,688 | |||||||
| Stock-based compensation expense | 12,089 | 10,449 | 8,973 | |||||||
| Undistributed (gains) losses of equity method investments | (6,393 | ) | (2,316 | ) | 1,889 | |||||
| Net realized (gains) losses | (6,359 | ) | 4,937 | (13,171 | ) | |||||
| Loss on disposal of fixed assets | 998 | — | — | |||||||
| Changes in assets and liabilities: | ||||||||||
| Increase in reserves for loss and loss expense, net of reinsurance recoverables | 106,226 | 114,422 | 59,438 | |||||||
| Increase in unearned premiums, net of prepaid reinsurance | 79,614 | 87,716 | 79,995 | |||||||
| Decrease in net federal income taxes | 30,918 | 11,150 | 25,004 | |||||||
| Increase in premiums receivable | (65,418 | ) | (66,447 | ) | (56,386 | ) | ||||
| Increase in deferred policy acquisition costs | (12,491 | ) | (9,405 | ) | (27,551 | ) | ||||
| (Increase) decrease in interest and dividends due or accrued | (1,088 | ) | (1,473 | ) | 407 | |||||
| (Decrease) increase in accrued salaries and benefits | (5,714 | ) | (46,536 | ) | 11,392 | |||||
| Increase in other assets | (9,872 | ) | (30,071 | ) | (11,523 | ) | ||||
| Increase in other liabilities | 27,297 | 9,191 | 77,564 | |||||||
| Net cash provided by operating activities | 370,733 | 301,783 | 381,580 | |||||||
| Investing Activities | ||||||||||
| Purchase of fixed income securities, held-to-maturity | — | (4,235 | ) | (3,316 | ) | |||||
| Purchase of fixed income securities, available-for-sale | (2,130,362 | ) | (1,982,023 | ) | (1,041,916 | ) | ||||
| Purchase of equity securities, available-for-sale | (61,931 | ) | (35,490 | ) | (195,720 | ) | ||||
| Purchase of other investments | (55,830 | ) | (66,164 | ) | (12,170 | ) | ||||
| Purchase of short-term investments | (4,280,553 | ) | (3,499,380 | ) | (1,602,327 | ) | ||||
| Sale of fixed income securities, available-for-sale | 1,197,920 | 926,470 | 61,571 | |||||||
| Sale of short-term investments | 4,338,318 | 3,470,022 | 1,539,480 | |||||||
| Redemption and maturities of fixed income securities, held-to-maturity | 58,832 | 102,868 | 106,621 | |||||||
| Redemption and maturities of fixed income securities, available-for-sale | 555,216 | 641,524 | 567,445 | |||||||
| Sale of equity securities, available-for-sale | 37,960 | 119,617 | 172,561 | |||||||
| Distributions from other investments | 23,426 | 26,837 | 32,457 | |||||||
| Purchase of property and equipment | (14,071 | ) | (18,147 | ) | (16,229 | ) | ||||
| Net cash used in investing activities | (331,075 | ) | (318,101 | ) | (391,543 | ) | ||||
| Financing Activities | ||||||||||
| Dividends to stockholders | (37,045 | ) | (33,758 | ) | (31,052 | ) | ||||
| Acquisition of treasury stock | (6,015 | ) | (4,992 | ) | (4,182 | ) | ||||
| Net proceeds from stock purchase and compensation plans | 7,599 | 7,811 | 10,089 | |||||||
| Proceeds from borrowings | 84,000 | 165,000 | 15,000 | |||||||
| Repayment of borrowings | (84,000 | ) | (115,000 | ) | — | |||||
| Excess tax benefits from share-based payment arrangements | — | 1,819 | 1,736 | |||||||
| Repayment of capital lease obligations | (4,121 | ) | (5,002 | ) | (4,689 | ) | ||||
| Net cash (used in) provided by financing activities | (39,582 | ) | 15,878 | (13,098 | ) | |||||
| Net increase (decrease) in cash | 76 | (440 | ) | (23,061 | ) | |||||
| Cash, beginning of year | 458 | 898 | 23,959 | |||||||
| Cash, end of year | $ | 534 | 458 | 898 | ||||||
| Consolidated Statements of Stockholders’ Equity | ||||||||||||||||||||
| December 31, | ||||||||||||||||||||
| ($ in thousands, except share and per share amounts) | 2020 | 2019 | 2018 | |||||||||||||||||
| Preferred stock: | ||||||||||||||||||||
| Beginning of year | $ | 0 | 0 | 0 | ||||||||||||||||
| Issuance of preferred stock | 200,000 | 0 | 0 | |||||||||||||||||
| End of year | 200,000 | 0 | 0 | |||||||||||||||||
| 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) | 0 | 0 | |||||||||||||||||
| 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 | 0 | 0 | 30,726 | |||||||||||||||||
| Cumulative effect adjustment due to adoption of stranded deferred tax guidance | 0 | 0 | (5,707) | |||||||||||||||||
| Cumulative effect adjustment due to adoption of lease guidance, net of tax | 0 | 342 | 0 | |||||||||||||||||
| Cumulative effect adjustment due to adoption of guidance on allowance for credit losses, net of tax (Note 3) | 1,435 | 0 | 0 | |||||||||||||||||
| 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 | 0 | 0 | 0 | |||||||||||||||||
| 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 | 0 | 0 | (30,726) | |||||||||||||||||
| Cumulative effect adjustment due to adoption of stranded deferred tax guidance | 0 | 0 | 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 | $ | 0 | 0 | 0 | ||||||||||||||||
| Dividends declared per common share | $ | 0.94 | 0.83 | 0.74 | ||||||||||||||||
| Preferred Stock, shares outstanding: | ||||||||||||||||||||
| Beginning of year | 0 | 0 | 0 | |||||||||||||||||
| Issuance of preferred stock | 8,000 | 0 | 0 | |||||||||||||||||
| End of year | 8,000 | 0 | 0 | |||||||||||||||||
| 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.
79
| 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 | 0 | 0 | (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) | 0 | 0 | |||||||||||||||||
| 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 | 0 | 0 | |||||||||||||||||
| 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 | 0 | 9 | 0 | |||||||||||||||||
| 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 | 0 | 0 | 0 | |||||||||||||||||
| 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 | 0 | 0 | |||||||||||||||||
| 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.
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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 isare publicly traded on the NASDAQ Global Select Market under the symbol “SIGI.”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) ReclassificationsInvestments
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 2017,2020, we reclassified certain line items withinbegan investing in commercial mortgage loans (“CMLs”). A description of our portfolio holdings, and the related presentation in our Consolidated Statements of Income to enhance the ability to analyze our expenses. Specifically, we reclassified our insurance underwriting expenses into amortization of deferred policy acquisition costs and other insurance expenses. These expenses were previously included in policy acquisition costs and other expenses. In addition, all expenses of the Parent, which were previously included in other expenses, are now separately identifiable as corporate expenses on the Consolidated Statements of Income. All prior periods presented in this Form 10-K have been reclassified to reflect this change.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 rated bonds, bank loan investments, redeemable preferred stocks,stock, and non-redeemable preferred stocksstock with certain debt-like characteristics, mortgage-backed securities (“MBS”), collateralizedcharacteristics;
•Collateralized loan obligations ("CLO"CLOs"), and other asset-backed securities (“ABS”("ABS");
•Residential mortgage-backed securities ("RMBS"); and
•Commercial mortgage-backed securities ("CMBS"). MBS, CLO, and other ABS are jointly referred to as structured securities. Fixed
We have designated substantially all of the holdings in our fixed income securities classifiedportfolio as available-for-sale (“AFS”("AFS"). These securities are reported at fair value. Those fixedvalue in our Consolidated Balance Sheet. The after-tax difference between fair value and cost or
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amortized cost is reflected in stockholders’ equity as a component of accumulated other comprehensive income securities that we have the ability and positive intent to hold to maturity are classified as held-to-maturity (“HTM”(loss) ("AOCI") and are carried at either: (i) amortized cost; or (ii) market value at the date of transfer into the HTM category, adjusted for subsequent amortization. .
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 structured securitiesRMBS, 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. Interest
Accrued interest on our fixed income securities is recorded as well as amortizationa component of “Interest and accretion, is included in "Net investment income earned"dividends due or accrued” on our Consolidated StatementsBalance 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 Income. The amortized cost“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 fixed income security is written down to fair value whenloan syndication arrangement or (ii) a declinemarketplace purchase. We record our investment in value is considered to
Equity securities may include common and non-redeemable preferred stocks. TheseEquity securities with readily determinable fair values are carriedreported at fair value. Equity securities without readily determinable fair values are reported at net asset value and the related dividend income is included in "Net investment income earned" on our Consolidated Statements of Income. The cost of equity securities is written down to fair value when("NAV") as a decline in value is considered to be other than temporary. See the discussion below on realized investment gains and losses for a description of the accounting for impairments. After-tax unrealized gains and losses are included in AOCI.practical expedient.
Short-term investments may include certain money market instruments, savings accounts, commercial paper, and debt issuesfixed 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 loansrepurchase agreements are fully collateralized with high quality, readily marketableby high-quality, readily-marketable instruments at a minimum of 102% ofthat support the loan principal.principal amount. At maturity, we receive principal and interest income on these agreements. All short-termShort-term investments are carriedgenerally reported at cost, which approximates fair value. The associated income is included in "Net investment income earned" on our Consolidated Statements of Income.
Other investments may includeare primarily comprised of alternative investments, which are limited partnership investments in private equity, private credit, and other securities. Alternativereal estate strategies. These alternative investments are accounted for using the equity method. Our share of distributed and undistributed netmethod, with income fromtypically recognized on a one-quarter lag. Because these alternative investments is includedare recorded under the equity method of accounting, the valuation and income recognized on these investments may be impacted by volatility in "Netthe financial markets. In addition to our alternative investments, our other investment income earned" on our Consolidated Statements of Income. Other securities are primarily comprised ofportfolio includes Federal Home Loan Bank stock (“FHLB Stock”) and tax credit investments. LowThe 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 methodmethod; and all
•All other tax credits in our investment portfolio are accounted for using the equity method. Under the proportional amortization method, our share of the investment’s performance is recorded in our Consolidated Statements of Income as a component of “Federal income tax expense.” Under the equity method, our share of distributed and undistributed net income is included in "Net investment income earned" on our Consolidated Statements of Income.
For federal income 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 Statements of 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
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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:have (i) the power to direct activities of the VIE;VIE, (ii) the ability to remove the decision maker of the VIE;VIE, (iii) the ability to participate in making decisions that are significant to the VIE;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 saledisposal of investmentsinvestment securities, which are determined on the basis of the cost of the specific investments sold and are creditedsold;
•Changes in unrealized gains or chargedlosses on our equity securities;
•Losses on securities for which we have the intent to income. Included in realized gains and losses are the other-than-temporary impairment ("OTTI") charges recognized in earnings,sell, which are discussed below.further below; and
Losses on securities for impairments that are other than temporary. Interest-related unrealized losses typically do not result in other-than-temporary impairments. The following provides informationwhich we have the intent to sell and ACL on this analysis for our fixed income securities and short-term investments, equity securities, and other investments.
AFS Fixed Income Securities and Short-Term Investments
We review our fixed income securities that are in an unrealized loss position to determine:determine (i) if we have the intent to sell the security;security, or (ii) if it is more likely than not that we will be required to sell the debt security before its anticipated recovery; and (iii) if the decline is other than temporary. Broad changes in the overall market or interest rate environment generally will not lead to a write down.recovery. If we determine that we have either the intent or likely requirement to sell the security, we write down its amortized cost to its fair value through a chargevalue. 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 losses. If we do not have either the intent or requirement to sell the security,and unrealized investment (losses) gains” on our evaluation for OTTI may include, but is not limited to, evaluationConsolidated Statement of the following factors:Income.
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 performed on all previously-impaired debt securities that continuehave the ability to be held by usincorporate 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 all structured securitiesother ABS that were not of high credit quality at the date of purchase. Any shortfallacquisition;
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•The effective interest rate in the expected present valueeffect as of the future cash flows, based on the DCF, from the amortized cost basis of a security is considered a “credit impairment,” with the remaining decline in fair value of a security considered a “non-credit impairment.” Credit impairments are charged to earnings as a component of realized losses, while non-credit impairments are recorded to Other Comprehensive Income ("OCI") as a component of unrealized losses.reporting date for non-fixed rate securities; and
•The discount rate we use in a DCF is the effective interest rate implicit in the security at the date of acquisition for those structured securities that were not of high credit quality at acquisition. For all other securities, we use a discount rate that equals the current yield, excluding the impact of previous OTTI charges, used to accrete the beneficial interest. 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 review securities that are in an unrealized loss position to determine: (i) if we do not intend to holdrecord 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 its forecasted recovery;be past due at the time any principal or (ii) ifinterest 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 declinepool of loans based on lifetime expected credit losses. The ACL is other than temporary, which includes declines driven by market volatility for which we cannot assert the security will recoverrecorded as a contra-asset reflected in the near term. If we determine either that we do not intend to hold a security, orcarrying value of our CMLs on the decline is other than temporary, we write down the security's cost to its fair value through a chargeConsolidated Balance Sheet. Our initial ACL and any subsequent changes are recorded to earnings as a component of “Net realized losses. 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 holdsell a holding in our investment portfolio and the security, our evaluation for OTTI may include, but is not limited to, an evaluationexpected proceeds are less than the recorded value of the following factors:
•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
If we do not record a loss on a security we intend to hold, or ifsell, and we determine the decline isexpect a credit loss on a holding in our other than temporary,investments portfolio, we write down the carry value of the investment and record thea charge throughto earnings as a component of “Net realized losses.and unrealized investment (losses) gains” on our Consolidated Statement of Income.
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. Transfers between levels in the fair value hierarchy are recognized at the end of the reporting period.
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The techniques used to value our financial assets are as follows:
Level 1 Pricing
| Security Type | Methodology | ||||
| Equity Securities; U.S. Treasury Notes | 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. | ||||
| Short-Term Investments | Short-term investments are | ||||
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 debtfixed 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 securities portfoliosecurity pricing is reviewed for reasonableness in the following ways:by (i) comparing our pricing to other third-party pricing services as well as benchmark indexed pricing;pricing, (ii) comparing fair value fluctuations between months for reasonableness; andreasonableness, (iii) reviewing stale prices.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:
| Security Type | Methodology | ||||
| Corporate Securities including preferred stocks classified as Fixed Income Securities, and U.S. Government and Government Agencies | 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. | ||||
Obligations of States and Political Subdivisions | 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. | ||||
| 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. | |||||
Foreign Government | Evaluations are performed using a DCF model and by incorporating observed market yields of benchmarks as inputs, adjusting for varied maturities. | ||||
Level 3 Pricing
| Security Type | Methodology | ||||
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
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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
| Security Type | Methodology | ||||
| 7.25% Senior Notes; 6.70% Senior Notes; 5.375% Senior Notes | Based on matrix pricing models prepared by external pricing services. | ||||
| Borrowings from Federal Home Loan Banks | 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. | ||||
We estimate an allowance for doubtful accountsACL on our outstanding premiums receivable. Thisreceivable balance at each reporting date. In determining this allowance, iswe use a method that considers the aging of the receivable, based on the effective year of the related policy, along with our historical write-off percentages adjusted forreceivable loss experience. We also contemplate expected macroeconomic conditions over the effectsexpected collection period, which are short-term in nature because the majority of currentthe 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 anticipated trends. An account(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 charged offa 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 believe it is probable that we will not collect a receivable. In making this determination, we considerdetermine the account to be uncollectible after considering information obtained from our efforts to collect amounts due directly or through collection agencies.efforts.
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 StatementsStatement of Stockholders' Equity.
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
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developing our best estimate of the allowance for estimated uncollectible reinsurancecredit 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 based on an evaluationas a contra-asset reflected in the carrying value of balances due from reinsurers and other available information, such as each reinsurers' credit rating from A.M. Best Company ("A.M. Best") or Standard & Poor's Rating Services ("S&P").the recoverable balance. We charge off reinsurance recoverables on paid losseswrite-offs against the ACL when it becomes probable that we will notdetermine the recoverable balance to be uncollectible after considering information obtained from our efforts to collect amounts due or through a review of the balance.financial condition of the reinsurer.
Property and equipment used in operations, including certain costs incurred to develop or obtain computer software for internal use, are capitalized and carriedrecorded 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:
| Asset Category | Years | |||||||||||||
| Computer hardware | 3 | |||||||||||||
| Computer software | 3 | to | 5 | |||||||||||
| Software licenses | 3 | to | 5 | |||||||||||
| Internally developed software | 5 | |||||||||||||
| Furniture and fixtures | 10 | |||||||||||||
| Buildings and improvements | 5 | to | 40 | |||||||||||
We recorded depreciation expense of $17.8$21.5 million, $17.4$18.7 million, and $16.4$19.5 million for 2017, 2016,2020, 2019, and 2015,2018, respectively.
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 2.9%3.0% for 2017, 2.4%2020, 3.5% for 2016,2019, and 2.5%3.3% for 2015.2018.
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, 2017,2020, goodwill was not impaired.
Reserves for loss and loss expense are comprised of bothincludes case reserves on individualreported claims and reserves for claimsknown as incurred but not reported ("IBNR"). reserves. Case reserves result from claims that have been reported to one or more of our Insurance Subsidiaries, and are estimated on each individual claim, and based on claim-specific facts and circumstances known at the amount oftime. The case reserves may be adjusted upward or downward as the expected ultimate payment.specific facts and circumstances change. IBNR reserves are established at more aggregated levels than case basis reserves, and in addition to reserves on claims that have been incurred but not reported, they include provisions for (i) claims not yet reported, (ii) future emergencedevelopment on knownreported claims, as well as(iii) previously closed claims that will be reopened claims. IBNRin the future, and (iv) anticipated salvage and subrogation recoveries.
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We evaluate our reserves quarterly, through our comprehensive reserve review process and adjustments to recorded reserves are established based onmade accordingly. The primary input in evaluating reserve levels is the results of the Insurance Subsidiaries’quarterly reserve review prepared by our internal reserve analysis, supplemented with other internal and external information.
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 frombased upon the various methods, considering the strengths and weaknesses of the methodseach as they applyit applies to the specific line of business and accident year.
Certain types of exposuresliabilities, by their nature, do not lend themselves to standard actuarialloss development methods. Examples of these are:
The result of the reserve review is a set of ultimate loss expenses”). These expenses are first allocated toand loss expense estimates by line of business, including the current and alternative projection methods are then applied to estimate expenses by calendar year, which are then allocated back toprior accident years. Furthermore, the applicable accident years for reporting.
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. Considering the reserve range along with all of the items described above, as well as current market conditions, IBNR estimates are then established and recorded.
We do not discount to present value that portion of our lossesloss 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.
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Claims are counted at the occurrence, line of business, and policy level. For example, if a single occurrence (e.g. an autoautomobile accident) leads to a claim under an autoautomobile 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.
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, and estimates of premiums earned but unbilled on the workers compensation and general liability lines of insurance, 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). Audit premium when it is reasonably possible to do so based on historical trends adjusted for the uncertainty of future economic conditions. Economic instability could ultimately impact our estimates and assumptions, and changes in ourIf we determine it is not reasonably possible to estimate may be material to the results of operations in future periods. 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.this premium, we do not do so.
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.
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, (“IRS”), the interestthese amounts would be recognized as “Interesta component of “Total federal income tax expense” and the penalties would be recognized as either “Other insurance expenses” or "Corporate expenses" on the Consolidated StatementsStatement of Income depending on the nature of what caused the occurrence of such an item.
We have various operating leases for office space, equipment, and fleet vehicles. RentalIn 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 for suchis 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 is recorded on a straight-line basis over the lease term. If a lease has a fixed and determinable escalation clause, or periods of rent holidays, the difference between rental expense and rent paid is included in "Other liabilities" in the Consolidated Balance Sheets.
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Our pension and post-retirement life benefit 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 the employee isemployees are currently entitled, based on the average life expectancy of the employee.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 MarchJune 2016, the Financial Accounting Standards Board ("FASB"(“FASB”) issued Accounting StandardStandards Update ("ASU") 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions. We adopted this guidance in the first quarter of 2017, which resulted in the following impacts on our consolidated financial statements:
We adopted this guidance on January 1, 2020, applied a modified retrospective approach for the adoption, and recorded a net cumulative-effect adjustment to asincrease the currentopening 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 loss model.losses related to the respective financial assets.
In August 2018, the FASB issued ASU 2016-132018-13, 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
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rate for fiscal years beginning after December 15, 2019,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, within thosean entity is required currently to estimate its annual periods. Early adoptioneffective 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 permitted, but no earlier than fiscal yearslimited 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 afterof the interim period that includes March 2020, or any date thereafter through December 15, 2018.31, 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, 2017, 2016,2020, 2019, and 20152018 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 | 0 | |||||||||||||||||
| Operating cash flows from financing leases | 15 | 16 | 0 | |||||||||||||||||
| 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 | 0 | 0 | |||||||||||||||||
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 | 0 | |||||||||||||||||
| Non-cash purchase of property and equipment | 590 | 89 | 291 | |||||||||||||||||
| ($ in thousands) | 2017 | 2016 | 2015 | |||||||
| Cash paid during the period for: | ||||||||||
| Interest | $ | 23,905 | 22,098 | 21,892 | ||||||
| Federal income tax | 62,000 | 46,405 | 39,500 | |||||||
| Non-cash items: | ||||||||||
| Exchange of fixed income securities, AFS | 22,511 | 23,579 | 36,792 | |||||||
| Exchange of fixed income securities, HTM | — | — | 15,257 | |||||||
Corporate actions related to equity securities, AFS1 | 4,725 | 3,263 | 4,239 | |||||||
| Assets acquired under capital lease arrangements | 278 | 3,151 | 6,760 | |||||||
| Non-cash purchase of property and equipment | — | 78 | — | |||||||
1Examples of such corporate actions include exchanges, non-cash acquisitions, and stock-splits.
| ($ 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 NFIP,National Flood Insurance Program ("NFIP"), which is restricted to pay flood claims under the Write Your Own Program.
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Note 5. Investments
(a) Net unrealized gains on investments included in OCI by asset class were as follows for the years ended December 31, 2017, 2016,2020, 2019, and 2015: 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 | 0 | |||||||||||||||||
| 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 | 0 | 0 | 30,726 | |||||||||||||||||
Cumulative effect adjustment due to accounting changes for stranded tax assets1 | 0 | 0 | (17,920) | |||||||||||||||||
| Increase (decrease) in net unrealized gains in OCI, net of deferred income tax | $ | 134,857 | 168,505 | (65,881) | ||||||||||||||||
| ($ in thousands) | 2017 | 2016 | 2015 | |||||||
| AFS securities: | ||||||||||
| Fixed income securities | $ | 85,806 | 38,781 | 55,689 | ||||||
| Equity securities | 38,894 | 25,864 | 13,235 | |||||||
| Total AFS securities | 124,700 | 64,645 | 68,924 | |||||||
| HTM securities: | ||||||||||
| Fixed income securities | (21 | ) | 159 | 300 | ||||||
| Total HTM securities | (21 | ) | 159 | 300 | ||||||
| Total net unrealized gains | 124,679 | 64,804 | 69,224 | |||||||
| Deferred income tax | (44,103 | ) | (22,681 | ) | (24,228 | ) | ||||
| Net unrealized gains, net of deferred income tax | 80,576 | 42,123 | 44,996 | |||||||
| Increase (decrease) in net unrealized gains in OCI, net of deferred income tax | $ | 38,453 | (2,873 | ) | (35,398 | ) | ||||
(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 | 0 | 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 | 0 | 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 | |||||||||||||||||||||
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The amortized cost, net unrealized gains andfollowing table provides a roll forward of the allowance for credit losses carrying value, unrecognized holding gains and losses, and fair value of HTMon our AFS fixed income securities were as follows: for 2020:
| December 31, 2017 | Net | ||||||||||||||||||
| Unrealized | Unrecognized | Unrecognized | |||||||||||||||||
| Amortized | Gains | Carrying | Holding | Holding | Fair | ||||||||||||||
| ($ in thousands) | Cost | (Losses) | Value | Gains | Losses | Value | |||||||||||||
| Obligations of state and political subdivisions | $ | 25,154 | 84 | 25,238 | 1,023 | — | 26,261 | ||||||||||||
| Corporate securities | 16,996 | (105 | ) | 16,891 | 1,003 | (55 | ) | 17,839 | |||||||||||
| Total HTM fixed income securities | $ | 42,150 | (21 | ) | 42,129 | 2,026 | (55 | ) | 44,100 | ||||||||||
| 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 | $ | 0 | 19 | 0 | (18) | 0 | 1 | ||||||||||||||||||||||||||||
| Obligations of states and political subdivisons | 0 | 4 | 0 | 0 | 0 | 4 | |||||||||||||||||||||||||||||
| Corporate Securities | 0 | 3,645 | 0 | (781) | (82) | 2,782 | |||||||||||||||||||||||||||||
| CLO and other ABS | 0 | 722 | 0 | (113) | (17) | 592 | |||||||||||||||||||||||||||||
| RMBS | 0 | 623 | 0 | (62) | 0 | 561 | |||||||||||||||||||||||||||||
| CMBS | 0 | 29 | 0 | 0 | 0 | 29 | |||||||||||||||||||||||||||||
| Total AFS fixed income securities | $ | 0 | 5,042 | 0 | (974) | (99) | 3,969 | ||||||||||||||||||||||||||||
| December 31, 2016 | Net | ||||||||||||||||||
| Unrealized | Unrecognized | Unrecognized | |||||||||||||||||
| Amortized | Gains | Carrying | Holding | Holding | Fair | ||||||||||||||
| ($ in thousands) | Cost | (Losses) | Value | Gains | Losses | Value | |||||||||||||
| Obligations of state and political subdivisions | 77,466 | 317 | 77,783 | 2,133 | — | 79,916 | |||||||||||||
| Corporate securities | 22,711 | (143 | ) | 22,568 | 1,665 | (158 | ) | 24,075 | |||||||||||
| CMBS | 1,220 | (15 | ) | 1,205 | 15 | — | 1,220 | ||||||||||||
| Total HTM fixed income securities | $ | 101,397 | 159 | 101,556 | 3,813 | (158 | ) | 105,211 | |||||||||||
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 they represent fair value fluctuations from the later of: (i) the datewe write-off these balances in a security is designated as HTM either through purchase or transfer from AFS; or (ii) the date that an OTTI charge is recognized timely manner. As of December 31, 2020, accrued interest
on an HTM security, through the dateAFS securities amounted to $43.8 million and we did not record any write-offs of the balance sheet.accrued interest during 2020.
(c) The cost/amortized cost, unrealized gains and losses, and fair value of AFS securities were as follows:
| December 31, 2017 | |||||||||||||
| Cost/ | |||||||||||||
| Amortized | Unrealized | Unrealized | Fair | ||||||||||
| ($ in thousands) | Cost | Gains | Losses | Value | |||||||||
| AFS fixed income securities: | |||||||||||||
| U.S. government and government agencies | $ | 49,326 | 647 | (233 | ) | 49,740 | |||||||
| Foreign government | 18,040 | 526 | (11 | ) | 18,555 | ||||||||
| Obligations of states and political subdivisions | 1,539,307 | 44,245 | (582 | ) | 1,582,970 | ||||||||
| Corporate securities | 1,588,339 | 30,891 | (1,762 | ) | 1,617,468 | ||||||||
| CLO and other ABS | 789,152 | 6,508 | (202 | ) | 795,458 | ||||||||
| CMBS | 382,727 | 1,563 | (841 | ) | 383,449 | ||||||||
| RMBS | 709,825 | 6,487 | (1,430 | ) | 714,882 | ||||||||
| Total AFS fixed income securities | 5,076,716 | 90,867 | (5,061 | ) | 5,162,522 | ||||||||
| AFS equity securities: | |||||||||||||
| Common stock | 129,696 | 38,287 | (226 | ) | 167,757 | ||||||||
| Preferred stock | 14,115 | 904 | (71 | ) | 14,948 | ||||||||
| Total AFS equity securities | 143,811 | 39,191 | (297 | ) | 182,705 | ||||||||
| Total AFS securities | $ | 5,220,527 | 130,058 | (5,358 | ) | 5,345,227 | |||||||
| December 31, 2016 | |||||||||||||
| Cost/ | |||||||||||||
| Amortized | Unrealized | Unrealized | Fair | ||||||||||
| ($ in thousands) | Cost | Gains | Losses | Value | |||||||||
| AFS fixed income securities: | |||||||||||||
| U.S. government and government agencies | $ | 75,139 | 2,230 | (36 | ) | 77,333 | |||||||
| Foreign government | 26,559 | 322 | (16 | ) | 26,865 | ||||||||
| Obligations of states and political subdivisions | 1,366,287 | 18,610 | (5,304 | ) | 1,379,593 | ||||||||
| Corporate securities | 1,976,556 | 27,057 | (5,860 | ) | 1,997,753 | ||||||||
| CLO and other ABS | 527,876 | 1,439 | (355 | ) | 528,960 | ||||||||
| CMBS | 256,356 | 1,514 | (1,028 | ) | 256,842 | ||||||||
| RMBS | 524,986 | 3,006 | (2,798 | ) | 525,194 | ||||||||
| Total AFS fixed income securities | 4,753,759 | 54,178 | (15,397 | ) | 4,792,540 | ||||||||
| AFS equity securities: | |||||||||||||
| Common stock | 104,663 | 26,250 | (305 | ) | 130,608 | ||||||||
| Preferred stock | 16,226 | 274 | (355 | ) | 16,145 | ||||||||
| Total AFS equity securities | 120,889 | 26,524 | (660 | ) | 146,753 | ||||||||
| Total AFS securities | $ | 4,874,648 | 80,702 | (16,057 | ) | 4,939,293 | |||||||
| 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) | 0 | 0 | 11,519 | (137) | |||||||||||||||||||||||||||||||
| Foreign government | 1,122 | (3) | 0 | 0 | 1,122 | (3) | ||||||||||||||||||||||||||||||||
| Obligations of states and political subdivisions | 2,223 | (11) | 0 | 0 | 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, 2017 | 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 | $ | 23,516 | (233 | ) | 250 | — | 23,766 | (233 | ) | ||||||||||
| Foreign government | 1,481 | (11 | ) | — | — | 1,481 | (11 | ) | |||||||||||
| Obligations of states and political subdivisions | 107,514 | (422 | ) | 14,139 | (160 | ) | 121,653 | (582 | ) | ||||||||||
| Corporate securities | 238,326 | (1,744 | ) | 3,228 | (18 | ) | 241,554 | (1,762 | ) | ||||||||||
| CLO and other ABS | 74,977 | (196 | ) | 1,655 | (6 | ) | 76,632 | (202 | ) | ||||||||||
| CMBS | 154,267 | (773 | ) | 5,214 | (68 | ) | 159,481 | (841 | ) | ||||||||||
| RMBS | 269,485 | (1,285 | ) | 11,200 | (145 | ) | 280,685 | (1,430 | ) | ||||||||||
| Total AFS fixed income securities | 869,566 | (4,664 | ) | 35,686 | (397 | ) | 905,252 | (5,061 | ) | ||||||||||
| AFS equity securities: | |||||||||||||||||||
| Common stock | 4,727 | (226 | ) | — | — | 4,727 | (226 | ) | |||||||||||
| Preferred stock | 3,833 | (71 | ) | — | — | 3,833 | (71 | ) | |||||||||||
| Total AFS equity securities | 8,560 | (297 | ) | — | — | 8,560 | (297 | ) | |||||||||||
| Total AFS securities | $ | 878,126 | (4,961 | ) | 35,686 | (397 | ) | 913,812 | (5,358 | ) | |||||||||
| 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 | $ | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||
| Foreign government | 1,416 | (2) | 0 | 0 | 1,416 | (2) | ||||||||||||||||||||||||||||||||
| Obligations of states and political subdivisions | 35,838 | (270) | 0 | 0 | 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) | |||||||||||||||||||||||||||||||
| December 31, 2016 | 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 | $ | 6,419 | (36 | ) | — | — | $ | 6,419 | $ | (36 | ) | ||||||||||
| Foreign government | 13,075 | (16 | ) | — | — | 13,075 | (16 | ) | |||||||||||||
| Obligations of states and political subdivisions | 306,509 | (5,304 | ) | — | — | 306,509 | (5,304 | ) | |||||||||||||
| Corporate securities | 462,902 | (5,771 | ) | 4,913 | (89 | ) | 467,815 | (5,860 | ) | ||||||||||||
| CLO and other ABS | 189,795 | (354 | ) | 319 | (1 | ) | 190,114 | (355 | ) | ||||||||||||
| CMBS | 82,492 | (1,021 | ) | 1,645 | (7 | ) | 84,137 | (1,028 | ) | ||||||||||||
| RMBS | 279,480 | (2,489 | ) | 8,749 | (309 | ) | 288,229 | (2,798 | ) | ||||||||||||
| Total AFS fixed income securities | 1,340,672 | (14,991 | ) | 15,626 | (406 | ) | 1,356,298 | (15,397 | ) | ||||||||||||
| AFS equity securities: | |||||||||||||||||||||
| Common stock | 11,271 | (305 | ) | — | — | 11,271 | (305 | ) | |||||||||||||
| Preferred stock | 6,168 | (355 | ) | — | — | 6,168 | (355 | ) | |||||||||||||
| Total AFS equity securities | 17,439 | (660 | ) | — | — | 17,439 | (660 | ) | |||||||||||||
| Total AFS securities | $ | 1,358,111 | (15,651 | ) | 15,626 | (406 | ) | $ | 1,373,737 | $ | (16,057 | ) | |||||||||
We do not currently intend to sell any of the securities in the tables above, nor dowill we believe we will be required to sell any of these securities. Additionally, we have reviewedConsidering these factors and our review of these securities in accordance withunder our OTTIcredit loss policy as described in Note 2. “Summary of Significant Accounting Policies” of this Form 10-K, andwe have concluded that they are temporarily impaired.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. If our judgment about an individual security changes in the future, we may ultimately record a credit loss after having originally concluded that one did not exist, which could have a material impact on our net income and financial position in future periods.
93
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, 2017:2020:
| AFS | HTM | AFS | HTM | |||||||||||||||||||||||||||
| ($ in thousands) | Fair Value | Carrying Value | Fair Value | ($ in thousands) | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||||||
| Due in one year or less | $ | 315,857 | 10,997 | 11,168 | Due in one year or less | $ | 433,241 | 1,132 | 1,149 | |||||||||||||||||||||
| Due after one year through five years | 2,099,529 | 23,035 | 24,235 | Due after one year through five years | 3,639,658 | 15,692 | 16,852 | |||||||||||||||||||||||
| Due after five years through 10 years | 2,510,294 | 8,097 | 8,697 | Due after five years through 10 years | 1,910,480 | 0 | 0 | |||||||||||||||||||||||
| Due after 10 years | 236,842 | — | — | Due after 10 years | 472,549 | 0 | 0 | |||||||||||||||||||||||
| Total fixed income securities | $ | 5,162,522 | 42,129 | 44,100 | Total fixed income securities | $ | 6,455,928 | 16,824 | 18,001 | |||||||||||||||||||||
| 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 | 0 | 35,370 | 32,667 | 0 | 32,667 | ||||||||||||||||||||||||||||||||
| Total other investments | $ | 266,322 | 215,728 | 482,050 | 216,807 | 219,219 | 436,026 | |||||||||||||||||||||||||||||||
| Other Investments | December 31, 2017 | December 31, 2016 | |||||||||||||||||
| ($ in thousands) | Carrying Value | Remaining Commitment | Maximum Exposure to Loss1 | Carrying Value | Remaining Commitment | Maximum Exposure to Loss1 | |||||||||||||
| Alternative Investments | |||||||||||||||||||
| Private equity | $ | 52,251 | 99,026 | 151,277 | 41,135 | 76,774 | 117,909 | ||||||||||||
| Private credit | 37,743 | 94,959 | 132,702 | 28,193 | 40,613 | 68,806 | |||||||||||||
| Real assets | 25,379 | 27,014 | 52,393 | 14,486 | 22,899 | 37,385 | |||||||||||||
| Total alternative investments | 115,373 | 220,999 | 336,372 | 83,814 | 140,286 | 224,100 | |||||||||||||
Other securities2 | 16,895 | — | 16,895 | 18,583 | 3,400 | 21,983 | |||||||||||||
| Total other investments | $ | 132,268 | 220,999 | 353,267 | 102,397 | 143,686 | 246,083 | ||||||||||||
1The maximum exposure to loss includes both the carrying value of these investments and the related unfunded commitments. In addition tax credits that have beento the amounts in this table, previously recognized in Other securitiestax credits are subject to the risk of recapture, which werecapture. We do not consider significant. 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 havedid not providedprovide any non-contractual financial support at any time during 20172020 or 2016.2019.
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.
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 forwith strong long-term capital appreciation.growth potential. This strategy makes private equity investments in seed stage, early stage, late stage, and growth equity and buyout partnerships.
Our private credit strategy includes the following:
•Mezzanine Financing: This strategy provides privately negotiatedprivately-negotiated fixed income securities, generally with an equity component, to LBO firms and private and publicly tradedpublicly-traded large, mid, and small-cap companies to finance LBOs, recapitalizations, and acquisitions.
•Opportunistic and Distressed Debt: This strategy makes direct and indirect investments in debt and equity securities of companies that are experiencing financial and/distress, operational issues, or operational distress.dislocated pricing of publicly-traded securities. Investments
94
include buying indebtedness of bankrupt or financially troubledfinancially-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:
•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 generallymay employ low or moderate levels of leverage and may use hedging only 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. We anticipate that the general partners of these alternative investments will liquidate their underlying investment portfolios through 2032.
The following tables set forthshow gross summarized financial information for our other investments portfolio, including the portion we do not owned by us.own. The investments are carried under the equity method of accounting. The last line in the income statement information table below reflects our shareportion of the aggregate income, which is the portionresults 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 | ||||||||||||
| Balance Sheet Information | |||||||
| September 30, | |||||||
| ($ in millions) | 2017 | 2016 | |||||
| Investments | $ | 21,046 | 11,244 | ||||
| Total assets | 22,357 | 12,075 | |||||
| Total liabilities | 4,767 | 1,802 | |||||
| Total partners’ capital | 17,590 | 10,273 | |||||
| Income Statement Information | Income Statement Information | |||||||||||||||||||||||||||||
| 12 months ended September 30, | 12 months ended September 30, | |||||||||||||||||||||||||||||
| ($ in millions) | 2017 | 2016 | 2015 | ($ in millions) | 2020 | 2019 | 2018 | |||||||||||||||||||||||
| Net investment (loss) income | $ | (143 | ) | (44 | ) | 129 | Net investment (loss) income | $ | (26) | (8) | 134 | |||||||||||||||||||
| Realized gains | 325 | 1,374 | 1,187 | Realized gains | 1,452 | 695 | 1,981 | |||||||||||||||||||||||
| Net change in unrealized appreciation (depreciation) | 2,894 | (719 | ) | (1,364 | ) | |||||||||||||||||||||||||
| Net income | $ | 3,076 | 611 | (48 | ) | |||||||||||||||||||||||||
| Net change in unrealized appreciation | Net change in unrealized appreciation | 4,898 | 5,543 | 1,303 | ||||||||||||||||||||||||||
| Net income before tax | Net income before tax | $ | 6,324 | 6,230 | 3,418 | |||||||||||||||||||||||||
| Insurance Subsidiaries' alternative investments income (loss) | 12.7 | 3.1 | (1.9 | ) | ||||||||||||||||||||||||||
| Alternative investment income included in "Net investment income earned" on our Consolidated Statements of Income | Alternative investment income included in "Net investment income earned" on our Consolidated Statements of Income | 26.5 | 17.9 | 17.6 | ||||||||||||||||||||||||||
95
The following table summarizes the market value of these securities at December 31, 2017:2020:
| ($ in millions) | FHLBI Collateral | FHLBNY Collateral | State and Regulatory Deposits | Total | ||||||||||||||||||||||
| U.S. government and government agencies | $ | 0 | 0 | 20.1 | 20.1 | |||||||||||||||||||||
| Obligations of states and political subdivisions | 0 | 0 | 5.1 | 5.1 | ||||||||||||||||||||||
| RMBS | 125.0 | 178.1 | 0 | 303.1 | ||||||||||||||||||||||
| CMBS | 7.0 | 36.3 | 0 | 43.3 | ||||||||||||||||||||||
| Total pledged as collateral | $ | 132.0 | 214.4 | 25.2 | 371.6 | |||||||||||||||||||||
| ($ in millions) | FHLBI Collateral | FHLBNY Collateral | State and Regulatory Deposits | Total | |||||||||
| U.S. government and government agencies | $ | 3.0 | — | 22.6 | 25.6 | ||||||||
| Obligations of states and political subdivisions | — | — | 3.1 | 3.1 | |||||||||
| CMBS | 6.2 | 14.1 | — | 20.3 | |||||||||
| RMBS | 56.3 | 59.6 | — | 115.9 | |||||||||
| Total pledged as collateral | $ | 65.5 | 73.7 | 25.7 | 164.9 | ||||||||
| ($ in thousands) | 2017 | 2016 | 2015 | ($ in thousands) | 2020 | 2019 | 2018 | |||||||||||||||||||||||
| Fixed income securities | $ | 153,230 | 129,306 | 123,230 | Fixed income securities | $ | 203,926 | 203,255 | 178,104 | |||||||||||||||||||||
| CMLs | CMLs | 844 | 0 | 0 | ||||||||||||||||||||||||||
| Equity securities | 6,442 | 7,368 | 9,161 | Equity securities | 9,286 | 6,996 | 7,764 | |||||||||||||||||||||||
| Short-term investments | 1,526 | 686 | 112 | Short-term investments | 1,821 | 6,653 | 3,472 | |||||||||||||||||||||||
| Other investments | 12,871 | 2,940 | (1,890 | ) | Other investments | 26,922 | 18,778 | 17,799 | ||||||||||||||||||||||
| Investment expenses | (12,187 | ) | (9,546 | ) | (9,297 | ) | Investment expenses | (15,692) | (13,139) | (11,803) | ||||||||||||||||||||
| Net investment income earned | $ | 161,882 | 130,754 | 121,316 | Net investment income earned | $ | 227,107 | 222,543 | 195,336 | |||||||||||||||||||||
| 2017 | Recognized in Earnings | |||||||||
| ($ in thousands) | Gross | Included in OCI | ||||||||
| AFS fixed income securities: | ||||||||||
| U.S. government and government agencies | $ | 36 | — | 36 | ||||||
| Obligations of states and political subdivisions | 612 | — | 612 | |||||||
| Corporate securities | 587 | — | 587 | |||||||
| CLO and other ABS | 96 | — | 96 | |||||||
| CMBS | 670 | — | 670 | |||||||
| RMBS | 1,183 | (36 | ) | 1,219 | ||||||
| Total AFS fixed income securities | 3,184 | (36 | ) | 3,220 | ||||||
| AFS equity securities: | ||||||||||
| Common stock | 1,435 | — | 1,435 | |||||||
| Total AFS equity securities | 1,435 | — | 1,435 | |||||||
| Other investments | $ | 190 | — | 190 | ||||||
| Total OTTI losses | $ | 4,809 | (36 | ) | 4,845 | |||||
| ($ 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) | ||||||||||||||||
| 2016 | Recognized in Earnings | |||||||||
| ($ in thousands) | Gross | Included in OCI | ||||||||
| AFS fixed income securities: | ||||||||||
| Obligations of states and political subdivisons | $ | 2,797 | — | 2,797 | ||||||
| Corporate securities | 1,880 | — | 1,880 | |||||||
| CLO and other ABS | 19 | — | 19 | |||||||
| CMBS | 220 | — | 220 | |||||||
| RMBS | 275 | 10 | 265 | |||||||
| Total AFS fixed income securities | 5,191 | 10 | 5,181 | |||||||
| AFS equity securities: | ||||||||||
| Common stock | 3,316 | — | 3,316 | |||||||
| Preferred stock | 2 | — | 2 | |||||||
| Total AFS equity securities | 3,318 | — | 3,318 | |||||||
| Total OTTI losses | $ | 8,509 | 10 | 8,499 | ||||||
| 2015 | Recognized in Earnings | |||||||||
| ($ in thousands) | Gross | Included in OCI | ||||||||
| AFS fixed income securities: | ||||||||||
| Corporate securities | $ | 2,188 | — | 2,188 | ||||||
| RMBS | 1 | — | 1 | |||||||
| Total AFS fixed income securities | 2,189 | — | 2,189 | |||||||
| AFS equity securities: | ||||||||||
| Common stock | 15,996 | — | 15,996 | |||||||
| Preferred stock | 181 | — | 181 | |||||||
| Total AFS equity securities | 16,177 | — | 16,177 | |||||||
| Total OTTI losses | $ | 18,366 | — | 18,366 | ||||||
| ($ 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) | ||||||||||||||||
| ($ in thousands) | 2017 | 2016 | 2015 | |||||||
| HTM fixed income securities | ||||||||||
| Gains | $ | 44 | 3 | 5 | ||||||
| Losses | (1 | ) | (1 | ) | (1 | ) | ||||
| AFS fixed income securities | ||||||||||
| Gains | 10,193 | 7,741 | 4,515 | |||||||
| Losses | (3,292 | ) | (11,411 | ) | (312 | ) | ||||
| AFS equity securities | ||||||||||
| Gains | 5,829 | 8,108 | 29,168 | |||||||
| Losses | (1,200 | ) | (864 | ) | (1,347 | ) | ||||
| Short-term investments | ||||||||||
| Gains | 2 | — | — | |||||||
| Losses | (6 | ) | (13 | ) | — | |||||
| Other investments | ||||||||||
| Gains | 494 | 3 | 162 | |||||||
| Losses | (859 | ) | (4 | ) | (653 | ) | ||||
| Total net realized investment gains | $ | 11,204 | 3,562 | 31,537 | ||||||
Net realized gains (losses) on disposals in the table above were driven by the following:
•2020: Active management of the fixed income securities portfolio.
•2018: Higher trading volume driven by opportunistic sales in both our fixed income securities portfolio relatedand equity portfolios.
Losses on securities for which we have the intent to a more active externalsell of $16.3 million were recorded in 2020 to provide our investment management approachmanagers flexibility to trade and opportunistic sales inoptimize our equityinvestment portfolio.
96
Note 6. Comprehensive Income
(a) The components of comprehensive income, both gross and net of tax, for 2017, 2016,2020, 2019, and 20152018 were as follows:
| 2020 | ||||||||||||||||||||
| ($ 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 | ||||||||||||||||
| 2017 | ||||||||||
| ($ in thousands) | Gross | Tax | Net | |||||||
| Net income | $ | 261,968 | 93,142 | 168,826 | ||||||
| Components of OCI: | ||||||||||
Unrealized gains (losses) on investment securities: | ||||||||||
| Unrealized holding gains during the year | 66,894 | 23,879 | 43,015 | |||||||
| Non-credit portion of OTTI recognized in OCI | 36 | 13 | 23 | |||||||
| Amounts reclassified into net income: | ||||||||||
| HTM securities | (179 | ) | (63 | ) | (116 | ) | ||||
| Non-credit OTTI | 104 | 36 | 68 | |||||||
| Realized gains on AFS securities | (6,979 | ) | (2,442 | ) | (4,537 | ) | ||||
| Net unrealized gains | 59,876 | 21,423 | 38,453 | |||||||
| Defined benefit pension and post-retirement plans: | ||||||||||
| Net actuarial loss | (4,684 | ) | (984 | ) | (3,700 | ) | ||||
| Amounts reclassified into net income: | ||||||||||
| Net actuarial loss | 2,102 | 735 | 1,367 | |||||||
| Defined benefit pension and post-retirement plans | (2,582 | ) | (249 | ) | (2,333 | ) | ||||
| Other comprehensive income | 57,294 | 21,174 | 36,120 | |||||||
| Comprehensive income | $ | 319,262 | 114,316 | 204,946 | ||||||
97
| 2016 | ||||||||||
| ($ in thousands) | Gross | Tax | Net | |||||||
| Net income | $ | 219,955 | 61,460 | 158,495 | ||||||
| Components of OCI: | ||||||||||
Unrealized (losses) gains on investment securities: | ||||||||||
| Unrealized holding losses during the year | (9,195 | ) | (3,218 | ) | (5,977 | ) | ||||
| Non-credit portion of OTTI recognized in OCI | (10 | ) | (4 | ) | (6 | ) | ||||
| Amounts reclassified into net income: | ||||||||||
| HTM securities | (141 | ) | (49 | ) | (92 | ) | ||||
| Non-credit OTTI | 213 | 75 | 138 | |||||||
| Realized losses on AFS securities | 4,713 | 1,649 | 3,064 | |||||||
| Net unrealized losses | (4,420 | ) | (1,547 | ) | (2,873 | ) | ||||
| Defined benefit pension and post-retirement plans: | ||||||||||
| Net actuarial loss | (12,079 | ) | (4,227 | ) | (7,852 | ) | ||||
| Amounts reclassified into net income: | �� | |||||||||
| Net actuarial loss | 6,462 | 2,262 | 4,200 | |||||||
| Defined benefit pension and post-retirement plans | (5,617 | ) | (1,965 | ) | (3,652 | ) | ||||
| Other comprehensive loss | (10,037 | ) | (3,512 | ) | (6,525 | ) | ||||
| Comprehensive income | $ | 209,918 | 57,948 | 151,970 | ||||||
| 2015 | ||||||||||
| ($ in thousands) | Gross | Tax | Net | |||||||
| Net income | $ | 232,692 | 66,831 | 165,861 | ||||||
| Components of OCI: | ||||||||||
Unrealized (losses) gains on investment securities: | ||||||||||
| Unrealized holding losses during the year | (40,221 | ) | (14,078 | ) | (26,143 | ) | ||||
| Amounts reclassified into net income: | ||||||||||
| HTM securities | (580 | ) | (203 | ) | (377 | ) | ||||
| Non-credit OTTI | 357 | 125 | 232 | |||||||
| Realized gains on AFS securities | (14,016 | ) | (4,906 | ) | (9,110 | ) | ||||
| Net unrealized losses | (54,460 | ) | (19,062 | ) | (35,398 | ) | ||||
| Defined benefit pension and post-retirement plans: | ||||||||||
| Net actuarial gain | 2,438 | 853 | 1,585 | |||||||
| Amounts reclassified into net income: | ||||||||||
| Net actuarial loss | 7,077 | 2,477 | 4,600 | |||||||
| Defined benefit pension and post-retirement plans | 9,515 | 3,330 | 6,185 | |||||||
| Other comprehensive loss | (44,945 | ) | (15,732 | ) | (29,213 | ) | ||||
| Comprehensive income | $ | 187,747 | 51,099 | 136,648 | ||||||
(b) The balances of, and changes in, each component of AOCI (net of taxes) as of December 31, 20172020 and 20162019 were as follows:
| Net Unrealized (Loss) Gain on Investment Securities | Net Unrealized (Losses) Gains on Investment Securities | Defined Benefit Pension and Post-retirement Plans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | OTTI Related | HTM Related | All Other | Investments Subtotal | Defined Benefit Pension and Post- retirement Plans | Total AOCI | ($ in thousands) | Credit Loss Related1 | HTM Related | All Other | Investments Subtotal | Total AOCI | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2015 | $ | (282 | ) | 194 | 45,083 | 44,995 | (54,420 | ) | (9,425 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | Balance, December 31, 2018 | $ | (71) | 71 | 1,888 | 1,888 | (79,844) | (77,956) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| OCI before reclassifications | (6 | ) | — | (5,977 | ) | (5,983 | ) | (7,852 | ) | (13,835 | ) | OCI before reclassifications | 0 | 0 | 168,021 | 168,021 | (10,898) | 157,123 | |||||||||||||||||||||||||||||||||||||||||||||
| Amounts reclassified from AOCI | 138 | (92 | ) | 3,064 | 3,110 | 4,200 | 7,310 | Amounts reclassified from AOCI | 0 | (46) | 530 | 484 | 2,099 | 2,583 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net current period OCI | 132 | (92 | ) | (2,913 | ) | (2,873 | ) | (3,652 | ) | (6,525 | ) | Net current period OCI | 0 | (46) | 168,551 | 168,505 | (8,799) | 159,706 | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2016 | (150 | ) | 102 | 42,170 | 42,122 | (58,072 | ) | (15,950 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | Balance, December 31, 2019 | (71) | 25 | 170,439 | 170,393 | (88,643) | 81,750 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| OCI before reclassifications | 23 | — | 43,015 | 43,038 | (3,700 | ) | 39,338 | OCI before reclassifications | (6,459) | 0 | 133,104 | 126,645 | 1,197 | 127,842 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Amounts reclassified from AOCI | 68 | (116 | ) | (4,537 | ) | (4,585 | ) | 1,367 | (3,218 | ) | Amounts reclassified from AOCI | 3,984 | (19) | 4,247 | 8,212 | 2,382 | 10,594 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net current period OCI | 91 | (116 | ) | 38,478 | 38,453 | (2,333 | ) | 36,120 | Net current period OCI | (2,475) | (19) | 137,351 | 134,857 | 3,579 | 138,436 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2017 | $ | (59 | ) | (14 | ) | 80,648 | 80,575 | (60,405 | ) | 20,170 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 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 | 0 | Net realized and unrealized investment (losses) gains | |||||||||||||||||
| 5,042 | 0 | Income before federal income tax | ||||||||||||||||||
| (1,058) | 0 | Total federal income tax expense | ||||||||||||||||||
| 3,984 | 0 | 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 | ||||||||||||||||
98
| ($ in thousands) | Year ended December 31, 2017 | Year ended December 31, 2016 | Affected Line Item in the Consolidated Statements of Income | ||||||
| OTTI related | |||||||||
Non-credit OTTI on disposed securities | $ | 104 | 213 | Net realized gains (losses) | |||||
| 104 | 213 | Income before federal income tax | |||||||
| (36 | ) | (75 | ) | Total federal income tax expense | |||||
| 68 | 138 | Net income | |||||||
| HTM related | |||||||||
| Unrealized losses on HTM disposals | 32 | 169 | Net realized gains (losses) | ||||||
| Amortization of net unrealized gains on HTM securities | (211 | ) | (310 | ) | Net investment income earned | ||||
| (179 | ) | (141 | ) | Income before federal income tax | |||||
| 63 | 49 | Total federal income tax expense | |||||||
| (116 | ) | (92 | ) | Net income | |||||
| Realized (losses) gains on AFS | |||||||||
| Realized (losses) gains on AFS disposals | (6,979 | ) | 4,713 | Net realized gains (losses) | |||||
| (6,979 | ) | 4,713 | Income before federal income tax | ||||||
| 2,442 | (1,649 | ) | Total federal income tax expense | ||||||
| (4,537 | ) | 3,064 | Net income | ||||||
| Defined benefit pension and post-retirement life plans | |||||||||
| Net actuarial loss | 450 | 1,486 | Loss and loss expense incurred | ||||||
| 1,652 | 4,976 | Other insurance expenses | |||||||
| Total defined benefit pension and post-retirement life | 2,102 | 6,462 | Income before federal income tax | ||||||
| (735 | ) | (2,262 | ) | Total federal income tax expense | |||||
| 1,367 | 4,200 | Net income | |||||||
| Total reclassifications for the period | $ | (3,218 | ) | 7,310 | 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 instrumentsliabilities as of December 31, 20172020 and 2016:2019:
| 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 | ||||||||||||||||||||||
| December 31, 2017 | December 31, 2016 | ||||||||||||
| ($ in thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||
| Financial Assets | |||||||||||||
| Fixed income securities: | |||||||||||||
| HTM | $ | 42,129 | 44,100 | 101,556 | 105,211 | ||||||||
| AFS | 5,162,522 | 5,162,522 | 4,792,540 | 4,792,540 | |||||||||
| Equity securities, AFS | 182,705 | 182,705 | 146,753 | 146,753 | |||||||||
| Short-term investments | 165,555 | 165,555 | 221,701 | 221,701 | |||||||||
| Long-term debt: | |||||||||||||
| 7.25% Senior Notes | 49,904 | 61,391 | 49,901 | 56,148 | |||||||||
| 6.70% Senior Notes | 99,446 | 116,597 | 99,430 | 108,333 | |||||||||
| 5.875% Senior Notes | 185,000 | 186,332 | 185,000 | 176,860 | |||||||||
| 1.61% Borrowings from FHLBNY | 25,000 | 24,270 | 25,000 | 24,286 | |||||||||
| 1.56% Borrowings from FHLBNY | 25,000 | 24,210 | 25,000 | 24,219 | |||||||||
| 3.03% Borrowings from FHLBI | 60,000 | 60,334 | 60,000 | 59,313 | |||||||||
| Subtotal long-term debt | 444,350 | 473,134 | 444,331 | 449,159 | |||||||||
| Unamortized debt issuance costs | (5,234 | ) | (5,664 | ) | |||||||||
| Total long-term debt | $ | 439,116 | 438,667 | ||||||||||
For discussion regarding the fair value techniques of our financial instruments, refer to Note 2. "Summary of Significant Accounting Policies" inof 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, 20172020 and 2016:2019:
| December 31, 2017 | Fair Value Measurements Using | ||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | 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)1 | Significant Other Observable Inputs (Level 2)1 | Significant Unobservable Inputs (Level 3) | ($ 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 | Description | ||||||||||||||||||||||||||||||||||||||
| Measured on a recurring basis: | Measured on a recurring basis: | ||||||||||||||||||||||||||||||||||||||
| AFS fixed income securities: | AFS fixed income securities: | ||||||||||||||||||||||||||||||||||||||
| U.S. government and government agencies | $ | 49,740 | 24,652 | 25,088 | — | U.S. government and government agencies | $ | 116,140 | 40,960 | 75,180 | 0 | ||||||||||||||||||||||||||||
| Foreign government | 18,555 | — | 18,555 | — | Foreign government | 18,366 | 0 | 18,366 | 0 | ||||||||||||||||||||||||||||||
| Obligations of states and political subdivisions | 1,582,970 | �� | 1,582,970 | — | Obligations of states and political subdivisions | 1,247,137 | 0 | 1,244,243 | 2,894 | ||||||||||||||||||||||||||||||
| Corporate securities | 1,617,468 | — | 1,617,468 | — | Corporate securities | 2,328,052 | 0 | 2,257,352 | 70,700 | ||||||||||||||||||||||||||||||
| CLO and other ABS | 795,458 | — | 795,458 | — | CLO and other ABS | 1,026,551 | 0 | 970,176 | 56,375 | ||||||||||||||||||||||||||||||
| RMBS | RMBS | 1,051,788 | 0 | 1,051,788 | 0 | ||||||||||||||||||||||||||||||||||
| CMBS | 383,449 | — | 376,895 | 6,554 | CMBS | 667,894 | 0 | 667,894 | 0 | ||||||||||||||||||||||||||||||
| RMBS | 714,882 | — | 714,882 | — | |||||||||||||||||||||||||||||||||||
| Total AFS fixed income securities | 5,162,522 | 24,652 | 5,131,316 | 6,554 | Total AFS fixed income securities | 6,455,928 | 40,960 | 6,284,999 | 129,969 | ||||||||||||||||||||||||||||||
| AFS equity securities: | |||||||||||||||||||||||||||||||||||||||
Common stock2 | 167,757 | 138,640 | — | 5,398 | |||||||||||||||||||||||||||||||||||
| Equity securities: | Equity securities: | ||||||||||||||||||||||||||||||||||||||
Common stock1 | Common stock1 | 308,632 | 261,846 | 0 | 0 | ||||||||||||||||||||||||||||||||||
| Preferred stock | 14,948 | 14,948 | — | — | Preferred stock | 1,735 | 1,735 | 0 | 0 | ||||||||||||||||||||||||||||||
| Total AFS equity securities | 182,705 | 153,588 | — | 5,398 | |||||||||||||||||||||||||||||||||||
| Total AFS securities | 5,345,227 | 178,240 | 5,131,316 | 11,952 | |||||||||||||||||||||||||||||||||||
| Total equity securities | Total equity securities | 310,367 | 263,581 | 0 | 0 | ||||||||||||||||||||||||||||||||||
| Short-term investments | 165,555 | 165,555 | — | — | Short-term investments | 409,852 | 405,400 | 4,452 | 0 | ||||||||||||||||||||||||||||||
| Total assets measured at fair value | $ | 5,510,782 | 343,795 | 5,131,316 | 11,952 | Total assets measured at fair value | $ | 7,176,147 | 709,941 | 6,289,451 | 129,969 | ||||||||||||||||||||||||||||
99
| December 31, 2016 | Fair Value Measurements Using | ||||||||||||||||||||||||||||||||||||||
| December 31, 2019 | 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)1 | Significant Other Observable Inputs (Level 2)1 | Significant Unobservable Inputs (Level 3) | ($ 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 | Description | ||||||||||||||||||||||||||||||||||||||
| Measured on a recurring basis: | Measured on a recurring basis: | ||||||||||||||||||||||||||||||||||||||
| AFS fixed income securities: | AFS fixed income securities: | ||||||||||||||||||||||||||||||||||||||
| U.S. government and government agencies | $ | 77,333 | 27,520 | 49,813 | — | U.S. government and government agencies | $ | 116,186 | 41,083 | 75,103 | 0 | ||||||||||||||||||||||||||||
| Foreign government | 26,865 | — | 26,865 | — | Foreign government | 18,542 | 0 | 18,542 | 0 | ||||||||||||||||||||||||||||||
| Obligations of states and political subdivisions | 1,379,593 | — | 1,379,593 | — | Obligations of states and political subdivisions | 1,230,090 | 0 | 1,230,090 | 0 | ||||||||||||||||||||||||||||||
| Corporate securities | 1,997,753 | — | 1,997,753 | — | Corporate securities | 1,947,477 | 0 | 1,930,426 | 17,051 | ||||||||||||||||||||||||||||||
| CLO and other ABS | 528,960 | — | 528,960 | — | CLO and other ABS | 793,012 | 3,635 | 772,343 | 17,034 | ||||||||||||||||||||||||||||||
| RMBS | RMBS | 1,451,969 | 0 | 1,451,969 | 0 | ||||||||||||||||||||||||||||||||||
| CMBS | 256,842 | — | 256,842 | — | CMBS | 538,344 | 0 | 538,344 | 0 | ||||||||||||||||||||||||||||||
| RMBS | 525,194 | — | 525,194 | — | |||||||||||||||||||||||||||||||||||
| Total AFS fixed income securities | 4,792,540 | 27,520 | 4,765,020 | — | Total AFS fixed income securities | 6,095,620 | 44,718 | 6,016,817 | 34,085 | ||||||||||||||||||||||||||||||
| AFS equity securities: | |||||||||||||||||||||||||||||||||||||||
| Common stock | 130,608 | 122,932 | — | 7,676 | |||||||||||||||||||||||||||||||||||
| Equity securities: | Equity securities: | ||||||||||||||||||||||||||||||||||||||
Common stock1 | Common stock1 | 69,900 | 32,145 | 0 | 0 | ||||||||||||||||||||||||||||||||||
| Preferred stock | 16,145 | 16,145 | — | — | Preferred stock | 3,037 | 3,037 | 0 | 0 | ||||||||||||||||||||||||||||||
| Total AFS equity securities | 146,753 | 139,077 | — | 7,676 | |||||||||||||||||||||||||||||||||||
| Total AFS securities | 4,939,293 | 166,597 | 4,765,020 | 7,676 | |||||||||||||||||||||||||||||||||||
| Total equity securities | Total equity securities | 72,937 | 35,182 | 0 | 0 | ||||||||||||||||||||||||||||||||||
| Short-term investments | 221,701 | 221,701 | — | — | Short-term investments | 282,490 | 265,306 | 17,184 | 0 | ||||||||||||||||||||||||||||||
| Total assets measured at fair value | $ | 5,160,994 | 388,298 | 4,765,020 | 7,676 | Total assets measured at fair value | $ | 6,451,047 | 345,206 | 6,034,001 | 34,085 | ||||||||||||||||||||||||||||
1There were no transfers of securities between Level 1 and Level 2.
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 2017:2020:
| 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | Obligations of states and political subdivisions | Corporate Securities | CLO and Other ABS | Total | |||||||||||||||||||||||||||||||||||||||||||
| Fair value, December 31, 2019 | $ | 0 | 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 | 0 | (1,046) | (237) | (1,283) | |||||||||||||||||||||||||||||||||||||||||||
| Net investment income earned | 0 | 21 | 6 | 27 | |||||||||||||||||||||||||||||||||||||||||||
| Purchases | 0 | 46,150 | 25,785 | 71,935 | |||||||||||||||||||||||||||||||||||||||||||
| Sales | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||
| Issuances | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||
| Settlements | 0 | (283) | (2,638) | (2,921) | |||||||||||||||||||||||||||||||||||||||||||
| Transfers into Level 3 | 2,890 | 9,592 | 31,520 | 44,002 | |||||||||||||||||||||||||||||||||||||||||||
| Transfers out of Level 3 | 0 | 0 | (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 | 0 | (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 | |||||||||||||||||||||||||||||||||||||||||||
100
| 2017 | |||||||||||||||||||||||||||||||
| 2019 | 2019 | ||||||||||||||||||||||||||||||
| ($ in thousands) | CMBS | Common Stock | ($ in thousands) | Corporate Securities | CLO and Other ABS | Total | |||||||||||||||||||||||||
| Fair value, December 31, 2016 | $ | — | 7,676 | ||||||||||||||||||||||||||||
| Fair value, December 31, 2018 | Fair value, December 31, 2018 | 0 | 7,409 | 7,409 | |||||||||||||||||||||||||||
| Total net (losses) gains for the period included in: | Total net (losses) gains for the period included in: | ||||||||||||||||||||||||||||||
| OCI | 4 | — | OCI | (118) | (261) | (379) | |||||||||||||||||||||||||
| Net income | — | — | |||||||||||||||||||||||||||||
| Net realized and unrealized (losses) gains | Net realized and unrealized (losses) gains | 0 | 0 | 0 | |||||||||||||||||||||||||||
| Net investment income earned | Net investment income earned | 0 | 245 | 245 | |||||||||||||||||||||||||||
| Purchases | 6,550 | 3,780 | Purchases | 0 | 21,282 | 21,282 | |||||||||||||||||||||||||
| Sales | — | (3,958 | ) | Sales | 0 | 0 | 0 | ||||||||||||||||||||||||
| Issuances | — | — | Issuances | 0 | 0 | 0 | |||||||||||||||||||||||||
| Settlements | — | — | Settlements | 0 | (279) | (279) | |||||||||||||||||||||||||
| Transfers into Level 3 | — | — | Transfers into Level 3 | 17,169 | 18,853 | 36,022 | |||||||||||||||||||||||||
| Transfers out of Level 3 | — | (2,100 | ) | Transfers out of Level 3 | 0 | (30,215) | (30,215) | ||||||||||||||||||||||||
| Fair value, December 31, 2017 | $ | 6,554 | $ | 5,398 | |||||||||||||||||||||||||||
| Fair value, December 31, 2019 | 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 | Change in unrealized gains (losses) for the period included in earnings for assets held at period end | 0 | 0 | 0 | |||||||||||||||||||||||||||
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, 20172020 and 2016:2019:
| 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 | 0 | 4,795 | 0 | |||||||||||||||||||||
| Corporate securities | 13,206 | 0 | 13,206 | 0 | ||||||||||||||||||||||
| Total HTM fixed income securities | $ | 18,001 | 0 | 18,001 | 0 | |||||||||||||||||||||
| CMLs | $ | 47,289 | 0 | 0 | 47,289 | |||||||||||||||||||||
| Financial Liabilities | ||||||||||||||||||||||||||
| Long-term debt: | ||||||||||||||||||||||||||
| 7.25% Senior Notes | $ | 66,148 | 0 | 66,148 | 0 | |||||||||||||||||||||
| 6.70% Senior Notes | 127,886 | 0 | 127,886 | 0 | ||||||||||||||||||||||
| 5.375% Senior Notes | 383,669 | 0 | 383,669 | 0 | ||||||||||||||||||||||
| 1.61% Borrowings from FHLBNY | 25,182 | 0 | 25,182 | 0 | ||||||||||||||||||||||
| 1.56% Borrowings from FHLBNY | 25,198 | 0 | 25,198 | 0 | ||||||||||||||||||||||
| 3.03% Borrowings from FHLBI | 67,513 | 0 | 67,513 | 0 | ||||||||||||||||||||||
| Total long-term debt | $ | 695,596 | 0 | 695,596 | 0 | |||||||||||||||||||||
101
| December 31, 2017 | Fair Value Measurements Using | ||||||||||||||||||||||||||||||||||||||
| December 31, 2019 | 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) | ($ 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 | Financial Assets | ||||||||||||||||||||||||||||||||||||||
| HTM: | HTM: | ||||||||||||||||||||||||||||||||||||||
| Obligations of states and political subdivisions | $ | 26,261 | — | 26,261 | — | Obligations of states and political subdivisions | $ | 4,921 | 0 | 4,921 | 0 | ||||||||||||||||||||||||||||
| Corporate securities | 17,839 | — | 12,306 | 5,533 | Corporate securities | 17,054 | 0 | 17,054 | 0 | ||||||||||||||||||||||||||||||
| Total HTM fixed income securities | $ | 44,100 | — | 38,567 | 5,533 | Total HTM fixed income securities | $ | 21,975 | 0 | 21,975 | 0 | ||||||||||||||||||||||||||||
| Financial Liabilities | Financial Liabilities | ||||||||||||||||||||||||||||||||||||||
| Long-term debt: | Long-term debt: | ||||||||||||||||||||||||||||||||||||||
| 7.25% Senior Notes | $ | 61,391 | — | 61,391 | — | 7.25% Senior Notes | $ | 66,365 | 0 | 66,365 | 0 | ||||||||||||||||||||||||||||
| 6.70% Senior Notes | 116,597 | — | 116,597 | — | 6.70% Senior Notes | 123,104 | 0 | 123,104 | 0 | ||||||||||||||||||||||||||||||
| 5.875% Senior Notes | 186,332 | 186,332 | — | — | |||||||||||||||||||||||||||||||||||
| 5.375% Senior Notes | 5.375% Senior Notes | 357,025 | 0 | 357,025 | 0 | ||||||||||||||||||||||||||||||||||
| 1.61% Borrowings from FHLBNY | 24,270 | — | 24,270 | — | 1.61% Borrowings from FHLBNY | 24,901 | 0 | 24,901 | 0 | ||||||||||||||||||||||||||||||
| 1.56% Borrowings from FHLBNY | 24,210 | — | 24,210 | — | 1.56% Borrowings from FHLBNY | 24,875 | 0 | 24,875 | 0 | ||||||||||||||||||||||||||||||
| 3.03% Borrowings from FHLBI | 60,334 | — | 60,334 | — | 3.03% Borrowings from FHLBI | 63,002 | 0 | 63,002 | 0 | ||||||||||||||||||||||||||||||
| Total long-term debt | $ | 473,134 | 186,332 | 286,802 | — | Total long-term debt | $ | 659,272 | 0 | 659,272 | 0 | ||||||||||||||||||||||||||||