Selective Insurance Group, Inc.
40 Wantage Avenue
Branchville, New Jersey 07890
www.Selective.com
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ANNUAL
REPORT
2016
90 years of personalized service and “Being the Best”
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90“So valuable is the human element that I will not
let this Company lose the human touch which
has been largely responsible for its success.”
-D.L.B. Smith
Founder
A horse and carriage accident in the early 1900’s led D.L.B. Smith to enter the insurance business and, in 1926,
establish the Selected Risks Insurance Company in New Jersey. While much has changed over nine decades of growth,
expansion and improvements, some things have remained the same, including the company’s commitment to servicing
customers and independent insurance agents. The historical highlights below are some of the milestones that helped
lay the foundation for Selective’s success today, our “high-tech, high-touch” business model, and unique field model.
1926
Selected issued its
first policy — a 1925
Hupmobile sedan — with
an annual premium of
$19.20.
1975
The company adds
fidelity, contract surety,
and commercial surety
bonds to its array of
products.
1995
Selective launched an
improved and expanded
field underwriting
program to bring
underwriting decision-
making closer to
customers.
2003
Selective advanced its
underwriting technology by
enhancing the Commercial
Lines Automated System
(CLAS®) and launching
SelectPLUS® for
Personal Lines.
1931
Coverages were
expanded to include
general liability,
workers compensation,
property, and municipal
government insurance.
1977
Selective Insurance
Group, Inc. (formerly
named SRI Corporation)
was incorporated.
1996
Selective began a
Midwest expansion,
adding nine new states
over two years.
1937
The company began
its growth as a regional
insurer by adding PA,
MD, DE, and DC to its
operating territory.
1962
The IBM RAMAC 1401
computer was installed,
enabling the company
to process 13 policies
per minute.
1984
The company began
issuing flood insurance
on behalf of the federal
government’s “Write
Your Own” flood
program.
2000
Selective formalized its
“high-tech, high-touch”
business model to
emphasize its commitment
to personalized customer
service and technology.
1993
Operations were
restructured into Strategic
Business Units to focus
on underwriting and
product development
for specific business
segments.
2001
Selective opened a Service
Center in Richmond,
VA, which now handles
underwriting, claims, and
personal lines services.
2007
Selective continued its
expansion by adding
MA to its operating
territory, followed by TN
in 2008.
2011
Selective acquired two
contract binding authority
excess and surplus
operations, now known
as Mesa Underwriters
Specialty Insurance
Company (MUSIC).
2016
As Selective celebrated its
90th year in business, the
company achieved record
underwriting profitability
and announced plans for a
Southwest expansion.
For the full story of our history, please visit www.Selective.com.
INVESTOR INFORMATION
Annual Meeting
Wednesday, April 26, 2017
Selective Insurance Group, Inc.
40 Wantage Avenue
Branchville, New Jersey 07890
Investor Relations
Rohan Pai
Senior Vice President
Investor Relations and Treasurer
(973) 948.1364
investor.relations@Selective.com
Dividend Reinvestment Plan
Selective Insurance Group, Inc. makes available
to holders of its common stock an automatic
dividend reinvestment and stock purchase plan.
For information contact:
Wells Fargo Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164
(866) 877.6351
Registrar and Transfer Agent
Wells Fargo Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164
(866) 877.6351
Auditors
KPMG LLP
345 Park Avenue
New York, New York 10154
Internal Audit Department
Martin Hollander
Chief Audit Executive
internal.audit@Selective.com
Executive Office
40 Wantage Avenue
Branchville, New Jersey 07890
(973) 948.3000
Shareholder Relations
Robyn P. Turner
Corporate Secretary
(973) 948.1766
shareholder.relations@Selective.com
Common Stock Information
Selective Insurance Group, Inc.’s common
stock trades on the NASDAQ Global Select
Market under the symbol: SIGI.
Form 10-K
Selective’s Form 10-K, as filed with the
U.S. Securities and Exchange Commission,
is provided as part of this 2016 Annual Report.
Website
Visit us at www.Selective.com
for information about Selective,
including our latest financial news.
2016 FINANCIAL HIGHLIGHTS
($ in millions, except per share data)
Insurance Operations
Net premiums written (NPW)
GAAP combined ratio
Statutory combined ratio
Underwriting gain after-tax
Return on equity (ROE) from insurance operations after-tax
Investments
Net investment income after-tax
Net realized (losses) gains after-tax
Total invested assets
Invested assets per dollar of stockholders’ equity
Annual after-tax yield on investment portfolio
ROE from net investment income after-tax
Summary Data
Total revenues
Net income
Return on average equity
Operating income*
Operating return on average equity*
Operating cash flow as % of NPW
Total assets
Stockholders’ equity
Per Share Data
Diluted net income
Diluted operating income*
Dividends
Stockholders’ equity
2016
2015
% or Point Change
Better (Worse)
$2,237.3
$2,069.9
92.9%
91.8%
$98.8
6.7%
$98.4
$(3.2)
$5,364.9
$3.50
1.9%
6.7%
92.5%
92.4%
$96.9
7.3%
$93.8
$8.6
$5,089.3
$3.64
1.9%
7.0%
$2,284.3
$2,131.9
$158.5
10.8%
$161.7
11.0%
13.5%
$7,355.8
$1,531.4
$2.70
$2.75
$0.61
$26.42
$165.9
12.4%
$157.3
11.8%
18.4%
$6,904.4
$1,398.0
$2.85
$2.70
$0.57
$24.37
8%
(0.4) pts
0.6 pts
2%
(0.6) pts
5%
(137)%
5%
(4)%
– pts
(0.3) pts
7%
(4)%
(1.6) pts
3%
(0.8) pts
(4.9) pts
7%
10%
(5)%
2%
7%
8%
91.8%
Overall Statutory Combined Ratio
8%
Year over Year Growth in NPW
11%
Operating Return on Equity*
8%
Year over Year Growth
in Book Value Per Share
SIGI
S&P 500
S&P Prop/Cas
Average
Annual
Return
Growth of a
$10,000 investment
(year-end 2011-16)
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
* Operating income, operating earnings per share, and operating return on equity are non-GAAP (U.S. Generally Accepted Accounting Principles) measures. Refer to the section entitled,
“Financial Highlights of Results for Years Ended December 31, 2016, 2015, and 2014” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
which appears in the Company’s Form 10-K for a reconciliation of the non-GAAP measures to the equivalent GAAP measures.
2011
2012
2013
2014
2015
2016
Selective 2016 Annual Report 1
TO OUR SHAREHOLDERS
Looking back on Selective’s highly successful history and our evolution over the past
90 years, we are particularly gratified that today, we are in our strongest position yet
from both a financial and strategic standpoint.
We are extremely pleased with our long-term financial
performance. In fact, in 2016 and 2015, we reported some
of the strongest underwriting margins in our history as a
publicly-traded company. We generated a record low statutory
combined ratio of 91.8% in 2016 and Standard & Poor’s
recognized our strong operating results when they upgraded our
financial strength ratings to A from A- in late 2016. Selective’s
stock price hit a record high in early March 2017.
Our results are even more compelling against the backdrop of
the longest low-interest rate environment we have witnessed
in several decades. Low interest rates have significantly limited
net investment income potential for the industry, and require
property and casualty companies to demonstrate strong
underwriting discipline that produces underwriting profits in
order to meet return targets. Our record underwriting margin
in 2016 demonstrates our ability to successfully execute our
strategic priorities. We achieved Commercial Lines renewal pure
price increases that, since 2009, are well above the industry
average, maintained high retention rates, and generated
substantial new business — all while improving the underlying
profitability of our book of business. While Standard Commercial
Lines remains our profit engine, with 78% of net premiums
written and a statutory combined ratio of 89.9% in 2016, we also
are pleased with the strategic direction and execution of our
Personal Lines and Excess and Surplus Lines operations.
We have transformed ourselves over the years into a super-
regional property and casualty insurance company, writing
Standard Commercial Lines business in 22 states, with a focus
on customer service, excellent product offerings, and technical
capabilities on par with national carriers. We are the 41st largest
property and casualty insurance company in the United States
as ranked by A.M. Best Company, based on 2015 net premiums
written. We have about a 1% Commercial Lines market share
in the states where we operate, and our long-term goal is to
increase our market share to approximately 3%. We seek to
accomplish this by increasing our agency appointments over
time to represent a 25% market share in the states where we are
fully operational (an additional $1.8 billion premium opportunity),
and targeting a 12% share of wallet within our existing agency
partners (an additional $1.0 billion premium opportunity). We
are also well on track to expand into new markets as part of our
geo-expansion strategy, with operations in Arizona and New
Hampshire targeted to open later in 2017. Our ultimate goal is
to develop a 50-state Standard Commercial Lines presence
to match our specialized Flood and Excess and Surplus
Lines footprint, but we will seek to achieve this objective in a
disciplined manner.
We have often described Selective’s sustainable competitive
advantages as being our: 1) true franchise value with “ivy
league” distribution partners; 2) unique field model enabled with
sophisticated underwriting and claims tools; and 3) superior
customer experience delivered by our best-in-class employees.
Enhancing our competitive strengths remains a key strategic
focus for our management team:
- We continue to invest in growing the talent in our field-based
underwriting model, and providing our distribution partners
with superior technological solutions to help them succeed.
Our partners appreciate our “high-tech, high-touch”
business model that empowers our field team with the local
underwriting authority and sophisticated tools required to
acquire business efficiently. They also value our locally-
based claims teams and Safety Management Specialists,
who are tasked with anticipating and providing advice on
risks before losses occur.
- We will be rolling out our new Underwriting Insights product
to our New Business Underwriters, providing them with
another sophisticated tool to analyze their opportunities on
an automated basis with more insightful data. The product
builds on the strong capabilities of our Dynamic Portfolio
Manager tool, helping to segment and rank business based
on expected profitability and risk characteristics. Our
ability to respond quickly and with the right solutions to our
distribution partners’ requirements is a key differentiator.
- Providing a superior customer experience and developing
omni-channel service capabilities are key strategic priorities
and differentiators for Selective. We continue to invest in
building and delivering — with our distribution partners — a
seamless world-class customer experience, 24 hours a day,
365 days a year, in a manner our customers choose, while
building out our Master Data Management and Customer
Relationship Management platforms. We strive to develop
a “360-degree view” of our customers to help provide them
with the most effective solutions.
Our achievements in 2016 could not have been accomplished
without the hard work, focus, and dedication of Selective’s
best-in-class employees who strive every day to achieve the
high targets that we set. Our focus on ensuring the highest
level of service to our distribution partners and customers
has always been the cornerstone of our strategy, and remains
vital to achieving our strategic objectives. We are committed
to delivering a product that our distribution partners and
customers can trust to be there when they need it most, along
with the great service they expect and deserve.
2
Gregory E. Murphy, Chairman
and CEO, and John J. Marchioni,
President and COO, stand in
front of the carriage that led to
Selective’s founding in 1926. The
carriage serves as a reminder of
the company’s rich and illustrious
90-year history.
2016 Financial Results
2016 was an excellent year for Selective, as we generated net
income of $158 million and an operating return on equity of 11%.
The results reflect overall favorable loss reserve development
and less severe weather, but they also reflect the significant
impact of a number of initiatives implemented to improve the
business mix and enhance claims outcomes. We believe these
improvements should lead to sustained margin benefits relative
to the industry over time. Our stated long-term financial goal is
to generate an operating return on equity for our shareholders
that is 300 basis points above our weighted average cost of
capital. Net premiums written grew at a robust 8% in 2016 and
totaled $2.2 billion. Our overall statutory combined ratio was
91.8% in 2016, our most profitable underwriting result yet as a
publicly-traded corporation.
Commercial Insurance
Our core Standard Commercial Lines business, which accounts
for 78% of total net premiums written, had another excellent
year. Net premiums written increased 9% and the statutory
combined ratio was an extremely profitable 89.9% for the year.
Results were driven by strong performance in larger lines, such
as general liability and workers compensation, but commercial
auto results negatively impacted us like the rest of the industry.
Generating profitable growth across all our businesses remains
a high priority for Selective. Renewal Commercial Lines pure
price increases averaged 2.6% in 2016, which is well above
the industry average as measured by the Willis Towers Watson
Commercial Lines Insurance Pricing Survey. Effectively
managing renewal pure price, maintaining strong retention
rates, and generating new business are core initiatives of our
growth strategy.
During 2016, Selective appointed 110 new agents and we are
planning for an additional 85 new agency appointments in 2017.
We now have 105 field-based Agency Management Specialists
servicing our distribution partners.
Personal Insurance
Personal Lines, which accounts for 13% of total net premiums
written, had a profitable year and generated a 95.2% statutory
combined ratio for 2016. Steps that we have taken in recent
years to improve performance in the homeowners line of
business resulted in a 91.7% statutory combined ratio. Our
personal auto business has experienced some adverse loss
trends, as has the rest of the industry. For some time, we have
taken aggressive pricing actions in the personal auto line that
made us less competitive. As the industry catches up and raises
prices to address profitability, we expect that our pricing will
become more competitive and we will see more opportunities to
profitably grow the business.
Excess and Surplus
Our Excess and Surplus Lines segment, which accounts for
9% of total net premiums written, generated a 102.1% statutory
combined ratio for the year. We have taken a number of steps to
address the profitability of this segment, including implementing
substantial targeted price increases and changing the business
mix. When combined with our initiatives to centralize claims
handling and improve settlement outcomes, we are on track to
increase profitability in this line significantly in the coming years.
Our long-term goal is to write the Excess and Surplus business
at a combined ratio that is better than that of our Standard
Commercial Lines segment.
Looking to the Future
As we look to the future, we are positioning ourselves for a more
competitive environment with a razor sharp focus on generating
adequate returns for our shareholders. We are preparing
ourselves for change in a period of uncertainty — whether it
be interest rates, tax rates, legislative changes, or inflation.
We will continue to invest in strategic initiatives to enhance our
technological offerings to our agents, refine our underwriting
tools, and improve the overall customer experience.
Gregory E. Murphy
Chairman and CEO
John J. Marchioni
President and COO
Selective 2016 Annual Report 3
COMPANY OVERVIEW
Where We Do Business
Selective is a super-regional insurance carrier operating in the following states:
Standard Commercial (22 states)
Targeted expansion states in 2017
Standard Personal (13 states)
* Flood Insurance available
in all 50 States.
Excess & Surplus (50 states)
Our Segments
Selective has a long history of financial strength, superior execution, and profitable growth. The company provides
value-added products and services to businesses, public entities, and individuals through the following segments:
Standard Commercial
78% of business*
Standard Personal
13% of business*
Excess & Surplus
9% of business*
Selective provides commercial
insurance to more than 80 industry
segments through our Strategic
Business Units that include
Contractors; Mercantile and Service;
Community and Public Services;
Manufacturing and Wholesale; and
Bonds. Unique risk management
solutions, safety management
expertise, customer-centric claims
service, and a commitment to
superior customer service position
Selective as the carrier of choice for
business insurance.
Selective offers a number of
customizable insurance solutions for
drivers, renters, and homeowners,
including coverage for personal
watercraft and watercraft
equipment. In addition, Selective
is the 6th largest Write Your Own
(WYO) carrier in the National Flood
Insurance Program, providing flood
building and contents coverage to
homeowners and businesses across
all 50 states.
Selective offers Excess and Surplus
Lines property, general liability, and
inland marine products coverage
through wholesale agents and
brokers to customers in targeted
industry segments, including
artisan and general contractors;
restaurants, bars and taverns; and
habitational vacant dwellings.
Investments
Conservative Investment Portfolio
Selective invests the premiums collected by our insurance
segments, as well as amounts generated throughout our
capital management strategies. The primary objective of the
investment portfolio is to maximize after-tax net investment
income while balancing risk and generating long-term growth
in shareholder value. Our overall portfolio — $5.4 billion — has
an average AA- credit quality and an effective duration of
3.6 years. For every $3.50 of invested assets, we have $1
of stockholders’ equity.
AS OF 12/31/2016
Fixed Income: 92%
Short-term: 4%
Equities: 2%
Alternatives & Other: 2%
* Based on net premiums written
4
OUR COMPETITIVE ADVANTAGES
Selective’s long history of financial strength, superior execution, and profitable
growth can be attributed to our sustainable competitive advantages:
True franchise value
with “ivy league” distribution
partners
Unique field model
coupled with sophisticated
underwriting and claims tools
Superior customer experience
delivered by best-in-class
employees
Insurance is a relationship business,
and Selective has true franchise value
with our distribution partners who
are committed to driving profitable
growth, as well as providing
best-in-class service to our shared
customers. We are the 41st largest*
property and casualty company in
the U.S., with more than 1,100 retail
and 80 wholesale distribution agents.
The cornerstone of Selective’s success
is our talented team. One of our core
values is to Be the Best, which includes
developing the best employees, creating
the best products for our customers
and delivering the best service to
our distribution partners and shared
customers. The strong customer-
centric focus shared by our employees
ensures we continually deliver a superior
customer experience across all channels,
commonly known as omni-channel, so
we can serve our customers how and
when they choose.
We have a highly responsive,
field-based model with approximately:
105 Agency Management
Specialists
15 Personal Lines
Marketing Specialists
115 Field claims adjusters
80 Safety Management
Specialists
All of our field employees are armed with
sophisticated underwriting and claims
tools to better service our distribution
partners and shared customers. Our
distribution partners cite our field
employees as the number one reason
they place their best business with us.
Our competitive advantages, coupled with our strong balance sheet and conservative investment portfolio, allow us to take
on more operating leverage with a net premiums written to statutory surplus ratio of 1.4 to 1, which is approximately twice
the industry average. As a result, each point on our combined ratio equates to approximately 1.0 point of operating ROE.**
* According to A.M. Best Top 200 U.S. Property/Casualty Writers, ranked by 2015 net premiums written.
** Operating income, operating earnings per share, and operating return on equity are non-GAAP (U.S. Generally Accepted Accounting Principles) measures. Refer to the section entitled,
“Financial Highlights of Results for Years Ended December 31, 2016, 2015, and 2014” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
which appears in the Company’s Form 10-K for a reconciliation of the non-GAAP measures to the equivalent GAAP measures.
Selective 2016 Annual Report 5
MANAGEMENT TEAM
Gregory E. Murphy
Chairman and
Chief Executive Officer
John J. Marchioni
President and
Chief Operating Officer
6
Angelique Carbo
Executive Vice President
Chief Human Resources Officer
George A. Neale
Executive Vice President
Chief Claims Officer
Gordon J. Gaudet
Executive Vice President
Chief Information Officer
Mark A. Wilcox
Executive Vice President
Chief Financial Officer
Michael H. Lanza
Executive Vice President
General Counsel and
Chief Compliance Officer
Ronald J. Zaleski, Sr.
Executive Vice President
Chief Actuary
2016 FINANCIALS
FORM 10-K
2016 ANNUAL REPORT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2016
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from_______________________to_______________________
Commission file number 001-33067
SELECTIVE INSURANCE GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
New Jersey
(State or Other Jurisdiction of Incorporation or Organization)
22-2168890
(I.R.S. Employer Identification No.)
40 Wantage Avenue, Branchville, New Jersey
(Address of Principal Executive Offices)
07890
(Zip Code)
Registrant’s telephone number, including area code:
(973) 948-3000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $2 per share
Title of each class
Name of each exchange on which registered
NASDAQ Global Select Market
5.875% Senior Notes due February 9, 2043
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
Yes
No
1
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No
The aggregate market value of the voting company common stock held by non-affiliates of the registrant, based on the closing
price on the NASDAQ Global Select Market, was $2,154,552,276 on June 30, 2016. As of February 14, 2017, the registrant
had outstanding 58,204,352 shares of common stock.
Portions of the registrant’s definitive Proxy Statement for the 2017 Annual Meeting of Stockholders to be held on April 26,
2017 are incorporated by reference into Part III of this report.
DOCUMENTS INCORPORATED BY REFERENCE
2
SELECTIVE INSURANCE GROUP, INC.
Table of Contents
Page No.
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements
Introduction
Critical Accounting Policies and Estimates
Financial Highlights of Results for Years Ended December 31, 2016, 2015, and 2014
Results of Operations and Related Information by Segment
Federal Income Taxes
Financial Condition, Liquidity, and Capital Resources
Off-Balance Sheet Arrangements
Contractual Obligations, Contingent Liabilities, and Commitments
Ratings
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Income for the Years Ended
December 31, 2016, 2015, and 2014
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2016, 2015, and 2014
Consolidated Statements of Stockholders’ Equity for the Years Ended
December 31, 2016, 2015, and 2014
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2016, 2015, and 2014
Notes to Consolidated Financial Statements
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
3
4
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32
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36
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37
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51
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64
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PART I
Item 1. Business.
Overview
Selective Insurance Group, Inc. (referred to as the “Parent”) is a New Jersey holding company that was incorporated in 1977.
Our main office is located in Branchville, New Jersey and the Parent’s common stock is publicly traded on the NASDAQ
Global Select Market under the symbol “SIGI.” The Parent has ten insurance subsidiaries, nine of which are licensed by
various state departments of insurance to write specific lines of property and casualty insurance business in the standard
market. The remaining subsidiary is authorized by various state insurance departments to write property and casualty insurance
in the excess and surplus ("E&S") lines market. Our ten insurance subsidiaries are collectively referred to as the “Insurance
Subsidiaries.” The Parent and its subsidiaries are collectively referred to as "we," “us,” or “our” in this document.
In 2016 we celebrated our 90th year in business. Over the years, we have transformed ourselves into a super-regional property
and casualty insurance company with the customer service capabilities, product offering, and technical know-how of a national
carrier.
In 2016, we were ranked as the 41st largest property and casualty group in the United States based on 2015 net premiums
written (“NPW”) in A.M. Best Company’s (“A.M. Best”) annual list of “Top 200 U.S. Property/Casualty Writers.”
The property and casualty insurance market is highly competitive, with fragmented market share and three main distribution
methods: (i) sales through independent insurance agents; (ii) direct sales to personal and commercial customers; and (iii) a
combination of independent agent and direct sales. In this highly competitive and regulated industry, we think we have three
principal strategic advantages. The first is the true franchise value we have with our independent distribution partners, who
collectively have significant market share in the states in which we operate and from whom we expect to gain increasing
percentages of the business they write. The second is our unique field model, in which our underwriting, claims, and safety
management personnel are located in the same communities as our distribution partners and customers supported by
sophisticated analytics, technology, and regional and home office support. The third is our focus on customer service and
providing an exceptional and personalized omni-channel 24/7 customer experience, which is less common in the marketplace
for commercial customers and more so for personal customers.
Based on these three principal strategic advantages, we have a financial goal to achieve an operating return on equity that is at
least three percentage points higher than our weighted-average cost of capital over time. For further details regarding our 2016
performance as it relates to return on equity, refer to "Financial Highlights of Results for Years Ended December 31, 2016,
2015, and 2014" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." of this
Form 10-K.
Furthermore, Financial Strength Ratings play a significant role in insurance purchasing recommendations by our distribution
partners and in decision-making by our customers. Distribution partners generally recommend higher rated carriers to limit
their liability for error and omission claims, and customers often have minimum insurer rating requirements in loan and other
banking covenants securing real and personal property. Our Insurance Subsidiaries’ ratings by major rating agency are as
follows:
Rating Agency
A.M. Best
Standard & Poor’s Global Ratings (“S&P”)
Moody’s Investors Services (“Moody’s”)
Fitch Ratings (“Fitch”)
Financial Strength Rating
A
A
A2
A+
Outlook
Stable
Stable
Stable
Stable
For further discussion on our ratings, please see the “Ratings” section of Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.” of this Form 10-K.
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.
4
Segments
We classify our business into four reportable segments, which are as follows:
•
•
Standard Commercial Lines, which is comprised of insurance products and services provided in the standard
marketplace to commercial enterprises, which are typically businesses, non-profit organizations, and local
government agencies. This business represents 78% of our total insurance segments’ NPW and is sold in 22 Eastern
and Midwestern states and the District of Columbia.
Standard Personal Lines, which is comprised of insurance products and services provided primarily to individuals
acquiring coverage in the standard marketplace. This business represents 13% of our total insurance segments’
NPW and is primarily sold in 13 Eastern and Midwestern states and the District of Columbia. Standard Personal
Lines includes flood insurance coverage. We are the sixth largest writer of this coverage through the National Flood
Insurance Program (“NFIP”) and write flood business in all 50 states and the District of Columbia.
• E&S Lines, which is comprised of insurance products and services provided to customers who have not obtained
coverage in the standard marketplace. We currently only write commercial lines E&S coverages and this business
represents 9% of our total insurance segments’ NPW and is sold in all 50 states and the District of Columbia.
•
Investments, which invests the premiums collected by our insurance segments, as well as amounts generated
through our capital management strategies, which includes the issuance of debt and equity securities.
We derive substantially all of our income in three ways:
• Underwriting income/loss from our insurance segments. Underwriting income/loss is comprised of revenues, which
are the premiums earned on our insurance products and services, less expenses. Gross premiums are direct premium
written (“DPW”) plus premiums assumed from other insurers. Gross premiums less premium ceded to reinsurers, is
NPW. NPW is recognized as revenue ratably over a policy’s term as net premiums earned (“NPE”). Expenses
related to our insurance segments fall into three main categories: (i) losses associated with claims and various loss
expenses incurred for adjusting claims (referred to as “losses and loss expenses”); (ii) expenses related to insurance
policy issuance, such as commissions to our distribution partners, premium taxes, and other expenses incurred in
issuing and maintaining policies, including employee compensation and benefits (referred to as “underwriting
expenses”); and (iii) policyholder dividends.
• Net investment income from the investment segment. We generate income from investing insurance premiums and
amounts generated through our capital management strategies. Net investment income consists primarily of: (i)
interest earned on fixed income investments and preferred stocks; (ii) dividends earned on equity securities; and (iii)
other income primarily generated from our alternative investment portfolio.
• Net realized gains and losses on investment securities from the investments segment. Realized gains and losses
from the investment portfolios of the Insurance Subsidiaries and the Parent are typically the result of sales, calls,
and redemptions. They also include write downs from other-than-temporary impairments (“OTTI”).
Our income is partially offset by: (i) expenses at the Parent that include general corporate expenses, as well as interest on our
debt obligations; and (ii) federal income taxes.
We use the combined ratio as the key measure in assessing the performance of our insurance segments. Under U.S. generally
accepted accounting principles (“GAAP”), the combined ratio is calculated by adding: (i) the loss and loss expense ratio,
which is the ratio of incurred losses and loss expenses to NPE; (ii) the expense ratio, which is the ratio of underwriting
expenses to NPE; and (iii) the dividend ratio, which is the ratio of policyholder dividends to NPE. Statutory accounting
principles ("SAP") provides a calculation of the combined ratio that differs from GAAP in that the statutory expense ratio is the
ratio of underwriting expenses to NPW, not NPE. A combined ratio under 100% generally indicates an underwriting profit and
a combined ratio over 100% generally indicates an underwriting loss. The combined ratio does not reflect investment income,
federal income taxes, or Parent company income or expense.
We use after-tax investment income and net realized gains or losses as the key measure in assessing the performance of our
investments segment. Our investment philosophy includes setting certain risk and return objectives for the fixed income,
equity, and other investment portfolios. We generally review our performance by comparing our returns for each of these
components of our portfolio to a weighted-average benchmark of comparable indices.
5
Our operations are heavily regulated by the state insurance regulators in the states in which our Insurance Subsidiaries are
organized and licensed or authorized to do business. In these states, the Insurance Subsidiaries are required to file financial
statements prepared in accordance with SAP, which are promulgated by the National Association of Insurance Commissioners
(“NAIC”) and adopted by the various states. Because of these state insurance regulatory requirements, we use SAP to manage
our insurance operations. The purpose of these state insurance regulations is to protect policyholders, so SAP focuses on
solvency and liquidation value unlike GAAP, which focuses on shareholder returns as a going concern. Consequently,
significant differences exist between GAAP and SAP as discussed below:
• With regard to the underwriting expense ratio: As noted above, NPE is the denominator for GAAP; whereas NPW
is the denominator for SAP.
• With regard to income or expense recognition:
• Underwriting expenses that are incremental and directly related to the successful acquisition of insurance
policies are deferred and amortized to expense over the life of an insurance policy under GAAP; whereas they
are recognized when incurred under SAP.
• Deferred taxes are recognized as either a deferred tax expense or a deferred tax benefit in income under GAAP;
whereas they are recorded directly to surplus under SAP.
• Changes in the value of our alternative investments, which are part of our other investment portfolio on our
Consolidated Balance Sheets, are recognized in income under GAAP; whereas they are recorded directly to
surplus under SAP and only recognized in income when cash is received.
• With regard to loss and loss expense reserves:
• Under GAAP, reinsurance recoverables, net of a provision for uncollectible reinsurance, are presented as an
asset on the Consolidated Balance Sheets, whereas under SAP, this amount is netted within the liability for loss
and loss expense reserves.
• Under GAAP, for those structured settlements for which we did not obtain a release, a deposit asset and the
related loss reserve are included on the Consolidated Balance Sheets, whereas under SAP, the structured
settlement transaction is recorded as a paid loss.
The following table reconciles losses and loss expense reserves under GAAP and SAP at December 31 as follows:
($ in thousands)
GAAP losses and loss expense reserves – net
Statutory reinsurance recoverable on unpaid losses and loss expenses
Structured settlements
Statutory losses and loss expense reserves
2016
2015
$
$
3,691,719
(616,700)
(12,127)
3,062,892
The following table reconciles reinsurance recoverables under GAAP and SAP at December 31:
($ in thousands)
GAAP reinsurance recoverable – net
Reinsurance recoverable on paid losses and loss expenses
GAAP reinsurance recoverable on unpaid losses and loss expenses
Provision for uncollectible reinsurance
Statutory reinsurance recoverable on unpaid losses and loss expenses
2016
2015
$
$
621,537
(10,337)
611,200
5,500
616,700
3,517,728
(556,719)
(9,104)
2,951,905
561,968
(10,949)
551,019
5,700
556,719
• With regard to equity under GAAP and statutory surplus under SAP:
• The timing difference in income due to the GAAP/SAP differences in expense recognition creates a difference
between GAAP equity and SAP statutory surplus.
6
• Regarding unrealized gains and losses on fixed income securities:
• Under GAAP, unrealized gains and losses on available-for-sale (“AFS”) fixed income securities are
recognized in equity; but they are not recognized in equity on purchased held-to-maturity (“HTM”)
securities. Unrealized gains and losses on HTM securities transferred from an AFS designation are
amortized from equity as a yield adjustment.
• Under SAP, unrealized gains and losses on fixed income securities assigned certain NAIC Securities
Valuation Office ratings (specifically designations of one or two, which generally equate to investment
grade bonds) are not recognized in statutory surplus. However, unrealized losses on fixed income
securities that have a designation of three or higher are recognized in statutory surplus.
• Certain assets are designated under insurance regulations as “non-admitted,” including, but not limited to,
certain deferred tax assets, overdue premium receivables, furniture and equipment, and prepaid expenses.
These assets are recorded in the Consolidated Balance Sheets net of applicable allowances under GAAP but are
excluded from statutory surplus under SAP.
• Regarding the recognition of the liability for our defined benefit plans, under both GAAP and SAP, the liability
is recognized in an amount equal to the excess of the projected benefit obligation over the fair value of the plan
assets. However, changes in this balance not otherwise recognized in income are recognized in equity as a
component of other comprehensive income (“OCI”) under GAAP and in statutory surplus under SAP.
Our combined insurance segments' GAAP results for the last three completed fiscal years are shown on the following table:
($ in thousands)
Combined Insurance Segments Results
NPW
NPE
Losses and loss expenses incurred
Net underwriting expenses incurred
Policyholder dividends
Underwriting income
Ratios:
Loss and loss expense ratio
Underwriting expense ratio
Policyholder dividends ratio
GAAP combined ratio
Statutory combined ratio
Years ended December 31,
2016
2015
2014
$
$
2,237,288
2,149,572
1,234,797
759,194
3,648
$
151,933
57.4%
35.3
0.2
92.9%
91.8%
2,069,904
1,989,909
1,148,541
686,120
6,219
149,029
57.7
34.5
0.3
92.5
92.4
1,885,280
1,852,609
1,157,501
610,783
6,182
78,143
62.5
33.0
0.3
95.8
95.7
For revenue and profitability measures for each of our three insurance segments, see Note 11. "Segment Information" in Item 8.
"Financial Statements and Supplementary Data." of this Form 10-K. We do not allocate assets to individual segments. In
addition, for analysis of our insurance segments' results, see "Results of Operations and Related Information by Segment" in
Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." of this Form 10-K.
7
Insurance Segments
Overview
We derive all of our insurance operations revenue from selling insurance products and services to businesses and individuals
for premium. The majority of our sales are annual insurance policies. Our most significant cost associated with the sale of
insurance policies is our losses and loss expenses.
To that end, we establish losses and loss expense reserves that are estimates of the amounts that we will need to pay in the
future for claims and related expenses for insured losses that have already occurred. Estimating reserves as of any given date
involves a considerable degree of judgment and is inherently uncertain. We regularly review our reserving techniques and our
overall amount of reserves. For disclosures concerning our unpaid losses and loss expenses, as well as a full discussion
regarding our loss reserving process, see "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. Additionally, for an analysis of changes in
our loss reserves over the most recent three-year period, see Note 9. "Reserves for Losses and Loss Expenses" in Item 8.
"Financial Statements and Supplementary Data." of this Form 10-K.
As part of our risk management efforts associated with the sale of our products and services, we use reinsurance to protect our
capital resources and insure us against losses on the risks that we underwrite. We use two main reinsurance vehicles: (i) a
reinsurance pooling agreement among our Insurance Subsidiaries in 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. For information regarding reinsurance treaties and agreements, see
"Reinsurance" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." of this
Form 10-K.
Insurance Segments Products and Services
The types of insurance we sell in our insurance segments fall into three broad categories:
•
Property insurance, which generally covers the financial consequences of accidental loss of an insured’s real and/or
personal property. Property claims are generally reported and settled in a relatively short period of time.
• Casualty insurance, which generally covers the financial consequences of employee injuries in the course of
employment and bodily injury and/or property damage to a third party as a result of an insured’s negligent acts,
omissions, or legal liabilities. Casualty claims may take several years to be reported and settled.
•
Flood insurance, which generally covers property losses under the Federal Government's Write Your Own ("WYO")
Program of the NFIP. Flood insurance premiums and losses are 100% ceded to the NFIP.
We underwrite our business primarily through traditional insurance. The following table shows the principal types of policies
we write:
Types of Policies
Category of Insurance
Commercial Property (including Inland Marine)
Property
Commercial Automobile
Property/Casualty
General Liability (including Excess Liability/
Umbrella)
Workers Compensation
Businessowners' Policy
Bonds (Fidelity and Surety)
Homeowners
Personal Automobile
Casualty
Casualty
Property/Casualty
Casualty
Property/Casualty
Property/Casualty
Standard Personal
Lines
E&S Lines
X
X
X
Standard Commercial
Lines
X
X
X
X
X
X
X
X
Personal Umbrella
Flood1
1Flood insurance premiums and losses are 100% ceded to the Federal Government’s WYO Program. Certain other policies contain minimal flood or flood
related coverages.
Flood/Property
Casualty
X
X
X
8
Product Development and Pricing
Our insurance policies are contracts that specify our coverages - what we will pay to or for an insured upon a specified loss.
We develop our coverages internally and by adopting and modifying forms and statistical data licensed from third party
aggregators, notably Insurance Services Office, Inc. (“ISO”), American Association of Insurance Services, Inc. ("AAIS"), and
the National Council on Compensation Insurance, Inc. ("NCCI"). Determining the price to charge for our coverages involves
consideration of many variables. At the time we underwrite and issue a policy, we do not know what our actual costs for the
policy will be in the future. To calculate and project future costs, we examine and analyze historical statistical data and factor
in expected changes in loss trends. Additionally, we have developed predictive models for certain of our Standard Commercial
and Standard Personal Lines. Predictive models analyze historical statistical data regarding our customers and their loss
experience, rank our policies, or potential policies, based on this analysis, and apply this risk data to current and future
customers to predict the likely profitability of an account. A model’s predictive capabilities are limited by the amount and
quality of the statistical data available. As a super-regional insurance group, our loss experience is not always statistically large
enough to analyze and project future costs. Consequently, we use ISO, AAIS, and NCCI data to supplement our proprietary
data.
Customers and Customer Markets
We categorize our Standard Commercial Lines customers into the following strategic business units ("SBUs"):
Percentage of Standard
Commercial Lines
Contractors
Mercantile and Services
Community and Public Services
Manufacturing and Wholesale
Bonds
Total Standard Commercial Lines
35%
26%
20%
18%
1%
100%
General contractors and trade contractors
Description
Focuses on retail, office, service businesses, restaurants, golf courses, and hotels
Focuses on public entities, social services, and religious institutions
Includes manufacturers, wholesalers, and distributors
Includes fidelity and surety
We do not categorize our Standard Personal Line customers or our E&S Line customers by SBU.
The following are general guidelines that can be used as indicators of the approximate size of our customers:
• The average Standard Commercial Lines account size is approximately $11,000.
• The average Standard Personal Lines account size is approximately $2,000.
• The average E&S Lines policy is approximately $3,000.
Although our average E&S Lines policy size is approximately $3,000, we have recently expanded into the wholesale brokerage
business and therefore expect this average policy size to increase gradually over time.
No one customer accounts for 10% or more of our insurance segments in the aggregate.
Geographic Markets
We principally sell in the following geographic markets:
•
•
Standard Commercial Lines products and services are primarily sold in 22 states located in the Eastern and
Midwestern regions of the United States and the District of Columbia. In 2017, we also plan on expanding into the
Southwest region of the United States.
Standard Personal Lines products and services are primarily sold in 13 states located in the Eastern and Midwestern
regions of the United States, except for the flood portion of this segment, which is sold in all 50 states and the District
of Columbia.
• E&S Lines are sold in all 50 states and the District of Columbia.
9
We believe this geographic diversification lessens our exposure to regulatory, competitive, and catastrophic risk. The following
table lists the principal states in which we write business and the percentage of total NPW each represents for the last three
fiscal years:
% of NPW
New Jersey
Pennsylvania
New York
Maryland
Virginia
Georgia
Indiana
North Carolina
Illinois
Michigan
South Carolina
Massachusetts
Other states
Total
Years ended December 31,
2016
2015
2014
20.2%
11.8
7.8
5.4
4.6
4.3
3.9
3.9
3.6
3.3
3.1
2.9
25.2
100.0%
21.2
11.7
7.2
5.4
4.6
4.1
4.3
3.7
3.7
3.5
3.0
2.8
24.8
100.0
22.6
11.4
7.1
5.6
4.6
3.8
4.5
3.4
4.0
3.3
3.1
2.7
23.9
100.0
We support geographically diversified business from our corporate headquarters in Branchville, New Jersey, and our six
regional branches (referred to as our “Regions”). The table below lists our Regions and where they have office locations:
Region
Heartland
New Jersey
Northeast
Mid-Atlantic
Southern
E&S
Office Location
Carmel, Indiana
Hamilton, New Jersey
Branchville, New Jersey
Allentown, Pennsylvania and Hunt Valley, Maryland
Charlotte, North Carolina
Horsham, Pennsylvania and Scottsdale, Arizona
We recently established a Southwest region in anticipation of expanding our geographic footprint for Standard Commercial
Lines. We currently expect to start writing premium in Arizona in the latter half of 2017 and may consider opening up more
states in the Southwest region. In addition, we also expect to start writing business in New Hampshire in the latter half of
2017. These new states leverage our current operating model, which is predicated around our field-based underwriting,
franchise distribution model, and excellent customer service. Over time, we currently expect to expand into additional states.
Distribution Channel
We sell our insurance products and services through the following types of distribution partners:
•
•
Standard Commercial Lines: independent retail agents;
Standard Personal Lines: independent retail agents; and
• E&S Lines: wholesale general agents and brokers.
We pay our distribution partners commissions that are based on a percentage of gross premiums written, and in some cases are
further based on profit calculations, and other consideration for business placed with us. We seek to compensate them fairly
and in a manner consistent with market practices. No one distribution partner is responsible for 10% or more of our combined
insurance segments' premium.
As our customers rely heavily on our distribution partners, it is sometimes difficult to develop brand recognition as these
customers cannot always differentiate between their insurance agents and their insurance carriers. We continue to evolve our
service model, post policy-acquisition, with an increasing focus on the customer. Our goal is to provide our customers with
24/7 access to transactional capabilities and account information. Customers expect this level of access from every business
and, while many insurers offer such solutions in the personal lines space, we want to be a leader in this area for the small
commercial lines market. When combined with our digital strategy, we believe this level of access will significantly improve
the customer experience. Within our digital strategy, we provide self-servicing capabilities via a mobile application and a web-
10
based portal where our customers have access to basic account information on demand. These efforts will allow us to continue
to offer customers a shared experience with our distribution partners, while positioning us to more directly demonstrate our
value proposition.
Independent Retail Agents
According to a study released in 2016 by the Independent Insurance Agents & Brokers of America, independent retail insurance
agents and brokers write approximately 80% of standard commercial lines insurance and 35% of standard personal lines
insurance in the United States. We believe that independent retail insurance agents will remain a significant force in overall
insurance industry premium production because they represent more than one insurance carrier and therefore are able to
provide a wider choice of commercial and personal lines insurance products and risk-based consultation to customers.
We currently have approximately 1,180 independent retail agents selling our Standard Commercial Lines business, 710 of
which also sell our Standard Personal Lines business (excluding flood). In total, these 1,180 distribution partners have
approximately 2,200 office locations selling our business. In addition, we have approximately 5,600 distribution partners
selling our flood insurance products.
In a 2016 survey, we received an overall satisfaction score of 8.76 out of 10 from our standard market distribution partners,
which, we believe, highlighted their satisfaction with our products, the ease of reporting claims, and the professionalism and
effectiveness of our employees.
Wholesale General Agents
E&S Lines are written almost exclusively through approximately 80 wholesale general agents and brokers with 205 office
locations, who are our distribution partners in the E&S market, although we recently expanded into the wholesale brokerage
business. We have granted contract binding authority to these partners for business that meets our prescribed underwriting and
pricing guidelines.
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 customers. For further discussion on
this, see the “Field Model and Technology” section below.
• Develop close relationships with each distribution partner, as well as their principals and producers: (i) by soliciting
their feedback on products and services; (ii) by advising them concerning our product developments; and (iii)
through education and development focusing on producer recruitment, sales training, enhancing customer
experience, online marketing, and distribution operations.
• Develop with each distribution partner, and then carefully monitor, annual goals regarding: (i) types and mix of
risks placed with us; (ii) amount of premium or number of policies placed with us; (iii) customer service and
retention levels; and (iv) profitability of business placed with us.
• Develop brand recognition with our customers through our marketing efforts, which include radio and television
advertising, as well as advertising at certain national and local sporting events.
Field Model and Technology
We use the service mark “High-tech x High-touch = HT2 SM” to describe our business strategy. “High-tech” refers to our
technology that we use to make it easy for 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.
High Tech
We leverage the use of technology in our business. We have made significant investments in information technology platforms,
integrated systems, internet-based applications, and predictive modeling initiatives. We do this to provide:
• Our distribution partners and customers with access to accurate business information and the ability to process
certain transactions from their locations, seamlessly integrating those transactions into our systems;
• Our underwriters with targeted underwriting and pricing tools to enhance profitability while growing the business;
11
• Our workers compensation claims adjusters with predictive tools to indicate when claims are likely to escalate;
• Our Special Investigations Unit ("SIU") investigators access to our business intelligence systems to better identify
claims with potential fraudulent activities;
• Our claims recovery and subrogation departments with the ability to expand and enhance their models through the
use of our business intelligence systems; and
• Our customers with 24/7 access to transactional capabilities and information through a web-based customer portal
and a customer mobile application.
In 2016, we received the following awards:
• NetVu Automation Excellence Award, which recognizes carriers that make it easier for agencies to do business;
• ACORD Leadership Award, which is presented to an organization or an individual demonstrating leadership in the
areas of standards development, advocacy, and/or implementation. It recognizes carriers that are guiding the
insurance industry towards greater clarity in the sharing of insurance data; and
•
IIBA Leadership Excellence in the Advancement of the Practice of Business Analysis, which is presented annually
to a company that adapts, optimizes, and evolves business analysis best practices and standards by implementing
effective tools, processes, and methodologies that enable better business capabilities.
We manage our information technology projects through an Enterprise Project Management Office (“EPMO”) governance
model. The EPMO is supported by certified project managers who apply methodologies to: (i) communicate project
management standards; (ii) provide project management training and tools; (iii) manage projects; (iv) review project status and
cost; 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, corporate functions, and information
technology, meets regularly to review all major initiatives and receives reports on the status of other projects. We believe the
EPMO is an important factor in the success of our technology implementation.
Our primary technology operations are located in Branchville, New Jersey and Glastonbury, Connecticut. We have agreements
with multiple consulting, information technology, and service providers for supplemental staffing services. Collectively, these
providers supply approximately 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. We retain management oversight of
all projects and ongoing information technology production operations. We believe we would be able to manage an efficient
transition to new vendors without significant impact to our operations if we terminated an existing vendor.
High Touch
To support our distribution partners, we employ a field model for both underwriting and claims, with various employees in the
field, usually working from home offices near our distribution partners. We believe that we build better and stronger
relationships with our distribution partners because of the close proximity of our field employees, and the resulting direct
interaction with our distribution partners and customers. At December 31, 2016, we had approximately 2,250 employees, of
which 310 worked in the field, 870 worked in one of our regional offices, and the remainder worked in our corporate office.
Underwriting Process
Our underwriting process requires communication and interaction among:
• Our Regions, which establish and execute upon: (i) annual premium and pricing goals; (ii) specific new business
targets by distribution partner; and (iii) profit improvement plans as needed across lines, states, and/or distribution
partners;
• Our corporate underwriting department, which develops our underwriting appetite, products, policy forms, pricing,
and underwriting guidelines for our standard market and E&S market business;
• Our corporate actuaries who assist in the determination of rate and pricing levels, while monitoring pricing and
profitability along with the Regions, corporate underwriting department, and business intelligence staff for our
standard market and with E&S market business;
12
• Our distribution partners, which include independent retail agents for our standard market business and wholesale
general agents for our E&S market business, that provide front-line underwriting within our prescribed guidelines;
• Our Agency Management Specialists (“AMSs”), who: (i) manage the growth and profitability of business that their
assigned distribution partners write with us; and (ii) perform field underwriting for new Standard Commercial Lines
business;
• Our territory managers who have oversight of the AMS production team, ensure that: (i) annual profit and growth
plans are developed on a state by state basis; (ii) the achievement of these state plans are monitored at the state, AMS
territory and account level; and (iii) individual agency plans are developed and monitored for achievement annually.
• Our Standard Commercial Lines small business teams that are responsible for handling: (i) new business in need of
review that was submitted by our distribution partners through our automated underwriting platform, One & Done®;
and (ii) other new small accounts and middle market accounts with low underwriting complexity;
• Our Safety Management Specialists (“SMSs”), who provide a wide range of front-line safety management services to
our Standard Commercial Lines customers as discussed more fully below;
• Our regional underwriters, who manage the in force policies for their assigned distribution partners, including, but not
limited to, managing profitability and pricing levels within their portfolios by developing policy-specific pricing;
• Our premium auditors, who supplement the underwriting process by working with insureds to accurately audit
exposures for certain policies that we write;
• Our field technical coordinators, who are responsible for technology assistance and training to aid our employees and
distribution partners;
• Our Standard Personal Lines Marketing Specialists (“PLMSs”), who have primary responsibility for identifying new
opportunities to grow our Standard Personal Lines; and
• Our E&S territory managers, who have primary responsibility for identifying new opportunities to grow our E&S
Lines.
We have an underwriting service center (“USC”) located in Richmond, Virginia. The USC assists our distribution partners by
servicing certain Standard Personal Lines and smaller Standard Commercial Lines accounts. At the USC, many of our
employees are licensed agents who respond to customer inquiries about insurance coverage, billing transactions, and other
matters. For the convenience of using the USC and our handling of certain transactions, our distribution partners agree to
receive a slightly lower than standard commission for the premium associated with the USC. As of December 31, 2016, our
USC was servicing Standard Commercial Lines NPW of $51.8 million and Standard Personal Lines NPW of $28.5 million.
The $80.3 million total serviced by the USC represents 4% of our total NPW.
As mentioned above, our field model provides a wide range of front-line safety management services focused on improving a
Standard Commercial Lines insured’s safety and risk management programs. Our service mark “Safety Management:
Solutions for a safer workplace”SM includes: (i) risk evaluation and improvement surveys intended to evaluate potential
exposures and provide solutions for mitigation; (ii) 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 infrared surveys aimed at identifying electrical hazards; and (iv) Occupational Safety and
Health Administration construction and general industry certification training. Risk improvement efforts for existing customers
are designed to improve loss experience and policyholder retention through valuable ongoing consultative service. Our safety
management goal is to work with our customers to identify, mitigate, and eliminate potential loss exposures.
Claims Management
Effective, fair, and timely claims management is one of the most important services that we provide to our customers and
distribution partners. It is also one of the critical factors in achieving underwriting profitability. We have structured our claims
organization to emphasize: (i) cost-effective delivery of claims services and control of losses and loss expenses; and (ii)
maintenance of timely and adequate claims reserves. In connection with our Standard Commercial Lines and Standard
Personal Lines, we achieve better claim outcomes through a field model that locates claim representatives in close proximity to
our customers and distribution partners.
13
We have a claims service center (“CSC”), co-located with the USC, in Richmond, Virginia. The CSC receives first notices of
loss from our customers and claimants related to our Standard Commercial Lines and Standard Personal Lines and manages
routine automobile and property claims with no injuries. The CSC is designed to help: (i) reduce the claims settlement time on
first- and third-party automobile property damage claims; (ii) increase the use of body shops, glass repair shops, and car rental
agencies that have contracted with us at discounted rates and specified service levels; (iii) handle and settle small property
claims; and (iv) investigate and negotiate auto liability claims. The CSC, as appropriate, will assign claims to the appropriate
regional claims office or other specialized area within our claims organization.
Claims Management Specialists (“CMSs”) are responsible for investigating and resolving the majority of our standard
marketplace commercial automobile bodily injury, general liability, and property losses with low severities. We also have
Property Claims Specialists ("PCSs") to handle property claims with severities ranging from $5,000 to $100,000. Strategically
located throughout our footprint, CMSs and PCSs are able to provide highly responsive customer and distribution partner
service to quickly resolve claims within their authority.
Our E&S claims processing is consistent with our Standard Commercial Lines and Standard Personal Lines claims processing.
E&S claims are handled in our standard lines regional offices and are segregated by line of business (property and liability),
litigation, and complexity. Our Quality Assurance Unit conducts monthly file reviews on all of our operations to validate
compliance with our quality claim handling standards. Complex claims oversight is handled by the Complex Claims Unit
("CCU").
We have implemented specialized claims handling as follows:
• Liability claims with high severity or technically complex losses are handled by the CCU. The CCU specialists are
primarily field based and handle losses based on injury type or with severities greater than $250,000.
• Litigated matters not meeting the CCU criteria are handled within our regional offices by our litigation claim units.
These teams are aligned based upon jurisdictional knowledge and technical experience. In addition, they are
supervised by litigation managers within the regional claim offices. These claims are segregated from the CMSs to
allow for focused management.
• Workers compensation claims handling is centralized in Charlotte, North Carolina. Jurisdictionally trained and
aligned medical only and lost-time adjusters manage non-complex workers compensation claims within our footprint.
Claims with high exposure and/or significant escalation risk are referred to the workers compensation strategic case
management unit.
• Low severity/high volume property claims are handled by the CSC. Certain complex claims that do not involve
structural damage (i.e. employee dishonesty and equipment breakdown losses) are handled by a small group of
specialists in the CSC.
• The Large Loss Unit ("LLU") handles complex property claims, typically those in excess of $100,000.
• All asbestos and environmental claims are referred to our specialized corporate Environmental Unit, which also
handles latent claims.
This structure allows us to provide experienced adjusting to each claim category.
All insurance segments are supported by the SIU that investigates potential insurance fraud and abuse, and supports efforts by
regulatory bodies and trade associations to curtail the cost of fraud. We have developed a proprietary SIU fraud detection
model that identifies the potential fraud cases early on in the life of the claim. The SIU adheres to uniform internal procedures
to improve detection and take action on potentially fraudulent claims. It is our practice to notify the proper authorities of SIU
findings, which we believe sends a clear message that we will not tolerate fraud against us or our customers. The SIU
supervises anti-fraud training for all claims adjusters and AMSs.
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Insurance Operations Competition
Our insurance segments face competition from public, private, and mutual insurance companies, which may have lower
operating costs and/or lower cost of capital than we do. Some, like us, rely on partners for the distribution of their products and
services and have competition within their distribution channel, making growth in market share difficult. 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 our insurance segments:
Standard Commercial Lines
The Standard Commercial Lines property and casualty insurance market is highly competitive and market share is fragmented
among many companies. We compete with two types of companies, primarily on the basis of price, coverage terms, claims
service, customer experience, safety management services, ease of technology usage, and financial ratings:
• Regional insurers, such as Cincinnati Financial Corporation, Erie Indemnity Company, The Hanover Insurance
Group, Inc., and United Fire Group, Inc.; and
• National insurers, such as The Hartford Financial Services Group, Inc., Liberty Mutual Holding Company Inc.,
Nationwide Mutual Insurance Company, The Travelers Companies, Inc., and Zurich Insurance Group, Ltd.
Standard Personal Lines
Our Standard Personal Lines face competition primarily from the regional and national carriers noted above, as well as
companies such as State Farm Mutual Automobile Insurance Company and Allstate Corporation. In addition, we face
competition from direct insurers such as The Government Employees Insurance Company and The Progressive Corporation,
which primarily offer personal auto coverage and market through a direct-to-consumer model.
E&S Lines
Our E&S Lines face competition from the E&S subsidiaries of the regional and national carriers named above, as well as the
following companies:
• Nautilus Insurance Group, a member of W. R. Berkley Company;
• Colony Specialty, a member of the Argo Group International Holding Ltd;
• Western World Insurance Group, a member of the Validus Group;
• Century Insurance Group, a member of the Meadowbrook Insurance Group;
• The Burlington Insurance Company, a member of IFG Companies;
• United States Liability Insurance Group, a member of Berkshire Hathaway, Inc.;
•
• Markel Corporation.
Scottsdale Insurance Company, a member of Nationwide Mutual Insurance Company; and
Other
In addition, both existing competitors and new industry participants are developing new platforms that are leveraging
technology and the Internet to provide a low cost "direct to the customer" model. New competitors emerging under this digital
platform include, but are not limited to, Lemonade, Attune, and Metromile. Many of these new entrants have significant
financial backing. Further, reinsurers have entered certain primary property and casualty insurance markets to diversity their
operations and compete with us.
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Industry Comparison
A comparison of certain statutory ratios for our combined insurance segments and our industry are shown in the following
table:
Insurance Operations Ratios:1
Loss and loss expense
Underwriting expense
Policyholder dividends
Statutory combined ratio
Growth in NPW
Industry Ratios:1, 2
Loss and loss expense
Underwriting expense
Policyholder dividends
Statutory combined ratio
Growth in NPW
Favorable (Unfavorable) to Industry:
Statutory combined ratio
Growth in NPW
Note: Some amounts may not foot due to rounding.
Simple
Average of
All Periods
Presented
62.5%
33.4
0.2
96.2
8.6
70.7
27.7
0.7
99.1
3.8
2.9
4.8
2016
2015
2014
2013
2012
57.4
34.2
0.2
91.8
8.1
73.0
27.1
0.6
100.7
2.7
8.9
5.4
57.7
34.4
0.3
92.4
9.8
69.8
27.8
0.7
98.3
3.3
5.9
6.5
62.4
33.0
0.3
95.7
4.1
69.3
27.4
0.7
97.4
4.3
64.5
32.8
0.2
97.5
8.7
67.7
28.0
0.7
96.4
4.4
70.7
32.6
0.2
103.5
12.2
73.7
28.2
0.6
102.5
4.4
1.7
(0.2)
(1.1)
4.3
(1.0)
7.8
1The ratios and percentages are based on SAP prescribed or permitted by state insurance departments in the states in which the Insurance Subsidiaries are
domiciled.
2Source: A.M. Best. The industry ratios for 2016 have been estimated by A.M. Best.
Insurance Regulation
Primary Oversight by the States in Which We Operate
Our insurance segments are heavily regulated. The primary public policy behind insurance regulation is 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. For a
discussion of the broad regulatory, administrative, and supervisory powers of the various departments of insurance, refer to the
risk factor that discusses regulation in Item 1A. “Risk Factors.” of this Form 10-K.
Our various state insurance regulators are members of the NAIC. The NAIC has codified SAP and other accounting reporting
formats and drafts model insurance laws and regulations governing insurance companies. An NAIC model only becomes law
when it is enacted in the various state legislatures or promulgated as a regulation by the state insurance department. The
adoption of certain NAIC model laws and regulations, however, is a key aspect of the NAIC Financial Regulations Standards
and Accreditation Program.
NAIC Monitoring Tools
Among the NAIC's various financial monitoring tools that are material to the regulators in states in which our Insurance
Subsidiaries are organized are the following:
• 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 the insurer's business. Our Insurance
Subsidiaries have consistently met the majority of the IRIS ratio tests.
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• Risk-Based Capital. Risk-based capital 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. Insurers face
a steadily increasing amount of regulatory scrutiny and potential intervention as their total adjusted capital declines
below two times their "Authorized Control Level". Based on our 2016 statutory financial statements, which have been
prepared in accordance with SAP, the total adjusted capital for each of our Insurance Subsidiaries substantially
exceeded two times their Authorized Control Level.
• Annual Financial Reporting Regulation (referred to as the "Model Audit Rule"). The Model Audit Rule, which is
modeled 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 Audit Committee of the Board of Directors (the “Board”) of the Parent also serves as the audit
committee of each of our Insurance Subsidiaries.
• Own Risk and Solvency Assessment ("ORSA"). ORSA requires insurers 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 has been adopted by the state insurance regulators
of our Insurance Subsidiaries, requires companies to file an internal assessment of their solvency with insurance
regulators annually. Although no specific capital adequacy standard is currently articulated in ORSA, it is possible
that such standard will be developed over time and may increase insurers' minimum capital requirements, which could
adversely impact our growth and return on equity.
In addition to the formal regulation above, we are subject to capital adequacy monitoring by rating agencies, for example,
Best's Capital Adequacy Ratio ("BCAR"). BCAR, which was developed by A.M. Best, examines an insurer's leverage,
underwriting activities, and financial performance.
Federal Regulation
Notable federal legislation and administrative policies that affect the insurance industry are:
• The Terrorism Risk Insurance Program Reauthorization Act ("TRIPRA");
• The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”); and
• Various privacy laws that apply to us because we have personal non-public information, including the:
Gramm-Leach-Bliley Act;
Fair Credit Reporting Act;
Drivers Privacy Protection Act; and
Health Insurance Portability and Accountability Act.
Like all businesses, we are required to enforce the economic and trade sanctions of the Office of Foreign Assets Control
(“OFAC”).
FEMA oversees the WYO Program enacted by Congress. Congress sets the WYO Program's budgeting, rules, and rating
parameters. Two significant pieces of legislation that impact the WYO Program are the Biggert-Waters Flood Insurance
Reform Act of 2012 ("Bigger-Waters Act") and the Homeowner Flood Insurance Affordability Act of 2014 ("Flood
Affordability Act"). The Biggert-Waters Act: (i) extended the NFIP funding to September 30, 2017; and (ii) moved the
program to more market based rates for certain flood policies. The Flood Affordability Act repealed and modified certain
provisions in the Biggert-Waters Act regarding premium adjustments. The NFIP authorization expires on September 30, 2017.
Congress has been considering options to the NFIP and it is expected that the program will be extended.
In response to the financial markets crises in 2008 and 2009, the Dodd-Frank Act was enacted in 2010. This law provided for,
among other things, the following:
• The establishment of the Federal Insurance Office (“FIO”) under the United States Department of the Treasury;
•
• Corporate governance reforms for publicly traded companies.
Federal Reserve oversight of financial services firms designated as systemically important; and
The FIO, the Federal Reserve, state regulators, and other regulatory bodies have been developing models for capital standards,
negotiating a covered agreement on reinsurance collateral, and have been gathering data as required under the Dodd-Frank Act.
Changes to the Dodd-Frank Act and FIO are expected in 2017 as the Trump Administration and the Republican Congress seek
opportunities to pare down the Dodd-Frank Act and its regulations. For additional information on the potential impact of the
Dodd-Frank Act, refer to the risk factor related to this legislation within Item 1A. “Risk Factors.” of this Form 10-K.
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International Regulation
We believe that development of global capital standards will influence the development of similar standards by domestic
regulators. Notable international developments include the following:
•
In 2014, the International Association of Insurance Supervisors proposed Basic Capital Standards for Global
Systemically Important Insurers as well as a uniform capital framework for internationally active insurers; and
• The European Union enacted Solvency II, which sets out new requirements on capital adequacy and risk management
for insurers operating in Europe, which was implemented in 2016.
For additional information on the potential impact of international regulation on our business, refer to the risk factor related to
regulation within Item 1A. “Risk Factors.” of this Form 10-K.
Investment Segment
Our Investment segment invests insurance premiums, as well as amounts generated through our capital management strategies,
which may include the issuance of debt and equity securities, to generate investment income and to satisfy obligations to our
customers, our shareholders, and our debt holders, among others. At December 31, 2016, our investment portfolio consisted of
the following:
Category of Investment
($ in millions, except invested assets per dollar of stockholders' equity)
Fixed income securities
Equity securities
Short-term investments
Other investments, including alternatives
Total
Invested assets per dollar of stockholders' equity
Carrying Value
% of Investment
Portfolio
$
$
$
4,894.1
146.7
221.7
102.4
5,364.9
3.50
92
2
4
2
100
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 has historically been
balanced with a long-term “buy-and-hold,” low turnover approach.
During 2016, we determined that a more active management approach to our investment portfolio was appropriate to maximize
the risk-adjusted after-tax income and total return of the portfolio, while maintaining a similar level of credit quality and
duration risk. We evaluated our previous buy-and-hold low turnover approach in the context of the current market
environment, and concluded that a change was appropriate to more effectively diversify, navigate, and manage the portfolio in
response to a persistently low and volatile interest rate environment, the potential for rising inflation, and an uncertain political
and tax landscape.
To execute on this revised approach, we hired several new investment managers who were on-boarded in the fourth quarter of
2016. We modestly increased our exposure to below investment grade fixed income securities, private equity, and private
credit strategies to further diversify our allocation within risk assets, which principally includes public equities, high-yield fixed
income securities, and private equity, in conjunction with repositioning the portfolio to a long-term target risk asset allocation
of approximately 10% of total invested assets. While our approach to managing the investment portfolio has changed, our core
investment philosophy has not changed. We remain focused on diversification, capital preservation, investment quality, and
liquidity to meet our needs and obligations.
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,” in Item 7. “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” and Item 8. “Financial Statements and Supplementary Data.” Note 5. of this Form 10-K.
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Reports to Security Holders
We file with the 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 under Sections 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended (“Exchange Act”). We provide access to these filed materials on our Internet website,
www.Selective.com.
Item 1A. Risk Factors.
Any of the following risk factors could cause our actual results to differ materially from historical or anticipated results. They
could have a significant impact on our business, liquidity, capital resources, results of operations, financial condition, and debt
ratings. These risk factors might affect, alter, or change actions that we might take in executing our long-term capital strategy,
including, but not limited to, contributing capital to any or all of the Insurance Subsidiaries, issuing additional debt and/or
equity securities, repurchasing our equity securities, redeeming our fixed income securities, or increasing or decreasing
stockholders’ dividends. This list of risk factors is not exhaustive, and others may exist.
In an effort to highlight recent trends that may impact our business, we have identified risk factors impacted by: (i) potential
changes to the U.S. federal tax code; (ii) other impacts of the Presidential election and Republican Congress; and (iii) other
evolving legislation. Following these sections are the ongoing risks that continue to impact our business segments, as well as
our corporate structure and governance.
U.S. Federal Tax Code
Changes in tax legislation initiatives could adversely affect our results of operations and financial condition.
We are subject to the tax laws and regulations of U.S. federal, state, and local governments, which may be amended in ways
that adversely impact us. Recently, there has been significant debate about reform of the current U.S. federal tax code.
Although some reform proposals may be beneficial to the insurance industry overall, we cannot predict what impact any
enacted reform proposals could have on our results of operations, liquidity, financial condition, financial strength, and debt
ratings. For example, if the existing U.S. federal corporate income tax rate is reduced from its current 35%, any deferred tax
assets would be reduced and we would likely be required to recognize a reduction of a previously-recognized federal tax
benefit in the period when enacted. This and other potential tax rule changes may increase or decrease our actual tax expense
and could materially and adversely affect our results of operations. If the corporate tax rate is reduced to between 15% and
20%, we would be required to record a non-cash write off of deferred tax assets to income of approximately $36 million to $49
million.
Recent tax reform proposals have included border adjustment provisions that could tax imports of products and services from
foreign states. Some proposals call for significant tariffs. We have agreements for products and services with foreign
domiciled companies, such as information technology services. In addition, risk transfer may or may not be included in the
definition of products and services; therefore, our reinsurance treaties, many of which are with non-U.S. reinsurance
companies, may be impacted by any new proposals. If new taxes are imposed on these products and services, it is possible that
our expenses for these items could increase, perhaps significantly. We cannot predict the impact such proposals could have on
our products and services supplier relationships, results of operations, liquidity, financial condition, financial strength, and debt
ratings if enacted.
Changes in tax legislation initiatives could adversely affect our investments results.
Amendments to the tax laws and regulations of U.S. federal, state, and local governments may adversely impact us. Our
investment portfolio has benefited from tax exemptions and certain other tax laws, including, but not limited to, those
governing dividends received deductions and tax-advantaged municipal bond interest. Future federal and/or state tax
legislation could be enacted to lessen or eliminate some or all of these favorable tax advantages. This could negatively impact
the value of our investment portfolio and, in turn, materially and adversely impact our results of operations.
If the recent renewed debate about revamping the current U.S. federal tax code results in enacted changes, it is possible that
some changes may be beneficial to the insurance industry overall. We, however, cannot predict what impact such enacted
proposals could have on our results of operations, liquidity, financial condition, financial strength, and debt ratings.
19
If we experience difficulties with outsourcing relationships, our ability to conduct our business might be negatively
impacted.
We outsource certain business and administrative functions to third parties for efficiencies and cost savings, and may do so
increasingly in the future. If we fail to develop and implement our outsourcing strategies or our third-party providers fail to
perform as anticipated, we may experience operational difficulties, increased costs, and a loss of business that may have a
material adverse effect on our results of operations or financial condition. Currently, we have agreements with multiple
consulting, information technology, and service providers for supplemental staffing services. Collectively, these providers
supply approximately 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 of the U.S. As mentioned above, the availability and
cost of these services may be impacted by potential tax reform proposals.
Other Potential Impacts of the Presidential Election and the Republican Majority Congress
We are subject to the risk that legislation will be passed that significantly changes insurance regulation and adversely
impacts our business, financial condition, and/or the results of operations.
In 2009, the Dodd-Frank Act was enacted to address corporate governance and control issues identified in the financial markets
crises in 2008 and 2009 and issues identified in the operations of non-insurance subsidiaries of American International Group,
Inc. The Dodd-Frank Act created the FIO as part of the U.S. Department of Treasury to advise the federal government on
insurance issues. The Dodd-Frank Act also requires the Federal Reserve, through the Financial Services Oversight Council
(“FSOC”), to supervise financial services firms designated as systemically important financial institutions ("SIFI"). The FSOC
has not designated us as a SIFI. The Dodd-Frank Act also included a number of corporate governance reforms for publicly
traded companies, including proxy access, say-on-pay, and other compensation and governance issues. Critics of the Dodd-
Frank Act are proposing various reforms to the act, and it is possible that some provisions of the law may be modified to lessen
regulatory burdens.
In general, the Trump Administration and the Republican Majority in Congress favor less federal involvement in insurance. It
is possible, however, that there may be legislative proposals in Congress that could result in the federal government directly
regulating the business of insurance. President Trump and the Republican Majority in Congress favor the repeal of the
Affordable Care Act ("ACA"). Repeal of the law raises some legal and practical challenges. Some reform proposals include a
provision to permit sales of insurance across state lines, which under current federal law cannot be sold across state lines
without the approval of the respective state insurance regulators. As part of some ACA reform proposals, there are calls for the
elimination of the anti-trust exemptions for health insurers under the McCarran-Ferguson Act. While we are not a health
insurer, we and the property and casualty industry operate under anti-trust exemptions that permit the aggregation of claims and
other data necessary under the law of large numbers to price insurance. If similar proposals related to the property and casualty
industry were made and enacted, we would have to seek a business practices exemption from the Department of Justice to share
information with other insurers. We cannot predict the impact such proposals, if enacted, could have on our product and
services supplier relationships, results of operations, liquidity, financial condition, financial strength, and debt ratings.
There also are legislative and regulatory proposals in various states that seek to limit the ability of insurers to assess insurance
risk. From time-to-time, proposals in various states seek to limit the ability of insurers to use certain factors or predictive
measures in the underwriting of property and casualty risks. Among the proposed legislation and regulation have been limits
on the use of insurance scores and marketplace considerations. These proposals, if enacted, could impact underwriting pricing
and results.
We cannot predict what federal and state rules or legislation will be proposed and adopted, or what impact, if any, such
proposals or the cost of compliance with such proposals, could have on our results of operations, liquidity, financial condition,
financial strength, and debt ratings if enacted.
Deterioration in the public debt and equity markets, the private investment marketplace, uncertainty regarding political
developments and the economy could lead to investment losses, which may adversely affect our results of operations,
financial condition, liquidity, and debt ratings.
Like most property and casualty insurance companies, we depend on income from our investment portfolio for a significant
portion of our revenue and earnings. Our investment portfolio is exposed to significant financial and capital market risks, both
in the U.S. and abroad, and volatile changes in general market or economic conditions could lead to a decline in the market
value of our portfolio as well as the performance of the underlying collateral of our structured securities. Concerns over weak
economic growth globally, elevated unemployment, volatile energy and commodity prices, and geopolitical issues, among other
factors, contribute to increased volatility in the financial markets, increased potential for credit downgrades, and decreased
liquidity in certain investment segments. In addition, President Donald J. Trump has proposed significant changes in United
20
States domestic and foreign policy. The uncertainty regarding these proposed changes, and whether they will be implemented,
may elevate the volatility of the financial markets and adversely impact our investment portfolio.
Our notes payable and line of credit are subject to certain debt-to-capitalization restrictions and net worth covenants, which
could be impacted by a significant decline in investment value. Further OTTI charges could be necessary if there is a
significant future decline in investment values. Depending on market conditions going forward, and in the event of extreme
prolonged market events, such as the global credit crisis, we could incur additional realized and unrealized losses in future
periods, which could have an adverse impact on our results of operations, financial condition, debt and financial strength
ratings, and our ability to access capital markets as a result of realized losses, impairments, and changes in unrealized positions.
For more information regarding market interest rate, credit, and equity price risk, see Item 7A. “Quantitative and Qualitative
Disclosures About Market Risk.” of this Form 10-K.
Other Evolving Legislation
We face risks regarding our flood business because of uncertainties regarding the NFIP.
We are the sixth largest insurance group participating in the WYO arrangement of the NFIP, which is managed by the
Mitigation Division of the Federal Emergency Management Agency (“FEMA”) in the U.S. Department of Homeland Security.
For WYO participation, we receive an expense allowance for policies written and a servicing fee for claims administered.
Under the program, all losses are 100% reinsured by the Federal Government. Currently, the expense allowance is 30.9% of
DPW. The servicing fee is the combination of 0.9% of DPW and 1.5% of incurred losses.
As a WYO carrier, we are required to follow certain NFIP procedures when administering flood policies and claims. Some of
these requirements may differ from our normal business practices and may present a reputational risk to our brand. Insurance
companies are regulated by states and the NFIP requires WYO carriers to be licensed in the states in which they operate. The
NFIP, however, is a federal program and WYO carriers are fiscal agents of the U.S. Government and must follow the directives
of the NFIP. Consequently, we have the risk that directives of the NFIP and a state regulator on the same issue may conflict.
There has been significant public policy and political debate regarding the NFIP and its outstanding debt, including the
obtainment of reinsurance coverage for NFIP losses. In 2016, FEMA secured its first placement of reinsurance for the NFIP.
In January 2017, FEMA expanded its September 2016 placement and transferred $1 billion of the NFIP's financial risk to
reinsurers through January 1, 2018. In addition, there are several legislative proposals in Congress regarding NFIP
reauthorization. The NFIP statute will expire on September 30, 2017, unless reauthorized by Congress. While it is possible
that the NFIP program will be reauthorized with limited changes to the underlying structure, there is substantial uncertainty
about the future of the program given the changing political environment. Our flood business could be impacted by: (i) any
mandate for primary insurance carriers to provide flood insurance; or (ii) private writers becoming more prevalent in the
marketplace. The uncertainty created by the public policy debate and politics of flood insurance reform make it difficult for us
to predict the future of the NFIP and our continued participation in the program.
We are subject to attempted cyber-attacks and other cybersecurity risks.
Our business heavily relies on various information technology and application systems that are connected to, or may be
accessed from, the Internet and may be impacted by a malicious cyber-attack. Our systems also contain confidential and
proprietary information regarding our operations, our employees, our agents, and our customers and their employees and
property, including personally identifiable information. We have developed and invested, and expect to continue to do both, in
a variety of controls to prevent, detect, and appropriately react to such cyber-attacks, including frequently testing our systems'
security and access controls. Cyber-attacks continue to become more complex and broad ranging and our internal controls
provide only a reasonable, not absolute, assurance that we will be able to protect ourselves from significant cyber-attack
incidents. By outsourcing certain business and administrative functions to third parties, we may be exposed to enhanced risk of
data security breaches. Any breach of data security could damage our reputation and/or result in monetary damages, which, in
turn, could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt
ratings. Although we have not experienced a material cyber-attack, it is possible that might occur. We have insurance coverage
for certain cybersecurity risks, including privacy breach incidents, that provides protection up to $20 million above a deductible
of $250,000.
21
Given the increased number of identity thefts from cyber-attacks, federal and state policymakers have proposed, and will likely
continue to propose, increased regulation of the protection of personally identifiable information and the steps to be followed
after a related cybersecurity breach. Compliance with these regulations and efforts to address continuingly developing
cybersecurity risks may result in a material adverse effect on our results of operations, liquidity, financial condition, financial
strength, and debt ratings.
Risks Related to our Insurance Segments
Our loss and loss expense reserves may not be adequate to cover actual losses and expenses.
We are required to maintain loss and loss expense reserves for our estimated liability for losses and loss expenses 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, including inflationary trends
particularly regarding medical costs, predictions of future events, trends in claims severity and frequency, and other subjective
factors relating to our insurance policies in force. There is no method for precisely estimating the ultimate liability for
settlement of claims. We cannot be certain that the reserves we establish are adequate or will be adequate in the future. From
time-to-time, we increase reserves if they are inadequate or reduce them if they are redundant. An increase in reserves: (i)
reduces net income and stockholders’ equity for the period in which the reserves are increased; and (ii) could have a material
adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings.
We are subject to losses from catastrophic events.
Our results are subject to losses from natural and man-made catastrophes, including, but not limited to: hurricanes, tornadoes,
windstorms, earthquakes, hail, terrorism, explosions, severe winter weather, floods, and fires, some of which may be related to
climate changes. The frequency and severity of these catastrophes are inherently unpredictable. One year may be relatively
free of such events while another may have multiple events. For further discussion regarding man-made catastrophes that
relate to terrorism, see the risk factor directly below regarding the potential for significant losses from acts of terrorism.
There is widespread interest among scientists, legislators, regulators, and the public regarding the effect that greenhouse gas
emissions may have on our environment, including climate change. If greenhouse gasses continue to impact our climate, it is
possible that more devastating catastrophic events could occur.
The magnitude of catastrophe losses is determined by the severity of the event and the total amount of insured exposures in the
area affected by the event as determined by ISO's Property Claim Services unit. Most of the risks underwritten by our
insurance segments are concentrated geographically in the Eastern and Midwestern regions of the country. In 2016,
approximately 20% of NPW were related to insurance policies written in New Jersey. Catastrophes in the Eastern and
Midwestern regions of the United States could adversely impact our financial results, as was the case in 2010, 2011, and 2012.
Although catastrophes can cause losses in a variety of property and casualty insurance lines, most of our historical catastrophe-
related claims have been from commercial property and homeowners coverages. In an effort to limit our exposure to
catastrophe losses, we purchase catastrophe reinsurance. Catastrophe reinsurance could prove inadequate if: (i) the various
modeling software programs that we use to analyze the Insurance Subsidiaries’ risk result in an inadequate purchase of
reinsurance by us; (ii) a major catastrophe loss exceeds the reinsurance limit or the reinsurers’ financial capacity; or (iii) the
frequency of catastrophe losses results in our Insurance Subsidiaries exceeding the aggregate limits provided by the catastrophe
reinsurance treaty. Even after considering our reinsurance protection, 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 subject to potentially significant losses from acts of terrorism.
As a Standard Commercial Lines and E&S Lines writer, we are required to participate in TRIPRA, which was extended by
Congress to December 31, 2020. TRIPRA requires private insurers and the United States government to share the risk of loss
on future acts of terrorism certified by the U.S. Secretary of the Treasury. Under TRIPRA, 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 2016, 89% 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.
Under TRIPRA, each participating insurer is responsible for paying a deductible of specified losses before federal assistance is
available. This deductible is based on a percentage of the prior year’s applicable Standard Commercial Lines and E&S Lines
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premiums. In 2017, our deductible is approximately $304 million. For losses above the deductible, the federal government
will pay 83% of losses to an industry limit of $100 billion, and the insurer retains 17%. The federal share of losses will be
reduced by 1% each year to 80% by 2020. Although TRIPRA’s provisions will mitigate our loss exposure to a large-scale
terrorist attack, our deductible is substantial and could have a material adverse effect on our results of operations, liquidity,
financial condition, financial strength, and debt ratings.
TRIPRA rescinded all previously approved coverage exclusions for terrorism. Many of the states in which we write
commercial property insurance mandate that we cover fire following an act of terrorism regardless of whether the insured
specifically purchased terrorism coverage. Likewise, terrorism coverage cannot be excluded from workers compensation
policies in any state in which we write.
Personal lines of business have never been covered under TRIPRA. Homeowners policies within our Standard Personal Lines
exclude nuclear losses, but do not exclude biological or chemical losses.
Our ability to reduce our risk exposure depends on the availability and cost of reinsurance.
We transfer a portion of our underwriting risk exposure to reinsurance companies. Through our reinsurance arrangements, a
specified portion of our losses and loss expenses are assumed by the reinsurer in exchange for a specified portion of premiums.
The availability, amount, and cost of reinsurance depend on market conditions, which may vary significantly. Most of our
reinsurance contracts renew annually and may be impacted by the market conditions at the time of the renewal that are
unrelated to our specific book of business or experience. Any decrease in the amount of our reinsurance will increase our risk
of loss. Any increase in the cost of reinsurance that cannot be included in renewal price increases will reduce our earnings.
Accordingly, we may be forced to incur additional expenses for reinsurance or may not be able to obtain sufficient reinsurance
on acceptable terms. Either could adversely affect our ability to write future business or result in the assumption of more risk
with respect to those policies we issue.
We are exposed to credit risk.
We are exposed to credit risk in several areas of our insurance segments, including from:
• Our reinsurers, who are obligated to us under our reinsurance agreements. Amounts recoverable from our
reinsurers can increase quickly and significantly during periods of high catastrophe loss activity, such as in the
fourth quarter of 2012 due to losses incurred from Superstorm Sandy, and thus our credit risk to our reinsurers can
increase significantly and will fluctuate over time. The relatively small size of the reinsurance market and our
objective to maintain an average weighted rating of “A” by A.M. Best on our current reinsurance programs
constrains our ability to diversify this credit risk. However, some of our reinsurance credit risk is collateralized.
• Certain life insurance companies that are obligated to our customers, as we have purchased annuities from them
under structured settlement agreements.
•
Some of our distribution partners, who collect premiums from our customers and are required to remit the collected
premium to us.
•
Some of our customers, who are responsible for payment of premiums and/or deductibles directly to us.
• The invested assets in our defined benefit plan, which partially serve to fund our liability associated with this plan.
To the extent that credit risk adversely impacts the valuation and performance of the invested assets within our
defined benefit plan, the funded status of the defined benefit plan could be adversely impacted and, as result, could
increase the cost of the plan to us.
Our exposure to credit risk could have a material adverse effect on our results of operations, liquidity, financial condition,
financial strength, and debt ratings.
Difficult conditions in global capital markets and the economy may adversely affect our revenue and profitability and harm
our business, and these conditions may not improve in the near future.
General economic conditions in the United States and throughout the world and volatility in financial and insurance markets
may materially affect our results of operations. Factors such as business and consumer confidence, unemployment levels,
consumer spending, business investment, government spending, the volatility and strength of the capital markets, and inflation
all affect the business and economic environment and, indirectly, the amount and profitability of our business. During 2016,
34% of DPW in our Standard Commercial Lines business were based on payroll/sales of our underlying customers. An
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economic downturn in which our customers decline in revenue or employee count can adversely affect our audit and
endorsement premium in our Standard Commercial Lines.
Unfavorable economic developments could adversely affect our earnings if our customers have less need for insurance
coverage, cancel existing insurance policies, modify coverage, or choose not to renew with us. Challenging economic
conditions may impair the ability of our customers to pay premiums as they come due. Adverse economic conditions may have
a material effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings.
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. Best, would affect our ability to write new or renewal
business with customers, some of whom are required under various third party agreements to maintain insurance with a carrier
that maintains a specified minimum rating. In addition, our $30 million line of credit ("Line of Credit") requires our Insurance
Subsidiaries to maintain an A.M. Best rating of at least “A-” (one level below 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 borrow in the future. As a result, any significant downgrade in our financial
strength 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" for our current financial strength ratings.
Nationally recognized statistical rating organizations ("NRSROs") also rate our long-term debt creditworthiness. Credit ratings
indicate the ability of debt issuers to meet debt obligations in a timely manner and are important factors in our overall funding
profile and ability to access certain types of liquidity. Our current senior credit ratings are as follows:
NRSRO
Credit Rating
Long Term Credit Outlook
A.M. Best
S&P
Moody’s
Fitch
bbb+
BBB
Baa2
BBB+
Stable
Stable
Stable
Stable
Downgrades in our credit ratings could have a material adverse effect on our financial condition and results of operations in
many ways, including making it more expensive for us to access capital markets. We cannot predict possible actions NRSROs
may take regarding our ratings that could adversely affect our business or the possible actions we may take in response to any
such actions.
We have many competitors and potential competitors.
Demand for insurance is influenced by prevailing general economic conditions. The supply of insurance is related to prevailing
prices, the levels of insured losses and the levels of industry capital which, in turn, may fluctuate in response to changes in rates
of return on investments being earned in the insurance industry. In addition, pricing is influenced by the operating performance
of insurers, as increased pricing may be necessary to meet return on equity objectives. As a result, the insurance industry
historically has had cycles characterized by periods of intense price competition due to excessive underwriting capacity and
periods when shortages of capacity and poor insurer operating performance drove favorable premium levels. If competitors
price business below technical levels, we might reduce our profit margin to retain our best business.
Pricing and loss trends impact our profitability. For example, assuming retention and all other factors remain constant:
• A pure price decline of approximately 1% would increase our statutory combined ratio by approximately 0.75
points;
• A 3% increase in our expected claim costs for the year would cause our loss and loss expense ratio to increase by
approximately 1.75 points; and
• A combination of the two could raise the combined ratio by approximately 2.5 points.
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We compete with regional, national, and direct-writer property and casualty insurance companies for customers, distribution
partners, and employees. Some competitors are public companies and some are mutual companies. Many competitors are
larger and may have lower operating costs and/or lower cost of capital. They may have the ability to absorb greater risk while
maintaining their financial strength ratings. Consequently, some competitors may be able to price their products more
competitively. These competitive pressures could result in increased pricing pressures on a number of our products and
services, particularly as competitors seek to win market share, and may impair our ability to maintain or increase our
profitability. Because of its relatively low cost of entry, the Internet has emerged as a significant place of new competition,
both from existing competitors and new competitors. New competitors emerging under this digital platform include, but are
not limited to, Lemonade, Attune, and Coverwallet. Additionally, reinsurers have entered certain primary property casualty
insurance markets to diversify their operations and compete with us. Further new competition could cause changes in the
supply or demand for insurance and adversely affect our business.
We have less loss experience data than our larger competitors.
We believe that insurers are competing and will continue to compete on their ability to use reliable data about their customers
and loss experience in complex analytics and predictive models to assess the profitability of risks, as well as the potential for
adverse claim development, recovery opportunities, fraudulent activities, and customer buying habits. With the consistent
expansion of computing power and the decline in its cost, we believe that data and analytics use will continue to increase and
become more complex and accurate. As a regional insurance group, the loss experience from our insurance operations is not
large enough in all circumstances to analyze and project our future costs. In addition, we have more limited experience data
related to our E&S business, which we purchased in 2011. We use data from ISO, AAIS, and NCCI to obtain industry loss
experience to supplement our own data. While statistically relevant, that data is not specific 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 customers and may not need aggregated industry loss data.
We depend on distribution partners.
We market and sell our insurance products through distribution partners who are not our employees. We believe that these
partners will remain a significant force in overall insurance industry premium production because they can provide customers
with a wider choice of insurance products than if they represented only one insurer. That, however, creates competition in our
distribution channel and we must market our products and services to our distribution partners before they sell them to our
mutual customers. Additionally, there has been a trend towards increased levels of consolidation of these distribution partners
in the marketplace, which increases competition among fewer distributors. Our Standard Personal Lines production is further
limited by the fact that independent retail insurance agencies only write approximately 35% of this business in the United
States. Our financial condition and results of operations are tied to the successful marketing and sales efforts of our products
by our distribution partners. In addition, under insurance laws and regulations and common law, we potentially can be held
liable for business practices or actions taken by our distribution partners.
We are heavily regulated and changes in regulation may reduce our profitability, increase our capital requirements, and/or
limit our growth.
Our Insurance Subsidiaries are heavily regulated by extensive laws and regulations that may change on short notice. The
primary public policy behind insurance regulation is the protection of policyholders and claimants over all other constituencies,
including shareholders. Historically by virtue of the McCarran-Ferguson Act, our Insurance Subsidiaries are primarily
regulated by the states in which they are domiciled and licensed. State insurance regulation is generally uniform throughout the
U.S. by virtue of similar laws and regulations required by the NAIC to accredit state insurance departments so their
examinations can be given full faith and credit by other state regulators. Despite their general similarity, various provisions of
these laws and regulations vary from state to state. At any given time, there may be various legislative and regulatory proposals
in each of the 50 states and District of Columbia that, if enacted, may affect our Insurance Subsidiaries.
The broad regulatory, administrative, and supervisory powers of the various state departments of insurance include the
following:
• Related to our financial condition, review and approval of such matters as minimum capital and surplus
requirements, standards of solvency, security deposits, methods of accounting, form and content of statutory
financial statements, reserves for unpaid losses and loss adjustment expenses, reinsurance, payment of dividends
and other distributions to shareholders, periodic financial examinations, and annual and other report filings.
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• Related to our general business, review and approval of such matters as certificates of authority and other insurance
company licenses, licensing and compensation of distribution partners, premium rates (which may not be excessive,
inadequate, or unfairly discriminatory), policy forms, policy terminations, reporting of statistical information
regarding our premiums and losses, periodic market conduct examinations, unfair trade practices, participation in
mandatory shared market mechanisms, such as assigned risk pools and reinsurance pools, participation in
mandatory state guaranty funds, and mandated continuing workers compensation coverage post-termination of
employment.
• Related to our ownership of the Insurance Subsidiaries, we are required to register as an insurance holding company
system in each state where an insurance subsidiary is domiciled and report information concerning all of our
operations that may materially affect the operations, management, or financial condition of the insurers. As an
insurance holding company, the appropriate state regulatory authority may: (i) examine our Insurance Subsidiaries
or us at any time; (ii) require disclosure or prior approval of material transactions of any of the Insurance
Subsidiaries with its affiliates; and (iii) require prior approval or notice of certain transactions, such as payment of
dividends or distributions to us.
Although Congress has largely delegated insurance regulation to the various states by virtue of the McCarran-Ferguson Act, we
are also subject to federal legislation and administrative policies, such as disclosure under the securities laws, including the
Sarbanes-Oxley Act and the Dodd-Frank Act, TRIPRA, OFAC, and various privacy laws, including the Gramm-Leach-Bliley
Act, the Fair Credit Reporting Act, the Drivers Privacy Protection Act, the Health Insurance Portability and Accountability Act,
and the policies of the Federal Trade Commission. As a result of issuing workers compensation policies, we are subject to
Mandatory Medicare Secondary Payer Reporting under the Medicare, Medicaid, and SCHIP Extension Act of 2007.
The European Union enacted Solvency II, which was implemented in 2016 and sets out new requirements for capital adequacy
and risk management for insurers operating in Europe. The strengthened regime is intended to reduce the possibility of
consumer loss or market disruption in insurance. In addition, in 2014, the International Association of Insurance Supervisors
proposed Basic Capital Standards for Global Systemically Important Insurers as well as a uniform capital framework for
internationally active insurers. Although Solvency II does not govern domestic American insurers, and we do not have
international operations, we believe that development of global capital standards will influence the development of similar
standards by domestic regulators. The NAIC has recently adopted ORSA, which requires insurers to maintain a framework for
identifying, assessing, monitoring, managing, and reporting on the “material and relevant risks” associated with the insurer's (or
insurance group's) current and future business plans. ORSA, which has been adopted by the state insurance regulators of our
Insurance Subsidiaries, requires companies to file an internal assessment of their solvency with insurance regulators annually.
Although no specific capital adequacy standard is currently articulated in ORSA, it is possible that such a standard will be
developed over time and may increase insurers' minimum capital requirements, which could adversely impact our growth and
return on equity.
We are subject to non-governmental regulators, such as the NASDAQ Stock Market and the New York Stock Exchange where
we list our securities. Many of these regulators, to some degree, overlap with each other on various matters. They have
different regulations on the same legal issues that are subject to their individual interpretative discretion. Consequently, we
have the risk that one regulator’s position may conflict with another regulator’s position on the same issue. As compliance is
generally reviewed in hindsight, we are subject to the risk that interpretations will change over time.
We believe we are in compliance with all laws and regulations that have a material effect on our results of operations, but the
cost of complying with various, potentially conflicting laws and regulations, and changes in those laws and regulations could
have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings.
Class action litigation could affect our business practices and financial results.
Our industry has been the target of class action litigation, including the following areas:
• After-market parts;
• Urban homeowner insurance underwriting practices, including those related to architectural or structural features
and attempts by federal regulators to expand the Federal Housing Administration's guidelines to determine unfair
discrimination;
• Credit scoring and predictive modeling pricing;
• Cybersecurity breaches;
•
• Managed care practices;
• Timing and discounting of personal injury protection claims payments;
Investment disclosure;
26
• Direct repair shop utilization practices;
Flood insurance claim practices; and
•
Shareholder class action suits.
•
If we were to be named in such class action litigation, we could suffer reputational harm with purchasers of insurance and have
increased litigation expenses that could have a materially adverse effect on our operations or results.
Risks Related to Our Investment Segment
We are exposed to interest rate risk in our investment portfolio.
We are exposed to interest rate risk primarily related to the market price, and cash flow variability, associated with changes in
interest rates. A rise in interest rates may decrease the fair value of our existing fixed income investments and declines in
interest rates may result in an increase in the fair value of our existing fixed income investments. Our fixed income investment
portfolio, which currently has an effective duration of 3.8 years excluding short-term investments, contains interest rate
sensitive instruments that 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. A rise in interest
rates would decrease the net unrealized gain position of the investment portfolio, partially offset by our ability to earn higher
rates of return on funds reinvested in new investments. Conversely, a decline in interest rates would increase the net unrealized
gain position of the investment portfolio, partially offset by lower rates of return on new and reinvested cash in the portfolio.
Changes in interest rates have an effect on the calculated duration of certain securities in the portfolio. We seek to mitigate our
interest rate risk associated with holding fixed income investments by monitoring and maintaining the average 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. This may include investing in floating rate securities and other shorter duration securities that exhibit low
effective duration and interest rate risk, but expose the portfolio to other risks, including the risk of a change in credit spreads,
liquidity spreads, and other factors that may adversely impact the value of the portfolio. Although we take measures to manage
the economic risks of investing in a changing interest rate environment, we may not be able to mitigate the interest rate risk of
our assets relative to our liabilities, particularly our loss reserves. In addition, our pension and post-retirement benefit
obligations include a discount rate assumption, which is an important element of expense and/or liability measurement.
Changes in the discount rate assumption could materially impact our pension and post-retirement life valuation.
We are exposed to credit risk in our investment portfolio.
The value of our investment portfolio is subject to credit risk from the issuers and/or guarantors of the securities in the
portfolio, other counterparties in certain transactions and, for certain securities, insurers that guarantee specific issuer’s
obligations. Defaults by the issuer or an issuer’s guarantor, insurer, or other counterparties regarding any of our investments,
could reduce our net investment income and net realized investment gains or result in investment losses. We are subject to the
risk that the issuers, or guarantors, of fixed income securities we own may default on principal and interest payments due under
the terms of the securities. At December 31, 2016, our fixed income 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. Over time, our exposure to below
investment grade securities and other credit sensitive risk assets may fluctuate as we continue to diversify the portfolio and take
advantage of opportunities to add or reduce risk commensurate with our risk-taking capacity and market conditions. The
occurrence of a major economic downturn, acts of corporate malfeasance, widening credit spreads, budgetary deficits,
municipal bankruptcies spurred by, among other things, pension funding issues, or other events that adversely affect the issuers
or guarantors of these securities could cause the value of our fixed income securities portfolio and our net income to decline
and the default rate of our fixed income securities portfolio to increase.
With economic uncertainty, credit quality of issuers or guarantors could be adversely affected and a ratings downgrade of the
issuers or guarantors of the securities in our portfolio could cause the value of our fixed income securities portfolio and our net
income to decrease. As our stockholders' equity is leveraged at 3.5:1 to our investment portfolio, a reduction in the value of our
investment portfolio could have a material adverse effect on our business, results of operations, financial condition, and debt
ratings. Levels of write-downs are impacted by our assessment of the impairment, including a review of the underlying
collateral of structured securities, 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. For further information regarding credit and interest rate risk, see Item 7A.
“Quantitative and Qualitative Disclosures About Market Risk.” of this Form 10-K.
Our statutory surplus may be materially affected by rating downgrades on investments held in our portfolio.
We are exposed to significant financial and capital markets risks, primarily relating to interest rates, credit spreads, equity
prices, and the change in market value of our alternative investment portfolio. A decline in both income and our investment
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portfolio asset values could occur as a result of, among other things, a decrease in market liquidity, fluctuations in interest rates,
decreased dividend payment rates, negative market perception of credit risk with respect to types of securities in our portfolio, a
decline in the performance of the underlying collateral of our structured securities, reduced returns on our alternative
investment portfolio, or general market conditions. A global decline in asset values will be more amplified in our financial
condition, as our statutory surplus is leveraged at a 3.4:1 ratio to our investment portfolio.
With economic uncertainty, the credit quality and ratings of securities in our portfolio could be adversely affected. The NAIC
could potentially apply a more adverse class code on a security than was originally assigned, which could adversely affect
statutory surplus because securities with NAIC class codes three through six require securities to be marked-to-market for
statutory accounting purposes, as compared to securities with NAIC class codes of one or two that are carried at amortized cost.
There can be no assurance that the actions of the U.S. Government, Federal Reserve, and other governmental and
regulatory bodies will achieve their intended effect.
Over the past several years, the Federal Reserve has taken a number of actions related to interest rates and purchasing of
financial instruments intended to spur economic recovery. The Federal Reserve's policy of quantitative easing and low interest
rates since the financial crisis of 2008 have had an adverse effect on our investment income, as higher yielding securities
mature and we reinvest the proceeds at lower yields. In December 2015 and again in December 2016, the Federal Reserve
increased the Federal Fund Rate by 25 basis points each. It is unclear whether the Federal Reserve's economic stimulus actions
will produce the desired results. The impact of these actions could materially and adversely affect our financial condition and
the trading price of our common stock. In the event of future material deterioration in business conditions, we may need to
raise additional capital or consider other transactions to manage our capital position.
In addition, our investment activities are subject to extensive laws and regulations that are administered and enforced by a
number of different governmental authorities and non-governmental self-regulatory agencies. In light of the current economic
conditions, some of these authorities have implemented, or may in the future implement, new or enhanced regulatory
requirements, such as those included in the Dodd-Frank Act, intended to restore confidence in financial institutions and reduce
the likelihood of similar economic events in the future. These authorities may seek to exercise their supervisory and
enforcement authority in new or more robust ways. Such events could affect the way we conduct our business and manage our
capital, and may require us to satisfy increased capital requirements. These developments, if they occurred, could have a
material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings.
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. 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
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. As these investments are
recorded under the equity method of accounting, any decreases in the valuation of these investments would negatively impact
our results of operations. We currently expect to increase our allocation to these investments, which may result in additional
variability in our net investment income.
We value our investments using methodologies, estimations, and assumptions that are subject to differing interpretations.
Changes in these interpretations could result in fluctuations in the valuations of our investments that may adversely affect
our results of operations or financial condition.
Fixed income, equity, and short-term investments, which are reported at fair value on our Consolidated Balance Sheet,
represented the majority of our total cash and invested assets as of December 31, 2016. As required under accounting rules, we
have categorized these securities into a three-level hierarchy, based on the priority of the inputs to the respective valuation
technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities
(Level 1). The next priority is to quoted prices in markets that are not active or inputs that are observable either directly or
indirectly, including quoted prices for similar assets or liabilities or 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 or liabilities
(Level 2). The lowest priority in the fair value hierarchy is to unobservable inputs supported by little or no market activity and
that reflect the reporting entity’s own assumptions about the exit price, including assumptions that market participants would
use in pricing the asset or liability (Level 3).
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An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its
valuation. We generally use an independent pricing service and broker quotes to price our investment securities. At
December 31, 2016, approximately 7% and 92% of these securities represented Level 1 and Level 2, respectively. However,
prices provided by independent pricing services and brokers can vary widely even for the same security. Rapidly changing and
unprecedented credit and equity market conditions could materially impact the valuation of securities as reported within our
consolidated financial statements (“Financial Statements”) and the period-to-period changes in value could vary significantly.
Decreases in value may result in an increase in non-cash OTTI charges, which could have a material adverse effect on our
results of operations, liquidity, financial condition, financial strength, and debt ratings.
The determination of the amount of impairments 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 impairments 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. There can be no assurance that management has accurately
assessed the level of impairments 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 regarding our evaluation and considerations for determining whether a security is other-than-
temporarily impaired, 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.
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 the ability of the Insurance Subsidiaries to pay dividends, make loans or advances to us, or enter into
transactions with affiliates may materially affect our ability to pay dividends on our common stock or repay our indebtedness.
As of December 31, 2016, the Parent had retained earnings of $1.5 billion. Of this amount, $1.4 billion was related to
investments in our Insurance Subsidiaries. The Insurance Subsidiaries have the ability to provide for $193 million in annual
ordinary dividends to us in 2017 under applicable state regulation; however, as they are regulated entities, their ability to pay
dividends or make loans or advances to us is subject to the approval or review of the insurance regulators in the states where
they are domiciled. The standards for review of such transactions are whether: (i) the terms and charges are fair and
reasonable; and (ii) after the transaction, the Insurance Subsidiary's surplus for policyholders is reasonable in relation to its
outstanding liabilities and financial needs. Although dividends and loans to us from our Insurance Subsidiaries historically
have been approved, we can make no assurance that future dividends and loans will be approved. For additional details
regarding dividend restrictions, see Note 19. “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.
Because we are 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.
Because we are an insurance holding company that owns insurance subsidiaries, anyone who seeks to acquire 10% or more of
our stock must seek prior approval from the insurance regulators in the states in which the subsidiaries are organized and file
extensive information regarding their business operations and finances.
Provisions in our Amended and Restated Certificate of Incorporation may discourage, delay, or prevent us from being acquired,
including:
•
•
Supermajority shareholder voting requirements to approve certain business combinations with interested
shareholders (as defined in the Amended and Restated Certificate of Incorporation) unless certain other conditions
are satisfied; and
Supermajority shareholder voting requirements to amend the foregoing provisions in our Amended and Restated
Certificate of Incorporation.
29
In addition to the requirements in our Amended and Restated Certificate of Incorporation, the New Jersey Shareholders’
Protection Act also prohibits us from engaging in certain business combinations with interested stockholders (as defined in the
statute), in certain instances for a five-year period, and in other instances indefinitely, unless certain conditions are satisfied.
These conditions may relate to, among other things, the interested stockholder’s acquisition of stock, the approval of the
business combination by disinterested members of our Board of Directors and disinterested stockholders, and the price and
payment of the consideration proposed in the business combination. Such conditions are in addition to those requirements set
forth in our Amended and Restated Certificate of Incorporation.
These provisions of our Amended and Restated Certificate of Incorporation and New Jersey law could have the effect of
depriving our stockholders of an opportunity to receive a premium over our common stock’s prevailing market price in the
event of a hostile takeover and may adversely affect the value of our common stock.
Risks Related to Our General Operations
The failure of our risk management strategies could have a material adverse effect on our financial condition or results of
operations.
As an insurance provider, it is our business to take on risk from our customers. Our long-term strategy includes the use of
above average operational leverage, which can be measured as the ratio of NPW to our equity or policyholders surplus. We
balance operational leverage risk with a number of risk management strategies within our insurance operations to achieve a
balance of growth and profit and to reduce our exposure. These strategies include, but are not limited to, the following:
• Being disciplined in our underwriting practices;
• Being prudent in our claims management practices, establishing adequate loss and loss expense reserves, and
placing appropriate reliance on our claims analytics;
• Continuing to develop and implement various underwriting tools and automated analytics to examine historical
statistical data regarding our customers and their loss experience to: (i) classify such policies based on that
information; (ii) apply that information to current and prospective accounts; and (iii) better predict account
profitability;
• Continuing to develop our customer experience platform as we grow in our understanding of customer
segmentation;
Purchasing reinsurance and using catastrophe modeling; and
•
• Being prudent in our financial planning process, which supports our underwriting strategies.
We also maintain a conservative approach to our investment portfolio management and employ risk management strategies that
include, but are not limited to:
• Being prudent in establishing our investment policy and appropriately diversifying our investments, which supports
our liabilities and underwriting strategies;
• Using complex financial and investment models to analyze historical investment performance and predict future
investment performance under a variety of scenarios using asset concentration, asset volatility, asset correlation, and
systematic risk; and
• Closely monitoring investment performance, general economic and financial conditions, and other relevant factors.
All of these strategies have inherent limitations. We cannot be certain that an event or series of unanticipated events will not
occur and result in losses greater than we expect and have a material adverse effect on our results of operations, liquidity,
financial condition, financial strength, and debt ratings.
Operational risks, including human or systems failures, are inherent in our business.
Operational risks and losses can result from, among other things, fraud, errors, failure to document transactions properly or to
obtain proper internal authorization, failure to comply with regulatory requirements, information technology failures, or
external events.
We believe that our predictive models for underwriting, claims, and catastrophe losses, as well as our business analytics and our
information technology and application systems are critical to our business. We expect our information technology and
application systems to remain an important part of our underwriting process and our ability to compete successfully. A major
defect or failure in our internal controls or information technology and application systems could: (i) result in management
distraction; (ii) harm our reputation; or (iii) increase our expenses. We believe appropriate controls and mitigation procedures
are in place to prevent significant risk of a defect in our internal controls around our information technology and application
systems, but internal controls provide only a reasonable, not absolute, assurance as to the absence of errors or irregularities and
any ineffectiveness of such controls and procedures could have a significant and negative effect on our business.
30
Rapid development of new technologies may result in an unexpected impact on our business and insurance industry overall.
Development of new technologies continues to impact all aspects of business and individuals’ lives at rapid speed. Often such
developments are positive and gradually improve standards of living and speed of communications, and allow for the
development of more efficient processes. The rapid development of new technologies, however, also presents challenges and
risks. Examples of such emerging risks include, but are not limited to:
• Change in exposures and claims frequency and/or severity due to unanticipated consequences of new technologies
and their use. For example, technologies have been developed and are being tested for autonomous self-driving
automobiles. It is unclear and we cannot predict the corresponding severity or cost of automobile claims. It is
possible that these technological developments will affect the profitability and demand for automobile insurance.
• Changes in how insurance products are marketed and purchased due to the availability of new technologies and
changes in customer expectations. For example, comparative rating technologies, which are widely used in
personal lines insurance, facilitate the process of efficiently generating quotes from multiple insurance companies.
This technology makes differentiation other than on pricing more difficult and has increased price comparison and
resulted in a higher level of quote activity with a lower percentage of quotes becoming new business written. These
trends may continue to accelerate and may affect other lines of business, which could put pressure on our future
profitability.
• New technologies may require the development of new insurance products without the support of sufficient
historical claims data for us to continue to compete effectively for our distribution partners' business and customers.
We depend on key personnel.
To a large extent, our business' success depends on our ability to attract and retain key employees. Competition to attract and
retain key personnel is intense. While we have employment agreements with certain key managers, all of our employees are at-
will employees and we cannot ensure that we will be able to attract and retain key personnel. As of December 31, 2016, our
workforce had an average age of approximately 47 and approximately 17% of our workforce was retirement eligible.
We are subject to a variety of modeling risks, which could have a material adverse impact on our business results.
We rely on complex financial models, such as predictive underwriting models, a claims fraud model, third party catastrophe
models, an enterprise risk management capital model, and modeling tools used by our investment managers, which have been
developed internally or by third parties to analyze historical loss costs and pricing, trends in claims severity and frequency, the
occurrence of catastrophe losses, investment performance, and portfolio risk. Flaws in these financial models, or faulty
assumptions used by these financial models, could lead to increased losses. We believe that statistical models alone do not
provide a reliable method for monitoring and controlling risk. Therefore, such models are tools and do not substitute for the
experience or judgment of senior management.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our main office is located in Branchville, New Jersey on a site owned by a subsidiary with approximately 114 acres and
315,000 square feet of operational space. We lease all of our other facilities. The principal office locations related to our
insurance segments are described in the “Geographic Markets” section of Item 1. “Business.” of this Form 10-K. We believe
our facilities provide adequate space for our present needs and that additional space, if needed, would be available on
reasonable terms.
Item 3. Legal Proceedings.
In the ordinary course of conducting business, we are named as defendants in various legal proceedings. Most of these
proceedings are claims litigation involving our Insurance Subsidiaries as either: (i) liability insurers defending or providing
indemnity for third-party claims brought against our customers; or (ii) insurers defending first-party coverage claims brought
against them. We account for such activity through the establishment of unpaid losses and loss expense reserves. We expect
that any potential ultimate liability in such ordinary course claims litigation will not be material to our consolidated financial
condition, results of operations, or cash flows after consideration of provisions made for potential losses and costs of defense.
From time to time, our Insurance Subsidiaries also are named as defendants in other legal actions, some of which assert claims
for substantial amounts. These actions include, among others, putative class actions seeking certification of a state or national
class. Such putative class actions have alleged, for example, improper reimbursement of medical providers paid under workers
compensation and personal and commercial automobile insurance policies. Similarly, our Insurance Subsidiaries are also
31
named from time-to-time in individual actions seeking extra-contractual damages, punitive damages, or penalties, some of
which allege bad faith in the handling of insurance claims. We believe that we have valid defenses to these cases. We expect
that any potential ultimate liability in any such lawsuit will not be material to our consolidated financial condition, after
consideration of provisions made for estimated losses. Nonetheless, given the inherent unpredictability of litigation and the
large or indeterminate amounts sought in certain of these actions, an adverse outcome in certain matters could possibly have a
material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods.
As of December 31, 2016, we do not believe the Company or any of the Insurance Subsidiaries was a defendant in any legal
action 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:
First quarter
Second quarter
Third quarter
Fourth quarter
2016
2015
High
Low
High
Low
$
36.92
38.67
41.30
44.00
29.27
33.60
35.90
34.95
30.10
29.60
32.50
37.91
25.49
26.28
28.10
30.36
On February 14, 2017, the closing price of our common stock as reported on the NASDAQ Global Select Market was $43.20.
(b) Holders
We had 3,374 stockholders of record as of February 14, 2017 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 based on our results of
operations, financial condition, capital requirements, contractual restrictions, and other relevant factors. On October 26, 2016,
the Board of Directors approved a 7% increase in our dividend to $0.16 per share. In addition, on February 2, 2017, the Board
of Directors declared a $0.16 per share quarterly cash dividend on common stock that is payable March 1, 2017, to
stockholders of record as of February 15, 2017. The following table provides information on the dividends declared for each
quarterly period within our two most recent fiscal years:
Dividend Per Share
First quarter
Second quarter
Third quarter
Fourth quarter
2016
2015
$
0.15
0.15
0.15
0.16
0.14
0.14
0.14
0.15
Our ability to receive dividends, loans, or advances from our Insurance Subsidiaries is subject to the approval and/or review of
the insurance regulators in the respective domiciliary states of our Insurance Subsidiaries. Such approval and/or review is
made under the respective domiciliary states’ insurance holding company acts, which generally require that any transaction
between related companies be fair and equitable to the insurance company and its policyholders. Although our dividends have
historically been met with regulatory approval, there is no assurance that future dividends will be approved given current
market conditions. We currently expect to continue to pay quarterly cash dividends on shares of our common stock in the
future. For additional information, see Note 19. "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.
32
(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, 2016:
Plan Category
(a)
(b)
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
(c)
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
355,391 1 $
16.87
5,277,703 2
1 Weighted average remaining contractual life of options is 2.14.
2 Includes 574,722 shares available for issuance under our Employee Stock Purchase Plan (2009); 1,867,287 shares available for issuance under the Stock
Purchase Plan for Independent Insurance Agencies; and 2,835,694 shares for issuance under the Selective Insurance Group, Inc. 2014 Omnibus Stock Plan
("Stock Plan"). Future grants under the Stock Plan can be made, among other things, as stock options, restricted stock units, or restricted stock.
(e) Performance Graph
The following chart, produced by Research Data Group, Inc., depicts our performance for the period beginning December 31,
2011 and ending December 31, 2016, 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
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.
33
(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 2016:
Period
October 1 – 31, 2016
November 1 – 30, 2016
December 1 – 31, 2016
Total
$
$
Total Number of
Shares Purchased1
Average Price
Paid Per Share
— $
203
—
203
$
—
35.75
—
35.75
Total Number of
Shares Purchased
as Part of Publicly
Announced Programs
Maximum Number of
Shares that May Yet
Be Purchased Under the
Announced Programs
—
—
—
—
—
—
—
—
1During the fourth quarter of 2016, 203 shares were purchased from employees in connection with the vesting of restricted stock units. These repurchases were
made to satisfy tax withholding obligations with respect to those employees. These shares were not purchased as part of any publicly announced program. The
shares were purchased at fair market value as defined in the Stock Plan and the Selective Insurance Group, Inc. 2005 Omnibus Stock Plan as Amended and
Restated Effective as of May 1, 2010.
34
Item 6. Selected Financial Data.
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)
Net premiums written
Net premiums earned
Net investment income earned
Net realized (losses) gains
Total revenues
Catastrophe losses
Underwriting income (loss)
Net income
Comprehensive income
Total assets2
Short-term debt2
Long-term debt2
Stockholders’ equity
2016
$
2,237,288
2,149,572
130,754
(4,937)
2,284,270
59,735
151,933
158,495
151,970
7,355,848
—
438,667
1,531,370
2015
2014
2013
2012
2,069,904
1,989,909
121,316
13,171
1,885,280
1,852,609
138,708
26,599
1,810,159
1,736,072
134,643
20,732
1,666,883
1,584,119
131,877
8,988
2,131,852
2,034,861
1,903,741
1,734,102
59,055
149,029
165,861
136,648
59,971
78,143
141,827
136,764
47,415
38,766
106,418
77,229
98,608
(64,007)
37,963
49,709
6,904,433
6,574,942
6,262,585
6,789,373
60,000
328,192
1,398,041
—
372,689
1,275,586
13,000
371,829
100,000
202,544
1,153,928
1,090,592
Statutory premiums to surplus ratio
GAAP combined ratio
Impact of catastrophe losses on statutory
combined ratio3
Statutory combined ratio
1.4
92.9 %
2.8
pts
91.8 %
Invested assets per dollar of stockholders' equity
$
3.50
Yield on investments, before tax
Debt to capitalization ratio2
Return on average equity
Per share data:
Net income from continuing operations1:
Basic
Diluted
Net income:
Basic
Diluted
Dividends to stockholders
2.5 %
22.3
10.8
2.74
2.70
2.74
2.70
0.61
$
$
$
1.5
92.5
3.0
92.4
3.64
2.5
21.7
12.4
2.90
2.85
2.90
2.85
0.57
1.4
95.8
3.2
95.7
3.77
3.0
22.6
11.7
2.52
2.47
2.52
2.47
0.53
1.4
97.8
2.7
97.5
3.97
3.0
25.0
9.5
1.93
1.89
1.91
1.87
0.52
1.6
104.0
6.2
103.5
3.97
3.1
21.7
3.5
0.69
0.68
0.69
0.68
0.52
Stockholders’ equity
26.42
24.37
22.54
20.63
19.77
Price range of common stock:
High
Low
Close
Number of weighted average shares:
Basic
Diluted
44.00
29.27
43.05
57,889
58,747
37.91
25.49
33.58
57,212
58,156
27.65
21.38
27.17
56,310
57,351
28.31
19.53
27.06
55,638
56,810
20.31
16.22
19.27
54,880
55,933
1In 2009, we sold our Selective HR Solutions operations.
2 Data for 2012 through 2014 has been restated to reflect the implementation of ASU 2015-03, Interest-Imputation of Interest (Topic 835-30): Simplifying the
Presentation of Debt Issue Costs, which was adopted in the fourth quarter of 2015.
3 The impact of catastrophe losses on the 2012 statutory combined ratio including flood claims handling fees related to Superstorm Sandy was 5.8 points.
35
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,
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” 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 the federal securities
laws, to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or
otherwise.
Factors that could cause our actual results to differ materially from those we have projected, forecasted or estimated in 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 continually changing business environment, and new risk factors emerge from time-to-time. We
can neither predict such new risk factors nor can we assess the impact, if any, of such new risk factors on our businesses or the
extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or
implied in any forward-looking statements in this report. In light of these risks, uncertainties and assumptions, the forward-
looking events discussed in this report might not occur.
Introduction
We classify our business into four reportable segments, which are as follows:
•
•
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.
Standard Personal Lines - comprised of insurance products and services, including flood insurance coverage, provided
primarily to individuals acquiring coverage in the standard marketplace.
• Excess and surplus ("E&S") Lines - comprised of 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.
Our Standard Commercial and Standard Personal Lines products and services are written through our nine insurance
subsidiaries, some of which write flood business through the Write Your Own ("WYO") program of the National Flood
Insurance Program ("NFIP"). Our E&S Lines products and services are written through one subsidiary, Mesa Underwriters
Specialty Insurance Company ("MUSIC"). This subsidiary provides us with a nationally-authorized non-admitted platform to
offer insurance products and services to customers who have not obtained coverage in the standard marketplace.
Our ten insurance subsidiaries are collectively referred to as the "Insurance Subsidiaries."
The following is Management’s Discussion and Analysis (“MD&A”) of the consolidated results of operations and financial
condition, as well as known trends and uncertainties, that may have a material impact in future periods.
In the MD&A, we will discuss and analyze the following:
Financial Highlights of Results for Years Ended December 31, 2016, 2015, and 2014;
• Critical Accounting Policies and Estimates;
•
• Results of Operations and Related Information by Segment;
•
•
• Off-Balance Sheet Arrangements;
• Contractual Obligations, Contingent Liabilities, and Commitments; and
• Ratings.
Federal Income Taxes;
Financial Condition, Liquidity, and Capital Resources;
36
Critical Accounting Policies and Estimates
We have identified the policies and estimates described below as critical to our business operations and the understanding of
the results of our operations. Our preparation of the Financial Statements requires us to make estimates and assumptions that
affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our Financial
Statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that
actual results will not differ from those estimates. Those estimates that were most critical to the preparation of the Financial
Statements involved the following: (i) reserves for losses and loss expenses; (ii) pension and post-retirement benefit plan
actuarial assumptions; (iii) investment valuation and other-than-temporary-impairments (“OTTI”); and (iv) reinsurance.
Reserves for Losses and Loss Expenses
Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the loss to the insurer, and the
insurer’s payment of that loss. To recognize liabilities for unpaid losses and loss expenses, insurers establish reserves as
balance sheet liabilities representing an estimate of amounts needed to pay reported and unreported net losses and loss
expenses. We had accrued $3.7 billion of gross loss and loss expense reserves and $3.1 billion of net loss and loss expense
reserves at December 31, 2016. At December 31, 2015, these gross and net reserves were $3.5 billion and $3.0 billion,
respectively.
The following tables provide case and incurred but not reported (“IBNR”) reserves for losses and loss expenses, and
reinsurance recoverable on unpaid losses and loss expenses as of December 31, 2016 and 2015:
As of December 31, 2016
Losses and Loss Expense Reserves
Case
Reserves
IBNR
Reserves
Total
Reinsurance
Recoverable on
Unpaid Losses and
Loss Expenses
Net Reserves
$
($ in thousands)
General liability
Workers compensation
Commercial auto
Businessowners' policies
Commercial property
Other
Total Standard Commercial Lines
Personal automobile
Homeowners
Other
Total Standard Personal Lines
Commercial liability1
Commercial property2
Total E&S Lines
235,329
463,523
170,380
40,018
50,757
5,243
965,250
78,512
24,779
64,314
167,605
50,337
8,253
58,590
1,053,400
745,590
259,861
56,894
7,910
9,647
1,288,729
1,209,113
430,241
96,912
58,667
14,890
2,133,302
3,098,552
72,435
19,845
26,198
118,478
241,473
7,021
248,494
150,947
44,624
90,512
286,083
291,810
15,274
307,084
Total
3,691,719
1Includes general liability (97% of net reserves) and commercial auto liability coverages (3% of net reserves).
2Includes commercial property (93% of net reserves) and commercial auto property coverages (7% of net reserves).
2,500,274
1,191,445
$
37
179,997
223,327
17,373
7,012
13,615
2,613
443,937
55,223
3,206
82,625
141,054
25,741
468
26,209
1,108,732
985,786
412,868
89,900
45,052
12,277
2,654,615
95,724
41,418
7,887
145,029
266,069
14,806
280,875
611,200
3,080,519
December 31, 2015
$
($ in thousands)
General liability
Workers compensation
Commercial auto
Businessowners' policies
Commercial property
Other
Total Standard Commercial Lines
Personal automobile
Homeowners
Other
Total Standard Personal Lines
Commercial liability1
Commercial property2
E&S Lines
Losses and Loss Expense Reserves
Case
Reserves
IBNR
Reserves
Total
Reinsurance
Recoverable on
Unpaid Losses and
Loss Expenses
Net Reserves
247,162
479,789
166,606
40,496
41,455
4,126
979,634
87,589
29,072
27,149
143,810
52,376
6,289
58,665
970,541
750,238
227,159
54,937
6,560
9,680
1,217,703
1,230,027
393,765
95,433
48,015
13,806
148,113
225,948
18,983
5,459
8,390
2,275
1,069,590
1,004,079
374,782
89,974
39,625
11,531
2,019,115
2,998,749
409,168
2,589,581
79,136
20,364
21,744
121,244
190,101
5,159
195,260
166,725
49,436
48,893
265,054
242,477
11,448
253,925
64,258
2,129
40,338
106,725
34,355
771
35,126
102,467
47,307
8,555
158,329
208,122
10,677
218,799
551,019
2,966,709
Total
3,517,728
1Includes general liability (97% of net reserves) and commercial auto liability coverages (3% of net reserves).
2Includes commercial property (93% of net reserves) and commercial auto property coverages (7% of net reserves).
2,335,619
1,182,109
$
How reserves are established
When a claim is reported to us, claims personnel establish a “case reserve” for the estimated amount of the reported loss. The
amount of the reserve is primarily based on a case-by-case evaluation of the type of claim involved, the circumstances
surrounding each claim, and the policy provisions relating to the type of losses, less any amounts previously paid to the
claimant. The estimate reflects the informed judgment of such personnel based on their knowledge, experience, and general
insurance reserving practices. Until the claim is resolved, these estimates are revised as deemed appropriate by the responsible
claims personnel based on subsequent developments and periodic reviews of the case.
Using generally accepted actuarial reserving techniques, we project our estimate of ultimate losses and loss expenses at each
reporting date. Our IBNR reserve is the difference between the projected ultimate losses and loss expenses incurred and the
sum of: (i) case losses and loss expense reserves; and (ii) paid losses and loss expenses. The actuarial techniques used in
determining ultimate losses are part of a comprehensive reserving process that includes two primary components. The first
component is a detailed quarterly reserve analysis performed by our internal actuarial staff. In completing this analysis, the
actuaries must gather substantially similar data in sufficient volume to ensure statistical credibility of the data, while
maintaining appropriate differentiation. This process defines the reserving segments, to which various actuarial projection
methods are applied. When applying these methods, the actuaries are required to make numerous assumptions including, for
example, the selection of loss and loss expense development factors and the weight to be applied to each individual projection
method. These methods include paid and incurred versions for the following: loss and loss expense development, Bornhuetter-
Ferguson, Berquist-Sherman, and frequency/severity modeling (chain-ladder approach). The second component of the analysis
is the projection of the expected ultimate loss and loss expense ratio for each line of business for the current accident year. This
projection is part of our planning process wherein we review and update expected loss and loss expense ratios each quarter.
This review includes actual versus expected pricing changes, loss and loss expense trend assumptions, and updated prior period
loss and loss expense ratios from the most recent quarterly reserve analysis.
In addition to the quarterly reserve analysis, a range of possible IBNR reserves is estimated annually and continually
considered, among other factors, in establishing IBNR for each reporting period. Loss and loss expense trends are also
considered, which include, but are not limited to, large loss activity, asbestos and environmental claim activity, large case
reserve additions or reductions for prior accident years, and reinsurance recoverable issues. We also consider factors such as:
(i) per claim information; (ii) company and industry historical loss experience; (iii) legislative enactments, judicial decisions,
38
legal developments in the imposition of damages, and changes in political attitudes; and (iv) trends in general economic
conditions, including the effects of inflation. Based on the consideration of the range of possible IBNR reserves, recent loss
and loss expense trends, uncertainty associated with actuarial assumptions, and other factors, IBNR is established and the
ultimate net liability for losses and loss expenses is determined. Such an assessment requires considerable judgment given that
it is frequently not possible to determine whether a change in the data is an anomaly until sometime after the event. Even if a
change is determined to be permanent, it is not always possible 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 many 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 to have
a Statement of Actuarial Opinion issued annually on our statutory reserve adequacy. We engage an independent actuary to
issue this opinion based on their independent review.
Range of reasonable reserves
We have estimated a range of reasonably possible reserves for net loss and loss expense claims to be $2,780 million to $3,237
million at December 31, 2016, which compares to $2,694 million to $3,136 million at December 31, 2015. These ranges reflect
low and high reasonable reserve estimates, which were selected primarily by considering the range of indications calculated
using generally accepted actuarial techniques. Such techniques assume that past experience, adjusted for the effects of current
developments and anticipated trends, are an appropriate basis for predicting future events. Although these ranges reflect likely
scenarios, it is possible that the final outcomes may fall above or below these amounts. The ranges do not include a provision
for potential increases or decreases associated with asbestos, environmental, and other continuous exposure claims, as
traditional actuarial techniques cannot be effectively applied to these exposures.
In 2016, we experienced overall net favorable loss development of $65.8 million, compared to $69.0 million in 2015, and $59.3
million in 2014. The following table summarizes prior year development by line of business:
(Favorable)/Unfavorable Prior Year Loss and Loss Expense Development
($ in millions)
General liability
Workers compensation
Commercial automobile
Businessowners' policies
Commercial property
Personal automobile
Homeowners
E&S
Other
Total
2016
2015
2014
$
$
(45.0)
(56.0)
25.3
1.8
0.3
1.0
1.7
7.1
(2.0)
(65.8)
(51.0)
(37.0)
2.4
2.2
(3.0)
0.4
1.5
15.5
—
(43.9)
—
(4.1)
1.9
(2.1)
(10.8)
(4.0)
3.7
—
(69.0)
(59.3)
Major developments related to loss and loss expense reserve estimates and uncertainty
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.
For the past eleven years, the Insurance Subsidiaries have experienced net favorable prior accident year loss and loss expense
development, although there can be no assurance that this will continue, or that we may experience adverse prior accident year
loss and loss expense development in future periods. Over the past three years, contributions to the favorable emergence have
come from different lines of business at different points in time. The greater contributions have generally come from the longer
tailed casualty lines, primarily due to their associated volume of reserves and the inherent uncertainty of the longer claims
settlement process, although this has been offset in part by adverse prior accident year loss and loss expense development
within certain lines such as commercial and personal auto liability and E&S.
39
A more detailed discussion of recent developments, by line of business, follows.
Standard Market General Liability Line of Business
At December 31, 2016, our general liability line of business had recorded reserves, net of reinsurance, of $1.1 billion, which
represented 36% of our total net reserves. In 2016, this line experienced favorable development of $45.0 million, attributable
mainly to lower than anticipated claims severities in accident years 2008 through 2013 and 2015.
During 2015, this line experienced favorable development of $51.0 million, attributable mainly to accident years 2013 and
prior. This was primarily driven by severities that continued to develop lower than expected, within both the premises and
operations and products liability coverages. In addition, the reduction in frequencies that we had seen in the immediately prior
accident years continued into accident year 2015.
Standard Market Workers Compensation Line of Business
At December 31, 2016, our workers compensation line of business recorded reserves, net of reinsurance, of $1.0 billion, which
represented 32% of our total net reserves. During 2016, this line experienced favorable development of $56.0 million driven
by accident years 2014 and prior. During 2015, this line experienced favorable development of $37.0 million driven by
virtually all prior accident years. The results over the past two years represent a change compared to 2014, during which this
line experienced no development on prior accident years. During 2016, this line showed continued reductions in paid and
reported loss amounts, due, in part, to: (i) lower medical inflation than originally anticipated; (ii) our proactive underwriting
actions in recent years; and (iii) various significant claims initiatives that we implemented, including the centralization of our
workers compensation claims handling in Charlotte, North Carolina, more favorable Preferred Provider Organizations ("PPO")
contracts, greater PPO penetration, and more proactive case management in the areas of medical, pharmaceutical, and physical
therapy treatments. Jurisdictionally trained and aligned medical only and lost-time adjusters manage non-complex workers
compensation claims within our footprint. Claims with high exposure and/or significant escalation risk are referred to the
workers compensation strategic case management unit.
While we believe these changes are significant drivers of our improved loss experience, there is always 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 in the estimated
reserves.
In addition to the uncertainties associated with actuarial assumptions and methodologies described above, the workers
compensation line of business can be impacted by a variety of 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 having 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, higher levels of unemployment could ultimately impact both the severity and frequency
of workers compensation claims. In particular, during more difficult economic times, workers may be more likely to
use the system, and less likely to return to work. Another example is the potential changes to federal healthcare laws,
which, depending on the nature of the changes, may have either positive or negative impacts on workers compensation
costs.
Changes in the economy could impact reserves in other ways. For example, in 2016, audit and endorsement activity resulted in
additional premium of $22.6 million, and in 2015, audit and endorsement activity resulted in additional premium of $22.5
million. As premiums earned are used as a basis for setting initial reserves on the current accident year, our reserves could be
impacted. While audit and endorsement premiums are modeled within our annual budgeting process, they remain uncertain,
and therefore provide additional variability to the resulting loss and loss expense ratio estimates.
40
Standard Market Commercial Automobile Line of Business
At December 31, 2016, our commercial automobile line of business had recorded reserves, net of reinsurance, of $413 million,
which represented 13% of our total net reserves. In 2016, this line experienced unfavorable development of $25.3 million,
which was mainly driven by higher severity in accident year 2014 and higher frequency and severity in 2015.
In 2015, this line experienced unfavorable development of $2.2 million, which was driven by bodily injury liability for accident
years 2013 and 2014. This was partially offset by favorable development in accident years 2010 and 2011.
For the industry, the commercial automobile line has experienced unfavorable trends in recent years, in both its casualty and
property coverages. While no direct causal relationships can be drawn, increased frequencies may be due to increased miles
driven, which may be the result of the economic recovery and lower gasoline prices, as well as distracted driving. Rising
severities may be the result of the increasing complexity of vehicles and the technology they incorporate, which results in
increased repair costs.
We are currently taking actions to improve the profitability of this line of business, including:
• Reducing premium leakage by improving the quality of our rating information. This includes validating application
information using third party data and using more detailed driver information.
• Co-underwriting selected higher hazard classes by the field and home office, providing better recognition of risk
drivers and improved pricing. This includes increasing rate targets on these exposures.
• Continuing to leverage our predictive modeling and analytical capabilities to provide more granular and actionable
rate per exposure unit guidance on new business opportunities, while also developing and executing targeted rate
change and underwriting actions on our renewal portfolio.
Standard Market Personal Automobile Line of Business
At December 31, 2016, our personal automobile line of business had recorded reserves, net of reinsurance, of $96 million,
which represented 3% of our total net reserves. In 2016, this line experienced unfavorable development of $1.0 million.
While this development is relatively neutral overall, it results from an increase in accident year 2015, largely offset by a
decrease in accident year 2014. This line experienced unfavorable prior year development of $0.4 million in 2015. We
continue to recalibrate our predictive models, as well as refine our underwriting and pricing approaches. While we believe
these changes will ultimately lead to improved profitability and greater stability, they may impact paid and reported
development patterns, thereby increasing the uncertainty in the reserves in the near-term.
E&S Lines
At December 31, 2016, our E&S Lines had recorded reserves, net of reinsurance, of $281 million, which represented 9% of our
total net reserves. In 2016, these lines experienced unfavorable development of $7.1 million, mostly associated with accident
year 2014. In 2015, these lines experienced unfavorable development of $15.5 million, associated with accident years 2012
through 2014. Since we have limited historical loss experience in this segment, our reserve estimates are partially based on
development patterns of companies that have similar operations. Therefore, these estimates are subject to somewhat greater
uncertainty than the comparable standard operations lines of business. As our own experience matures, we will continue to
place greater weight upon it, and less weight upon the surrogate patterns.
In order to improve outcomes, we have taken the following actions related to E&S claims:
• Effective January 1, 2015, the E&S Claims operation began reporting through our Corporate Claims division in
Charlotte, North Carolina.
• Complex claims were integrated into our standard lines CCU in August 2015.
•
• Effective January 1, 2016, the E&S Claims operation in Scottsdale, Arizona was closed and all open and new claims
Potential complex liability claims are now systematically identified and referred to our CCU.
are now handled out of our standard lines regional claims offices by dedicated E&S claims personnel.
• Claims have been segregated into “litigated” versus “non-litigated.” Separate claim handling teams have been created,
with the required skill sets, to appropriately handle these two types of claims.
Implemented the following expense improvement initiatives regarding outside adjusters and legal counsel:
•
Maximized use of staff counsel when geographically possible;
Utilized staff coverage attorney for coverage reviews;
Heightened focus on legal budgeting and expense management;
Required panel counsel firms to use our electronic legal billing and budgeting system to better manage
budgets and expenses associated with litigation; and
Implemented a panel counsel review process.
41
•
•
In addition to the expense improvement initiatives above, we anticipate implementing the following in 2017 to further
improve benefits:
Expanding the use of staff counsel in high volume, high cost locations; and
Expanding the use of alternative fee arrangements with panel counsel.
For property claims, similar corporate oversight and referrals have been implemented. In addition, large losses are
now adjusted by or overseen by Standard Lines property personnel.
We believe that the actions above will not only lead to earlier identification of severe claims, but also earlier claims resolutions
with improved outcomes. We have begun to see the benefits of the actions above, through significantly lower loss adjustment
expenses.
Other impacts creating additional loss and loss expense reserve uncertainty
Claims Initiative Impacts
In addition to the line of business specific issues mentioned above, our lines of business have been impacted by a number of
initiatives undertaken by our Claims Department that have resulted in variability, or shifts, in the average level of case reserves.
Some of these initiatives have also impacted claims settlement rates. These changes affect the data upon which the ultimate
loss and loss expense projections are made. While these changes in case reserve levels and settlement rates increase the
uncertainty in the short run, we expect the longer-term benefit will be a more refined management of the claims process.
Some of the specific actions implemented over the past several years, other than those regarding E&S as discussed above, are
as follows:
•
Increased focus on reducing workers compensation medical costs through more favorable PPO contracts and greater
PPO penetration.
• A more comprehensive approach for handling workers compensation claims, with an emphasis towards improving
recovery times, allowing for earlier “return-to-work.” This involves elevated and proactive case management in the
areas of medical, pharmaceutical, and physical therapy treatments.
• The continued use of our CCU, to which all significant and complex liability claims are assigned. This unit has been
staffed with personnel that have significant experience in handling and settling these types of claims.
• The strategic realignment of our CMS model to handle property claims under $5,000.
• The continued use of our PCSs and our LLU. Our PCSs handle claims between $5,000 and $100,000, while the LLU
handles claims above $100,000. Both groups form the core of our catastrophe response team. During 2016, we began
increasing the number of property claims specialists to respond to property claims with higher severity and/or
complexity. This provides us with more staff to respond to claim volume, including the fluctuations that result from
catastrophes, while ensuring we have the highest level of property expertise available to apply to our more complex
claims.
• Continued efforts in the areas of fraud investigation and salvage/subrogation recoveries. These efforts have been
supported by the introduction of predictive models that allow us to better focus our efforts.
Our internal reserve analyses incorporate actuarial projection methods, which make adjustments for changes in case reserve
adequacy and claims settlement rates. These methods adjust our historical loss experience to the current level of case adequacy
or settlement rate, which provides a more consistent basis for projecting future development patterns. These methods have
their own assumptions and judgments associated with them, so as with 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
Although inflationary volatility is expected to be low in the near term, current United States monetary policy and global
economic conditions bring additional uncertainty in the long-term given the length of time required for claim settlement and the
impact of medical cost trends relating to longer-tail liability and workers compensation claims. Uncertainty regarding future
inflation or deflation creates the potential for additional volatility in our reserves for these lines of business.
42
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:
• The selection of loss and loss expense development factors;
• The weight to be applied to each individual actuarial projection method;
•
• Expected ultimate loss and loss expense ratios for the current accident year.
Projected future loss trends; and
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 and may be material to the results of operations in future periods. Set forth below are sensitivity
tests that highlight potential impacts to loss and loss expense reserves under different scenarios, for the major casualty lines of
business. 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 key assumptions as identified by management, there is no
assurance that the future emergence of our loss and loss expense experience will be consistent with either our current or
alternative sets of assumptions.
While the sources of variability discussed above are generated by different underlying 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, the expected loss and loss expense
ratios are another key assumption in the reserving process. These expected ratios are developed through a rigorous process of
projecting recent accident years' experience to an ultimate settlement basis, and then adjusting it to the current accident year's
pricing and loss cost levels. Impact from changes in the underwriting portfolio and changes in 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 the estimated impacts from changes in expected reported loss and loss expense development patterns. 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 judgmentally based, they reflect the
relative contribution of the specific line of business to the overall reserve range. The second table shows 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 Prior Years Expected Loss and Loss Expense Reporting Patterns
($ in millions)
General liability
Workers compensation
Commercial automobile liability
Personal automobile liability
E&S liability
Percentage
Decrease/
Increase
7%
$
7
10
15
10
(Decrease) to Future
Calendar Year Reported
Increase to Future Calendar
Year Reported
(80) $
(70)
(35)
(10)
(35)
80
70
35
10
35
Reserve Impacts of Changes to Current Year Expected Ultimate Loss and Loss Expense Ratios
($ in millions)
General liability
Workers compensation
Commercial automobile liability
Personal automobile liability
E&S liability
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
7 pts $
7
7
7
7
(37) $
(22)
(21)
(6)
(11)
37
22
21
6
11
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, these tables provide
perspective into the sensitivity of each of these key assumptions.
43
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.
The total carried net losses and loss expense reserves for these claims were $22.7 million as of December 31, 2016 and $23.2
million as of December 31, 2015. The emergence of these claims occurs over an extended period and is highly unpredictable.
For example, within our Standard Commercial Lines book, certain landfill sites are included on the National Priorities List
(“NPL”) by the United States Environmental Protection Agency (“USEPA”). Once on the NPL, the USEPA determines an
appropriate remediation plan for these sites. A landfill can remain on the NPL for many years until final approval for the
removal of the site is granted from the USEPA. The USEPA has the authority to re-open previously closed sites and return
them to the NPL. We currently have reserves for nine customers related to six sites on the NPL.
“Asbestos claims” are claims for bodily injury alleged to have occurred from exposure to asbestos-containing products. Our
primary exposure arises from insuring various distributors of asbestos-containing products, such as electrical and plumbing
materials. At December 31, 2016, asbestos claims constituted 29% of our $22.7 million net asbestos and environmental
reserves, compared to 29% of our $23.2 million net asbestos and environmental reserves at December 31, 2015.
“Environmental claims” are claims alleging bodily injury or property damage from pollution or other environmental
contaminants other than asbestos. These claims include landfills and leaking 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 tanks in New
Jersey. In 2007, we instituted a fuel oil system exclusion on our New Jersey homeowners policies that limits our exposure to
leaking underground storage tanks for certain customers. At that time, existing customers were offered a one-time opportunity
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.
Our asbestos and environmental claims are handled in our centralized and specialized asbestos and environmental claim unit.
Case reserves for these exposures 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.
Estimating IBNR reserves for asbestos and environmental claims is difficult because of the delayed and inconsistent reporting
patterns associated with these claims. In addition, there are significant uncertainties associated with estimating critical
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 commercial lines industry. Prior to the introduction of the absolute pollution
exclusion endorsement in the mid-1980's, we were primarily a personal lines carrier and therefore do not have broad exposure
to asbestos and environmental claims. Additionally, we are the primary insurance carrier on the majority of these exposures,
which provides more certainty in our reserve position compared to others in the insurance marketplace.
Pension and Post-retirement Benefit Plan Actuarial Assumptions
Our pension and post-retirement benefit obligations and related costs are calculated using actuarial methods, within the
framework of U.S. GAAP. 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. Other assumptions involve
demographic factors, such as retirement age and mortality.
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. A higher discount rate reduces the present
value of benefit obligations and generally reduces pension expense. Conversely, a lower discount rate increases the present
44
value of benefit obligations and generally increases pension expense. For additional information regarding our discount rate
selection, refer to Note 14. “Retirement Plans” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
The expected long-term rate of return on the plan assets is determined by considering the current and expected asset allocation,
as well as historical and expected returns on each plan asset class. A lower expected rate of return on pension plan assets would
increase pension expense. Our long-term expected return on plan assets decreased 13 basis points, to 6.24%, in 2016 as
compared to 6.37% in 2015, reflecting the current interest rate environment.
At December 31, 2016, our pension and post-retirement benefit plan obligation was $346.0 million compared to $324.8 million
at December 31, 2015. Plan assets were $316.5 million and $249.7 million at December 31, 2016 and December 31, 2015,
respectively. Volatility in the marketplace, coupled with changes in the discount rate assumption, could materially impact our
pension and post-retirement life valuation in the future. For additional information regarding our pension and post-retirement
benefit plan obligations, see Note 14. “Retirement Plans” in Item 8. “Financial Statements and Supplementary Data.” of this
Form 10-K.
Investment Valuation and OTTI
Investment Valuation
Fair value of our investment portfolio is defined under accounting guidance as the exit price or the amount that would be: (i)
received to sell an asset; or (ii) paid to transfer a liability in an orderly transaction between market participants. When
determining an exit price we must, when available, rely upon observable market data. Our AFS portfolio is carried at fair value
and the related unrealized gains or losses are reflected in stockholders' equity, net of tax. For both our AFS and HTM
portfolios, fair value is a key factor in the evaluation of a security for OTTI.
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) and the lowest priority to unobservable inputs (Level 3).
The fair value of approximately 99% of our investment portfolio is 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. 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% of our investment portfolio is 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) of Note 2. "Summary of
Significant Accounting Policies" within Item 8. "Financial Statements and Supplementary Data." of this Annual Report.
OTTI
Our investment portfolio is subject to market declines below amortized cost that may be other than temporary and therefore
may result in the recognition of OTTI losses. Factors considered in the determination of whether or not a decline is other than
temporary 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. For
additional information regarding our OTTI process and OTTI charges recorded, see item (d) of Note 2. "Summary of
Significant Accounting Policies" and item (j) of Note 5. "Investments" within Item 8. "Financial Statements and Supplementary
Data." of this Annual Report, respectively.
Reinsurance
Reinsurance recoverables on paid and unpaid losses and loss expenses represent estimates of the portion of such liabilities that
will be recovered from reinsurers. Each reinsurance contract is analyzed to ensure that the transfer of risk exists to properly
record the transactions in the Financial Statements. Amounts recovered from reinsurers are recognized as assets at the same
time and in a manner consistent with the paid and unpaid losses associated with the reinsured policies. An allowance for
estimated uncollectible reinsurance is recorded based on an evaluation of balances due from reinsurers and other available
information. This allowance totaled $5.5 million at December 31, 2016 and $5.7 million at December 31, 2015. We
continually monitor developments that may impact recoverability from our reinsurers and have available to us contractually
provided remedies if necessary. For further information regarding reinsurance, see the “Reinsurance” section below and Note
8. “Reinsurance” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
45
Financial Highlights of Results for Years Ended December 31, 2016, 2015, and 20141
($ in thousands, except per share amounts)
2016
2015
2016 vs.
2015
2014
2015 vs.
2014
GAAP measures:
Revenues
Pre-tax net investment income
Pre-tax net income
Net income
Diluted net income per share
Diluted weighted-average outstanding shares
GAAP combined ratio
Statutory combined ratio
Invested assets per dollar of stockholders' equity
After-tax yield on investments
Return on average equity ("ROE")
Non-GAAP measures:
Operating income
Diluted operating income per share
Operating ROE
$
2,284,270
2,131,852
130,754
219,955
158,495
2.70
58,747
92.9 %
91.8
3.50
1.9 %
10.8
161,704
2.75
11.0 %
$
$
$
121,316
232,692
165,861
2.85
58,156
92.5
92.4
3.64
1.9
12.4
157,300
2.70
11.8
7 % $
8
(5)
(4)
(5)
1
$
0.4
pts
(0.6)
(4) % $
— pts
(1.6)
2,034,861
138,708
197,131
141,827
2.47
57,351
5 %
(13)
18
17
15
1
95.8 %
(3.3) pts
95.7
3.77
2.2 %
11.7
(3.3)
(3) %
(0.3) pts
0.7
26 %
24
1.5
pts
3 % $
2
124,538
2.17
(0.8) pts
10.3 %
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.
Reconciliations of net income, net income per share, and ROE to operating income, operating income per share, and operating
ROE, respectively, are provided in the tables below:
Reconciliation of net income to operating income
($ in thousands)
Net income
Exclude: Net realized losses (gains)
Exclude: Tax on net realized losses (gains)
Operating income
Reconciliation of net income per share to operating income per share
Diluted net income per share
Exclude: Net realized losses (gains) per share
Exclude: Tax on net realized losses (gains) per share
Diluted operating income per share
Reconciliation of ROE to operating ROE
ROE
Exclude: Net realized losses (gains)
Exclude: Tax on net realized losses (gains)
Operating ROE
$
$
$
$
2016
2015
2014
158,495
4,937
(1,728)
161,704
165,861
(13,171)
4,610
157,300
141,827
(26,599)
9,310
124,538
2016
2015
2014
2.70
0.08
(0.03)
2.75
2.85
(0.23)
0.08
2.70
2016
2015
2014
10.8%
0.3
(0.1)
11.0%
12.4
(1.0)
0.4
11.8
2.47
(0.46)
0.16
2.17
11.7
(2.2)
0.8
10.3
46
We generated excellent financial results in 2016, continuing the trend of excellent financial performance we achieved in 2015
and 2014, which reflects our hard work to drive renewal pure price increases within our Standard Commercial and Personal
Lines segments as well as our E&S segment, generate new business, improve the underlying profitability of our book of
business through various underwriting and claims initiatives. In 2016, we also moved to more actively manage our investment
portfolio to generate higher after-tax net investment income in an investment environment of declining interest rates. Our NPW
growth of 8% in 2016 and 10% in 2015 was driven by our strong franchise value with our ivy league distribution partners.
Over the past 28 quarters, our Standard Commercial Lines renewal pure price increases have cumulatively outperformed the
Willis Towers Watson Commercial Lines Pricing (or CLIPs) survey by approximately 1700 basis points, while maintaining
high retention rates. In addition, NPW growth was aided by the appointment of 110 retail agents in 2016 and some new
business opportunities in our E&S segment as we increased our appetite for new business through our brokerage channel.
In addition to the cumulative pure renewal price increases we have achieved over the past several years, we have benefited
from underwriting and claims process enhancements, as well as a shift in our business mix towards higher quality accounts.
For example, our workers compensation book of business, which represents approximately 20% of our Standard Commercial
Lines business, continues to benefit from the steps we have taken in recent years to increase premium rates and to improve the
business mix by shifting towards lower hazard and smaller accounts from higher hazard and larger accounts. Additionally,
claims initiatives, such as having an increased focus on reducing workers compensation medical costs through more favorable
PPO contracts and greater PPO penetration, have helped to improve profitability of this line. The statutory combined ratios for
this line of business improved, aided by net favorable loss development, from 110.1% in 2014 to 88.2% in 2015 and 80.7% in
2016. Our E&S segment has also seen an improvement in underwriting results as we have continued to deploy our corporate
claims practices in this operation, although we have not yet met our financial targets for this segment. For a full discussion of
the claims initiatives that we have deployed, refer to the “Reserves for Loss and Loss Expenses” section within Critical
Accounting Policies in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Pre-tax net investment income grew 8% in 2016 compared to 2015 after decreasing 13% compared to 2014. The improvement
in 2016 was driven by a higher fixed income asset base and improved returns on our alternative investments, while the decrease
in 2015 compared to 2014 was due to lower returns on these alternative investments. During 2016, we determined that a more
active management approach to our investment portfolio was necessary to maximize the risk-adjusted after-tax income and
total return of the portfolio, while maintaining a similar level of credit quality and duration risk. We evaluated our previous
buy-and-hold low turnover approach in the context of the current market environment, and concluded that a change was
necessary to more effectively diversify, navigate, and manage the portfolio in response to the persistently low and volatile
interest rate environment, the potential for rising inflation, and an uncertain political and tax landscape. To execute on this
approach, we hired four new fixed income investment managers in 2016, increased our long-term target risk asset allocation,
and modestly increased our exposure to non-investment grade fixed income securities, private equity investments, and private
credit strategies to further diversity our allocation within risk assets. Our risk assets, which include public equities, non-
investment grade fixed income securities, private equity investments, and other limited partnership private investments,
represented 7% of our total invested assets at December 31, 2016 and may increase to approximately 10% over time.
The improvements to our underwriting profitability and after tax net investment income discussed above drove our long-term
goal of generating an operating ROE that is approximately 300 basis points in excess of our weighted average cost of capital
over time. Although our operating income increased in 2016, compared to 2015, our operating ROE was below 2015 levels,
due to higher comprehensive income, partially offset by dividends paid to our shareholders, which has increased our
shareholders' equity. Our ROE and operating ROE contributions by component are as follows:
Return on Average Equity
Insurance segments
Investment income
Other
Net realized (losses) gains, net of tax at 35%
ROE
Exclude: Net realized losses (gains), net of tax at 35%
Operating ROE
Weighted average cost of capital
2016
2015
2014
6.7%
6.7
(2.4)
(0.2)
10.8
0.2
11.0%
8.5%
7.3
7.0
(2.5)
0.6
12.4
(0.6)
11.8
8.7
4.2
8.6
(2.5)
1.4
11.7
(1.4)
10.3
8.9
47
Insurance Segments
The key metric in understanding our insurance segments’ contribution to ROE is the GAAP combined ratio. The following
table provides a quantitative foundation for analyzing this ratio:
All Lines
($ in thousands)
GAAP Insurance Operations Results:
Net Premiums Written ("NPW")
Net Premiums Earned ("NPE")
Less:
Losses and loss expenses incurred
Net underwriting expenses incurred
Dividends to policyholders
Underwriting income
GAAP Ratios:
Loss and loss expense ratio
Underwriting expense ratio
Dividends to policyholders ratio
Combined ratio
Statutory Ratios:
Loss and loss expense ratio
Underwriting expense ratio
Dividends to policyholders ratio
Combined ratio
2016
2015
2016
vs. 2015
2014
2015
vs. 2014
$
2,237,288
2,149,572
1,234,797
759,194
3,648
151,933
$
57.4 %
35.3
0.2
92.9
57.4
34.2
0.2
91.8 %
2,069,904
1,989,909
1,148,541
686,120
6,219
149,029
57.7
34.5
0.3
92.5
57.7
34.4
0.3
92.4
8 % $
8
1,885,280
1,852,609
8
11
(41)
2 % $
1,157,501
610,783
6,182
78,143
10 %
7
(1)
12
1
91 %
(0.3) pts
62.5 %
(4.8) pts
0.8
(0.1)
0.4
(0.3)
(0.2)
(0.1)
33.0
0.3
95.8
62.4
33.0
0.3
1.5
—
(3.3)
(4.7)
1.4
—
(0.6) pts
95.7 %
(3.3) pts
Fluctuations in our GAAP combined ratio were driven by the following:
• Growth in our net premiums earned, which was driven by the acquisition of new business as well as renewal pure
price increases on our standard lines business of 2.9% in 2016, 3.5% in 2015, and 5.8% in 2014. The renewal pure
price increases provided earned rate of approximately 3.1% in 2016 and 4.0% in 2015, both of which were above our
rate of expected claim inflation and thus contributed to improved combined ratios in each of the three years presented.
However, as described below, our combined ratios are also significantly impacted by prior year casualty reserve
development, net catastrophe loss activity, and non-catastrophe property losses.
• Net favorable prior year casualty reserve development, the details of which are below:
(Favorable)/Unfavorable Prior Year Casualty Reserve Development
($ in millions)
General liability
Commercial automobile
Workers compensation
Businessowners' policies
Other
Total Standard Commercial Lines
Homeowners
Personal automobile
Total Standard Personal Lines
E&S
2016
2015
2014
$
(45.0)
25.0
(56.0)
0.5
(2.0)
(77.5)
1.5
1.0
2.5
6.0
(51.0)
3.0
(37.0)
4.0
—
(81.0)
(2.0)
—
(2.0)
16.0
(43.9)
(4.0)
—
2.5
—
(45.4)
(0.7)
(8.0)
(8.7)
5.8
Total favorable prior year casualty reserve development
$
(69.0)
(67.0)
(48.3)
(Favorable) impact on loss ratio
(3.2) pts
(3.4)
(2.6)
For a qualitative discussion of this reserve development, please see the related insurance segment discussions below.
48
• Catastrophe losses, the details of which are below:
Catastrophe Losses
($ in millions)
For the Year ended December 31,
Loss and Loss
Expense Incurred
Impact on Loss and Loss
Expense Ratio
(Favorable)/
Unfavorable Year-
Over-Year Change
2016
2015
2014
$
59.7
59.1
60.0
2.8 pts
3.0
3.2
(0.2)
(0.2)
0.5
• Non-catastrophe property losses, the details of which are below:
Non-Catastrophe Property Losses
($ in millions)
For the Year ended December 31,
2016
2015
2014
Loss and Loss Expense
Incurred
Impact on Loss and
Loss Expense Ratio
(Favorable)/
Unfavorable Year-Over-
Year Change
$
279.2
265.4
287.5
13.0 pts
13.3
15.5
(0.3)
(2.2)
2.4
The improvement in the loss and loss expense ratio of 0.3 points, to 57.4% in 2016 from 57.7% in 2015 was offset by increases
in the underwriting expense ratio of 0.8 points in 2016. The higher expense ratio was driven by 0.7 points of higher
supplemental commission expense to our distribution partners as a result of improved underwriting profitability, as well as
increased compensation paid to our employees, partially offset by reduced pension costs driven in part by the curtailment of our
pension plan in the first quarter of 2016.
The 1.5-point increase in the 2015 underwriting expense ratio compared to 2014 was driven by the following:
•
•
•
Improved underwriting profitability that resulted in higher supplemental commission expense to our distribution
partners and increased the ratio by 0.3 points;
Improved underwriting profitability that also resulted in higher annual incentive compensation expense to
employees and increased the ratio by 0.3 points;
Pension expense increases due to the accrual of service costs for eligible employees and the negative impact of
declining interest rates in 2014 that increased the ratio by 0.3 points; and
• The March 2014 sale of the renewal rights to our $37 million Self Insured Group ("SIG") book of business that
contributed $8 million to other income and reduced the combined ratio by 0.4 points. Although we did not solicit
buyers, we decided to sell this small and specialized book of business when the opportunity presented itself because it
had significant production outside of our standard lines footprint, and proved difficult to grow. We however, have
retained our substantial individual risk public entity book of business and continue to look for opportunities to grow it.
Investments Segment
The ROE contribution from investment income has decreased from 2014 through 2016 reflecting declining investment leverage
as a result of overall stockholders' equity growth outpacing investment income growth. This was, in part, due to strong
profitability in our insurance operations coupled with declining portfolio yields.
Net realized gains/losses, which is another component of our investment segments' results, experienced volatility in its
contribution to ROE in 2014 through 2016. For qualitative information regarding these fluctuations, which include OTTI
charges and investment sales that are largely discretionary as to timing, refer to Note 5. "Investments" in Item 8. "Financial
Statements and Supplementary Data." of this Form 10-K.
Other
The ROE contribution from "other" above in the "Return on Average Equity" table, remained consistent from 2014 through
2016. However, we have restructured our long-term incentive program, which is included in other expenses, and expect these
expenses to decrease by approximately $10 million over the next twelve months.
49
Outlook
In 2016, we delivered on an aggressive plan built on a profitable foundation that outperformed the estimated industry statutory
combined ratio by approximately nine points. According to A.M. Best's Review and Preview dated January 26, 2017, the
industry's 2016 overall statutory combined ratio is expected to be 100.7%, with commercial lines and personal lines expected to
deliver a combined ratio of about 98.2% and 102.6%, respectively. We were able to achieve our results in a weakening
commercial lines pricing market. Our renewal pure price increases averaged 2.6% during 2016 reflecting our strong agency
relationships and pricing sophistication. As reported by the Willis Towers Watson Commercial Lines Insurance Pricing (or
CLIPs) Survey, renewal rates for the industry in commercial lines were only up an average of 0.4% in the first nine months of
2016.
Our results for the year reflect the various initiatives we have implemented to maintain strong profitability while executing our
strategic initiatives around growing the business. We continue to invest in technology to enhance the ease of doing business for
our agents, the overall customer experience, and our data and analytics platforms. We believe these will be key strategic
imperatives as we look to the future.
In 2017, we expect we will continue to focus on seeking out additional growth opportunities in our insurance operations while
working towards our profit targets. We have been able to achieve NPW growth that has significantly exceeded the industry’s
growth rate, while at the same time generating solid underwriting margins. In 2016, our Standard Commercial Lines
experienced NPW growth of 9%, which was significantly above the A.M. Best expected industry growth rate for commercial
lines. In addition, we have about a 1% market share in the 22 states in which we operate and our long-term goal is to increase
our market share to approximately 3%. As we continue to leverage our agency franchise model by offering our distribution
partners superior technology solutions and customer experience, we are targeting a 12% share of the business within our
agencies, from our current 7% share, which we refer to as our "share of wallet." We are also seeking to increase our agency
appointments over time to represent a 25% market share of the states in which we are fully operational, from our current 17%
share. We believe our relationships with our distribution partners are among the strongest in the industry and underpin our
success. During 2016, we appointed 110 new agents and we are planning for an additional 85 agency appointments in 2017.
Our plans are well on track to expand into Arizona and New Hampshire by the latter half of 2017. We have identified most of
the agents that we will look to designate in those new markets. Our approach to entering new states is consistent with our agent
franchise business model, which is predicated around our field based underwriting, claims, and customer service.
Turning to investments, we generated after-tax net investment income of $98.4 million, compared to $93.8 million in 2015 and
2% below our February 4, 2016 guidance of $100.0 million. Our challenge in 2017 will be navigating the increased market
volatility that may accompany uncertainty regarding fiscal and monetary policy changes. For instance, the potential impact of
limiting or eliminating tax-advantaged municipal bond interest may be significant to the returns of our municipal bond
portfolio. Likewise, a reduction in the corporate tax rate, a border-adjustment tax, and repealing or replacing the ACA may
have significant repercussions in the marketplace. Weighing these risks when seeking new opportunities, and managing the
risks for existing positions and sectors in the portfolio, will be a key focus in the upcoming year.
In summary, we are positioning ourselves for a more competitive environment with a focus on generating adequate returns for
our shareholders. We are preparing ourselves for changes in a period of heightened uncertainty surrounding interest rates, tax
law changes, legislative changes, and inflation. We also have a number of internal strategic initiatives in place to enhance our
technological offerings to our agents while improving the overall customer experience.
For 2017, based on our current view of the marketplace and assuming no tax law changes, we currently expect the following:
• A statutory combined ratio, excluding catastrophe losses, of approximately 90.5%. This assumes no prior year
casualty reserve development;
• Catastrophe losses of 3.5 points;
• After-tax investment income of approximately $110 million; and
• Weighted average shares of approximately 59.2 million.
50
Results of Operations and Related Information by Segment
Standard Commercial Lines
($ in thousands)
2016
2015
GAAP Insurance Segments Results:
2016
vs. 2015
2014
2015
vs. 2014
NPW
NPE
Less:
Loss and loss expense incurred
Net underwriting expenses incurred
Dividends to policyholders
Underwriting income
GAAP Ratios:
Loss and loss expense ratio
Underwriting expense ratio
Dividends to policyholders ratio
Combined ratio
Statutory Ratios:
Loss and loss expense ratio
Underwriting expense ratio
Dividends to policyholders ratio
Combined ratio
$
1,745,782
1,665,483
913,506
601,894
3,648
$
146,435
54.8 %
36.2
0.2
91.2
54.8
34.9
0.2
89.9 %
1,596,965
1,529,442
819,573
539,154
6,219
164,496
53.6
35.2
0.4
89.2
53.6
35.2
0.4
89.2
9 % $
1,441,047
9
1,415,712
11
12
(41)
(11) % $
870,018
478,291
6,182
61,221
%
11
8
(6)
13
1
169
%
1.2 pts
61.5 %
(7.9)
pts
1.0
(0.2)
2.0
1.2
(0.3)
(0.2)
33.8
0.4
95.7
61.3
33.8
0.4
1.4
—
(6.5)
(7.7)
1.4
—
0.7 pts
95.5 %
(6.3)
pts
Our continued ability to obtain renewal pure price increases while balancing retention in this segment of our business has
driven the NPW growth from 2014 through 2016 in the table above. Additionally, new business growth, especially in 2015
when compared to 2014, has also contributed to the NPW increases. Quantitative information on these drivers is as follows:
($ in millions)
Retention
Renewal pure price increases on NPW
Direct new business
For the Year Ended December 31,
2016
2015
2014
83 %
2.6
357.6
$
83
3.0
339.6
82
5.6
268.7
The GAAP loss and loss expense ratio increased 1.2 points in 2016 compared to 2015 due to net favorable prior year casualty
reserve development of 4.7 points in 2016 compared to 5.3 points in 2015. Additionally, higher non-catastrophe property
losses contributed to the increase in the loss and loss expense ratio. For quantitative information on this development by line of
business, see "Financial Highlights of Results for Years Ended December 2016, 2015, and 2014" above and for qualitative
information about the significant drivers of this development, see the line of business discussions below.
The GAAP loss and loss expense ratio decreased 7.9 points in 2015 compared to 2014 primarily due to the following: (i)
earned rate above our expected claim inflation, which improved profitability by approximately 0.5 points for 2015; (ii) a 3.1-
point decrease in property losses; (iii) net favorable prior year casualty reserve development of 5.3 points in 2015 compared to
3.2 points in 2014; and (iv) a decrease in the current year loss reserve estimate of 1.8 points in 2015 compared to 2014.
51
Quantitative information related to these items is as follows:
($ in millions)
For the year ended December 31,
2016
2015
2014
(Favorable) Prior Year Casualty Reserve
Development
Losses and Loss
Expense Incurred
Impact on Losses and
Loss Expense Ratio
Unfavorable/
(Favorable)
Year-Over-Year
Change
$
(77.5)
(81.0)
(45.4)
(4.7) pts
(5.3)
(3.2)
0.6
(2.1)
(2.4)
($ 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
2016
2015
2014
$
182.4
154.7
180.4
11.0 pts $
10.1
12.7
35.0
34.1
37.9
2.1 pts
2.2
2.7
13.1
12.3
15.4
0.8
(3.1)
4.1
In addition to the increase in GAAP loss and loss expense ratio in 2016, there was an increase of 1.0 point in the GAAP
underwriting expense ratio in 2016 compared to 2015. This increase was primarily attributable to higher supplemental
commission expense to our distribution partners of 0.9 points.
The statutory underwriting expense ratio remained relatively flat in 2016 compared to 2015. The difference to GAAP is
primarily due to higher supplemental commission expenses in the fourth quarter of 2015 that were immediately recognized on a
statutory basis but earned in the GAAP underwriting expense ratio during 2016.
The 1.4-point increase in the GAAP underwriting expense ratio in 2015 compared to 2014 was primarily attributable to: (i)
higher supplemental commission expense to our distribution partners of 0.4 points; (ii) increases in annual incentive
compensation expense to employees of 0.2 points; and (iii) pension expense increases of 0.3 points. Additionally, the 2014
underwriting ratio included $8.0 million, or 0.6 points, of non-recurring benefit related to the sale of the renewal rights to our
SIG book of business in March 2014.
The following is a discussion of our most significant Standard Commercial Lines of business:
General Liability
($ in thousands)
Statutory NPW
Direct new business
Retention
Renewal pure price increases
Statutory NPE
Statutory combined ratio
% of total statutory standard commercial NPW
2016
2015
2016
vs. 2015
2014
2015
vs. 2014
$
553,579
105,961
83 %
1.8
505,891
99,938
83
2.7
9 % $
453,594
78,124
12 %
28
82 %
1
pts
6.7
(4.0)
6
— pts
(0.9)
$
527,859
483,291
9 % $
444,938
9 %
83.8 %
32
82.1
32
1.7 pts
83.9 %
(1.8) pts
31
Growth in 2016 and 2015 premium was primarily due to direct new business increases as outlined in the table above. Both
reporting periods also had positive improvements in NPW and NPE from strong retention and improved renewal pure price
increases.
The fluctuations in the statutory combined ratios were driven by changes in prior year development. Prior year development
can be volatile year to year, requiring a longer period of time before true trends are fully recognized. The impact of the prior
year casualty reserve development on this line was as follows:
•
2016: favorable prior year development of 8.5 points attributable to accident years 2008 through 2013 and 2015. This
was primarily driven by lower than anticipated claims severities.
52
•
•
2015: favorable prior year development of 10.6 points attributable to accident years 2013 and prior. This was
primarily driven by severities that continued to develop lower than expected, within both the premises and operations
and products liability coverages. In addition, the reduction in frequencies exhibited in recent accident years continued
into accident year 2015.
2014: favorable prior year development of 9.9 points driven by lower severities in the 2010 through 2012 accident
years, within both the premises and operations and products liability coverages. In addition, accident years 2011 and
2012 continued to show lower claim counts, even as they matured.
Commercial Automobile
($ in thousands)
Statutory NPW
Direct new business
Retention
Renewal pure price increases
Statutory NPE
Statutory combined ratio
% of total statutory standard commercial NPW
2016
2015
2016
vs. 2015
$
422,013
77,255
84 %
4.9
$
398,942
109.3 %
24
376,064
70,556
83
3.8
358,909
101.9
24
12 % $
9
1 pts
1.1
2014
341,926
57,280
82 %
5.5
11 % $
333,310
7.4 pts
96.2 %
24
2015
vs. 2014
10 %
23
1 pts
(1.7)
8 %
5.7 pts
In 2016, new business was up 9% over last year, while in 2015, new business was up 23% from 2014. In addition, renewal
pure price increases and strong retention contributed to NPW growth in both periods. NPE increases in 2016 and 2015 were
consistent with the fluctuations in NPW for their respective twelve-month periods ended December 31.
The 7.4-point increase in the statutory combined ratio in 2016 compared to 2015 was driven by: (i) unfavorable prior year
casualty reserve development that increased the combined ratio by 5.5 points compared to last year; (ii) an increase in the
current year loss reserve estimate of 2.1 points driven by an increase in casualty claim frequency; and (iii) higher property
losses of 1.0 point.
The 5.7-point increase in the statutory combined ratio in 2015 compared to 2014 was driven by: (i) higher current year loss
costs of 3.2 points driven by an increase in casualty claim frequency; (ii) prior year casualty reserve development that increased
the combined ratio by 2.0 points compared to 2014; and (iii) higher property losses of 1.2 points.
In all three years, the combined ratio was positively impacted by earned rate that exceeded our expected claim inflation.
Property losses are outlined below:
($ 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
2016
2015
2014
$
64.4
54.7
45.6
16.1 pts $
15.2
13.7
1.3
0.9
1.6
0.3 pts
0.2
0.5
16.4
15.4
14.2
1.0
1.2
(0.5)
Prior year casualty reserve development was as follows:
•
•
•
2016: Unfavorable development of 6.3 points, which was driven primarily by bodily injury liability for accident years
2014 and 2015. The unfavorable development in accident year 2014 was driven by higher than expected severity,
whereas accident year 2015 was driven by higher than expected frequency and severity.
2015: Unfavorable development of 0.8 points, which was driven by bodily injury liability for accident years 2013 and
2014. This was partially offset by favorable development in accident years 2010 and 2011. The unfavorable
development in accident years 2013 and 2014 was driven by severities that were greater than expected.
2014: Favorable development of 1.2 points driven by bodily injury liability for accident years 2012 and prior,
partially offset by accident year 2013 due to higher frequency of claims.
53
Workers Compensation
($ in thousands)
Statutory NPW
Direct new business
Retention
Renewal pure price increases
Statutory NPE
Statutory combined ratio
% of total statutory standard commercial NPW
2016
2015
2016
vs. 2015
$
319,807
67,102
84 %
1.2
$
308,233
80.7 %
18
299,686
68,971
83
2.6
290,075
88.2
19
7 % $
(3)
1 pts
(1.4)
2014
269,130
48,613
81 %
4.8
6 % $
274,585
2015
vs. 2014
11 %
42
2 pts
(2.2)
6 %
(7.5) pts
110.1 %
(21.9) pts
19
NPW increases in both periods were due to: (i) renewal pure price increases; and (ii) increased retention. The NPW increases
in 2015 compared to 2014 were also driven by increases in direct new business.
NPE increases in 2016 and 2015 were consistent with the fluctuations in NPW for their respective twelve-month periods ended
December 31.
The 7.5-point decrease in the statutory combined ratio in 2016 compared to 2015 was due primarily to the following:
•
Favorable prior year casualty reserve development of $56.0 million, or 18.2 points, compared $37.0 million and 12.8
points in 2015. The favorable development in both periods was attributable to virtually all prior accident years.
The 21.9-point decrease in the statutory combined ratio in 2015 compared to 2014 was due to the following:
•
Favorable prior year casualty reserve development of $37.0 million, or 12.8 points, attributable to virtually all prior
accident years, compared to no development in 2014.
• Lower expected loss costs for the current accident year that resulted in an improvement of 9.3-points in 2015,
reflecting our ongoing focus on improving this competitive line of business through pricing and claims initiatives, as
discussed further above.
Favorable prior year casualty reserve development for both years is primarily driven by continued decreasing severities in
accident years 2014 and prior. We believe these claim outcome improvements are due, in part, to lower medical inflation than
originally anticipated, as well as the various claims initiatives that we have implemented, including, but not limited to:
• Centralization of workers compensations claims handling;
• The implementation of a strategic case management unit for the handling of workers compensation claims with high
exposure and/or significant escalation risk;
• A more proactive case management in areas of medical, pharmaceutical, and physical therapy treatments.
Commercial Property
($ in thousands)
Statutory NPW
Direct new business
Retention
Renewal pure price increases
Statutory NPE
Statutory combined ratio
% of total statutory standard commercial NPW
2016
2015
2016
vs. 2015
$
308,140
74,901
82 %
2.4
$
293,438
84.3 %
18
282,731
72,118
82
2.8
269,022
82.6
18
9 % $
4
— pts
(0.4)
2014
253,625
58,436
81 %
4.4
9 % $
244,792
2015
vs. 2014
11 %
23
1 pts
(1.6)
10 %
1.7 pts
97.3 %
(14.7) pts
18
NPW and NPE increased in 2016 compared to 2015, as well as in 2015 compared to 2014, primarily due to: (i) growth in
direct new business; (ii) renewal pure price increases; and (iii) strong retention.
54
NPE increases in 2016 and 2015 were consistent with the fluctuations in NPW for their respective twelve-month periods ended
December 31.
The fluctuation in the statutory combined ratios over the three-year period for this line were due to fluctuations in non-
catastrophe property losses and catastrophe losses. Quantitative information regarding these items is as follows:
($ 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
2016
2015
2014
$
95.9
78.4
107.3
32.7 pts $
29.1
43.8
23.7
25.8
27.3
8.1 pts
9.6
11.2
40.8
38.7
55.0
2.1
(16.3)
18.9
Standard Personal Lines
($ in thousands)
2016
2015
GAAP Insurance Segments Results:
2016
vs. 2015
2014
2015
vs. 2014
NPW
NPE
Less:
Losses and loss expenses incurred
Net underwriting expenses incurred
Underwriting income (loss)
GAAP Ratios:
Loss and loss expense ratio
Underwriting expense ratio
Combined ratio
Statutory Ratios:
Loss and loss expense ratio
Underwriting expense ratio
Combined ratio
$
$
281,822
280,607
177,749
90,439
12,419
63.3 %
32.3
95.6
63.4
31.8
95.2 %
283,926
288,134
200,237
86,561
1,336
69.5
30.0
99.5
69.6
30.3
99.9
(1) % $
(3)
(11)
5
830 % $
(6.2) pts
2.3
(3.9)
(6.2)
1.5
(4.7) pts
292,061
296,747
197,182
83,029
16,536
66.4 %
28.0
94.4
66.3
28.2
94.5 %
(3) %
(3)
2
4
(92) %
3.1 pts
2.0
5.1
3.3
2.1
5.4 pts
NPW in this segment decreased over the three-year period as shown in the table above. As illustrated in the table below, in both
2016 and 2015 new business has not been sufficient to compensate for the attrition in the retention ratio.
($ in millions)
Retention
Renewal pure price increases on NPW
Direct new business premiums
2016
2015
2014
82 %
4.8
39.7
$
82
5.8
32.9
81
6.5
36.1
NPE decreases over the three-year period were consistent with the NPW fluctuations for their respective twelve-month periods
ended December 31.
The GAAP loss and loss expense ratio decreased 6.2 points in 2016 compared to 2015, primarily driven by: (i) property losses
that were lower than 2015 by 5.9 points; (ii) earned rate above our expected claim inflation, which improved profitability by
approximately 1.3 points for 2016; and (iii) increased flood claims handling fees of 1.0 point, mainly due to Louisiana flooding
and Hurricane Matthew during the second half of 2016. These decreases were partially offset by unfavorable prior year
casualty reserve development that was higher than 2015 by 1.6 points.
The GAAP loss and loss expense ratio increased 3.1 points in 2015 compared to 2014, primarily driven by: (i) favorable prior
year casualty reserve development that was lower than 2014 by 2.2 points; and (ii) property losses that were higher than 2014
by 0.9 points.
55
Quantitative information over the three-year period related to these items is as follows:
($ 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
2016
2015
2014
$
71.2
87.2
90.1
25.4 pts $
30.3
30.4
18.2
21.7
19.3
6.5 pts
7.5
6.5
31.9
37.8
36.9
(Favorable)/
Unfavorable
Year-Over-Year
Change
(5.9)
0.9
0.4
($ in millions)
For the year ended December 31,
2016
2015
2014
(Favorable)/Unfavorable Prior Year Casualty
Reserve Development
Losses and Loss
Expense Incurred
Impact on Losses and
Loss Expense Ratio
Unfavorable
Year-Over-Year
Change
$
2.5
(2.0)
(8.7)
0.9
pts
(0.7)
(2.9)
1.6
2.2
(0.9)
The increase in the GAAP underwriting expense ratio in 2016 compared to 2015 was primarily driven by increased costs
related to: (i) increased costs associated with capital improvements, (ii) underwriting expenses from third-party data vendors;
and (iii) higher supplemental commission expense to our distribution partners.
The increase in the underwriting expense ratio in 2015 compared to 2014 was driven by: (i) staffing additions, such as
Standard Personal Lines Marketing Specialists, to support our growth initiatives; (ii) increases in annual incentive
compensation expense to employees through our corporate-wide incentive plan; (iii) pension expense increases; and (iv)
increased costs associated with capital improvements.
E&S Lines
($ in thousands)
2016
2015
GAAP Insurance Segments Results:
2016
vs. 2015
2014
2015
vs. 2014
NPW
NPE
Less:
Losses and loss expenses incurred
Net underwriting expenses incurred
Underwriting income (loss)
GAAP Ratios:
Loss and loss expense ratio
Underwriting expense ratio
Combined ratio
Statutory Ratios:
Loss and loss expense ratio
Underwriting expense ratio
Combined ratio
$
$
209,684
203,482
143,542
66,861
(6,921)
70.5 %
32.9
103.4
70.5
31.6
102.1 %
189,013
172,333
128,731
60,405
(16,803)
74.7
35.1
109.8
74.7
33.7
108.4
11 % $
18
12
11
59 % $
152,172
140,150
90,301
49,463
386
(4.2) pts
(2.2)
(6.4)
(4.2)
(2.1)
(6.3) pts
64.4 %
35.3
99.7
64.5
34.7
99.2 %
24 %
23
43
22
(4,453) %
10.3 pts
(0.2)
10.1
10.2
(1.0)
9.2 pts
We continue to focus on profitability drivers in our E&S operations and have achieved overall price increases of 4.9% and
2.9% in 2016 and 2015, respectively. While the NPW growth rate has declined as a consequence of these actions, our primary
focus is on bringing this segment to targeted levels of profitability. Quantitative information is as follows:
($ in millions)
Price increases
Direct new business premiums
2016
2015
2014
4.9 %
$
100.0
2.9
99.6
4.5
80.9
56
NPE increases in 2016 and 2015 were consistent with the increases in NPW for their respective twelve-month periods ended
December 31, 2016.
The GAAP loss and loss expense ratio decreased 4.2 points in 2016 compared to 2015, primarily due to lower unfavorable prior
year casualty reserve development that decreased by 6.4 points compared to 2015. This decrease was partially offset by a 1.3-
point increase in the current year loss costs.
The GAAP loss and loss expense ratio increased 10.3 points in 2015 compared to 2014, primarily due to the following: (i)
unfavorable prior year casualty reserve development that increased by 5.2 points compared to 2014; (ii) a 2.9-point increase in
the current year loss costs; and (iii) a 1.5-point increase in property losses.
Property losses are outlined below:
($ 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
2016
2015
2014
$
25.6
23.6
17.0
12.6 pts $
13.7
12.1
6.5
3.2
2.8
3.2 pts
1.9
2.0
15.8
15.6
14.1
($ in millions)
For the year ended December 31,
Unfavorable Prior Year Casualty Reserve
Development
Losses and Loss
Expense Incurred
Impact on Losses and
Loss Expense Ratio
(Favorable)/
Unfavorable
Year-Over-Year
Change
2016
2015
2014
$
6.0
16.0
5.8
pts
2.9
9.3
4.1
0.2
1.5
0.8
(6.4)
5.2
2.2
Unfavorable prior year casualty reserve development for 2016 was $6 million, driven by accident year 2014. Unfavorable prior
year casualty reserve development for 2015 was $16 million. In 2015, we integrated the E&S claims operation with our
Corporate Claims operation. As part of that effort, we completed a review of all complex claims. As a result, we recorded
adverse prior year casualty reserve development of $10 million in the fourth quarter of 2015, bringing the full year adverse
prior year development to $16 million. We also recorded a $5 million adjustment to the 2015 current accident year.
The GAAP underwriting expense ratio decreased 2.2 points in 2016 compared to 2015, primarily due to the following: (i) a
1.6-point reduction from the annual cash incentive plan payment for employees in this segment based on 2015 underwriting
results; and (ii) 0.5-point decrease from lower supplemental commission expense to our distribution partners.
Our E&S business is comprised of risks that are similar in nature to our Standard Commercial Lines, with smaller-sized
insureds and lower policy limits. Approximately 98% of the policies in this segment have limits of less than $1 million. We
will continue to deploy our Corporate Claims practices into the E&S operation in 2017, including the use of more robust
monitoring tools. We believe these actions will allow us to better assess the associated liability for these claims and will
ultimately result in improved outcomes. For more information, refer to the E&S Lines discussion within the Reserves for
Losses and Loss Expenses section of "Critical Accounting Policies and Estimates" in this MD&A.
57
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 in
which each company agrees to share in premiums and losses based on certain specified percentages; and (ii) reinsurance
contracts and arrangements with third parties that cover various policies that we issue to our customers.
Reinsurance Pooling Agreement
The primary purposes of the reinsurance pooling agreement among our Insurance Subsidiaries are the following:
•
Pool or share proportionately the underwriting profit and loss results of property and casualty insurance
underwriting operations through reinsurance;
•
Prevent any of our Insurance Subsidiaries from suffering undue loss;
• Reduce administration expenses; and
•
Permit all of the Insurance Subsidiaries to obtain a uniform rating from A.M. Best.
The following illustrates the pooling percentages by Insurance Subsidiary as of December 31, 2016:
Insurance Subsidiary
Selective Insurance Company of America ("SICA")
Selective Way Insurance Company ("SWIC")
Selective Insurance Company of South Carolina ("SICSC")
Selective Insurance Company of the Southeast ("SICSE")
Selective Insurance Company of New York ("SICNY")
Selective Casualty Insurance Company ("SCIC")
Selective Auto Insurance Company of New Jersey ("SAICNJ")
Mesa Underwriters Specialty Insurance Company ("MUSIC")
Selective Insurance Company of New England ("SICNE")
Selective Fire and Casualty Insurance Company ("SFCIC")
Pooling Percentage
32.0%
21.0%
9.0%
7.0%
7.0%
7.0%
6.0%
5.0%
3.0%
3.0%
Reinsurance Treaties and Arrangements
By entering into reinsurance treaties and arrangements, we are able to increase underwriting capacity and accept larger risks
and a larger number of risks without directly increasing capital or surplus. Our reinsurance consists of traditional reinsurance
and we do not purchase finite 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 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. Accordingly, we have counterparty credit risk from our reinsurers. We attempt to
mitigate this credit risk by: (i) pursuing relationships with reinsurers rated “A-” or higher; or (ii) obtaining collateral to secure
reinsurance obligations. Some of our reinsurance contracts include provisions that permit us to terminate or commute the
reinsurance treaty if the reinsurer's financial condition or rating deteriorates. We monitor the financial condition of our
reinsurers and we review the quality of reinsurance recoverables and reserves for uncollectible reinsurance. For additional
information regarding our counterparty credit risk with our reinsurers, see Note 8. "Reinsurance" in Item 8. "Financial
Statements and Supplementary Data." of this Form 10-K.
58
We have reinsurance contracts that separately cover our property and casualty insurance business. Available reinsurance can be
segregated into the following key categories:
• Property Reinsurance - includes our property excess of loss treaties purchased for protection against large
individual property losses and our property catastrophe treaties purchased to provide protection for the overall
property portfolio against severe catastrophic events. Facultative reinsurance is used for property risks that are in
excess of our treaty capacity.
• Casualty Reinsurance - purchased to provide protection for both individual large casualty losses and catastrophic
casualty losses involving multiple claimants or customers. Facultative reinsurance is also used for casualty risks
that are in excess of our treaty capacity.
•
Terrorism Reinsurance - in addition to protection built into our property and casualty reinsurance treaties, terrorism
protection is available as a federal backstop related to terrorism losses as provided under the Terrorism Risk
Insurance Program Reauthorization Act (“TRIPRA”). For further information regarding this legislation, see Item
1A. “Risk Factors.” of this Form 10-K.
• Flood Reinsurance - as a servicing carrier in the WYO Program, we receive a fee for writing flood business, for
which the related premiums and losses are 100% ceded to the federal government.
In addition to the above categories, we have entered into several reinsurance agreements with Montpelier Re Insurance Ltd. as
part of the acquisition of MUSIC. Together, these agreements provide protection for losses on policies written prior to the
December 2011 acquisition and any development on reserves established by MUSIC as of the date of acquisition. The
reinsurance recoverables under these treaties are collateralized.
Property Reinsurance
The property catastrophe treaty, which covers both our standard market and E&S business, was renewed effective January 1,
2017. The current treaty structure remains the same, providing total coverage of $685 million in excess of $40 million. The
annual aggregate limit net of our co-participation is approximately $1.0 billion for 2017. We also renewed the separate
catastrophe treaty of $35 million in excess of $5 million that covers events outside of our standard lines footprint, in support of
our growing E&S property book. We expect the overall catastrophe ceded premium for 2017 to be similar to 2016, although
down modestly on a risk-adjusted basis. As our need for catastrophe reinsurance increases, we seek ways to minimize credit
risk inherent in a reinsurance transaction by dealing with highly-rated reinsurance partners and purchasing collateralized
reinsurance products, particularly for high severity, low-probability events. The current reinsurance program includes $201
million in collateralized limit, primarily in the top layer of the catastrophe program.
We continue to assess our property catastrophe exposure aggregations, modeled results, and effects of growth on our property
portfolio, and strive to manage our exposure to individual large events balanced against the cost of reinsurance protections.
Although we model various catastrophic perils, due to our geographic spread, the risk of hurricane continues to be the most
significant natural catastrophe peril to which our portfolio is exposed. Below is a summary of the largest five actual hurricane
losses that we experienced in the past 25 years:
($ in millions)
Hurricane Name
Superstorm Sandy
Hurricane Irene
Hurricane Hugo
Hurricane Isabel
Hurricane Floyd
Actual Gross Loss
125.4 1
44.8
26.4
25.1
14.5
Net Loss2
45.5
40.2
3.0
15.7
14.5
Accident
Year
2012
2011
1989
2003
1999
1 This amount represents reported and unreported gross losses estimated as of December 31, 2016.
2 Net loss does not include reinstatement premiums, taxes, or flood claims handling fees.
We use the results of the Risk Management Solutions 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) a long-term view that closely relates
modeled event frequency to historical hurricane activity; and (ii) a medium-term view that adjusts historical frequencies to
reflect higher expectations of hurricane activity in the North Atlantic Basin. We believe that modeled estimates provide a range
of potential outcomes and we review multiple estimates for purposes of understanding our catastrophic risk. The following
59
table provides modeled hurricane results based on a blended view of the four models for the Insurance Subsidiaries' combined
property book as of July 2016:
Occurrence Exceedence Probability
Four-Model Blend
($ in thousands)
4.0% (1 in 25 year event)
2.0% (1 in 50 year event)
1.0% (1 in 100 year event)
0.67% (1 in 150 year event)
0.5% (1 in 200 year event)
0.4% (1 in 250 year event)
0.2% (1 in 500 year event)
1 Losses are after tax and include applicable reinstatement premium.
2 Equity as of December 31, 2016.
Gross
Losses
$124,207
224,781
386,755
515,584
631,404
704,793
1,029,687
Net
Losses1
29,215
31,598
37,091
41,964
47,636
52,893
251,137
Net Losses
as a Percent of
Equity2
2%
2
2
3
3
3
16
Our current catastrophe reinsurance program exhausts at a 1 in 265 year return period, or events with 0.38% probability, based
on a multi-model view of hurricane risk. Our actual gross and net losses incurred from U.S. landfalling hurricanes 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, 2016 with
an additional layer also renewed on January 1, 2017. The major terms of these treaties are consistent with the prior year. The
details of the current year treaty are included in the table below.
The following is a summary 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
segments)
$685 million above $40 million retention in four layers:
- 80% of losses in excess of $40 million up to
$100 million;
- 95% of losses in excess of $100 million up to
$225 million;
- 95% of losses in excess of $225 million up to
$475 million; and
- 90% of losses in excess of $475 million up
to $725 million.
- The treaty provides one reinstatement per layer
for the first three layers and no reinstatements
on the fourth layer. The annual aggregate limit
is $1.0 billion, net of the Insurance
Subsidiaries' co-participation.
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.
Property Excess of Loss
(covers all insurance
segments)
$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:
- $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 approximately $76 million in 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 approximately $36 million in annual aggregate
limits. Non-foreign terrorism losses (other than NBCR) are
covered to the same extent as non-terrorism losses.
Flood
100% reinsurance by the federal government’s WYO
Program.
None
60
Casualty Reinsurance
The casualty excess of loss treaty, which covers both our standard market and E&S business, was renewed on July 1, 2016 and
is effective through June 30, 2017, with substantially the same terms as the expiring treaty. The details of the current year
treaty are included in the table below.
The following is a summary of 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
segments)
There are six layers covering 100% of $88 million in excess
of $2 million. Losses other than terrorism losses are subject to
the following reinstatements and annual aggregate limits:
All NBCR losses are excluded. All other losses stemming
from the acts of terrorism are subject to the following
reinstatements and annual aggregate limits:
- $3 million in excess of $2 million layer
with $72 million annual aggregate limit;
- $7 million in excess of $5 million layer
with $35 million annual aggregate limit;
- $9 million in excess of $12 million layer
with $27 million annual aggregate limit;
- $9 million in excess of $21 million layer
with $18 million annual aggregate limit;
- $20 million in excess of $30 million layer
with $40 million annual aggregate limit;
- $40 million in excess of $50 million layer
with $80 million annual aggregate limit;
Montpelier Re Quota
Share and Loss
Development Cover
(covers E&S Lines)
As part of the acquisition of MUSIC we entered into several
reinsurance agreements that together provide protection for
losses on policies written prior to the acquisition and any
development on reserves established by MUSIC as of the date
of acquisition. The reinsurance recoverables under these
treaties are 100% collateralized. Montpelier Re was acquired
by Endurance Specialty on December 29, 2015.
- $3 million in excess of $2 million layer with
$15 million net annual terrorism 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 with
$27 million net annual terrorism 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 with
$40 million net annual terrorism aggregate limit;
- $40 million in excess of $50 million layer with
$80 million net annual terrorism aggregate limit;
Provides full terrorism coverage including NBCR.
We have other reinsurance treaties that we do not consider core to our reinsurance program, such as our Surety and Fidelity
Excess of Loss Reinsurance Treaty, National Workers Compensation Reinsurance Pool Quota Share, which covers business
assumed from the involuntary workers compensation pool, a property catastrophe excess of loss treaty covering losses outside
of our standard lines footprint states, and our Equipment Breakdown Coverage Reinsurance Treaty.
We regularly reevaluate our overall reinsurance program and try to develop effective ways to manage transfer of risk. Our
analysis is based on a comprehensive process that includes periodic analysis of modeling results, aggregation of exposures,
exposure growth, diversification of risks, limits written, projected reinsurance costs, 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 retaining a certain level of risk.
Investments
The primary objective of the investment portfolio is to maximize after-tax investment income while balancing risk and
generating long-term growth in shareholder value. 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 has historically been balanced with a long-term “buy-and-hold,” low turnover approach.
During 2016, we determined that a more active management approach to our investment portfolio was appropriate to maximize
the risk-adjusted after-tax income and total return of the portfolio, while maintaining a similar level of credit quality and
duration risk. We evaluated our previous buy-and-hold low turnover approach in the context of the current market
environment, and concluded that a change was appropriate to more effectively diversify, navigate, and manage the portfolio in
response to a persistently low and volatile interest rate environment, the potential for rising inflation, and an uncertain political
and tax landscape.
To execute on this revised approach, we hired several new investment managers who were on-boarded in the fourth quarter of
2016. We modestly increased our exposure to below investment grade fixed income securities, private equity, and private
credit strategies to further diversity our allocation within risk assets, which principally includes public equities, high-yield fixed
income securities, and private equity, in conjunction with repositioning the portfolio to a long-term target risk asset allocation
of approximately 10% of total invested assets. While our approach to managing the investment portfolio has changed, our core
investment philosophy has not changed. We remain focused on diversification, capital preservation, investment quality, and
liquidity to meet our needs and obligations.
61
Total Invested Assets
($ in thousands)
Total invested assets
Invested assets per dollar of stockholders' equity
Unrealized gain – before tax
Unrealized gain – after tax
2016
2015
Change
$
5,364,947
3.50
64,803
42,122
5,089,269
3.64
69,224
44,996
5%
(4)
(6)
(6)
The increase in our investment portfolio at December 31, 2016 compared with year-end 2015 was primarily driven by
operating cash flow of $301.8 million, partially offset by a decrease in unrealized gains of $4.4 million. The $4.4 million
change in unrealized gains was comprised of a $12.6 million increase in unrealized gains in our equity portfolio offset by a
decrease in unrealized gains in our fixed income securities portfolio of $17 million, which was driven by general interest rate
movements as seen in the 10-year U.S. Treasury Note, which rose by 17 basis points in 2016.
We structure our portfolio conservatively with a focus on: (i) asset diversification; (ii) investment quality; (iii) liquidity,
particularly to meet the cash obligations of our three insurance segments; (iv) consideration of taxes; and (v) preservation of
capital. We believe that we have a high quality and liquid investment portfolio. The breakdown of our investment portfolio is
as follows:
As of December 31,
Fixed income securities:
U.S. government obligations
Foreign government obligations
State and municipal obligations
Corporate securities1
Mortgage-backed securities (“MBS”)
Collateralized loan obligations ("CLO") and other asset-backed securities ("ABS")
Total fixed income securities
2016
2015
2 %
1
27
37
15
10
92
2
—
30
38
16
5
91
Equity securities:
Common stock
Preferred stock1
Total equity securities
4
—
4
4
Short-term investments
1
Other investments
100
Total
1Included $68.2 million of preferred stock within corporate securities and $16.1 million of preferred stock within equity securities. In aggregate, these account
for approximately 2% of invested assets at December 31, 2016.
2
—
2
4
2
100 %
Fixed Income Securities
The effective duration of the fixed income securities portfolio as of December 31, 2016 was 3.6 years, including short-term
investments, compared to the Insurance Subsidiaries’ liability duration of approximately 4.0 years. The current 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, credit quality, and
maturities that affords us ample liquidity. Every purchase or sale is made with the intent of maximizing risk-adjusted
investment returns in the current market environment while balancing capital preservation.
Our fixed income securities portfolio maintained a weighted average credit rating of AA- as of December 31, 2016 with 97%
and 99% of the securities within the portfolio being investment grade quality at December 31, 2016 and December 31, 2015,
respectively. For further details on how we manage overall 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.
62
Unrealized/Unrecognized Losses
Held-to-maturity ("HTM") fixed income securities were in an unrealized/unrecognized loss position of $0.2 million at
December 31, 2016. Available-for-sale ("AFS") fixed income securities that were in an unrealized loss position at
December 31, 2016 by contractual maturity are shown below. MBS are included in the maturity tables using the estimated
average life of each security. Expected maturities may differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Contractual Maturities
($ in thousands)
Available-for-sale ("AFS") fixed income securities:
Amortized Cost
Fair Value
Unrealized Loss
One year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
$
$
24,522
520,626
740,795
85,752
24,349
517,830
730,764
83,355
1,371,695
1,356,298
(173)
(2,796)
(10,031)
(2,397)
(15,397)
We have reviewed securities in an unrealized/unrecognized loss position in accordance with our OTTI policy as discussed
previously in Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary
Data." of this Form 10-K. For qualitative information regarding our conclusions as to why these impairments are deemed
temporary, see Note 5. “Investments” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
Net Investment Income
The components of net investment income earned were as follows:
($ in thousands)
Fixed income securities
Equity securities
Short-term investments
Other investments
Investment expenses
Net investment income earned – before tax
Net investment income tax expense
Net investment income earned – after tax
Effective tax rate
Annual after-tax yield on fixed income securities
Annual after-tax yield on investment portfolio
2016
2015
2014
$
129,306
7,368
686
2,940
(9,546)
130,754
32,349
98,405
24.7%
2.0
1.9
$
123,230
9,161
112
(1,890)
(9,297)
121,316
27,480
93,836
22.7
2.1
1.9
126,489
7,449
66
13,580
(8,876)
138,708
34,501
104,207
24.9
2.2
2.2
The $9.4 million increase in investment income before tax in 2016, compared to 2015, was primarily attributable to increases in
fixed income securities of $6.1 million and in other investment income of $4.8 million. Returns on fixed income securities
increased due to a higher asset base of which 2016 fixed income securities reflected and increased allocation to taxable asset
classes with a 3% reduction to the tax advantaged asset classes. Other investments increased due to improvement in our
energy-related and private equity limited partnerships. The increase in net investment income after-tax attributable to our
taxable fixed income securities and our other investments led to an overall increase in our effective tax rate of 200 basis points.
The $17.4 million decrease in investment income before tax in 2015, compared to 2014, was primarily attributable to a
decrease in other investment income of $15.5 due to lower returns on the alternative investments within the other investments
portfolio. In particular, our energy-related limited partnerships were negatively impacted by declining oil prices. Additionally,
lower reinvestment yields on our fixed income securities portfolio continued to put pressure on investment income. In 2015,
bonds that matured or were sold, valued at $735.6 million, had yields that averaged 3.3% pre-tax, while new purchases of $1.0
billion had an average pre-tax yield of 2.4%.
63
Realized Gains and Losses
Our general philosophy for sales of securities is to reduce our exposure to securities and sectors based on economic evaluations
and when the fundamentals for that security or sector have deteriorated, or to opportunistically trade out of securities to other
securities with better economic return characteristics. Net realized (losses)/gains for the indicated periods were as follows:
($ in thousands)
Net realized gains, excluding OTTI
OTTI
Total net realized (losses) gains
2016
2015
2014
$
$
3,562
(8,499)
(4,937)
31,537
(18,366)
13,171
37,703
(11,104)
26,599
We regularly review our entire investment portfolio for declines in fair value. If we believe that a decline in the value of a
particular investment is other than temporary, we record it as an OTTI through realized losses in earnings for the credit-related
portion and through unrealized losses in OCI for the non-credit related portion for fixed income securities. If there is a decline
in fair value of an equity security that we do not intend to hold or if we determine the decline is other than temporary, we write
down the cost of the investment to fair value and record the charge through earnings as a component of realized losses.
For a discussion of our realized gains and losses as well as our OTTI methodology, see Note 2. “Summary of Significant
Accounting Policies” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. In addition, for
qualitative information regarding these charges, see 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)
Federal income tax expense
Effective tax rate
2016
2015
2014
$
61.5
27.9%
66.8
28.7
55.3
28.1
The effective tax rate in the table above differs from the statutory tax rate of 35% primarily because of tax-advantaged interest
and dividend income. The contribution of this tax-advantaged income to overall pre-tax income remained relatively stable in
2014 through 2016 and, as a result, there is not a significant variance in our overall effective tax rate during these periods.
We believe that our future effective tax rate will continue to be impacted by similar items, assuming no significant changes to
tax laws. However, the U.S. federal income tax structure is currently under significant debate as a result of the recent
Presidential election. We are unable to provide an estimate of the magnitude of potential changes. However, one impact,
amongst the potential for many, would be if the corporate tax rate were to be reduced to a rate between 15% and 20%, this
would result in a revaluation of our current deferred tax asset from approximately $85 million to approximately $36 million to
$49 million, all else remaining equal.
For a reconciliation of our effective tax rate to the statutory rate of 35%, see Note 13. “Federal Income Taxes” in Item 8.
“Financial Statements and Supplementary Data.” of this Form 10-K.
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.
Liquidity
We manage liquidity with a focus on generating sufficient cash flows to meet the short-term and long-term cash requirements
of our business operations. Our cash and short-term investment position of $222 million at December 31, 2016 was comprised
of $18 million at Selective Insurance Group, Inc. (the “Parent”) and $204 million at the Insurance Subsidiaries. Short-term
investments are generally maintained in "AAA" rated money market funds approved 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 $74 million at December 31, 2016, compared to $62 million at
December 31, 2015.
64
Sources of Liquidity
Sources of cash for the Parent have historically consisted of dividends from the Insurance Subsidiaries, the investment portfolio
discussed above, borrowings under lines of credit and loan agreements with certain Insurance Subsidiaries, and the issuance of
stock and debt securities. We continue to monitor these sources, giving consideration to our long-term liquidity and capital
preservation strategies.
Insurance Subsidiary Dividends
The Insurance Subsidiaries paid $61 million in dividends to the Parent in 2016. As of December 31, 2016, our allowable
ordinary maximum dividend is $193 million for 2017.
Any dividends to the Parent are subject to the approval and/or review of the insurance regulators in the respective Insurance
Subsidiaries' domiciliary states and are generally payable only from earned surplus as reported in the statutory annual
statements of those subsidiaries as of the preceding December 31. Although past dividends have historically been met with
regulatory approval, there is no assurance that future dividends that may be declared will be approved. For additional
information regarding dividend restrictions, refer to Note 19. “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.
The Insurance Subsidiaries generate liquidity through insurance float, which is created by collecting premiums and earning
investment income before losses 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, including short-term investments, was 3.6 years as of
December 31, 2016, while the liabilities of the Insurance Subsidiaries have a duration of 4.0 years. As protection for the capital
resources at the Insurance Subsidiaries, we purchase reinsurance coverage for any significantly large claims or catastrophes that
may occur during the year.
Line of Credit
The Parent's line of credit with Wells Fargo Bank, National Association, as administrative agent, and Branch Banking and Trust
Company (BB&T) (referred to as our "Line of Credit"), was renewed effective December 1, 2015 with a borrowing capacity of
$30 million, which can be increased to $50 million with the approval of both lending partners. This Line of Credit expires on
December 1, 2020 and has an interest rate which varies and is based on, among other factors, the Parent's debt ratings.
For information regarding the Line of Credit agreement and corresponding representations, warranties, and covenants, refer to
Note 10. “Indebtedness” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
Several of our Insurance Subsidiaries are members of certain branches of the Federal Home Loan Bank, which provides those
subsidiaries with additional access to liquidity. Membership is as follows:
Branch
Insurance Subsidiary Member
Federal Home Loan Bank of Indianapolis ("FHLBI")
Federal Home Loan Bank of New York ("FHLBNY")
SICSC1
SICSE1
SICA
SICNY
1These subsidiaries are jointly referred to as the "Indiana Subsidiaries" as they are domiciled in Indiana.
The Line of Credit permits aggregate borrowings from the FHLBI and the FHLBNY up to 10% of the respective member
company’s admitted assets for the previous year. Additionally, the FHLBNY limits borrowings by SICA and SICNY to 5% of
admitted assets for the previous year. All borrowings from both the FHLBI and the FHLBNY are required to be secured by
investments pledged as collateral. For additional information regarding collateral outstanding, refer to Note 5. "Investments" in
Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
65
The following table provides information on the remaining capacity for Federal Home Loan Bank borrowings based on these
restrictions, as well as the amount of additional stock that would need to be purchased to allow these member companies to
borrow their remaining capacity:
($ in millions)
As of December 31, 2016
SICSC
SICSE
SICA
SICNY
Total
Admitted
Assets
as of
December 31,
2016
$
644.9
$
490.7
2,314.2
424.3
$
Borrowing
Limitation
Amount
Borrowed
Remaining
Capacity
Additional
Stock
Requirements
64.5
49.1
115.7
21.2
250.5
32.0
28.0
50.0
—
110.0
32.5
21.1
65.7
21.2
140.5
1.4
0.9
3.0
1.0
6.3
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. 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)
As of December 31, 2016
SICSC
SICSE
Total
Admitted
Assets
as of
December 31,
2016
Borrowing
Limitation
Amount
Borrowed
Remaining
Capacity
$
644.9
490.7
$
$
64.5
49.1
113.6
27.0
18.0
45.0
37.5
31.1
68.6
Short-term Borrowings
There were no balances outstanding under the Line of Credit at December 31, 2016 or at any time during 2016. During 2016,
SICA borrowed an aggregate of $105 million from the FHLBNY, of which $55 million has already matured and has been paid.
For additional information regarding other borrowings, see Note 10. "Indebtedness" in Item 8. "Financial Statements and
Supplementary Data." of this Form 10-K.
Capital Market Activities
The Parent had no private or public issuances of stock or debt instruments during 2016.
Uses of Liquidity
The 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 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
2016, our Board of Directors approved an increase in the quarterly cash dividend, to $0.16 from $0.15 per share.
Our ability to meet our interest and principal repayment obligations on our debt, as well as our ability to continue to pay
dividends to our stockholders, is dependent on liquidity at the Parent coupled with the ability of the Insurance Subsidiaries to
pay dividends, if necessary, and/or the availability of other sources of liquidity to the Parent. Our next two principal
repayments, each in the amount of $25 million, are due in 2021, with the next following principal payment due in 2026.
Restrictions on the ability of the Insurance Subsidiaries to declare and pay dividends, without alternative liquidity options,
could materially affect our ability to service debt and pay dividends on common stock.
Capital Resources
Capital resources provide protection for policyholders, furnish the financial strength to support the business of underwriting
insurance risks, and facilitate continued business growth. At December 31, 2016, we had GAAP stockholders’ equity of $1.5
billion and statutory surplus of $1.6 billion. With total debt of $439 million, our debt-to-capital ratio was approximately 22%.
Our cash requirements include, but are not limited to, 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
66
well as other operating expenses, which include 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. Based on our analysis and market conditions, we
may take a variety of actions, including, but not limited to, contributing capital to the Insurance Subsidiaries in our insurance
segments, issuing additional debt and/or equity securities, repurchasing shares of the Parent’s common stock, and increasing
stockholders’ dividends.
Our capital management strategy is intended to protect the interests of the policyholders of the Insurance Subsidiaries and our
stockholders, while enhancing our financial strength and underwriting capacity.
Book value per share increased to $26.42 as of December 31, 2016, from $24.37 as of December 31, 2015, primarily due to
$2.70 in net income, partially offset by $0.61 paid in dividends to our shareholders.
Off-Balance Sheet Arrangements
At December 31, 2016 and December 31, 2015, we did not have any 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 facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes.
As such, we are not exposed to any material financing, liquidity, market, or credit risk that could arise if we had engaged in
such relationships.
Contractual Obligations, Contingent Liabilities, and Commitments
As discussed in the “Reserves for Losses and Loss Expenses” section in the "Critical Accounting Policies and Estimates"
section of this MD&A, we maintain case reserves and estimates of reserves for losses and loss expenses IBNR, in accordance
with industry practice. Using generally accepted actuarial reserving techniques, we project our estimate of ultimate losses and
loss expenses at each reporting date.
Given that the losses and loss expense reserves are estimates, as described in detail under the “Critical Accounting Policies and
Estimates” section of this MD&A, the payment of actual losses and loss expenses is generally not fixed as to amount or timing.
Due to this uncertainty, financial accounting standards prohibit us from discounting these reserves to their present value.
Additionally, estimated losses as of the financial statement date do not consider the impact of estimated losses from future
business. Therefore, the projected settlement of the reserves for net losses and loss expenses will differ, perhaps significantly,
from actual future payments.
The projected paid amounts 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, 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 capital leases, debt, interest on debt
obligations, and losses and loss expenses as of December 31, 2016 are summarized below:
Contractual Obligations
($ in millions)
Operating leases
Capital leases
Notes payable
Interest on debt obligations
Subtotal
Gross losses and loss expense payments
Ceded losses and loss expense payments
Net losses and loss expense payments
Total
Payment Due by Period
Total
Less than
1 year
1-3
years
3-5
years
More than
5 years
$
34.4
6.3
445.0
500.5
986.2
3,691.7
611.2
3,080.5
$
4,066.7
67
9.1
4.0
—
23.8
36.9
969.6
180.4
789.2
826.1
13.3
2.3
—
47.7
63.3
1,115.9
139.9
976.0
1,039.3
7.3
—
50.0
47.5
104.8
562.9
77.3
485.6
590.4
4.7
—
395.0
381.5
781.2
1,043.3
213.6
829.7
1,610.9
See the “Short-term Borrowings” section above for a discussion of our syndicated Line of Credit agreement.
At December 31, 2016, we had contractual obligations that expire at various dates through 2030 that may require us to invest
up to an additional $143.7 million in alternative and other investments. There is no certainty that any such additional
investment will be required. 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. “Related Party Transactions” included in Item 8. “Financial Statements and Supplementary Data.”
of this Form 10-K.
Ratings
We are rated by major rating agencies that issue opinions on our financial strength, operating performance, strategic position,
and ability to meet policyholder obligations. We believe that our ability to write insurance business is most influenced by our
rating from A.M. Best. In the third quarter of 2016, A.M. Best reaffirmed our rating of "A (Excellent)," their third highest of 13
financial strength ratings with a "stable" outlook. The rating reflects A.M. Best's view that we have an excellent level of risk-
adjusted capitalization, targeted regional markets with strong distribution partner relationships, and consistently profitable
operating performance. We have been rated "A" or higher by A.M. Best for the past 86 years. A downgrade from A.M. Best to
a rating below “A-” is an event of default under our Line of Credit and could affect our ability to write new business with
customers and/or distribution partners, some of whom are required (under various third-party agreements) to maintain
insurance with a carrier that maintains a specified A.M. Best minimum rating.
Ratings by other major rating agencies are as follows:
•
•
Fitch Ratings ("Fitch") - Our "A+" Rating was reaffirmed in the third quarter of 2016 with a "stable"outlook by Fitch.
In taking this action, Fitch cited our strong underwriting results, solid capitalization with growth in stockholders'
equity, stable leverage metrics, and improved interest coverage metrics.
S&P Global Ratings ("S&P") - During the fourth quarter of 2016, S&P upgraded our financial strength rating to "A"
from "A-" with a stable outlook. This rating change reflects S&P's view of our strong business risk profile and strong
financial risk profile, built on our strong competitive position and very strong capital and earnings. In addition, our
stable outlook reflects S&P's expectation that we will sustain our strong competitive position and operating
performance.
• Moody's Investor Service ("Moody's") - Our "A2" financial strength rating was reaffirmed in the second quarter of
2015 by Moody's. In taking this action, Moody's cited our solid regional franchise with established independent
agency support, solid risk adjusted capitalization, strong invested asset quality, and good underwriting profitability.
The outlook was revised to stable from negative, reflecting Moody's view of our improved profitability as a result of
our stronger price adequacy in commercial lines, re-underwriting initiatives, and claims processing improvements.
Our S&P, Moody's, and Fitch financial strength and associated credit ratings affect our ability to access capital markets. The
interest rate on our Line of Credit varies and is based on, among other factors, the Parent's debt ratings. There can be no
assurance that our ratings will continue for any given period or that they will not be changed. It is possible that positive or
negative ratings actions by one or more of the rating agencies may occur in the future.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
The fair value of our assets and liabilities are subject to market risk, primarily interest rate, credit risk, and equity price risk
related to our investment portfolio as well as fluctuations in the value of our alternative investment portfolio. The allocation of
our portfolio was 92% fixed income securities, 2% equity securities, 4% short-term investments, and 2% other investments as
of December 31, 2016. We do not hold derivative or commodity investments. Foreign investments are made on a limited
basis, and all fixed income transactions are denominated in U.S. currency. We have minimal foreign currency fluctuation risk.
For a discussion of our investment objective and philosophy, see the "Investments" section of Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations." of this Form 10-K.
We manage our investment portfolio to mitigate risks associated with various financial market scenarios. We will, however,
take prudent risk to enhance our overall long-term results while managing a conservative, well-diversified investment portfolio
to support our underwriting activities.
68
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- or above) corporate
securities, U.S. government and agency securities, municipal obligations, and MBS. 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. 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 maintaining 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, 2016
remained stable at 3.6 years, including short-term investments, compared to a year ago. 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
Insurance Subsidiaries’ liability duration is approximately 4.0 years.
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, the calculations do not take into account any
actions we may take in response to market fluctuations, and do not take into account changes to credit spreads, liquidity
spreads, and other risk factors which may also impact the value of the fixed income portfolio.
The following table presents the sensitivity analysis of interest rate risk as of December 31, 2016:
($ in thousands)
HTM fixed income securities
Fair value of HTM fixed income securities portfolio
$
Fair value change
Fair value change from base (%)
AFS fixed income securities
2016
Interest Rate Shift in Basis Points
-200
-100
0
100
200
108,081
2,869
106,993
1,782
2.73%
1.69%
105,211
103,401
(1,810)
(1.72)%
101,563
(3,649)
(3.47)%
Fair value of AFS fixed income securities portfolio
$
5,094,678
302,138
4,963,644
171,104
6.30%
3.57%
4,792,540
4,610,774
4,420,642
(181,766)
(371,898)
(3.79)%
(7.76)%
Fair value change
Fair value change from base (%)
Pension and Post-Retirement Benefit Plan Obligation
Our pension and post-retirement benefit obligations and related costs are calculated using actuarial methods within the
framework of U.S. GAAP. The discount rate assumption is an important element of expense and/or liability measurement.
Changes in the discount rate assumption could materially impact our pension and post-retirement life valuation in the future.
For additional information regarding our discount rate selection, refer to Note 14. "Retirement Plans" in Item 8. “Financial
Statements and Supplementary Data.” of this Form 10-K.
Credit Risk
Our most significant credit risk is within our fixed income security portfolio, which had an overall credit quality of “AA-” as of
December 31, 2016 and December 31, 2015. Exposure to non-investment grade bonds represented approximately 3% and 1%
of the total fixed income securities portfolio at December 31, 2016 and 2015, respectively.
69
The following table summarizes the fair value, carry value, net unrealized/unrecognized gain (loss) balances, and the weighted
average credit qualities of our fixed income securities at December 31, 2016 and December 31, 2015:
Total fixed income portfolio
$
4,897.7
4,894.1
December 31, 2016
($ in millions)
U.S. government obligations
Foreign government obligations
State and municipal obligations
Corporate securities
CLO and Other ABS
CMBS
RMBS
December 31, 2015
($ in millions)
U.S. government obligations
Foreign government obligations
State and municipal obligations
Corporate securities
CLO and Other ABS
CMBS
RMBS
Fair
Value
Carry
Value
Unrealized/
Unrecognized
Gain (Loss)
Weighted
Average
Credit
Quality
$
77.3
26.9
1,459.5
2,021.8
529.0
258.0
525.2
77.3
26.9
1,457.4
2,020.3
529.0
258.0
525.2
$
104.1
15.2
1,541.0
1,922.2
245.2
248.2
541.8
104.1
15.2
1,535.3
1,920.2
245.1
247.9
541.8
2.2
0.3
15.7
22.6
1.1
0.5
0.2
42.6
AAA
A
AA
A-
AA+
AAA
AA+
AA-
4.6
0.3
51.0
9.7
(0.4)
(1.6)
0.6
64.2
AA+
AA-
AA
A-
AAA
AAA
AA+
AA-
Fair
Value
Carry
Value
Unrealized/
Unrecognized
Gain (Loss)
Weighted
Average
Credit
Quality
Total fixed income portfolio
$
4,617.7
4,609.6
State and Municipal Obligations
The following table details the top 10 state exposures of the municipal bond portion of our fixed income portfolio at
December 31, 2016:
State Exposures of Municipal Bonds
($ in thousands)
New York
California
Texas1
Washington
Arizona
Pennsylvania
Florida
Virginia
Massachusetts
Colorado
Other
Pre-refunded/escrowed to maturity bonds
General Obligation
Local
State
Special
Revenue
$
17,929
—
123,385
32,236
37,875
29,806
11,243
—
5,454
26,767
—
22,155
144,042
327,507
26,639
12,503
19,324
12,765
—
37,371
9,116
—
878
—
70,129
162,086
3,248
81,004
63,965
33,980
57,979
23,899
45,042
32,180
48,467
23,901
366,106
899,908
40,121
Fair
Value
141,314
125,743
121,164
76,551
69,222
61,270
59,612
58,947
49,345
46,056
580,277
1,389,501
70,008
% of Total
10%
9%
8%
5%
5%
4%
4%
4%
3%
3%
40%
95%
5%
Total
$ 354,146
165,334
940,029
1,459,509
100%
Weighted Average
Credit Quality
AA
AA-
AA
AA+
AA
AA-
AA
AA+
AA+
AA-
AA
AA
AA+
AA
% of Total Municipal Portfolio
1 Of the $38 million in local Texas general obligation bonds, $14 million represents investments in Texas Permanent School Fund bonds, which are considered
to have lower risk as a result of the bond guarantee programs that support these bonds.
100%
65%
24%
11%
Special revenue fixed income securities of municipalities (referred to as “special revenue bonds”) generally do not have the
“full faith and credit” backing of the municipal or state governments, as do general obligation bonds, but special revenue bonds
have a dedicated revenue stream for repayment. For our special revenue bonds, 90% of the dedicated revenue stream is
comprised of the following: (i) essential services (47%), which is comprised of transportation, water and sewer, and electric;
(ii) education (13%), which includes school districts and higher education, including state-wide university systems; and (iii)
70
special tax (30%), which are backed by a dedicated lien on a tax or other revenue repayment source. As such, we believe our
special revenue bond portfolio is appropriate for the current environment.
Corporate Securities
For investment-grade corporate bonds, we address the risk of an individual issuers' default by maintaining a diverse portfolio of
holdings. The primary risk related to non-investment grade corporate bonds is credit risk. A weak financial profile can lead to
rating downgrades from the credit rating agencies, which can put further downward pressure on bond prices. Valuations on
these bonds are related more directly to underlying operating performance than to general interest rates. Our holdings of non-
investment grade corporate bonds represent less than 3% of our overall investment portfolio.
The tables below provide details on our corporate bond holdings at December 31, 2016 and December 31, 2015:
December 31, 2016
($ in millions)
Investment grade
Non-investment grade
Total corporate securities
December 31, 2015
($ in millions)
Investment grade
Non-investment grade
Total corporate securities
Fair
Value
Carry
Value
1,892.4
129.4
2,021.8
1,890.9
129.4
2,020.3
Fair
Value
Carry
Value
1,901.6
20.6
1,922.2
1,899.6
20.6
1,920.2
$
$
$
$
Unrealized/
Unrecognized
Gain (Loss)
21.0
1.6
22.6
Unrealized/
Unrecognized
Gain (Loss)
9.8
(0.2)
9.6
Weighted
Average
Credit
Quality
A-
B+
A-
Weighted
Average
Credit
Quality
A-
BB
A-
MBS Portfolio
To manage and mitigate exposure on our MBS portfolio (CMBS and RMBS), 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 for 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, total projected return on the investment, and overall asset allocation of the
portfolio in our decisions to purchase or sell MBS.
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
structuring of the deal, the credit quality of underlying loans or assets, the composition of the underlying portfolio, and the
track record and capabilities of the portfolio manager. Key performance metrics, including over collateralization, interest
coverage, and cash flows, are monitored on an on-going basis. We consider the overall credit environment, economic
conditions, total projected return on the investment, and overall asset allocation of the portfolio in our decisions to purchase or
sell CLO and other ABS.
The tables below provide details on our CLO and other ABS holdings at December 31, 2016 and December 31, 2015:
December 31, 2016
($ in millions)
Investment grade:
CLO
Other ABS
Total investment grade
Non-investment grade:
CLO
Other ABS
Total non-investment grade
Total CLO and other ABS
Fair
Value
Carry
Value
Unrealized/
Unrecognized
Gain (Loss)
Weighted
Average
Credit
Quality
$
$
341.9
170.2
512.1
16.9
—
16.9
529.0
341.9
170.2
512.1
16.9
—
16.9
529.0
0.1
0.2
0.3
0.8
—
0.8
1.1
AAA
AA+
AA+
BB-
—
BB-
AA+
71
December 31, 2015
($ in millions)
Investment grade:
CLO
Other ABS
Total investment grade
Non-investment grade:
CLO
Other ABS
Total non-investment grade
Total CLO and other ABS
Fair
Value
Carry
Value
Unrealized/
Unrecognized
Gain (Loss)
Weighted
Average
Credit
Quality
$
21.0
223.9
244.9
—
0.3
0.3
20.9
223.9
244.8
—
0.3
0.3
$
245.2
245.1
(0.1)
(0.4)
(0.5)
—
0.1
0.1
(0.4)
AAA
AAA
AAA
—
CCC
CCC
AAA
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 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, 2016:
($ in thousands)
(30)%
(20)%
(10)%
Fair value of AFS equity portfolio
$
102,727
Fair value change
(44,026)
117,402
(29,351)
132,078
(14,675)
0%
146,753
10%
20%
30%
161,428
14,675
176,104
29,351
190,779
44,026
Change in Equity Values in Percent
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 market lending, mezzanine debt, distressed debt, and real estate. As of
December 31, 2016, other investments represented 2% of our total invested assets and 7% 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 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.
72
Indebtedness
(a) Long-Term Debt
As of December 31, 2016, we had outstanding long-term debt of $438.7 million that matures as shown in the following table:
($ in thousands)
Financial liabilities
Long-term debt
1.61% Borrowings from FHLBNY
1.56% Borrowings from FHLBNY
3.03% Borrowings from FHLBI
7.25% Senior Notes
6.70% Senior Notes
5.875% Senior Notes
Subtotal
Unamortized debt issuance costs
Total notes payable
Year of
Maturity
Carrying
Amount
Fair
Value
2016
$
2021
2021
2026
2034
2035
2043
25,000
25,000
60,000
49,901
99,430
185,000
444,331
(5,664)
$
438,667
24,286
24,219
59,313
56,148
108,333
176,860
449,159
The weighted average effective interest rate for our outstanding long-term debt was 5.3% at December 31, 2016. Our debt is
not exposed to material changes in interest rates because the interest rates are fixed.
Refer to Note 10. "Indebtedness", within Item 8. "Financial Statements and Supplementary Data." of this Form 10-K for
discussion on debt covenant provisions.
(b) Short-Term Debt
Our Line of Credit with Wells Fargo Bank, National Association, as administrative agent, and Branch Banking and Trust
Company (BB&T), was renewed effective December 1, 2015 with a borrowing capacity of $30 million, which can be increased
to $50 million with the approval of both lending partners.
The Line of Credit provides the Parent with an additional source of short-term liquidity. The interest rate on our Line of Credit
varies and is based on, among other factors, the Parent’s debt ratings. The Line of Credit expires on December 1, 2020. There
were no balances outstanding under this Line of Credit or the previous credit facility at December 31, 2016 or at any time
during 2016.
73
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Selective Insurance Group, Inc.:
We have audited the accompanying consolidated balance sheets of Selective Insurance Group, Inc. and its subsidiaries (the
“Company”) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income,
stockholders’ equity, and cash flows for each of the years in the
period ended December 31, 2016. In connection with
our audits of the consolidated financial statements, we also have audited financial statement schedules I to V. 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 and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Selective Insurance Group, Inc. and its subsidiaries as of December 31, 2016 and 2015, and the results of their operations and
their cash flows for each of the years in the
period ended December 31, 2016, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the related 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),
Selective Insurance Group, Inc. and its subsidiaries' internal control over financial reporting as of December 31, 2016, 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 21, 2017, expressed an unqualified opinion on the effectiveness
of the Company’s internal controls over financial reporting.
/s/ KPMG LLP
New York, New York
February 21, 2017
74
Consolidated Balance Sheets
December 31,
($ in thousands, except share amounts)
ASSETS
Investments:
Fixed income securities, held-to-maturity – at carrying value
(fair value: $105,211 – 2016; $209,544 – 2015)
Fixed income securities, available-for-sale – at fair value
(amortized cost: $4,753,759 – 2016; $4,352,514 – 2015)
Equity securities, available-for-sale – at fair value
(cost: $120,889 – 2016; $193,816 – 2015)
Short-term investments (at cost which approximates fair value)
Other investments
Total investments (Notes 5 and 7)
Cash
Interest and dividends due or accrued
Premiums receivable, net of allowance for uncollectible
accounts of: $5,980 – 2016; $4,422 – 2015
Reinsurance recoverable, net of allowance for uncollectible
accounts of: $5,500 – 2016; $5,700 – 2015 (Note 8)
Prepaid reinsurance premiums (Note 8)
Current federal income tax (Note 13)
Deferred federal income tax (Note 13)
Property and equipment – at cost, net of accumulated
depreciation and amortization of: $198,729 – 2016; $188,548 – 2015
Deferred policy acquisition costs (Note 2)
Goodwill (Note 11)
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Reserve for losses and loss expenses (Note 9)
Unearned premiums
Short-term debt (Note 10)
Long-term debt (Note 10)
Current federal income tax (Note 13)
Accrued salaries and benefits
Other liabilities
Total liabilities
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: 101,620,436 – 2016; 100,861,372 – 2015
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss (Note 6)
Treasury stock – at cost (shares: 43,653,237 – 2016; 43,500,642 – 2015)
Total stockholders’ equity
Commitments and contingencies (Notes 17 and 18)
Total liabilities and stockholders’ equity
See accompanying Notes to Consolidated Financial Statements.
75
2016
2015
$
101,556
201,354
4,792,540
4,408,203
146,753
221,701
102,397
207,051
194,819
77,842
5,364,947
5,089,269
458
40,164
681,611
621,537
146,282
2,486
84,840
69,576
222,564
7,849
113,534
898
38,501
615,164
561,968
140,889
—
92,696
65,701
213,159
7,849
78,339
7,355,848
6,904,433
3,691,719
1,262,819
—
438,667
—
132,880
298,393
3,517,728
1,169,710
60,000
328,192
7,442
167,336
255,984
5,824,478
5,506,392
—
—
203,241
347,295
1,568,881
(15,950)
(572,097)
1,531,370
201,723
326,656
1,446,192
(9,425)
(567,105)
1,398,041
$
$
$
$
$
7,355,848
6,904,433
Consolidated Statements of Income
December 31,
($ in thousands, except per share amounts)
Revenues:
Net premiums earned
Net investment income earned
Net realized (losses) gains:
Net realized investment gains
Other-than-temporary impairments
Other-than-temporary impairments on fixed income securities recognized in other
comprehensive income
Total net realized (losses) gains
Other income
Total revenues
Expenses:
Losses and loss expenses incurred
Policy acquisition costs
Interest expense
Other expenses
Total expenses
2016
2015
2014
$
2,149,572
130,754
1,989,909
121,316
1,852,609
138,708
3,562
(8,509)
10
(4,937)
8,881
31,537
(18,366)
—
13,171
7,456
37,703
(11,104)
—
26,599
16,945
2,284,270
2,131,852
2,034,861
1,234,797
763,758
22,771
42,989
1,148,541
689,820
22,428
38,371
1,157,501
624,470
23,063
32,696
2,064,315
1,899,160
1,837,730
Income before federal income tax
219,955
232,692
197,131
Federal income tax expense:
Current
Deferred
Total federal income tax expense
Net income
Earnings per share:
Basic net income
Diluted net income
Dividends to stockholders
See accompanying Notes to Consolidated Financial Statements.
48,581
12,879
61,460
45,347
21,484
66,831
28,415
26,889
55,304
158,495
165,861
141,827
2.74
2.70
0.61
2.90
2.85
0.57
2.52
2.47
0.53
$
$
$
$
76
Consolidated Statements of Comprehensive Income
December 31,
($ in thousands)
Net income
Other comprehensive (loss) income, net of tax:
Unrealized (losses) gains on investment securities:
Unrealized holding (losses) gains arising during year
2016
2015
2014
$
158,495
165,861
141,827
(5,977)
(26,143)
47,411
Non-credit portion of other-than-temporary impairments recognized in other comprehensive income
(6)
—
—
Amounts reclassified into net income:
Held-to-maturity securities
Non-credit other-than-temporary impairments
Realized losses (gains) on available for sale securities
Total unrealized (losses) gains on investment securities
Defined benefit pension and post-retirement plans:
Net actuarial (loss) gain
Amounts reclassified into net income:
Net actuarial loss
Total defined benefit pension and post-retirement plans
Other comprehensive loss
Comprehensive income
See accompanying Notes to Consolidated Financial Statements.
(92)
138
3,064
(2,873)
(377)
232
(9,110)
(35,398)
(844)
1,085
(18,762)
28,890
(7,852)
1,585
(35,189)
4,200
(3,652)
(6,525)
$
151,970
4,600
6,185
(29,213)
136,648
1,236
(33,953)
(5,063)
136,764
77
Consolidated Statements of Stockholders’ Equity
December 31,
($ in thousands, except share amounts)
Common stock:
Beginning of year
Dividend reinvestment plan
(shares: 38,741 – 2016; 50,013 – 2015; 58,309 – 2014)
Stock purchase and compensation plans
(shares: 720,323 – 2016; 863,426 – 2015; 769,389 – 2014)
End of year
Additional paid-in capital:
Beginning of year
Dividend reinvestment plan
Stock purchase and compensation plans
End of year
Retained earnings:
Beginning of year
Net income
Dividends to stockholders
($0.61 per share – 2016; $0.57 per share – 2015; $0.53 per share – 2014)
End of year
Accumulated other comprehensive (loss) income:
Beginning of year
Other comprehensive loss
End of year
Treasury stock:
Beginning of year
Acquisition of treasury stock
(shares: 152,595 – 2016; 147,461 – 2015; 154,559 – 2014)
End of year
Total stockholders’ equity
2016
2015
2014
$
201,723
199,896
198,240
77
100
117
1,441
203,241
1,727
201,723
1,539
199,896
326,656
1,389
19,250
347,295
305,385
1,374
19,897
326,656
288,182
1,306
15,897
305,385
1,446,192
1,313,440
1,202,015
158,495
165,861
141,827
(35,806)
(33,109)
(30,402)
1,568,881
1,446,192
1,313,440
(9,425)
(6,525)
(15,950)
19,788
(29,213)
(9,425)
24,851
(5,063)
19,788
(567,105)
(562,923)
(559,360)
(4,992)
(4,182)
(3,563)
(572,097)
(567,105)
(562,923)
$
1,531,370
1,398,041
1,275,586
Selective Insurance Group, Inc. also has authorized, but not issued, 5,000,000 shares of preferred stock, without par value, of which 300,000 shares have been
designated Series A junior preferred stock, without par value.
See accompanying Notes to Consolidated Financial Statements.
78
Consolidated Statements of Cash Flows
December 31,
($ in thousands)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Sale of renewal rights
Stock-based compensation expense
Undistributed (gains) losses of equity method investments
Net realized losses (gains)
Net gain on disposal of property and equipment
Changes in assets and liabilities:
Increase in reserves for losses and loss expenses, net of reinsurance recoverables
Increase in unearned premiums, net of prepaid reinsurance
Decrease in net federal income taxes
Increase in premiums receivable
Increase in deferred policy acquisition costs
(Increase) decrease in interest and dividends due or accrued
(Decrease) increase in accrued salaries and benefits
(Increase) decrease in other assets
Increase (decrease) in other liabilities
Net cash provided by operating activities
Investing Activities
Purchase of fixed income securities, held-to-maturity
Purchase of fixed income securities, available-for-sale
Purchase of equity securities, available-for-sale
Purchase of other investments
Purchase of short-term investments
Sale of fixed income securities, available-for-sale
Sale of short-term investments
Redemption and maturities of fixed income securities, held-to-maturity
Redemption and maturities of fixed income securities, available-for-sale
Sale of equity securities, available-for-sale
Distributions from other investments
Purchase of property and equipment
Sale of renewal rights
Net cash used in investing activities
Financing Activities
Dividends to stockholders
Acquisition of treasury stock
Net proceeds from stock purchase and compensation plans
Proceeds from borrowings
Repayment of borrowings
Excess tax benefits from share-based payment arrangements
Repayment of capital lease obligations
Net cash provided by (used in) financing activities
Net (decrease) increase in cash
Cash, beginning of year
Cash, end of year
See accompanying Notes to Consolidated Financial Statements.
79
2016
2015
2014
$
158,495
165,861
141,827
61,671
—
10,449
(2,316)
4,937
—
114,422
87,716
11,150
(66,447)
(9,405)
(1,473)
(46,536)
(30,071)
9,191
301,783
59,688
—
8,973
1,889
(13,171)
—
59,438
79,995
25,004
(56,386)
(27,551)
407
11,392
(11,523)
77,564
381,580
45,346
(8,000)
8,702
(153)
(26,599)
(104)
97,449
32,671
31,323
(33,908)
(12,627)
(1,536)
(7,182)
1,186
(35,632)
232,763
(4,235)
(3,316)
(1,982,023)
(1,041,916)
(35,490)
(66,164)
(195,720)
(12,170)
—
(843,616)
(186,019)
(10,617)
(3,499,380)
(1,602,327)
(1,410,123)
926,470
3,470,022
102,868
641,524
119,617
26,837
(18,147)
—
61,571
1,539,480
106,621
567,445
172,561
32,457
(16,229)
—
(318,101)
(391,543)
(33,758)
(4,992)
7,811
165,000
(115,000)
1,819
(5,002)
15,878
(440)
898
458
$
(31,052)
(4,182)
10,089
15,000
—
1,736
(4,689)
(13,098)
(23,061)
23,959
898
51,002
1,452,402
73,415
482,816
208,008
20,774
(15,510)
8,000
(169,468)
(28,428)
(3,563)
7,283
—
(13,000)
1,020
(2,841)
(39,529)
23,766
193
23,959
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 main offices are located in
Branchville, New Jersey. The Parent’s common stock is publicly traded on the NASDAQ Global Select Market under the
symbol “SIGI.” 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 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 insurance products and services, including flood insurance coverage, provided
primarily to individuals acquiring coverage in the standard marketplace.
• E&S Lines - comprised of 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) 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) Reclassifications
Certain amounts in our prior years' Financial Statements and related notes have been reclassified to conform to the 2016
presentation. Such reclassifications had no effect on our net income, stockholders' equity, or cash flows.
(d) Investments
Fixed income securities may include investment grade and below investment grade rated bonds, redeemable preferred stocks,
non-redeemable preferred stocks with certain debt-like characteristics, mortgage-backed securities (“MBS”), collateralized loan
obligations ("CLO") and other asset-backed securities (“ABS”). MBS, CLO, and other ABS are jointly referred to as structured
securities. Fixed income securities classified as available-for-sale (“AFS”) are reported at fair value. Those fixed income
securities that we have the ability and positive intent to hold to maturity are classified as held-to-maturity (“HTM”) 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. Premiums and discounts arising from the
purchase of structured securities are amortized over the expected life of the security based on future principal payments, and
considering 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 income, as well as
amortization and accretion, is included in "Net investment income earned" on our Consolidated Statements of Income. The
amortized cost of a fixed income security is written down to fair value when 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 on: (i) fixed income securities classified as AFS; and (ii) fixed income
securities that were transferred into an HTM designation from an AFS designation, are included in accumulated other
comprehensive income (loss) ("AOCI").
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Equity securities, which are classified as AFS, may include common and non-redeemable preferred stocks. These securities are
carried at fair 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 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.
Short-term investments may include certain money market instruments, savings accounts, commercial paper, and debt issues
purchased with a maturity of less than one year. We also enter into reverse repurchase agreements that are included in short-
term investments. These loans are fully collateralized with high quality, readily marketable instruments at a minimum of 102%
of the loan principal. At maturity, we receive principal and interest income on these agreements. All short-term investments
are carried at cost, which approximates fair value. The associated income is included in "Net investment income earned" on
our Consolidated Statement of Income.
Other investments may include alternative investments and other securities. Alternative investments are accounted for using
the equity method. Our share of distributed and undistributed net income from alternative investments is included in "Net
investment income earned" on our Consolidated Statement of Income. Other securities are primarily comprised of tax credit
investments. Low income housing tax credits are accounted for under the proportional amortization method and all other tax
credits are accounted for using the equity method. Under the proportional amortization method, our share of the investment’s
performance is recorded in our Consolidated Statement 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 Statement 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
Statement of Income as a component of "Federal income tax expense" ratably over the life of the investment.
Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold and
are credited or charged to income. Included in realized gains and losses are the other-than-temporary impairment ("OTTI")
charges recognized in earnings, which are discussed below.
On a quarterly basis, we review our investment portfolio for impairments that are other than temporary. The following
provides information on this analysis for our fixed income securities and short-term investments, our equity securities, and our
other investments.
Fixed Income Securities and Short-Term Investments
We review securities that are in an unrealized loss position to determine: (i) if we have the intent to sell the security; (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.
If we determine that we have either the intent or requirement to sell the security, we write down its amortized cost to its fair
value through a charge to earnings as a component of realized losses. If we do not have either the intent or requirement to sell
the security, our evaluation for OTTI may include, but is not limited to, evaluation of the following factors:
• Whether the decline appears to be issuer or industry specific;
• The degree to which the issuer is current or in arrears in making principal and interest payments on the fixed income
security;
• The issuer’s current financial condition and ability to make future scheduled principal and interest payments on a
timely basis;
• Evaluation of projected cash flows;
• Buy/hold/sell recommendations published by outside investment advisors and analysts; and
• Relevant rating history, analysis, and guidance provided by rating agencies and analysts.
Non-redeemable preferred stocks that are classified as fixed income securities are evaluated under this OTTI method unless the
security is below investment grade, at which time they are evaluated under the equity securities OTTI model discussed below.
To determine if an impairment is other than temporary, we perform assessments that may include, but are not limited to,
discounted cash flow analyses ("DCFs") to determine the security's present value of future cash flows. In addition, this analysis
is performed on all previously-impaired debt securities that continue to be held by us and all structured securities that were not
of high-credit quality at the date of purchase. Any shortfall in the expected present value 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
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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.
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. Discounted
cash flow models 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.
Equity Securities
We review securities that are in an unrealized loss position to determine: (i) if we do not intend to hold the security to its
forecasted recovery; or (ii) if the decline is other than temporary, which includes declines driven by market volatility for which
we cannot assert will recover in the near term. If we determine either that we do not intend to hold a security, or the decline is
other than temporary, we write down the security's cost to its fair value through a charge to earnings as a component of realized
losses. If we intend to hold the security, our evaluation for OTTI may include, but is not limited to, an evaluation of the
following factors:
• Whether the decline appears to be issuer or industry specific;
• The relationship of market prices per share to book value per share at the date of acquisition and date of evaluation;
• The price-earnings ratio at the time of acquisition and date of evaluation;
• The financial condition and near-term prospects of the issuer, including any specific events that may influence the
issuer's operations, coupled with our intention to hold the securities in the near-term;
• The recent income or loss of the issuer;
• The independent auditors' report on the issuer's recent financial statements;
• The dividend policy of the issuer at the date of acquisition and the date of evaluation;
• Buy/hold/sell recommendations or price projections published by outside investment advisors;
• Rating agency announcements;
• The length of time and the extent to which the fair value has been, or is expected to be, less than its cost in the near
term; and
• Our expectation of when the cost of the security will be recovered.
Other Investments
Our evaluation for OTTI of an other investment (i.e., an alternative investment) may include, but is not limited to,
conversations with the management of the alternative investment concerning the following:
• The current investment strategy;
• Changes made or future changes to be made to the investment strategy;
• Emerging issues that may affect the success of the strategy; and
• The appropriateness of the valuation methodology used regarding the underlying investments.
If there is a decline in the fair value of an other investment that we do not intend to hold, or if we determine the decline is other
than temporary, we write down the carry value of the investment and record the charge through earnings as a component of
realized losses.
(e) Fair Values of Financial Instruments
Assets
The fair values of our investments are generated using various valuation techniques and are placed into the fair value hierarchy
considering the following: (i) the highest priority is given to quoted prices in active markets for identical assets (Level 1); (ii)
the next highest priority is given to quoted prices in markets that are not active or inputs that are observable either directly or
indirectly, including quoted prices for similar assets in markets that are not active and other inputs that can be derived
principally from, or corroborated by, observable market data for substantially the full term of the assets (Level 2); and (iii) the
lowest priority is given to unobservable inputs supported by little or no market activity and that reflect our assumptions about
the exit price, including assumptions that market participants would use in pricing the asset (Level 3). An asset’s classification
within the fair value hierarchy is based on the lowest level of significant input to its valuation. 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
Equity Securities;
U.S. Treasury Notes
Short-Term Investments
Methodology
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 are carried at cost, which approximates fair value. Given the liquid nature of our short-term
investments, we generally validate their fair value by way of active trades within approximately one week of the
financial statement close.
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 debt 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 portfolio
pricing is reviewed for reasonableness in the following ways: (i) comparing our pricing to other third-party pricing services as
well as benchmark indexed pricing; (ii) comparing fair value fluctuations between months for reasonableness; and (iii)
reviewing stale prices. 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.
Structured Securities (including CLO
and other ABS, CMBS, RMBS)
Evaluations are based on a discounted cash flow model, 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 incorporating observed market yields of benchmarks as inputs,
adjusting for varied maturities.
Level 3 Pricing
Less than 1% of our portfolio cannot be priced using our primary or secondary pricing service. At times, we may use non-
binding broker quotes to value some of these securities. These prices are from various broker/dealers that use bid or ask prices,
or benchmarks to indices, in measuring the fair value of a security. We review these fair value measurements for
reasonableness. This review typically includes an analysis of price fluctuations between months with variances over
established thresholds being analyzed further.
Further information on our current Level 3 asset pricing is included in the following table:
Security Type
Methodology
Corporate Securities
These tax credit investments are priced internally using spread-based evaluations.
Equity Securities
These non-publicly traded stocks are valued by the issuer and reviewed internally.
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Liabilities
The techniques used to value our notes payable are as follows:
Level 1 Pricing
Security Type
5.875% Senior Notes
Level 2 Pricing
Security Type
7.25% Senior Notes;
6.70% Senior Notes
Based on the quoted market prices.
Methodology
Methodology
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 is consistent with the remaining term of the borrowing.
See Note 7. “Fair Value Measurements” for a summary table of the fair value and related carrying amounts of financial
instruments.
(f) Allowance for Doubtful Accounts
We estimate an allowance for doubtful accounts on our premiums receivable. This allowance is based on historical write-off
percentages adjusted for the effects of current and anticipated trends. An account is charged off when we believe it is probable
that we will not collect a receivable. In making this determination, we consider information obtained from our efforts to collect
amounts due directly and/or through collection agencies.
(g) Share-Based Compensation
Share-based compensation consists of all share-based payment transactions in which an entity acquires goods or services by
issuing (or offering to issue) its shares, share units, share options, or other equity instruments. The cost resulting from all
share-based payment transactions are recognized in the Financial Statements based on the fair value of both equity and liability
awards. The fair value is measured at grant date for equity awards, whereas the fair value for liability awards are remeasured at
each reporting period. Both the fair value of 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, and as permitted under, our stock-based compensation plans. This activity is
disclosed in our Consolidated Statements of Stockholders' Equity.
(h) Reinsurance
Reinsurance recoverables represent estimates of amounts that will be recovered from reinsurers under our various treaties.
Generally, amounts recoverable from reinsurers are recognized as assets at the same time and in a manner consistent with the
paid and unpaid losses associated with the reinsured policies. We require collateral to secure reinsurance recoverables
primarily from our reinsurance carriers that are not authorized, otherwise approved, or certified to do business in one or more
of our ten insurance subsidiaries' domiciliary states. Our ten insurance subsidiaries are collectively referred to as the
"Insurance Subsidiaries". This collateral is typically in the form of a letter of credit or cash. An allowance for estimated
uncollectible reinsurance is recorded based on an evaluation 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").
We charge off reinsurance recoverables on paid losses when it becomes probable that we will not collect the balance.
84
(i) Property and Equipment
Property and equipment used in operations, including certain costs incurred to develop or obtain computer software for internal
use, are capitalized and carried 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
Computer hardware
Computer software
Internally developed software
Software licenses
Furniture and fixtures
Buildings and improvements
Years
3
3 to 5
5 to 10
3 to 5
10
5 to 40
We recorded depreciation expense of $17.4 million, $16.4 million, and $12.6 million for 2016, 2015, and 2014, respectively.
(j) Deferred Policy Acquisition Costs
Deferred policy acquisition costs are limited to costs directly related to the successful acquisition of insurance contracts. Costs
meeting this definition typically include, among other things, sales commissions paid to our distribution partners, premium
taxes, and the portion of employee salaries and benefits directly related to time spent on acquired contracts. These costs are
deferred and amortized over the life of the contracts.
Accounting guidance requires a premium deficiency analysis to be performed at the level an entity acquires, services, and
measures the profitability of its insurance contracts. We currently perform three premium deficiency analyses for our insurance
segments, 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 losses and loss expenses,
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 are based on our actual average investment yield before tax as of the September 30
calculation date, were 2.4% for 2016, 2.5% for 2015, and 3.0% for 2014. Deferred policy acquisition costs amortized to
expense were $450.3 million for 2016, $399.4 million for 2015, and $364.3 million for 2014.
(k) Goodwill
Goodwill results from business acquisitions where the cost of assets and liabilities acquired exceeds the fair value of those
assets and liabilities. A quantitative goodwill impairment analysis is performed if our quarterly qualitative analysis indicates
that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Goodwill is allocated to the
reporting units for purposes of these analyses. Based on our analysis at December 31, 2016, goodwill was not impaired.
(l) Reserves for Losses and Loss Expenses
Reserves for losses and loss expenses are comprised of both case reserves on individual claims, and reserves for claims
incurred but not reported ("IBNR"). Case reserves result from claims that have been reported to one or more of our Insurance
Subsidiaries, and are estimated at the amount of the expected ultimate payment. 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 future emergence on known claims, as well as reopened claims. IBNR reserves are established based on
the results of the Insurance Subsidiaries’ internal reserve analysis, supplemented with other internal and external information.
The internal reserve analysis is performed quarterly, and relies upon generally accepted actuarial techniques. Such techniques
assume that past experience, adjusted for the effects of current developments and anticipated trends, are an appropriate basis for
predicting future events. Our analyses rely upon historical paid and case losses and loss adjustment expense experience
organized by line of business, accident year and maturity (i.e., “triangles”). Standard actuarial projection methods are applied
to this history, producing a set of estimated ultimate losses and loss adjustment expenses. Ultimate losses and loss adjustment
expenses are selected from the various methods, considering the strengths and weaknesses of the methods as they apply to the
specific line and accident year.
85
Certain types of exposures do not lend themselves to standard actuarial methods. Examples of these are:
• Certain property catastrophe events may be low in frequency and high in severity. These events may affect many
insureds simultaneously. Due to the unique nature of these events, ultimate liabilities are estimated for each event,
based on surveys of our portfolio of exposures, in conjunction with individual claims estimates. While generally
short-tailed, the liabilities associated with these events are subject to a higher degree of uncertainty. We maintain
significant reinsurance protection that greatly limits the impact that these extreme events have on net loss and loss
adjustment expenses.
•
In some limited cases, an insured event may span multiple years and multiple policies, as in the case of asbestos and
environmental claims, where the injury is deemed to occur over an extended period of time. These claims are
analyzed without accident year detail, using alternative methods and metrics. The associated selected ultimate loss
and loss adjustment expenses are then allocated to accident year for reporting.
• Another example of non-standard methods relate to loss adjustment expenses that cannot be attributed to a specific
claim (referred to as “unallocated loss adjustment expenses”). These expenses are first allocated to accident year and
alternative projection methods are then applied to these expenses. The resulting ultimate expenses by accident year
are then used for reporting purposes.
The selected ultimate losses and loss adjustment expenses are translated into indicated IBNR reserves, which are then
compared to the recorded IBNR reserves. Management's judgment is applied in determining any required adjustments and the
resulting adjustments are then recorded and assigned or allocated to accident year using the results of the actuarial analysis.
While the reserve analysis is the primary basis for determining the recorded IBNR reserves, other internal and external factors
are considered. Internal factors include: (i) supplemental data regarding claims reporting and settlement trends; (ii) exposure
estimates for reported claims, along with recent development on those estimates with respect to individual large claims and the
aggregate of all claims; (iii) the rate at which new large or complex claims are being reported; and (iv) additional trends
observed by claims personnel or reported to them by defense counsel. External factors considered include: (i) legislative
enactments; (ii) judicial decisions; (iii) legal developments in the determination of liability and the imposition of damages; and
(iv) trends in general economic conditions, including the effects of inflation.
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.
The combination of the IBNR estimates along with the case reserve estimates on individual claims results in our total reserves
for losses and loss expenses. These reserves are expected to be sufficient for settling losses and loss reserve 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 losses and loss
expenses. However, the ultimate claim settlements may be higher or lower than reserves established. As our experience
emerges and other information develops, we revise our reserve estimates accordingly. 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. The associated impacts may be
material to the results of operations in future periods.
We do not discount to present value that portion of our losses and loss expense reserves expected to be paid in future periods.
Our loss and loss expense reserves implicitly include anticipated recoveries for salvage and subrogation claims.
Claims are counted at the occurrence, line of business, and policy level. For example, if a single occurrence (e.g. an auto
accident) leads to a claim under an auto 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 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.
86
We also write a small amount of assumed reinsurance. Currently, this business is limited to our share of certain involuntary
pools. Since the associated claims are not processed by us, they are not captured within our claims system. Therefore, the
claim counts reported exclude this business.
(m) Revenue Recognition
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 is based on historical trends adjusted for the uncertainty of
future economic conditions. Economic instability could ultimately impact our estimates and assumptions, and changes in our
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.
(n) Dividends to Policyholders
We establish reserves for dividends to policyholders on certain policies, most significantly workers compensation policies.
These dividends are based on the policyholders' loss experience. Dividend reserves are established based on past experience,
adjusted for the effects of current developments and anticipated trends. The expense for these dividends is recognized over a
period that begins at policy inception and ends with the payment of the dividend. We do not issue policies that entitle the
policyholder to participate in the earnings or surplus of our Insurance Subsidiaries.
(o) Federal Income Tax
We use the asset and liability method of accounting for income taxes. Current federal income taxes are recognized for the
estimated taxes payable or refundable on tax returns for the current year. Deferred federal income taxes arise from the
recognition of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities.
We consider all evidence, both positive and negative, with respect to our federal tax loss carryback availability, expected levels
of pre-tax financial statement income, and federal taxable income, when evaluating whether the temporary differences will be
realized. In projecting future taxable income, we begin with budgeted pre-tax income adjusted for estimated non-taxable items.
The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we
use to manage our businesses. A valuation allowance is established when it is more likely than not that some portion of the
deferred tax asset will not be realized. A liability for uncertain tax positions is recorded when it is more likely than not that a
tax position will not be sustained upon examination by taxing authorities. The effect of a change in tax rates is recognized in
the period of enactment. If we were to be levied interest and penalties by the Internal Revenue Service (“IRS”), the interest
would be recognized as “Interest expense” and the penalties would be recognized as “Other expenses” on the Consolidated
Statements of Income.
(p) Leases
We have various operating leases for office space, equipment, and fleet vehicles. Rental expense for such 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" as deferred rent in the Consolidated
Balance Sheets.
In addition, we have various capital leases for computer hardware and software. These leases are accounted for as an
acquisition of an asset and an incurrence of an obligation. Depreciation is calculated using the straight-line method over the
shorter of the estimated useful life of the asset or the lease term.
(q) Pension
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 is currently entitled, based on the average life expectancy of the employee. 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, plus additional amounts that the Board of Directors 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
87
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.
Note 3. Adoption of Accounting Pronouncements
In January 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-01,
Accounting for Investments in Qualified Affordable Housing Projects ("ASU 2014-01"). ASU 2014-01 applies to all reporting
entities that invest in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for
a low-income housing tax credit. ASU 2014-01 permits reporting entities to make an accounting policy election to account for
their investments in qualified affordable housing projects using a newly defined "proportional amortization method" if certain
conditions are met. This policy election is required to be applied consistently to all qualifying investments, rather than a
decision to be applied to individual investments. Under the proportional amortization method, an entity amortizes the initial
cost of the investment in proportion to the tax credits and other tax benefits received, and recognizes the net investment
performance in the Consolidated Statements of Income as components of "Federal income tax expense". We adopted this
guidance in the third quarter of 2014 and have made a policy election to use the proportional amortization method. The
adoption of this guidance did not materially impact our financial condition or results of operations.
In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide
That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). ASU 2014-12 requires
that performance targets that affect vesting and could be achieved after the requisite service period be treated as performance
conditions. The adoption of ASU 2014-12 in the first quarter of 2016 did not affect us, as we have historically recorded
expense consistent with the requirements of this accounting update.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going
Concern (“ASU 2014-15”). ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is
substantial doubt about an entity’s ability to continue as a going concern and provide related footnote disclosures. Our
adoption of this amendment in the fourth quarter of 2016 did not affect us, as the additional disclosure requirements are
applicable only to entities that have been subject to events or conditions that cast substantial doubt as to whether the entity has
the ability to continue as a going concern.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02
affects the following areas: (i) limited partnerships and similar legal entities; (ii) the evaluation of fees paid to a decision maker
or a service provider as a variable interest; (iii) the effect of fee arrangements on the primary beneficiary determination; (iv) the
effect of related parties on the primary beneficiary determination; and (v) certain investment funds. We adopted this guidance
in the first quarter of 2016. Under the new guidance, our limited partnership and tax credit investments are variable interest
entities ("VIEs"); however, we are not the primary beneficiary of any of these investments. As such, the adoption had no
impact on our financial condition or results of operations. The required disclosures related to our VIEs are included in Note 5.
“Investments” below.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU
2015-03 requires debt issuance costs to be netted against the related debt liability in the balance sheet rather than presented as a
separate asset. However, ASU 2015-03 does not address the presentation or subsequent measurement of debt issuance costs
related to line-of-credit arrangements. Therefore, in August 2015, the FASB issued ASU 2015-15, Presentation and
Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC
Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (“ASU 2015-15”). ASU 2015-15 clarifies that, in
the absence of authoritative guidance on line-of-credit arrangements within ASU 2015-03, the SEC would not object to the
deferral and presentation of debt issuance costs as an asset and the subsequent amortization of the deferred costs over the term
of the line-of-credit arrangement. We adopted this guidance retrospectively, effective in the fourth quarter of 2015. As such,
2014 balances in this Form 10-K have been restated to reflect the revised guidance, as follows:
Income Statement Information
Year ended December 31, 2014
($ in thousands)
Interest Expense
Other Expense
As Originally Reported
As Restated
$
22,086
33,673
23,063
32,696
88
In April 2015, the FASB issued ASU 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement
(“ASU 2015-05”). ASU 2015-05 provides guidance to customers with cloud computing arrangements that include a software
license. If a cloud computing arrangement includes a software license, the customer's accounting for the software license
element of the arrangement is consistent with the acquisition of other software licenses. If a cloud computing arrangement
does not include a software license, the customer accounts for the arrangement as a service contract. We adopted this guidance
in the first quarter of 2016, with prospective application. The impact of this adoption did not have a material effect on our
financial condition or results of operations.
In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value
per Share (or Its Equivalent) (“ASU 2015-07”). ASU 2015-07 provides that investments for which the practical expedient is
used to measure fair value at net asset value per share ("NAV") must be removed from the fair value hierarchy. Instead, those
investments must be included as a reconciling line item so that the total fair value amount of investments in the disclosure is
consistent with the amount on the balance sheet. ASU 2015-07 also includes disclosure requirements for investments for which
the NAV practical expedient was used to determine fair value. We adopted this guidance in the first quarter of 2016 and have
included the related disclosures in Note 14. "Retirement Plans" below.
In May 2015, the FASB issued ASU 2015-09, Disclosures about Short-Duration Contracts (“ASU 2015-09”). ASU 2015-09
requires companies that issue short duration contracts to disclose additional information, including: (i) incurred and paid
claims development tables; (ii) frequency and severity of claims; and (iii) information about material changes in judgments
made in calculating the liability for unpaid claim adjustment expenses, including reasons for the change and the effects on the
financial statements. We adopted this guidance in the fourth quarter of 2016 and have included the related disclosures in Note
9. "Reserves for Losses and Loss Expenses" below.
Pronouncements to be effective in the future
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Sub-topic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 provides guidance to improve
certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Specifically the guidance:
(i) requires equity investments to be measured at fair value with changes in fair value recognized in earnings; (ii) simplifies the
impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to
identify impairment; (iii) eliminates the requirement to disclose the methods and significant assumptions used to estimate the
fair value that is required to be disclosed for financial instruments measured at amortized cost; (iv) requires the use of the exit
price notion when measuring the fair value of financial instruments for disclosure purposes; and (v) clarifies that the need for a
valuation allowance on a deferred tax asset related to an available-for-sale ("AFS") security should be evaluated with other
deferred tax assets.
ASU 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual
periods. Early application to financial statements of annual or interim periods that have not yet been issued are permitted as of
the beginning of the year of adoption, otherwise early adoption of ASU 2016-01 is not permitted. We are currently evaluating
the impact of this guidance on our financial condition and results of operations.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires all lessees to
recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the
lease commencement date. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim
reporting periods within that annual period, with early adoption permitted. ASU 2016-02 requires the application of a modified
retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in
the financial statements. While we are currently evaluating ASU 2016-02, we do not expect a material impact on our financial
condition or results of operations from the adoption of this guidance.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee
Share-based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based
payment transactions including: (i) income tax consequences; (ii) classification of awards as either equity or liabilities; (iii)
forfeitures assumptions; and (iv) cash flow classification. ASU 2016-09 is effective for annual periods beginning after
December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. We do not expect this ASU
to have a material impact on our financial condition or results of operations.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”). ASU 2016-13 will
change the way entities recognize impairment of financial assets by requiring immediate recognition of estimated credit losses
expected to occur over the remaining life of many financial assets, including, among others, HTM debt securities,
trade receivables, and reinsurance receivables. ASU 2016-13 requires a valuation allowance to be calculated on these financial
89
assets and that they be presented on the financial statements net of the valuation allowance. The valuation allowance is a
measurement of expected losses that is based on relevant information about past events, including historical experience, current
conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This methodology is
referred to as the current expected credit loss model. ASU 2016-13 is effective for annual periods beginning after December
15, 2019, including interim periods within those annual periods. Early adoption is permitted, but no earlier than annual periods
beginning after December 15, 2018. We are currently evaluating the impact of this guidance on our financial condition and
results of operations.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (“ASU 2016-15”). ASU 2016-15 adds or clarifies
guidance on the classification of certain cash receipts and payments in the statements of cash flows including, but not limited
to: (i) debt prepayment or debt extinguishment costs; (ii) proceeds from the settlement of corporate-owned life insurance
policies including bank-owned life insurance policies; (iii) distributions received from equity method investees; and (iv)
separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for annual periods
beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. We are
currently evaluating the impact of this guidance on our statements of cash flows.
In October 2016, the FASB issued ASU 2016-17, Consolidation: Interests Held through Related Parties That Are Under
Common Control ("ASU 2016-17"). ASU 2016-17 changes how a decision maker considers indirect interests in a VIE held
under common control in making the primary beneficiary determination. ASU 2016-17 will be effective for annual periods
beginning after December 15, 2016, including interim periods within those annual periods. We do not expect this ASU to
impact us as we are not the decision maker in any of the VIEs in which we are invested.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash ("ASU 2016-18"). ASU
2016-18, requires that restricted cash and restricted cash equivalents be included with cash and cash equivalents in the
reconciliation of beginning and ending cash on the statements of cash flows. This update also requires a reconciliation of the
statement of the cash flows to the balance sheet if the balance sheet includes more than one line item of cash, cash equivalents,
and restricted cash. ASU 2016-18 is effective, with retrospective adoption, for annual periods beginning after December 15,
2017, and interim periods within those annual periods. We are currently evaluating the impact of this guidance on our
statements of cash flows.
Note 4. Statements of Cash Flows
Supplemental cash flow information for the years ended December 31, 2016, 2015, and 2014 is as follows:
($ in thousands)
Cash paid during the period for:
Interest
Federal income tax
Non-cash items:
Exchange of fixed income securities, AFS
Exchange of fixed income securities, HTM
Corporate actions related to equity securities, AFS1
Assets acquired under capital lease arrangements
Non-cash purchase of property and equipment
1Examples of such corporate actions include non-cash acquisitions and stock-splits.
2016
2015
2014
$
22,098
46,405
23,579
—
3,263
3,151
78
21,892
39,500
36,792
15,257
4,239
6,760
—
22,221
22,699
20,781
4,289
334
5,642
338
Included in "Other assets" on the Consolidated Balance Sheet was $36.9 million at December 31, 2016 and $11.9 million at
December 31, 2015 of cash received from the National Flood Insurance Program ("NFIP"), which is restricted to pay flood
claims under the Write Your Own ("WYO") Program.
90
Note 5. Investments
(a) Net unrealized gains on investments included in OCI by asset class were as follows for the years ended December 31, 2016,
2015, and 2014:
($ in thousands)
AFS securities:
Fixed income securities
Equity securities
Total AFS securities
HTM securities:
Fixed income securities
Total HTM securities
Total net unrealized gains
Deferred income tax expense
Net unrealized gains, net of deferred income tax
2016
2015
2014
$
38,781
25,864
64,645
159
159
64,804
(22,681)
42,123
55,689
13,235
68,924
300
300
69,224
(24,228)
44,996
90,336
32,389
122,725
958
958
123,683
(43,289)
80,394
(Decrease) increase in net unrealized gains in OCI, net of deferred income tax
$
(2,873)
(35,398)
28,890
(b) The amortized cost, net unrealized gains and losses, carrying value, unrecognized holding gains and losses, and fair value of
HTM fixed income securities were as follows:
December 31, 2016
($ in thousands)
Obligations of state and political
subdivisions
Corporate securities
CMBS
Total HTM fixed income securities
December 31, 2015
($ in thousands)
Obligations of state and political
subdivisions
Corporate securities
CLO and other ABS
CMBS
Amortized
Cost
$
$
77,466
22,711
1,220
101,397
Amortized
Cost
175,269
20,228
1,030
4,527
Total HTM fixed income securities
$
201,054
Net
Unrealized
Gains
(Losses)
Carrying
Value
Unrecognized
Holding
Gains
Unrecognized
Holding
Losses
Fair
Value
317
(143)
(15)
159
77,783
22,568
1,205
101,556
2,133
1,665
15
3,813
—
(158)
—
(158)
79,916
24,075
1,220
105,211
Net
Unrealized
Gains
(Losses)
Carrying
Value
Unrecognized
Holding
Gains
Unrecognized
Holding
Losses
Fair
Value
848
(185)
(120)
(243)
300
176,117
20,043
910
4,284
201,354
5,763
1,972
118
337
8,190
—
—
—
—
—
181,880
22,015
1,028
4,621
209,544
Unrecognized holding gains and losses of HTM securities are not reflected in the Financial Statements, as they represent fair
value fluctuations from the later of: (i) the date a security is designated as HTM either through purchase or transfer from AFS;
or (ii) the date that an OTTI charge is recognized on an HTM security, through the date of the balance sheet.
91
(c) The cost/amortized cost, unrealized gains and losses, and fair value of AFS securities were as follows:
December 31, 2016
($ in thousands)
AFS fixed income securities:
U.S. government and government agencies
$
Foreign government
Obligations of states and political subdivisions
Cost/
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Corporate securities
CLO and other ABS
CMBS
RMBS
Total AFS fixed income securities
AFS equity securities:
Common stock
Preferred stock
Total AFS equity securities
Total AFS securities
December 31, 2015
($ in thousands)
AFS fixed income securities:
Corporate securities
CLO and other ABS
CMBS
RMBS
Total AFS fixed income securities
AFS equity securities:
Common stock
Preferred stock
Total AFS equity securities
Total AFS securities
U.S. government and government agencies
$
Foreign government
Obligations of states and political subdivisions
$
4,874,648
75,139
26,559
1,366,287
1,976,556
527,876
256,356
524,986
4,753,759
104,663
16,226
120,889
99,485
14,885
1,314,779
1,892,296
244,541
245,252
541,276
4,352,514
181,991
11,825
193,816
$
4,546,330
2,230
322
18,610
27,057
1,439
1,514
3,006
54,178
26,250
274
26,524
80,702
(36)
(16)
(5,304)
(5,860)
(355)
(1,028)
(2,798)
77,333
26,865
1,379,593
1,997,753
528,960
256,842
525,194
(15,397)
4,792,540
(305)
(355)
(660)
130,608
16,145
146,753
(16,057)
4,939,293
4,721
298
44,523
23,407
531
750
4,274
78,504
14,796
477
15,273
93,777
(91)
(2)
(160)
(15,521)
(918)
(2,410)
(3,713)
104,115
15,181
1,359,142
1,900,182
244,154
243,592
541,837
(22,815)
4,408,203
(1,998)
(40)
(2,038)
(24,853)
194,789
12,262
207,051
4,615,254
Cost/
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Unrealized gains and losses of AFS securities represent fair value fluctuations from the later of: (i) the date a security is
designated as AFS; or (ii) the date that an OTTI charge is recognized on an AFS security, through the date of the balance sheet.
These unrealized gains and losses are recorded in AOCI on the Consolidated Balance Sheets.
92
(d) The table below provides our net unrealized/unrecognized loss positions by impairment severity for both AFS and HTM
securities as of December 31, 2016 compared to the prior year:
($ in thousands)
December 31, 2016
December 31, 2015
Number of
Issues
% of
Market/Book
Unrealized/
Unrecognized
Loss
Number of
Issues
% of
Market/Book
Unrealized/
Unrecognized
Loss
456
—
—
—
—
80% - 99% $
16,215
60% - 79%
40% - 59%
20% - 39%
0% - 19%
—
—
—
—
606
3
—
—
—
80% - 99% $
60% - 79%
40% - 59%
20% - 39%
0% - 19%
22,971
1,888
—
—
—
$
16,215
$
24,859
The severity of impairment on the securities in the table above averaged 1% of amortized cost at December 31, 2016 and
December 31, 2015. The decrease in the unrealized/unrecognized loss balance during 2016 was primarily from our AFS
corporate fixed income securities portfolio, which was positively impacted by tightening credit spreads.
Quantitative information regarding unrealized losses on our AFS portfolio is provided below. Our HTM portfolio had $0.2
million in unrealized/unrecognized losses at December 31, 2016 and no unrealized/unrecognized losses at December 31, 2015.
December 31, 2016
Less than 12 months
12 months or longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
($ in thousands)
AFS fixed income securities:
U.S. government and government agencies
$
Foreign government
Obligations of states and political subdivisions
Corporate securities
CLO and other ABS
CMBS
RMBS
6,419
13,075
306,509
462,902
189,795
82,492
279,480
(36)
(16)
(5,304)
(5,771)
(354)
(1,021)
(2,489)
—
—
—
4,913
319
1,645
8,749
Total AFS fixed income securities
1,340,672
(14,991)
15,626
AFS equity securities:
Common stock
Preferred stock
Total AFS equity securities
11,271
6,168
17,439
(305)
(355)
(660)
—
—
—
—
—
—
(89)
(1)
(7)
(309)
(406)
—
—
—
6,419
13,075
306,509
467,815
190,114
84,137
288,229
(36)
(16)
(5,304)
(5,860)
(355)
(1,028)
(2,798)
1,356,298
(15,397)
11,271
6,168
17,439
(305)
(355)
(660)
Total AFS securities
$
1,358,111
(15,651)
15,626
(406)
1,373,737
(16,057)
93
December 31, 2015
Less than 12 months
12 months or longer
Total
($ in thousands)
AFS fixed income securities:
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
U.S. government and government agencies
$
16,006
Foreign government
Obligations of states and political subdivisions
Corporate securities
CLO and other ABS
CMBS
RMBS
1,067
28,617
761,479
197,477
146,944
264,914
(87)
(2)
(160)
(12,671)
(807)
(2,196)
(1,992)
396
—
—
50,382
12,022
15,385
63,395
Total AFS fixed income securities
1,416,504
(17,915)
141,580
AFS equity securities:
Common stock
Preferred stock
Total AFS equity securities
31,148
1,531
32,679
Total AFS securities
$
1,449,183
(1,998)
(40)
(2,038)
(19,953)
—
—
—
(4) $
16,402
$
—
—
(2,850)
(111)
(214)
(1,721)
(4,900)
—
—
—
1,067
28,617
811,861
209,499
162,329
328,309
(91)
(2)
(160)
(15,521)
(918)
(2,410)
(3,713)
1,558,084
(22,815)
31,148
1,531
32,679
(1,998)
(40)
(2,038)
141,580
(4,900) $
1,590,763
$
(24,853)
We do not intend to sell any of the securities in the tables above, nor do we believe we will be required to sell any of these
securities. Additionally, we have reviewed these securities in accordance with our OTTI policy, as described in Note 2.
“Summary of Significant Accounting Policies” of this Form 10-K and have concluded that they are temporarily impaired. This
conclusion reflects our current judgment as to the financial position and future prospects of the entity that issued the 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.
(e) Fixed income securities at December 31, 2016, by contractual maturity are shown below. MBS are included in the maturity
tables using the estimated average life of each security. Expected maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Listed below are HTM fixed income securities at December 31, 2016:
($ in thousands)
Due in one year or less
Due after one year through five years
Due after five years through 10 years
Total HTM fixed income securities
Listed below are AFS fixed income securities at December 31, 2016:
($ in thousands)
Due in one year or less
Due after one year through five years
Due after five years through 10 years
Due after 10 years
Total AFS fixed income securities
Carrying Value
Fair Value
$
$
55,505
37,536
8,515
101,556
56,249
39,853
9,109
105,211
Fair Value
374,080
2,141,596
2,090,677
186,187
4,792,540
$
$
(f) We evaluate the alternative investments and tax credit investments included in our other investments portfolio to determine
whether those investments are VIEs and if so, whether consolidation is required. A VIE is an entity that either has equity
investors that lack certain essential characteristics of a controlling financial interest or lack sufficient funds to finance its own
activities without financial support provided by other entities. We consider several significant factors in determining if our
investments are VIEs and if we are the primary beneficiary, including whether we have: (i) the power to direct activities of the
VIE; (ii) the ability to remove the decision maker of the VIE; (iii) the ability to participate in making decisions that are
significant to the VIE; and (iv) the obligation to absorb losses and the right to receive benefits that could potentially be
94
significant to the VIE. We have determined that the investments in our other investment portfolio are VIEs, but that we are not
the primary beneficiary and therefore, consolidation is not required.
The following table summarizes our other investment portfolio by strategy:
Other Investments
December 31, 2016
December 31, 2015
($ in thousands)
Alternative Investments
Private equity
Private credit
Real assets
Total alternative investments
Other securities
Carrying
Value
Remaining
Commitment
Maximum
Exposure to Loss1
Carrying
Value
Remaining
Commitment
Maximum
Exposure to Loss1
$
41,135
28,193
14,486
83,814
18,583
76,774
40,613
22,899
140,286
3,400
117,909
68,806
37,385
224,100
21,983
35,088
13,246
19,500
67,834
10,008
30,204
15,129
25,820
71,153
3,200
65,292
28,375
45,320
138,987
13,208
Total other investments
1The maximum exposure to loss includes both the carry value of these investments and the related unfunded commitments. In addition, tax credits that have
been previously recognized in Other securities are subject to the risk of recapture, which we do not consider significant.
143,686
102,397
246,083
77,842
74,353
$
152,195
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.
•
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 privately-held
corporations, for long-term capital appreciation. This strategy makes private equity investments in growth equity and
buyout partnerships.
Our private credit strategy includes the following:
• Middle Market Lending: This strategy provides privately negotiated loans to U.S. middle market companies.
Typically, these are floating rate, senior secured loans diversified across industries. Loans can be made to private
equity sponsor-backed companies or non-sponsored companies to finance LBOs, recapitalizations, and acquisitions.
• Mezzanine Financing: This strategy provides privately negotiated fixed income securities, generally with an equity
component, to LBO firms and private and publicly traded large, mid, and small-cap companies to finance LBOs,
recapitalizations, and acquisitions.
• Distressed Debt: This strategy makes direct and indirect investments in debt and equity securities of companies that
are experiencing financial and/or operational distress. Investments include buying indebtedness of bankrupt or
financially troubled companies, small balance loan portfolios, special situations and capital structure arbitrage trades,
commercial real estate mortgages, and similar non-U.S. securities and debt obligations.
Our real assets strategy includes the following:
• Energy & Power Generation: This strategy makes energy and power generation investments in cash flow generating
infrastructure assets. Energy investments are made in a variety of industries including oil, natural gas, and coal.
These investments are diversified across the energy supply chain and include assets in the exploration and production,
pipeline, and refining sectors. Power generation includes investments in: (i) conventional power, such as natural gas
and oil; (ii) renewable power, such as wind and solar; and (iii) electric transmission and distribution.
• Real Estate: This strategy invests opportunistically in real estate in North America, Europe, and Asia via direct
property ownership, joint ventures, mortgages, and investments in equity and debt instruments.
95
Our alternative investment strategies generally employ low or moderate levels of leverage and use hedging only to reduce
foreign exchange or interest rate volatility. At this time, our alternative investment strategies do not include hedge funds. We
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 in the limited partnerships. We anticipate
that the general partners of these alternative investments will liquidate their underlying investment portfolios through 2030.
The following tables set forth summarized financial information for our other investments portfolio, including the portion not
owned by us. The investments are carried under the equity method of accounting. The last line in the income statement
information table below reflects our share of the aggregate income, which is the portion 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
September 30,
($ in millions)
Investments
Total assets
Total liabilities
Total partners’ capital
Income Statement Information
12 months ended September 30,
($ in millions)
Net investment income
Realized gains
Net change in unrealized (depreciation) appreciation
Net income
Insurance Subsidiaries' alternative investments income
$
$
$
2016
2015
11,244
12,075
1,802
10,273
2016
2015
2014
(44)
1,374
(719)
611
3.1
129
1,187
(1,364)
(48)
(1.9)
7,527
8,515
316
8,199
226
581
1,098
1,905
13.6
(g) We did not have exposure to any credit concentration risk of a single issuer greater than 10% of our stockholders' equity,
other than certain U.S. government agencies, as of December 31, 2016 or December 31, 2015.
(h) We have pledged certain AFS fixed income securities as collateral related to our relationships with the Federal Home Loan
Bank of Indianapolis ("FHLBI") and the Federal Home Loan Bank of New York ("FHLBNY"). In addition, certain securities
were on deposit with various state and regulatory agencies at December 31, 2016 to comply with insurance laws. We retain all
rights regarding securities pledged as collateral.
The following table summarizes the market value of these securities at December 31, 2016:
($ in millions)
U.S. government and government agencies
CMBS
RMBS
Total pledged as collateral
FHLBI
Collateral
FHLBNY
Collateral
State and
Regulatory
Deposits
Total
$
$
7.4
0.5
59.6
67.5
—
—
58.2
58.2
24.8
—
—
24.8
32.2
0.5
117.8
150.5
96
(i) The components of pre-tax net investment income earned were as follows:
($ in thousands)
Fixed income securities
Equity securities
Short-term investments
Other investments
Investment expenses
Net investment income earned
2016
2015
2014
$
$
129,306
123,230
7,368
686
2,940
(9,546)
130,754
9,161
112
(1,890)
(9,297)
121,316
126,489
7,449
66
13,580
(8,876)
138,708
(j) The following tables summarize OTTI by asset type for the periods indicated:
2016
($ in thousands)
AFS fixed income securities:
Obligations of states and political subdivisions
Corporate securities
CLO and other ABS
CMBS
RMBS
Total AFS fixed income securities
AFS equity securities:
Common stock
Preferred stock
Total AFS equity securities
Total OTTI losses
2015
($ in thousands)
AFS fixed income securities:
Corporate securities
RMBS
Total AFS fixed income securities
AFS equity securities:
Common stock
Preferred stock
Total AFS equity securities
Total OTTI losses
2014
($ in thousands)
AFS fixed income securities:
RMBS
Total AFS fixed income securities
AFS equity securities:
Common stock
Total AFS equity securities
Other investments
Total OTTI losses
Gross
Included in OCI
Recognized in
Earnings
2,797
1,880
19
220
275
5,191
3,316
2
3,318
8,509
—
—
—
—
10
10
—
—
—
10
2,797
1,880
19
220
265
5,181
3,316
2
3,318
8,499
Gross
Included in OCI
Recognized in
Earnings
2,188
1
2,189
15,996
181
16,177
18,366
—
—
—
—
—
—
—
2,188
1
2,189
15,996
181
16,177
18,366
Gross
Included in OCI
Recognized in
Earnings
7
7
10,517
10,517
580
11,104
—
—
—
—
—
—
7
7
10,517
10,517
580
11,104
$
$
$
$
$
$
97
The majority of the OTTI charges in 2016 were on securities for which we had the intent to sell to facilitate our fixed income
strategy change to more actively manage the portfolio to maximize after-tax income and total return, while maintaining a
similar level of credit quality and duration risk. Charges in 2015 and 2014 related to equity securities for which we had the
intent to sell in relation to a change in our high-dividend yield strategy, with the remaining charges relating to securities that we
did not believe would recover in the near term.
(k) The components of net realized gains, excluding OTTI charges, were as follows:
($ in thousands)
HTM fixed income securities
Gains
Losses
AFS fixed income securities
Gains
Losses
AFS equity securities
Gains
Losses
Short-term investments
Gains
Losses
Other investments
Gains
Losses
Total net realized investment gains
2016
2015
2014
$
$
3
(1)
7,741
(11,411)
8,108
(864)
—
(13)
3
(4)
3,562
5
(1)
4,515
(312)
29,168
(1,347)
—
—
162
(653)
31,537
2
(20)
1,945
(392)
36,871
(704)
—
—
1
—
37,703
Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold.
Proceeds from the sale of AFS securities were $1,046.1 million in 2016, $234.1 million in 2015, and $259.0 million in 2014.
Net realized gains in the table above were driven by the following:
•
•
•
2016: A repositioning of our equity portfolio partially offset by net losses in our AFS fixed income portfolio related to
the change in our strategy to more actively manage this portfolio.
2015: A change in our dividend strategy from a quantitative, model-driven stock selection strategy to a
fundamentally-based stock selection approach that incorporates an assessment of the sustainability and growth rate of
a company's dividends and future cash flow.
2014: A quantitative rebalancing of our dividend yield strategy holdings within our equity portfolio.
98
Note 6. Comprehensive Income
(a) The components of comprehensive income, both gross and net of tax, for 2016, 2015, and 2014 were as follows:
2016
($ in thousands)
Net income
Components of OCI:
Unrealized losses (gains) on investment securities:
Unrealized holding losses during the year
Non-credit portion of other-than-temporary impairments recognized in other
comprehensive income
Amounts reclassified into net income:
HTM securities
Non-credit OTTI
Realized losses on AFS securities
Net unrealized losses
Defined benefit pension and post-retirement plans:
Net actuarial loss
Amounts reclassified into net income:
Net actuarial loss
Defined benefit pension and post-retirement plans
Other comprehensive loss
Comprehensive income
2015
($ in thousands)
Net income
Components of OCI:
Unrealized gains on investment securities:
Unrealized holding losses during the year
Amounts reclassified into net income:
HTM securities
Non-credit OTTI
Realized gains on AFS securities
Net unrealized losses
Defined benefit pension and post-retirement plans:
Net actuarial gain
Amounts reclassified into net income:
Net actuarial loss
Defined benefit pension and post-retirement plans
Other comprehensive loss
Comprehensive income
2014
($ in thousands)
Net income
Components of OCI:
Unrealized gains on investment securities:
Unrealized holding gains during the year
Amounts reclassified into net income:
HTM securities
Non-credit OTTI
Realized gains on AFS securities
Net unrealized gains
Defined benefit pension and post-retirement plans:
Net actuarial loss
Amounts reclassified into net income:
Net actuarial loss
Defined benefit pension and post-retirement plans
Other comprehensive loss
Comprehensive income
99
Gross
Tax
Net
$
219,955
61,460
158,495
(9,195)
(10)
(141)
213
4,713
(4,420)
(12,079)
6,462
(5,617)
(10,037)
209,918
(3,218)
(4)
(49)
75
1,649
(1,547)
(4,227)
2,262
(1,965)
(3,512)
57,948
(5,977)
(6)
(92)
138
3,064
(2,873)
(7,852)
4,200
(3,652)
(6,525)
151,970
Gross
Tax
Net
232,692
66,831
165,861
(40,221)
(14,078)
(26,143)
(580)
357
(14,016)
(54,460)
2,438
7,077
9,515
(44,945)
187,747
(203)
125
(4,906)
(19,062)
(377)
232
(9,110)
(35,398)
853
1,585
2,477
3,330
(15,732)
51,099
4,600
6,185
(29,213)
136,648
Gross
Tax
Net
197,131
55,304
141,827
72,940
25,529
47,411
(1,299)
1,669
(28,864)
44,446
(455)
584
(10,102)
15,556
(844)
1,085
(18,762)
28,890
(54,136)
(18,947)
(35,189)
1,902
(52,234)
(7,788)
189,343
666
(18,281)
(2,725)
52,579
1,236
(33,953)
(5,063)
136,764
$
$
$
$
$
(b) The balances of, and changes in, each component of AOCI (net of taxes) as of December 31, 2016 and 2015 were as
follows:
Net Unrealized (Loss) Gain on Investment Securities
($ in thousands)
OTTI Related
HTM Related
All Other
Investments
Subtotal
Defined Benefit
Pension and Post-
retirement Plans
Total AOCI
Balance, December 31, 2014
$
OCI before reclassifications
Amounts reclassified from AOCI
Net current period OCI
Balance, December 31, 2015
OCI before reclassifications
Amounts reclassified from AOCI
Net current period OCI
Balance, December 31, 2016
$
(514)
—
232
232
(282)
(6)
138
132
(150)
623
(52)
(377)
(429)
194
—
(92)
(92)
102
80,284
(26,091)
(9,110)
(35,201)
45,083
(5,977)
3,064
(2,913)
42,170
80,393
(26,143)
(9,255)
(35,398)
44,995
(5,983)
3,110
(2,873)
42,122
(60,605)
1,585
4,600
6,185
(54,420)
(7,852)
4,200
(3,652)
(58,072)
19,788
(24,558)
(4,655)
(29,213)
(9,425)
(13,835)
7,310
(6,525)
(15,950)
The reclassifications out of AOCI are as follows:
($ in thousands)
HTM related
Unrealized losses on HTM disposals
$
Amortization of net unrealized gains on HTM
securities
OTTI related
Non-credit OTTI on disposed securities
Realized (losses) gains on AFS
Realized (losses) gains on AFS disposals
Defined benefit pension and post-retirement life plans
Net actuarial loss
Total defined benefit pension and post-retirement life
Year ended
December 31, 2016
Year ended
December 31, 2015
Affected Line Item in the Consolidated
Statement of Income
169
(310)
(141)
49
(92)
213
213
(75)
138
4,713
4,713
(1,649)
3,064
1,486
4,976
6,462
(2,262)
4,200
308 Net realized (losses) gains
(888) Net investment income earned
(580)
Income before federal income tax
203 Total federal income tax expense
(377) Net income
357 Net realized (losses) gains
357
Income before federal income tax
(125) Total federal income tax expense
232 Net income
(14,016) Net realized (losses) gains
(14,016)
Income before federal income tax
4,906 Total federal income tax expense
(9,110) Net income
1,538 Losses and loss expenses incurred
5,539
Policy acquisition costs
7,077
Income before federal income tax
(2,477) Total federal income tax expense
4,600 Net income
Total reclassifications for the period
$
7,310
(4,655) Net income
100
Note 7. Fair Value Measurements
The following table presents the carrying amounts and estimated fair values of our financial instruments as of December 31,
2016 and 2015:
($ in thousands)
Financial Assets
Fixed income securities:
HTM
AFS
Equity securities, AFS
Short-term investments
Financial Liabilities
Short-term debt:
0.63% borrowings from FHLBI
1.25% borrowings from FHLBI
Total short-term debt
Long-term debt:
7.25% Senior Notes
6.70% Senior Notes
5.875% Senior Notes
1.61% Borrowings from FHLBNY
1.56% Borrowings from FHLBNY
3.03% Borrowings from FHLBI
Subtotal long-term debt
Unamortized debt issuance costs
Total long-term debt
December 31, 2016
December 31, 2015
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
101,556
4,792,540
146,753
221,701
105,211
4,792,540
146,753
221,701
201,354
4,408,203
207,051
194,819
209,544
4,408,203
207,051
194,819
—
—
—
56,148
108,333
176,860
24,286
24,219
59,313
449,159
—
—
—
49,901
99,430
185,000
25,000
25,000
60,000
444,331
(5,664)
438,667
15,000
45,000
60,000
49,898
99,415
185,000
—
—
—
334,313
(6,121)
328,192
14,977
45,083
60,060
56,929
110,363
192,474
—
—
—
359,766
$
$
For discussion regarding the fair value techniques of our financial instruments, refer to Note 2. "Summary of Significant
Accounting Policies" in this Form 10-K.
101
The following tables provide quantitative disclosures of our financial assets that were measured at fair value at December 31,
2016 and 2015:
December 31, 2016
Fair Value Measurements Using
($ in thousands)
Description
Measured on a recurring basis:
AFS fixed income securities:
Assets Measured
at Fair Value
12/31/16
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities
(Level 1)1
Significant Other
Observable Inputs
(Level 2)1
Significant
Unobservable
Inputs
(Level 3)
U.S. government and government agencies
$
Foreign government
Obligations of states and political subdivisions
Corporate securities
CLO and other ABS
CMBS
RMBS
Total AFS fixed income securities
AFS equity securities:
Common stock
Preferred stock
Total AFS equity securities
Total AFS securities
Short-term investments
Total assets measured at fair value
$
77,333
26,865
1,379,593
1,997,753
528,960
256,842
525,194
4,792,540
130,608
16,145
146,753
4,939,293
221,701
5,160,994
27,520
—
—
—
—
—
—
27,520
122,932
16,145
139,077
166,597
221,701
388,298
49,813
26,865
1,379,593
1,997,753
528,960
256,842
525,194
4,765,020
—
—
—
4,765,020
—
4,765,020
—
—
—
—
—
—
—
—
7,676
—
7,676
7,676
—
7,676
December 31, 2015
Fair Value Measurements Using
($ in thousands)
Description
Measured on a recurring basis:
AFS fixed income securities:
Assets Measured at
Fair Value 12/31/15
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities
(Level 1)1
Significant Other
Observable Inputs
(Level 2)1
Significant
Unobservable
Inputs
(Level 3)
U.S. government and government agencies
$
Foreign government
Obligations of states and political subdivisions
Corporate securities
CLO and other ABS
CMBS
RMBS
Total AFS fixed income securities
AFS equity securities:
Common stock
Preferred stock
Total AFS equity securities
Total AFS securities
Short-term investments
Total assets measured at fair value
$
1 There were no transfers of securities between Level 1 and Level 2.
104,115
15,181
1,359,142
1,900,182
244,154
243,592
541,837
4,408,203
194,789
12,262
207,051
4,615,254
194,819
4,810,073
102
42,702
—
—
—
—
—
—
61,413
15,181
1,359,142
1,900,182
244,154
243,592
541,837
42,702
4,365,501
191,517
12,262
203,779
246,481
194,819
441,300
—
—
—
4,365,501
—
4,365,501
—
—
—
—
—
—
—
—
3,272
—
3,272
3,272
—
3,272
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 2016:
2016
($ in thousands)
Fair value, December 31, 2015
Total net (losses) gains for the period included in:
OCI
Net income
Purchases
Sales
Issuances
Settlements
Transfers into Level 3
Transfers out of Level 3
Fair value, December 31, 2016
Common Stock
$
3,272
—
—
6,204
(1,800)
—
—
—
—
$
7,676
The following tables provide quantitative information regarding our financial assets and liabilities that were disclosed at fair
value at December 31, 2016 and 2015:
December 31, 2016
Fair Value Measurements Using
($ in thousands)
Financial Assets
HTM:
Obligations of states and political subdivisions
Corporate securities
CMBS
Total HTM fixed income securities
Financial Liabilities
Long-term debt:
7.25% Senior Notes
6.70% Senior Notes
5.875% Senior Notes
1.61% Borrowings from FHLBNY
1.56% Borrowings from FHLBNY
3.03% Borrowings from FHLBI
Total long-term debt
Assets/Liabilities
Disclosed at
Fair Value
12/31/2016
Quoted Prices in
Active Markets
for Identical
Assets/Liabilities
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
79,916
24,075
1,220
105,211
56,148
108,333
176,860
24,286
24,219
59,313
—
—
—
—
—
—
176,860
—
—
—
$
449,159
176,860
79,916
16,565
1,220
97,701
56,148
108,333
—
24,286
24,219
59,313
272,299
—
7,510
—
7,510
—
—
—
—
—
—
—
103
December 31, 2015
Fair Value Measurements Using
($ in thousands)
Financial Assets
HTM:
Obligations of states and political subdivisions
Corporate securities
CLO and other ABS
CMBS
Total HTM fixed income securities
Financial Liabilities
Short-term debt:
0.63% borrowings from FHLBI
1.25% borrowings from FHLBI
Total short-term debt
Long-term debt:
7.25% Senior Notes
6.70% Senior Notes
5.875% Senior Notes
Total long-term debt
Assets/Liabilities
Disclosed at
Fair Value
12/31/2015
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
$
181,880
22,015
1,028
4,621
209,544
14,977
45,083
60,060
56,929
110,363
192,474
359,766
—
—
—
—
—
—
—
—
—
—
192,474
192,474
181,880
18,679
1,028
4,621
206,208
14,977
45,083
60,060
56,929
110,363
—
167,292
—
3,336
—
—
3,336
—
—
—
—
—
—
—
Note 8. Reinsurance
Our Financial Statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to the
acceptance of certain insurance risks that other insurance entities have underwritten. Ceded reinsurance involves transferring
certain insurance risks (along with the related written and earned premiums) that we have underwritten to other insurance
companies that agree to share these risks. The primary purpose of ceded reinsurance is to protect the Insurance Subsidiaries
from potential losses in excess of the amount that we are prepared to accept. Our major treaties covering property, property
catastrophe, and casualty business are excess of loss contracts. In addition, we have an intercompany quota share pooling
arrangement and other minor quota share treaties.
As a Standard Commercial Lines and E&S Lines writer, we are required to participate in Terrorism Risk Insurance Program
Reauthorization Act ("TRIPRA"), which was extended by Congress to December 31, 2020. TRIPRA requires private insurers
and the United States government to share the risk of loss on future acts of terrorism certified by the U.S. Secretary of the
Treasury. Under TRIPRA, each participating insurer is responsible for paying a deductible of specified losses before federal
assistance is available. This deductible is based on a percentage of the prior year’s applicable Standard Commercial Lines and
E&S Lines premiums. In 2017, our deductible is approximately $304 million. For losses above the deductible, the federal
government will pay 83% of losses to an industry limit of $100 billion, and the insurer retains 17%. The federal share of losses
will be reduced by 1% each year to 80% by 2020.
The Insurance Subsidiaries remain liable to policyholders to the extent that any reinsurer becomes unable to meet their
contractual obligations. We evaluate and monitor the financial condition of our reinsurers under voluntary reinsurance
arrangements to minimize our exposure to significant losses from reinsurer insolvencies. On an ongoing basis, we review
amounts outstanding, length of collection period, changes in reinsurer credit ratings, and other relevant factors to determine
collectability of reinsurance recoverables. The allowance for uncollectible reinsurance recoverables was $5.5 million at
December 31, 2016 and $5.7 million at December 31, 2015.
104
The following table represents our total reinsurance balances segregated by reinsurer to depict our concentration of risk
throughout our reinsurance portfolio:
($ in thousands)
Total reinsurance recoverables
Total prepaid reinsurance premiums
Total reinsurance balance
Federal and state pools1:
NFIP
New Jersey Unsatisfied Claim Judgment Fund
Other
Total federal and state pools
Remaining reinsurance balance
Munich Re Group (A.M. Best rated "A+")
Hannover Ruckversicherungs AG (A.M. Best rated "A+")
AXIS Reinsurance Company (A.M. Best rated "A+")
Swiss Re Group (A.M. Best rated "A+")
Partner Reinsurance Company of the U.S. (A.M. Best rated “A”)
All other reinsurers
Total reinsurers
Less: collateral2
Reinsurers, net of collateral
As of December 31, 2016
As of December 31, 2015
Reinsurance
Balances
% of
Reinsurance
Balance
Reinsurance
Balances
% of
Reinsurance
Balance
$
$
$
621,537
146,282
767,819
211,181
65,574
3,227
279,982
487,837
119,520
106,298
59,737
50,494
21,125
130,663
487,837
(113,763)
$
374,074
$
$
$
561,968
140,889
702,857
164,130
71,884
3,136
239,150
463,707
112,889
99,535
53,374
51,340
20,748
125,821
463,707
(106,449)
$
357,258
27%
9
—
36
64
16
13
8
7
3
17
64%
24%
10
—
34
66
16
14
8
7
3
18
66%
1 Considered to have minimal risk of default.
2 Includes letters of credit, trust funds, and funds held against reinsurance recoverables.
Note: Some amounts may not foot due to rounding.
Under our reinsurance arrangements, which are prospective in nature, reinsurance premiums ceded are recorded as prepaid
reinsurance and amortized over the remaining contract period in proportion to the reinsurance protection provided, or recorded
periodically, as per the terms of the contract, in a direct relationship to the gross premium recording. Reinsurance recoveries
are recognized as gross losses are incurred.
The following table contains a listing of direct, assumed, and ceded reinsurance amounts for premiums written, premiums
earned, and losses and loss expenses incurred:
($ in thousands)
Premiums written:
Direct
Assumed
Ceded
Net
Premiums earned:
Direct
Assumed
Ceded
Net
Losses and loss expenses incurred:
Direct
Assumed
Ceded
Net
2016
2015
2014
2,577,259
28,779
(368,750)
2,237,288
2,484,715
28,214
(363,357)
2,149,572
1,560,356
22,708
(348,267)
1,234,797
2,403,519
23,848
(357,463)
2,069,904
2,330,267
23,209
(363,567)
1,989,909
1,274,872
16,996
(143,327)
1,148,541
2,228,270
26,306
(369,296)
1,885,280
2,183,258
34,653
(365,302)
1,852,609
1,314,864
26,187
(183,550)
1,157,501
$
$
$
$
$
$
105
The ceded premiums and losses related to our participation in the NFIP, under which 100% of our flood premiums, and losses
and loss expenses are ceded to the NFIP, are as follows:
Ceded to NFIP ($ in thousands)
Ceded premiums written
Ceded premiums earned
Ceded losses and loss expenses incurred
2016
2015
2014
$
(232,245)
(227,882)
(239,891)
(228,907)
(233,940)
(62,078)
(237,718)
(234,224)
(57,323)
Note 9. Reserves for Losses and Loss Expenses
(a) The table below provides a roll forward of reserves for losses and loss expenses for beginning and ending reserve balances:
($ in thousands)
2016
2015
2014
Gross reserves for losses and loss expenses, at beginning of year
$
3,517,728
Less: reinsurance recoverable on unpaid losses and loss expenses, at beginning of year
Net reserves for losses and loss expenses, at beginning of year
Incurred losses and loss expenses for claims occurring in the:
Current year
Prior years
Total incurred losses and loss expenses
Paid losses and loss expenses for claims occurring in the:
Current year
Prior years
Total paid losses and loss expenses
Net reserves for losses and loss expenses, at end of year
Add: Reinsurance recoverable on unpaid losses and loss expenses, at end of year
551,019
2,966,709
1,300,565
(65,768)
1,234,797
450,811
670,176
1,120,987
3,080,519
611,200
Gross reserves for losses and loss expenses at end of year
$
3,691,719
3,477,870
571,978
2,905,892
1,217,550
(69,009)
1,148,541
446,550
641,174
1,087,724
2,966,709
551,019
3,517,728
3,349,770
540,839
2,808,931
1,216,770
(59,269)
1,157,501
468,478
592,062
1,060,540
2,905,892
571,978
3,477,870
Our net losses and loss expense reserves increased by $113.8 million in 2016, $60.8 million in 2015, and $97.0 million in 2014.
The losses and loss expense reserves are net of anticipated recoveries for salvage and subrogation claims, which amounted to
$64.9 million for 2016, $62.1 million for 2015, and $65.1 million for 2014. The changes in the net losses and loss expense
reserves were the result of growth in exposures, particularly associated with our E&S Lines of business, anticipated loss trends,
and normal reserve changes inherent in the uncertainty in establishing reserves for losses and loss expenses. As additional
information is collected in the loss settlement process, reserves are adjusted accordingly. These adjustments are reflected in the
Consolidated Statements of Income in the period in which such adjustments are identified. These changes could have a material
impact on the results of operations of future periods when the adjustments are made.
In 2016, we experienced overall net favorable loss development of $65.8 million, compared to $69.0 million in 2015, and $59.3
million in 2014. The following table summarizes the prior year development by line of business:
(Favorable)/Unfavorable Prior Year Development
($ in millions)
General Liability
Commercial Automobile
Workers Compensation
Businessowners' Policies
Commercial Property
Homeowners
Personal Automobile
E&S
Other
Total
2016
2015
2014
$
$
(45.0)
25.3
(56.0)
1.8
0.3
1.7
1.0
7.1
(2.0)
(65.8)
(51.0)
2.4
(37.0)
2.2
(3.0)
1.5
0.4
15.5
—
(69.0)
(43.9)
(4.1)
—
1.9
(2.1)
(4.0)
(10.8)
3.7
—
(59.3)
The prior accident year development during 2016 was favorable by $65.8 million, which included $69.0 million of net favorable
casualty development and $3.2 million of unfavorable property development. The net favorable casualty reserve development
was largely driven by the general liability line of business, including products liability and excess liability, and by the workers
compensation line. Partially offsetting this net favorable development was the commercial auto line of business, which
experienced $25.0 million of unfavorable casualty development in 2016. In addition, our E&S Lines experienced unfavorable
casualty development of $6.0 million in 2016.
106
The majority of the 2016 net favorable development was attributable to accident years 2013 and prior, driven by the general
liability and workers compensation lines of business. This net favorable development was partially offset by unfavorable
development in accident years 2014 and 2015, which was attributable to our commercial auto and E&S Lines of business. The
unfavorable development in our commercial auto line of business was driven primarily by bodily injury liability for accident
years 2014 and 2015. The unfavorable development in accident year 2014 was driven by higher than expected severity, whereas
accident year 2015 was driven by higher than expected frequency and severity.
The prior accident year development during 2015 was favorable by $69.0 million, which included $67.0 million of net favorable
casualty development and $2.0 million of favorable property development. The net favorable casualty reserve development was
largely driven by the general liability and workers compensation lines of business. For workers compensation, this was a
significant change from 2014, during which period this line experienced no development. Our E&S Lines experienced
unfavorable casualty development of $15.5 million in 2015.
The majority of the 2015 net favorable development was attributable to accident years 2009 through 2013, driven by general
liability and workers compensation lines of business. This net favorable development was partially offset by unfavorable
development in accident years 2012 through 2014, which was attributable to our E&S Lines.
The prior accident year development during 2014 was favorable by $59.3 million, which included $48.2 million of net favorable
casualty development and $11.1 million of property development. The property development was primarily related to a prior year
reinsurance recoverable. The net favorable casualty reserve development was largely driven by the general liability and personal
automobile lines of business. Conversely, businessowners' policies and our E&S Lines experienced unfavorable emergence in
2014.
The majority of the 2014 net favorable development was attributable to accident years 2010 through 2012, although earlier
accident years also developed favorably. The general liability, commercial automobile, and personal automobile lines of business
all contributed to this development, partially offset by businessowners’ liability. The overall favorable development for accident
years 2012 and prior was partially offset by unfavorable development in accident year 2013, which was largely attributable to
commercial automobile liability, and partially E&S Lines casualty.
(b) Reserves established for liability insurance include exposure to asbestos and environmental claims. These claims have arisen
primarily from insured exposures in municipal government, small non-manufacturing commercial risk, and homeowners policies.
The emergence of these claims is slow and highly unpredictable. There are significant uncertainties in estimating our exposure to
asbestos and environmental claims (for both case and IBNR reserves) resulting from lack of relevant historical data, the delayed
and inconsistent reporting patterns associated with these claims, and uncertainty as to the number and identity of claimants and
complex legal and coverage issues. Legal issues that arise in asbestos and environmental cases include federal or state venue,
choice of law, causation, admissibility of evidence, allocation of damages and contribution among joint defendants, successor and
predecessor liability, and whether direct action against insurers can be maintained. Coverage issues that arise in asbestos and
environmental cases include the interpretation and application of policy exclusions, the determination and calculation of policy
limits, the determination of the ultimate amount of a loss, the extent to which a loss is covered by a policy, if at all, the obligation
of an insurer to defend a claim, and the extent to which a party can prove the existence of coverage. Courts have reached different
and sometimes inconsistent conclusions on these legal and coverage issues. We do not discount to present value that portion of
our losses and loss expense reserves expected to be paid in future periods.
The following table details our losses and loss expense reserves for various asbestos and environmental claims:
($ in millions)
Asbestos
Landfill sites
Leaking underground storage tanks
Total
2016
Gross
Net
$
$
7.9
12.8
9.3
30.0
6.6
8.1
8.0
22.7
Estimating IBNR reserves for asbestos and environmental claims is difficult because of the delayed and inconsistent reporting
patterns associated with these claims. In addition, there are significant uncertainties associated with estimating critical
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 asbestos and
107
environmental losses. 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 as, prior to the introduction of the
absolute pollution exclusion endorsement in the mid-1980’s, we were primarily a personal lines carrier and therefore do not have
broad exposure to asbestos and environmental claims. Additionally, we are the primary insurance carrier on the majority of these
exposures, which provides more certainty in our reserve position compared to other insurance carriers.
The following table provides a roll forward of gross and net asbestos and environmental incurred losses and loss expenses and
related reserves thereon:
($ in thousands)
Asbestos
Reserves for losses and loss expenses at beginning of year
Incurred losses and loss expenses
Less: losses and loss expenses paid
Reserves for losses and loss expenses at the end of year
Environmental
Reserves for losses and loss expenses at beginning of year
Incurred losses and loss expenses
Less: losses and loss expenses paid
Reserves for losses and loss expenses at the end of year
Total Asbestos and Environmental Claims
Reserves for losses and loss expenses at beginning of year
Incurred losses and loss expenses
Less: losses and loss expenses paid
Reserves for losses and loss expenses at the end of year
2016
2015
2014
Gross
Net
Gross
Net
Gross
Net
$
$
$
$
$
$
8,024
77
(254)
7,847
22,387
1,406
(1,678)
22,115
30,411
1,483
(1,932)
29,962
6,793
77
(255)
6,615
16,368
1,303
(1,570)
16,101
23,161
1,380
(1,825)
22,716
8,751
(428)
(299)
8,024
21,902
3,396
(2,911)
22,387
30,653
2,968
(3,210)
30,411
7,314
(77)
(444)
6,793
15,680
3,397
(2,709)
16,368
22,994
3,320
(3,153)
23,161
8,897
60
(206)
8,751
23,867
107
(2,072)
21,902
32,764
167
(2,278)
30,653
7,518
—
(204)
7,314
17,649
—
(1,969)
15,680
25,167
—
(2,173)
22,994
(c) The following is information about incurred and paid claims development as of December 31, 2016, net of reinsurance, as well
as cumulative claim frequency and the total of IBNR liabilities. During the experience period, we implemented a series of
claims-related initiatives and claims management changes. These initiatives focused on claims handling and reserving, medical
claims costs, and loss adjustment expenses. As a result of these initiatives, several historical patterns have changed and may no
longer be appropriate to use as the sole basis for projections.
The information about incurred and paid claims development for the years ended December 31, 2007 to 2015 is presented as
supplementary information.
All Lines
(in thousands)
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
As of
December 31, 2016
Accident
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
IBNR
$ 1,038,585 1,066,670 1,047,912 1,028,546 1,028,956 1,015,897 1,003,552
998,496
957,247
988,584
990,931
920,143
941,972
950,114
964,862
916,691
973,742
947,306
883,590
977,959
936,975
927,958
870,057
869,927
956,600
943,118
922,404
1,042,576 1,061,667 1,062,233 1,056,107 1,033,518
1,023,726
992,673
931,785
857,960
989,709
926,017
853,401
915,131
42,970
48,590
49,532
65,625
82,565
1,065,437 1,071,290 1,020,655
998,028
973,089
101,992
1,044,142 1,062,045 1,047,230
1,021,007
182,613
1,107,513 1,133,798
1,146,990
278,689
1,114,081
1,130,513
375,894
1,188,608
589,938
Total
10,168,191
108
Cumulative
Number of
Reported
Claims
84,996
85,264
85,444
94,093
104,303
103,498
90,330
93,747
91,410
85,202
All Lines
(in thousands)
Accident
Year
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$
350,369
543,949
286,314
665,277
489,633
277,275
762,422
609,851
442,417
328,826
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
835,347
690,016
540,982
509,910
391,944
877,933
764,196
634,902
625,229
585,867
378,067
896,590
798,996
695,249
704,895
692,730
555,819
335,956
912,683
819,280
736,100
773,536
782,655
651,544
518,872
405,898
920,931
839,392
760,589
803,773
852,202
743,742
644,475
614,075
376,641
929,082
853,769
775,885
823,770
901,801
810,135
748,758
736,154
581,203
387,272
All outstanding liabilities before 2007, net of reinsurance
324,070
Liabilities for loss and loss adjustment expenses, net of reinsurance
2,944,432
Total
7,547,829
General Liability
(in thousands)
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
As of December 31, 2016
Accident
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
IBNR
$ 252,732
256,627
255,538
250,834
248,807
242,878
234,173
234,697
231,439
250,239
243,755
243,536
234,770
233,712
224,236
219,551
221,640
237,913
241,625
233,530
223,146
212,947
211,243
206,387
215,208
228,680
242,499
237,154
222,328
211,619
229,967
228,720
239,480
230,785
217,256
238,979
245,561
215,083
194,144
250,609
251,421
239,776
244,312
249,946
254,720
230,717
221,203
205,741
208,968
211,196
175,305
225,709
257,132
245,710
277,214
17,815
19,939
22,858
29,380
36,350
44,493
90,026
135,883
167,995
233,794
Total
2,258,895
Cumulative
Number of
Reported
Claims
14,016
13,721
13,815
12,629
11,533
9,864
10,107
10,157
9,371
7,790
General Liability
(in thousands)
Accident
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$
14,695
44,356
16,397
80,621
45,595
14,346
123,108
82,421
37,143
15,726
158,424
113,088
64,970
46,201
13,924
181,641
151,055
103,213
80,018
42,692
13,030
191,405
166,394
130,554
113,050
73,643
35,241
12,789
201,842
176,873
151,920
143,360
102,978
56,580
35,113
14,901
204,159
186,896
166,767
161,487
135,377
89,008
72,127
46,825
14,665
208,449
194,257
176,316
172,394
159,768
109,448
104,587
79,972
39,978
15,684
All outstanding liabilities before 2007, net of reinsurance
Liabilities for loss and loss adjustment expenses, net of reinsurance
72,887
1,070,929
Total
1,260,853
109
Workers Compensation
(in thousands)
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
As of December 31, 2016
Accident
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
IBNR
$ 231,462
236,993
231,104
226,095
230,109
225,165
225,904
222,623
218,828
219,616
243,186
255,810
250,423
241,921
245,993
244,100
243,512
197,504
215,946
213,036
210,109
210,756
216,992
212,536
198,371
214,469
212,838
211,030
214,916
212,448
205,238
218,973
214,743
215,114
210,591
203,864
208,036
199,360
195,197
199,794
194,318
187,658
199,346
187,065
193,729
216,177
238,836
208,611
208,155
205,708
188,596
173,160
182,579
194,639
196,774
23,152
26,983
24,238
34,437
38,227
39,122
43,058
55,599
63,496
107,977
Total
2,013,235
Cumulative
Number of
Reported
Claims
16,344
14,400
12,214
12,181
11,843
11,601
11,361
10,464
10,479
9,910
Workers Compensation
(in thousands)
Accident
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$
31,478
88,786
39,628
123,681
100,678
37,885
144,713
139,144
87,299
46,795
156,320
158,083
117,019
93,281
42,941
164,373
171,403
133,116
122,442
90,836
40,911
169,941
180,556
145,417
137,184
118,847
86,909
36,829
175,205
188,206
154,726
149,086
134,646
108,211
74,568
35,924
179,011
191,265
160,529
153,795
139,232
122,755
96,376
78,944
33,857
180,865
195,962
164,336
158,078
149,269
132,052
109,739
100,876
77,320
34,525
All outstanding liabilities before 2007, net of reinsurance
Liabilities for loss and loss adjustment expenses, net of reinsurance
226,553
936,766
Total
1,303,022
Commercial Automobile
(in thousands)
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
As of December 31, 2016
Accident
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
IBNR
$185,733
194,567
187,966
182,030
179,739
178,956
176,049
175,342
175,431
196,370
195,823
190,349
187,100
187,417
182,785
180,902
183,736
199,541
191,079
182,724
169,858
166,682
162,911
161,251
187,562
189,305
187,778
181,923
179,854
172,969
174,006
183,044
182,325
178,421
172,617
179,551
191,947
183,527
184,289
188,289
205,282
209,197
200,534
212,725
220,994
175,894
183,618
161,923
173,157
174,882
184,367
207,994
216,824
240,958
255,187
Total 1,974,804
1,434
1,332
1,873
2,318
5,153
6,421
18,464
37,432
65,528
106,894
Cumulative
Number of
Reported
Claims
24,074
24,105
24,554
25,194
25,146
23,751
25,215
27,129
28,475
28,740
110
Commercial Automobile
(in thousands)
Accident
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$
65,544
102,233
69,053
126,507
104,711
63,126
146,690
130,857
94,406
68,098
163,629
151,741
113,697
99,254
69,849
170,241
166,487
137,564
128,015
99,196
73,316
171,622
173,795
149,949
146,913
121,576
105,371
76,469
171,839
175,244
155,560
163,513
142,507
127,235
109,893
80,810
173,050
180,779
158,303
167,227
157,291
148,669
140,015
117,169
91,347
173,980
181,779
159,723
169,100
166,082
168,114
169,850
148,884
132,260
106,022
All outstanding liabilities before 2007, net of reinsurance
Liabilities for loss and loss adjustment expenses, net of reinsurance
3,271
402,281
Total
1,575,794
Businessowners' Policies
(in thousands)
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
As of December 31, 2016
Accident
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
IBNR
$ 32,749
34,011
39,660
33,397
38,986
48,535
31,212
39,334
51,762
53,669
29,270
32,974
46,645
49,285
54,469
29,393
30,250
43,828
42,408
57,083
54,342
28,440
29,793
43,553
39,915
51,047
48,029
49,617
28,503
31,066
44,938
40,899
58,242
46,303
42,618
55,962
29,691
31,340
44,299
40,581
59,256
44,172
41,005
60,949
52,871
29,288
30,967
44,273
41,239
58,966
44,077
40,624
62,548
53,768
52,335
Total
458,085
124
94
730
693
2,177
834
4,189
10,891
12,089
16,027
Cumulative
Number of
Reported
Claims
2,956
3,258
3,473
3,917
4,956
5,533
3,474
4,038
3,860
3,398
Businessowners' Policies
(in thousands)
Accident
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$
14,051
18,870
15,019
22,583
21,765
18,915
24,978
24,449
29,612
20,821
25,759
25,738
32,689
28,131
27,884
27,273
28,026
36,073
31,027
37,362
22,199
28,073
28,660
40,052
34,705
41,011
31,833
17,412
28,095
28,589
42,895
37,819
46,444
35,089
26,592
28,914
28,368
29,778
43,358
38,900
52,114
37,215
30,845
40,584
24,189
29,048
30,873
43,448
40,279
55,856
38,766
34,760
44,911
36,014
24,655
All outstanding liabilities before 2007, net of reinsurance
Liabilities for loss and loss adjustment expenses, net of reinsurance
7,327
86,802
Total
378,610
111
Commercial Property
(in thousands)
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
As of December 31, 2016
Accident
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
IBNR
$ 98,167
104,160
100,809
101,027
103,183
103,381
102,998
102,732
102,679
97,578
102,860
101,436
101,470
101,265
101,702
101,043
100,881
82,619
82,124
105,647
82,025
96,851
82,014
97,386
80,774
96,127
80,455
95,530
80,558
95,363
136,954
131,667
130,942
131,282
131,353
118,464
114,224
115,375
116,658
88,101
90,639
90,103
141,192
136,249
110,270
103,077
101,043
80,545
95,178
131,113
117,102
90,005
136,820
109,513
121,927
Total 1,086,323
2
4
10
21
22
(22)
(78)
(1,052)
(1,320)
7,112
Cumulative
Number of
Reported
Claims
6,919
7,604
7,009
7,667
9,035
8,512
5,704
6,503
6,380
6,253
Commercial Property
(in thousands)
Accident
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$
63,159
95,050
68,211
99,036
98,921
59,933
99,942
100,465
78,695
69,543
101,805
99,288
80,433
91,918
94,538
102,310
100,213
80,894
94,602
127,580
81,528
102,370
100,752
80,251
95,111
129,579
108,834
60,244
102,532
100,908
80,352
95,270
130,681
111,503
87,874
101,131
102,663
100,868
80,529
95,147
131,060
114,699
90,446
132,909
79,048
103,061
101,034
80,509
95,156
131,115
116,291
90,350
136,634
106,182
83,966
All outstanding liabilities before 2007, net of reinsurance
Liabilities for loss and loss adjustment expenses, net of reinsurance
254
42,279
Total
1,044,298
Personal Automobile
(in thousands)
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
As of December 31, 2016
Accident
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2007
2008
2009
2010
2011
2012
2013
2014
2015
$ 97,161
102,932
103,283
102,325
101,744
101,654
101,814
101,747
101,750
100,311
106,999
106,842
103,934
100,213
99,912
99,686
99,255
93,808
103,319
105,033
103,908
104,734
103,866
103,393
103,340
110,075
112,346
109,515
107,490
107,405
113,232
116,164
113,686
112,993
114,241
113,771
114,921
109,832
109,324
108,417
109,620
106,225
102,250
109,325
96,387
Cumulative
Number of
Reported
Claims
IBNR
254
264
256
277
644
988
2,252
6,945
13,594
18,187
15,354
16,042
17,346
20,821
22,700
22,332
22,359
22,478
20,797
19,044
2016
101,714
99,116
103,412
107,224
113,830
110,294
106,703
106,757
99,698
92,727
Total
1,041,475
112
Personal Automobile
(in thousands)
Accident
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Homeowners
(in thousands)
Accident
Year
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$
45,846
66,884
50,396
82,455
73,194
51,039
92,019
84,715
71,911
58,786
97,335
91,834
86,431
82,490
61,323
99,454
95,932
96,229
95,300
82,102
63,704
100,539
97,723
100,566
101,540
93,878
82,729
61,384
100,667
98,174
102,187
104,061
105,068
94,842
80,861
62,519
101,099
98,604
102,322
105,849
111,085
102,977
92,637
83,739
58,725
101,134
98,668
102,437
106,453
112,732
107,890
100,528
92,589
76,470
57,961
All outstanding liabilities before 2007, net of reinsurance
Liabilities for loss and loss adjustment expenses, net of reinsurance
5,803
90,416
Total
956,862
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
As of December 31, 2016
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
IBNR
$ 38,589
36,547
41,224
34,926
41,747
47,636
34,273
39,342
44,511
68,373
34,186
39,203
42,609
67,525
103,804
34,422
38,062
40,313
63,285
98,211
87,260
34,566
38,410
61,927
97,761
82,744
82,745
73,670
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
34,056
38,111
40,400
62,462
94,167
86,560
72,528
80,111
34,025
38,042
40,465
62,402
94,543
86,667
71,494
82,461
76,637
34,010
38,045
40,457
62,339
94,183
86,271
72,145
83,637
76,400
60,105
Total
647,592
58
65
74
86
143
251
1,545
1,928
2,984
5,646
Cumulative
Number of
Reported
Claims
4,570
5,139
5,631
9,128
15,102
16,927
7,738
8,739
7,677
6,402
Homeowners
(in thousands)
Accident
Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$
20,840
30,104
21,277
31,846
33,535
28,299
32,228
36,271
36,965
43,699
33,081
37,086
38,078
58,638
71,668
33,862
37,763
39,342
60,295
89,963
69,056
33,857
37,837
39,731
61,106
91,718
79,584
50,664
33,869
37,933
39,819
62,155
92,185
82,720
65,528
61,561
33,953
37,939
39,907
62,227
93,312
84,250
67,838
76,007
52,589
33,951
37,930
40,189
62,241
93,720
85,196
69,775
79,751
70,078
42,252
All outstanding liabilities before 2007, net of reinsurance
Liabilities for loss and loss adjustment expenses, net of reinsurance
6,469
38,978
Total
615,083
113
E&S - Liability
(in thousands)
Incurred Loss and Loss Adjustment Expenses, Net of Reinsurance
As of December 31, 2016
Accident Year
2011
2012
2013
2014
2015
2016
IBNR
$
—
92
885
3,294
8,127
—
169
1,053
4,106
7,102
42,367
—
146
938
3,369
9,853
42,621
55,468
—
119
728
4,299
12,207
43,175
60,309
55,316
—
52
710
3,831
10,273
46,149
67,099
63,505
75,498
—
(162)
96
3,055
9,652
46,165
69,112
69,929
76,432
94,451
—
(270)
(630)
(1,778)
(599)
9,289
21,956
29,236
48,390
84,328
Total
368,730
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
E&S - Liability
(in thousands)
Cumulative
Number of
Reported
Claims
—
35
274
797
1,303
1,982
2,128
1,888
2,313
1,760
Accident Year
2011
2012
2013
2014
2015
2016
Cumulative Paid Loss and Loss Adjustment Expenses, Net of Reinsurance
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$
—
—
—
—
—
—
24
198
1,218
806
3,722
—
70
431
2,570
3,200
7,914
2,715
—
80
605
3,574
6,445
16,430
9,470
2,353
—
79
626
4,078
9,954
25,064
21,980
12,234
3,036
Total
All outstanding liabilities before 2007, net of reinsurance
Liabilities for loss and loss adjustment expenses, net of reinsurance
—
92
709
4,513
9,912
32,343
35,200
25,571
13,057
3,720
125,117
—
243,613
In 2011, the Parent purchased MUSIC, a wholly-owned E&S Lines subsidiary of Montpelier Re Holdings, Ltd. Under the terms
of the purchase agreement, the Parent acquired loss and loss adjustment reserves amounting to approximately $15 million. All
development on this acquired business was fully reinsured as of the acquisition date.
114
(d) The reconciliation of the net incurred and paid claims development tables to the liability for loss and loss adjustment expenses
in the consolidated statement of financial position is as follows:
(in thousands)
Net outstanding liabilities:
Standard Commercial Lines
General liability
Workers compensation
Commercial automobile
Businessowners' policies
Commercial property
Other Commercial Lines
Total Standard Commercial Lines net outstanding liabilities
Standard Personal Lines
Personal automobile
Homeowners
Other Personal Lines
Total Personal Lines net outstanding liabilities
E&S Lines
Commercial liability
Commercial property
Total E&S Lines net outstanding liabilities
Total liabilities for unpaid loss and loss adjustment expenses, net of reinsurance
Reinsurance recoverable on unpaid claims:
Standard Commercial Lines
General liability
Workers compensation
Commercial automobile
Businessowners' policies
Commercial property
Other Commercial Lines
Total Standard Commercial Lines reinsurance recoverable on unpaid loss
Standard Personal Lines
Personal automobile
Homeowners
Other Personal Lines
Total Personal Lines reinsurance recoverable on unpaid loss
E&S Lines
Commercial liability
Commercial property
Total E&S Lines reinsurance recoverable on unpaid loss
Total reinsurance recoverable on unpaid loss
Unallocated loss adjustment expenses
Total gross liability for unpaid loss and loss adjustment expenses
115
December 31, 2016
1,070,929
936,766
402,281
86,802
42,279
11,389
2,550,446
90,416
38,978
7,728
137,122
243,613
13,251
256,864
2,944,432
179,997
223,327
17,373
7,012
13,615
2,613
443,937
55,223
3,206
82,625
141,054
25,741
468
26,209
611,200
136,087
3,691,719
(e) The table below reflects the historical average annual percentage payout of incurred claims by age. For example, the general
liability line of business averages payout of 6.5% of its ultimate losses in the first year, 12.4% in the second year, and so forth.
The following is supplementary information about average historical claims duration as of December 31, 2016:
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years
General liability
Workers compensation
Commercial automobile
Businessowners’ policies
Commercial property
Personal automobile
Homeowners
E&S Lines - liability
1
6.5%
19.0
38.6
46.9
70.0
54.9
69.6
3.9
2
12.4
23.9
17.6
20.1
26.3
18.9
21.8
12.2
3
15.1
14.2
14.0
8.3
2.4
11.3
3.8
17.8
4
16.6
8.2
12.6
8.0
0.4
7.8
1.8
5
15.3
5.3
9.2
6.2
0.4
4.1
1.6
19.8
16.0
6
10.2
3.9
3.8
4.8
0.2
1.6
0.6
9.5
7
5.5
3.1
1.3
1.6
0.1
0.4
0.2
8
4.3
2.4
1.2
1.5
0.1
0.1
0.1
9
2.3
2.5
0.4
0.9
0.1
0.3
0.1
10
2.2
1.2
0.2
0.8
0.1
—
0.1
Note 10. Indebtedness
The table below provides a summary of our outstanding debt at December 31, 2016 and 2015:
Outstanding Debt
($ in thousands)
Description
Short-term:
(1) FHLBI
(2) FHLBI
Issuance
Date
Maturity
Date
Interest
Rate
Original
Amount
1/22/2015
7/22/2016
0.63% $
15,000
12/16/2011
12/16/2016
1.25%
45,000
Total short-term debt
$
60,000
Long-term:
(3) FHLBI
(4) FHLBNY
(5) FHLBNY
(6) Senior Notes
(7) Senior Notes
(8) Senior Notes
Total long-term debt
12/16/2016
12/16/2026
3.03% $
60,000
8/15/2016
8/16/2021
7/21/2016
7/21/2021
1.56%
1.61%
2/8/2013
2/9/2043
5.875%
11/3/2005
11/1/2035
11/16/2004
11/15/2034
6.70%
7.25%
25,000
25,000
185,000
100,000
50,000
$ 445,000
2016
Debt Discount
and Unamortized
Issuance Costs
Carry Value
December 31, 2016 December 31, 2015
—
—
—
—
—
—
(4,932)
(1,048)
(353)
(6,333)
—
—
—
60,000
25,000
25,000
180,068
98,952
49,647
438,667
15,000
45,000
60,000
—
—
—
179,684
98,890
49,618
328,192
Short-term Debt
(1) In January 2015, Selective Insurance Company of South Carolina ("SICSC") and Selective Insurance Company of the
Southeast ("SICSE"), collectively referred to as the "Indiana Subsidiaries," borrowed $15 million in the aggregate from the
FHLBI with an interest rate of 0.63%. The funds were used for general corporate purposes. We repaid this borrowing on July
22, 2016.
(2) In December 2011, the Indiana Subsidiaries borrowed $45 million in the aggregate from the FHLBI with an interest rate of
1.25%. The funds were loaned to the Parent for use in the acquisition of Mesa Underwriters Specialty Insurance Company
("MUSIC") on December 31, 2011. We repaid this borrowing in December 2016.
In addition to the above borrowings, the Parent's line of credit with Wells Fargo Bank, National Association, as administrative
agent, and Branch Banking and Trust Company (BB&T) (referred to as our "Line of Credit"), was renewed effective
December 1, 2015, with a borrowing capacity of $30 million, which can be increased to $50 million with the approval of both
lending partners. Our Line of Credit expires on December 1, 2020, and has an interest rate, which varies and is based on,
among other factors, the Parent’s debt ratings. There were no balances outstanding under our Line of Credit at December 31,
2016 or at any time during 2016.
Our Line of Credit agreement contains representations, warranties, and covenants that are customary for credit facilities of this
type, including, without limitation, financial covenants under which we are obligated to maintain a minimum consolidated net
worth, minimum combined statutory surplus, maximum ratio of consolidated debt to total capitalization, and covenants limiting
our ability to: (i) merge or liquidate; (ii) incur debt or liens; (iii) dispose of assets; (iv) make investments and acquisitions; and
(v) engage in transactions with affiliates.
116
The table below outlines information regarding certain of the covenants in the Line of Credit:
Consolidated net worth
Statutory surplus
Debt-to-capitalization ratio1
A.M. Best financial strength rating
1 Calculated in accordance with the Line of Credit agreement.
Required as of
December 31, 2016
Not less than $1.1 billion
Not less than $750 million
Not to exceed 35%
Minimum of A-
Actual as of
December 31, 2016
$1.5 billion
$1.6 billion
22.5%
A
In addition to the above requirements, the Line of Credit agreement contains a cross-default provision that provides that the
Line of Credit will be in default if we fail to comply with any condition, covenant, or agreement (including payment of
principal and interest when due on any debt with an aggregate principal amount of at least $20 million), which causes or
permits the acceleration of principal.
Refer to "Financial Condition, Liquidity, and Capital Resources" in Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations." for further discussion regarding limitations on aggregate borrowings by the
FHLBI and FHLBNY permitted by our Line of Credit.
Long-term Debt
(3) In the first quarter of 2009, the Indiana Subsidiaries joined, and invested in, the FHLBI, which provides them with access to
additional liquidity. The Indiana Subsidiaries’ aggregate investment in the FHLBI was $2.8 million at December 31, 2016 and
$2.8 million at December 31, 2015. Our investment provides us the ability to borrow approximately 20 times the total amount
of the FHLBI common stock purchased with additional collateral, at comparatively low borrowing rates.
In December 2016, the Indiana Subsidiaries borrowed $60 million from the FHLBI at an interest rate of 3.03%. The principal
amount of this borrowing is due on December 16, 2026. $45 million of the proceeds were used to repay the then outstanding
$45 million borrowing from the FHLBI and the remaining $15 million was used for general corporate purposes.
All borrowings from the FHLBI require security. For information on investments that are pledged as collateral for these
borrowings, see Note 5. "Investments" above.
(4) In the fourth quarter of 2015, SICA and Selective Insurance Company of New York ("SICNY") joined, and invested in, the
FHLBNY, which provides them with access to additional liquidity. The aggregate investment for both subsidiaries was $2.8
million at December 31, 2016 and $0.5 million at December 31, 2015. Our investment provides us the ability to borrow
approximately 20 times the total amount of the FHLBNY common stock purchased with additional collateral, at comparatively
low borrowing rates. In August 2016, SICA borrowed $25 million from the FHLBNY. The unpaid principal amount accrues
interest of 1.56%. The principal amount is due on August 16, 2021.
All borrowings from the FHLBNY require security. For information on investments that are pledged as collateral for these
borrowings, see Note 5. "Investments" above.
(5) In July 2016, SICA borrowed $25 million from the FHLBNY. The unpaid principal amount accrues interest of 1.61%. The
principal amount is due on July 21, 2021.
(6) In February 2013, we issued $185 million of 5.875% Senior Notes due 2043. The notes are callable by us on or after
February 8, 2018, at a price equal to 100% of their principal outstanding amount, plus accrued and unpaid interest to, but
excluding, the date of redemption. A portion of the proceeds from this debt issuance was used to fully redeem the $100 million
aggregate principal amount of our 7.5% Junior Subordinated Notes due 2066. Of the remaining net proceeds, $57.1 million
was used to make capital contributions to the Insurance Subsidiaries, while the balance was used for general corporate
purposes. There are no financial debt covenants to which we are required to comply in regards to these Senior Notes.
117
(7) In November 2005, we issued $100 million of 6.70% Senior Notes due 2035. These notes were issued at a discount of $0.7
million resulting in an effective yield of 6.754%. Net proceeds of approximately $50 million were used to fund an irrevocable
trust to provide for certain payment obligations in respect of our outstanding debt. The remainder of the proceeds was used for
general corporate purposes. The agreements covering these notes contain a standard default cross-acceleration provision that
provides the 6.70% Senior Notes will enter a state of default upon the failure to pay principal when due or upon any event or
condition that results in an acceleration of principal of any other debt instrument in excess of $10 million that we have
outstanding concurrently with the 6.70% Senior Notes. There are no financial debt covenants to which we are required to
comply in regards to these notes.
(8) In November 2004, we issued $50 million of 7.25% Senior Notes due 2034. These notes were issued at a discount of $0.1
million, resulting in an effective yield of 7.27%. We contributed $25 million of the bond proceeds to the Insurance Subsidiaries
as capital. The remainder of the proceeds was used for general corporate purposes. The agreements covering these notes
contain a standard default cross-acceleration provision that provides the 7.25% Senior Notes will enter a state of default upon
the failure to pay principal when due or upon any event or condition that results in an acceleration of principal of any other debt
instrument in excess of $10 million that we have outstanding concurrently with the 7.25% Senior Notes. There are no financial
debt covenants to which we are required to comply in regards to these notes.
Note 11. Segment Information
The disaggregated results of our four reportable segments are used by senior management to manage our operations. These
reportable segments are evaluated as follows:
• Our Standard Commercial Lines, Standard Personal Lines, and E&S Lines are evaluated based on statutory
underwriting results (net premiums earned, incurred losses and loss expenses, policyholders dividends, policy
acquisition costs, and other underwriting expenses), and statutory combined ratios.
• Our Investments segment is evaluated based on after-tax net investment income and net realized gains and losses.
In computing the results of each segment, we do not make adjustments for interest expense or net general corporate expenses.
While we do not fully allocate taxes to all segments, we do allocate taxes to our investments segment as we manage that
segment on after-tax results. We do not maintain separate investment portfolios for the segments and therefore, do not allocate
assets to the segments.
Our combined insurance segments are subject to certain geographic concentrations, particularly in the Northeast and Mid-
Atlantic regions of the country. In 2016, approximately 20% of NPW were related to insurance policies written in New Jersey.
The goodwill balance of $7.8 million at both December 31, 2016 and 2015 relates to our Standard Commercial Lines reporting
unit.
118
The following summaries present revenues from continuing operations (net investment income and net realized gains on
investments in the case of the Investments segment) and pre-tax income for the individual segments:
Revenue by Segment
Years ended December 31,
($ in thousands)
Standard Commercial Lines:
Net premiums earned:
Commercial automobile
Workers compensation
General liability
Commercial property
Businessowners’ policies
Bonds
Other
Miscellaneous income
Total Standard Commercial Lines revenue
Standard Personal Lines:
Net premiums earned:
Personal automobile
Homeowners
Other
Miscellaneous income
Total Standard Personal Lines revenue
E&S Lines:
Net premiums earned:
Commercial liability
Commercial property
Miscellaneous income
Total E&S Lines revenue
Investments:
Net investment income
Net realized investment (losses) gains
Total investment revenues
Total all segments
Other income
Total revenues
2016
2015
2014
$
398,942
308,233
527,859
293,438
97,754
23,227
16,030
7,782
358,909
290,075
483,291
269,022
93,428
20,350
14,367
6,343
333,310
274,585
444,938
244,792
85,788
19,288
13,011
14,747
1,673,265
1,535,785
1,430,459
142,876
130,973
6,758
1,098
281,705
151,638
51,844
1
203,483
130,754
(4,937)
125,817
146,784
134,382
6,968
1,113
289,247
126,064
46,269
—
172,333
121,316
13,171
134,487
2,284,270
2,131,852
—
—
$
2,284,270
2,131,852
151,317
134,273
11,157
1,834
298,581
99,086
41,064
17
140,167
138,708
26,599
165,307
2,034,514
347
2,034,861
119
Income before Federal Income Tax
Years ended December 31,
($ in thousands)
Standard Commercial Lines:
2016
2015
2014
Underwriting gain, before federal income tax
$
146,435
164,496
GAAP combined ratio
Statutory combined ratio
Standard Personal Lines:
Underwriting gain, before federal income tax
GAAP combined ratio
Statutory combined ratio
E&S Lines:
Underwriting (loss) gain, before federal income tax
GAAP combined ratio
Statutory combined ratio
Investments:
Net investment income
Net realized investment (losses) gains
Total investment income, before federal income tax
Tax on investment income
Total investment income, after federal income tax
Reconciliation of Segment Results to Income before Federal Income Tax
Years ended December 31,
($ in thousands)
Underwriting gain (loss), before federal income tax
Standard Commercial Lines
Standard Personal Lines
E&S Lines
Investment income, before federal income tax
Total all segments
Interest expense
General corporate and other expenses
Income, before federal income tax
$
$
$
$
91.2%
89.9%
12,419
95.6%
95.2%
(6,921)
103.4%
102.1%
130,754
(4,937)
125,817
30,621
95,196
89.2%
89.2%
1,336
99.5%
99.9%
(16,803)
109.8%
108.4%
121,316
13,171
134,487
32,090
102,397
61,221
95.7%
95.5%
16,536
94.4%
94.5%
386
99.7%
99.2%
138,708
26,599
165,307
43,811
121,496
2016
2015
2014
146,435
12,419
(6,921)
125,817
277,750
(22,771)
(35,024)
219,955
164,496
1,336
(16,803)
134,487
283,516
(22,428)
(28,396)
232,692
61,221
16,536
386
165,307
243,450
(23,063)
(23,256)
197,131
Note 12. Earnings per Share
The following table provides a reconciliation of the numerators and denominators of basic and diluted earnings per share
("EPS"):
2016
($ in thousands, except per share amounts)
Basic EPS:
Net income available to common stockholders
Effect of dilutive securities:
Stock compensation plans
Diluted EPS:
Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
$
158,495
57,889
$
2.74
—
858
Net income available to common stockholders
$
158,495
58,747
$
2.70
120
2015
($ in thousands, except per share amounts)
Basic EPS:
Net income available to common stockholders
Effect of dilutive securities:
Stock compensation plans
Diluted EPS:
Net income available to common stockholders
2014
($ in thousands, except per share amounts)
Basic EPS:
Net income available to common stockholders
Effect of dilutive securities:
Stock compensation plans
Diluted EPS:
Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
$
165,861
57,212
$
2.90
—
944
$
$
165,861
58,156
$
2.85
Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
141,827
56,310
$
2.52
—
1,041
Net income available to common stockholders
$
141,827
57,351
$
2.47
Note 13. Federal Income Taxes
(a) A reconciliation of federal income tax on income at the corporate rate to the effective tax rate is as follows:
($ in thousands)
Tax at statutory rate of 35%
Tax-advantaged interest
Dividends received deduction
Other
Federal income tax expense from continuing operations
2016
2015
2014
$
$
76,984
(12,126)
(1,114)
(2,284)
61,460
81,442
(13,164)
(1,817)
370
66,831
68,996
(12,926)
(1,121)
355
55,304
(b) The tax effects of the significant temporary differences that give rise to deferred tax assets and liabilities are as follows:
($ in thousands)
Deferred tax assets:
Net loss reserve discounting
Net unearned premiums
Employee benefits
Long-term incentive compensation plans
Temporary investment write-downs
Other investment related items, net
Net operating loss
Other
Total deferred tax assets
Deferred tax liabilities:
Deferred policy acquisition costs
Unrealized gains on investment securities
Other investment-related items, net
Accelerated depreciation and amortization
Total deferred tax liabilities
Net deferred federal income tax asset
2016
2015
70,065
78,201
17,881
17,750
2,475
1,484
771
8,344
74,436
72,057
30,432
15,551
5,419
—
1,454
8,132
196,971
207,481
75,310
22,681
—
14,140
112,131
84,840
72,481
24,228
5,566
12,510
114,785
92,696
$
$
After considering all evidence, both positive and negative, with respect to our federal tax loss carryback availability, expected
levels of pre-tax financial statement income, and federal taxable income, we believe it is more likely than not that the existing
deductible temporary differences will reverse during periods in which we generate net federal taxable income or have adequate
121
federal carryback availability. As a result, we have no valuation allowance recognized for federal deferred tax assets at
December 31, 2016 or 2015.
As of December 31, 2016, we had federal tax net operating loss ("NOL") carryforwards of $2.2 million. These NOLs, which
are subject to an annual limitation of $1.9 million, will expire between 2030 and 2031 as follows:
($ in thousands)
2030
2031
Total NOL carryforwards
Gross NOL
Tax Effected NOL
$
$
2,124
79
2,203
744
28
772
Stockholders' equity reflects tax benefits related to compensation expense deductions for share-based compensation awards of
$23.8 million at December 31, 2016, $22.0 million at December 31, 2015, and $20.2 million at December 31, 2014.
We have analyzed our tax positions in all open tax years, which as of December 31, 2016 were 2013 through 2015. The 2013
tax year is currently under audit. We do not expect any material adjustments to arise out of the 2013 audit. We do not have
unrecognized tax expense or benefit as of December 31, 2016.
We believe our tax positions will more likely than not be sustained upon examination, including related appeals or litigation. In
the event we had a tax position that did not meet the more likely than not criteria, any tax, interest, and penalties incurred
related to such a position would be reflected in "Total federal income tax expense" on our Consolidated Statements of Income.
Note 14. Retirement Plans
(a) Selective Insurance Retirement Savings Plan (“Retirement Savings Plan”)
SICA offers a voluntary defined contribution 401(k) plan, which is available to most of our employees and is a tax-qualified
retirement plan subject to the Employee Retirement Income Security Act of 1974 ("ERISA"). Expense recorded for this plan
was $15.0 million in 2016, $14.1 million in 2015, and $13.4 million in 2014.
(b) Deferred Compensation Plan
SICA offers a nonqualified deferred compensation plan ("Deferred Compensation Plan") to a group of management or highly
compensated employees as a method of recognizing and retaining such employees. The Deferred Compensation Plan provides
these employees the opportunity to elect to defer receipt of specified portions of compensation and to have such deferred
amounts deemed to be invested in specified investment options. In addition to the employee deferrals, SICA may choose to
make matching contributions to some or all of the participants in this plan to the extent the participant did not receive the
maximum matching or non-elective contributions permissible under the Retirement Savings Plan due to limitations under the
Internal Revenue Code or the Retirement Savings Plan. Expense recorded for these contributions was $0.3 million in 2016 and
$0.2 million in both 2015 and 2014.
(c) Retirement Income Plan and Retirement Life Plan
SICA's primary pension plan is the Retirement Income Plan for Selective Insurance Company of America (the "Pension Plan").
This qualified, noncontributory defined benefit plan is closed to new entrants and existing participants ceased accruing benefits
after March 31, 2016.
In addition to the Pension Plan, SICA also sponsors the Supplemental Excess Retirement Plan (the "Excess Plan") and a life
insurance benefit plan (the "Retirement Life Plan"). Both of these plans are closed to new entrants and participants in the
Excess Plan ceased accruing benefits after March 31, 2016. The Retirement Life Plan does not accrue benefits and this plan
applies only to retirees who terminated employment with SICA on or before March 31, 2009. These are both unfunded plans
with benefit obligations as of December 31, 2016 and December 31, 2015 of $9.1 million and $8.5 million, respectively, for the
Excess Plan and $6.3 million and $6.0 million, respectively, for the Retiree Life Plan. Expense recorded for the Excess Plan
was $0.5 million in 2016, $0.8 million in 2015, and $0.6 million in 2014. Expense recorded for the Retiree Life Plan was $0.3
million in 2016 and 2015, and $0.4 million in 2014.
122
The following tables provide details on the Pension Plan for 2016 and 2015:
December 31,
($ in thousands)
Change in Benefit Obligation:
Benefit obligation, beginning of year
Service cost
Interest cost
Actuarial losses (gains)
Benefits paid
Benefit obligation, end of year
Change in Fair Value of Assets:
Fair value of assets, beginning of year
Actual return on plan assets, net of expenses
Contributions by the employer to funded plans
Benefits paid
Fair value of assets, end of year
Funded status
Amounts Recognized in the Consolidated Balance Sheet:
Liabilities
Net pension liability, end of year
Amounts Recognized in AOCI:
Net actuarial loss
Total
Other Information as of December 31:
Accumulated benefit obligation
Weighted-Average Liability Assumptions as of December 31:
Discount rate
Rate of compensation increase
($ in thousands)
Components of Net Periodic Benefit Cost and Other Amounts Recognized in
Other Comprehensive Income:
Net Periodic Benefit Cost:
Service cost
Interest cost
Expected return on plan assets
Amortization of unrecognized actuarial loss
Total net periodic cost
Other Changes in Plan Assets and Benefit Obligations Recognized in Other
Comprehensive Income:
Net actuarial loss (gain)
Reversal of amortization of net actuarial loss
Total recognized in other comprehensive income
Total recognized in net periodic benefit cost and other comprehensive income
123
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Pension Plan
2016
2015
310,308
1,647
12,336
15,086
(8,789)
330,588
249,700
21,079
54,525
(8,789)
316,515
(14,073)
(14,073)
(14,073)
85,845
85,845
330,588
4.41%
—
2016
Pension Plan
2015
2014
1,647
12,336
(17,309)
6,299
2,973
11,316
(6,299)
5,017
7,990
7,215
13,668
(15,969)
6,831
11,745
(1,425)
(6,831)
(8,256)
3,489
322,271
7,215
13,668
(24,994)
(7,852)
310,308
253,452
(7,600)
11,700
(7,852)
249,700
(60,608)
(60,608)
(60,608)
80,828
80,828
310,307
4.69
4.00
5,763
12,776
(15,671)
1,776
4,644
52,556
(1,776)
50,780
55,424
The estimated net actuarial loss for the Pension Plan that will be amortized from AOCI into net periodic benefit cost during the
2017 fiscal year is $1.9 million. This is lower than the $6.3 million amortized in 2016 due to a change in the amortization
period for the net actuarial loss. Historically, the amortization period was the average remaining service life of the active
participants. However, as the Pension Plan is no longer accruing service benefits, the amortization period has changed to the
average remaining life expectancy of plan participants.
Weighted-Average Expense Assumptions for the years ended December 31:
Discount rate
4.69%
4.29
2016
Pension Plan
2015
2014
Expected return on plan assets
Rate of compensation increase1
1This assumption was 4.00% through March 31, 2016, the date after which benefits ceased accruing for all participants of the Pension Plan.
6.37
4.00
6.27
—
5.16
6.92
4.00
Our latest measurement date was December 31, 2016 and we decreased our expected return on plan assets to 6.24%, reflecting
the current interest rate environment.
When determining the most appropriate discount rate to be used in the valuation, we consider, among other factors, our
expected payout patterns of the Pension Plan's obligations as well as our investment strategy and we ultimately select the rate
that we believe best represents our estimate of the inherent interest rate at which our pension and post-retirement life benefits
can be effectively settled. Effective January 1, 2016, the approach used to calculate the service and interest components of net
periodic benefit cost for benefit plans was changed to provide a more precise measurement of service and interest costs. Prior
to 2016, we calculated these service and interest components utilizing a single weighted-average discount rate derived from the
yield curve used to measure the benefit obligation at the beginning of the period. Beginning in 2016, we elected to utilize an
approach that discounts the individual expected cash flows using the applicable spot rates derived from the yield curve over the
projected cash flow period. We have accounted for this change prospectively as a change in accounting estimate. The weighted
average discount rate used to determine 2017 interest cost is 3.83%.
Plan Assets
Assets of the Pension Plan are invested to ensure that principal is preserved and enhanced over time. Our return objective is to
exceed the returns of the plan's policy benchmark, which is the return the plan would have earned if the assets were invested
according to the target asset class weightings and earned index returns shown below. In 2017, we will continue to phase in
adjustments to the asset allocation to steadily close the gap between the duration of the assets and the duration of the liabilities,
provided certain improved funding targets are achieved.
The Pension Plan’s equity investments may not contain investments in any one security greater than 8% of the portfolio value
without notification to our management investment committee, nor have more than 5% of the outstanding shares of any one
corporation or other entity. The use of derivative instruments is permitted under certain circumstances, but shall not be used for
unrelated speculative hedging or to apply leverage to portfolio positions. Within the alternative investments portfolio, some
leverage is permitted as defined and limited by the partnership agreements.
The plan’s target ranges, as well as the actual weighted average asset allocation by asset class, at December 31 were as follows:
Long duration fixed income
Global equity
Alternatives & other return seeking assets1
Cash and short-term investments
Total
1Includes limited partnerships.
2016
2015
Target Ranges
Actual Percentage
Actual Percentage
40%-100%
0%-40%
0%-30%
0%-5%
—%
53%
33%
6%
8%
100%
60%
36%
3%
1%
100%
At December 31, 2016, the Pension Plan's allocation to cash and short-term investments was slightly above the targeted range,
as we were analyzing the most effective deployment of these balances considering current market conditions.
The Pension Plan had no investments in the Parent’s common stock as of December 31, 2016 or 2015.
124
The techniques used to determine the fair value of the Pension Plan's invested assets are as follows:
•
Short-term investments are carried at cost, which approximates fair value. Given that these investments are listed on
active exchanges, coupled with their liquid nature, these investments are classified as Level 1 in the fair value
hierarchy.
• The deposit administration contract is carried at cost, which approximates fair value. Given the liquid nature of the
underlying investments in overnight cash deposits and other short-term duration products, we have determined that a
correlation exists between the deposit administration contract and other short-term investments, such as money market
funds. As such, this investment is classified as Level 2 in the fair value hierarchy.
• The long-duration fixed income mutual funds utilize a market approach wherein the quoted prices in the active market
for identical assets are used. All of the mutual funds are traded in active markets at their net asset value per share.
These investments are classified as Level 1 in the fair value hierarchy.
• The investments in global equity collective investment funds and in private equity limited partnerships are valued
utilizing net asset value as a practical expedient for fair value. These investments are not classified in the fair value
hierarchy.
For discussion regarding the levels within the fair value hierarchy, see Note 2. "Summary of Significant Accounting Policies."
In addition, refer to Note 5. "Investments" for discussion regarding the limited partnership investment strategies, excluding the
middle market lending strategy, as these investments are not part of the Pension Plan.
The following tables provide quantitative disclosures of the Pension Plan’s invested assets that are measured at fair value on a
recurring basis:
December 31, 2016
Fair Value Measurements at 12/31/16 Using
($ in thousands)
Description
Long-duration fixed income:
Global asset allocation fund
Extended duration fixed income
Total long duration fixed income
Cash and short-term investments:
Short-term investments
Deposit administration contracts
Total cash and short-term investments
Global equity, at net asset value1:
Non-U.S. equity
U.S. equity
Total global equity
Private equity (limited partnerships, at net asset value)1:
Real assets
Private equity
Private credit
Total private equity
Total invested assets
Assets Measured at
Fair Value
At 12/31/16
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
37,878
131,457
169,335
23,722
—
23,722
—
—
—
—
—
—
—
—
—
—
—
1,832
1,832
—
—
—
—
—
—
—
193,057
1,832
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
37,878
131,457
169,335
23,722
1,832
25,554
48,836
55,073
103,909
15,466
1,615
1,108
18,189
316,987
125
December 31, 2015
Fair Value Measurements at 12/31/15 Using
($ in thousands)
Description
Long-duration fixed income:
Global asset allocation fund
Extended duration fixed income
Total long duration fixed income
Cash and short-term investments:
Short-term investments
Deposit administration contracts
Total cash and short-term investments
Global equity, at net asset value1:
Non-U.S. equity
U.S. equity
Total global equity
Private equity (limited partnerships, at net asset value)1:
Private equity
Real assets
Private credit
Total private equity
Assets Measured at
Fair Value
At 12/31/15
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
$
33,565
117,297
150,862
1,600
1,418
3,018
42,603
46,840
89,443
2,626
2,514
1,318
6,458
33,565
117,297
150,862
1,600
—
1,600
—
—
—
—
—
—
—
—
—
—
—
1,418
1,418
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total invested assets
—
1In accordance with ASU 2015-07, certain investments that are measured at fair value using the net asset value per share (or its practical expedient) have not
been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to total
Pension Plan invested assets.
249,781
152,462
1,418
$
Contributions
We presently do not anticipate contributing to the Pension Plan in 2017, as we have no minimum required contribution
amounts.
Benefit Payments
($ in thousands)
Benefits Expected to be Paid in Future
Fiscal Years:
2017
2018
2019
2020
2021
2022-2026
Pension Plan
$
10,830
12,041
13,125
14,184
15,124
89,771
Note 15. Share-Based Payments
Active Plans
As of December 31, 2016, the following four plans were available for the issuance of share-based payment awards:
• The 2014 Omnibus Stock Plan (the "Stock Plan");
• The Cash Incentive Plan, amended and restated effective as of May 1, 2014 (the "Cash Plan");
• The Employee Stock Purchase Plan (2009) ("ESPP"); and
• The Amended and Restated Stock Purchase Plan for Independent Insurance Agencies (the "Agent Plan").
126
The following table provides information regarding the approval of these plans:
Plan
Stock Plan
Cash Plan
ESPP
Agent Plan
Approvals
Approved effective as of May 1, 2014 by stockholders on April 23, 2014.
Approved effective April 1, 2005 by stockholders on April 27, 2005.
Most recently amended and restated plan was approved effective May 1, 2014 by stockholders on April 23, 2014.
Approved by stockholders on April 29, 2009 effective July 1, 2009.
Approved by stockholders on April 26, 2006.
Most recently amended and restated plan was approved on December 13, 2016 by the Parent's Board of Directors' Salary and
Employee Benefits Committee. The amendment was effective February 1, 2017.
The types of awards that can be issued under each of these plans are as follows:
Plan
Types of Share-Based Payments Issued
Stock Plan
Cash Plan
ESPP
Agent Plan
Qualified and nonqualified stock options, stock appreciation rights ("SARs"), restricted stock, restricted stock units ("RSUs"), stock
grants, and other awards valued in whole or in part by reference to the Parent's common stock. The maximum exercise period for an
option grant under this plan is 10 years from the date of the grant. Dividend equivalent units ("DEUs") are earned during the vesting
period on RSU grants. The DEUs are reinvested in the Parent's common stock at fair value on each dividend payment date. The
requisite service period for grants to employees under this plan is the lesser of: (i) the stated vested date, which is typically three
years from issuance; or (ii) the date the employee becomes eligible to retire.
Cash incentive units (“CIUs”). The initial dollar value of each CIU will be adjusted to reflect the percentage increase or decrease in
the total shareholder return on the Parent's common stock over a specified performance period. In addition, for certain grants, the
number of CIUs granted will be increased or decreased to reflect our performance on specified performance indicators as compared to
targeted peer companies. The requisite service period for grants under this plan is the lesser of: (i) the stated vested date, which is
typically three years from issuance; or (ii) the date the employee becomes eligible to retire.
Enables employees to purchase shares of the Parent’s common stock. The purchase price is the lower of: (i) 85% of the closing
market price at the time the option is granted; or (ii) 85% of the closing price at the time the option is exercised. Shares are generally
issued on June 30 and December 31 of each year.
Quarterly offerings to purchase the Parent's common stock at a 10% discount with a one year restricted period during which the shares
purchased cannot be sold or transferred. Only our independent retail insurance agencies and wholesale general agencies, and certain
eligible persons associated with the agencies, are eligible to participate in this plan.
Shares authorized and available for issuance as of December 31, 2016 are as follows:
As of December 31, 2016
Authorized
Available for Issuance Awards Outstanding
Stock Plan
ESPP
Agent Plan
3,500,000
1,500,000
3,000,000
2,835,694
574,722
1,867,287
607,156
—
—
Retired Plans
The following plans are closed for the issuance of new awards, although awards outstanding continue in effect according to the
terms of the applicable award agreements:
Types of Share-Based Payments Issued
Reserve Shares
Awards Outstanding1
December 31, 2016
Plan
2005 Omnibus Stock Plan
("2005 Stock Plan")
Qualified and nonqualified stock options, SARs, restricted stock, RSUs,
phantom stock, stock bonuses, and other awards in such amounts and with
such terms and conditions as it determined, subject to the provisions of the
2005 Stock Plan. The maximum exercise period for an option grant under
this plan is 10 years from the date of the grant. DEUs are earned during
the vesting period on RSU grants. The DEUs are reinvested in the Parent's
common stock at fair value on each dividend payment date.
Parent's Stock Compensation
Plan for Non-employee Directors
("Directors Stock Compensation
Plan")
1 Awards outstanding under the 2005 Stock Plan consisted of 371,003 RSUs and 355,391 stock options.
Directors could elect to receive a portion of their annual compensation in
shares of the Parent's common stock.
127
2,664,594
726,394
67,242
67,242
RSU Transactions
A summary of the RSU transactions under our share-based payment plans is as follows:
Unvested RSU awards at December 31, 2015
Granted in 2016
Vested in 2016
Forfeited in 2016
Unvested RSU awards at December 31, 2016
Number
of Shares
1,018,530
$
299,670
(389,245)
(12,315)
916,640
$
Weighted
Average
Grant Date
Fair Value
22.55
32.53
21.56
24.97
26.20
As of December 31, 2016, total unrecognized compensation expense related to unvested RSU awards granted under our stock
plans was $5.3 million. That expense is expected to be recognized over a weighted-average period of 1.8 years. The total
intrinsic value of RSUs vested was $12.6 million for 2016, $10.3 million for 2015, and $8.5 million for 2014. In connection
with vested RSUs, the total value of the DEU shares that vested was $0.7 million during each of 2016, 2015, and 2014.
Option Transactions
A summary of the stock option transactions under our share-based payment plans is as follows:
Outstanding at December 31, 2015
Granted in 2016
Exercised in 2016
Forfeited or expired in 2016
Outstanding at December 31, 2016
Exercisable at December 31, 2016
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life in Years
Aggregate
Intrinsic Value
($ in thousands)
17.84
—
20.33
—
16.87
16.87
2.14
2.14
$
$
9,304
9,304
Number
of Shares
493,428
$
—
(138,037)
—
355,391
355,391
$
$
The total intrinsic value of options exercised was $2.3 million during 2016, $2.2 million in 2015, and $0.8 million in 2014.
CIU Transactions
The liability recorded in connection with our Cash Plan was $32.0 million at December 31, 2016 and $26.5 million at
December 31, 2015. The remaining cost associated with the CIUs is expected to be recognized over a weighted average period
of 1.2 years. The CIU payments made were $14.3 million in 2016, $10.2 million in 2015, and $9.0 million in 2014.
ESPP and Agent Plan Transactions
A summary of ESPP and Agent Plan share issuances is as follows:
ESPP Issuances
Agent Plan Issuances
2016
2015
2014
88,432
69,867
100,944
82,142
106,832
78,724
Fair Value Measurements
The grant date fair value of RSUs is based on the market price of our common stock on the grant date, adjusted for the present
value of our expected dividend payments. The expense recognized for share-based awards is based on the number of shares or
units expected to be issued at the end of the performance period and the grant date fair value.
128
The grant date fair value of each option award is estimated using the Black Scholes option valuation model ("Black Scholes").
The following are the significant assumptions used in applying Black Scholes: (i) the risk-free interest rate, which is the
implied yield currently available on U.S. Treasury zero-coupon issues with an equal remaining term; (ii) the expected term,
which is based on historical experience of similar awards; (iii) the dividend yield, which is determined by dividing the expected
per share dividend during the coming year by the grant date stock price; and (iv) the expected volatility, which is based on the
volatility of the Parent's stock price over a historical period comparable to the expected term. In applying Black Scholes, we
use the weighted average assumptions illustrated in the following table:
Risk-free interest rate
Expected term
Dividend yield
Expected volatility
2016
0.47%
6 months
1.7%
31%
ESPP
2015
0.10
6 months
2.0
20
2014
0.07
6 months
2.0
21
The weighted-average fair value of options and stock per share, including RSUs granted for the Parent's stock plans, during
2016, 2015, and 2014 was as follows:
RSUs
ESPP:
Six month option
Discount of grant date market value
Total ESPP
Agent Plan:
Discount of grant date market value
2016
2015
2014
$
32.53
25.22
21.58
2.63
5.23
7.86
3.79
1.26
4.16
5.42
2.94
1.24
3.87
5.11
2.42
The fair value of the CIU liability is remeasured at each reporting period through the settlement date of the awards, which is
three years from the date of grant based on an amount expected to be paid. A Monte Carlo simulation is performed to
approximate the projected fair value of the CIUs that, in accordance with the Cash Plan, is adjusted to reflect our performance
on specified indicators as compared to targeted peer companies.
Expense Recognition
The following table provides share-based compensation expense in 2016, 2015, and 2014:
($ in millions)
Share-based compensation expense, pre-tax
Income tax benefit
Share-based compensation expense, after-tax
2016
2015
2014
$
$
30.3
(10.3)
20.0
23.8
(8.0)
15.8
18.6
(6.2)
12.4
Note 16. Related Party Transactions
William M. Rue, a Director of the Parent, is Chairman of, and owns more than 10% of the equity of, Chas. E. Rue & Son, Inc.,
t/a Rue Insurance, a general independent retail insurance agency ("Rue Insurance"). Rue Insurance is an appointed distribution
partner of the Insurance Subsidiaries on terms and conditions similar to those of our other distribution partners and includes the
right to participate in the Agent Plan. Mr. Rue’s son is President, and an employee, of Rue Insurance and Mr. Rue’s daughter is
an employee of Rue Insurance. Our relationship with Rue Insurance has existed since 1928.
Rue Insurance placed insurance policies with the Insurance Subsidiaries for its customers and itself. Direct premiums written
associated with these policies were $10.4 million in 2016, $9.6 million in 2015, and $9.0 million in 2014. In return, the
Insurance Subsidiaries paid standard market commissions to Rue Insurance of $2.1 million in 2016, $1.7 million in 2015, and
$1.6 million in 2014 including supplemental commissions. Amounts due to Rue Insurance at December 31, 2016 and
December 31, 2015 were $0.7 million and $0.6 million, respectively.
In 2005, we established a private foundation, now named The Selective Insurance Group Foundation (the "Foundation"), under
Section 501(c)(3) of the Internal Revenue Code. The Board of Directors of the Foundation is comprised of some of the Parent's
officers. We made no contributions to the Foundation in 2016. We made contributions to the Foundation in the amount of $1.0
million in 2015 and $0.8 million in 2014.
129
Note 17. Commitments and Contingencies
(a) We purchase annuities from life insurance companies to fulfill obligations under claim settlements that provide for periodic
future payments to claimants. As of December 31, 2016, we had purchased such annuities with a present value of $17.9 million
for settlement of claims on a structured basis for which we are contingently liable. To our knowledge, there are no material
defaults from any of the issuers of such annuities.
(b) We have various operating leases for office space, equipment, and fleet vehicles. Such lease agreements, which expire at
various times, are generally renewed or replaced by similar leases. Rental expense under these leases amounted to $17.3
million in 2016, $17.4 million in 2015, and $15.6 million in 2014. We also lease computer hardware and software under capital
lease agreements expiring at various dates through 2019. See item (p) of Note 2. "Summary of Significant Accounting
Policies" in this Form 10-K for information on our accounting policy regarding leases.
In addition, certain of these leases are non-cancelable, and liability for payment will continue even though the leased asset may
no longer be in use. At December 31, 2016, the total future minimum rental commitments under non-cancelable leases were as
follows:
($ in millions)
Capital Leases
Operating Leases
Total
2017
2018
2019
2020
2021
After 2021
Total minimum payment required
$
$
4.0
2.2
0.1
—
—
—
6.3
9.1
7.7
5.6
4.4
2.9
4.7
34.4
13.1
9.9
5.7
4.4
2.9
4.7
40.7
(c) At December 31, 2016, we have contractual obligations that expire at various dates through 2030 to invest up to an
additional $143.7 million in alternative and other investments. There is no certainty that any such additional investment will be
required. For additional information regarding these investments, see item (f) of Note 5. "Investments" in this Form 10-K.
Note 18. Litigation
In the ordinary course of conducting business, we are named as defendants in various legal proceedings. Most of these
proceedings are claims litigation involving our Insurance Subsidiaries as either: (i) liability insurers defending or providing
indemnity for third-party claims brought against our customers; or (ii) insurers defending first-party coverage claims brought
against them. We account for such activity through the establishment of unpaid losses and loss expense reserves. We expect
that any potential ultimate liability in such ordinary course claims litigation will not be material to our consolidated financial
condition, results of operations, or cash flows after consideration of provisions made for potential losses and costs of defense.
From time to time, our Insurance Subsidiaries also are named as defendants in other legal actions, some of which assert claims
for substantial amounts. These actions include, among others, putative class actions seeking certification of a state or national
class. Such putative class actions have alleged, for example, improper reimbursement of medical providers paid under workers
compensation and personal and commercial automobile insurance policies. Similarly, our Insurance Subsidiaries are also
named from time-to-time in individual actions seeking extra-contractual damages, punitive damages, or penalties, some of
which allege bad faith in the handling of insurance claims. We believe that we have valid defenses to these cases. We expect
that any potential ultimate liability in any such lawsuit will not be material to our consolidated financial condition, after
consideration of provisions made for estimated losses. Nonetheless, given the inherent unpredictability of litigation and the
large or indeterminate amounts sought in certain of these actions, an adverse outcome in certain matters could possibly have a
material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods.
As of December 31, 2016, we do not believe the Company was involved in any legal action that could have a material adverse
effect on our consolidated financial condition, results of operations, or cash flows.
130
Note 19. Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds
(a) Statutory Financial Information
The Insurance Subsidiaries prepare their statutory financial statements in accordance with accounting principles prescribed or
permitted by the various state insurance departments of domicile. Prescribed statutory accounting principles include state laws,
regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance
Commissioners (“NAIC"). Permitted statutory accounting principles encompass all accounting principles that are not
prescribed; such principles differ from state to state, may differ from company to company within a state and may change in the
future. The Insurance Subsidiaries do not utilize any permitted statutory accounting principles that materially affect the
determination of statutory surplus, statutory net income, or risk-based capital (“RBC”). As of December 31, 2016, the various
state insurance departments of domicile have adopted the March 2016 version of the NAIC Accounting Practices and
Procedures manual in its entirety, as a component of prescribed or permitted practices.
The following table provides statutory data for each of our Insurance Subsidiaries:
State of
Domicile
Unassigned Surplus
Statutory Surplus
Statutory Net Income
2016
2015
2016
2015
2016
2015
2014
($ in millions)
SICA
Selective Way Insurance Company ("SWIC")
SICSC
SICSE
SICNY
New Jersey
$
New Jersey
Indiana
Indiana
New York
Selective Insurance Company of New England ("SICNE") New Jersey
Selective Auto Insurance Company of New Jersey
("SAICNJ")
MUSIC
Selective Casualty Insurance Company ("SCIC")
Selective Fire and Casualty Insurance Company
("SFCIC")
New Jersey
New Jersey
New Jersey
New Jersey
414.4
260.5
110.6
83.5
74.1
13.6
36.9
16.7
26.6
11.3
366.6
223.6
96.6
70.7
65.3
9.2
26.4
7.0
17.8
568.6
309.5
141.9
109.1
101.8
43.7
79.8
85.2
101.0
520.8
272.6
127.9
96.2
93.0
39.4
69.2
75.5
92.3
72.2
41.2
17.4
13.4
12.9
5.9
11.5
9.7
12.6
69.6
42.3
15.9
12.1
12.7
5.5
10.8
9.5
12.1
7.5
43.2
39.4
5.5
5.3
83.9
37.0
14.0
10.5
10.3
4.4
9.1
7.3
9.6
4.2
Total
$ 1,048.2
890.7
1,583.8
1,426.3
202.3
195.8
190.3
(b) Capital Requirements
The Insurance Subsidiaries are required to maintain certain minimum amounts of statutory surplus to satisfy the requirements
of their various state insurance departments of domicile. RBC requirements for property and casualty insurance companies are
designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. The
Insurance Subsidiaries' combined total adjusted capital exceeded the authorized control level RBC, as defined by the NAIC
based on their 2016 statutory financial statements. In addition to statutory capital requirements, we are impacted by various
rating agency requirements related to certain rating levels. These required capital levels may be more than statutory
requirements.
(c) Restrictions on Dividends and Transfers of Funds
Our ability to declare and pay dividends on the Parent's common stock is dependent on liquidity at the Parent coupled with the
ability of the Insurance Subsidiaries to declare and pay dividends, if necessary, and/or the availability of other sources of
liquidity to the Parent. As of December 31, 2016, the Parent had an aggregate of $91.7 million in investments and cash
available to fund future dividends and interest payments. These amounts are not subject to any regulatory restrictions other
than standard state insolvency restrictions, whereas our consolidated retained earnings of $1.5 billion is predominately
restricted due to the regulation associated with our Insurance Subsidiaries. In 2017, the Insurance Subsidiaries have the ability
to provide for $192.7 million in annual dividends to the Parent; however, as regulated entities, these dividends are subject to
certain restrictions, which are further discussed below. The Parent also has available to it other potential sources of liquidity,
such as: (i) borrowings from our Indiana Subsidiaries; (ii) debt issuances; (iii) common stock issuances; and (iv) borrowings
under our Line of Credit. Borrowings from our Indiana Subsidiaries are governed by approved intercompany lending
agreements with the Parent that provide for additional capacity of $68.6 million as of December 31, 2016, after considering that
borrowings under these lending agreements are restricted to 10% of the admitted assets of these respective subsidiaries. For
additional information regarding the Parent's Line of Credit, refer to "Financial Condition, Liquidity, and Capital Resources" in
Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations.” of this Form 10-K. For
additional restrictions on the Parent's debt, see Note 10. "Indebtedness" in this Form 10-K.
131
Insurance Subsidiaries Dividend Restrictions
As noted above, the restriction on our net assets and retained earnings is predominantly driven by our Insurance Subsidiaries'
ability to pay dividends to the Parent under applicable law and regulations. Under the insurance laws of the domiciliary states
of the Insurance Subsidiaries, New Jersey, Indiana, and New York, an insurer can potentially make an ordinary dividend
payment if its statutory surplus following such dividend is reasonable in relation to its outstanding liabilities, is adequate to its
financial needs, and the dividend does not exceed the insurer's unassigned surplus. In general, New Jersey defines an ordinary
dividend as a dividend whose fair market value, together with other dividends made within the preceding 12 months, is less
than the greater of 10% of the insurer's statutory surplus as of the preceding December 31, or the insurer's net income
(excluding capital gains) for the 12-month period ending on the preceding December 31. Indiana's ordinary dividend
calculation differs from New Jersey's, in that it is the lessor of 10% of the insurer's statutory surplus, or the insurer's net
income. Indiana's net income is computed by subtracting the amount of dividends paid in the first and second preceding
calendar years from the aggregate net income (excluding capital gains), of the second and third preceding calendar years.
In general, New York defines an ordinary dividend as a dividend whose fair market value, together with other dividends made
within the preceding 12 months, is less than the lesser of 10% of the insurer's statutory surplus, or 100% of adjusted net
investment income. New Jersey and Indiana require notice of the declaration of any ordinary dividend distribution. During the
notice period, the relevant state regulatory authority may disallow all or part of the proposed dividend if it determines that the
dividend is not appropriate given the above considerations. New York does not require notice of ordinary dividends. Dividend
payments exceeding ordinary dividends are referred to as extraordinary dividends and require review and approval by the
applicable domiciliary insurance regulatory authority prior to payment.
The following table provides quantitative data regarding all Insurance Subsidiaries' dividends paid to the Parent in 2016 for
debt service, shareholder dividends, and general operating purposes:
Twelve Months ended December 31, 2016
State of Domicile
Ordinary Dividends Paid
Dividends
($ in millions)
SICA
SWIC
SICSC
SICSE
SICNY
SICNE
SAICNJ
SCIC
SFCIC
Total
New Jersey
New Jersey
Indiana
Indiana
New York
New Jersey
New Jersey
New Jersey
New Jersey
$
$
Based on the 2016 statutory financial statements, the maximum ordinary dividends that can be paid to the Parent by the
Insurance Subsidiaries in 2017 are as follows:
($ in millions)
State of Domicile
Maximum Ordinary Dividends
2017
SICA
SWIC
SICSC
SICSE
SICNY
SICNE
SAICNJ
MUSIC
SCIC
SFCIC
Total
New Jersey
New Jersey
Indiana
Indiana
New York
New Jersey
New Jersey
New Jersey
New Jersey
New Jersey
132
$
$
26.0
12.0
5.0
2.0
5.0
2.0
1.5
5.5
2.0
61.0
72.2
40.4
13.8
10.9
10.2
5.9
11.5
9.7
12.6
5.5
192.7
Note 20. Quarterly Financial Information
(unaudited, $ in thousands,
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
except per share data)
Net premiums earned
Net investment income earned
Net realized (losses) gains
Underwriting income
Net income
Other comprehensive income (loss)
Comprehensive income (loss)
Net income per share:
Basic
Diluted
Dividends to stockholders1
Price range of common stock:2
High
Low
2016
2015
2016
2015
2016
2015
2016
2015
$
522,458
476,123
531,932
490,309
542,429
30,769
(2,704)
40,955
37,032
45,422
82,454
0.64
0.63
0.15
36.92
29.27
26,917
18,883
26,021
39,708
3,827
43,535
0.70
0.69
0.14
30.10
25.49
31,182
1,765
43,777
43,601
36,010
79,611
0.75
0.74
0.15
38.67
33.60
32,230
(3,420)
29,124
33,768
(35,944)
(2,176)
0.59
0.58
0.14
29.60
26.28
33,375
3,688
32,033
38,502
(9,798)
28,704
0.66
0.66
0.15
41.30
35.90
507,390
32,061
308
44,831
46,996
6,290
53,286
0.82
0.81
0.14
32.50
28.10
552,753
516,087
35,428
(7,686)
35,168
39,360
(78,159)
(38,799)
0.68
0.67
0.16
44.00
34.95
30,108
(2,600)
49,053
45,389
(3,386)
42,003
0.79
0.78
0.15
37.91
30.36
The addition of all quarters may not agree to annual amounts on the Financial Statements due to rounding.
1 See Note 19. “Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds” for a discussion of dividend
restrictions.
2 These ranges of high and low prices of the Parent’s common stock, as reported by the NASDAQ Global Select Market, represent actual transactions. Price
quotations do not include retail markups, markdowns, and commissions. The range of high and low prices for common stock for the period beginning January
3, 2017 and ending February 14, 2017 was $38.50 to $44.35.
133
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period,
our disclosure controls and procedures are: (i) effective in recording, processing, summarizing, and reporting information on a
timely basis that we are required to disclose in the reports that we file or submit under the Exchange Act; and (ii) effective in
ensuring that information that we are required to disclose in the reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal
control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) is a process designed by,
or under the supervision of, a company's principal executive and principal financial officers and effected by the Board,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
•
•
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the financial statements.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control-Integrated Framework ("COSO Framework") in 2013.
Based on this assessment, our management believes that, as of December 31, 2016, our internal control over financial reporting
is effective.
No changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) of the Exchange Act)
occurred during the fourth quarter of 2016 that materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Attestation Report of the Independent Registered Public Accounting Firm
Our independent registered public accounting firm, KPMG, LLP, has issued their attestation report on our internal control over
financial reporting which is set forth below.
134
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Selective Insurance Group, Inc.:
We have audited Selective Insurance Group, Inc. and its subsidiaries’ (the “Company”) internal control over financial reporting
as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Selective Insurance Group, Inc.’s
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Selective Insurance Group, Inc. and its subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Selective Insurance Group, Inc. and subsidiaries as of December 31, 2016 and 2015, and 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, 2016, and our report dated February 21, 2017 expressed an unqualified opinion on
those consolidated financial statements.
/s/ KPMG LLP
New York, New York
February 21, 2017
135
Item 9B. Other Information.
There is no other information that was required to be disclosed in a report on Form 8-K during the fourth quarter of 2016 that
we did not report.
PART III
Because we will file a Proxy Statement within 120 days after the end of the fiscal year ending December 31, 2016, this Annual
Report on Form 10-K omits certain information required by Part III and incorporates by reference certain information included
in the Proxy Statement.
Item 10. Directors, Executive Officers and Corporate Governance.
Information about our executive officers, Directors, and all other matters required to be disclosed in Item 10. "Directors,
Executive Officers and Corporate Governance." appears under the "Executive Officers" and "Information About Proposal 1 -
Election of Directors" sections of the Proxy Statement. These portions of the Proxy Statement are hereby incorporated by
reference.
Section 16(a) Beneficial Ownership Reporting Compliance
Information about compliance with Section 16(a) of the Exchange Act appears under "Section 16(a) Beneficial Ownership
Reporting Compliance" in the "Information About Proposal 1 - Election of Directors" section of the Proxy Statement and is
hereby incorporated by reference.
Item 11. Executive Compensation.
Information about compensation of our named executive officers appears under "Executive Compensation" in the "Election of
Directors" section of the Proxy Statement and is hereby incorporated by reference. Information about compensation of the
Board appears under "Director Compensation" in the "Information About Proposal 1 - Election of Directors" section of the
Proxy Statement and is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information about security ownership of certain beneficial owners and management appears under "Security Ownership of
Management and Certain Beneficial Owners" in the "Information About Proposal 1 - Election of Directors" section of the
Proxy Statement and is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information about certain relationships and related transactions, and director independence appears under “Transactions with
Related Persons” in the "Information About Proposal 1 - Election of Directors" section of the Proxy Statement and is hereby
incorporated by reference.
Item 14. Principal Accounting Fees and Services.
Information about the fees and services of our principal accountants appears under "Audit Committee Report" and "Fees of
Independent Registered Public Accounting Firm" in the "Information About Proposal 4 - Ratification of Appointment of
Independent Registered Public Accounting Firm" section of the Proxy Statement and is hereby incorporated by reference.
136
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as part of this report:
(1) Financial Statements:
The Financial Statements listed below are included in Item 8. "Financial Statements and Supplementary Data."
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Income for the Years Ended December 31, 2016, 2015, and 2014
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016, 2015, and 2014
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2016, 2015, and 2014
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015, and 2014
Notes to Consolidated Financial Statements, December 31, 2016, 2015, and 2014
(2) Financial Statement Schedules:
Form 10-K
Page
75
76
77
78
79
80
The financial statement schedules, with Independent Auditors' Report thereon, required to be filed are listed below by page
number as filed in this report. All other schedules are omitted as the information required is inapplicable, immaterial, or the
information is presented in the Financial Statements or related notes.
Schedule I
Summary of Investments – Other than Investments in Related Parties at December 31, 2016
Schedule II
Condensed Financial Information of Registrant at December 31, 2016 and 2015 and for the Years Ended
December 31, 2016, 2015, and 2014
Schedule III
Supplementary Insurance Information for the Years Ended December 31, 2016, 2015, and 2014
Schedule IV
Reinsurance for the Years Ended December 31, 2016, 2015, and 2014
Schedule V
Allowance for Uncollectible Premiums and Other Receivables for the Years Ended December 31, 2016, 2015,
and 2014
Form 10-K
Page
140
141
144
146
146
(3) Exhibits:
The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index, which is incorporated by reference and
immediately precedes the exhibits filed with or incorporated by reference in this Form 10-K.
137
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SELECTIVE INSURANCE GROUP, INC.
By: /s/ Gregory E. Murphy
Gregory E. Murphy
Chairman of the Board and Chief Executive Officer
By: /s/ Mark A. Wilcox
Mark A. Wilcox
Executive Vice President and Chief Financial Officer
(principal financial officer)
By: /s/ Anthony D. Harnett
Anthony D. Harnett
Senior Vice President and Chief Accounting Officer
(principal accounting officer)
February 21, 2017
February 21, 2017
February 21, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the date indicated.
138
By: /s/ Gregory E. Murphy
Gregory E. Murphy
Chairman of the Board and Chief Executive Officer
*
Paul D. Bauer
Director
*
A. David Brown
Director
*
John C. Burville
Director
*
Robert Kelly Doherty
Director
*
Michael J. Morrissey
Director
*
Cynthia S. Nicholson
Director
*
Ronald L. O’Kelley
Director
*
William M. Rue
Director
*
John S. Scheid
Director
*
J. Brian Thebault
Director
*
Philip H. Urban
Director
* By: /s/ Michael H. Lanza
Michael H. Lanza
Attorney-in-fact
139
February 21, 2017
February 21, 2017
February 21, 2017
February 21, 2017
February 21, 2017
February 21, 2017
February 21, 2017
February 21, 2017
February 21, 2017
February 21, 2017
February 21, 2017
February 21, 2017
February 21, 2017
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2016
SCHEDULE I
Types of investment
($ in thousands)
Fixed income securities:
Held-to-maturity:
Amortized Cost
or Cost
Fair Value
Carrying
Amount
Obligations of states and political subdivisions
$
Public utilities
All other corporate securities
Commercial mortgage-backed securities
Total fixed income securities, held-to-maturity
Available-for-sale:
U.S. government and government agencies
Foreign government
Obligations of states and political subdivisions
Public utilities
All other corporate securities
Collateralized loan obligation securities and other asset-backed securities
Commercial mortgage-backed securities
Residential mortgage-backed securities
77,466
8,589
14,122
1,220
79,916
9,292
14,783
1,220
77,783
8,579
13,989
1,205
101,397
105,211
101,556
75,139
26,559
1,366,287
108,664
1,867,892
527,876
256,356
524,986
77,333
26,865
1,379,593
110,000
1,887,753
528,960
256,842
525,194
77,333
26,865
1,379,593
110,000
1,887,753
528,960
256,842
525,194
Total fixed income securities, available-for-sale
4,753,759
4,792,540
4,792,540
Equity securities:
Common stock:
Banks, trusts and insurance companies
Industrial, miscellaneous and all other
Total common stock, available-for-sale
Preferred stock:
Banks, trusts and insurance companies
Total preferred stock, available-for-sale
Total equity securities, available-for-sale
Short-term investments
Other investments
Total investments
14,056
90,607
104,663
16,226
16,226
120,889
221,701
102,397
$
5,300,143
17,648
112,960
130,608
16,145
16,145
146,753
221,701
17,648
112,960
130,608
16,145
16,145
146,753
221,701
102,397
5,364,947
See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
140
SELECTIVE INSURANCE GROUP, INC.
(Parent Corporation)
Balance Sheets
($ in thousands, except share amounts)
Assets:
Fixed income securities, available-for-sale – at fair value (amortized cost: $73,471 – 2016; $61,794 – 2015)
Short-term investments
Cash
Investment in subsidiaries
Current federal income tax
Deferred federal income tax
Other assets
Total assets
Liabilities:
Long-term debt
Intercompany notes payable
Accrued long-term stock compensation
Other liabilities
Total liabilities
Stockholders’ Equity:
Preferred stock at $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: 101,620,436 – 2016; 100,861,372 – 2015
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Treasury stock – at cost (shares: 43,653,237 – 2016; 43,500,642 – 2015)
Total stockholders’ equity
Total liabilities and stockholders’ equity
SCHEDULE II
December 31,
2016
2015
73,509
17,777
458
61,567
29,116
898
1,845,410
1,716,681
19,766
19,562
840
18,297
17,513
670
1,977,322
1,844,742
328,667
79,324
32,029
5,932
445,952
328,192
86,163
26,465
5,881
446,701
—
—
$
$
$
$
$
203,241
347,295
1,568,881
(15,950)
(572,097)
1,531,370
$
1,977,322
201,723
326,656
1,446,192
(9,425)
(567,105)
1,398,041
1,844,742
See accompanying Report of Independent Registered Public Accounting Firm. Information should be read in conjunction with the Notes to Consolidated
Financial Statements of Selective Insurance Group, Inc. and its subsidiaries. Both items are in Item 8. “Financial Statements and Supplementary Data.” of this
Form 10-K.
141
SELECTIVE INSURANCE GROUP, INC.
(Parent Corporation)
Statements of Income
SCHEDULE II (continued)
Year ended December 31,
2016
2015
2014
$
61,014
1,259
(220)
—
62,053
24,030
35,020
59,050
57,752
57,511
852
—
—
620
2
340
58,604
58,473
24,057
28,393
52,450
24,817
23,598
48,415
($ in thousands)
Revenues:
Dividends from subsidiaries
Net investment income earned
Net realized (losses) gains
Other income
Total revenues
Expenses:
Interest expense
Other expenses
Total expenses
Income before federal income tax
3,003
6,154
10,058
Federal income tax benefit:
Current
Deferred
Total federal income tax benefit
(17,924)
(2,143)
(20,067)
(16,609)
(1,603)
(18,212)
(15,920)
(646)
(16,566)
Net income before equity in undistributed income of subsidiaries
23,070
24,366
26,624
Equity in undistributed income of subsidiaries, net of tax
135,425
141,495
115,203
Net income
$
158,495
165,861
141,827
See accompanying Report of Independent Registered Public Accounting Firm. Information should be read in conjunction with the Notes to Consolidated
Financial Statements of Selective Insurance Group, Inc. and its subsidiaries. Both items are in Item 8. “Financial Statements and Supplementary Data.” of this
Form 10-K.
142
SELECTIVE INSURANCE GROUP, INC.
(Parent Corporation)
Statements of Cash Flows
SCHEDULE II (continued)
($ in thousands)
Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of subsidiaries, net of tax
Stock-based compensation expense
Net realized losses (gains)
Amortization – other
Changes in assets and liabilities:
Increase in accrued long-term stock compensation
(Increase) decrease in net federal income taxes
(Decrease) increase in other assets
Increase (decrease) in other liabilities
Net cash provided by operating activities
Investing Activities:
Purchase of fixed income securities, available-for-sale
Redemption and maturities of fixed income securities, available-for-sale
Sale of fixed income securities, available-for-sale
Purchase of short-term investments
Sale of short-term investments
Net cash (used in) provided by investing activities
Financing Activities:
Dividends to stockholders
Acquisition of treasury stock
Net proceeds from stock purchase and compensation plans
Excess tax benefits from share-based payment arrangements
Principal payment on borrowings from subsidiaries
Net cash used in financing activities
Net (decrease) increase in cash
Cash, beginning of year
Cash, end of year
Year ended December 31,
2016
2015
2014
$
158,495
165,861
141,827
(135,425)
10,449
220
648
5,564
(3,612)
(202)
80
36,217
(45,789)
14,983
18,768
(119,501)
130,841
(698)
(33,758)
(4,992)
7,811
1,819
(6,839)
(35,959)
(440)
898
458
$
(141,495)
(115,203)
8,973
—
740
4,575
(3,052)
(12)
(202)
35,388
(33,717)
21,578
—
(106,933)
94,422
(24,650)
(31,052)
(4,182)
10,089
1,736
(2,798)
(26,207)
(15,469)
16,367
898
8,702
(2)
1,421
1,062
10,977
1,165
(120)
49,829
(18,511)
23,210
300
(102,717)
101,510
3,792
(28,428)
(3,563)
7,283
1,020
(13,759)
(37,447)
16,174
193
16,367
See accompanying Report of Independent Registered Public Accounting Firm. Information should be read in conjunction with the Notes to Consolidated
Financial Statements of Selective Insurance Group, Inc. and its subsidiaries. Both items are in Item 8. “Financial Statements and Supplementary Data.” of this
Form 10-K.
143
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 2016
SCHEDULE III
Deferred
policy
acquisition
costs
Reserve
for losses
and loss
expenses
Unearned
premiums
Net
premiums
earned
Net
investment
income1
Losses
and loss
expenses
incurred
Amortization
of deferred
policy
acquisition
costs2
Other
operating
expenses3
Net
premiums
written
$
181,193
3,098,554
884,976
1,665,483
16,664
24,707
286,081
307,084
282,111
95,732
280,607
203,482
—
—
—
913,506
367,813
237,730
1,745,782
177,749
143,542
34,105
48,410
56,334
18,451
281,822
209,684
($ in thousands)
Standard Commercial
Lines Segment
Standard Personal
Lines Segment
E&S Lines Segment
Investments Segment
—
—
—
—
125,817
—
—
—
—
Total
$
222,564
3,691,719
1,262,819
2,149,572
125,817
1,234,797
450,328
312,515
2,237,288
1Includes “Net investment income earned” and “Net realized investment gains” on the Consolidated Statements of Income.
2The total of “Amortization of deferred policy acquisition costs” of $450,328 and “Other operating expenses” of $312,515 reconciles to the Consolidated
Statements of Income as follows:
Policy acquisition costs
Other income3
Other expenses3
Total
$
$
763,758
(8,881)
7,966
762,843
3 In addition to amounts related to the Standard Commercial Lines, Standard Personal Lines, and E&S Lines, “Other income” and “Other expenses” on the
Consolidated Statements of Income includes holding company income and expense amounts of $0 and $35,023, respectively.
See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
Year ended December 31, 2015
Deferred
policy
acquisition
costs
Reserve
for losses
and loss
expenses
Unearned
premiums
Net
premiums
earned
Net
investment
income1
Losses
and loss
expenses
incurred
Amortization
of deferred
policy
acquisition
costs2
Other
operating
expenses3
Net
premiums
written
$ 171,476
2,998,749
803,648
1,529,442
17,258
24,425
—
265,054
253,925
—
276,533
89,529
—
288,134
172,333
—
134,487
—
—
—
819,573
323,753
221,620
1,596,965
200,237
128,731
—
33,638
42,044
—
52,923
18,361
—
283,926
189,013
—
($ in thousands)
Standard Commercial
Lines Segment
Standard Personal
Lines Segment
E&S Lines Segment
Investments Segment
Total
$ 213,159
3,517,728
1,169,710
1,989,909
134,487
1,148,541
399,435
292,904
2,069,904
1Includes “Net investment income earned” and “Net realized investment gains” on the Consolidated Statements of Income.
2 The total of “Amortization of deferred policy acquisition costs” of $399,435 and “Other operating expenses” of $292,904 reconciles to the Consolidated
Statements of Income as follows:
Policy acquisition costs
Other income3
Other expenses3
Total
$
$
689,820
(7,456)
9,975
692,339
3 In addition to amounts related to the Standard Commercial Lines, Standard Personal Lines, and E&S Lines, “Other income” and “Other expenses” on the
Consolidated Statements of Income includes holding company income and expense amounts of $0 and $28,396, respectively.
See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
144
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 2014
SCHEDULE III (continued)
($ in thousands)
Standard Commercial
Lines Segment
Standard Personal
Lines Segment
E&S Lines Segment
Investments Segment
Deferred
policy
acquisition
costs
Reserve
for losses
and loss
expenses
Unearned
premiums
Net
premiums
earned
Net
investment
income1
$ 147,285
3,000,796
734,697
1,415,712
17,495
20,828
—
279,761
197,313
—
285,777
75,345
—
296,747
140,150
—
165,307
Losses
and loss
expenses
incurred
Amortization
of deferred
policy
acquisition
costs2
Other
operating
expenses3
Net
premiums
written
870,018
295,774
188,699
1,441,047
197,182
90,301
—
34,851
33,670
—
48,178
15,793
—
292,061
152,172
—
—
—
—
Total
$ 185,608
3,477,870
1,095,819
1,852,609
165,307
1,157,501
364,295
252,670
1,885,280
1 Includes “Net investment income earned” and “Net realized investment gains” on the Consolidated Statements of Income.
2 The total of “Amortization of deferred policy acquisition costs” of $364,295 and “Other operating expenses” of $252,670 reconciles to the Consolidated
Statements of Income as follows:
Policy acquisition costs
Other income3
Other expenses3
Total
$
$
624,470
(16,598)
9,093
616,965
3 In addition to amounts related to the Standard Commercial Lines, Standard Personal Lines, and E&S Lines, “Other income” and “Other expenses” on the
Consolidated Statements of Income includes holding company income and expense amounts of $347 and $23,603, respectively.
See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
145
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
REINSURANCE
Years ended December 31, 2016, 2015, and 2014
SCHEDULE IV
($ thousands)
2016
Premiums earned:
Accident and health insurance
Property and liability insurance
Total premiums earned
2015
Premiums earned:
Accident and health insurance
Property and liability insurance
Total premiums earned
2014
Premiums earned:
Accident and health insurance
Property and liability insurance
Total premiums earned
Direct Amount
Assumed From
Other
Companies
Ceded to Other
Companies
Net Amount
% of Amount
Assumed
To Net
$
$
$
32
2,484,683
2,484,715
37
2,330,230
2,330,267
44
2,183,214
2,183,258
—
28,214
28,214
—
23,209
23,209
—
34,653
34,653
—
363,357
363,357
32
2,149,540
2,149,572
37
363,530
363,567
—
1,989,909
1,989,909
44
365,258
365,302
—
1,852,609
1,852,609
—
1%
1%
—
1 %
1 %
—
2 %
2 %
See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
ALLOWANCE FOR UNCOLLECTIBLE PREMIUMS AND OTHER RECEIVABLES
Years ended December 31, 2016, 2015, and 2014
SCHEDULE V
($ in thousands)
Balance, January 1
Additions
Deductions
Balance, December 31
2016
2015
2014
$
$
10,122
4,669
(3,311)
11,480
11,037
3,604
(4,519)
10,122
9,542
4,617
(3,122)
11,037
See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
146
EXHIBIT INDEX
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
10.1+
10.1a+
10.2+
10.2a
Amended and Restated Certificate of Incorporation of Selective Insurance Group, Inc., filed May 4, 2010
(incorporated by reference herein to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2010, File No. 001-33067).
By-Laws of Selective Insurance Group, Inc., effective July 29, 2015 (incorporated by reference herein to
Exhibit 3.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, File No.
001-33067).
Indenture, dated as of September 24, 2002, between Selective Insurance Group, Inc. and National City Bank,
as Trustee, relating to the Company's 1.6155% Senior Convertible Notes due September 24, 2032
(incorporated by reference herein to Exhibit 4.1 of the Company's Registration Statement on Form S-3 No.
333-101489).
Indenture, dated as of November 16, 2004, between Selective Insurance Group, Inc. and Wachovia Bank,
National Association, as Trustee, relating to the Company's 7.25% Senior Notes due 2034 (incorporated by
reference herein to Exhibit 4.1 of the Company's Current Report on Form 8-K filed November 18, 2004, File
No. 000-08641).
Indenture, dated as of November 3, 2005, between Selective Insurance Group, Inc. and Wachovia Bank,
National Association, as Trustee, relating to the Company’s 6.70% Senior Notes due 2035 (incorporated by
reference herein to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed November 9, 2005, File
No. 000-08641).
Registration Rights Agreement, dated as of November 16, 2004, between Selective Insurance Group, Inc. and
Keefe, Bruyette & Woods, Inc. (incorporated by reference herein to Exhibit 4.2 of the Company’s Current
Report on Form 8-K filed November 18, 2004, File No. 000-08641).
Registration Rights Agreement, dated as of November 3, 2005, between Selective Insurance Group, Inc. and
Keefe, Bruyette & Woods, Inc. (incorporated by reference herein to Exhibit 4.2 of the Company’s Current
Report on Form 8-K filed November 9, 2005, File No. 000-08641).
Indenture, dated as of February 8, 2013, between Selective Insurance Group, Inc. and U.S. Bank National
Association, as Trustee (incorporated by reference herein to Exhibit 4.1 of the Company's Current Report on
Form 8-K filed February 8, 2013, File No. 001-33067).
First Supplemental Indenture, dated as of February 8, 2013, between Selective Insurance Group, Inc. and U.S.
Bank National Association, as Trustee, relating to the Company’s 5.875% Senior Notes due 2043 (incorporated
by reference herein to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed February 8, 2013, File
No. 001-33067).
Selective Insurance Supplemental Pension Plan, As Amended and Restated Effective January 1, 2005
(incorporated by reference herein to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2008, File No. 001-33067).
Amendment No. 1 to Selective Insurance Supplemental Pension Plan, As Amended and Restated Effective
January 1, 2005 (incorporated by reference herein to Exhibit 10.1 of the Company's Current Report on Form 8-
K filed March 25, 2013, File No. 001-33067).
Selective Insurance Company of America Deferred Compensation Plan (2005), As Amended and Restated
Effective as of January 1, 2010 (incorporated by reference herein to Exhibit 10.2 of the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2011, File No. 001-33067).
Amendment No 1. to Selective Insurance Company of America Deferred Compensation Plan (2005)
(incorporated by reference herein to Exhibit 10.2a of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2011, File No. 001-33067).
147
Exhibit
Number
10.2b+
10.3+
10.4+
10.5+
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
10.12+
10.13+
10.14+
10.15+
Amendment No. 2 to Selective Insurance Company of America Deferred Compensation Plan (2005), As
Amended and Restated Effective as of January 1, 2010 (incorporated by reference herein to Exhibit 10.2 of the
Company's Current Report on Form 8-K filed March 25, 2013, File No. 001-33067).
Selective Insurance Group, Inc. 2014 Omnibus Stock Plan, effective May 1, 2014 (incorporated by reference
herein to Appendix A-1 to the Company’s Definitive Proxy Statement for its 2014 Annual Meeting of
Stockholders filed April 3, 2014, File No. 000-08641).
Selective Insurance Group, Inc. 2014 Omnibus Stock Plan Director Stock Option Agreement (incorporated by
reference herein to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March
31, 2014, File No. 000-08641).
Selective Insurance Group, Inc. 2014 Omnibus Stock Plan Stock Option Agreement (incorporated by reference
herein to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2014, File No. 000-08641).
Selective Insurance Group, Inc. 2014 Omnibus Stock Plan Service-Based Restricted Stock Agreement
(incorporated by reference herein to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2014 File No. 000-08641).
Selective Insurance Group, Inc. 2014 Omnibus Stock Plan Performance-Based Restricted Stock Agreement
(incorporated by reference herein to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2014, File No. 000-08641).
Selective Insurance Group, Inc. 2014 Omnibus Stock Plan Service-Based Restricted Stock Unit Agreement
(incorporated by reference herein to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2014 File No. 000-08641).
Selective Insurance Group, Inc. 2014 Omnibus Stock Plan Performance-Based Restricted Stock Unit
Agreement (incorporated by reference herein to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-
Q for the quarter ended March 31, 2014, File No. 000-08641).
Selective Insurance Group, Inc. 2014 Omnibus Stock Plan Director Restricted Stock Unit Agreement
(incorporated by reference herein to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2014, File No. 000-08641).
Selective Insurance Group, Inc. 2005 Omnibus Stock Plan As Amended and Restated Effective as of May 1,
2010 (incorporated by reference herein to Appendix C of the Company’s Definitive Proxy Statement for its
2010 Annual Meeting of Stockholders filed March 25, 2010, File No. 001-33067).
Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Stock Option Agreement (incorporated by reference
herein to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2006, File No. 000-08641).
Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Director Restricted Stock Unit Agreement
(incorporated by reference herein to Exhibit 10.8 of the Company’s Annual Report on Form 10-K for the year
ended December 31, 2009, File No. 001-33067).
Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Director Stock Option Agreement (incorporated by
reference herein to Exhibit 10.9 of the Company’s Annual Report on Form 10-K for the year ended December
31, 2005, File No. 000-08641).
Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Restricted Stock Unit Agreement (incorporated by
reference herein to Exhibit 10.12 of the Company’s Annual Report on Form 10-K for the year ended December
31, 2009, File No. 001-33067).
148
Exhibit
Number
10.16+
10.17+
Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Restricted Stock Unit Agreement (incorporated by
reference herein to Exhibit 10.13 of the Company’s Annual Report on Form 10-K for the year ended December
31, 2009, File No. 001-33067).
Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Automatic Director Stock Option Agreement
(incorporated by reference herein to Exhibit 2 of the Company’s Definitive Proxy Statement for its 2005
Annual Meeting of Stockholders filed April 6, 2005, File No. 000-08641).
10.18*
Selective Insurance Group, Inc. Non-Employee Directors’ Compensation and Deferral Plan, As Amended and
Restated Effective as of January 1, 2017.
10.19+
Deferred Compensation Plan for Directors (incorporated by reference herein to Exhibit 10.5 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 1993, File No. 000-08641).
10.20+
10.21+
10.22+
10.23+
10.24+
10.25+
Selective Insurance Group, Inc. Employee Stock Purchase Plan (2009), amended and restated effective July 1,
2009 (incorporated by reference herein to Appendix A to the Company’s Definitive Proxy Statement for its
2009 Annual Meeting of Stockholders filed March 26, 2009, File No. 001-33067).
Selective Insurance Group, Inc. Cash Incentive Plan As Amended and Restated as of May 1, 2014
(incorporated by reference herein to Appendix B to the Company’s Definitive Proxy Statement for its 2014
Annual Meeting of Stockholders filed March 24, 2014, File No. 001-33067).
Selective Insurance Group, Inc. Cash Incentive Plan Service-Based Cash Incentive Unit Award Agreement
(incorporated by reference herein to Exhibit 10.8 of the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2014, File No. 001-33067).
Selective Insurance Group, Inc. Cash Incentive Plan Performance-Based Cash Incentive Unit Award
Agreement (incorporated by reference herein to Exhibit 10.9 of the Company’s Quarterly Report on Form 10-
Q for the quarter ended March 31, 2014, File No. 001-33067).
Selective Insurance Group, Inc. Cash Incentive Plan Cash Incentive Unit Award Agreement (incorporated by
reference herein to Exhibit 10.14c of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2007, File No. 001-33067).
Selective Insurance Group, Inc. Cash Incentive Plan Cash Incentive Unit Award Agreement (incorporated by
reference herein to Exhibit 10.14d of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2007, File No. 001-33067).
10.26*
Amended and Restated Selective Insurance Group, Inc. Stock Purchase Plan for Independent Insurance
Agencies (2010), Amended and Restated as of February 1, 2017.
10.27+
10.28+
10.29+
Selective Insurance Group, Inc. Stock Option Plan for Directors (incorporated by reference herein to Exhibit B
of the Company’s Definitive Proxy Statement for its 2000 Annual Meeting of Stockholders filed March 31,
2000, File No. 000-08641).
Amendment to the Selective Insurance Group, Inc. Stock Option Plan for Directors, as amended, effective as
of July 26, 2006, (incorporated by reference herein to Exhibit 10.3 of the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2006, File No. 000-08641).
Selective Insurance Group, Inc. Stock Compensation Plan for Nonemployee Directors, (incorporated by
reference herein to Exhibit A of the Company’s Definitive Proxy Statement for its 2000 Annual Meeting of
Stockholders filed March 31, 2000, File No. 000-08641).
149
Exhibit
Number
10.30+
10.31+
10.32+
10.33+
10.34+
10.35
10.36
10.37+
10.38+
Amendment to Selective Insurance Group, Inc. Stock Compensation Plan for Nonemployee Directors, as
amended (incorporated by reference herein to Exhibit 10.22a of the Company’s Annual Report on Form 10-K
for the year ended December 31, 2008, File No. 001-33067).
Employment Agreement between Selective Insurance Company of America and Gregory E. Murphy, dated as
of December 23, 2008 (incorporated by reference herein to Exhibit 10.1 of the Company’s Current Report on
Form 8-K filed December 30, 2008, File No. 001-33067).
Employment Agreement between Selective Insurance Company of America and Michael H. Lanza, dated as of
December 23, 2008 (incorporated by reference herein to Exhibit 10.23e of the Company’s Annual Report on
Form 10-K for the year ended December 31, 2008, File No. 001-33067).
Employment Agreement between Selective Insurance Company of America and John J. Marchioni, dated as of
September 10, 2013 (incorporated by reference herein to Exhibit 10.1 of the Company’s Current Report on
Form 8-K filed September 11, 2013, File No. 001-33067).
Employment Agreement between Selective Insurance Company of America and Mark A. Wilcox, dated as of
October 28, 2016 (incorporated by reference herein to Exhibit 10.1 of the Company’s Current Report on Form
8-K filed October 31, 2016, File No. 001-33067).
Credit Agreement among Selective Insurance Group, Inc., the Lenders Named Therein and Wells Fargo Bank,
National Association, as Administrative Agent, dated as of December 1, 2015.
Form of Indemnification Agreement between Selective Insurance Group, Inc. and each of its directors and
executive officers, as adopted on May 19, 2005 (incorporated by reference herein to Exhibit 10.1 of the
Company’s Current Report on Form 8-K filed May 20, 2005, File No. 000-08641).
Selective Insurance Group, Inc. Non-Employee Directors’ Deferred Compensation Plan (incorporated by
reference herein to Exhibit 10.27 of the Company’s Annual Report on Form 10-K for the year ended December
31, 2009, File No. 001-33067).
Amendment No. 1 to the Selective Insurance Group, Inc. Non-Employee Directors’ Deferred Compensation
Plan (incorporated by reference herein to Exhibit 10.27a of the Company’s Annual Report on Form 10-K for
the year ended December 31, 2010, File No. 001-33067).
150
Exhibit
Number
*21
Subsidiaries of Selective Insurance Group, Inc.
*23.1
Consent of KPMG LLP.
*24.1
Power of Attorney of Paul D. Bauer.
*24.2
Power of Attorney of A. David Brown.
*24.3
Power of Attorney of John C. Burville.
*24.4
Power of Attorney of Robert Kelly Doherty.
*24.5
Power of Attorney of Michael J. Morrissey.
*24.6
Power of Attorney of Cynthia S. Nicholson.
*24.7
Power of Attorney of Ronald L. O'Kelley.
*24.8
Power of Attorney of William M. Rue.
*24.9
Power of Attorney of John S. Scheid.
*24.10
Power of Attorney of J. Brian Thebault.
*24.11
Power of Attorney of Philip H. Urban.
*31.1
*31.2
*32.1
Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.
*32.2
Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.
*99.1
Glossary of Terms.
XBRL Instance Document.
** 101.INS
** 101.SCH XBRL Taxonomy Extension Schema Document.
** 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
** 101.LAB XBRL Taxonomy Extension Label Linkbase Document.
** 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
** 101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
* Filed herewith.
** Furnished and not filed herewith.
+ Management compensation plan or arrangement.
151
SELECTIVE INSURANCE GROUP, INC.
SUBSIDIARIES AS OF DECEMBER 31, 2016
Name
Jurisdiction
in which
organized
Parent
Mesa Underwriters Specialty Insurance Company
New Jersey
Selective Insurance Group, Inc.
Selective Auto Insurance Company of New Jersey
New Jersey
Selective Insurance Group, Inc.
Selective Casualty Insurance Company
New Jersey
Selective Insurance Group, Inc.
Selective Fire and Casualty Insurance Company
New Jersey
Selective Insurance Group, Inc.
Selective Insurance Company of America
New Jersey
Selective Insurance Group, Inc.
Selective Insurance Company of New England
New Jersey
Selective Insurance Group, Inc.
Selective Insurance Company of New York
New York
Selective Insurance Group, Inc.
Selective Insurance Company of South Carolina
Indiana
Selective Insurance Group, Inc.
Selective Insurance Company of the Southeast
Indiana
Selective Insurance Group, Inc.
Selective Way Insurance Company
New Jersey
Selective Insurance Group, Inc.
SRM Insurance Brokerage, LLC.
New Jersey
Selective Way Insurance Company
Wantage Avenue Holding Company, Inc.
New Jersey
Selective Insurance Group, Inc.
Selective Insurance Company of the Southeast
Exhibit 21
Percentage
voting
securities
owned
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
75%
25%
100%
152
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Selective Insurance Group, Inc.:
We consent to the incorporation by reference in the registration statements
333-168765, 333-125451,
333-14620, 333-147383, 333-41674, 333-10465, 333-88806, 333-97799, 333-37501, 333-87832, and 333-31942) on Form S-8
and registration statements (Nos. 333-204846, 333-136578, 333-136024, 333-110576, 333-101489, and 333-71953) on Form S-3
of Selective Insurance Group, Inc. (“Selective”) of our reports dated February 21, 2017, with respect to the consolidated balance
sheets of Selective and its subsidiaries as of December 31, 2016 and 2015, and 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,
2016, and all related financial statement schedules, and the effectiveness of internal control over financial reporting as of
of Selective Insurance Group,
December 31, 2016, which reports appear in the December 31, 2016 annual report on Form
Inc.
/s/ KPMG LLP
New York, New York
February 21, 2017
153 Exhibit 31.1
Certification pursuant to Rule 13a–14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, GREGORY E. MURPHY, Chairman of the Board and Chief Executive Officer of Selective Insurance Group, Inc. (the
“Company”), certify, that:
1. I have reviewed this annual report on Form 10-K of the Company;
2. Based on my knowledge, this annual report on Form 10-K does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report on Form 10-
K, fairly present in all material respects the financial condition, results of operations, comprehensive income and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant's internal control over financial reporting.
Date: February 21, 2017
By: /s/ Gregory E. Murphy
Gregory E. Murphy
Chairman of the Board and Chief Executive Officer
154
Exhibit 31.2
Certification pursuant to Rule 13a-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, MARK A. WILCOX, Executive Vice President and Chief Financial Officer of Selective Insurance Group, Inc. (the
“Company”), certify, that:
1. I have reviewed this annual report on Form 10-K of the Company;
2. Based on my knowledge, this annual report on Form 10-K does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report on Form 10-
K, fairly present in all material respects the financial condition, results of operations, comprehensive income and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 21, 2017
By: /s/ Mark A. Wilcox
Mark A. Wilcox
Executive Vice President and Chief Financial Officer
155
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
I, GREGORY E. MURPHY, the Chairman of the Board and Chief Executive Officer of Selective Insurance Group, Inc.
(the “Company”), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that the annual report on Form 10-K of the Company for the period ended December 31, 2016, which this
certification accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934, and the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: February 21, 2017
By: /s/ Gregory E. Murphy
Gregory E. Murphy
Chairman of the Board and Chief Executive Officer
156
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2
I, MARK A. WILCOX, the Executive Vice President and Chief Financial Officer of Selective Insurance Group, Inc. (the
“Company”), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that the annual report on Form 10-K of the Company for the period ended December 31, 2016, which this certification
accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the
information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: February 21, 2017
By: /s/ Mark A. Wilcox
Mark A. Wilcox
Executive Vice President and Chief Financial Officer
157
Glossary of Terms
Accident Year: accident year reporting focuses on the cost of the losses that
occurred in a given year regardless of when reported. These losses are calculated
by adding all payments that have been made for those losses occurring in a
given calendar year (regardless of the year in which they were paid) to any
current reserve that remains for losses that occurred in that given calendar year.
Agent (Independent Retail Insurance Agent): a distribution partner who
recommends and markets insurance to individuals and businesses; usually
represents several insurance companies. Insurance companies pay agents for
business production.
Allocated loss adjustment expenses: defense, litigation, and medical cost
containment expense, whether internal or external, that can be attributed to a
specific claim.
Audit Premium: premiums based on data from an insured’s records, such as
payroll data. Insured’s records are subject to periodic audit for purposes of
verifying premium amounts.
Catastrophe Loss: severe loss, as defined by the Insurance Services Office's
Property Claims Service (PCS) unit, either natural or man-made, usually
involving, but not limited to, many risks from one occurrence such as fire,
hurricane, tornado, earthquake, windstorm, explosion, hail, severe winter
weather, and terrorism.
Combined Ratio: measure of underwriting profitability determined by
dividing the sum of all GAAP expenses (losses, loss expenses, underwriting
expenses, and dividends to policyholders) by GAAP net premiums earned for
the period. A ratio over 100% is indicative of an underwriting loss, and a ratio
below 100% is indicative of an underwriting profit.
Contract Binding Authority: business that is written in accordance with a
well-defined underwriting strategy that clearly delineates risk eligibility, rates,
and coverages; generally distributed through wholesale general agents.
Credit Risk: risk that a financially-obligated party will default on any type of
debt by failing to make payment obligations. Examples include: (i) a bond issuer
does not make a payment on a coupon or principal payment when due; or (ii)
a reinsurer does not pay policy obligations.
Credit Spread Risk: represent the risk premium required by market
participants for a given credit quality and debt issuer. Spread is the difference
between the yield on a particular debt instrument and the yield of a similar
maturity U.S. Treasury debt security. Changes in credit spreads may arise from
changes in economic conditions and perceived risk of default or downgrade of
individual debt issuers.
Customers: another term for policyholders; individuals or entities that
purchase our insurance products or services.
Exhibit 99.1
Liquidity Spread: represents the risk premium that flows to a market
participant willing to provide liquidity to another market participant that is
demanding it. The spread is the difference between the price a seller is willing
to accept to sell the asset and the price the buyer is willing to pay for the asset.
Loss Expenses: expenses incurred in the process of evaluating, defending, and
paying claims.
Loss and Loss Expense Reserves: amount of money an insurer expects to pay
for claim obligations and related expenses resulting from losses that have
occurred and are covered by insurance policies it has sold.
Operating Income: non-GAAP measure that is comparable to net income with
the exclusion of capital gains and losses and the results of discontinued
operations. Operating income is used as an important financial measure by us,
analysts, and investors, because the realization of investment gains and losses
on sales in any given period is largely discretionary as to timing. Realized
investment gains and losses, and other-than-temporary impairment charges
included in earnings, and the results of discontinued operations, could distort
the analysis of trends.
Operating Income per Diluted Share: non-GAAP measure that is comparable
to net income per diluted share with the exclusion of capital gains and losses
and the results of discontinued operations.
Operating Return on Average Equity: measurement of profitability that
reveals the amount of operating income generated by dividing operating income
by average stockholders’ equity during the period.
Reinsurance: insurance company assuming all or part of a risk undertaken by
another insurance company. Reinsurance spreads the risk among insurance
companies to reduce the impact of losses on individual companies. Types of
reinsurance include proportional, excess of loss, treaty, and facultative.
Premiums Written: premiums for all policies sold during a specific accounting
period.
Renewal Pure Price: estimated average premium change on renewal policies
(excludes exposure changes).
Reported claim count: amount of reported claims, including those closed
without payment.
Retention: measures how well an insurance company retains business by count;
is expressed as a ratio of renewed over expired policies.
Risk: two distinct and frequently used meanings in insurance: (i) the chance
that a claim loss will occur; or (ii) an insured or the property covered by a policy.
Severity: amount of damage that is, or may be, inflicted by a loss or catastrophe.
Diluted Weighted Average Shares Outstanding: represents weighted-
average common shares outstanding adjusted for the impact of any dilutive
common stock equivalents.
Statutory Accounting Principles (SAP): accounting practices prescribed and
required by the National Association of Insurance Commissioners (“NAIC”)
and state insurance departments that stress evaluation of a company’s solvency.
Distribution Partners: insurance consultants that we partner with in selling
our insurance products and services. Independent retail insurance agents are
our distribution partners for standard market business and wholesale general
agents are our distribution partners for E&S market business.
Earned Premiums: portion of a premium that is recognized as income based
on the expired portion of the policy period.
Statutory Combined Ratio: measurement commonly used within the property
and casualty insurance industry to measure underwriting profit or loss;
combination of underwriting expense ratio, loss and loss expense ratio, and
dividends to policyholders ratio. The loss and loss expense ratio and dividends
to policyholders ratio are calculated by dividing expenses by statutory net
premiums earned. The underwriting expense ratio is calculated by dividing
underwriting expenses by net premiums written.
Effective Duration: expressed in years, provides an approximate measure of
the portfolio's price sensitivity to a change in interest rates, taking into
consideration how the change in interest rates may impact the timing of expected
cash flows.
Frequency: likelihood that a loss will occur. Expressed as low frequency
(meaning the loss event is possible but has rarely happened in the past and is
not likely to occur in the future), moderate frequency (meaning the loss event
has happened once in a while and can be expected to occur sometime in the
future), or high frequency (meaning the loss event happens regularly and can
be expected to occur regularly in the future).
Generally Accepted Accounting Principles (GAAP): accounting practices
used in the United States of America determined by the Financial Accounting
Standards Board. Public companies use GAAP when preparing financial
statements to be filed with the United States Securities and Exchange
Commission.
Incurred But Not Reported (IBNR) Reserves: reserves for estimated losses
that have been incurred by insureds but not yet reported plus provisions for
future emergence on known claims and reopened claims.
Interest Rate Risk: exposure to interest rate risk relates primarily to market
price and cash flow variability associated with changes in interest rates. A rise
in interest rates may decrease the fair value of our existing fixed maturity
investments and declines in interest rates may result in an increase in the fair
value of our existing fixed maturity investments.
Invested Assets per Dollar of Stockholders' Equity Ratio: measure of
investment leverage calculated by dividing invested assets by stockholders'
equity.
Statutory Premiums to Surplus Ratio: statutory measure of solvency risk
calculated by dividing net statutory premiums written for the year by the ending
statutory surplus.
Statutory Surplus: amount left after an insurance company’s liabilities are
subtracted from its assets. Statutory surplus is not based on GAAP, but SAP
prescribed or permitted by state and foreign insurance regulators.
Unallocated loss adjustment expenses: loss adjustment expenses other than
allocated loss adjustment expenses.
Underwriting: insurer’s process of reviewing applications submitted for
insurance coverage, deciding whether to provide all or part of the coverage
requested, and determining applicable premiums and terms and conditions of
coverage.
Underwriting Result: underwriting income or loss; represents premiums
earned less insurance losses and loss expenses, underwriting expenses, and
dividends to policyholders (determined on a GAAP or SAP basis). Also referred
to as the GAAP underwriting result or the statutory underwriting result. This
measure of performance is used by management and analysts to evaluate
profitability of underwriting operations and is not intended to replace GAAP
net income.
Unearned Premiums: portion of a premium that a company has written but
has yet to earn because a portion of the policy is unexpired.
Wholesale General Agent: distribution partner authorized to underwrite on
behalf of a surplus lines insurer through binding authority agreements.
Insurance companies pay wholesale general agents for business production.
158 DIRECTORS
Paul D. Bauer 1998
Lead Independent Director, Selective Insurance Group, Inc.
Retired, former Executive Vice President and
Chief Financial Officer, Tops Markets, Inc.
A. David Brown 1996 to April 2015 and since July 2015
Retired, former Executive Vice President and
Chief Administrative Officer, Urban Brands, Inc.
John C. Burville, Ph.D, FIA, MAAA 2006
Retired, former Insurance Consultant
to the Bermuda Government
Robert Kelly Doherty 2015
Managing Partner, Caymen Advisors
and Caymen Partners
Michael J. Morrissey, CFA 2008
President and Chief Executive Officer,
International Insurance Society, Inc.
Gregory E. Murphy 1997
Chairman and Chief Executive Officer,
Selective Insurance Group, Inc.
Cynthia (Cie) S. Nicholson 2009
Chief Operating Officer, Forkcast
Ronald L. O’Kelley 2005
Chairman and Chief Executive Officer,
Atlantic Coast Venture Investments Inc.
William M. Rue 1977
Chairman, Chas. E. Rue & Son, Inc.,
t/a Rue Insurance
John S. Scheid, CPA 2014
Owner, Scheid Investment Group, LLC
Former Senior Partner, PricewaterhouseCoopers LLC
J. Brian Thebault 1996
Partner, Thebault Associates
Philip H. Urban 2014
Retired, former President and
Chief Executive Officer, Grange Insurance
The first Board of
Directors in 1926.
Selective 2016 Annual Report
OFFICERS
Chairman and
Chief Executive Officer
Gregory E. Murphy 1,2
President and
Chief Operating Officer
John J. Marchioni 1,2
Executive
Vice Presidents
Angelique M. Carbo 2
Chief Human Resources Officer
Gordon J. Gaudet 2
Chief Information Officer
Michael H. Lanza 1,2
General Counsel and
Chief Compliance Officer
George A. Neale 2
Chief Claims Officer
Mark A. Wilcox 1,2
Chief Financial Officer
Ronald J. Zaleski, Sr. 1,2
Chief Actuary
1 Selective Insurance Group, Inc.
2 Selective Insurance Company of America
Senior Vice Presidents
Charles C. Adams 2
Regional Manager
Mid-Atlantic Region
Shadi Albert 2
Regional Manager
Southwest Region
Allen H. Anderson 2
Chief Underwriting Officer
Personal Lines/Flood
Jeffrey F. Beck 2
Government and Regulatory Affairs
John P. Bresney 2
Enterprise Application
Delivery Services
Teresa M. Caro 2
Regional Manager
New Jersey Region
Sarita G. Chakravarthi 1,2
Tax and Assistant Treasurer
Thomas M. Clark 2
Claims General Counsel
Joseph O. Eppers 1,2
Chief Investment Officer
Brenda M. Hall 2
Chief Strategic Operations Officer
Anthony D. Harnett 1,2
Chief Accounting Officer
Todd Hoivik 2
Commercial Lines Pricing
and Research
Martin Hollander 1,2
Chief Audit Executive
Kory Jensen 2
IT Infrastructure and Operations
Jeffrey F. Kamrowski 2
Chief Underwriting Officer
Commercial Lines
Robert J. McKenna, Jr. 2
Enterprise Architecture and
Information Security
James McLain 2
Chief Field Operations Officer
Ryan Miller 2
Regional Manager
Southern Region
Yanina Montau-Hupka 1,2
Chief Risk Officer
Rohit Mull 2
Chief Marketing Officer
Charles A. Musilli, III 2
Distribution Strategy
Richard R. Nenaber 2
MUSIC
Rohan Pai 1,2
Investor Relations and Treasurer
Thomas S. Purnell 2
Regional Manager
Northeast Region
Erik A. Reidenbach 2
Regional Manager
Heartland Region
Brian C. Sarisky 2
Commercial Lines Underwriting
Vincent M. Senia 2
Director of Actuarial Reserving
90“So valuable is the human element that I will not
let this Company lose the human touch which
has been largely responsible for its success.”
-D.L.B. Smith
Founder
A horse and carriage accident in the early 1900’s led D.L.B. Smith to enter the insurance business and, in 1926,
establish the Selected Risks Insurance Company in New Jersey. While much has changed over nine decades of growth,
expansion and improvements, some things have remained the same, including the company’s commitment to servicing
customers and independent insurance agents. The historical highlights below are some of the milestones that helped
lay the foundation for Selective’s success today, our “high-tech, high-touch” business model, and unique field model.
1926
Selected issued its
first policy — a 1925
Hupmobile sedan — with
an annual premium of
$19.20.
1975
The company adds
fidelity, contract surety,
and commercial surety
bonds to its array of
products.
1995
Selective launched an
improved and expanded
field underwriting
program to bring
underwriting decision-
making closer to
customers.
2003
Selective advanced its
underwriting technology by
enhancing the Commercial
Lines Automated System
(CLAS®) and launching
SelectPLUS® for
Personal Lines.
1931
Coverages were
expanded to include
general liability,
workers compensation,
property, and municipal
government insurance.
1977
Selective Insurance
Group, Inc. (formerly
named SRI Corporation)
was incorporated.
1996
Selective began a
Midwest expansion,
adding nine new states
over two years.
1937
The company began
its growth as a regional
insurer by adding PA,
MD, DE, and DC to its
operating territory.
1962
The IBM RAMAC 1401
computer was installed,
enabling the company
to process 13 policies
per minute.
1984
The company began
issuing flood insurance
on behalf of the federal
government’s “Write
Your Own” flood
program.
2000
Selective formalized its
“high-tech, high-touch”
business model to
emphasize its commitment
to personalized customer
service and technology.
1993
Operations were
restructured into Strategic
Business Units to focus
on underwriting and
product development
for specific business
segments.
2001
Selective opened a Service
Center in Richmond,
VA, which now handles
underwriting, claims, and
personal lines services.
2007
Selective continued its
expansion by adding
MA to its operating
territory, followed by TN
in 2008.
2011
Selective acquired two
contract binding authority
excess and surplus
operations, now known
as Mesa Underwriters
Specialty Insurance
Company (MUSIC).
2016
As Selective celebrated its
90th year in business, the
company achieved record
underwriting profitability
and announced plans for a
Southwest expansion.
For the full story of our history, please visit www.Selective.com.
INVESTOR INFORMATION
Annual Meeting
Wednesday, April 26, 2017
Selective Insurance Group, Inc.
40 Wantage Avenue
Branchville, New Jersey 07890
Investor Relations
Rohan Pai
Senior Vice President
Investor Relations and Treasurer
(973) 948.1364
investor.relations@Selective.com
Dividend Reinvestment Plan
Selective Insurance Group, Inc. makes available
to holders of its common stock an automatic
dividend reinvestment and stock purchase plan.
For information contact:
Wells Fargo Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164
(866) 877.6351
Registrar and Transfer Agent
Wells Fargo Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164
(866) 877.6351
Auditors
KPMG LLP
345 Park Avenue
New York, New York 10154
Internal Audit Department
Martin Hollander
Chief Audit Executive
internal.audit@Selective.com
Executive Office
40 Wantage Avenue
Branchville, New Jersey 07890
(973) 948.3000
Shareholder Relations
Robyn P. Turner
Corporate Secretary
(973) 948.1766
shareholder.relations@Selective.com
Common Stock Information
Selective Insurance Group, Inc.’s common
stock trades on the NASDAQ Global Select
Market under the symbol: SIGI.
Form 10-K
Selective’s Form 10-K, as filed with the
U.S. Securities and Exchange Commission,
is provided as part of this 2016 Annual Report.
Website
Visit us at www.Selective.com
for information about Selective,
including our latest financial news.
Selective Insurance Group, Inc.
40 Wantage Avenue
Branchville, New Jersey 07890
www.Selective.com
The Selective Mobile App
Where we put Response is everything.®
in the palm of your hand.
ANNUAL
REPORT
2016
90 years of personalized service and “Being the Best”
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