2018
AN EXCELLENT YEAR
ON A PATH THAT ESTABLISHED
OUR MARKET-LEADING POSITION
Selective's elite performance has
allowed us to be in our strongest
financial position ever.
6%
Net Premiums
Written
95.0%
35%
Combined
Ratio
Net Investment
Income After-Tax
12.5%
Non-GAAP Operating
Return on Equity*
5.1%
Total Return
to Shareholders
Selective Insurance Group, Inc. is a New Jersey holding
company for ten property and casualty insurance
companies. Selective is the 35th† largest property and
casualty company in the U.S. and rated “A” (Excellent) by
A.M. Best. We provide risk management solutions and
value-added services to businesses, public entities, and
individuals through the following segments:
Standard Commercial
79% of business
Standard Personal
12% of business
Excess & Surplus (E&S)
9% of business
* Non-GAAP operating income, non-GAAP operating income per diluted share, and non-GAAP
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, 2018,
2017, and 2016” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results
of Operations,” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2018 for a reconciliation of the non-GAAP measures to the equivalent GAAP measures.
† According to A.M. Best Top 200 U.S. Property/Casualty Writers, ranked by 2017 net premiums written.
With a best-in-class team of
employees and an unwavering
commitment to service
excellence, Selective achieved
the following key measures of
success:
Continued Outperformance: For 2018, we
achieved double-digit non-GAAP operating
return on equity* (ROE) of 12.5% – our fifth
consecutive year of double digit non-GAAP
ROE – placing us among an extremely select
group of insurance companies that have
achieved this level of elite performance.
Premium Growth: Each of our segments
contributed to the overall net premiums
written (NPW) growth for 2018, including 6%
in Standard Commercial Lines, 4% in Standard
Personal Lines, and 7% in E&S Lines. For the
year, our consolidated combined ratio was
95.0%, contributing 5.5 points of ROE.
Investments: Our investment portfolio
generated superior results for the year, with
after-tax net investment income up 35% from
2017, to $160 million. With an invested assets
to equity ratio of 3.3x and an after-tax yield on
our investment portfolio of 2.8%, investment
income performance was a strong contributor
of 9.2 points of ROE for the year.
Return to Shareholders: Selective’s total
return to shareholders for 2018 was 5.1%,
significantly outperforming the performance
of our peers and the S&P 500 Index, which
was down 4.4%. We are extremely proud of
our continued track record of generating solid
returns for our shareholders.
Expansion: For a second consecutive year, we
continued our geographic expansion and began
offering Standard Commercial Lines coverages
in Colorado, Utah, and New Mexico, and
Standard Personal Lines coverages in Arizona
and Utah. These states, in addition to Arizona
and New Hampshire where we began offering
Standard Commercial Lines coverages in 2017,
contributed $34 million in total premium in 2018.
2018 FINANCIAL HIGHLIGHTS
2018
2017
% or Point Change
Better (Worse)
($ in millions, except per share data)
Insurance Operations
Net premiums written
Combined ratio
Underwriting gain after-tax
Return on equity from insurance operations after-tax
Investments
Net investment income after-tax
Net realized and unrealized (losses) gains after-tax
$2,514.3
$2,370.6
95.0%
$95.7
5.5%
$160.5
($39.6)
93.3%
$100.3
6.2%
$118.5
$4.1
Total invested assets
$5,960.7
$5,685.2
$3.33
2.8%
9.2%
$3.32
2.1%
7.3%
$2,586.1
$2,470.0
$178.9
10.2%
$218.6
12.5%
18.1%
$168.8
10.4%
$184.9
11.4%
16.0%
$7,952.7
$7,686.4
$1,791.8
$1,713.0
$3.00
$3.66
$0.74
$2.84
$3.11
$0.66
$30.40
$29.28
Invested assets per dollar of stockholders’ equity
Annual after-tax yield on investment portfolio
Return on equity from net investment income after-tax
Summary Data
Total revenues
Net income
Return on equity
Non-GAAP operating income*
Non-GAAP operating return on equity*
Operating cash flow as % of net premiums written
Total assets
Stockholders’ equity
Per Share Data
Diluted net income
Diluted non-GAAP operating income*
Dividends to stockholders
Stockholders’ equity
AVERAGE
ANNUAL
RETURN
Growth of a $10,000
investment (year-end
2013-2018)
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
6%
(1.7) pts
(5)%
(0.7) pts
35%
(1,059)%
5%
--%
0.7 pts
1.9 pts
5%
6%
(0.2) pts
18%
1.1 pts
2.1 pts
3%
5%
6%
18%
12%
4%
SIGI
S&P 500
S&P Prop/Cas
2013
2014
2015
2016
2017
2018
* Non-GAAP operating income, non-GAAP operating income per diluted share, and non-GAAP 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, 2018, 2017, and 2016” in Item 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 for a reconciliation of the non-GAAP measures to the equivalent
GAAP measures.
SELECTIVE 2018 ANNUAL REPORT 1
Selective had another excellent year of
financial and operating performance,
building on the momentum of recent
years with a double-digit non-GAAP
operating ROE, continued strong NPW
growth, and tremendous execution on
our strategic imperatives. 2018 marks the
fifth consecutive year of solid double-digit
non-GAAP operating ROEs for Selective,
Gregory E. Murphy, Chairman and CEO, and
John J. Marchioni, President and COO
placing us among an extremely select
group of insurance companies that have
achieved this level of elite performance.
This is a particularly impressive track
record in the context of: (i) material
industry insured catastrophe losses; (ii) a
very competitive commercial lines pricing
environment; and (iii) a depressed interest
rate environment. Going into 2018,
management established high standards
in all aspects of Selective’s business,
and focused the Company’s resources
on executing and exceeding these
ambitious financial and operating goals.
Our strong financial results combined with
our best-in-class employees’ successful
execution have allowed Selective to be in
its strongest financial position ever, setting
the stage for continued outperformance
relative to the industry.
HOW
WE’RE
RAISING
THE BAR
A LETTER
TO OUR
SHAREHOLDERS
2
Financial results have been extremely strong in recent years
Each year, we establish a target non-GAAP operating
ROE that is well above our cost of capital, and takes into
account macro factors such as property and casualty
insurance market conditions and interest rates. For 2018,
Selective’s non-GAAP operating ROE of 12.5% exceeded
our 12.0% target, and was among the highest relative to
our peer group. Overall NPW grew a solid 6% for the year.
Underwriting operations produced a very profitable 95.0%
combined ratio, contributing 5.5 points of ROE. Selective’s
best-in-class underwriting results reflect the hard work of
our employees, our sophisticated pricing and risk analytic
tools, and our seamless capability to work effectively with
the Company’s “ivy league” distribution partners.
(iii) executing a growth strategy in our 27-state Standard
Commercial Lines footprint; (iv) improving profitability in our
E&S segment; and (v) actively managing the investment
portfolio to optimize risk-adjusted after-tax yields.
• A focus on achieving adequate price: We have often
said that “arithmetic has no mercy” and that the only
way to produce long-term sustainable underwriting
results is through the generation of overall renewal
pure price increases at or in excess of expected loss
trend. We are very proud of achieving overall renewal
pure price increases that averaged 3.6%, in line with
expected claim trend. Our ability to consistently obtain
the appropriate level of price increases is due, in part,
to our solid relationships with distribution partners and
BOOK VALUE PER SHARE AND
STOCKHOLDERS’ EQUITY GROWTH
MARKET CAPITALIZATION
$32
$24
$16
$8
$30.40
$2,000
$15.81
'08
'09
'10
'11
'12
'13
'14
'15
'16
'17
'18
)
s
n
o
i
l
l
i
m
n
i
$
(
$1,500
$1,000
$500
$0
$4B
$3
$2
$1
$0
$1.2B
$3.6B
GAAP Stockholders’ Equity
Book Value Per Share
'08 '09 '10 '11
'12 '13 '14 '15 '16 '17 '18
Our excellent investment income, after tax, contributed 9.2
points to the ROE for the year, benefiting from: (i) higher
interest rates; (ii) active portfolio management; (iii) excellent
operating cash flow that was 18% of NPW; (iv) improved
alternative investment returns; and (v) a lower Federal
income tax rate.
our excellent underwriting capabilities that allow us to
efficiently price risks on a granular basis. Insurance is
a business in which we do not know the actual value
of claims at point of sale, and underestimating pricing
can have a significant negative impact on future
underwriting results.
Financial results have benefited share price performance
Selective’s total return to shareholders for 2018 was 5.1%,
significantly outperforming the performance of our peers
(down 4.7% on average), and the S&P 500 Index (down
4.4%). Over the past five years, Selective’s shareholders
experienced returns averaging 19.6% annually, compared to
11.3% on average for the S&P Property & Casualty Insurance
Index and 8.5% on average for the S&P 500 Index.
We established high operational objectives
Successfully executing on key operational and strategic
objectives positions us well to meet or exceed Selective’s
financial targets in a highly competitive industry. Key
operational targets include: (i) achieving overall pure price
increases in line with expected claims inflation; (ii) ongoing
enhancement of the customer experience (CX) strategy,
including the introduction of value-added services;
• Enhancing the customer experience while
introducing value-added products and services: We
are investing in technologies that enable enhanced
overall CX, with a goal toward increasing both renewal
retention and new business hit ratios. Our goal is to
deliver a superior omni-channel experience, enabling
customers to interact with us in a 24/7 environment
in a manner of their choosing. Take up rates for our
digital platform offerings are strong in both Standard
Personal and Commercial Lines. The development of a
360-degree view of customers through our master data
management program enhances our ability to engage
with customers through initiatives such as proactive
messaging in relation to product recalls, potential loss
activity, or policy changes. Because the relationship
with the ultimate customer is a shared experience with
distribution partners, we have been working closely to
SELECTIVE 2018 ANNUAL REPORT 3
CONSERVATIVE INVESTMENT PORTFOLIO
develop higher levels of CX experience with a focus
on first call resolution, 24-hour service, and significant
digital capabilities.
We are also expanding value-added technology
solutions for customers with a goal toward further
increasing customer satisfaction. Our Selective®
Drive program was introduced to policyholders with
commercial auto vehicles in 2018. Leveraging
connected sensors, this platform helps fleet owners
with logistics management and improved safety by
tracking and scoring individual drivers based on driving
attributes. Selective® Drive provides business owners
with information such as driver speed, location and
route, distracted driving, and harsh events like sudden
braking and turning. This
value-added product will
increase new business hit
ratios and retention rates,
and most importantly,
influence driving behavior
and improve loss
experience.
$6.0 billion as of 12/31/2018
• Executing on our growth
strategy: The Company’s
goal for top line expansion
includes reaching the
long-term target of a 3%
Standard Commercial
Lines market share in
our existing geographic
footprint. To achieve a
3% market share, two
targets were established:
(i) appointing distribution
partners that control 25% of statewide market share;
and (ii) writing 12% of their premium. Achieving our
market share goal within the current footprint translates
to an additional premium opportunity in excess of $2
billion. During 2018, we appointed 110 new distribution
partners, including in our newly-opened geo-expansion
states, bringing the total to over 1,320 distribution
partners, and approximately 2,200 storefronts.
Short-term: 5%
Our geo-expansion strategy continues to be on-track,
as we successfully established a regional hub in the
Southwest, and launched on a greenfield basis five
states (Arizona, Colorado, Utah, New Mexico, and New
Hampshire) that for the year contributed $26 million
in new business. We are now fully operational for
Standard Commercial Lines in 27 states. We are very
pleased with the receptivity of new distribution partners
in each of the geo-expansion states, which validates
the strength of the Company’s business model and
uniqueness of our franchise. By limiting our distribution
partner appointments to approximately 50 in our five
new states, we are positioned to grow profitably with a
small group of “ivy league” distribution partners.
4
• Improving E&S profitability: Aggressive steps
have been taken to address profitability in the E&S
segment, where results in recent years have lagged
expectations. Some of these actions include:
(i) implementing targeted price increases; (ii) eliminating
challenged segments of the business; and (iii) driving
claim process improvements. We sacrificed growth
during 2017 and the first half of 2018 as we addressed
underwriting profitability and exited some unprofitable
classes. We have begun to see improvement in
profitability from these actions and plan to maintain our
focus on this front as we have started to see a return to
reasonable growth rates.
• Actively managing the investment portfolio to
optimize after-tax income: The 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 our
conservative investment
portfolio is to maximize
after-tax net investment
income while balancing risk
and generating long-term
growth in shareholder value.
again generated superior
results in 2018, with after-
tax net investment income
up 35%, to $160 million. The
after-tax investment income
ROE contribution was 9.2
points. External investment
managers executed a number
of trades within the portfolio
that generated additional
after-tax net investment
income without any significant
changes to the duration or
credit risk of the fixed income
securities portfolio. At year-
end, the weighted average
after-tax book yield on our
fixed income securities
portfolio was 3.0%, and the
ratio of invested assets per
dollar of stockholders’ equity was 3.3x.
Well positioned for the future
Customer-centricity and a culture of underwriting
discipline are core tenets that enable Selective to “be the
best;” a truly unique company in the industry. Selective’s
sustainable competitive advantages include: (i) true
franchise value with “ivy league” distribution partners;
(ii) unique field model enabled with sophisticated
underwriting and claims tools; and (iii) very strong CX
delivered by our best-in-class employees. We have
transformed ourselves over the years into a super-regional
property and casualty insurance company with a strong
focus on customer service, superior product offerings, and
technical capabilities on par with the best national carriers.
Selective is extremely well positioned for the future from a
financial and operating perspective.
2018 financial results
We generated net income of $179 million and non-
GAAP operating income of $219 million. NPW were up
6% to $2.5 billion. ISO’s (Insurance Services Office, Inc.)
Property Claim Services estimates U.S. industry insured
catastrophe losses for 2018 at $46 billion, making it the
Fixed Income: 89% (2% High yield)
Equities: 3%
Alternatives: 3%
Reported Combined Ratio
Underlying Combined Ratio*
95.0%
93.1%
'13
'14
'15
'16
'17
'18
The achievement of our targeted strategic initiatives has
contributed to strong GAAP reported and underlying
combined ratios.
*Underlying GAAP combined ratio excludes catastrophe
losses and prior year casualty reserve development
GAAP COMBINED RATIOS
third costliest year on record. Major loss events included
Hurricanes Florence and Michael, and the California
wildfires, serving as another painful reminder of severe
events. Our 95.0% combined ratio included 3.6 points of
catastrophe losses, which were in line with our 10-year
average and expectations. Solid investment performance
was also a major contributor to the excellent financial
performance for the year. Going into 2019, our balance
sheet remains strong with
a record $1.8 billion of
stockholders’ equity and a
historically low 19.7% debt-
to-capitalization ratio. We
increased our quarterly
shareholder dividend by 11%
in 2018, while maintaining the
financial flexibility to continue
to grow our Company with
internally generated capital at
growth rates well in excess of
the industry.
105%
110%
100%
100%
99.4%
'12
'11
'10
'08
'09
95%
90%
Standard Commercial Lines:
Standard Commercial Lines
business, which accounts
for 79% of total NPW, had
another excellent year, with
NPW up 6% and an extremely
strong 94.3% combined
ratio. Results were driven by
strong performance in larger
lines, such as general liability
and workers compensation,
although commercial auto
remained a problem area for
us and the industry. Standard Commercial Lines renewal
pure price increases averaged 3.5%, up from 2.9% in
2017, and in line with our expected claim inflation. In 2019,
continuing to balance our profitability expectations, while
driving new business and retention rates higher, will be a
key objective.
Standard Personal Lines: Standard Personal Lines
business accounts for 12% of total NPW, and had a
profitable year, generating 4% NPW growth and a
95.8% combined ratio. We are continuing to improve
profitability in our homeowners and personal automobile
books through pricing and business mix shifts. Although
elevated catastrophe and property losses negatively
impacted profitability in 2018, we are well positioned
to generate improved results. The modest growth in
personal automobile NPW was driven by an average 6.2%
renewal pure price increase. Ongoing price increases,
coupled with business mix shifts and expense reductions,
should continue to improve our automobile results. Our
homeowners book was profitable for the year. The flood
business is written on behalf of the government-backed
National Flood Insurance Program and generated attractive
fee income that helped the results of the segment.
Excess & Surplus Lines: The E&S segment, which
accounts for 9% of total NPW, generated 7% NPW growth
and a 100.3% combined ratio for the year. In addition to
substantial targeted pricing actions, we have strived to
improve results in this segment through business mix shifts
and enhanced underwriting standards. While the relatively
small size of the book could lead to some volatility, pricing
and claims outcomes have us on track to be close to our
risk-adjusted profitability
target for this segment by the
end of 2019.
Conclusion
We have continued to
strengthen our Board of
Directors, appointing Terry
Cavanaugh, who was
previously President and
Chief Executive Officer of
Erie Indemnity Company,
as Director in July 2018.
Terry will play a key role in
contributing to Selective’s
overall corporate strategy, in
particular, in areas including
insurance operations,
customer experience, and
talent development.
We would also like to offer
our sincere gratitude to Paul
D. Bauer for his 21 years of
service as a Board member.
Paul has reached mandatory
retirement age and will be
leaving the Board at the
2019 Annual Meeting. He served successfully as Lead
Independent Director for four years, chaired several
committees, and during his tenure, was a member of
each standing Board Committee. Paul’s leadership, sound
judgement, financial acumen, and friendship will be missed.
Finally, we wanted to add that Selective’s financial and
operating achievements in 2018, or for that matter the
past five years, are truly a reflection of our outstanding
employees. They set high standards each day and
strive through their focus and dedication to exceed
the expectations of customers, investors, and other
stakeholders. Ongoing investments for additional growth,
as well as providing best-in-class service to customers, will
undoubtedly position us well for the future.
Gregory E. Murphy
Chairman and CEO
John J. Marchioni
President and COO
SELECTIVE 2018 ANNUAL REPORT 5
OUTPERFORMING THE INDUSTRY
Selective’s sustainable competitive advantages contribute to the Company’s continued outperformance, including a
long history of financial strength, superior execution, and disciplined growth.
Our Competitive Advantages
Unique field model
enabled by sophisticated tools and technology
Selective’s empowered and dynamic field model,
comprised of locally-based field underwriters, claims
professionals, and safety management specialists, is
key to our agency value proposition and underwriting
quality. Enabled by sophisticated tools, our field experts
apply a data-driven approach to underwriting and
pricing to effectively deliver products and services to
our distribution partners.
True franchise value
with “ivy league” distribution partners
Selective works closely with more than 1,300 retail and 90
wholesale distribution partners to build strong relationships
and deliver exceptional service to our shared customers.
We are committed to our distribution partners’ success
and provide them with the tools, products, services, and
resources to prosper and build their market share. We will
continue to appoint high-caliber and diverse distribution
partners to drive profitable growth and expand our
geographic footprint.
Superior customer experience
delivered by best-in-class employees
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 an
exceptional omni-channel service experience to our
distribution partners and mutual customers.
Above-average operating leverage
enhances return on equity
2018 marks the fifth consecutive year of solid double-
digit non-GAAP operating ROE* for Selective, placing
us among an extremely select group of insurance
companies that have achieved this level of elite
performance.
Our Growing Footprint
Selective continues to seek opportunities to grow profitably, and currently operates in the following states:
Standard Commercial (27 states)
Standard Personal† (15 states)
Excess & Surplus (50 states)
† Flood Insurance available in all 50 states
Increasing market share
Selective’s expanded regional capability provides access to growth opportunities and improves the diversification
of our business. Our long-term growth plan to achieve a 3% total market share in our Standard Commercial Lines
footprint states includes increasing the market share held by our distribution partners to be at least 25% of their
state’s available premium and increasing our share of their business, or “share of wallet,” to 12%. Combined, this
provides for an additional premium opportunity in excess of $2 billion.
* Non-GAAP operating income, non-GAAP operating income per share, and non-GAAP 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, 2018, 2017, and 2016” in Item 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 for a reconciliation of the non-GAAP measures to the
equivalent GAAP measures.
6
EXCEEDING EXPECTATIONS
The significance of CX in building loyalty and retaining customers is well researched and documented. At Selective,
we recognize the strategic importance of a customer-centric focus and, as a result, have been able to build and
successfully leverage our CX infrastructure to better engage our customers.
The tools and tactics used to deliver service excellence to customers include the following value-added services
and innovative technologies.
Value-Added Services
Safety Management evaluation
and service visits
Vehicle and product recall alerts
Live chat and interactive voice
recognition for customer service
inquiries
Digital insurance policies
Mobile app and web portal
Electronic billing alerts
Proactive communication to
customers to help manage risks
Automatic payment options
Innovative Technologies
Selective® Drive helps perpetuate safe driving behaviors
Safety is a priority at Selective. Selective® Drive features a sensor device and cloud-
based application to enable business owners with commercial vehicles to monitor
driver and vehicle safety, and manage their fleets. This new technology helps monitor
driving speed, location, idle time, and harsh driving events involving acceleration,
turning, and stopping to positively affect driver behavior.
SWIFTClaim
SWIFTClaimSM expedites claims processing
SWIFTClaimSM or “Service With Improved Fast Tracking,” is a new process for handling
non-complex auto and property claims payments more swiftly. To help keep claims
moving quickly, communications with customers are conveniently conducted via email.
This process saves customers who opt in to SWIFTClaimSM valuable time and effort, and
it also helps expedite their claims payments.
CX Desktop enables more personalized service
CX Desktop enables our Customer Service Representatives to see a 360-degree
view of the customer. This platform allows for enhanced customer engagement and
improves the way we connect, communicate, and collaborate with customers. It
also helps eliminate a key point of friction from customers by not needing to repeat
previously provided information.
CXDesktop
SELECTIVE 2018 ANNUAL REPORT 7
MANAGEMENT TEAM
Gregory E. Murphy
Chairman and
Chief Executive Officer
John J. Marchioni
President and
Chief Operating Officer
George D. Dufala, Jr.
Executive Vice President
Insurance Operations
Gordon J. Gaudet
Executive Vice President
Chief Information Officer
Michael H. Lanza
Executive Vice President
General Counsel and
Chief Compliance Officer
Charles A. Musilli, III
Executive Vice President
Chief Human Resources Officer
George A. Neale
Executive Vice President
Chief Claims Officer
Vincent M. Senia
Executive Vice President
Chief Actuary
Mark A. Wilcox
Executive Vice President
Chief Financial Officer
Brenda M. Hall
Senior Vice President
Chief Strategic Operations
Officer
Jeffrey F. Kamrowski
Senior Vice President
MUSIC
2018 FINANCIALS
FORM 10-K
2018 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, 2018
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 every Interactive Data File required to be submitted
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 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, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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 $3,169,745,480 on June 30, 2018. As of February 7, 2019, the registrant had
outstanding 58,966,940 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the 2019 Annual Meeting of Stockholders to be held on May 1, 2019
are incorporated by reference into Part III of this report.
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, 2018, 2017, and 2016
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, 2018 and 2017
Consolidated Statements of Income for the Years Ended
December 31, 2018, 2017, and 2016
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2018, 2017, and 2016
Consolidated Statements of Stockholders’ Equity for the Years Ended
December 31, 2018, 2017, and 2016
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2018, 2017, and 2016
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
18
32
32
32
33
35
36
36
36
37
46
52
65
65
68
68
69
70
76
77
78
79
80
81
82
137
137
139
139
139
139
139
139
140
PART I
Item 1. Business.
Overview
Selective Insurance Group, Inc. (referred to as the “Parent”) is a New Jersey holding company 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 as admitted insurance carriers in
what is referred to as the standard marketplace. 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 as a non-admitted insurance carrier.
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 2018, we were ranked as the 35th largest property and casualty group in the United States based on 2017 net premiums
written (“NPW”) in A.M. Best Company’s (“A.M. Best”) annual list of “Top 100 U.S. Property/Casualty Writers.”
The property and casualty insurance market is highly competitive, with fragmented market share and four main distribution
methods: (i) sales through independent insurance agents; (ii) direct sales to personal and commercial customers; (iii) a
combination of independent agent and direct sales; and (iv) sales through captive insurance agents that are contracted to work
exclusively with one insurance company. In this highly competitive and regulated industry, we focus on sales exclusively
through independent agents and have several strategic advantages as follows:
(i) The true franchise value we have built through our relationships with a small group of independent distribution
partners that we refer to as our "ivy league" 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.
(ii) 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 and benefit from sophisticated analytics, technology, and
regional and home office support.
(iii) Our investment in technologies that help us enhance overall customer experience and position us to increase
retention rates and new business hit ratios over time. Our digital platform allows customers to interact with us in a
24x7 environment in the manner of their choosing. Additionally, we have developed a 360-degree view of our
customers, enhancing our ability to provide value-added services, such as proactive messaging in relation to product
recalls, potential loss activity, or policy changes.
(iv) Our deployment of sophisticated underwriting and claims tools that enable our personnel to make better decisions
faster, creating greater efficiencies and improving outcomes. Our underwriters receive real-time model driven
underwriting and pricing guidance on every account, along with the tools to measure the impact of each decision on
their overall portfolio.
Financial Strength Ratings play a significant role in insurance purchasing recommendations by our independent 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 loans,
mortgages, and other agreements securing real and personal property. Our Insurance Subsidiaries’ ratings by major rating
agency are as follows:
Rating Agency
Financial Strength Rating
A.M. Best
Standard & Poor’s Global Ratings (“S&P”)
Moody’s Investors Services (“Moody’s”)
Fitch Ratings (“Fitch”)
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.
4
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.
Segments
We classify our business into four reportable segments:
•
•
Standard Commercial Lines, which is comprised of insurance products and services provided in the standard
marketplace to commercial enterprises; typically businesses, non-profit organizations, and local government
agencies. This business represents 79% of our total insurance operations’ NPW and is sold in 27 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 12% of our total insurance operations’
NPW and is sold in 15 states. Standard Personal Lines includes flood insurance coverage. We are the fifth 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. This business
represents 9% of our total insurance operations’ NPW and is sold in all 50 states and the District of Columbia.
•
Investments, which invests the premiums collected by our insurance operations and amounts generated through our
capital management strategies, which include the issuance of debt and equity securities.
We derive substantially all of our income in three ways:
• Underwriting income/loss from our insurance operations. 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. NPW is equal to gross premiums less
premium ceded to reinsurers. NPW is recognized as revenue ratably over a policy’s term as net premiums earned
(“NPE”).
Expenses related to our insurance operations fall into three categories, which are depicted on our Consolidated
Statements of Income: (i) "Loss and loss expense incurred," which includes losses associated with claims and all
loss expenses incurred for adjusting claims; (ii) "Amortization of deferred policy acquisition costs," which includes
expenses related to the successful acquisition of insurance policies, such as commissions to our distribution partners
and premium taxes, and are recognized ratably over a policy's term; and (iii) "Other insurance expenses," which
includes acquisition expenses not captured above, as well as expenses incurred in maintaining policies and
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 and unrealized 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”).
Due to a change in accounting literature that became effective January 1, 2018, changes in unrealized gains and
losses on our equity portfolio are now recognized in income through "Net unrealized losses on equity securities" on
our Consolidated Statements of Income.
Our income is partially offset by: (i) expenses of the Parent that include long-term incentive compensation to employees,
interest on our debt obligations, and other general corporate expenses; and (ii) federal income taxes.
We use the combined ratio as the key measure in assessing the performance of our insurance operations. The combined ratio is
calculated by adding: (i) the loss and loss expense ratio, which is the ratio of incurred loss and loss expense 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
5
dividends to NPE. A combined ratio under 100% indicates an underwriting profit and a combined ratio over 100% 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 net investment income, and net realized and unrealized gains or losses as the key measures 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.
We also use non-generally accepted accounting principles operating return on equity ("non-GAAP operating ROE") as an
important measure of our overall financial performance. We evaluate our segments, in part, based on their contribution to this
company metric. Our non-GAAP operating ROE for 2018 was 12.5%, which exceeded our financial target of 12% for 2018.
For 2019, we have established a non-GAAP operating ROE target of 12%, which is an appropriate return for our shareholders
based on our current estimated weighted average cost of capital, the current interest rate environment, and property and
casualty insurance market conditions. For further details regarding our 2018 performance as it relates to return on equity, refer
to "Financial Highlights of Results for Years Ended December 31, 2018, 2017, and 2016" in Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations." of this Form 10-K.
Insurance Operations
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 loss and loss expense.
To that end, we establish loss and loss expense reserves that are estimates of the ultimate amounts that we will need to pay in
the future for claims and related expenses for insured losses that have already been incurred, but have not yet been settled.
Estimating reserves as of any given date requires the application of estimation techniques, involves a considerable degree of
judgment, and is an inherently uncertain process. We regularly review our reserving techniques and the overall adequacy of our
reserves. For 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.
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 we underwrite. We use two main reinsurance vehicles: (i) a
reinsurance pooling agreement among our Insurance Subsidiaries in which each company shares 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 Operations Products and Services
The types of insurance we sell in our insurance operations fall into two 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, and for some casualty claims even several
decades, to be reported and settled.
6
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 Write Your Own Program ("WYO") of the NFIP. The results of our
Standard Personal Lines and Standard Commercial Lines flood operations are reported solely within our Standard Personal Lines segment results.
Casualty
Property
X
X
X
Product Development and Pricing
Our insurance policies are contracts that specify the coverage provided to our insured, such as what we will pay to, or on behalf
of, the insured upon a covered loss. We develop our coverages by: (i) adopting forms created or filed by statistical rating
agencies or other third parties, notably Insurance Services Office, Inc. (“ISO”), American Association of Insurance Services,
Inc. ("AAIS"), and the National Council on Compensation Insurance, Inc. ("NCCI"); (ii) independently creating our own
coverage forms; or (iii) modifying third-party forms.
Since our policies provide coverage for future events, we do not know what our actual costs for a policy will be at the time we
underwrite and issue it. Therefore, determining the prices to charge for our coverages involves consideration of many
variables. In certain cases, we adopt rating structures and loss costs filed by statistical rating agencies, such as ISO and NCCI.
We supplement this with detailed analyses of our own historical statistical data, factoring in loss trends and other expected
impacts. We then load these expected loss costs for our own expenses and profit provision. In other cases, we develop rating
structures and rates based upon a combination of our own experience and competitors information. Generally speaking, our
approach is to rely upon our own experience to the full extent we deem it statistically credible.
To supplement our rating structures, we have developed predictive models for many of our Standard Commercial and Standard
Personal Lines. Predictive models analyze historical statistical data regarding our customers and their loss experience to model
additional risk characteristics that drive loss experience. These models rely upon more advanced statistical analysis and
rigorous testing. We use the output of these models to group our policies, or potential policies, based upon their expected loss
potential. In other cases, we use these models to develop factors in our rating plan. These models' predictive capabilities are
limited by the amount and quality of the available statistical data, so they may be supplemented with competitive information
or underwriting judgment.
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
39%
25%
18%
17%
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, religious institutions, and schools
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.
7
The following are general guidelines that can be used as indicators of the approximate size of our customers:
• The average Standard Commercial Lines premium per customer is approximately $12,000.
• The average Standard Personal Lines premium per customer is approximately $2,000.
• The average E&S Lines premium per policy is approximately $3,000.
No one customer accounts for 10% or more of our insurance operations in the aggregate.
Geographic Markets
We sell in the following geographic markets:
•
•
Standard Commercial Lines products and services are sold in 27 states located in the Eastern, Midwestern, and
Southwestern regions of the United States and the District of Columbia.
Standard Personal Lines products and services are sold in 15 states located in the Eastern, Midwestern, and
Southwestern 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 products and services are sold in all 50 states and the District of Columbia.
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 their office locations:
Region
Heartland
New Jersey
Northeast
Mid-Atlantic
Southern
Southwest
Office Location
Carmel, Indiana
Hamilton, New Jersey
Branchville, New Jersey
Allentown, Pennsylvania and Hunt Valley, Maryland
Charlotte, North Carolina
Scottsdale, Arizona
In addition, our E&S Lines are supported by office locations in Horsham, Pennsylvania and Scottsdale, Arizona.
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.
We pay our distribution partners commissions calculated as a percentage of DPW, and in some cases on profitability or 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 operations' premium. Our top
20 distribution partners generated approximately 30% of our NPW in 2018.
Our customers rely heavily on our distribution partners and some do not differentiate between their insurance agent and their
insurance carrier, so developing brand recognition particularly with these types of customers can be difficult . 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 us
because of the technological and service improvements in retail and other consumer sectors. While many insurers offer such
solutions in the personal lines space, we want to be a leader in digital and customer experience in all three segments of our
insurance operations. As part of our digital strategy, we provide customers with a mobile application and a web-based portal
that permit our customers on demand self-service access to basic account information, pay their bills electronically, and report
claims. In addition, we are able to provide value-added services, such as proactive messaging in relation to product recalls,
potential loss activity, or policy changes. These efforts will permit us to offer customers an improved shared experience with
our independent distribution partners, and better position us to more directly demonstrate our value proposition to our
customers and distribution partners.
8
Independent Retail Agents
According to a 2018 study by the Independent Insurance Agents & Brokers of America, independent retail insurance agents and
brokers write approximately 84% of standard commercial lines insurance and 35% of standard personal lines insurance in the
United States. We believe that independent retail insurance agents, which comprise the bulk of our independent distribution
partners, will remain a significant force in overall insurance industry premium production because they represent more than one
insurance carrier and provide a wider choice of commercial and personal lines insurance products and risk-based consultation
to customers.
We currently have 1,320 distribution partners selling our Standard Commercial Lines business, and 720 of these distribution
partners also sell our Standard Personal Lines business. These 1,320 distribution partners sell our products and services
through approximately 2,200 office locations. We also have 6,000 retail agents selling our flood insurance products.
In our independently administered 2018 survey, we received an overall satisfaction score of 8.7 out of 10 from our standard
market distribution partners. We believe this score highlights the satisfaction of our independent distribution partners with our
products, the ease of reporting claims, and the professionalism and effectiveness of our employees.
Wholesale General Agents
Our distribution partners for our E&S Lines are 90 wholesale general agents with a combined 250 office locations. We have
granted limited binding authority to the wholesale general agents for business that meets our prescribed underwriting and
pricing guidelines. Our wholesale general agents submit brokerage business to us for risk acceptability, terms and conditions,
and pricing.
Marketing
Our primary marketing strategy is to:
• Use an empowered field underwriting model to provide our Standard Commercial Lines retail distribution partners
with resources within close geographic proximity to their businesses and our mutual customers. For further
discussion on this, see the “Field Model and Technology” section below.
• Develop close relationships with each distribution partner, particularly their principals and producers by: (i)
soliciting their feedback on products and services; (ii) advising them concerning our product developments; and (iii)
providing 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) new business and renewal retention expectations; (iii) customer service; (iv) pricing of their
in-force book and changes in renewal prices; and (v) profitability of business placed with us.
• Develop brand recognition with our customers through our marketing efforts to be recognized as a proactive risk
manager that provides the value-added services that customers seek, which include proactive communication, and
providing exceptional products and services that help position us as a leader in the marketplace.
Technology and Field Model
Technology
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;
• Our workers compensation claims adjusters with predictive tools to indicate when claims are likely to escalate to
better serve our customers;
• Our Special Investigations Unit ("SIU") investigators access to our business intelligence systems to better identify
claims with potential fraudulent activities;
9
• 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 24x7 access to transactional capabilities and information through a web-based customer portal
and a customer mobile application.
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, the
projected net present value of project benefits, if applicable, and external and internal costs; 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 50% 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.
Field Model
To support our distribution partners, we employ a field model for both underwriting and claims, with various employees 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, 2018, we had approximately 2,290 employees, of which 590 worked in
the field, 860 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 together with our corporate underwriting and actuarial departments, jointly establish and execute
upon the following for our Standard Commercial Lines business: (i) annual premium and pricing goals; (ii) specific
new business targets by distribution partner; and (iii) profit improvement plans as needed across our business
segments, 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 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 and E&S market business;
• 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 field operations leadership, who have oversight of the AMS production team for Standard Commercial Lines,
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;
10
• 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 our in-force policies for their assigned Standard Commercial Lines
distribution partners, including, but not limited to, managing profitability and pricing levels within their portfolios by
developing policy-specific pricing;
• Our managers and underwriters, who are responsible for new business, renewal underwriting and service needs for our
large Standard Commercial Lines accounts, including those written with alternative risk transfer techniques for our
distribution partners;
• Our premium auditors, who supplement the underwriting process by working with insureds to accurately audit
exposures for certain Standard Commercial Lines policies that we write;
• Our field technical coordinators, who are responsible for technology assistance and training to aid our employees and
standard market distribution partners;
• Our 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 Commercial and Personal 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, 2018, our USC was servicing Standard
Commercial Lines NPW of $52.0 million and Standard Personal Lines NPW of $28.9 million. The $80.9 million total serviced
by the USC represents 3% of our total NPW.
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. During 2018, we introduced: (i) our Selective® Drive program to our
commercial automobile policyholders. This product assists with logistics management and improved safety by tracking and
scoring individual drivers based on driving attributes, including phone usage while the vehicle is in motion; and (ii) a web-
based cybersecurity training program that is currently being piloted with our agents to help them better protect their agencies
and better safeguard our data and systems. In addition, 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 loss and loss expense; 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.
In 2018, we introduced the Swift Claims Handling process ("SWIFT") where parties can opt-in to having low-severity
automobile or property claims handled entirely through email. This accelerates the claims handling process and improves the
customer experience. Over 4,000 individuals have opted into having their claims managed through SWIFT, with payment
issuance often occurring as soon as 24 hours from submission.
11
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 $10,000 to $100,000. They also
form the basis of our catastrophe response team. 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, as well as in our Complex Claims and Litigation Unit ("CCU")
discussed below, 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
claims handling standards. Complex and litigated claims oversight is handled by specialists within the 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 employees, and handle losses based on injury type or with expected severities greater than
$250,000 in our Standard Commercial Lines and Standard Personal Lines, and severities greater than $100,000 in our
E&S Lines.
• Litigated matters not meeting the CCU criteria are handled within our litigation unit. Teams of litigation adjusters are
aligned based upon jurisdictional knowledge and technical experience and are supervised by regional litigation
managers. These claims are segregated from the CMSs to allow for focused management and application of specific
technical expertise.
• 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 other latent claims.
• The Construction Defect Unit unit handles larger, complex construction defect claims.
• All abuse and molestation claims have been centralized in one unit so as to apply the highest level of expertise
possible to this emerging risk within the industry.
This structure allows us to provide experienced adjusting to each claim category.
12
The SIU, which investigates potential insurance fraud and abuse, and furthers efforts by regulatory bodies and trade
associations to curtail the cost of fraud, supports all insurance operations. 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.
Insurance Operations Competition
We face substantial competition in the insurance marketplace, including from public, private, and mutual insurance companies,
which in some cases may have lower cost of capital than we do. Many of our competitors, like us, rely on partners for the
distribution of their products and services. Other insurance carriers either employ their own agents who only represent them or
use a combination of distribution partners, captive agents, and direct marketing. The following provides information on the
competition facing each of 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 primarily two types of companies, mostly 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 Acuity Insurance, American Family Insurance Group, Auto-Owners Insurance, Cincinnati
Financial Corporation, Erie Indemnity Company, The Hanover Insurance Group, Inc., United Fire Group, Inc., and
Westfield Insurance.
• National insurers, such as Chubb Limited, The Hartford Financial Services Group, Inc., Liberty Mutual Holding
Company Inc., Nationwide Mutual Insurance Company, The Progressive Corporation, 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. We also face competition
from established direct-to-consumer insurers such as The Government Employees Insurance Company (GEICO) and The
Progressive Corporation, which offer personal auto coverage.
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 American International 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.;
• Cincinnati Financial Corporation; and
• Markel Corporation.
Scottsdale Insurance Company, an affiliate of Nationwide Mutual Insurance Company;
Other
Existing competitors and new entrants to the industry are developing new platforms that are leveraging digital technology to
provide a lower cost "direct-to-the customer" and "pay-as-you-go" or "pay for use" models. These new platforms may offer the
potential for enhanced customer experience, ease of understanding coverages, and streamlined claims processing. New
competitors emerging under this digital platform include, but are not limited to, Lemonade, Next, and Metromile. Existing
competitors leveraging new digital strategies to target small commercial customers directly include, Hiscox, The Progressive
Corporation, Attune, a division of American International Group, and biBerk, a division of Berkshire Hathaway. Many of these
new entrants have significant financial backing.
13
Insurance Regulation
Primary Oversight by the States in Which We Operate
Our insurance operations are heavily regulated. The primary public policy behind insurance regulation is the protection of
policyholders and claimants against insurer insolvency and inappropriate business practices. Insurance regulation typically
prioritizes policyholder and claimant protection 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 licensed. The types of activities that are regulated by the states include:
Pricing and underwriting practices;
•
• Claims practices;
• Exiting geographic markets and/or canceling or non-renewing policies;
• Assessments for guaranty funds and second-injury funds and other mandatory assigned risks and reinsurance;
• The types, quality and concentration of investments we make;
• Minimum capital requirements for the Insurance Subsidiaries;
• Dividends from our Insurance Subsidiaries to the Parent; and
•
Privacy and data security.
For additional 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 National Association of Insurance Commissioners ("NAIC"). The
NAIC has codified statutory accounting principles ("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.
• 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 three times their "Authorized Control Level." Based on our 2018 statutory financial statements, which have
been prepared in accordance with SAP, the total adjusted capital for each of our Insurance Subsidiaries substantially
exceeded three times their Authorized Control Level.
• Annual Financial Reporting Regulation (referred to as the "Model Audit Rule"). The Model Audit Rule, 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.
14
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") and S&P's capital model. BCAR, which was developed by A.M. Best, and S&P's
capital model examine the strength of an insurer's balance sheet and compare available capital to estimated required capital at
various probability or rating levels. The regulatory and rating agency models differ from each other in their design. Although
the results of each model show similar direction as circumstances change, they react differently to changes in economic
conditions, underwriting and investment portfolio mix, and capital, and are also subject to change as the rating agencies update
and change their capital adequacy models and requirements over time. This model divergence, combined with updates and
changes to the rating agency capital adequacy models over time, can complicate decisions around management of our capital,
risk profile, and growth objectives.
Federal Regulation
Notable federal legislation and administrative policies that affect the insurance industry are:
• McCarran-Ferguson Act;
• Terrorism Risk Insurance Program Reauthorization Act ("TRIPRA");
• 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”).
The Mitigation Division of the Federal Emergency Management Agency ("FEMA") oversees the NFIP's WYO, which was
created by an act of Congress. Under the program, all losses are 100% reinsured by the Federal government and we receive an
expense allowance for flood policies written and a servicing fee for flood claims administered . Congress sets the WYO's
budgeting, rules, and rating parameters. The program has been extended several times since its 2018 expiration, and it
currently expires on May 31, 2019. While short-term lapses impacting our ability to service NFIP policies may occur from
time-to-time, we do not expect a long-term disruption to the program. We continue to participate in the public policy debate to
achieve a long-term meaningful program extension.
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,
negotiated a covered agreement with the European Union that, among other things, impacted reinsurance collateral, and have
been gathering data as required under the Dodd-Frank Act. We continue to monitor and be actively involved in the industry
and public policy discussions around federal and international insurance regulatory developments to ensure that the state
regulatory system established under the McCarran-Ferguson Act is maintained.
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.
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.
15
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.
Investments Segment
Our Investments segment seeks to generate net investment income by investing the premiums we receive from our insurance
operations and the amounts generated through our capital management strategies, which may include the issuance of debt and
equity securities. Proceeds are used to satisfy obligations to our customers, our shareholders, and our debt holders, among
others.
At December 31, 2018, 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
$
$
$
5,310.2
147.7
323.9
178.9
5,960.7
3.33
89
2
6
3
100
Our investment philosophy includes certain net investment income, total return, and risk objectives for our fixed income,
equity, and other investment portfolios. Our investment strategies are managed by our internal investment management team,
and are executed by relationships with multiple external investment advisers.
During 2018, we were able to increase our after-tax pretax book yield on our core fixed income portfolio by 47 basis points as
we tactically positioned the investment portfolio to take advantage of rising rates without increasing credit risk or extending the
duration of the portfolio. As an example, approximately 16% of the fixed-income portfolio is in floating rate securities, which
reset principally on 90-day LIBOR. The book yield on these securities has benefited from the 111 basis point increase in 90-
day LIBOR in 2018. Also, we actively managed the investment portfolio with an emphasis on a portion of our portfolio that
we refer to as risk assets. Our risk assets include public equity, high-yield fixed income securities, and alternative investments.
Our active management included trimming our exposure to public equities and high yield fixed-income securities to 7.2% on
December 31, 2018, from 7.9% on December 31, 2017. Overall, we have been gradually diversifying our portfolio, and will
work towards modestly increasing our risk asset allocation over time, up to approximately 10% of our invested assets,
depending on market conditions.
For further information regarding our risks associated with the overall investment portfolio, see Item 7A. “Quantitative and
Qualitative Disclosures About Market Risk.” and Item 1A. “Risk Factors.” of this Form 10-K. For additional information
about investments, see the section entitled, “Investments Segment,” in Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.” and Item 8. “Financial Statements and Supplementary Data.” Note 5. of this
Form 10-K.
Enterprise Risk Management
As a property and casualty holding company, our Insurance Subsidiaries are in the business of assuming risk. We categorize
our major risks into the following five broad categories:
• Asset risk, which stems primarily from our investment portfolio and reinsurance recoverables and includes credit and
market risk;
• Underwriting risk, which is the risk that the insured losses are higher than our expectations, including:
Losses from inadequate loss reserves;
Larger than expected non-catastrophe current accident year losses; and
Catastrophe losses that exceed our expectations or our reinsurance treaty limits.
• Liquidity risk, which is the risk we will be unable to meet contractual obligations as they become due because we are
unable to liquidate assets or obtain adequate funding without incurring unacceptable losses;
• Emerging risks, which are new and known but evolving risks that may have a significant impact on our financial
strength, reputation, or long-term strategy, potentially including U.S. and global economic concerns; and
16
• Other risks, including a broad range of operational risks that can be difficult to quantify, such as legal, regulatory,
reputational, and strategic risks as well as the risk of fraud, human failure, and failure of controls and systems,
including, for example a rapidly evolving cyber security risk.
Our internal control framework operates with the three lines of defense model. The first line of defense consists of individual
functions that deliberately assume risks and own and manage that risk on a day-to-day and business operational basis. The
second line of defense is responsible for risk oversight and also supports the first line to understand and manage risk. A
dedicated risk team led by the Chief Risk Officer is responsible for this second line and reports to the Chief Financial Officer.
The third line of defense is our Internal Audit team, which provides independent, objective assurance as to the assessment of
the adequacy and effectiveness of our internal control environment. It also coordinates risk-based audits and compliance
reviews and other specific initiatives to evaluate and address risk within targeted areas of our business.
We use Enterprise Risk Management (“ERM”) as part of our governance and control process to take an entity-wide view of our
major risks and their impact. Our ERM framework is designed to identify, measure, report, and monitor our major risks and
develop appropriate responses to support successful execution of our business strategy.
Our Board oversees our ERM process, while the Executive Risk Committee is responsible for the holistic evaluation,
management, and supervision of our aggregated risk profile and determination of future risk management actions in support of
overall risk appetite. In addition to the Board’s oversight of the ERM process, various committees of the Board oversee risks
specific to their areas of supervision and report their activities and findings to the full Board. The Executive Risk Committee
uses various management committees for detailed analysis and management of specific major risks. The Executive Risk
Committee primarily consists of the Chief Executive Officer, the President and Chief Operating Officer, their direct reports and
key operational leaders, each of whom is responsible for management of risk in his or her respective area, and the Chief Risk
Officer.
In addition to the various committees and the governance process over the ERM process, we believe that high-quality and
effective ERM is best achieved when it is a shared cultural value throughout the organization. We consider ERM to be a key
process that is the responsibility of every employee. We have developed and use tools and processes that we believe support a
culture of risk management and create a robust framework of ERM within our organization. In addition, our compensation
policies and practices, as well as our governance framework, including our Board's leadership structure, are designed to support
our overall risk appetite and strategy. Our ERM processes and practices help us to identify potential events that may affect us,
quantify, evaluate and manage the risks to which we are exposed, and provide reasonable assurance regarding the achievement
of our objectives.
We rely on quantitative and qualitative tools to identify, prioritize, and manage our major risks including proprietary and third-
party computer modeling as well as various other analyses. The Executive Risk Committee meets at least quarterly and
reviews and discusses various aspects and the interrelation of Selective’s major risks, including, but not limited to, capital
modeling results, capital adequacy, risk metrics, emerging risks, and sensitivity analysis. Consistent with the requirements of
state insurance regulators, our Insurance Subsidiaries annually file their ORSA report, which is an internal assessment of our
Insurance Subsidiaries' solvency. The Chief Risk Officer develops the report in coordination with members of the Executive
Risk Committee, and the report is provided to the Board. The Chief Risk Officer reports on the Executive Risk Committee's
activities, analyses, and findings to the Board or the appropriate Board Committee, and provides a quarterly update on certain
risk metrics.
We believe that our risk governance structure facilitates strong risk dialogue across all levels and disciplines of the organization
and promotes robust risk management practices. All of our strategies and controls, however, 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.
An investor should carefully consider the risks and all of the other information included in Item 1A. “Risk Factors.”, Item 7A.
“Quantitative and Qualitative Disclosures About Market Risk.", and Item 8. “Financial Statements and Supplementary Data."
of this Form 10-K.
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 any amendments to these reports that we file or furnish pursuant to
Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), which can be accessed on the
SEC's website, www.SEC.gov. In addition, we provide access to these filed materials on our Internet website,
www.Selective.com.
17
Item 1A. Risk Factors.
Any of the following risk factors could: (i) significantly impact our business, liquidity, capital resources, results of operations,
financial condition, and debt ratings; and (ii) cause our actual results to differ materially from historical or anticipated results.
These non-exhaustive risk factors might affect, alter, or change our actions 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.
Risks Related to our Insurance Operations
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, including cyber-attacks, 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. In recent years, we have seen an escalation
in global insured industry losses from catastrophes, with 2017 being the most costly year on record and 2018 being the third
most costly year on record, as reported by various statistical reporting agencies. Whether this is a short-term phenomenon, or is
part of a longer-term trend driven by climate change, other environmental factors, and development in areas more exposed to
catastrophes, is subject to debate. 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 operations are concentrated geographically in the Eastern and Midwestern regions of the country. Hurricanes
continue to be our most significant catastrophic exposure, particularly in the Eastern states. However, tornadic activity in the
Midwestern regions of the U.S. could also adversely impact our financial results. It also is possible that we could experience
more than one severe catastrophic event in any given period.
Certain factors can impact our estimation of ultimate costs for catastrophes. Such factors can include inability to access
portions of the impacted areas following a catastrophic event, scarcity of necessary labor and materials that delay repairs and
increase our loss costs, regulatory uncertainties, including new interpretations of coverage, residual market assessment-related
increases in our catastrophe losses, late claims reporting, and escalation of business interruption costs due to infrastructure
disruption. The occurrence of a catastrophe close to the end of a reporting period also may limit the availability of information
for estimating loss and loss expense reserves and it is possible that more detailed information about claims may be available
later resulting in changes in reserves in subsequent periods.
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.
Our loss and loss expense reserves may not be adequate to cover actual losses and expenses.
We must maintain loss and loss expense reserves for our estimated liability for loss and loss expense associated with reported
and unreported insurance claims. Our estimates of reserve amounts are based on known facts and circumstances, including our
expectations of the ultimate settlement and claim administration expenses, trends in claims severity and frequency, including
the impact of inflationary trends on medical costs, predictions of future events, and other subjective factors relating to our
insurance policies in force. There is no method for precisely estimating the ultimate liability for settlement of claims.
Estimates of reserve amounts may be further impacted by unexpected increases in loss costs related to economic or social
inflation, developments in tort law, and various state legislative initiatives, including expansion of statutes of limitations and
18
revisions to claims settlement practices standards. For example, several states in our principal operating areas are exploring
expansion of the statute of limitations for previously time-barred civil suits alleging sexual abuse of a minor. This type of
retroactive legislation may significantly increase insurance industry loss costs and require re-evaluation of previously
established reserves. In addition, state initiatives such as legalization of marijuana may have significant impact on future loss
development, as usage of this drug becomes more pervasive. Therefore, 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 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 rescinded all previously approved coverage exclusions for terrorism and requires
private insurers and the U.S. government to share the risk of loss on future acts of terrorism certified by the U.S. Secretary of
the Treasury. Under TRIPRA, each participating insurer is responsible for paying a deductible of specified losses before
federal assistance is available. This deductible is based on a percentage of the prior year’s applicable Standard Commercial
Lines and E&S Lines premiums. In 2019, our deductible is $339 million. For losses above the deductible, the federal
government will pay 81% of losses to an industry limit of $100 billion, and the insurer retains 19%. The federal share of losses
will be reduced by 1% to 80% in 2020. Although TRIPRA’s provisions 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. Additionally, if the U.S. Secretary of Treasury does not certify certain future
terrorist events, it is possible we could be required to pay terrorism-related covered losses without TRIPRA's risk-sharing
benefits. For example, the U.S. Secretary of Treasury did not certify either the 2013 Boston Marathon bombing or the 2015
San Bernardino, California shootings as terrorism events.
Under TRIPRA, terrorism coverage is mandatory for all primary workers compensation policies. Additionally, 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 2018, 89% of our Standard Commercial Lines non-workers compensation policyholders purchased
terrorism coverage that included nuclear, biological, chemical, and radioactive ("NBCR") events.
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. Also, in addition to providing terrorism coverage
for lines of business required and covered by TRIPRA, we sometimes choose to provide terrorism coverage for lines of
business not included in TRIPRA, such as Commercial Automobile. 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.
If future legislation changes or eliminates TRIPRA, our exposure to terrorism losses could increase materially. If that happens,
the measures we might take to mitigate our risk could impact our ability to write future business, or increase our reinsurance
expense. We currently plan to continue providing coverage to our customers that includes protection from terrorism events,
without the benefit of a conditional exclusion that would specifically exclude this coverage if TRIPRA was non-renewed.
Therefore, in the event that TRIPRA is changed or eliminated, our exposure to losses from terrorism events will increase
materially, which would have the potential to significantly negatively impact our results of operations and financial condition.
Our current reinsurance programs generally provide coverage for conventional acts of foreign and domestic terrorism, but no
coverage is afforded to NBCR events.
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 loss and loss expense is 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 fluctuate significantly, and do not
necessarily correlate to our specific book of business experience. Most of our reinsurance contracts renew annually and may be
impacted by the market conditions at the time of the renewal. Any decrease in the amount of our reinsurance will increase our
risk of loss. Any increase in the cost of reinsurance that cannot be passed on to our policyholders will reduce our earnings. If
we are unable to obtain reinsurance in amounts that we expected or on acceptable terms, our ability to write future business
could be adversely affected, our reinsurance expenses could increase, or we might assume more risk for losses on aggregate or
individual losses than we currently do.
19
We are exposed to credit risk.
We are exposed to credit risk in several areas of our insurance operations, including from:
• Our reinsurers, who are obligated to us under our reinsurance agreements. During periods of high catastrophe loss
activity, amounts recoverable from our reinsurers and the correlated credit risk can increase quickly and
significantly, fluctuating over time. Our reinsurers also often rely on their own reinsurance programs, or
retrocessions, to manage their exposure to large losses. Any limitations on or the inability of our reinsurers to
collect on their retrocession programs, or reinstate coverage after a large loss, particularly given the relatively small
size of the global reinsurer community, may impair their ability to pay our reinsurance claims. Accordingly, we
have direct and indirect counterparty credit risk from our reinsurers. We attempt to mitigate our direct and indirect
counterparty credit risk from our reinsurers by: (i) pursuing relationships with reinsurers rated “A-” or higher by
A.M. Best; and/or (ii) obtaining collateral to secure reinsurance obligations.
• Certain life insurance companies if they fail to fulfill their obligations to those customers for whom we have
purchased annuities under structured settlement agreements.
•
•
Some of our distribution partners, who collect premiums due us from our customers.
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 fund our liability associated with this plan. To the
extent that credit risk adversely impacts the valuation and performance of the invested assets in our defined benefit
plan, the funded status of the defined benefit plan could be adversely impacted and, if so, the expense of the plan
and our obligations under it could increase.
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 U.S. 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 2018, 32% of
DPW in our Standard Commercial Lines business was based on payroll/sales of our underlying customers. An economic
downturn in which our customers experience declines in revenue or employee count could 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.
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. For additional information on our current financial strength
ratings, refer to "Overview" in Item 1. "Business." of this Form 10-K.
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
with a specified minimum rating. 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), so a downgrade could create a default
leading to an acceleration of any outstanding principal. Such an event also could trigger default provisions under certain of our
other debt instruments and negatively impact our ability to borrow in the future.
20
Nationally recognized statistical rating organizations ("NRSROs") also rate our long-term debt creditworthiness. Credit ratings
indicate the ability of debt issuers to meet 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 the possible rating actions
NRSROs might take that could adversely affect our business or our potential actions in response.
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, insured loss levels, and industry capital levels that may fluctuate in response to changing rates of return on insurance
industry investments. Pricing also is influenced by the operating performance of insurers, who may increase pricing to meet
return on equity objectives. Consequently, the insurance industry historically has had cycles characterized by periods of intense
price competition from excess underwriting capacity and periods of favorable pricing driven by shortages of underwriting
capacity and poor insurer operating performance. If competitors price business below technical levels, we might decide it is
appropriate to reduce our profit margin to retain our best business.
We compete with regional, national, and direct-writer property and casualty insurance companies for customers, distribution
partners, and employees. Some competitors are public stock companies, some are mutual companies, and some are reciprocal
insurers. Many competitors are larger and may have lower operating costs, lower cost of capital, or the ability to absorb greater
risk while maintaining their financial strength ratings. Other competitors, such as mutual or reciprocal companies, are
cooperatively owned by insureds and do not have shareholders who evaluate return on equity performance. 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 limit our ability to maintain or increase our profitability. Because of its relatively low cost of entry, the Internet has
emerged as a significant competitive new marketplace where existing and new competitors have platforms. Established
insurance competitors, such as Chubb Limited and The Progressive Corporation, are beginning to explore broader offerings
through this digital platform, while new insurance competitors continue to emerge, including, but are not limited to, Lemonade
and Attune. Reinsurers also have entered certain primary property and casualty insurance markets to diversify their operations
and compete with us. Because the Internet makes it easier to bundle products and services, it also is possible that companies
doing business on the Internet could enter the insurance business in the future or form strategic alliances with insurers.
Changes in competitors and competition, particularly on the Internet, 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.
Insurers rely on access to reliable data about their customers and loss experience to build complex analytics and predictive
models that assess risk profitability, adverse claim development potential, recovery opportunities, fraudulent activities, and
customer buying habits. We expect the use of data science and analytics will continue to increase and become more complex
and accurate, particularly with the use of larger amounts of relevant data. Some of our competitors, particularly larger national
carriers, have significantly larger volumes of data about the performance of the risks they have underwritten. It is possible that
the loss experience from our insurance operations, particularly the more limited experience data we have related to our E&S
business acquired in 2011, may not be sufficiently large or granular in all circumstances to analyze and project our future costs
as accurately as our larger competitors. To supplement our data, we use industry loss experience data from ISO, AAIS, and
NCCI. While relevant, industry data may not correlate specifically to the performance of risks we have underwritten and may
not be as predictive as if we had more data on our book of business. Because we use and rely on the aggregated industry loss
data assembled by ISO, AAIS, NCCI and other similar rating bureaus under the anti-trust exemptions of the McCarran-
Ferguson Act, we likely would be at a competitive disadvantage to larger insurers with more loss experience data on their book
of business if Congress repealed the McCarran-Ferguson Act.
21
We depend on distribution partners.
We market and sell our insurance products through independent distribution partners who are not our employees. We believe
that these independent partners will remain a significant force in overall insurance industry premium production because they
provide insurance and risk management expertise and advice to customers, particularly small businesses and individuals, who
otherwise do not have it or cannot afford either the time or expense to acquire it. We also believe that some commercial
customers, particularly smaller commercial businesses, will continue to use independent distribution partners for the potential
customer and business referrals independent distribution partners may provide. Independent distribution partners also generally
provide customers with a wider choice of insurance products than those who represent or are employed by only one insurer.
Our reliance on independent distribution partners, however, present challenges and risks, including the following:
• The availability of products from multiple markets 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.
• Growth in our market share is dependent, in part, on growth in the market share controlled by our distribution
partners. Independent retail insurance agencies control 84% of Standard Commercial Lines business but only
35% of Standard Personal Lines business in the U.S. Consequently, our Standard Personal Lines market
opportunity could be more limited. Over the last several years, more competitors are focused on lower cost
"direct to customer" distribution models based on technological developments and efficiencies. Continued
advancements in "direct to customer" distribution models may impact the overall market share controlled by our
distribution partners and make it more difficult for us to grow or require us to establish relationships with more
distribution partners.
• There has been an increasing trend of consolidation among our independent distribution partners, particularly by
private-equity-backed entities and publicly-traded insurance brokers ("aggregators"). As more of our
independent distribution partners consolidate and become larger, their influence on our business and premium
production can increase. For example, they could direct the business they produce to be consolidated with a
smaller group of insurance carriers, which may or may not include us. With their increased size and control of
meaningful amounts of business, they could also increase insurance carrier costs through requiring higher base
and supplemental commissions to place business. Aggregators accounted for approximately 28% of our DPW at
December 31, 2018. Currently, no one distribution partner is responsible for 10% or more of our combined
insurance operations' premium.
Our financial condition and results of operations are tied to the successful marketing and sales efforts of our products by our
independent distribution partners. In addition, under insurance laws and regulations and common law, we may have liability
for the business practices of, or actions taken by, our independent distribution partners.
Expansion of our insurance offerings and geographic footprint may create additional risks
Part of our growth strategy includes measured geographic and product expansion. In 2017, we established a Southwest Region
and began writing Standard Commercial Lines in Arizona. In 2018, we expanded our Standard Commercial Lines operations
into Colorado, New Mexico, and Utah and, later in the year, began offering Standard Personal Lines products in Arizona and
Utah. In our Northeast Region, we also expanded our Standard Commercial Lines business into New Hampshire in 2017. We
expect to continue to diversify our book of business through geographic and product expansion. Although diversification of
our business is beneficial to our competitive position and long-term results, it exposes us to increased and different risks,
including catastrophic natural risks to which we previously only had limited exposure due to our narrower geographic footprint
and risks related to insurance regulations in the expansion states. These new risks could have a material adverse effect on our
results of operations, liquidity, financial condition, financial strength, and debt ratings.
22
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 insurance laws and regulations that can change on short notice.
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 primary public policy behind insurance regulation is the protection
of policyholders and claimants against insurer insolvency and inappropriate business practices. Insurance regulation typically
prioritizes policyholder and claimant protection over all other constituencies, including shareholders. 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. because most states have enacted variations of
model laws and regulations that permit their insurance department to be accredited by the NAIC and have their regulatory
examinations and other work be given full faith and credit by other state regulators. Despite their general similarity, state
insurance laws and regulations do vary by jurisdiction. The types of insurance activities regulated by the states include:
Pricing and underwriting practices;
•
• Claims practices;
• Exiting geographic markets and/or canceling or non-renewing policies;
• Assessments for guaranty funds and second-injury funds and other mandatory assigned risks and reinsurance;
• The types, quality, and concentration of investments we make;
• Dividends from our Insurance Subsidiaries to the Parent; and
• The acquisition of 10% or more of the stock of a company such as Selective, which is an insurance holding company
that owns 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 loss and loss expenses, reinsurance, payment of dividends and other
distributions to shareholders, periodic financial examinations, and annual and other report filings.
• 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
also are subject to federal legislation and administrative policies related our insurance business, including TRIPRA, OFAC,
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. By issuing
workers compensation policies, we are subject to Mandatory Medicare Secondary Payer Reporting under the Medicare,
Medicaid, and SCHIP Extension Act of 2007. As a publicly traded company, we also are subject to Federal securities laws,
including the Sarbanes-Oxley Act and the Dodd-Frank Act. If Congress were to enact laws affecting the oversight of insurer
solvency and state regulators remained responsible for rate approval, it is possible that we could be subject to a conflicting and
inconsistent regulatory framework that could impact our profitability and capital adequacy.
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 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
23
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 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 requires companies to file an internal assessment of their solvency with insurance regulators annually.
Although no specific capital adequacy standard currently is articulated in ORSA, it is possible that such a standard could be
developed over time that might increase minimum capital requirements for insurers and 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. To some degree, these regulators can overlap each other and have different interpretations and/or
regulations on the same legal issues. Consequently, we have the risk that one regulator’s position or interpretation may conflict
with that of another regulator on the same issue and that they may 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.
Class action litigation has been filed from time-to-time against our industry, related to the following issues:
• 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;
Investment disclosure;
• Credit scoring and predictive modeling pricing;
• Cybersecurity breaches;
•
• Managed care practices;
•
• Direct repair shop utilization practices;
• The use of after-market replacement parts;
Flood insurance claim practices; and
•
Shareholder class action suits.
•
Prompt and appropriate payment of personal injury protection claims;
If we were named as a defendant in class action litigation, we could suffer reputational harm with our customers, other
purchasers of insurance, shareholders, and the general public. Expenses for the related litigation defense could have a
materially adverse effect on our operations or results.
Risks Related to Our Investments 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. Recent economic data points to increased U.S. and global economic growth, continued low levels of
unemployment, and signs of rising wages, which compounded with the potential for the pro-growth benefits of the Tax Cuts
and Jobs Act of 2017 ("Tax Reform") and the potential for higher federal budget deficits, has recently led to rising U.S. 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 securities portfolio,
which currently has an effective duration of 3.8 years, 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 or create a net unrealized loss. This would be 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, which currently represent 16% of our fixed income
portfolio, 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
24
value of the portfolio, including a decline in short-term interest rates, such as the 90-day London Interbank Offered Rate
("LIBOR"), which would result in lower yields and lower net investment income from our floating rate securities. 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.
Many of our floating rate securities are tied to the U.S. dollar-denominated LIBOR, which will be eliminated by the end of
2021. LIBOR is used to calculate interest rates for numerous types of debt obligations, including personal and commercial
loans, interest rate swaps, and other derivative products, making it a primary metric in the global banking system. LIBOR is set
every business day in numerous currencies and maturities, based on estimates submitted by major banks. In the wake of the
financial crisis, several banks were discovered to have doctored estimates in order to manipulate LIBOR, promoting a push for
submissions based on actual interbank loans. According to the U.K. Financial Conduct Authority ("FCA"), the interbank
lending market slowed in recent years, resulting in a lack of data on which to base LIBOR estimates and therefore susceptible
to further fraud. The FCA determined that, without an active market to support estimates, LIBOR should not be used as a
benchmark rate. In anticipation of the elimination of LIBOR, the U.S. Federal Reserve established the Alternative Reference
Rates Committee (ARRC) to select a replacement index for U.S. Dollar LIBOR. ARRC, comprised of a group of large
domestic banks and regulators, voted to use a benchmark based on short-term loans backed by Treasury securities, known as
repurchase agreements or "repo" trades. ARRC is expected to announce a transition plan for the new rate. We are unsure
whether the elimination of LIBOR and the transition to a new rate will have any impact on the performance of our floating rate
securities.
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 and insurers of the securities
we hold and other counterparties in certain transactions. Defaults on any of our investments by any issuer, guarantor, insurer,
or other counterparties 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 obligations. Changes in the financial market environment and general sentiment about the broad economy
may impact the credit spreads demanded by fixed income investors and negatively impact the fair market value of our fixed
income securities. At December 31, 2018, our fixed income securities portfolio represented approximately 89% of our total
invested assets. Approximately 98% of these fixed income securities were investment grade and 2% were rated below
investment grade, resulting in an average credit rating of AA- for our fixed income securities portfolio. Our fixed income
portfolio spread duration, which reflects the portfolio's sensitivity to changes in credit spread, is currently 4.4 years. 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 add or reduce risk commensurate with market conditions and our risk-taking capacity. Events
adversely impacting issuers or guarantors of fixed income securities, such as a major economic downturn, acts of corporate
malfeasance, widening credit spreads, budgetary deficits, and municipal bankruptcies spurred by, among other things, pension
funding issues, 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.
Economic uncertainty could adversely affect the credit quality of fixed income issuers or guarantors, and a ratings downgrade
in any of our holdings could cause the value of our fixed income securities portfolio and our net income to decrease. As our
stockholders' equity is leveraged to our investment portfolio at 3.3:1, 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 our residential
mortgage-backed securities ("RMBS"), commercial mortgage-backed securities ("CMBS"), collateralized loan obligations
("CLOs"), and other asset-backed securities ("ABS"), including structured note obligations, and our intent and ability to hold
securities that have declined in value until recovery. If we reposition or realign portions of the portfolio and 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 related to interest rates, credit spreads, equity prices,
and market value fluctuations in our alternative investment portfolio. We could experience a decline in both income and our
investment portfolio asset values related to many different scenarios, including: (i) a decrease in market liquidity; (ii)
fluctuations in interest rates; (iii) decreased dividend payment rates; (iv) negative market perception of credit risk with respect
to types of securities in our portfolio; (v) a decline in the performance of the underlying collateral of our RMBS, CMBS, CLOs,
25
and other ABS; (vi) reduced returns on our alternative investment portfolio; or (vii) 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 3.2:1 ratio to
our investment portfolio.
Economic uncertainty could adversely affect the credit quality and ratings of securities in our portfolio. If the NAIC were to
apply a more adverse class code on a security than was originally assigned, our statutory surplus could be adversely affected
because securities with NAIC class codes three through six are carried at fair market value and securities with NAIC class
codes of one or two are carried at amortized cost under statutory accounting rules. For those securities carried at fair market
value, see the risk factor immediately following regarding the risks around the methodologies used in determining these
valuations.
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, 2018. As accounting rules require, we have
categorized these securities into a three-level hierarchy based on the priority of the inputs to the respective valuation technique:
1. The highest priority is given to quoted prices in active markets for identical assets or liabilities (Level 1).
2. 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).
3. 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).
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, 2018, approximately 1% of our fixed income securities were priced with Level 1 inputs and 98% of our fixed
income securities were priced with Level 2 inputs. 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 when the evaluations are made. There can be no assurance that management has accurately
assessed the level of impairments taken as reflected in our Financial Statements. Additional impairments may need to be taken
in the future. It also is possible that interest rates, currently below historical averages, will increase. If they do, net unrealized
gains may be reduced and net unrealized losses associated with declines in value strictly related to such interest rate movements
may result. If that happens and we sell those impacted securities, we could experience realized losses or increased OTTI if we
determine we do not have the ability and intent to hold those securities until they recover in value. Because our investment
managers actively manage our fixed income securities portfolio, our OTTI also may fluctuate from period-to-period if the value
of securities we may intend to sell despite being in an unrealized loss position increases. Historical impairment trends may not
be indicative of future events. For further information about 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.
26
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 the primary assets or liabilities underlying the investments in these limited
partnerships generally do not have quoted prices in active markets for the same or similar assets, the valuation of our interests
in these limited partnerships is subject to (i) a higher level of subjectivity and unobservable inputs than substantially all of our
other investments and (ii) greater scrutiny and reconsideration from one reporting period to the next. Because these limited
partnership investments are recorded under the equity method of accounting, any valuation decreases could 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.
Changes in tax law could adversely affect our investments results.
Changes in the tax laws and regulations of U.S. federal, state, and local governments may adversely impact us. Our investment
portfolio benefits from tax exemptions and certain other tax law advantages, including those governing dividends received and
tax-advantaged municipal bond interest. Future federal and/or state tax law changes could lessen or eliminate some or all of
these favorable tax advantages, negatively impact the value of our investment portfolio, and materially and adversely impact
our results of operations. It also is possible that the elimination of the state and local tax deduction (the "SALT deduction") for
U.S. taxpayers filing Federal income tax returns could negatively impact the financial strength of issuers of state and local
municipal securities in our portfolio, reduce the value of our investment portfolio, and materially and adversely impact our
results of operations. The SALT deduction elimination and the reduction of mortgage interest deductibility to purchase money
mortgages of $750,000 or less also could adversely impact the value or volatility of residential real estate markets, which would
impact various classes of our investments, such as residential mortgage-backed securities and other asset classes backed by
mortgages, or real estate. Ultimately, this could reduce the value of our investment portfolio, and materially and adversely
impact our results of operations.
Uncertainty regarding domestic and international political developments and their impact on the economy could lead to
investment losses, which may adversely affect our results of operations, financial condition, liquidity, and debt ratings.
As a property and casualty insurance holding company, 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. 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 RMBS, CMBS, CLOs, and other ABS. The
current political climate has created more uncertainty about U.S. domestic and foreign policy that 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 that a
significant decline in investment value could impact. Significant future declines in investment value also could require further
OTTI charges. Depending on future market conditions, such as an extreme prolonged market event like the global credit crisis,
we could incur additional realized and unrealized losses in future periods that could adversely impact our results of operations,
financial condition, debt and financial strength ratings, and our ability to access capital markets.
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.
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, 2018, the Parent had retained earnings of $1.9 billion. Of this amount, $1.7 billion was related to
investments in our Insurance Subsidiaries. In 2019, the Insurance Subsidiaries have the ability to provide for $210 million in
ordinary annual dividends to us in 2019 under applicable state regulation; but 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
27
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.
In addition to regulatory restrictions on the availability of dividends that our Insurance Subsidiaries can pay to the Parent, the
maximum amount of dividends the Parent can pay to our shareholders is limited by certain New Jersey corporate law
provisions that limit dividends if either: (i) the Parent would be unable to pay its debts as they became due in the usual course
of business; or (ii) the Parent’s total assets would be less than its total liabilities. The Parent’s ability to pay dividends to
shareholders also are impacted by covenants in its Line of Credit agreement that obligate it, among other things, to maintain a
minimum consolidated net worth, statutory surplus, and debt-to-capital ratio. For additional details about the Line of Credit’s
financial covenants, see Note 10. “Indebtedness” 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.
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 Evolving Legislation and Public Policy Debates
We face risks regarding our flood business because of uncertainties regarding the NFIP.
We are the fifth largest insurance group in the WYO arrangement of the NFIP, which is managed by the Mitigation Division of
FEMA in the U.S. Department of Homeland Security. Under the arrangement, we receive an expense allowance for policies
written and a servicing fee for claims administered, and all losses are 100% reinsured by the Federal Government. The current
expense allowance is 30.0% 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 in the administration of flood policies and claims. Some
of these requirements may differ from our normal business practices and may present a reputational risk to our brand. While
insurance companies are regulated by the states and the NFIP requires WYO carriers to be licensed in the states in which they
operate, the NFIP is a federal program and WYO carriers are fiscal agents of the U.S. Government and must follow the NFIP's
directives. Consequently, we have the risk that directives from the NFIP and a state regulator on the same issue may conflict.
The NFIP was authorized until May 31, 2019, as a short-term solution while Congress continues to debate a more
comprehensive proposal. There continues to be significant public policy and political debate in Congress about an extension of
the NFIP, appropriate compensation for the WYO carriers, and solutions for flood risk throughout the country. Effective
October 2018, FEMA, on its own initiative, revised the arrangement by: (i) reducing the WYO’s expense allowance by 0.9
points, from 30.9% to 30.0%; and (ii) eliminating the provision allowing FEMA to increase a WYO’s expense allowance by
one percentage point to cover additional incurred expenses.
28
Our flood business could be impacted by: (i) a lapse in program authorization; (ii) further changes to WYO carrier
compensation; (iii) any mandate for primary insurance carriers to provide flood insurance; or (iv) private writers becoming
more prevalent in the marketplace. The uncertainty created by the public policy debate and politics of flood insurance reform
makes it difficult for us to predict the future of the NFIP and our continued participation in the program.
We are subject to risk that enacted legislation might significantly change insurance regulation and adversely impacts our
business, financial condition, and/or the results of operations.
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.
In 2009, Congress passed the Dodd-Frank Act to address corporate governance and control issues identified in the financial
crises in 2008 and 2009 and the non-insurance subsidiaries of American International Group, Inc. One of the key Dodd-Frank
Act provisions created the FIO as part of the U.S. Department of Treasury to advise the federal government on insurance issues.
Another Dodd-Frank Act provision requires the Federal Reserve, through the Financial Services Oversight Council (“FSOC”),
to supervise financial service firms designated as systemically important financial institutions ("SIFI"). We are not and do not
expect to be designated as a SIFI. Included among Dodd-Frank's corporate governance reforms for public companies were
proxy access, say-on-pay, and other compensation and governance issues. A number of Dodd-Frank reform bills have been
introduced, but it is uncertain whether any proposal will pass into law.
In general, the Trump Administration and the current Republican Senate majority favor less federal involvement in insurance.
Legislative proposals, however, could involve the federal government directly in regulating the business of insurance.
President Trump and the Republican Senate majority favor the repeal of the Affordable Care Act ("ACA"). Repeal of the ACA
presents some legal and practical challenges. Some reform proposals include a provision to permit sales of insurance across
state lines, which is not permitted under current federal law without approval of the respective state insurance regulators. Some
ACA reforms call for the elimination of the anti-trust exemptions for health insurers under the McCarran-Ferguson Act
("MFA"). While we are not a health insurer, property and casualty insurers operate under anti-trust exemptions that permit the
aggregation of claims and other data in numbers actuarially and statistically sufficient to price insurance. If the MFA were
repealed for the property and casualty industry, we would have to seek a business practices exemption from the Department of
Justice to share information with other insurers. In the election of November 2018, the Republicans lost their majority in the
House of Representatives. Given the Democratic House Majority, we do not expect ACA repeal to be advanced for the
foreseeable future. The Democratic House, however, may advance public policy positions or legislation focused on consumer
issues and/or disclosures that may impact the manner in which we conduct our insurance operations. We cannot predict the
impact that such a public policy debate or legislative event could have on our product and services supplier relationships,
results of operations, liquidity, financial condition, financial strength, and debt ratings.
Legislative and regulatory proposals in various states sometimes seek to limit the ability of insurers to assess insurance risk,
including limiting or prohibiting the use of certain factors or predictive measures in property and casualty underwriting such as
insurance scores and marketplace considerations. There are also proposals from time-to-time to impose new or higher
standards on claims settlement practices. These proposals, if enacted, could impact underwriting pricing, loss and loss
expenses, and results of operations.
Legislative and regulatory proposals and public policy debates in various states and among legal experts also impact tort and
insurance law, positively and negatively in relation to our business. For example, tort reform proposals may limit the amounts
recoverable for certain torts or limit the statute of limitations on certain torts. Conversely, there are proposals to expand, in
some cases retroactively, the statute of limitations for certain torts or misdeeds, such as sexual abuse and molestation. Further,
legal expert groups like the American Law Institute ("ALI") traditionally have summarized and restated the common law in
various areas. The ALI's Restatement of the Law, Liability, Insurance, expected to be published in 2019, differs from
traditional restatements and offers concepts about insurance law that are not established in legal precedents. Depending on the
proposal or initiative, if enacted or adopted, underwriting pricing, loss and loss expenses, and results of operations could be
impacted positively or negatively.
Because some of our claims cannot be settled and are litigated, our loss and loss expenses may be impacted by our ability to
promptly try cases. State court systems, in which many of our litigated claims cases reside, are subject to legislative funding,
which is not always to the levels requested by the judicial branch. Consequently, some courts have overcrowded dockets,
particularly with criminal, family, and small claims matters. According to the National Center for State Court's Court Statistic's
Project, www.courtstatistics.org, tort cases, which represent the great majority of insurance claims cases, only represent
between two and four percent of most state court dockets. Only one percent of those tort cases in which evidence is introduced
- whether before a judge or a jury - wind up being tried to completion. Most cases settle and, with fewer cases being tried and
29
appealed, there are fewer reported judicial decisions that contribute to the common law. We are unsure as to the ultimate
impact that crowded court dockets may have on our loss and loss expenses, and results of operations.
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;
•
• Being disciplined in our monitoring of, and management over, our ERM framework; 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 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.
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, particularly if we experience a privacy breach; 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.
Rapid development of new technologies may result in an unexpected impact on our business and the 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, gradually improving standards of living, the speed of communications, and fostering 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
30
automobiles. It is unclear and we cannot predict the corresponding impact on 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 based upon factors other than pricing more difficult and has increased price
comparisons, resulting 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 and growth.
• 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, 2018, our
workforce had an average age of approximately 47 and approximately 18% of our workforce was retirement eligible, which we
define as including individuals who are 55 years of age and have 10 or more years of service.
We are subject to a variety of modeling risks, which could have a material adverse impact on our business results.
We rely on internally or third-party developed complex financial models, such as those that predict underwriting results on
individual risks and our overall portfolio, claims fraud, impacts from catastrophes, enterprise risk management capital
scenarios, and investment portfolio changes, 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
in the assumptions made in them could lead to increased losses. We believe that statistical models alone do not provide a
reliable method for monitoring and controlling risk and are tools that do not substitute for the experience or judgment of senior
management.
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 proprietary and
confidential information, including personally identifiable information, about our operations, our employees, our agents, our
customers, and their employees and property. A malicious cyber-attack on our systems or those of our vendors may interrupt
our ability to operate and impact our results of operations. We have and expect to continue to: (i) implement employee
education programs and tabletop exercises; and (ii) develop and invest in a variety of controls to prevent, detect, and
appropriately react to 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 our systems or data security could damage our reputation and/or result in monetary damages that, 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 breach, it is possible that one 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 $1 million. In addition, within our Standard Commercial Lines segment, we offer cyber-related insurance
products for which we have mitigated the majority of the related risk through protection under our reinsurance treaties.
Given the increased number of identity thefts from cyber-attacks, federal and state policymakers have, and will likely continue
to propose increased regulation of the protection of personally identifiable information and appropriate protocols after a related
cybersecurity breach. The New York Department of Financial Services recently adopted a cyber protection and reporting
regulation for financial services companies with which we are complying. The NAIC also has adopted a model regulation
based on the New York regulation, which several states adopted in 2018, and we expect other states will consider adopting in
2019. California passed a broad-reaching new Consumer Privacy Act in 2018 that layers additional obligations and penalties
on companies that collect a variety of personal information. Compliance with these regulations and efforts to address
continually developing cybersecurity risks may result in a material adverse effect on our results of operations, liquidity,
financial condition, financial strength, and debt ratings.
31
Changes in tax law 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, and their amendment could
adversely impact us. For example, the U.S. tax code was recently amended to reduce the federal corporate income tax rate
from 35% to 21% effective for the 2018 tax year. As a result, our deferred tax assets were reduced and we were required to
recognize a reduction of a previously-recognized federal tax benefit in the fourth quarter of 2017 when enacted. Potential
future tax rule changes may increase or decrease our actual tax expense and could materially and adversely affect our results of
operations.
If we experience difficulties with outsourcing relationships, our ability to conduct our business might be negatively
impacted.
We currently outsource certain business and administrative functions to third parties for expediency, efficiency and economies
of scale and this outsourcing may increase in the future. If we or our third-party partners falter in the development,
implementation, or execution of our outsourcing strategies, we may experience operational difficulties, increased costs, and
customer losses that may have a material adverse effect on our results of operations or financial condition. We have
supplemental staffing service agreements with multiple consulting, information technology, and service providers that supply
approximately 50% of our skilled technology capacity. These resources are principally based in the U.S., although some of the
resources are foreign. The impact of the recently-enacted U.S. tax reform on the availability and cost of these services is still
uncertain.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our headquarters are located in a 315,000 square foot structure on a 56 acre site zoned for office and professional use in
Branchville, New Jersey. The site is owned by a subsidiary, which also owns abutting property in Frankford, New Jersey. We
lease all of our other facilities. The principal office locations related to our insurance operations 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 loss 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, 2018, 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.
32
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.”
(b) Holders
We had 3,122 stockholders of record as of February 7, 2019 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. We currently expect to
continue to pay quarterly cash dividends on shares of our common stock in the future.
On October 25, 2018, the Board of Directors approved an 11% increase in our dividend to $0.20 per share. In addition, on
January 31, 2019, the Board of Directors declared a $0.20 per share quarterly cash dividend on common stock that is payable
March 1, 2019, to stockholders of record as of February 15, 2019.
(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, 2018:
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
Equity compensation plans approved by security holders
126,735 1 $
14.37
(c)
Number of securities remaining
available for
future issuance under
equity compensation
plans (excluding
securities reflected in column (a))
5,666,732 2
1Weighted average remaining contractual life of options is 0.8 years.
2Includes 429,181 shares available for issuance under our Employee Stock Purchase Plan (2009); 1,776,359 shares available for issuance under the Stock
Purchase Plan for Independent Insurance Agencies; and 3,461,192 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.
33
(e) Performance Graph
The following chart, produced by Research Data Group, Inc., depicts our performance for the period beginning December 31,
2013 and ending December 31, 2018, 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.
(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 2018:
Period
October 1 – 31, 2018
November 1 – 30, 2018
December 1 – 31, 2018
Total
Total Number of
Shares Purchased1
Average Price
Paid Per Share
—
2,085
2
2,087
$
$
—
63.83
66.33
63.83
Total Number of
Shares Purchased
as Part of Publicly
Announced Programs
Maximum Number of
Shares that May Yet
Be Purchased Under the
Announced Programs
—
—
—
—
—
—
—
—
1These shares were purchased from employees in connection with the vesting of restricted stock units and option exercises. These repurchases were made to
satisfy tax withholding obligations and/or option costs with respect to those employees.
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 and unrealized (losses) gains1
Total revenues
Catastrophe losses
Underwriting income
Net income
Comprehensive income
Total assets
Short-term debt
Long-term debt
Stockholders’ equity
Statutory premiums to surplus ratio
Combined ratio
Impact of catastrophe losses on combined ratio
2018
$
2,514,286
2,436,229
195,336
(54,923)
2,586,080
88,023
121,173
178,939
105,832
7,952,729
—
439,540
1,791,802
1.4
95.0 %
3.6
pts
Invested assets per dollar of stockholders' equity
$
3.33
Yield on investments, after tax
Debt to capitalization ratio
Return on average equity
2.8 %
19.7
10.2
Per share data:
Net income:
Basic
Diluted
Dividends to stockholders
Stockholders’ equity
Price range of common stock:
High
Low
Close
Number of weighted average shares:
Basic
$
$
3.04
3.00
0.74
30.40
67.17
53.55
60.94
2017
2,370,641
2,291,027
161,882
6,359
2016
2,237,288
2,149,572
130,754
(4,937)
2015
2014
2,069,904
1,989,909
121,316
13,171
1,885,280
1,852,609
138,708
26,599
2,469,984
2,284,270
2,131,852
2,034,861
67,299
154,336
168,826
204,946
59,735
151,933
158,495
151,970
59,055
149,029
165,861
136,648
59,971
78,143
141,827
136,764
7,686,431
7,355,848
6,904,433
6,574,942
—
439,116
1,712,957
—
438,667
1,531,370
60,000
328,192
1,398,041
—
372,689
1,275,586
1.4
93.3
2.9
3.32
2.1
20.4
10.4
2.89
2.84
0.66
1.4
92.9
2.8
3.50
1.9
22.3
10.8
2.74
2.70
0.61
1.5
92.5
3.0
3.64
1.9
21.7
12.4
2.90
2.85
0.57
1.4
95.8
3.2
3.77
2.2
22.6
11.7
2.52
2.47
0.53
29.28
26.42
24.37
22.54
62.40
38.50
58.70
44.00
29.27
43.05
37.91
25.49
33.58
27.65
21.38
27.17
58,950
58,458
57,889
57,212
56,310
Diluted
57,351
1Effective January 1, 2018, changes in unrealized gains and losses on our equity portfolio are recognized in income through "Net unrealized losses on equity
securities" on our Consolidated Statements of Income, as a result of our adoption of the Financial Accounting Standards Board issued Accounting Standards
Update 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. See Note 3. "Adoption of
Accounting Pronouncements" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K for additional information.
58,156
59,357
58,747
59,713
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 business environment that changes constantly, and new risk factors may emerge at any time. We
can neither predict these new risk factors nor assess their impact, if any, on our businesses or the extent to which any new factor
or combination of factors may cause actual results to differ materially from any forward-looking statements. In light of these
risks, uncertainties and assumptions, it is possible that 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;
Standard Personal Lines;
•
•
• E&S Lines; and
Investments.
•
For further details regarding these segments, refer to Note 1. "Organization" and Note 11. "Segment Information" included in
Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
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 NFIP's WYO. 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 generally cannot obtain
coverage in the standard marketplace.
Our ten insurance subsidiaries are collectively referred to as the "Insurance Subsidiaries."
In Management's Discussion and Analysis ("MD&A"), we will discuss and analyze the consolidated results of operations and
financial condition, as well as known trends and uncertainties that may have a material impact in future periods, including the
following:
Financial Highlights of Results for Years Ended December 31, 2018, 2017, and 2016;
• 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. We can offer no assurance that
actual results will be the same as those estimates, and it is possible they will differ materially. Those estimates that were most
critical to the preparation of the Financial Statements involved the following: (i) reserves for loss and loss expense; (ii) pension
and post-retirement benefit plan actuarial assumptions; (iii) investment valuation and other-than-temporary-impairments
(“OTTI”); and (iv) reinsurance.
Reserves for Loss and Loss Expense
Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the loss to us, and our
payment of that loss. To recognize liabilities for unpaid loss and loss expense, insurers establish reserves as balance sheet
liabilities representing an estimate of amounts needed to pay reported and unreported net loss and loss expense. We had
accrued $3.9 billion of gross loss and loss expense reserves and $3.4 billion of net loss and loss expense reserves at
December 31, 2018. At December 31, 2017, these gross and net reserves were $3.8 billion and $3.2 billion, respectively. The
Insurance Subsidiaries' liability duration was approximately 3.6 years at December 31, 2018, down from 3.8 years at December
31, 2017.
The following tables provide case and incurred but not reported (“IBNR”) reserves for loss and loss expenses, and reinsurance
recoverable on unpaid loss and loss expense as of December 31, 2018 and 2017:
As of December 31, 2018
Loss and Loss Expense Reserves
Case
Reserves
IBNR
Reserves
Total
Reinsurance
Recoverable on
Unpaid Loss and
Loss Expense
Net Reserves
$
($ in thousands)
General liability
Workers compensation
Commercial automobile
Businessowners' policies
Commercial property
Other
Total Standard Commercial Lines
Personal automobile
Homeowners
Other
Total Standard Personal Lines
E&S casualty lines1
E&S property lines2
Total E&S Lines
244,367
402,732
197,777
31,631
63,651
6,339
946,497
70,993
14,627
14,569
100,189
66,867
8,053
74,920
1,152,770
742,726
363,234
60,675
10,943
6,686
1,397,137
1,145,458
561,011
92,306
74,594
13,025
2,337,034
3,283,531
75,081
20,109
27,844
123,034
304,864
7,330
312,194
146,074
34,736
42,413
223,223
371,731
15,383
387,114
Total
3,893,868
1Includes general liability (95% of net reserves) and commercial auto liability coverages (5% of net reserves).
2Includes commercial property (88% of net reserves) and commercial auto property coverages (12% of net reserves).
1,121,606
2,772,262
$
37
181,102
220,683
15,641
3,473
12,620
2,909
436,428
45,572
1,346
31,777
78,695
21,898
367
22,265
1,216,035
924,775
545,370
88,833
61,974
10,116
2,847,103
100,502
33,390
10,636
144,528
349,833
15,016
364,849
537,388
3,356,480
$
December 31, 2017
($ 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
E&S casualty lines1
E&S property lines2
E&S Lines
Loss and Loss Expense Reserves
Case
Reserves
IBNR
Reserves
Total
Reinsurance
Recoverable on
Unpaid Loss and
Loss Expense
Net Reserves
260,605
427,955
200,409
31,758
64,192
5,018
989,937
76,895
15,477
51,646
144,018
53,764
6,586
60,350
1,046,261
756,609
291,681
58,522
13,420
8,787
1,306,866
1,184,564
492,090
90,280
77,612
13,805
2,175,280
3,165,217
73,356
18,763
27,029
119,148
273,607
8,900
282,507
150,251
34,240
78,675
263,166
327,371
15,486
342,857
175,276
218,024
16,745
3,926
24,387
2,287
440,645
53,129
999
69,333
123,461
21,360
389
21,749
1,131,590
966,540
475,345
86,354
53,225
11,518
2,724,572
97,122
33,241
9,342
139,705
306,011
15,097
321,108
585,855
3,185,385
Total
3,771,240
1Includes general liability (95% of net reserves) and commercial auto liability coverages (5% of net reserves).
2Includes commercial property (90% of net reserves) and commercial auto property coverages (10% of net reserves).
1,194,305
2,576,935
$
How reserves are established
Each quarter, our actuaries prepare a comprehensive loss and loss expense reserve analysis. This analysis applies standard
actuarial projection techniques to our own loss and loss expense experience, to produce updated ultimate loss and loss expense
estimates. Our actuaries may also consider other non-standard approaches. The results of the reserve analysis results are then
discussed with management to determine if any changes are required to the estimated ultimate loss and loss expense reserves.
In addition to the actuarial loss and loss expense projections, management considers other information and factors, including
internal impacts, such as changes to our underwriting and claims practices and external impacts, such as economic, legal,
judicial, and social trends. Upon considering all of this information, management makes a decision about whether changes to
the reserve estimates are appropriate.
The actuarial reserve analysis is the foundation of the quarterly reserve review process. Using generally accepted actuarial
reserving techniques, we project our estimate of ultimate loss and loss expense at each reporting date. Our IBNR reserve is the
difference between the projected ultimate loss and loss expense incurred and the sum of: (i) case loss and loss expense
reserves; and (ii) paid loss and loss expense. 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, such as the selection of loss and loss expense development factors and
the weight to be applied to each individual projection method, among others. These methods include paid and incurred
versions of the following methods: aggregate loss and loss expense development, Bornhuetter-Ferguson, Berquist-Sherman,
and frequency/severity modeling (via a development 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 reserve 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. Actual claims counts and severities are also considered
relative to initial expectations.
38
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, claims frequencies and severities, individual large loss activity, asbestos and
environmental claim activity, and other latent and continuous trigger claims activities. We also consider factors such as: (i)
industry loss experience; (ii) legislative enactments, judicial decisions, legal developments, and changes in political attitudes;
and (iii) trends in general economic conditions, including the effects of inflation. Based upon our quarterly reserve analysis,
our annual reserve range, and other relevant factors and considerations, IBNR is established and the ultimate net liability for
loss and loss expense 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 external consulting 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 $3,003 million to $3,556
million at December 31, 2018, which compares to $2,899 million to $3,361 million at December 31, 2017. 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 reflect ranges of
reasonable estimates, 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 certain other continuous exposure
claims, as traditional actuarial techniques cannot be effectively applied to these exposures.
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.
Changes in Reserve Estimates (Loss Development)
Each quarter a reserve review produces updated reserve estimates for the current and prior accident years, which in turn leads
to changes in the recorded reserves, favorably, or unfavorably. In 2018, we experienced overall net favorable prior year loss
development of $29.9 million, compared to $39.2 million in 2017, and $65.8 million in 2016. The following table summarizes
prior year development by line of business:
(Favorable)/Unfavorable Prior Year Loss and Loss Expense Development
($ in millions)
General liability
Workers compensation
Commercial automobile
Businessowners' policies
Commercial property
Personal automobile
Homeowners
E&S casualty lines
E&S property lines
Other
Total
2018
2017
2016
$
(9.5)
(83.0)
36.7
(1.5)
7.5
3.0
9.8
12.0
(4.8)
(0.1)
39
$
(29.9)
(48.3)
(52.3)
35.6
1.9
8.7
6.7
0.4
10.0
0.1
(2.0)
(39.2)
(45.0)
(56.0)
25.3
1.8
0.3
1.0
1.7
6.0
1.2
(2.1)
(65.8)
A detailed discussion of recent reserve developments, by line of business, follows.
Standard Market General Liability Line of Business
At December 31, 2018, our general liability line of business had recorded reserves, net of reinsurance, of $1.2 billion, which
represented 36% of our total net reserves. In 2018, this line experienced favorable development of $9.5 million, attributable to
lower than expected loss expenses in accident years 2013 through 2017. The favorable loss expense emergence was partially
offset by higher than expected loss emergence in accident years 2016 and 2017.
During 2017, this line experienced favorable development of $48.3 million, attributable to lower than expected frequencies and
severities, mainly in accident years 2016 and prior.
By its nature, this line presents a diverse set of exposures, and can be influenced by a variety of factors. In recent years, the
line has been favorably impacted by decreasing frequencies partially offset by modest severity trends. Potential increases in
either economic or social inflation could impact the loss trends for this line of business. Sources of social inflation could
include: (i) state legislation that could extend the statute of limitation for lawsuits alleging abuse and/or re-open the window for
lawsuits that were previously beyond the statute of limitations; and (ii) increased awareness of abuse and molestation liability.
Our actuarial department actively monitors these trends within our reserve review data, and holds frequent discussions with
claims, to identify any potential shifts in these trends.
Standard Market Workers Compensation Line of Business
At December 31, 2018, our workers compensation line of business recorded reserves, net of reinsurance, of $924.8 million,
which represented 28% of our total net reserves. During 2018, this line experienced favorable development of $83.0 million
driven by accident years 2017 and prior. During 2017, this line experienced favorable development of $52.3 million driven by
accident years 2016 and prior. During 2018, this line again showed lower loss emergence than expected, due, in part, to: (i)
lower medical inflation than originally anticipated; (ii) our proactive underwriting actions; and (iii) various significant claims
initiatives that we have implemented. Because of the length of time that injured workers receive medical treatment, decreases
in medical inflation can cause favorable loss development across an extended number of accident years.
While we believe the underwriting and claims operational changes are significant drivers of our improved loss experience,
there is always risk associated with change. Most notably, changes in operations may inherently change paid and reported
development patterns. While our reserve analyses incorporate methods that adjust for these changes, nevertheless there is a
greater risk of fluctuation in the estimated reserves.
In addition to the uncertainties associated with our actuarial assumptions and methodologies, the workers compensation line of
business can be impacted by a variety of 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, such as increased use of pharmaceuticals and more complex medical procedures, among others. Also,
lower levels of unemployment may cause the hiring of less skilled workers who may experience higher loss
frequencies.
Audit premium and endorsement premium may also introduce uncertainty into our reserves, as earned premiums are used as a
basis to set initial reserves. Over recent years, this activity has been fairly consistent. Audit and endorsement activity resulted
in additional DPW of $12.1 million in 2018 and $18.2 million in 2017.
Standard Market Commercial Automobile Line of Business
At December 31, 2018, our commercial automobile line of business had recorded reserves, net of reinsurance, of $545 million,
which represented 16% of our total net reserves. In 2018, this line experienced unfavorable development of $36.7 million,
which was mainly driven by higher than expected severities in accident years 2015 through 2017.
40
In 2017, this line experienced unfavorable development of $35.6 million, which was mainly driven by: (i) higher than expected
frequencies and severities in accident years 2015 and 2016; and (ii) higher than expected severities in accident years 2012
through 2014.
For both us and the industry, the commercial automobile line has experienced unfavorable trends in recent years. Increased
frequencies are likely due to increased miles driven as a result of lower unemployment and lower gasoline prices, as well as an
increase in distracted driving. We have seen rising severities on both bodily injury and property damage claims. On bodily
injury claims, we have seen an increase in the average value of our paid loss settlements, which may be related to higher
awards driven by aggressive attorney representation. Increasing property damage 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:
• Taking meaningful rate and underwriting actions on our renewal portfolio. We will continue to leverage our predictive
modeling and analytical capabilities to provide more granular insights as to where best to focus our actions.
• Aggressively managing new business pricing and hazard mix, co-underwriting selected higher hazard classes by the
field and home office, providing better recognition of risk drivers, and improved pricing.
• Reducing premium leakage by improving the quality of our rating information. This includes validating application
information using third-party data and obtaining more detailed driver information.
Implementing new tools to score drivers to underwrite more effectively and align rate with exposure.
•
We also are investing in technologies that help us enhance the overall customer experience and improve our retention rates and
hit ratios over time, such as our "Selective® Drive" program that was introduced to our commercial automobile policyholders in
the fourth quarter of 2018. This product assists with logistics management and improved safety by tracking and scoring
individual drivers based on driving attributes, including phone usage while the vehicle is in motion.
Standard Market Personal Automobile Line of Business
At December 31, 2018, our personal automobile line of business had recorded reserves, net of reinsurance, of $101 million,
which represented 3% of our total net reserves. In 2018, this line experienced unfavorable development of $3.0 million, mainly
attributable to an increase in accident years 2016 and 2017. In 2017, this line experienced unfavorable development of $6.7
million, mainly attributable to an increase in accident years 2011 through 2016.
Some of the sames issues affecting the commercial automobile line are also affecting this line. Increased usage and vehicle
repair costs, coupled with social trends such as distracted driving, are likely causes of increased frequencies and rising
severities. 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 Casualty Lines of Business
At December 31, 2018, our E&S casualty lines of business had recorded reserves, net of reinsurance, of $350 million, which
represented 10% of our total net reserves. In 2018, this line experienced unfavorable development of $12.0 million, mostly
associated with accident years 2015 and 2016. In 2017, this line experienced unfavorable development of $10.0 million,
mostly associated with accident years 2014 and 2015. While we continue to build historical loss experience in this segment,
our experience base is still significantly shorter than we have in our Standard Commercial and Personal Lines segments.
Therefore, our reserve estimates for this line are subject to somewhat greater uncertainty than the comparable Standard
Commercial and Personal Line segments. In addition, by its nature, the composition of this book tends to undergo greater
changes over time, which may impact development patterns.
Our E&S results have improved over recent years. In support of these improved results, we have taken the following actions
related to E&S casualty claims:
• Over the course of late 2015 and early 2016, our E&S claims handling function was aligned with our standard
operations claims function. E&S claims were migrated from the business unit in Scottsdale, Arizona, to the
appropriate regional claims operation. Complex claims are referred to the corporate Complex Claims Unit ("CCU")
for specialized handling.
• 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.
• We implemented the following expense improvement initiatives regarding outside adjusters and legal counsel:
41
Maximized use of staff counsel, increasing staff where necessary to support claims volume;
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.
We believe that the actions above are leading to earlier identification of severe claims, as well as earlier claims resolutions with
improved outcomes. However, changes in claims operations can result in changes to claims reserving and settlement patterns.
Once claims initiatives are implemented, it takes time for patterns to stabilize, and in the near term, these operational changes
increase the uncertainty in reserve estimates.
Other impacts creating additional loss and loss expense reserve uncertainty
Claims Initiative Impacts
Like all areas of our organization, our Claims Department is continually identifying areas for improvement and efficiency,
increasing their value proposition to both our insureds and our organization. These improvements may lead to changes in
claims practices that affect average case reserve levels and/or claims settlement rates, which directly impact the data used to
project ultimate loss and loss expense. While these changes increase the uncertainty in our estimates in the short-term, we
expect the longer-term benefit will be a more refined management of the claims process.
Some of the specific claims actions implemented over the past several years, in addition to those regarding E&S, as discussed
above, are as follows:
•
Increased focus on reducing workers compensation medical costs through more favorable Preferred Provider
Organization ("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 Property Claims Specialists ("PCS") and our Property Large Loss Unit ("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 predictive models that allow us to better focus our efforts.
Our internal reserve analyses incorporate certain 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
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 claim frequencies, severities, and 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 internal and external trends and operational changes,
they ultimately manifest themselves as changes in the expected loss and loss expense development patterns. These patterns are
a key assumption in the reserving process. In addition to the expected development patterns, 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 judgmental, they are based on the reserve
range analysis, as well as the actual historical reserve development for the line of business. 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 Expected Loss and Loss Expense Reporting Patterns
($ in millions)
General liability
Workers compensation
Commercial automobile liability
Personal automobile liability
E&S casualty lines
Percentage
Decrease/
Increase
7 % $
10
12
15
10
(Decrease) to Future
Calendar Year Reported
Increase to Future
Calendar Year Reported
(85) $
(65)
(55)
(10)
(40)
85
65
55
10
40
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 casualty lines
Percentage
Decrease/
Increase
10 pts $
10
10
10
10
(Decrease) to Current
Accident Year Expected
Loss and Loss Expense
Ratio
Increase to Current
Accident Year Expected
Loss and Loss Expense
Ratio
(60) $
(35)
(35)
(10)
(20)
60
35
35
10
20
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 loss and loss expense reserves for these claims were $22.8 million as of December 31, 2018 and $21.2
million as of December 31, 2017. 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 six customers related to three sites on the NPL.
“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.
“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, 2018, asbestos claims constituted 27% of our $22.8 million net asbestos and environmental
reserves, compared to 30% of our $21.2 million net asbestos and environmental reserves at December 31, 2017.
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 Standard Commercial Lines industry. Prior to the introduction of the absolute
pollution exclusion endorsement in the mid-1980's, we were primarily a Standard 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.
Other Latent Exposures
In addition to asbestos and environmental reserves, we also have exposure to other latent, or continuous trigger, exposures in
our ongoing portfolio. Examples include construction defect claims and abuse and molestation coverage. We manage our
exposure to these liabilities through our underwriting and claims practices. Similar to asbestos and environmental claims, these
claims are handled by a dedicated claims unit. Nevertheless, these claims bring greater uncertainty to our estimates, and are
particularly susceptible to changes in our legal, social, and judicial environments.
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
44
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. Conversely, a lower discount rate increases the present value of benefit obligations. Our discount
rate increased 68 basis points, to 4.46%, as of December 31, 2018, compared to 3.78% as of December 31, 2017. 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 higher expected rate of return on pension plan assets
would decrease pension expense. Our long-term expected return on plan assets increased 14 basis points, to 6.50%, as of
December 31, 2018 compared to 6.36% as of December 31, 2017, reflecting a higher expected allocation to risk-seeking assets
in the portfolio and a change to our investment funds.
At December 31, 2018, our pension and post-retirement benefit plan obligation was $350.0 million compared to $381.0 million
at December 31, 2017. Plan assets were $331.7 million and $363.7 million at December 31, 2018 and December 31, 2017,
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
The fair value of our investment portfolio is defined under accounting guidance as the exit price or the amount that would be:
(i) received to sell an asset; or (ii) paid to transfer a liability in an orderly transaction between market participants. When
determining an exit price we must, when available, rely upon observable market data. The majority of securities in our equity
portfolio have readily determinable fair values and, as such, are carried at fair value with changes in unrealized gains or losses
being recognized through income. Additionally, our available-for-sale ("AFS") fixed income securities 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 held-
to-maturity ("HTM") fixed income securities 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. We
also consider whether or not we have the intent to sell securities that are in an unrealized loss position. For additional
information regarding our OTTI process and OTTI charges recorded, see item (d) of Note 2. "Summary of Significant
45
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 loss and loss expense 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 $4.5 million at December 31, 2018 and $4.6 million at December 31, 2017. We continually monitor
developments that may impact recoverability from our reinsurers and have available to us contractually provided remedies if
necessary. For further information regarding reinsurance, see the “Reinsurance” section below and Note 8. “Reinsurance” in
Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
Financial Highlights of Results for Years Ended December 31, 2018, 2017, and 20161
($ in thousands, except per share amounts)
2018
Revenues
After-tax net investment income
After-tax underwriting income
Net income before federal income tax
Net income
Diluted net income per share
Diluted weighted-average outstanding shares
Combined ratio
Invested assets per dollar of stockholders' equity
After-tax yield on investments
Return on equity ("ROE")
$
2,586,080
160,481
95,727
211,721
178,939
3.00
59,713
95.0 %
3.33
2.8 %
10.2
$
$
2017
2,469,984
118,520
100,318
261,968
168,826
2.84
59,357
93.3
3.32
2.1
10.4
2018 vs.
2017
5 % $
35
(5)
(19)
6
6
1
$
1.7
pts
— % $
pts
0.7
(0.2)
2016
2,284,270
98,405
98,756
219,955
158,495
2.70
58,747
2017 vs.
2016
8 %
20
2
19
7
5
1
92.9 %
3.50
1.9 %
10.8
0.4
pts
(5) %
0.2
pts
(0.4)
$
218,567
Non-GAAP operating income2
Diluted non-GAAP operating income per share2
Non-GAAP operating ROE2
1Refer to the Glossary of Terms attached to this Form 10-K as Exhibit 99.1 for definitions of terms used in this financial review.
2Non-GAAP operating income is used as an important financial measure by us, analysts, and investors, because the realization of net investment gains and
losses on sales of securities in any given period is largely discretionary as to timing. In addition, these net realized investment gains and losses, as well as
OTTI that are charged to earnings, unrealized gains and losses on equity securities, and the deferred tax asset charge that was recognized in 2017 in relation to
Tax Reform, could distort the analysis of trends.
18 % $
18
12.5 %
11.0 %
161,704
184,898
14 %
3.11
11.4
3.66
2.75
pts
1.1
0.4
pts
13
For the year, our combined ratio was 95.0% and our non-GAAP operating ROE of 12.5% exceeded our financial target of 12%
for 2018. Industry-wide commercial property results have been volatile and commercial auto has been a consistently poor
performer, which when coupled with ongoing pricing pressures within the workers compensation line, have led to an expected
2018 combined ratio of 99.4% for the U.S. property and casualty insurance industry, or an ROE of 7.2%, as reported by
Conning, Inc. in their fourth quarter 2018 Property-Casualty Forecast and Analysis Report.
Reconciliations of net income, net income per diluted share, and ROE to non-GAAP operating income, non-GAAP operating
income per diluted share, and non-GAAP operating ROE, respectively, are provided in the tables below:
Reconciliation of net income to non-GAAP operating income
($ in thousands)
Net income
Net realized and unrealized losses (gains), before tax
Tax on net realized and unrealized losses (gains)
Net realized and unrealized losses (gains)
Tax Reform impact
Non-GAAP operating income
2018
2017
2016
$
178,939
54,923
(15,295)
39,628
—
$
218,567
168,826
158,495
(6,359)
2,226
(4,133)
20,205
184,898
4,937
(1,728)
3,209
—
161,704
46
Reconciliation of net income per diluted share to non-GAAP operating income per diluted share
2018
2017
2016
Net income per diluted share
Net realized and unrealized losses (gains), before tax
Tax on net realized and unrealized losses (gains)
Net realized and unrealized losses (gains)
Tax Reform impact
Non-GAAP operating income per diluted share
$
$
3.00
0.92
(0.26)
0.66
—
3.66
2.84
(0.11)
0.04
(0.07)
0.34
3.11
2.70
0.08
(0.03)
0.05
—
2.75
Reconciliation of ROE to non-GAAP operating ROE
2018
2017
2016
ROE
Net realized and unrealized losses (gains), before tax
Tax on net realized and unrealized losses (gains)
Net realized and unrealized losses (gains)
Tax Reform impact
Non-GAAP operating ROE
The components of our ROE are as follows:
ROE Components
Standard Commercial Lines Segment
Standard Personal Lines Segment
E&S Lines Segment
Total insurance operations
Investment income
Net realized and unrealized (losses) gains
Total investments segment
Tax Reform impact
Other
ROE
10.2%
3.1
(0.8)
2.3
—
12.5%
10.4
(0.4)
0.2
(0.2)
1.2
11.4
10.8
0.3
(0.1)
0.2
—
11.0
2018
2017
Change
Points
2016
Change
Points
4.9%
0.6
—
5.5
9.2
(2.3)
6.9
—
(2.2)
10.2%
6.1
0.4
(0.3)
6.2
7.3
0.2
7.5
(1.2)
(2.1)
10.4
(1.2)
0.2
0.3
(0.7)
1.9
(2.5)
(0.6)
1.2
(0.1)
(0.2)
6.4
0.6
(0.3)
6.7
6.7
(0.2)
6.5
—
(2.4)
10.8
(0.3)
(0.2)
—
(0.5)
0.6
0.4
1.0
(1.2)
0.3
(0.4)
2018 marks the fifth consecutive year that we reported double-digit non-GAAP operating ROEs, placing us among a select
group of insurance companies that have achieved this level of performance. This is a particularly impressive track record in the
context of: (i) meaningful catastrophe losses over the past two-year period; (ii) a highly competitive commercial lines pricing
environment; and (iii) a continued low level of interest rates that negatively impacts net investment income from fixed income
security portfolios.
Insurance Operations
Our insurance operations' ROE decreased 0.7 points, to 5.5%, in 2018 and 0.5 points, to 6.2%, in 2017 compared to the same
prior year periods, reflecting increases in our combined ratio of 1.7 points and 0.4 points, respectively. These increases were
principally driven by higher levels of both catastrophe and non-catastrophe property losses, lower levels of favorable prior year
casualty reserve development, and a higher than expected booked accident year casualty loss and loss expense ratio for 2018,
that were partially offset by improvements in our expense ratio.
47
The following table provides quantitative information for analyzing the combined ratio:
All Lines
($ in thousands)
Insurance Operations Results:
Net premiums written ("NPW")
Net premiums earned ("NPE")
Less:
Loss and loss expense incurred
Net underwriting expenses incurred
Dividends to policyholders
Underwriting income
Combined Ratios:
Loss and loss expense ratio
Underwriting expense ratio
Dividends to policyholders ratio
Combined ratio
2018
2017
2018
vs. 2017
2016
2017
vs. 2016
$
2,514,286
2,436,229
1,498,134
808,939
7,983
121,173
$
61.5 %
33.2
0.3
95.0
2,370,641
2,291,027
1,345,074
786,983
4,634
154,336
58.7
34.4
0.2
93.3
6 % $
6
2,237,288
2,149,572
11
3
72
(21) % $
1,234,797
759,194
3,648
151,933
6 %
7
9
4
27
2 %
2.8 pts
57.4 %
1.3 pts
(1.2)
0.1
1.7
35.3
0.2
92.9
(0.9)
—
0.4
Our 2018 results continue to reflect our efforts to: (i) achieve meaningful overall renewal pure price increases at levels that are
at or exceed expected claim cost inflation; (ii) generate new business; and (iii) improve the underlying profitability of our
business through various underwriting and claims initiatives. Our NPW growth of 6% in 2018 and 2017 compared to the same
prior year periods, was aided by the net appointment of about 110 retail agents in both 2018 and 2017, excluding agency
consolidations. Included in these net appointments were 52 agents appointed in our new states of Arizona, New Hampshire,
Colorado, New Mexico, and Utah, which contributed $25.7 million to our new business in 2018.
Loss and Loss Expenses
The loss and loss expense ratio increased 2.8 points in 2018 and 1.3 points in 2017 compared to the same prior year periods,
driven by the following:
($ in millions)
Non-Catastrophe Property Losses
Catastrophe Losses
For the year ended
December 31,
Loss Incurred
Impact on Loss
and Loss
Expense Ratio
Loss and Loss
Expense
Incurred
Impact on Loss
and Loss
Expense Ratio
Total Impact on
Loss and Loss
Expense Ratio
(Favorable)/
Unfavorable
Change in Ratio
2018
2017
2016
$
361.5
303.7
279.2
14.8 pts $
13.3
13.0
88.0
67.3
59.7
3.6 pts
2.9
2.8
18.4
16.2
15.8
2.2
0.4
(0.5)
($ in millions)
Favorable Prior Year Casualty Reserve Development
For the year ended December 31,
Loss and Loss
Expense Incurred
Impact on Loss and Loss
Expense Ratio
(Favorable)/
Unfavorable
Change in Ratio
2018
2017
2016
(41.5)
(48.6)
(69.0)
(1.7) pts
(2.1)
(3.2)
0.4
1.1
0.2
48
2018
2017
2016
Details of the prior year casualty reserve development were as follows:
(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
$
(9.5)
37.5
(83.0)
(3.0)
—
(58.0)
1.5
3.0
4.5
12.0
Total (favorable) prior year casualty reserve development
$
(41.5)
(Favorable) impact on loss ratio
(1.7) pts
(48.3)
36.0
(52.3)
—
(2.0)
(66.6)
1.0
7.0
8.0
10.0
(48.6)
(2.1)
(45.0)
25.0
(56.0)
0.5
(2.0)
(77.5)
1.5
1.0
2.5
6.0
(69.0)
(3.2)
As illustrated in the table above, we have seen the most significant favorable prior year casualty reserve development in our
workers compensation and general liability lines of business and the most significant unfavorable prior year casualty reserve
development in our commercial automobile and E&S lines of business. The following provides some qualitative discussion
around the actions we have taken regarding these lines of business:
Workers Compensation
We continue to execute on various claims process enhancements and underwriting initiatives to improve our profitability on
this line. During 2018, we experienced renewal pure price decreases of 0.2% in a market place that is demonstrating significant
pricing pressure. Our workers compensation book of business, which represents approximately 16% of our Standard
Commercial Lines business, continues to benefit from: (i) claims initiatives, such as reducing workers compensation medical
costs through more favorable Preferred Provider Organization ("PPO") contracts and greater PPO penetration; and (ii) better
outcomes driven by our workers compensation strategic case management unit, which handles claims with high exposure and/
or significant escalation risk. In addition, this line has benefited in recent years from lower than anticipated medical inflation
that has led to lower severity trends. Favorable prior year casualty reserve development in 2018 amounted to $83.0 million for
the year, reflecting lower than expected severities in accident years 2017 and prior. For a full discussion of the claims
initiatives we have deployed, refer to the “Reserves for Loss and Loss Expense” section within Critical Accounting Policies and
Estimates in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Commercial Automobile
Our commercial automobile line of business has been unprofitable for the past three years and remains a significant area of
focus for us. Loss severities and frequencies have remained elevated, resulting in upward adjustments for the prior and current
accident year casualty reserves. We have been taking a number of steps to address profitability in this line, including renewal
pure price increases that averaged 7.3% in 2018, 6.7% in 2017, and 4.9% in 2016. We also continue to take a more
conservative underwriting and pricing stance on higher hazard classes, resulting in a shift of business mix towards lower and
medium hazard accounts. Longer-term, we also expect the introduction of Selective® Drive to improve the performance of
accounts in that program. Our commercial automobile combined ratio was 115.7% for 2018, compared to the full-year
expectation of 112% reported by Conning, Inc. On-going industry-wide profitability issues should drive pricing higher for this
line of business in 2019.
49
E&S
Our E&S segment continues to perform below our target level and remains an area of focus for us as we continued to
experience unfavorable development on the 2015 and 2016 accident years. We have been taking active steps over the past two
years to address profitability in this segment, including implementing meaningful targeted price increases, exiting challenged
business segments, and improving claims handling processes. We have begun to see improvement in profitability from these
actions and plan to maintain our focus on this front as we have started to see a return to reasonable growth rates. Renewal pure
price increases in E&S averaged 4.7% in 2018, with substantially higher price increases in targeted classes. While the
relatively small size of the book could lead to some volatility, improved underwriting, pricing and claim outcomes have us on
track to achieve our risk-adjusted profitability target for this segment by the end of 2019.
For additional qualitative discussions regarding reserve development, please refer to the insurance segment sections below in
"Results of Operations and Related Information by Segment."
Underwriting Expenses
The increase in the loss and loss expense ratio in 2018 was partially offset by improvement in the underwriting expense ratio of
of 1.2 points in 2018. The improvement was primarily driven by:
• A 0.5-point decrease in employee-related expenses, reflecting reduced labor expenses associated with productivity
gains from the growth of our business, coupled with lower pension and medical benefit costs; and
• A 0.3-point decrease in profit-based compensation to our distribution partners, driven by the higher combined ratio,
resulting in a reduced level of underwriting income.
The improvement in the underwriting expense ratio of 0.9 points in 2017 compared to 2016 was primarily due to:
• A 0.7-point decrease in employee-related expenses, including 0.4 points from labor expenses and 0.3 points from
pension expenses; and
• A 0.5-point decrease in commissions to our distribution partners in 2017 due to lower supplemental commission
expense, as well as lower base commissions that were driven by targeted actions we took in late 2016 on our
homeowners book of business.
Investments Segment
Net investment income, after tax, contributed 9.2 percentage points to ROE in 2018 compared to 7.3 points in 2017 and 6.7
points in 2016.
The improvements in both periods were driven by: (i) a higher overall level of interest rates in 2018; (ii) active portfolio
management; (iii) excellent operating cash flow that was 18% of NPW; (iv) improved alternative investment returns; and (v) in
2018 a lower Federal income tax rate. Our alternative investments generated $14 million in after-tax income in 2018,
compared to $8 million in 2017. In addition, after-tax investment income benefited from higher reinvestment yields in 2018,
including a 111 basis point increase in the 90-day London Interbank Offered Rate ("LIBOR"), which affected our floating rate
securities that represented approximately 16% of our fixed income securities portfolio at year-end. The after-tax earned income
yield on the portfolio averaged 2.8% during 2018, compared to 2.1% during 2017. After-tax new money yields averaged 2.9%
in 2018, and the weighted average after-tax book yield on the fixed income securities portfolio was 3.0% at December 31,
2018. Invested assets per dollar of stockholders' equity was 3.33 at year-end, which was basically flat compared to 2017.
Net realized and unrealized gains and losses can fluctuate when comparing ROE contributions year over year as they contain
realized gains and losses on disposals that are discretionary as to timing, as well as OTTI charges. Additionally, due to a
change in accounting literature that became effective on January 1, 2018, fluctuations in the market value of our equity
portfolio are included in this line item. In 2018, this change in literature resulted in after-tax market valuation fluctuations of
$29.4 million, or a 1.7-point decrease to ROE. Additionally, in 2018, we had higher trading volume driven by opportunistic
sales, with net losses primarily in our fixed income securities portfolio as we reacted to volatility in the marketplace to increase
our risk-adjusted yield.
50
Other
Our interest and corporate expenses, which are primarily comprised of stock compensation expense at the holding company
level, reduced ROE by 2.2 points in 2018, compared to 2.1 points in 2017 and 2.4 points in 2016. The lower corporate tax rate
that was introduced with Tax Reform at the end of 2017 masked some of the improvement in the underlying pre-tax corporate
expenses of $10.8 million. The decrease in the underlying corporate expenses were attributable to the following savings related
to our long-term share based compensation program: (i) increases in our stock price that were of less magnitude than prior year
increases; and (ii) structural changes we made to our long-term incentive program in early 2017.
Outlook
We ended 2018 with record levels of capital and liquidity, and we feel extremely positive about our financial position. For
2019, we have established a non-GAAP operating ROE target of 12%, which is an appropriate return for our shareholders
based on our current estimated weighted average cost of capital, the current interest rate environment, and property and
casualty insurance market conditions.
Looking into 2019, there remain a number of areas that require our continued focus to maintain our financial position:
• Achieving written renewal pure price increases that match or exceed estimated loss inflation trends.
• Delivering on our strategy for continued disciplined growth, which will be driven by the addition of new agents,
greater share of wallet in our agents’ offices, and geographic expansion. Our longer-term Standard Commercial Lines
target is to attain a 3% market share in the states in which we operate, by appointing partner relationships
approximating 25% of their markets and seeking an average share of wallet of 12% across the relationships. This goal
represents an additional premium opportunity in excess of $2.3 billion in our pre-expansion state footprint.
• Continuing to enhance our customer experience strategy including value-added technologies and services such as our
“Selective® Drive” program, which was introduced to our commercial automobile policyholders in the fourth quarter
of 2018. This product assists with logistics management and improved safety by tracking and scoring individual
drivers based on certain driving attributes, including phone usage while the vehicle is in motion.
•
Improving profitability in our commercial automobile line of business, personal automobile line of business and E&S
Lines.
• Actively managing the investment portfolio to enhance after-tax yields while managing credit, duration, and liquidity
risk.
Overall, we remain extremely pleased with our financial and strategic position heading into 2019. We will maintain a steadfast
focus on underwriting discipline as we execute on our various strategies to generate profitable growth. The investments we are
making today in our franchise distribution model, sophisticated underwriting tools and technology, and overall customer
experience in an omni-channel environment, will position us as a leader in the coming years.
Turning to 2019 expectations, Conning, Inc. is currently forecasting a property and casualty industry combined ratio of 97.8%,
including 4 points of catastrophe losses, with a return on equity of 7.6%.
Our guidance for 2019 is based on our current view of the marketplace, and incorporates the following:
• A GAAP combined ratio, excluding catastrophe losses, of 92.0%. This assumes no prior-year casualty reserve
development;
• Catastrophe losses of 3.5 points;
• After-tax net investment income of $175 million, which includes $8 million after-tax net investment income from our
alternative investments;
• An overall effective tax rate of approximately 19%, which also includes an effective tax rate of 18% for net
investment income, reflecting a tax rate of 5.25% for tax-advantaged municipal bonds, and a tax rate of 21% for all
other items; and
• Weighted average shares outstanding of 60 million on a diluted basis.
51
Results of Operations and Related Information by Segment
Standard Commercial Lines Segment
($ in thousands)
Insurance Segments Results:
NPW
NPE
Less:
Loss and loss expense incurred
Net underwriting expenses incurred
Dividends to policyholders
Underwriting income
Combined Ratios:
Loss and loss expense ratio
Underwriting expense ratio
Dividends to policyholders ratio
Combined ratio
2018
2017
2018
vs. 2017
2016
2017
vs. 2016
$
1,975,683
1,912,222
1,141,038
654,097
7,983
$
109,104
59.7 %
34.2
0.4
94.3
1,858,735
1,788,499
1,008,150
626,201
4,634
149,514
56.3
35.0
0.3
91.6
6 % $
1,745,782
7
1,665,483
13
4
72
913,506
601,894
3,648
(27) % $
146,435
6
7
10
4
27
2
%
%
3.4 pts
54.8 %
1.5
pts
(0.8)
0.1
2.7
36.2
0.2
91.2
(1.2)
0.1
0.4
For the past three years, growth in this segment of our business has reflected: (i) renewal pure price increases; (ii) new
business growth; and (iii) stable retention. 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,
2018
2017
2016
83 %
3.5
381.2
$
83
2.9
368.2
83
2.6
357.6
Increases in the loss and loss expense ratio over the three-year period were driven by: (i) higher weather and non-weather
related property losses; and (ii) lower favorable prior year casualty reserve development, as displayed in the tables below. In
addition, current year loss costs increased by 0.9 points in 2018 and 0.6 points in 2017, compared to the same prior year
periods. For quantitative information on the prior year development by line of business, see "Financial Highlights of Results
for Years Ended December 2018, 2017, and 2016" above and for qualitative information about the significant drivers of this
development, see the line of business discussions below.
($ in millions)
Non-Catastrophe Property Losses
Catastrophe Losses
For the year ended
December 31,
Losses Incurred
Impact on Loss
and Loss
Expense Ratio
Loss and Loss
Expense
Incurred
Impact on Loss
and Loss
Expense Ratio
Total Impact on
Loss and Loss
Expense Ratio
Unfavorable
Year-Over-Year
Change
2018
2017
2016
$
245.5
204.9
182.4
12.8 pts $
11.5
11.0
64.3
40.0
35.0
3.4 pts
2.2
2.1
16.2
13.7
13.1
($ in millions)
For the year ended December 31,
(Favorable) Prior Year Casualty Reserve
Development
Loss and Loss
Expense Incurred
Impact on Loss and
Loss Expense Ratio
Unfavorable
Year-Over-Year
Change
2018
2017
2016
$
(58.0)
(66.6)
(77.5)
(3.0) pts
(3.7)
(4.7)
2.5
0.6
0.8
0.7
1.0
0.6
52
Our underwriting expense ratio decreased by 0.8 points in 2018 and 1.2 points in 2017 compared to the respective prior year
periods. These expense improvements were primarily driven by the following:
• Decreases in employee-related expenses of 0.4 points in 2018 and 0.7 points in 2017, mainly attributable to lower
pension, medical benefit, and labor costs;
• Decreases in profit-based compensation to our distribution partners of 0.2 points in 2018 and 0.3 points in 2017.
The following is a discussion of our most significant Standard Commercial Lines of business:
General Liability
($ in thousands)
NPW
Direct new business
Retention
Renewal pure price increases
NPE
Underwriting income
Combined ratio
% of total standard commercial NPW
$
$
2018
639,720
112,683
83 %
2.6
616,187
70,268
88.6
32
2017
2018
vs. 2017
594,816
110,069
83
2.6
569,217
98,229
82.7
32
8 % $
2
— pts
—
8 % $
(28)
5.9
2016
553,579
105,961
83 %
1.8
527,859
79,120
85.0
32
2017
vs. 2016
7 %
4
— pts
0.8
8 %
24
(2.3)
Growth in 2018 and 2017 premium was primarily due to direct new business as outlined in the table above, coupled with strong
retention and renewal pure price increases.
The combined ratio increased in 2018 by 5.9 points, driven by lower favorable prior year casualty reserve development
compared to 2017, which increased the combined ratio by 7.0 points. This was partially offset by a lower underwriting expense
ratio of 1.0 point, primarily attributable to the aforementioned items discussed in the overall Commercial Lines segment above.
The combined ratio decreased in 2017 compared to 2016 by 2.3 points driven by: (i) a decrease in supplemental commission to
our distribution partners of 0.4 points; (ii) a decrease in pension expense of 0.3 points; and (iii) a decrease in current year loss
costs of approximately 0.4 points.
The favorable prior year casualty reserve development for each year is outlined in the table below.
($ in millions)
For the year ended December 31,
2018
2017
2016
(Favorable)/Unfavorable Prior Year Casualty
Reserve Development
Loss and Loss
Expense Incurred
Impact on Loss and
Loss Expense Ratio
(Favorable)/
Unfavorable
Year-Over-Year
Change
$
(9.5)
(48.3)
(45.0)
(1.5)
pts
(8.5)
(8.5)
7.0
—
2.1
The impact of the favorable prior year casualty reserve development on this line was as follows:
•
•
•
2018: 1.5 points attributable to lower than expected loss adjustment expenses in accident years 2013 through 2017,
partially offset by higher than expected loss emergence in accident years 2016 and 2017.
2017: 8.5 points attributable to decreases in accident years 2016 and prior, driven by lower than expected frequencies
and severities.
2016: 8.5 points attributable to accident years 2008 through 2013 and 2015. This was primarily driven by lower than
anticipated claims severities.
53
Commercial Automobile
($ in thousands)
NPW
Direct new business
Retention
Renewal pure price increases
NPE
Underwriting loss
Combined ratio
% of total standard commercial NPW
2018
2017
2018
vs. 2017
$
518,942
94,442
83 %
7.3
$
493,093
(77,403)
115.7
26
465,621
78,869
84
6.7
442,818
(65,267)
114.7
25
11 % $
20
(1) pts
0.6
2016
422,013
77,255
84 %
4.9
11 % $
398,942
(19)
1.0
(43,163)
110.8
24
2017
vs. 2016
10 %
2
— pts
1.8
11 %
(51)
3.9
For the past three years, growth in this line of business has reflected renewal pure price increases, new business growth, and
strong retention.
The increases in the combined ratio of 1.0 points in 2018 compared to 2017, and 3.9 points in 2017 compared to 2016, were
primarily driven by the items in the tables below, as well as increases in current year loss costs of 3.0 points in 2018 and 4.4
points in 2017 compared to the prior years. These items were partially offset by mix improvement of the underlying coverages
within this line that reduced our loss estimates by 1.1 points in 2018 and 0.9 points in 2017, coupled with decreases in the
underwriting expense ratio of 0.8 points in 2018 and 1.3 points in 2017, the drivers of which are consistent with those discussed
in overall Standard Commercial Lines above.
($ in millions)
Non-Catastrophe Property Losses
Catastrophe Losses
For the year ended
December 31,
Losses Incurred
Impact on Loss
and Loss
Expense Ratio
Loss and Loss
Expense
Incurred
Impact on Loss
and Loss
Expense Ratio
Total Impact on
Loss and Loss
Expense Ratio
$
2018
2017
2016
84.3
71.3
64.4
17.1 pts
$
16.1
16.1
2.9
1.8
1.3
0.6 pts
0.4
0.3
17.7
16.5
16.4
Unfavorable/
(Favorable)
Year-Over-Year
Change
1.2
0.1
1.0
($ in millions)
For the year ended December 31,
2018
2017
2016
(Favorable)/Unfavorable Prior Year Casualty
Reserve Development
Loss and Loss
Expense Incurred
Impact on Loss and
Loss Expense Ratio
(Favorable)/
Unfavorable
Year-Over-Year
Change
$
37.5
36.0
25.0
pts
7.6
8.1
6.3
(0.5)
1.8
5.5
Prior year casualty reserve development was as follows:
•
•
•
2018: Unfavorable development of 7.6 points, which was driven primarily by higher than expected severities in
accident years 2015 through 2017.
2017: Unfavorable development of 8.1 points, which was driven primarily by: (i) higher than expected frequencies
and severities in accident years 2015 and 2016; and (ii) higher than expected severities in accident years 2012 through
2014.
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.
54
Workers Compensation
($ in thousands)
NPW
Direct new business
Retention
Renewal pure price (decreases) increases
NPE
Underwriting income
Combined ratio
% of total standard commercial NPW
2018
2017
2018
vs. 2017
$
$
316,647
60,089
84 %
(0.2)
317,616
94,395
70.3
16
323,263
66,616
84
—
317,982
61,693
80.6
17
(2) % $
(10)
— pts
(0.2)
— % $
53
(10.3)
2017
vs. 2016
1 %
(1)
— pts
(1.2)
3 %
10
(1.2)
2016
319,807
67,102
84 %
1.2
308,233
56,118
81.8
18
The 10.3 point improvement in the combined ratio in 2018 compared to 2017 was primarily attributable to higher favorable
prior year development of 9.7 points. This favorable development was due to continued favorable medical severity trends
impacting accident years 2017 and prior. Because of the length of time that injured workers receive medical treatment,
decreases in medical inflation can cause favorable loss development across an extended number of accident years. In addition,
the underwriting expense ratio improved by 0.7 points, consistent with the improvement in overall Standard Commercial Lines
discussed above.
The 2017 combined ratio decrease compared to 2016 was attributable to the loss and loss expense ratio, which decreased 0.9
points in 2017, driven by lower current year loss costs, partially offset by lower favorable prior year development.
Additionally, the expense ratio improved by 1.2 points, consistent with the improvement in overall Standard Commercial Lines
discussed above.
The favorable prior year casualty reserve development for each year is outlined in the table below.
($ in millions)
For the year ended December 31,
2018
2017
2016
(Favorable) Prior Year Casualty Reserve
Development
Loss and Loss
Expense Incurred
Impact on Loss and
Loss Expense Ratio
(Favorable)/
Unfavorable
Year-Over-Year
Change
$
(83.0)
(52.3)
(56.0)
(26.1) pts
(16.4)
(18.2)
(9.7)
1.8
(5.4)
In 2018, favorable development resulted from an improvement in medical severity trends from accident years 2017 and prior.
Commercial Property
($ in thousands)
NPW
Direct new business
Retention
Renewal pure price increases
NPE
Underwriting (loss) income
Combined ratio
% of total standard commercial NPW
$
$
2018
342,027
76,391
82 %
3.1
329,660
(3,211)
101.0
17
2017
2018
vs. 2017
2016
2017
vs. 2016
322,343
73,951
82
1.7
311,932
31,976
89.7
17
6 % $
3
— pts
1.4
6 % $
(110)
11.3
308,140
74,901
82 %
2.4
293,438
42,270
85.6
18
5 %
(1)
— pts
(0.7)
6 %
(24)
4.1
The combined ratio increases in the table above were driven by property losses as shown below. The increased non-catastrophe
property losses in 2018 were principally related to the January deep freeze in our footprint states coupled with the relatively
large number of fire losses during the year and continued increases in non-catastrophe loss severities. Higher catastrophe
losses in 2018 include the impact of two hurricanes, Hurricane Florence and Hurricane Michael, and severe winter storms
including Grayson and Riley that impacted our footprint states.
55
Quantitative information regarding property losses is as follows:
($ in millions)
For the year ended
December 31,
Non-Catastrophe Property Losses
Impact on Loss
and Loss
Expense Ratio
Losses Incurred
Catastrophe Losses
Loss and Loss
Expense
Incurred
Impact on Loss
and Loss
Expense Ratio
2018
2017
2016
$
136.7
109.5
95.9
41.5 pts $
35.1
32.7
51.7
34.2
23.7
15.7 pts
11.0
8.1
Total Impact on
Loss and Loss
Expense Ratio
57.2
46.1
40.8
Unfavorable/
(Favorable)
Year-Over-Year
Change
11.1
5.3
2.1
Standard Personal Lines Segment
($ in thousands)
Insurance Segments Results:
NPW
NPE
Less:
Loss and loss expense incurred
Net underwriting expenses incurred
Underwriting income
Combined Ratios:
Loss and loss expense ratio
Underwriting expense ratio
Combined ratio
2018
2017
2018
vs. 2017
2016
2017
vs. 2016
$
$
309,277
304,441
206,752
84,925
12,764
67.9 %
27.9
95.8
296,775
289,701
189,294
89,303
11,104
65.4
30.8
96.2
4 % $
5
9
(5)
15 % $
2.5 pts
(2.9)
(0.4)
281,822
280,607
177,749
90,439
12,419
5 %
3
6
(1)
(11) %
63.3 %
2.1 pts
32.3
95.6
(1.5)
0.6
The increases in NPW reflected in the table above were driven by the following:
($ in millions)
Retention
Renewal pure price increases on NPW
Direct new business premiums
2018
2017
2016
84 %
3.8
51.5
$
84
3.0
50.9
82
4.8
39.7
The loss and loss expense ratio increased 2.5 points in 2018 compared to 2017, and 2.1 points in 2017 compared to 2016, the
primary drives of which were as follows:
($ in millions)
Non-Catastrophe Property Losses
Catastrophe Losses
For the year ended
December 31,
Losses Incurred
Impact on Loss
and Loss
Expense Ratio
Loss and Loss
Expense
Incurred
Impact on Loss
and Loss
Expense Ratio
Total Impact on
Loss and Loss
Expense Ratio
Unfavorable/
(Favorable)
Year-Over-Year
Change
2018
2017
2016
$
91.5
76.2
71.2
30.1 pts $
26.3
25.4
17.5
16.1
18.2
5.7 pts
5.6
6.5
35.8
31.9
31.9
3.9
—
(5.9)
($ in millions)
For the year ended December 31,
2018
2017
2016
(Favorable)/Unfavorable Prior Year Casualty
Reserve Development
Loss and Loss
Expense Incurred
Impact on Loss and
Loss Expense Ratio
(Favorable)/
Unfavorable
Year-Over-Year
Change
$
4.5
8.0
2.5
pts
1.5
2.8
0.9
(1.3)
1.9
1.6
The prior year development in all three years primarily related to our personal automobile book of business.
The underwriting expense ratio decreased 2.9 points in 2018 compared to 2017, reflecting: (i) a reduction in costs of 1.1 points
associated with the internally developed software platform used in this segment of our business, which was fully amortized in
the fourth quarter of 2017; (ii) a reduction in employee-related expenses of 0.9 points; (iii) a reduction in profit-based
56
commission of 0.3 points; and (iv) a reduction in the cost of insurance scoring and motor vehicle reports used in the
underwriting process of 0.3 points.
The underwriting expense ratio decreased 1.5 points in 2017 compared to 2016 reflecting: (i) targeted actions taken on our
homeowners book of business that drove a 0.7 point decrease in direct commissions for this segment; (ii) a decrease in
supplemental commissions to our distribution partners of 0.2 points; and (iii) a reduction in pension expense of 0.3 points.
E&S Lines Segment
($ in thousands)
2018
2017
Insurance Segments Results:
NPW
NPE
Less:
Loss and loss expense incurred
Net underwriting expenses incurred
Underwriting loss
Combined Ratios:
Loss and loss expense ratio
Underwriting expense ratio
Combined ratio
$
$
229,326
219,566
150,344
69,917
(695)
68.5 %
31.8
100.3
215,131
212,827
147,630
71,479
(6,282)
69.4
33.6
103.0
2018
vs. 2017
2016
2017
vs. 2016
7 % $
3
2
(2)
89 % $
(0.9) pts
(1.8)
(2.7)
209,684
203,482
143,542
66,861
(6,921)
70.5 %
32.9
103.4
3 %
5
3
7
9 %
(1.1) pts
0.7
(0.4)
While this segment experienced increased growth in 2018, we continue to address profitability through targeted price increases,
business mix shifts, and improved underwriting standards and claims handling processes. We have sacrificed growth during
2017 and the first half of 2018 as we addressed underwriting profitability and exited some unprofitable classes. We have begun
to see improvement in profitability from these actions and plan to maintain our focus on this front as we have started to see a
return to reasonable growth rates. Renewal pure price increases in E&S averaged 4.7% in 2018, with substantially higher price
increases in targeted classes. While the relatively small size of the book could lead to some volatility, improved underwriting,
pricing and claim outcomes have us on track to achieve our risk-adjusted profitability target for this segment by the end of
2019.
Quantitative information is as follows:
($ in millions)
Overall renewal price increases1
Direct new business premiums
2018
2017
2016
$
4.7 %
98.0
5.0
90.5
6.1
100.0
1
The E&S casualty renewal price increases were 5.0%, 7.5%, and 9.1% in 2018, 2017, and 2016, respectively.
The loss and loss expense ratio improvement in 2018 compared to 2017 is primarily attributable to a decrease in catastrophe
losses partially offset by increases in unfavorable prior year casualty reserve development and non-catastrophe property losses.
The loss and loss expense ratio improvement in 2017 compared to 2016 is primarily attributable to a decrease in current year
loss costs reflecting our underwriting and claims improvement initiatives, including generating earned rate that is sufficient to
outpace loss costs.
Quantitative information pertaining to our property losses and prior year development are as follows:
($ in millions)
Non-Catastrophe Property Losses
Catastrophe Losses
For the year ended
December 31,
Losses Incurred
Impact on Loss
and Loss
Expense Ratio
Loss and Loss
Expense
Incurred
Impact on Loss
and Loss
Expense Ratio
Total Impact on
Loss and Loss
Expense Ratio
(Favorable)/
Unfavorable
Year-Over-Year
Change
2018
2017
2016
$
24.5
22.6
25.6
11.2 pts $
10.6
12.6
6.2
11.2
6.5
2.8 pts
5.3
3.2
14.0
15.9
15.8
(1.9)
0.1
0.2
57
($ in millions)
For the year ended December 31,
2018
2017
2016
Unfavorable Prior Year Casualty Reserve
Development
Loss and Loss
Expense Incurred
Impact on Loss and
Loss Expense Ratio
Unfavorable/
(Favorable)
Year-Over-Year
Change
$
12.0
10.0
6.0
pts
5.5
4.7
2.9
0.8
1.8
(6.4)
Unfavorable prior year casualty reserve development for 2018 was driven by frequencies and severities in accident years 2015
and 2016. Unfavorable prior year casualty reserve development for 2017 was driven by increases in claims severities in
accident years 2014 and 2015.
The underwriting expense ratio improvement in 2018 compared to 2017 was primarily due to: (i) a decrease in labor-related
expenses of 1.0 points; and (ii) a decrease in profit-based compensation to our distribution partners of 0.7 points. The increase
in the underwriting expense ratio in 2017 compared to 2016 was primarily due to a 0.8-point increase in the allocation of
corporate services to this segment in 2017.
Reinsurance
We use reinsurance to protect our capital resources and insure us against losses on property and casualty risks that we
underwrite. We use two main reinsurance vehicles: (i) a reinsurance pooling agreement among our Insurance Subsidiaries
through which each company agrees to share in premiums and losses based on certain specified percentages; and (ii)
reinsurance contracts and arrangements with third parties that cover various policies that we issue to our customers.
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, 2018:
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 our underwriting capacity and accept larger
individual risks and a larger aggregation of risks without directly increasing our capital or surplus. Our reinsurance program
principally consists of traditional reinsurance. Under our reinsurance treaties, the reinsurer generally assumes a portion of the
losses we cede to them in exchange for a portion of the premium. Amounts not reinsured below an attachment point are known
as retention. Reinsurance does not legally discharge us from liability under the terms and limits of our policies, but it does
make our reinsurer liable to us for the amount of liability we cede to them. In addition, our reinsurers often rely on their own
reinsurance programs, or retrocession, as part of managing their exposure to large losses. Given the relatively small size of the
58
global reinsurance community, the inability of our reinsurers to collect on their retrocession program may impair their ability to
pay us for the amounts we cede to them. Accordingly, we have direct and indirect counterparty credit risk from our reinsurers.
We attempt to mitigate this credit risk by: (i) pursuing relationships with reinsurers rated “A-” or higher by A.M. Best; and/or
(ii) obtaining collateral to 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 or otherwise require
our reinsurers to post collateral. 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.
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, 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, as part of the acquisition of MUSIC in December 2011, we entered into several reinsurance
agreements with Montpelier Re Insurance Ltd., which subsequently merged into Endurance Specialty Insurance Ltd in
December 2015. Together, these agreements 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 collateralized.
Property Reinsurance
The property catastrophe treaty, which covers both our standard market and E&S business, was renewed effective January
2019. We also renewed the separate catastrophe treaty of $35 million in excess of $5 million that covers events outside of our
original 22-state footprint, in support of our growing E&S property book and geographic expansion into Arizona, New
Hampshire, Colorado, Utah, and New Mexico. Both treaties were renewed with substantially the same terms as the expiring
treaty. Overall catastrophe ceded premium for 2019 increased modestly primarily due to increases in reinsurer participation.
On a risk-adjusted basis, however, the expiring layers saw a reduction in rate.
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 $242 million in collateralized limit, primarily in the top layer
of the catastrophe program.
We continue to assess our property catastrophe exposure aggregations, modeled results, and effects of growth on our property
portfolio, and strive to manage our exposure to individual large events balanced against the cost of reinsurance protections.
59
Although we model various catastrophic perils, due to our geographic spread, the risk of hurricane continues to be the most
significant natural catastrophe peril to which our portfolio is exposed. Below is a summary of the largest five actual hurricane
losses that we experienced in the past 25 years:
($ in millions)
Hurricane Name
Superstorm Sandy
Hurricane Irene
Hurricane Hugo
Hurricane Isabel
Hurricane Florence
Actual Gross Loss
125.5 1
44.9
26.4
25.1
16.7
Net Loss2
45.6
40.2
3.0
15.7
16.7
Accident
Year
2012
2011
1989
2003
2018
1This amount represents reported and unreported gross losses estimated as of December 31, 2018.
2Net 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 expectations of hurricane activity in the near future. 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 table provides
modeled hurricane results based on a blended view of the four models for the Insurance Subsidiaries' combined property book
as of July 2018:
Occurrence Exceedence Probability
Four-Model Blend
($ in thousands)
Gross
Losses1
4.0% (1 in 25 year event)
$147,275
2.0% (1 in 50 year event)
263,861
1.0% (1 in 100 year event)
454,874
0.67% (1 in 150 year event)
611,398
0.5% (1 in 200 year event)
727,506
0.4% (1 in 250 year event)
815,992
0.2% (1 in 500 year event)
1,215,882
1Include assumptions for certain un-modeled costs, such as the impact of loss expenses, residual market assessments, and automobile-related losses, which
collectively increase our gross losses by an estimated 13%.
2Losses are after a 21% Federal income tax benefit and include applicable reinstatement premiums.
3Equity as of December 31, 2018.
Net
Losses2
34,328
36,980
43,478
50,769
58,026
94,044
402,226
Net Losses
as a Percent of
Equity3
2%
2
2
3
3
5
22
Our current catastrophe reinsurance program exhausts at approximately 1 in 225 year return period, or events with 0.4%
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, 2018 with
the top layer renewed on January 1, 2019. The major terms of these treaties are consistent with the prior year.
60
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
operations)
Property Excess of Loss
(covers all insurance
operations)
Flood
$735 million above $40 million retention treaty that responds
on per occurrence basis in four layers:
- 82% of losses in excess of $40 million up to
$100 million;
- 97% of losses in excess of $100 million up to
$225 million;
- 97% of losses in excess of $225 million up to
$475 million; and
- 90% of losses in excess of $475 million up
to $775 million.
- The treaty provides one reinstatement in each of the first
three layers and no reinstatement in the fourth layer. The
annual aggregate limit is $1.1 billion, net of the Insurance
Subsidiaries' co-participation.
In addition, our $35 million above $5 million retention treaty
that responds on per occurrence basis covers 85% of losses
outside of our standard lines original 22-state footprint and
has an annual aggregate limit of $30 million, net of the
Insurance Subsidiaries' co-participation. This layer was
purchased primarily to protect the growth of our E&S
property book but also provides coverage for our Standard
Lines expansion states.
$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 $75 million in aggregate limits.
100% reinsurance by the federal government’s WYO.
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.
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 $35 million in annual aggregate
limits. Non-foreign terrorism losses (other than NBCR) are
covered to the same extent as non-terrorism losses.
None
61
Casualty Reinsurance
The casualty excess of loss treaty, which covers both our standard market and E&S business, was renewed on July 1, 2018 and
is effective through June 30, 2019, with substantially the same terms as the expiring treaty.
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
operations)
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 $78 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; and
- $40 million in excess of $50 million layer
with $80 million annual aggregate limit.
Endurance Specialty
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. On March
28, 2017, Endurance Specialty was acquired by SOMPO
Holdings, Inc.
- $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; and
- $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, our Equipment Breakdown Coverage Reinsurance Treaty, and our
Data Compromise Reinsurance Treaty.
We regularly reevaluate our overall reinsurance program and try to develop effective ways to manage the 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 Segment
The primary objective of the investment portfolio is to maximize after-tax net investment income and the overall total return of
the portfolio, while maintaining a high credit quality core fixed income securities portfolio and managing our duration risk
profile. The effective duration of the fixed income securities portfolio as of December 31, 2018 was 3.8 years, compared to the
Insurance Subsidiaries’ liability duration of approximately 3.6 years. The effective duration of the fixed income securities
portfolio 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. Purchases and sales are
made with the intent of maximizing investment returns in the current market environment while balancing capital preservation.
Over time, we may seek to increase or decrease the duration and overall credit quality of the portfolio based on market
conditions.
Our investment philosophy includes certain return and risk objectives for the fixed income, equity, and other investment
portfolios. After-tax yield and income generation are key drivers to our investment strategy, which we believe will be obtained
through active management of the portfolio.
62
Total Invested Assets
($ in thousands)
Total invested assets
Invested assets per dollar of stockholders' equity
Unrealized gain – before tax1
Unrealized gain – after tax1
1Includes unrealized gain on fixed income securities and equity securities.
3.33
11,916
9,414
2018
2017
Change
$
5,960,651
5,685,179
3.32
124,679
80,575
5%
0.3
(90)
(88)
The increase in invested assets at December 31, 2018 compared to December 31, 2017 was driven by operating cash flow of
$455 million, of which approximately $60 million was used to fund shareholder dividends and capital expenditures in the
aggregate. The remaining operating cash flow was partially offset by a reduction in unrealized gains on our investment
portfolio, primarily driven by the impact of rising interest rates on our fixed income securities portfolio during 2018.
Our fixed income securities and short-term investment portfolio, in the aggregate, represented 95% of our total invested assets
at December 31, 2018, consistent with last year. In the aggregate, these portfolios maintained a weighted average credit rating
of "AA-" as of both December 31, 2018 and 2017, with 98% and 97% of the securities within the portfolio being investment
grade quality, respectively.
For further details on the composition, credit quality, and the various risks to which our portfolio is subject, see Item 7A.
“Quantitative and Qualitative Disclosures About Market Risk.” of this Form 10-K.
Unrealized/Unrecognized Losses
HTM fixed income securities were in an unrealized/unrecognized loss position of $0.2 million at December 31, 2018. AFS
fixed income securities that were in an unrealized loss position at December 31, 2018 by contractual maturity are shown below.
Mortgage-backed securities ("MBS") are included in the maturity tables using the estimated average life of each security.
Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment penalties.
Contractual Maturities
($ in thousands)
AFS fixed income securities:
One year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
Amortized Cost
Fair Value
Unrealized Loss
$
$
142,988
1,197,396
1,021,110
101,180
2,462,674
142,368
1,182,423
998,637
94,179
2,417,607
(620)
(14,973)
(22,473)
(7,001)
(45,067)
We have reviewed securities in an unrealized/unrecognized loss position in accordance with our OTTI policy as discussed 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.
63
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
$
160,481
Effective tax rate
Annual after-tax yield on fixed income securities
Annual after-tax yield on investment portfolio
17.8%
2.8
2.8
2018
2017
2018
vs. 2017
2016
2017
vs. 2016
$
178,104
153,230
16 %
129,306
19 %
7,764
3,472
17,799
(11,803)
195,336
34,855
6,442
1,526
12,871
(12,187)
161,882
43,362
118,520
26.8
2.2
2.1
21
128
38
3
21
(20)
35
(9.0) pts
0.6
0.7
7,368
686
2,940
(9,546)
130,754
32,349
98,405
24.7
2.0
1.9
(13)
122
338
(28)
24
34
20
2.1 pts
0.2
0.2
Pre-tax net investment income increased $33.5 million in 2018 compared to 2017, driven primarily by our fixed income
securities portfolio, which benefited from improved new money reinvestment yields and repositioning of investment grade
securities as a result of active investment management principally in our core fixed income securities portfolio. In addition,
with approximately 16% of our fixed income securities portfolio invested in floating rate securities that reset based principally
on the 90-day LIBOR, we have benefited from the 111-point rise in LIBOR during 2018. Strong returns on our alternative
investments within our other investments portfolio also contributed to the higher pre-tax net investment income this year
compared to last.
In 2017, pre-tax net investment income increased $31.1 million compared to 2016, driven by higher yields on our core fixed
income securities portfolio, coupled with a higher asset base from operating cash flows that were 16% of NPW. In addition,
our alternative income portfolio generated higher returns in 2017 compared to 2016.
On an after-tax basis, the reduction in the effective tax rate in 2018 compared to 2017 was driven by Tax Reform, which among
other items, lowered the statutory corporate tax rate to 21% from 35%. See the "Federal Income Taxes" discussion below for
additional information regarding the impact of this legislation. In 2017 compared to 2016, the effective tax rate increased
approximately 200 basis points, which was driven by a modest increase in our allocation to taxable investment classes coupled
with higher returns on our alternative investment portfolio.
Realized Gains and Losses
Our general philosophy for sales of securities is to reduce our exposure to securities and sectors based on economic evaluations
and when the fundamentals for that security or sector have deteriorated, or to opportunistically trade out of securities to other
securities with better economic return characteristics. Net realized (losses) gains for the indicated periods were as follows:
($ in thousands)
Net realized (losses) gains, excluding OTTI
OTTI
Unrealized losses recognized in income on equity securities
Total net realized (losses) gains
2018
2017
2016
$
$
(18,975)
(6,579)
(29,369)
(54,923)
11,204
(4,845)
—
6,359
3,562
(8,499)
—
(4,937)
Net realized losses were significantly higher in 2018 than in the prior years, as reflected in the table above, driven by the
following:
• A change in accounting guidance that became effective on January 1, 2018 requiring that the fluctuation in the market
value of our equity securities be recognized in earnings. These unrealized losses amounted to $29.4 million in 2018.
For additional information regarding this change in accounting, see Note 3. "Adoption of Accounting Pronouncements
in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
• A higher trading volume driven by opportunistic sales, with net losses primarily in our fixed income securities
portfolio as we reacted to volatility in the marketplace to increase our risk-adjusted yield.
Net realized losses in 2017 were driven by a higher trading volume in our fixed income securities portfolio related to a more
active external investment management approach compared to 2016 and opportunistic sales in our equity portfolio.
64
For additional information regarding our realized gains and losses, as well as our OTTI methodology, see Note 2. “Summary of
Significant Accounting Policies” and Note 5. "Investments" in Item 8. “Financial Statements and Supplementary Data.” of this
Form 10-K.
Federal Income Taxes
The following table provides information regarding federal income taxes.
($ in millions)
Federal income tax expense
Exclude: Tax Reform impact 1
Federal income tax expense, excluding Tax Reform impact
Statutory Tax Rate
Effective tax rate
Effective tax rate without Tax Reform impact
2018
2017
2016
$
32.8
—
32.8
21.0%
15.5%
15.5
93.1
20.2
72.9
35.0
35.6
27.8
61.5
—
61.5
35.0
27.9
27.9
1Represents the deferred tax write off that was recognized in 2017 in relation to Tax Reform.
On December 22, 2017, Tax Reform was signed into law, which among other provisions, has reduced our statutory corporate
tax rate from 35% to 21% beginning with our 2018 tax year. We revalued our deferred tax inventory as of December 31, 2017,
which resulted in a $20.2 million charge to federal income tax expense as our net deferred tax assets have become less valuable
given the decrease in the tax rate.
In general, our effective tax rate differs from the statutory tax rate primarily because of tax-advantaged interest and dividend
income, as well as the impact of excess tax benefits on our stock-based compensation awards. Additionally, in 2018 we
recognized tax benefits of approximately $3.8 million driven by capital losses that were carried back to prior tax years and
taxed at the 35% statutory tax rate. See Note 13. “Federal Income Taxes” in Item 8. “Financial Statements and Supplementary
Data.” of this Form 10-K for further information regarding the following: (i) the implementation of Tax Reform; (ii) a
reconciliation of our effective tax rate to the statutory rate of 21%; and (iii) details regarding our net deferred tax assets.
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 $324 million at December 31, 2018 was comprised
of $36 million at the Parent and $288 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 $110 million at December 31, 2018, compared to $90 million at December 31, 2017. In total, we
had $146 million of cash and investments at the Parent at December 31, 2018 compared to $114 million at December 31, 2017.
We expect to continue to modestly increase the level of cash and invested assets at the Parent over time, although there will be
fluctuations in these cash and invested asset balances, based on factors including the amount and availability of dividends from
our Insurance Subsidiaries, investment income, expenses, and other needs of the Parent. Our target is to maintain the cash and
liquidity at the Parent to at least two years of its expected annual needs, which is currently estimated at $160 million.
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.
65
Insurance Subsidiary Dividends
The Insurance Subsidiaries paid $100 million in dividends to the Parent in 2018. As of December 31, 2018, our allowable
ordinary maximum dividend is $210 million for 2019. 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.
In addition to regulatory restrictions on the availability of dividends that our Insurance Subsidiaries can pay to the Parent, the
maximum amount of dividends the Parent can pay our shareholders is limited by certain New Jersey corporate law provisions
that limit dividends if either: (i) the Parent would be unable to pay its debts as they became due in the usual course of business;
or (ii) the Parent’s total assets would be less than its total liabilities. The Parent’s ability to pay dividends to shareholders also
are impacted by covenants in its Line of Credit agreement that obligate it, among other things, to maintain a minimum
consolidated net worth, statutory surplus, and debt-to-capital ratio.
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 and for additional details regarding financial covenants in the Line of Credit, see Note 10.
“Indebtedness” 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.
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 $50 million with the approval of both lending partners. This Line of Credit expires on
December 1, 2020 and has an interest rate which varies and is based on, among other factors, the Parent's debt ratings.
For information regarding the Line of Credit agreement and corresponding representations, warranties, and covenants, refer to
Note 10. “Indebtedness” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
Several of our Insurance Subsidiaries are members of certain branches of the Federal Home Loan Bank, which provides those
subsidiaries with additional access to short-term and/or long-term liquidity. Membership is as follows:
Branch
Insurance Subsidiary Member
Federal Home Loan Bank of Indianapolis ("FHLBI")
Federal Home Loan Bank of New York ("FHLBNY")
SICSC1
SICSE1
SICA
SICNY
1These subsidiaries are jointly referred to as the "Indiana Subsidiaries" as they are domiciled in Indiana.
The Line of Credit permits aggregate borrowings from the FHLBI and the FHLBNY up to 10% of the respective member
company’s admitted assets for the previous year. Additionally, as SICNY is domiciled in New York, this company's borrowings
from the FHLBNY are limited to the lower of 5% of admitted assets for the most recently completed fiscal quarter or 10% of
admitted assets for the previous year end.
All borrowings from both the FHLBI and the FHLBNY are required to be secured by investments pledged as collateral. For
additional information regarding collateral outstanding, refer to Note 5. "Investments" in Item 8. "Financial Statements and
Supplementary Data." of this Form 10-K.
66
The following table provides information on the remaining capacity for Federal Home Loan Bank ("FHLB") borrowings based
on these restrictions, as well as the amount of additional FHLB stock that would need to be purchased to allow these member
companies to borrow their remaining capacity:
($ in millions)
As of December 31, 2018
SICSC
SICSE
SICA
SICNY
Total
Admitted
Assets
Borrowing
Limitation
Amount
Borrowed
Remaining
Capacity
Additional
FHLB Stock
Requirements
$
678.3
$
534.3
2,539.7
465.3
$
67.8
53.4
254.0
23.3
398.5
32.0
28.0
50.0
—
110.0
35.8
25.4
204.0
23.3
288.5
1.6
1.1
9.2
1.0
12.9
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, 2018
SICSC
SICSE
Total
Admitted
Assets
as of
December 31,
2018
Borrowing
Limitation
Amount
Borrowed
Remaining
Capacity
$
678.3
534.3
$
$
67.8
53.4
121.2
27.0
18.0
45.0
40.8
35.4
76.2
Short-term Borrowings
There were no balances outstanding under the Line of Credit at December 31, 2018 or at any time during 2018. During 2018,
SICA borrowed an aggregate of $130 million from the FHLBNY, which was subject to the borrowing limitations outlined
above. This amount has already matured and been repaid.
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 2018.
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
2018, our Board of Directors approved an 11% increase in the quarterly cash dividend, to $0.20 from $0.18 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. We
have $185 million of Senior Notes due February 9, 2043 that became callable on February 8, 2018. We may elect to call these
Senior Notes, in whole or in part, at any time. If we were to call and redeem these Senior Notes we would write-off the
associated unamortized debt issuance costs. The balance of the unamortized debt issuance costs associated with our $185
million of Senior Notes was $4.2 million at December 31, 2018.
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.
67
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, 2018, we had GAAP stockholders’ equity and
statutory surplus of $1.8 billion. With total debt of $440 million, our debt-to-capital ratio was approximately 19.7%.
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
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
operations, 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 $30.40 as of December 31, 2018, from $29.28 as of December 31, 2017, primarily due to
$3.00 in net income per share, partially offset by $1.12 in unrealized losses on our investment portfolio and $0.74 in dividends
to our shareholders.
Off-Balance Sheet Arrangements
At December 31, 2018 and December 31, 2017, 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
Our contractual obligations include required payments under capital and operating leases, debt obligations, and reserves for
loss and loss expenses. As discussed in the “Reserves for Loss and Loss Expense” section in the "Critical Accounting Policies
and Estimates" section of this MD&A, we maintain case reserves and estimates of reserves for loss and loss expense IBNR, in
accordance with industry practice. Using generally accepted actuarial reserving techniques, we project our estimate of ultimate
loss and loss expense at each reporting date.
Given that the loss and loss expense reserves are estimates, as described in detail under the “Critical Accounting Policies and
Estimates” section of this MD&A, the payment of actual loss and loss expense is generally not fixed as to amount or timing.
Due to this uncertainty, financial accounting standards prohibit us from discounting these reserves to their present value.
Additionally, estimated losses as of the financial statement date do not consider the impact of estimated losses from future
business. Therefore, the projected settlement of the reserves for net loss and loss expense will differ, perhaps significantly,
from actual future payments.
The projected paid amounts 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.
68
Our future cash payments associated with contractual obligations pursuant to operating and capital leases, debt, interest on debt
obligations, and loss and loss expense as of December 31, 2018 are summarized below:
Contractual Obligations
($ in millions)
Operating leases
Capital leases
Notes payable
Interest on debt obligations
Subtotal
Gross loss and loss expense payments
Ceded loss and loss expense payments
Net loss and loss expense payments
Total
$
36.4
0.8
445.0
453.6
935.8
3,893.9
537.4
3,356.5
Payment Due by Period
Less than
1 year
1-3
years
3-5
years
More than
5 years
7.6
0.7
—
23.8
32.1
1,025.6
133.4
892.2
12.4
0.1
50.0
47.7
110.2
1,222.5
130.0
1,092.5
6.5
—
—
46.6
53.1
605.6
71.1
534.5
587.6
9.9
—
395.0
335.5
740.4
1,040.2
202.9
837.3
1,577.7
Total
$
4,292.3
924.3
1,202.7
See the “Short-term Borrowings” section above for a discussion of our syndicated Line of Credit agreement.
Certain of our notes payable in table above contain cross-default provisions, the details are which are included in Note 10.
"Indebtedness" in Item 8. "Financial Statements and Supplementary Data." in this Form 10-K.
At December 31, 2018, we had contractual obligations that expire at various dates through 2036 that may require us to invest
up to an additional $202.3 million in alternative and other investments. Additionally, as of December 31, 2018, we had the
following contractual obligations: (i) $17.8 million to further invest in non-publicly traded common stock within our equity
portfolio that expire in 2023; and (ii) $40.4 million to further invest in non-publicly traded collateralized loan obligations in our
fixed income securities portfolio that expire in 2030. There is no certainty that any such additional investment will be required.
We expect to have the capacity to repay and/or refinance these obligations as they come due.
We have issued no material guarantees on behalf of others and have no trading activities involving non-exchange traded
contracts accounted for at fair value. We have no material transactions with related parties other than those disclosed in Note
16. “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. 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. In
the fourth quarter of 2018, 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 on our strong balance sheet, sustained profitability,
favorable business profile, and appropriate enterprise risk management. We have been rated "A" or higher by A.M. Best for the
past 88 years.
Ratings by other major rating agencies are as follows:
• Moody's Investor Service ("Moody's") - Our "A2" financial strength rating with a "stable" outlook was reaffirmed in
the first quarter of 2018 by Moody's. In taking this action, Moody's cited our solid risk-adjusted capitalization, strong
asset quality, and underwriting profitability, as well as our good regional presence and established independent agency
support.
•
•
Fitch Ratings ("Fitch") - Our "A+" Rating was reaffirmed in the second quarter of 2018 with a "stable" outlook by
Fitch. In taking this action, Fitch cited our strong underwriting results, solid capitalization with growth in
stockholders' equity, strong business profile, and stable interest coverage metrics.
S&P Global Ratings ("S&P") - Our "A" rating was reaffirmed in the fourth quarter of 2018 with a "stable" outlook by
S&P. In taking this action, S&P cited our improved operating performance in standard lines supported by
sophisticated underwriting tools, a strong network of independent agents, and strong capital adequacy.
69
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, equity price risk, and
liquidity risk related to our investment portfolio as well as fluctuations in the value of our alternative investment portfolio. The
allocation of our portfolio was 89% fixed income securities, 2% equity securities, 6% short-term investments, and 3% other
investments as of December 31, 2018. We do not directly 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 Segment" 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.
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, CLO and other ABS, 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 managing the
effective duration of our portfolio to maximize yield while managing interest rate risk at an acceptable level. The effective
duration of the fixed income securities portfolio at both December 31, 2018 and December 31, 2017 was 3.8 years, which is
within our historical range. The Insurance Subsidiaries’ liability duration is approximately 3.6 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: (i) any
actions we may take in response to market fluctuations; and (ii) changes to credit spreads, liquidity spreads, and other risk
factors that may also impact the value of the fixed income securities portfolio.
70
The following table presents the sensitivity analysis of interest rate risk as of December 31, 2018:
($ in thousands)
Fixed income securities
2018 Interest Rate Shift in Basis Points
-200
-100
0
100
200
Fair value of fixed income securities portfolio
$
5,770,718
5,541,486
5,311,417
5,081,165
4,850,756
Fair value change
Fair value change from base (%)
459,301
230,069
8.65%
4.33%
(230,252)
(460,661)
(4.34)%
(8.67)%
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 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 securities portfolio, which had an overall credit quality of “AA-” as
of both December 31, 2018 and December 31, 2017. Exposure to non-investment grade bonds represented approximately 2%
and 3% of the total fixed income securities portfolio at December 31, 2018 and December 31, 2017, respectively.
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, 2018 and December 31, 2017:
December 31, 2018
($ in millions)
U.S. government obligations
Foreign government obligations
State and municipal obligations
Corporate securities
CLO and Other ABS
CMBS
RMBS
Total fixed income portfolio
December 31, 2017
($ 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
121.3
23.1
1,156.4
1,637.8
717.4
527.1
1,128.3
5,311.4
121.3
23.1
1,156.0
1,637.0
717.4
527.1
1,128.3
5,310.2
1.2
(0.1)
17.4
(21.7)
(2.8)
(0.3)
9.9
3.6
AAA
A
AA-
BBB+
AA
AA+
AAA
AA-
Fair
Value
Carry
Value
Unrealized/
Unrecognized
Gain (Loss)
Weighted
Average
Credit
Quality
49.7
18.6
1,609.2
1,635.3
795.5
383.4
714.9
49.7
18.6
1,608.2
1,634.4
795.5
383.4
714.9
0.4
0.5
44.8
30.0
6.3
0.7
5.1
87.8
AAA
A
AA
BBB+
AA
AA+
AA+
AA-
Total fixed income portfolio
$
5,206.6
5,204.7
71
State and Municipal Obligations
The following table details the top 10 state exposures of the municipal bond portion of our fixed income securities portfolio at
December 31, 2018:
% of Total
Weighted Average
Credit Quality
State Exposures of Municipal Bonds
($ in thousands)
New York
California
Texas1
New Jersey
Washington
Pennsylvania
Florida
Arizona
Massachusetts
Ohio
Other
Pre-refunded/escrowed to maturity bonds
Total
General Obligation
State & Local
13,607
37,563
50,886
—
28,944
—
3,223
5,552
860
10,587
124,918
276,140
31,946
308,086
$
$
Special
Revenue
105,576
78,631
38,331
71,721
33,441
44,223
40,131
40,292
45,239
27,990
Fair
Value
119,183
116,194
89,217
71,721
62,385
44,223
43,354
45,844
46,099
38,577
287,133
812,708
35,644
412,051
1,088,848
67,590
10%
10%
8%
6%
5%
4%
4%
4%
4%
3%
36%
94%
6%
848,352
1,156,438
100%
AA-
AA-
AA
A
AA
AA-
AA-
AA
AA
AA-
AA-
AA-
AAA
AA-
27%
% of Total Municipal Portfolio
1Of the $50.9 million in state and local Texas general obligation bonds, $18.3 million represents investments in Texas Permanent School Fund bonds, which are
considered to have lower risk as a result of the bond guarantee programs that support these bonds.
100%
73%
Special revenue fixed income securities of municipalities (referred to as “special revenue bonds”) generally do not have the
“full faith and credit” backing of the municipal or state governments, as do general obligation bonds, but special revenue bonds
have a dedicated revenue stream for repayment. For our special revenue bonds, 73% of the dedicated revenue stream is
comprised of the following: (i) essential services (58%), which is comprised of transportation, water and sewer, and electric;
and (ii) education (15%), which includes school districts and higher education, including state-wide university systems. As
such, we believe our special revenue bond portfolio is appropriate for the current environment.
Corporate Securities
For investment-grade corporate bonds, we address the risk of an individual issuer's default by maintaining a diverse portfolio of
holdings. The primary risk related to non-investment grade corporate bonds is credit risk. A weak financial profile can lead to
rating downgrades from the credit rating agencies, which can put further downward pressure on bond prices. Valuations on
these bonds are related more directly to underlying operating performance than to general interest rates. Our holdings of non-
investment grade corporate bonds represent less than 2% of our overall investment portfolio.
The tables below provide details on our corporate bond holdings at December 31, 2018 and December 31, 2017:
December 31, 2018
($ in millions)
Investment grade
Non-investment grade
Total corporate securities
December 31, 2017
($ in millions)
Investment grade
Non-investment grade
Total corporate securities
Fair
Value
Carry
Value
1,532.6
105.2
1,637.8
1,531.8
105.2
1,637.0
Unrealized/
Unrecognized
Gain (Loss)
(14.4)
(7.2)
(21.6)
Fair
Value
Carry
Value
1,505.0
130.3
1,635.3
1,504.1
130.3
1,634.4
Unrealized/
Unrecognized
Gain (Loss)
27.5
2.5
30.0
$
$
$
$
Weighted
Average
Credit
Quality
A-
B+
BBB+
Weighted
Average
Credit
Quality
A-
B
BBB+
72
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. Other ABS includes structured note obligations and securities collateralized by loans and other
financial assets, including, but not limited to, auto loans, credit card receivables, equipment leases, and student loans.
The tables below provide details on our CLO and other ABS holdings at December 31, 2018 and December 31, 2017:
December 31, 2018
($ 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
December 31, 2017
($ 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
462.3
235.0
697.3
15.5
4.6
20.1
717.4
462.3
235.0
697.3
15.5
4.6
20.1
717.4
(5.2)
3.2
(2.0)
(0.8)
—
(0.8)
(2.8)
AA+
AA-
AA
B+
B+
B+
AA
Fair
Value
Carry
Value
Unrealized/
Unrecognized
Gain (Loss)
Weighted
Average
Credit
Quality
572.5
202.2
774.7
20.8
—
20.8
795.5
572.5
202.2
774.7
20.8
—
20.8
795.5
2.1
2.9
5.0
1.3
—
1.3
6.3
AA+
AA-
AA+
BB-
—
BB-
AA
$
$
$
$
CMBS and RMBS Portfolios
To manage and mitigate exposure on our CMBS and RMBS portfolios, we perform analysis both at the time of purchase and as
part of the ongoing portfolio evaluation. This analysis includes review of loan-to-value ratios, geographic spread of the assets
securing the bond, delinquencies in payments 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 these securities.
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, 2018:
($ in thousands)
(30)%
(20)%
(10)%
Fair value of AFS equity portfolio
$
103,347
Fair value change
(44,292)
118,111
(29,528)
132,875
(14,764)
0%
147,639
10%
20%
30%
162,403
14,764
177,167
29,528
191,931
44,292
Change in Equity Values in Percent
73
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, 2018, other investments represented 3% of our total invested assets and 10% of our stockholders’ equity. These
investments are subject to the risks arising from the fact that their valuation is inherently subjective. The general partner of
each of these partnerships usually reports the change in the value of the interests in the partnership on a one quarter lag because
of the nature of the underlying assets or liabilities. Since these partnerships' underlying investments consist primarily of assets
or liabilities for which there are no quoted prices in active markets for the same or similar assets, the valuation of interests in
these 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.
In addition to the above, we have a defined benefit pension plan with $331.8 million in invested assets as of December 31,
2018, of which approximately 43% was invested in assets subject to equity price risk. The value of these invested assets is an
important element of expense and liability measurement for our pension plan. For additional information regarding the fair
value of our pension assets, refer to Note 14. "Retirement Plans" in Item 8. “Financial Statements and Supplementary Data.” of
this Form 10-K.
Liquidity Risk
As a property and casualty insurer, our liquidity needs are generally met through the cash flow provided by our on-going
operations, as premium collections and investment income generated from our portfolio provide a significant flow of cash to
support policyholder loss and other payment obligations. Additionally, we purchase substantial reinsurance at low retention
levels to mitigate exposure to significant loss events and we have access to various borrowing facilities if the need to raise
capital were to arise. See the "Financial Condition, Liquidity, and Capital Resources" section in Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K for additional information
regarding our available borrowing capacity. In addition to this, we monitor our investment portfolio's liquidity profile to ensure
it meets our operational liquidity needs. The liquidity characteristics of our portfolio are illustrated below:
Asset Category
Highly-liquid assets
Generally liquid assets, may become less liquid with market stress1
Generally illiquid assets2
Total
1These exposures are concentrated within CMBS, CLOs, and other ABS.
2These exposures include our alternative investments and other non-traded securities.
Percentage of
Invested Assets
75 %
22
3
100 %
74
Indebtedness
(a) Long-Term Debt
As of December 31, 2018, we had outstanding long-term debt of $439.5 million that matures as shown in the following table:
($ 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
2018
$
2021
2021
2026
2034
2035
2043
25,000
25,000
60,000
49,907
99,462
185,000
444,369
(4,829)
$
439,540
24,218
24,162
58,905
57,032
107,075
177,230
448,622
The weighted average effective interest rate for our outstanding long-term debt was 5.3% at December 31, 2018. 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, 2018 or at any time
during 2018.
75
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Selective Insurance Group, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Selective Insurance Group, Inc. and subsidiaries (the
Company) as of December 31, 2018 and 2017, 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, 2018, and the related
notes and financial statement schedules I to V (collectively, the consolidated financial statements). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December
31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended
December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 15, 2019, expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
We have served as the Company's auditor since 1964.
/s/ KPMG LLP
New York, New York
February 15, 2019
76
Consolidated Balance Sheets
December 31,
($ in thousands, except share amounts)
ASSETS
Investments:
Fixed income securities, held-to-maturity – at carrying value
(fair value: $38,317 – 2018; $44,100 – 2017)
Fixed income securities, available-for-sale – at fair value
(amortized cost: $5,270,798 – 2018; $5,076,716 – 2017)
Equity securities – at fair value
(cost: $138,114 – 2018; $143,811 – 2017)
Short-term investments (at cost which approximates fair value)
Other investments
Total investments (Notes 5 and 7)
Cash
Restricted cash
Interest and dividends due or accrued
Premiums receivable, net of allowance for uncollectible
accounts of: $9,400 – 2018; $10,000 – 2017
Reinsurance recoverable, net of allowance for uncollectible
accounts of: $4,500 – 2018; $4,600 – 2017 (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: $211,657 – 2018; $213,227 – 2017
Deferred policy acquisition costs (Note 2)
Goodwill (Note 11)
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Reserve for loss and loss expense (Note 9)
Unearned premiums
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: 102,848,394 – 2018; 102,284,564 – 2017
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income (Note 6)
Treasury stock – at cost (shares: 43,899,840 – 2018; 43,789,442 – 2017)
Total stockholders’ equity
Commitments and contingencies (Notes 17 and 18)
Total liabilities and stockholders’ equity
See accompanying Notes to Consolidated Financial Statements.
77
2018
2017
$
37,110
42,129
5,273,100
5,162,522
147,639
323,864
178,938
182,705
165,555
132,268
5,960,651
5,685,179
505
16,414
41,620
770,518
549,172
157,723
—
53,540
65,248
252,612
7,849
76,877
534
44,176
40,897
747,029
594,832
153,493
3,243
31,990
63,959
235,055
7,849
78,195
7,952,729
7,686,431
3,893,868
1,431,932
439,540
1,302
116,706
277,579
3,771,240
1,349,644
439,116
—
131,850
281,624
6,160,927
5,973,474
—
—
205,697
390,315
1,858,414
(77,956)
(584,668)
1,791,802
204,569
367,717
1,698,613
20,170
(578,112)
1,712,957
$
$
$
$
$
7,952,729
7,686,431
Consolidated Statements of Income
December 31,
($ in thousands, except per share amounts)
Revenues:
Net premiums earned
Net investment income earned
Net realized and unrealized (losses) gains:
Net realized investment (losses) gains on disposals
Other-than-temporary impairments
Other-than-temporary impairments on fixed income securities recognized in other
comprehensive income
Net unrealized losses on equity securities
Total net realized and unrealized (losses) gains
Other income
Total revenues
Expenses:
Loss and loss expense incurred
Amortization of deferred policy acquisition costs
Other insurance expenses
Interest expense
Corporate expenses
Total expenses
2018
2017
2016
$
2,436,229
195,336
2,291,027
161,882
2,149,572
130,754
(18,975)
(6,579)
—
(29,369)
(54,923)
9,438
11,204
(4,809)
(36)
—
6,359
10,716
3,562
(8,509)
10
—
(4,937)
8,881
2,586,080
2,469,984
2,284,270
1,498,134
1,345,074
1,234,797
495,042
331,318
24,419
25,446
469,236
333,097
24,354
36,255
450,328
321,395
22,771
35,024
2,374,359
2,208,016
2,064,315
Income before federal income tax
211,721
261,968
219,955
Federal income tax expense:
Current
Deferred
Total federal income tax expense
Net income
Earnings per share:
Basic net income
Diluted net income
See accompanying Notes to Consolidated Financial Statements.
35,012
(2,230)
32,782
62,184
30,958
93,142
48,581
12,879
61,460
178,939
168,826
158,495
3.04
3.00
2.89
2.84
2.74
2.70
$
$
$
78
Consolidated Statements of Comprehensive Income
December 31,
($ in thousands)
Net income
Other comprehensive (loss) income, net of tax:
Unrealized (losses) gains on investment securities:
2018
2017
2016
$
178,939
168,826
158,495
Unrealized holding (losses) gains arising during year
(97,284)
43,015
(5,977)
Non-credit portion of other-than-temporary impairments recognized in other comprehensive income
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
Amounts reclassified into net income:
Net actuarial loss
Total defined benefit pension and post-retirement plans
Other comprehensive (loss) income
Comprehensive income
See accompanying Notes to Consolidated Financial Statements.
—
87
—
31,316
(65,881)
23
(6)
(116)
68
(4,537)
38,453
(92)
138
3,064
(2,873)
(8,906)
(3,700)
(7,852)
1,680
(7,226)
(73,107)
1,367
(2,333)
36,120
4,200
(3,652)
(6,525)
$
105,832
204,946
151,970
79
Consolidated Statements of Stockholders’ Equity
December 31,
($ in thousands, except share amounts)
Common stock:
Beginning of year
Dividend reinvestment plan
(shares: 23,493 – 2018; 28,607 – 2017; 38,741 – 2016)
Stock purchase and compensation plans
(shares: 540,337 – 2018; 635,521 – 2017; 720,323 – 2016)
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, as previously reported
Cumulative effect adjustment due to adoption of equity security guidance, net of tax
Cumulative effect adjustment due to adoption of stranded deferred tax guidance
Balance at beginning of year, as adjusted
Net income
Dividends to stockholders
($0.74 per share – 2018; $0.66 per share – 2017; $0.61 per share – 2016)
End of year
Accumulated other comprehensive (loss) income:
Beginning of year, as previously reported
Cumulative effect adjustment due to adoption of equity security guidance, net of tax
Cumulative effect adjustment due to adoption of stranded deferred tax guidance
Balance at beginning of year, as adjusted
Other comprehensive (loss) income
End of year
Treasury stock:
Beginning of year
Acquisition of treasury stock
(shares: 110,398 – 2018; 136,205 – 2017; 152,595 – 2016)
End of year
Total stockholders’ equity
2018
2017
2016
$
204,569
203,241
201,723
47
57
77
1,081
205,697
1,271
204,569
1,441
203,241
367,717
1,379
21,219
390,315
347,295
1,395
19,027
367,717
326,656
1,389
19,250
347,295
1,698,613
1,568,881
1,446,192
30,726
(5,707)
—
—
—
—
1,723,632
1,568,881
1,446,192
178,939
168,826
158,495
(44,157)
(39,094)
(35,806)
1,858,414
1,698,613
1,568,881
20,170
(30,726)
5,707
(4,849)
(73,107)
(77,956)
(15,950)
(9,425)
—
—
(15,950)
36,120
20,170
—
—
(9,425)
(6,525)
(15,950)
(578,112)
(572,097)
(567,105)
(6,556)
(6,015)
(4,992)
(584,668)
(578,112)
(572,097)
$
1,791,802
1,712,957
1,531,370
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.
80
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
Stock-based compensation expense
Undistributed (gains) losses of equity method investments
Distributions in excess of current year income of equity method investments
Net realized and unrealized losses (gains)
Loss on disposal of fixed assets
Changes in assets and liabilities:
Increase in reserves for loss and loss expense, 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 in interest and dividends due or accrued
Decrease in accrued salaries and benefits
Increase in other assets
(Decrease) increase 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
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
Sale of other investments
Distributions from other investments
Purchase of property and equipment
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 (used in) provided by financing activities
Net (decrease) increase in cash and restricted cash
Cash and restricted cash, beginning of year
Cash and restricted cash, end of year
See accompanying Notes to Consolidated Financial Statements.
$
81
2018
2017
2016
$
178,939
168,826
158,495
44,874
14,507
(8,341)
2,924
54,923
63
168,288
78,058
2,428
(23,489)
(17,557)
(540)
(26,418)
(372)
(13,343)
454,944
52,100
12,089
(5,362)
552
(6,359)
998
106,226
79,614
30,918
(65,418)
(12,491)
(1,088)
(5,714)
(2,643)
27,297
379,545
61,671
10,449
318
—
4,937
—
114,422
87,716
11,150
(66,447)
(9,405)
(1,473)
(46,536)
(4,979)
9,191
329,509
(7,150)
—
(4,235)
(2,918,203)
(2,130,362)
(1,982,023)
(94,344)
(68,578)
(61,931)
(55,830)
(35,490)
(66,164)
(4,259,734)
(4,280,553)
(3,499,380)
2,030,664
4,101,530
12,106
638,916
113,339
3,497
28,379
(16,110)
(435,688)
(42,097)
(6,556)
7,252
130,000
(130,000)
—
(5,646)
(47,047)
(27,791)
44,710
16,919
1,197,920
4,338,318
58,832
555,216
37,960
—
21,843
(14,071)
(332,658)
(37,045)
(6,015)
7,599
84,000
(84,000)
—
(4,121)
(39,582)
7,305
37,405
44,710
926,470
3,470,022
102,868
641,524
119,617
—
24,202
(18,147)
(320,736)
(33,758)
(4,992)
7,811
165,000
(115,000)
1,819
(5,002)
15,878
24,651
12,754
37,405
Notes to Consolidated Financial Statements
Note 1. Organization
Selective Insurance Group, Inc., through its subsidiaries, (collectively referred to as “we,” “us,” or “our”) offers standard
commercial, standard personal, and excess and surplus ("E&S") lines property and casualty insurance products. Selective
Insurance Group, Inc. (referred to as the “Parent”) was incorporated in New Jersey in 1977 and its corporate headquarters is
located in Branchville, New Jersey. The Parent’s common 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
2018 presentation. Specifically, we reclassified restricted cash balances related to our participation in the National Flood
Insurance Program ("NFIP") from other assets in our consolidated balance sheet into a separate line item on the face of that
statement. Additionally, refer to Note 3. "Adoption of Accounting Pronouncements" below for a discussion of the retroactive
restatements that are included in these financial statements in relation to the adoption of new accounting pronouncements for
the treatment of restricted cash and distributions from equity method investments on the Consolidated Statements of Cash
Flows.
(d) Investments
Portfolio Composition and Presentation in the Consolidated Balance Sheets
Our investment portfolio is primarily comprised of fixed income securities, which represent approximately 89% of our invested
assets. We also hold equity securities, short-term investments, and other investments. A description of our portfolio holdings,
and the related presentation in our Consolidated Balance Sheets, is provided below.
Fixed Income Portfolio
We hold the following types of securities in our fixed income securities portfolio:
• U.S. government and government agencies;
•
•
• Corporate securities, which may include investment grade and below investment grade bonds, bank loan investments,
Foreign government obligations;
State and municipal obligations, including special revenue and general obligation bonds;
redeemable preferred stock, and non-redeemable preferred stock with certain debt-like characteristics;
82
• Collateralized loan obligations ("CLOs") and other asset-backed securities ("ABS");
• Residential mortgage-backed securities ("RMBS"); and
• Commercial mortgage-backed securities ("CMBS").
We have designated approximately 99% of our fixed income securities portfolio as available-for-sale ("AFS"), with the
remaining 1% being designated as held-to-maturity ("HTM"), as we have the ability and positive intent to hold these securities
to maturity. Our AFS securities are reported at fair value in our consolidated balance sheets, with unrealized gains or losses
recognized in accumulated other comprehensive income (loss) ("AOCI"), net of tax. HTM securities are carried at either: (i)
amortized cost; or (ii) market value at the date of transfer into the HTM category, adjusted for subsequent amortization. After-
tax unrealized gains and losses on securities that were transferred into an HTM designation from an AFS designation, are also
included in AOCI.
The amortized cost of fixed income securities is adjusted for the amortization of premiums and the accretion of discounts over
the expected life of the security using the effective yield method. Callable debt securities held at a premium are amortized to
the earliest call date. Premiums and discounts arising from the purchase of RMBS, CMBS, CLOs and other ABS are amortized
over the expected life of the security based on future principal payments, giving additional consideration to prepayments.
These prepayments are estimated based on historical and projected cash flows. Prepayment assumptions are reviewed quarterly
and adjusted to reflect actual prepayments and changes in expectations. Future amortization of any premium and/or discount is
adjusted to reflect the revised assumptions.
Other Portfolio Holdings
Equity securities may include common and non-redeemable preferred stocks. Equity securities with readily determinable fair
values are carried at fair value. Certain equity securities without readily determinable fair values are carried at net asset value
("NAV") as a practical expedient.
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.
Other investments may include alternative investments and other securities. Alternative investments are accounted for using
the equity method, with income typically recognized on a one-quarter lag. Other securities are primarily comprised of tax
credit investments and equity securities without readily determinable fair values that are not carried at NAV as a practical
expedient. These equity securities are carried at cost. Accounting for our tax credit investments is dependent on the type of
credit we have purchased, as follows:
Federal low income housing tax credits are accounted for under the proportional amortization method; and
•
• All other tax credits in our investment portfolio are accounted for using the equity method.
For federal tax credits accounted for under the equity method, we use the deferral method for recognizing the benefit of the tax
credit with the related deferred revenue being recognized in our Consolidated Income Statement as a component of "Federal
income tax expense" proportionately over the life of the investment.
We evaluate the alternative investments and tax credit investments included in our other investments portfolio to determine
whether those investments are variable interest entities ("VIEs") and if so, whether consolidation is required. A VIE is an entity
that either has equity investors that lack certain essential characteristics of a controlling financial interest or lack sufficient
funds to finance its own activities without financial support provided by other entities. We consider several significant factors
in determining if our investments are VIEs and if we are the primary beneficiary, including whether we have: (i) the power to
direct activities of the VIE; (ii) the ability to remove the decision maker of the VIE; (iii) the ability to participate in making
decisions that are significant to the VIE; and (iv) the obligation to absorb losses and the right to receive benefits that could
potentially be significant to the VIE. We have reviewed our alternative and tax credit investments and have concluded that they
are VIEs, but that we are not the primary beneficiary and therefore, consolidation is not required.
Presentation in the Consolidated Statements of Income
Net investment income earned on our Consolidated Statements of Income include the following:
Interest income, as well as amortization and accretion, on fixed income securities;
•
• Dividend income on equity securities;
•
Interest income on our short-term investments; and
83
•
Income recognized on our alternative and other investments accounted for under the equity method of accounting,
except for federal tax credits, as discussed below.
Income related to federal tax credits (either low income housing tax credits or other federal credits) is recorded in our
Consolidated Statements of Income as a component of “Federal income tax expense” proportionately over the life of the
investment.
Net realized and unrealized gains and losses on our Consolidated Statements of Income include the following:
• Realized gain and losses on the disposal of investment securities, which are determined on the basis of the cost of the
specific investments sold;
• Other-than-temporary impairment ("OTTI") charges that are credit related or related to our intent to sell; and
• Changes in unrealized gains or losses on our equity securities that are carried at fair value.
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, and our other investments.
OTTI Charges on Fixed Income Securities and Short-Term Investments
We review our fixed income securities and short-term investments 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 security before its
anticipated recovery; (iii) if the decline is other than interest-rate related; and (iv) 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 an OTTI
charge to earnings. 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.
To determine if an impairment is other than temporary, we perform assessments that may include, but are not limited to, a
discounted cash flow analysis ("DCF") to determine the security's present value of future cash flows. This analysis is also
performed on all previously-impaired debt securities that continue to be held by us and all RMBS, CMBS, CLOs and ABS 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 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
RMBS, CMBS, CLOs and other ABS 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. DCFs may include, but are not necessarily limited to: (i) generating cash flows for each tranche considering tranche-
specific data, market data, and other pertinent information, such as the historical performance of the underlying collateral,
including net operating income generated by underlying properties, conditional default rate assumptions, loan loss severity
assumptions, consensus projections, prepayment projections, and actual pool and collateral information; (ii) identifying
applicable benchmark yields; and (iii) applying market-based tranche specific spreads to determine an appropriate yield by
incorporating collateral performance, tranche-level attributes, trades, bids, and offers.
Non-redeemable preferred stocks that are classified as fixed income securities are evaluated using the OTTI method described
above unless the security is below investment grade. In this situation, we would 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 recovery in the near term. If we determine either that we do not intend to hold the
security, or the decline is other than temporary, we write down the security's cost to its fair value through an OTTI charge to
earnings.
84
OTTI Charges on Other Investments
Our evaluation for OTTI of 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.
Our evaluation for OTTI of our other investments (tax credits and equity securities without a readily determinable fair value for
which NAV is not used as a practical expedient) include a qualitative assessment of impairment indicators, which include, but
are not limited to, the following:
• A significant deterioration in the earnings performance, credit ratings, asset quality, or business prospects of the
investee;
• A significant adverse change in the regulatory, economic, or technological environment of the investee;
• A significant adverse change in the general market condition of either the geographical area or the industry in which
the investee operates;
• A bona fide offer to purchase, or an offer by the investee to sell, or a completed auction process for the same or
•
similar investment for an amount less than the carrying amount of that investment; and
Factors that raise significant concerns about the investee's ability to continue as a going concern, such as negative
cash flows from operations, working capital deficiencies, or noncompliance with statutory capital requirements or
debt covenants.
If there is a decline in the fair value of an alternative or 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 through an OTTI charge to earnings.
(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.
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)
85
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.
RMBS, CMBS, CLOs and other ABS
Evaluations are based on a DCF, including: (i) generating cash flows for each tranche considering tranche-specific
data, market data, and other pertinent information, such as historical performance of the underlying collateral,
including net operating income generated by the underlying properties, conditional default rate assumptions, loan
loss severity assumptions, consensus projections, prepayment projections, and actual pool and loan level collateral
information; (ii) identifying applicable benchmark yields; and (iii) applying market-based tranche-specific spreads
to determine an appropriate yield by incorporating collateral performance, tranche-level attributes, trades, bids, and
offers.
Foreign Government
Evaluations are performed using a DCF model and by incorporating observed market yields of benchmarks as
inputs, adjusting for varied maturities.
Level 3 Pricing
Less than 1% of our portfolio cannot be priced using our primary or secondary pricing service. At times, we may use
valuations performed by the issuer or non-binding broker quotes to determine the fair value of these securities. We internally
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.
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 are consistent with the remaining term of the borrowing.
(f) Allowance for Uncollectible Accounts
We estimate an allowance for uncollectible 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 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. The fair value of both equity and liability awards is recognized over the requisite service period. The
86
requisite service period is typically the lesser of the vesting period or the period of time from the grant date to the date of
retirement eligibility. The expense recognized for share-based awards, which, in some cases, contain performance criteria, is
based on the number of shares or units expected to be issued at the end of the performance period. We repurchase the Parent’s
stock from our employees in connection with tax withholding obligations, as permitted under our stock-based compensation
plans. This activity is disclosed in our Consolidated Statements of Stockholders' Equity.
(h) Reinsurance
Reinsurance recoverable represents 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 reinsurer's 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.
(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 $19.5 million, $17.8 million, and $17.4 million for 2018, 2017, and 2016, 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
operations, consistent with our reportable segments of Standard Commercial Lines, Standard Personal Lines, and E&S Lines.
A combined ratio of over 100% does not necessarily indicate a premium deficiency, as any year's combined ratio includes a
portion of underwriting expenses that are expensed at policy inception and therefore are not covered by the remaining unearned
premium. In addition, investment income is not contemplated in the combined ratio calculation.
There were no premium deficiencies for any of the reported years, as the sum of the anticipated loss and loss expense,
unamortized acquisition costs, policyholder dividends, and other expenses for each segment did not exceed that segment’s
related unearned premium and anticipated investment income. The investment yields assumed in the premium deficiency
assessment for each reporting period, which were based on our actual average investment yield before tax as of the September
30 calculation date, were 3.3% for 2018, 2.9% for 2017, and 2.4% for 2016.
(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, 2018, goodwill was not impaired.
87
(l) Reserve for Loss and Loss Expense
Reserves for loss and loss expense 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 include: (i) reserves on IBNR claims; and (ii) provisions for future emergence
on known or 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 loss and loss 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 loss and loss expenses. Ultimate loss and loss 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.
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
expenses.
•
Some insured events may span multiple years and trigger 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 types of losses
often do not lend themselves to traditional actuarial methods. Where we deem appropriate, our experience may be
analyzed without differentiating by accident year, using alternative methods and metrics. In these cases, the associated
selected ultimate loss and loss expenses are then allocated to the applicable accident years for reporting.
• Another example of non-standard methods relate to loss expenses that cannot be attributed to a specific claim (referred
to as “unallocated loss expenses”). These expenses are first allocated to line of business, and alternative projection
methods are then applied to estimate expenses by calendar year, which are then allocated back to the applicable
accident years for reporting.
The selected ultimate loss and loss 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 to IBNR 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; (iv)
social inflation and heightened awareness of sources of liability; and (v) 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 loss and loss expense. These reserves are expected to be sufficient for settling loss and loss expense obligations under our
policies on unpaid claims, including changes in the volume of business written, claims frequency and severity, the mix of
business, claims processing, and other items that management expects to affect our ultimate settlement of loss and loss expense.
However, the ultimate claim settlements may be higher or lower than reserves established. As our experience emerges and
88
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 loss and loss expense reserves expected to be paid in future periods.
Our loss and loss expense reserves implicitly include anticipated recoveries for salvage and subrogation claims.
Claims are counted at the occurrence, line of business, and policy level. For example, if a single occurrence (e.g. an 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 a payment is made. Therefore, claims
closed without payment are included in the count as long as there was an associated case reserve at some point in its life cycle.
We also write a small amount of assumed reinsurance. Currently, this business is limited to our share of certain involuntary
pools. As 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 business, 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 report these dividends within "Other
insurance expenses" on the Consolidated Statements of Income. 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 either “Other insurance expenses” or
"Corporate expenses" on the Consolidated Statements of Income depending on the nature of what caused the occurrence of
such an item.
(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" in the Consolidated Balance Sheets.
89
In addition, we have various capital leases for computer hardware and software. These leases are accounted for as an
acquisition of an asset with a corresponding 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 of 1974 ("ERISA"), 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
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 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-01,
Financial Instruments - Overall: 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 securities held in our investment portfolio 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.
We adopted ASU 2016-01 in the first quarter of 2018 and recognized a $30.7 million cumulative-effect adjustment to the
opening balances of accumulated other comprehensive income ("AOCI") and retained earnings, which represents the after-tax
net unrealized gain on our equity portfolio as of December 31, 2017. Additionally, beginning in the first quarter of 2018,
changes in unrealized gains or losses on this portfolio are no longer recorded to AOCI, but are instead recognized in income
through "Net unrealized losses on equity securities" on our Consolidated Statements of Income. See Note 5. "Investments"
below for information regarding unrealized equity losses recognized in income for 2018.
There were two accounting updates that we adopted with a retrospective transition in the first quarter of 2018 that related to our
statements of cash flows. These accounting updates impacted our categorization of distributions from equity method investees
(ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15")) and
the presentation of restricted cash (ASU 2016-18, Statement of Cash Flows: Restricted Cash ("ASU 2016-18")). These ASUs
are discussed below and the discussions are followed with a table presenting the impact of the prior period restatements.
In August 2016, the FASB issued ASU 2016-15. As mentioned above, this ASU adds guidance on the categorization of
distributions from equity method investees within the statement of cash flows. In accordance with this guidance, we made an
accounting policy election to classify these distributions using the cumulative earnings approach. This election resulted in a
restatement to operating and investing cash flows as outlined in the table below. ASU 2016-15 also added or clarified guidance
on the cash flow classification of certain cash receipts and payments, 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; and (iii) separately identifiable cash flows and application of the predominance principle. The updated
guidance for these topics did not result in any restatements to our statement of cash flows.
In November 2016, the FASB issued ASU 2016-18. ASU 2016-18 requires restricted cash and restricted cash equivalents to 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 containing cash, cash equivalents, and restricted cash. We have restricted cash related to our
participation in the NFIP, which we had previously reported as part of "Other assets" on the Consolidated Balance Sheets.
90
Beginning in the first quarter of 2018, we are reporting restricted cash in its own line item on the Consolidated Balance Sheets
to aid in the reconciliation of the amounts presented on the Consolidated Statements of Cash Flows. We have also restated
prior year balances on the Consolidated Balance Sheets to conform to the current year presentation.
The adoption of this guidance resulted in a restatement of operating cash flows in 2017 and 2016 to remove the impact of
the change in restricted cash from operating activities and include the restricted cash balance in the reconciliation of beginning
and ending cash balances on the Statements of Cash Flows. In addition, we have included the required reconciliation in Note 4.
"Statements of Cash Flows" below.
ASU 2016-15 and ASU 2016-18 resulted in the following line item restatements within operating and investing cash flows on
the Statements of Cash Flows:
($ in thousands)
December 31, 2017
December 31, 2016
Prior to Adoption
After Adoption
Prior to Adoption
After Adoption
Undistributed (gains) losses of equity method investments
$
Distributions in excess of current year income of equity method investments
(Increase) decrease in other assets
Net cash provided by operating activities
Distributions from other investments
Net cash used in investing activities
(6,393)
—
(9,872)
370,733
23,426
(331,075)
(5,362) $
552
(2,643)
379,545
21,843
(332,658)
(2,316)
—
(30,071)
301,783
26,837
(318,101)
318
—
(4,979)
329,509
24,202
(320,736)
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill
Impairment (“ASU 2017-04”). ASU 2017-04 eliminates the second step of the two part goodwill impairment test, which
required entities to determine the fair value of individual assets and liabilities of a reporting unit to measure the goodwill
impairment. Under the new guidance, a goodwill impairment is calculated as the amount by which a reporting unit’s carrying
value exceeds its fair value, not to exceed the carrying amount of goodwill. An entity still has the option to perform the
qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments in this
update are to be applied on a prospective basis for annual or interim goodwill impairment tests in fiscal years beginning after
December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates
after January 1, 2017. We adopted ASU 2017-04 in the first quarter of 2018 and it had no impact on us.
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits: Improving the Presentation of Net
Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ("ASU 2017-07"). ASU 2017-07 requires that an
employer report a pension plan's service cost in the same line item or line items as other compensation costs arising from
services rendered by pertinent employees during the period. ASU 2017-07 also requires that other components of net benefit
cost be presented in the income statement separately from the service cost component. If a separate line item or items are not
used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed.
ASU 2017-07 was effective for annual periods beginning after December 15, 2017, including interim periods within those
annual periods, with early adoption permitted at the beginning of an annual period. We adopted ASU 2017-07 in the first
quarter of 2018, but it had no impact on us as our pension plan was frozen as of March 2016 and we have therefore ceased
accruing additional service fee costs since that time.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income ("ASU 2018-02").
ASU 2018-02 allows a one-time reclassification from AOCI to retained earnings for the stranded tax assets that were created in
AOCI from the enactment of the Tax Cuts and Jobs Act of 2017 ("Tax Reform"). We adopted ASU 2018-02 in the first quarter
of 2018 and recognized a $5.7 million cumulative-effect adjustment for the deferred tax charge to income in the fourth quarter
of 2017 that was associated with net unrealized gains on our investment portfolio and pension plan resulting from the
enactment of Tax Reform.
Pronouncements to be effective in the future
The FASB has issued new leasing guidance through ASU 2016-02, Leases, which was issued in February 2016, as well as
additional implementation guidance that was issued in 2018 (collectively referred to as "ASU 2016-02"). ASU 2016-02
requires all lessees to recognize assets and liabilities on their balance sheets for the rights and obligations created by leases with
terms longer than 12 months. For leases with a term of 12 months or less, an accounting policy election is allowed to recognize
lease expense on a straight-line basis over the lease term. Under the new lease guidance, we expect an increase in assets and
liabilities as we will recognize operating leases for office space, fleet vehicles, and equipment on our Consolidated Balance
Sheets for the first time. ASU 2016-02 allows for certain practical expedients, accounting policy elections, and a transition
method election. We currently plan to adopt practical expedients related to reassessing: (i) whether our existing contracts are,
91
or contain, leases; (ii) lease classification for existing leases; and (iii) initial direct costs for existing leases. Additionally, we
plan to adopt accounting policy elections to: (i) aggregate lease and non-lease components of a contract into a single lease
component; and (ii) expense short-term leases on a straight-line basis over the lease term. We will be adopting ASU 2016-02
effective January 1, 2019 with a cumulative-effect adjustment to the opening balance of retained earnings as of that date. We
do not anticipate the impact of this guidance to be material to our financial condition or results of operations, as operating lease
right-of-use assets are expected to be approximately $21 million at transition with related lease liabilities of approximately $20
million. The differential of $1 million will be recognized, on an after-tax basis, as a cumulative-effect adjustment to the
opening balance of 2019 retained earnings. Financing lease right-of-use assets and the related lease liabilities are expected to
be approximately $1 million as of January 1, 2019.
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 recoverables. This ASU will not impact the impairment accounting model for AFS debt securities.
ASU 2016-13 requires a valuation allowance to be calculated on these financial 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 fiscal years beginning after December 15, 2019, including interim periods within
those annual periods. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2018. We are
currently evaluating the impact of this guidance on our financial condition and results of operations.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to
Nonemployee Share-Based Payment Accounting ("ASU 2018-07"). The amendments in ASU 2018-07 expand the scope of
Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. ASU 2018-07 is
effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is
permitted. The adoption of this guidance will not have a material impact on our financial condition or results of operations.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements for fair value
measurements. The modifications removed the following disclosure requirements: (i) the amount of, and reasons for, transfers
between Level 1 and Level 2 of the fair value hierarchy; (ii) the policy for timing of transfers between levels; and (iii) the
valuation processes for Level 3 fair value measurements. This ASU added the following disclosure requirements: (i) the
changes in unrealized gains and losses for the period included in other comprehensive income ("OCI") for recurring Level 3
fair value measurements held at the end of the reporting period; and (ii) the range and weighted average of significant
observable inputs used to develop Level 3 fair value measurements. This update is effective for annual and interim periods
beginning after December 15, 2019, with early adoption permitted. As the requirements of this literature are disclosure only,
ASU 2018-13 will not impact our financial condition or results of operations.
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General:
Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”). ASU 2018-14
modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. These
modifications include: (i) removing the requirement to disclose the amount in AOCI expected to be recognized as components
of net periodic benefit cost over the next fiscal year; and (ii) adding the requirement to disclose an explanation of the reasons
for significant gains or losses related to changes in the benefit obligation for the period. This update is effective for fiscal years
ending after December 15, 2020, with early adoption permitted. As the requirements of this literature are disclosure only, ASU
2018-14 will not impact our financial condition or results of operations.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU
2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that
is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use
software. This update is effective for annual and interim periods beginning after December 15, 2019, with early adoption
permitted. We are currently evaluating the impact of this guidance on our financial condition or results of operations.
92
Note 4. Statements of Cash Flows
Supplemental cash flow information for the years ended December 31, 2018, 2017, and 2016 is as follows:
($ in thousands)
Cash paid during the period for:
Interest
Federal income tax
Non-cash items:
Corporate actions related to fixed income securities, AFS1
Corporate actions related to equity securities1
Assets acquired under capital lease arrangements
Non-cash purchase of property and equipment
1Examples of corporate actions include exchanges, non-cash acquisitions, and stock-splits.
2018
2017
2016
$
23,992
29,193
52,277
944
4,119
291
23,905
62,000
22,511
4,725
278
—
22,098
46,405
23,579
3,263
3,151
78
The following table provides a reconciliation of cash and restricted cash reported within the Consolidated Balance Sheets that
equate to the amount reported in the Consolidated Statements of Cash Flows:
($ in thousands)
Cash
Restricted cash
Total cash and restricted cash shown in the Statements of Cash Flows
December 31, 2018
December 31, 2017
$
$
505
16,414
16,919
534
44,176
44,710
Amounts included in restricted cash represent cash received from the NFIP, which is restricted to pay flood claims under the
Write Your Own Program.
Note 5. Investments
(a) Net unrealized gains on investments included in OCI by asset class were as follows for the years ended December 31, 2018,
2017, and 2016:
($ 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
Net unrealized gains, net of deferred income tax
2018
2017
2016
$
2,302
—
2,302
89
89
2,391
(502)
1,889
85,806
38,894
124,700
(21)
(21)
124,679
(44,103)
80,576
38,781
25,864
64,645
159
159
64,804
(22,681)
42,123
Cumulative effect adjustment due to accounting change for equity unrealized1
Cumulative effect adjustment due to accounting changes due to accounting change for stranded
tax assets1
(2,873)
Increase (decrease) in net unrealized gains in OCI, net of deferred income tax
1Upon adoption of ASU 2016-01, we recognized a $30.7 million cumulative-effect adjustment to the opening balance of AOCI, which represents the after-tax
net unrealized gain on our equity portfolio as of December 31, 2017. Additionally, upon adoption of ASU 2018-02, we recognized a one-time reclassification
from AOCI to retained earnings for $17.9 million representing the stranded tax assets related to our investment portfolio that were created in AOCI from the
enactment of Tax Reform. See Note 3. "Adoption of Accounting Pronouncements" above for additional information.
(65,881)
(17,920)
30,726
38,453
—
—
—
—
$
93
(b) Information regarding our HTM fixed income securities as of December 31, 2018 and December 31, 2017 was as follows:
December 31, 2018
($ in thousands)
Obligations of state and political
subdivisions
Corporate securities
Total HTM fixed income securities
Amortized
Cost
$
$
17,431
19,590
37,021
Net
Unrealized
Gains
(Losses)
Carrying
Value
Unrecognized
Holding
Gains
Unrecognized
Holding
Losses
Fair
Value
39
50
89
17,470
19,640
37,110
504
855
1,359
(5)
(147)
(152)
17,969
20,348
38,317
December 31, 2017
($ in thousands)
Obligations of state and political
subdivisions
Corporate securities
Total HTM fixed income securities
$
Amortized
Cost
25,154
16,996
42,150
Net
Unrealized
Gains
(Losses)
Carrying
Value
Unrecognized
Holding
Gains
Unrecognized
Holding
Losses
Fair
Value
84
(105)
(21)
25,238
16,891
42,129
1,023
1,003
2,026
—
(55)
(55)
26,261
17,839
44,100
Unrecognized holding gains and losses of HTM securities are not reflected in the Financial Statements, as they represent fair
value fluctuations from the date a security is designated as HTM through the date of the balance sheet.
(c) Information regarding our AFS securities as of December 31, 2018 and December 31, 2017 were as follows:
December 31, 2018
($ 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
Cost/
Amortized
Cost
120,092
23,202
1,121,615
1,639,852
720,193
527,409
1,118,435
Total AFS fixed income securities
$
5,270,798
Unrealized
Gains
Unrealized
Losses
Fair
Value
1,810
36
19,485
5,521
4,112
3,417
12,988
47,369
(592)
(107)
(2,631)
(27,965)
(6,943)
(3,748)
(3,081)
(45,067)
121,310
23,131
1,138,469
1,617,408
717,362
527,078
1,128,342
5,273,100
94
December 31, 2017
($ 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
Total AFS fixed income securities
AFS equity securities:
Common stock
Preferred stock
Total AFS equity securities
Total AFS securities
Cost/
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
49,326
18,040
1,539,307
1,588,339
789,152
382,727
709,825
5,076,716
129,696
14,115
143,811
$
5,220,527
647
526
44,245
30,891
6,508
1,563
6,487
90,867
38,287
904
39,191
130,058
(233)
(11)
(582)
(1,762)
(202)
(841)
(1,430)
(5,061)
(226)
(71)
(297)
49,740
18,555
1,582,970
1,617,468
795,458
383,449
714,882
5,162,522
167,757
14,948
182,705
(5,358)
5,345,227
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. As of the first quarter of 2018,
equity securities are no longer required to be included in the table above under new accounting guidance that provides that
unrealized gains and losses on equity securities should no longer be recognized in AOCI, but instead recognized though
income. Refer to Note 3. "Adoption of Accounting Pronouncements" for additional information regarding the adoption of ASU
2016-01.
(d) The severity of impairment on the securities in an unrealized/unrecognized loss position averaged approximately 2% of
amortized cost at December 31, 2018 and approximately 1% at December 31, 2017. 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, 2018 and $0.1 million in unrealized/unrecognized losses at December 31, 2017.
December 31, 2018
Less than 12 months
12 months or longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(418)
(14)
(557)
(4,316)
(193)
(1,200)
(1,421)
(8,119)
29,856
13,690
239,619
1,120,905
532,906
295,632
184,999
(592)
(107)
(2,631)
(27,965)
(6,943)
(3,748)
(3,081)
2,417,607
(45,067)
($ 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
6,693
12,208
196,798
1,041,952
516,106
229,338
139,338
(174)
(93)
(2,074)
(23,649)
(6,750)
(2,548)
(1,660)
23,163
1,482
42,821
78,953
16,800
66,294
45,661
Total AFS fixed income securities
$
2,142,433
(36,948)
275,174
95
December 31, 2017
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
$
23,516
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
1,481
107,514
238,326
74,977
154,267
269,485
869,566
4,727
3,833
8,560
(233)
(11)
(422)
(1,744)
(196)
(773)
(1,285)
(4,664)
(226)
(71)
(297)
250
—
14,139
3,228
1,655
5,214
11,200
35,686
—
—
—
—
—
(160)
(18)
(6)
(68)
(145)
(397)
—
—
—
23,766
1,481
121,653
241,554
76,632
159,481
280,685
905,252
4,727
3,833
8,560
(233)
(11)
(582)
(1,762)
(202)
(841)
(1,430)
(5,061)
(226)
(71)
(297)
Total AFS securities
$
878,126
(4,961)
35,686
(397)
913,812
(5,358)
The increase in the less than 12 months unrealized loss position was due to higher interest rates, with a 60-basis point increase
in the 2-year U.S. Treasury Note yields and a 28-point basis increase in the 10-year U.S. Treasury Note yields during 2018. We
do not currently intend to sell any of the securities in the tables above, nor will we be required to sell any of these securities.
Considering these factors and our review of these securities under our OTTI policy as described in Note 2,“Summary of
Significant Accounting Policies” of this Form 10-K, we have concluded that they are temporarily impaired as we believe: (i)
they will mature at par value; (ii) they have not incurred a credit impairment; and (iii) future values of these securities will
fluctuate with changes in interest rates. This conclusion reflects our current judgment as to the financial position and future
prospects of the entity that issued the investment security and underlying collateral.
(e) Fixed income securities at December 31, 2018, by contractual maturity are shown below. Mortgage-backed securities are
included in the maturity tables using the estimated average life of each security. Expected maturities may differ from
contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment
penalties.
Listed below are the contractual maturities of fixed income securities at December 31, 2018:
($ 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 fixed income securities
AFS
HTM
Fair Value
Carrying Value
Fair Value
$
188,309
2,040,395
2,863,528
180,868
$
5,273,100
13,502
17,308
6,300
—
37,110
13,693
18,260
6,364
—
38,317
96
(f) The following table summarizes our other investment portfolio by strategy:
Other Investments
December 31, 2018
December 31, 2017
Carrying
Value
Remaining
Commitment
Maximum
Exposure to Loss1
Carrying
Value
Remaining
Commitment
Maximum
Exposure to Loss1
($ in thousands)
Alternative Investments
Private equity
Private credit
Real assets
Total alternative investments
$
84,352
41,682
27,862
153,896
93,688
81,453
27,129
202,270
178,040
123,135
54,991
356,166
52,251
37,743
25,379
115,373
16,895
99,026
94,959
27,014
220,999
151,277
132,702
52,393
336,372
Other securities2
353,267
Total other investments
1The maximum exposure to loss includes both the carrying 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.
2Other securities primarily consists of tax credit investments.
220,999
381,208
202,270
178,938
132,268
16,895
25,042
25,042
—
—
$
We have reviewed various investments included in the table above and have concluded that they are VIEs, but that we are not
the primary beneficiary and therefore, consolidation is not required. We do not have a future obligation to fund losses or debts
on behalf of these investments; however, we are contractually committed to make additional investments up to the remaining
commitment outlined above. We have not provided any non-contractual financial support at any time during 2018 or 2017.
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.
97
• Real Estate: This strategy invests in real estate in North America, Europe, and Asia via direct property ownership,
joint ventures, mortgages, and investments in equity and debt instruments.
Our alternative investment strategies generally employ low or moderate levels of leverage and may use hedging to reduce
foreign exchange or interest rate volatility. At this time, our alternative investment strategies do not include hedge funds. We
typically cannot redeem our investments with the general partners of these investments; however, occasionally these
partnerships can be traded on the secondary market. Once liquidation is triggered by clauses within the limited partnership
agreements or at the funds’ stated end date, we will receive our final allocation of capital and any earned appreciation of the
underlying investments, assuming we have not divested ourselves of our partnership interests prior to that time. We currently
receive distributions from these alternative investments through the realization of the underlying investments or income
generated in the limited partnerships.
The following tables 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 (loss)
Realized gains
Net change in unrealized appreciation (depreciation)
Net income
Insurance Subsidiaries' alternative investments income (loss)
2018
2017
$
28,292
30,377
4,532
25,845
2018
2017
2016
$
$
134
1,981
1,303
3,418
17.6
(143)
325
2,894
3,076
12.7
21,046
22,357
4,767
17,590
(44)
1,374
(719)
611
3.1
(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, 2018 or December 31, 2017.
(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, 2018 to comply with insurance laws. We retain all
rights regarding all securities pledged as collateral.
The following table summarizes the market value of these securities at December 31, 2018:
($ in millions)
U.S. government and government agencies
Obligations of states and political subdivisions
Corporate securities
CMBS
RMBS
Total pledged as collateral
$
$
FHLBI
Collateral
FHLBNY
Collateral
State and
Regulatory
Deposits
Total
—
—
—
18.1
45.5
63.6
22.5
3.9
0.3
—
—
26.7
22.5
3.9
0.3
25.3
103.5
155.5
—
—
—
7.2
58.0
65.2
98
(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
2018
2017
2016
$
$
178,104
7,764
3,472
17,799
(11,803)
195,336
153,230
6,442
1,526
12,871
(12,187)
161,882
129,306
7,368
686
2,940
(9,546)
130,754
(j) The following tables summarize OTTI by asset type for the periods indicated:
2018
($ in thousands)
AFS fixed income securities:
Corporate securities
RMBS
Total AFS fixed income securities
Other investments
Total OTTI losses
2017
($ in thousands)
AFS fixed income securities:
U.S. government and government agencies
Obligations of states and political subdivisons
Corporate securities
CLO and other ABS
CMBS
RMBS
Total AFS fixed income securities
AFS equity securities:
Common stock
Total AFS equity securities
Other investments
Total OTTI losses
2016
($ in thousands)
AFS fixed income securities:
Obligations of states and political subdivisons
CLO and other ABS
Corporate securities
CMBS
RMBS
Total AFS fixed income securities
AFS equity securities:
Common stock
Preferred stock
Total AFS equity securities
Total OTTI losses
Gross
Included in OCI
Recognized in
Earnings
1,783
2,903
4,686
1,893
6,579
—
—
—
—
—
1,783
2,903
4,686
1,893
6,579
Gross
Included in OCI
Recognized in
Earnings
36
612
587
96
670
1,183
3,184
1,435
1,435
190
4,809
—
—
—
—
—
(36)
(36)
—
—
—
(36)
36
612
587
96
670
1,219
3,220
1,435
1,435
190
4,845
Gross
Included in OCI
Recognized in
Earnings
2,797
19
1,880
220
275
5,191
3,316
2
3,318
8,509
—
—
—
—
10
10
—
—
—
10
2,797
19
1,880
220
265
5,181
3,316
2
3,318
8,499
$
$
$
$
$
$
99
(k) Net realized and unrealized gains and losses included the following:
($ in thousands)
Net realized (losses) gains on the disposals of securities:
2018
2017
2016
Fixed income securities
Equity securities
Short-term investments
Other investments
Net realized (losses) gains on the disposal of securities
OTTI charges
Net realized (losses) gains
Unrealized (losses) recognized in income on equity securities1
Total net realized and unrealized investment (losses) gains
$
$
(34,953)
18,695
(3)
(2,714)
(18,975)
(6,579)
(25,554)
(29,369)
(54,923)
6,944
4,629
(4)
(365)
11,204
(4,845)
6,359
—
6,359
(3,668)
7,244
(13)
(1)
3,562
(8,499)
(4,937)
—
(4,937)
1Includes unrealized holding gains (losses) of: (i) $(3.1) million on equity securities remaining in our portfolio as of December 31, 2018; and (ii) $(26.3)
million on equity securities sold in 2018.
The components of net realized (losses) gains on disposals were as follows:
$
($ in thousands)
HTM fixed income securities
Gains
Losses
AFS fixed income securities
Gains
Losses
Equity securities
Gains
Losses
Short-term investments
Gains
Losses
Other investments
Gains
Losses
Total net realized investment (losses) gains
$
2018
2017
2016
2
—
5,460
(40,415)
23,203
(4,508)
7
(10)
—
(2,714)
(18,975)
44
(1)
10,193
(3,292)
5,829
(1,200)
2
(6)
494
(859)
11,204
3
(1)
7,741
(11,411)
8,108
(864)
—
(13)
3
(4)
3,562
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 fixed income securities were $2,030.7 million, $1,197.9 million, and $926.5 million in 2018,
2017, and 2016, respectively. Proceeds from sale of equity securities were $113.3 million, $38.0 million, and $119.6 million in
2018, 2017, and 2016, respectively.
Net realized (losses) gains in the table above were driven by the following:
•
•
•
2018: Higher trading volume driven by opportunistic sales in both our fixed income securities and equity portfolios.
2017: Higher trading volume in our fixed income securities portfolio related to a more active external investment
management approach and opportunistic sales in our equity portfolio.
2016: A repositioning of our equity portfolio, partially offset by net losses in our AFS fixed income portfolio related
to the change in our strategy to more actively manage this portfolio.
100
Note 6. Comprehensive Income
(a) The components of comprehensive income, both gross and net of tax, for 2018, 2017, and 2016 were as follows:
2018
($ in thousands)
Net income
Components of OCI:
Unrealized (losses) gains on investment securities:
Unrealized holding losses during the year
Amounts reclassified into net income:
HTM securities
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
2017
($ in thousands)
Net income
Components of OCI:
Unrealized gains (losses) on investment securities:
Unrealized holding gains during the year
Non-credit portion of OTTI recognized in OCI
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 income
Comprehensive income
2016
($ in thousands)
Net income
Components of OCI:
Unrealized (losses) gains on investment securities:
Unrealized holding losses during the year
Non-credit portion of OTTI recognized in OCI
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
Gross
Tax
Net
$
211,721
32,782
178,939
(123,145)
(25,861)
(97,284)
110
39,641
(83,394)
23
8,325
(17,513)
87
31,316
(65,881)
(11,273)
(2,367)
(8,906)
2,127
(9,146)
(92,540)
119,181
447
(1,920)
(19,433)
13,349
1,680
(7,226)
(73,107)
105,832
Gross
Tax
Net
261,968
93,142
168,826
66,894
36
(179)
104
(6,979)
59,876
(4,684)
2,102
(2,582)
57,294
319,262
23,879
13
(63)
36
(2,442)
21,423
(984)
735
(249)
21,174
114,316
43,015
23
(116)
68
(4,537)
38,453
(3,700)
1,367
(2,333)
36,120
204,946
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
$
$
$
$
$
101
(b) The balances of, and changes in, each component of AOCI (net of taxes) as of December 31, 2018 and 2017 were as
follows:
($ in thousands)
OTTI Related
HTM Related
All Other
Investments
Subtotal
Net Unrealized (Loss) Gain on Investment Securities
Defined Benefit
Pension and
Post-retirement
Plans
Total AOCI
(15,950)
39,338
(3,218)
36,120
20,170
(25,019)
(4,849)
(106,190)
33,083
(73,107)
(77,956)
Balance, December 31, 2016
$
(150)
OCI before reclassifications
Amounts reclassified from AOCI
Net current period OCI
Balance, December 31, 2017
Cumulative effect adjustments1
Balance: December 31, 2017 as adjusted
$
OCI before reclassifications
Amounts reclassified from AOCI
Net current period OCI
23
68
91
(59)
(12)
(71)
—
—
—
102
—
(116)
(116)
(14)
(2)
(16)
—
87
87
42,170
43,015
(4,537)
38,478
80,648
(12,792)
67,856
(97,284)
31,316
(65,968)
42,122
43,038
(4,585)
38,453
80,575
(12,806)
67,769
(97,284)
31,403
(65,881)
(58,072)
(3,700)
1,367
(2,333)
(60,405)
(12,213)
(72,618)
(8,906)
1,680
(7,226)
Balance, December 31, 2018
1 Upon adoption of ASU 2016-01 and ASU 2018-02 in the first quarter of 2018, we recognized a $25.0 million cumulative-effect adjustment to the opening
balance of AOCI, which represents the after-tax net unrealized gain on our equity portfolio as of December 31, 2017 and the one-time reclassification from
AOCI to retained earnings for the stranded tax assets that were created in AOCI from the enactment of Tax Reform. See Note 3. "Adoption of Accounting
Pronouncements" above for additional information.
(79,844)
1,888
1,888
(71)
71
$
The reclassifications out of AOCI are as follows:
($ in thousands)
OTTI related
Non-credit OTTI on disposed securities
$
HTM related
Unrealized losses on HTM disposals
Amortization of net unrealized gains on HTM
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, 2018
Year ended
December 31, 2017
Affected Line Item in the Consolidated
Statements of Income
—
—
—
—
137
(27)
110
(23)
87
39,641
39,641
(8,325)
31,316
450
1,677
2,127
(447)
1,680
104 Net realized and unrealized (losses) gains
104
Income before federal income tax
(36) Total federal income tax expense
68 Net income
32 Net realized and unrealized (losses) gains
(211) Net investment income earned
(179)
Income before federal income tax
63 Total federal income tax expense
(116) Net income
(6,979) Net realized and unrealized (losses) gains
(6,979)
Income before federal income tax
2,442 Total federal income tax expense
(4,537) Net income
450 Loss and loss expense incurred
1,652 Other insurance expenses
2,102
Income before federal income tax
(735) Total federal income tax expense
1,367 Net income
Total reclassifications for the period
$
33,083
(3,218) Net income
102
Note 7. Fair Value Measurements
The following table presents the carrying amounts and estimated fair values of our financial instruments as of December 31,
2018 and 2017:
($ in thousands)
Financial Assets
Fixed income securities:
HTM
AFS
Equity securities
Short-term investments
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, 2018
December 31, 2017
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
$
$
37,110
5,273,100
147,639
323,864
49,907
99,462
185,000
25,000
25,000
60,000
444,369
(4,829)
439,540
38,317
5,273,100
147,639
323,864
57,032
107,075
177,230
24,218
24,162
58,905
448,622
42,129
5,162,522
182,705
165,555
49,904
99,446
185,000
25,000
25,000
60,000
444,350
(5,234)
439,116
44,100
5,162,522
182,705
165,555
61,391
116,597
186,332
24,270
24,210
60,334
473,134
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.
The following tables provide quantitative disclosures of our financial assets that were measured and recorded at fair value at
December 31, 2018 and 2017:
December 31, 2018
($ in thousands)
Description
Measured on a recurring basis:
AFS fixed income securities:
Fair Value Measurements Using
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities
(Level 1)1
Significant Other
Observable Inputs
(Level 2)1
Significant
Unobservable
Inputs
(Level 3)
Assets Measured
at Fair Value
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
Equity securities:
Common stock2
Preferred stock
Total equity securities
Short-term investments
121,310
23,131
1,138,469
1,617,408
717,362
527,078
1,128,342
5,273,100
144,727
2,912
147,639
323,864
Total assets measured at fair value
$
5,744,603
78,381
—
—
—
—
—
—
78,381
107,397
2,912
110,309
321,370
510,060
42,929
23,131
1,138,469
1,617,408
709,953
527,078
1,128,342
5,187,310
—
—
—
2,494
5,189,804
—
—
—
—
7,409
—
—
7,409
—
—
—
—
7,409
103
December 31, 2017
Fair Value Measurements Using
($ in thousands)
Description
Measured on a recurring basis:
AFS fixed income securities:
Assets Measured at
Fair Value
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities
(Level 1)1
Significant Other
Observable Inputs
(Level 2)1
Significant
Unobservable
Inputs
(Level 3)
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
$
49,740
18,555
1,582,970
1,617,468
795,458
383,449
714,882
5,162,522
167,757
14,948
182,705
5,345,227
165,555
5,510,782
24,652
—
—
—
—
—
—
25,088
18,555
1,582,970
1,617,468
795,458
376,895
714,882
24,652
5,131,316
138,640
14,948
153,588
178,240
165,555
343,795
—
—
—
5,131,316
—
5,131,316
—
—
—
—
—
6,554
—
6,554
5,398
—
5,398
11,952
—
11,952
1There were no transfers of securities between Level 1 and Level 2.
2In accordance with ASU 2015-07, investments amounting to $37.3 million and $23.7 million at December 31, 2018 and December 31, 2017, respectively,
were measured at fair value using the net asset value per share (or its practical expedient) and have not been classified in the fair value hierarchy. The fair
value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to total assets measured at fair value.
The following table provides a summary of the changes in the fair value of securities measured using Level 3 inputs and related
quantitative information during 2018:
2018
($ in thousands)
Fair value, December 31, 2017
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, 2018
CMBS
$
6,554
—
—
—
—
—
—
—
(6,554)
—
$
CLO and Other
ABS
Common Stock
Total
—
—
—
7,409
—
—
—
—
—
5,398
11,952
—
—
—
—
—
—
—
—
—
7,409
—
—
—
—
(5,398)
(11,952)
7,409
—
7,409
104
The following tables provide quantitative information regarding our financial assets and liabilities that were not measured, but
were disclosed at fair value at December 31, 2018 and 2017:
December 31, 2018
Fair Value Measurements Using
($ in thousands)
Financial Assets
HTM:
Obligations of states and political subdivisions
Corporate securities
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
Quoted Prices in
Active Markets
for Identical
Assets/Liabilities
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
17,969
20,348
38,317
57,032
107,075
177,230
24,218
24,162
58,905
—
—
—
—
—
177,230
—
—
—
$
448,622
177,230
17,969
20,348
38,317
57,032
107,075
—
24,218
24,162
58,905
271,392
—
—
—
—
—
—
—
—
—
—
December 31, 2017
Fair Value Measurements Using
($ in thousands)
Financial Assets
HTM:
Obligations of states and political subdivisions
Corporate securities
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
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
26,261
17,839
44,100
61,391
116,597
186,332
24,270
24,210
60,334
—
—
—
—
—
186,332
—
—
—
$
473,134
186,332
26,261
12,306
38,567
61,391
116,597
—
24,270
24,210
60,334
286,802
—
5,533
5,533
—
—
—
—
—
—
—
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 reinsurance treaties.
As a Standard Commercial Lines and E&S Lines writer, we are subject to the Terrorism Risk Insurance Program
Reauthorization Act ("TRIPRA"), which was extended by Congress to December 31, 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
105
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 2019, our deductible is approximately $339 million. For losses above the deductible, the federal
government will pay 81% of losses to an industry limit of $100 billion, and the insurer retains 19%. The federal share of losses
will be reduced to 80% in 2020.
The Insurance Subsidiaries remain liable to policyholders to the extent that any reinsurer becomes unable to meet their
contractual obligations. In addition to this direct counterparty credit risk, we have indirect counterparty credit risk as our
reinsurers often enter into their own reinsurance programs, or retrocessions, as part of managing their exposure to large losses.
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 $4.5 million at December 31, 2018 and $4.6
million at December 31, 2017.
The following table represents our total reinsurance balances segregated by reinsurer to illustrate our concentration of risk
throughout our reinsurance portfolio:
($ 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+")
Transatlantic Reinsurance Company (A.M. Best rated “A+”)
Endurance Specialty Ins. LTD. (A.M. Best rated “A+”)
Partner Reinsurance Company of the U.S. (A.M. Best rated “A”)
All other reinsurers
Total reinsurers
Less: collateral2
As of December 31, 2018
As of December 31, 2017
Reinsurance
Balances
% of
Reinsurance
Balance
Reinsurance
Balances
% of
Reinsurance
Balance
$
$
$
549,172
157,723
706,895
170,453
55,167
3,602
229,222
477,673
112,841
101,835
69,102
37,519
17,686
15,163
12,261
111,266
477,673
(112,201)
$
$
$
24%
7
1
32
68
16
14
10
5
3
2
2
16
68%
594,832
153,493
748,325
204,161
62,947
3,634
270,742
477,583
117,460
101,652
62,396
40,772
13,237
18,469
16,925
106,672
477,583
(122,413)
27%
9
—
36
64
16
14
8
5
2
2
2
15
64%
Reinsurers, net of collateral
$
365,472
$
355,170
1Considered to have minimal risk of default.
2Includes letters of credit, trust funds, and funds held against reinsurance recoverables.
Under our reinsurance arrangements, which are prospective in nature, reinsurance premiums ceded are recorded as prepaid
reinsurance and amortized over the remaining contract period in proportion to the reinsurance protection provided, or recorded
periodically, as per the terms of the contract, in a direct relationship to the gross premium recording. Reinsurance recoveries
are recognized as gross losses are incurred.
106
The following table contains a listing of direct, assumed, and ceded reinsurance amounts for premiums written, premiums
earned, and loss and loss expense incurred:
($ in thousands)
Premiums written:
Direct
Assumed
Ceded
Net
Premiums earned:
Direct
Assumed
Ceded
Net
Loss and loss expense incurred:
Direct
Assumed
Ceded
Net
2018
2017
2016
$
$
$
$
$
$
2,890,633
26,250
(402,597)
2,514,286
2,808,764
25,831
(398,366)
2,436,229
1,706,951
21,469
(230,286)
1,498,134
2,733,459
26,685
(389,503)
2,370,641
2,647,488
25,831
(382,292)
2,291,027
1,570,678
17,588
(243,192)
1,345,074
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
The ceded premiums and losses related to our participation in the NFIP, under which 100% of our flood premiums, and loss and
loss expense are ceded to the NFIP, are as follows:
Ceded to NFIP ($ in thousands)
Ceded premiums written
Ceded premiums earned
Ceded loss and loss expense incurred
2018
2017
2016
$
(248,053)
(244,238)
(144,967)
(241,345)
(235,088)
(160,922)
(232,245)
(227,882)
(239,891)
Note 9. Reserve for Loss and Loss Expense
(a) The table below provides a roll forward of reserves for loss and loss expense for beginning and ending reserve balances:
($ in thousands)
2018
2017
2016
Gross reserves for loss and loss expense, at beginning of year
$
3,771,240
Less: reinsurance recoverable on unpaid loss and loss expense, at beginning of year
Net reserves for loss and loss expense, at beginning of year
Incurred loss and loss expense for claims occurring in the:
Current year
Prior years
Total incurred loss and loss expense
Paid loss and loss expense for claims occurring in the:
Current year
Prior years
Total paid loss and loss expense
Net reserves for loss and loss expense, at end of year
Add: Reinsurance recoverable on unpaid loss and loss expense, at end of year
585,855
3,185,385
1,527,997
(29,863)
1,498,134
573,718
753,321
1,327,039
3,356,480
537,388
Gross reserves for loss and loss expense at end of year
$
3,893,868
3,691,719
611,200
3,080,519
1,384,266
(39,192)
1,345,074
497,486
742,722
1,240,208
3,185,385
585,855
3,771,240
3,517,728
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
3,691,719
Our net loss and loss expense reserves increased by $171.1 million in 2018, $104.9 million in 2017, and $113.8 million in 2016.
The loss and loss expense reserves are net of anticipated recoveries for salvage and subrogation claims, which amounted to $67.7
million for 2018, $64.8 million for 2017, and $64.9 million for 2016. The increase in net loss and loss expense reserves in 2018
was primarily driven by increases in: (i) current year loss costs on our commercial automobile line of business; and (ii) exposure
due to premium growth. This increase was partially offset by favorable prior year loss development, largely driven by the
workers compensation and general liability lines of business.
107
In 2018, we experienced overall net favorable prior year loss development of $29.9 million, compared to $39.2 million in 2017
and $65.8 million in 2016. The following table summarizes the prior year development by line of business:
(Favorable)/Unfavorable Prior Year Development
($ in millions)
General Liability
Commercial Automobile
Workers Compensation
Businessowners' Policies
Commercial Property
Homeowners
Personal Automobile
E&S Casualty Lines
E&S Property Lines
Other
Total
2018
2017
2016
$
$
(9.5)
36.7
(83.0)
(1.5)
7.5
9.8
3.0
12.0
(4.8)
(0.1)
(29.9)
(48.3)
35.6
(52.3)
1.9
8.7
0.4
6.7
10.0
0.1
(2.0)
(39.2)
(45.0)
25.3
(56.0)
1.8
0.3
1.7
1.0
6.0
1.2
(2.1)
(65.8)
The Insurance Subsidiaries had $29.9 million of favorable prior accident year development during 2018, which included $41.5
million of net favorable casualty development and $11.6 million of unfavorable property development. The net favorable casualty
reserve development was largely driven by the workers compensation and general liability lines of business. Partially offsetting
this net favorable development was $37.5 million of unfavorable casualty development in the commercial auto line of business.
In addition, our E&S casualty lines experienced unfavorable development of $12.0 million in 2018.
The majority of the 2018 net favorable development was attributable to our workers compensation line of business, which was
impacted by continued favorable medical trends in accident years 2017 and prior. Partially offsetting this was adverse
development in the commercial automobile line of business, driven by increases in severities in accident years 2015 through
2017.
The Insurance Subsidiaries had $39.2 million of favorable prior accident year development during 2017, which included $48.6
million of net favorable casualty development and $9.4 million of unfavorable property development. The net favorable casualty
reserve development was largely driven by the workers compensation and general liability lines of business, including products
liability and excess liability. Partially offsetting this net favorable development was $36.0 million of unfavorable casualty
development in the commercial auto line of business, which was primarily driven by: (i) higher than expected frequencies and
severities in accident years 2015 and 2016, and (ii) higher than expected severities in accident years 2012 through 2014. In
addition, our E&S casualty lines experienced unfavorable development of $10.0 million in 2017.
The majority of the 2017 net favorable development was attributable to accident years 2014 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 2015 and 2016 attributable to our commercial auto and E&S casualty lines of business. The
unfavorable development in our commercial auto line of business was driven primarily by bodily injury liability for accident
years 2012 through 2016, driven by higher than expected frequency and severity.
The Insurance Subsidiaries had $65.8 million of favorable prior accident year development during 2016, 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 workers compensation and general liability lines of business, including products
liability and excess liability. Partially offsetting this net favorable development was $25 million of unfavorable casualty
development in the commercial automobile line of business. In addition, our E&S casualty lines experienced unfavorable
development of $6.0 million in 2016.
The majority of the 2016 net favorable development was attributable to accident years 2013 and prior, driven by the workers
compensation and general liability lines of business. This net favorable development was partially offset by unfavorable
development in accident years 2014 and 2015 attributable to our commercial auto and E&S casualty 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.
(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.
108
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 loss and loss expense reserves expected to be paid in future periods.
The following table details our loss and loss expense reserves for various asbestos and environmental claims:
($ in millions)
Asbestos
Landfill sites
Underground storage tanks
Total
2018
Gross
Net
$
$
7.3
12.2
10.5
30.0
6.1
7.4
9.3
22.8
Reserves for asbestos and environmental claims are highly uncertain. 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. Estimating IBNR is challenging
because of the delayed and inconsistent reporting patterns associated with these claims. Traditional actuarial approaches cannot
be applied because past loss history is not necessarily indicative of future behavior. While certain alternative projection models
can be applied, such models can produce significantly different results with small changes in assumptions. As a result, reserves
for asbestos and environmental require a high degree of judgment. Because of the significant uncertainty in the estimate, we do
not calculate an asbestos and environmental loss range.
Historically, our asbestos and environmental claims have been significantly lower in volume than many other standard
commercial lines carriers since, prior to the introduction of the absolute pollution exclusion endorsement in the mid-1980’s, we
were primarily a Standard Personal Lines carrier and therefore do not have broad exposure to asbestos and environmental claims.
The following table provides a roll forward of gross and net asbestos and environmental incurred loss and loss expense and
related reserves thereon:
($ in thousands)
Asbestos
Reserves for loss and loss expense at beginning of year
Incurred loss and loss expense
Less: loss and loss expense paid
Reserves for loss and loss expense at the end of year
Environmental
Reserves for loss and loss expense at beginning of year
Incurred loss and loss expense
Less: loss and loss expense paid
Reserves for loss and loss expense at the end of year
Total Asbestos and Environmental Claims
Reserves for loss and loss expense at beginning of year
Incurred loss and loss expense
Less: loss and loss expense paid
Reserves for loss and loss expense at the end of year
2018
2017
2016
Gross
Net
Gross
Net
Gross
Net
7,847
—
(270)
7,577
22,115
126
(1,403)
20,838
29,962
126
(1,673)
28,415
6,615
—
(269)
6,346
16,101
—
(1,235)
14,866
22,716
—
(1,504)
21,212
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
6,346
—
(249)
6,097
14,866
2,877
(1,057)
16,686
21,212
2,877
(1,306)
22,783
$
$
$
$
$
$
7,577
—
(249)
7,328
20,838
3,059
(1,205)
22,692
28,415
3,059
(1,454)
30,020
109
(c) The following is information about incurred and paid claims development as of December 31, 2018, 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 expenses. As a result of these initiatives, several historical patterns have changed and may no longer be
appropriate to use as the sole basis for projections.
All Lines
(in thousands, except for claim counts)
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
IBNR
$
920,143
941,972
916,691
883,590
950,114
973,742
977,959
870,057
956,600
869,927
943,118
857,960
922,404
853,401
848,413
915,131
907,074
846,017
904,561
1,042,576 1,061,667 1,062,233 1,056,107 1,033,518 1,023,726 1,019,351
1,013,115
1,065,437 1,071,290 1,020,655
998,028
973,089
973,644
1,044,142 1,062,045 1,047,230 1,021,007 1,002,316
973,411
987,763
34,771
42,224
50,251
66,071
86,250
1,107,513 1,133,798 1,146,990 1,124,014
1,114,081 1,130,513 1,144,830
1,188,608 1,203,634
1,104,218
1,138,313
117,760
175,271
1,227,142
319,825
1,270,110
1,313,372
471,978
1,413,800
677,444
Total
10,921,712
As of
December 31, 2018
Cumulative
Number of
Reported
Claims
85,707
94,400
104,677
103,949
91,084
94,774
93,673
93,724
96,426
96,408
All Lines
(in thousands)
Accident
Year
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
$
277,275
442,417
328,826
540,982
509,910
391,944
634,902
625,229
585,867
378,067
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
695,249
704,895
692,730
555,819
335,956
736,100
773,536
782,655
651,544
518,872
405,898
760,589
803,773
852,202
743,742
644,475
614,075
376,641
775,885
823,770
901,801
810,135
748,758
736,154
581,203
387,272
784,713
835,532
924,111
856,195
833,823
855,959
725,385
617,958
433,440
791,281
846,386
940,626
879,372
872,331
936,425
845,868
764,331
678,453
511,271
All outstanding liabilities before 2009, net of reinsurance
361,631
Liabilities for loss and loss expenses, net of reinsurance
3,216,999
Total
8,066,344
110
General Liability
(in thousands, except for claim counts)
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
As of
December 31, 2018
Cumulative
Number of
Reported
Claims
13,873
12,696
11,614
9,960
10,326
10,513
10,253
10,213
10,032
8,741
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
IBNR
$ 237,913
241,625
233,530
223,146
212,947
211,243
206,387
205,741
201,568
215,208
228,680
242,499
237,154
222,328
211,619
208,968
202,394
227,769
228,720
239,480
230,785
217,256
211,196
212,011
238,979
245,561
215,083
194,144
175,305
175,268
250,609
251,421
239,776
225,709
210,785
244,312
249,946
257,132
239,333
254,720
245,710
246,990
277,214
272,048
293,747
203,176
206,146
211,500
180,659
203,831
234,082
233,249
277,986
293,128
317,934
15,951
18,634
20,973
25,251
35,971
57,041
84,861
142,991
202,925
270,267
Total
2,361,691
General Liability
(in thousands)
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
$
14,346
37,143
15,726
64,970
46,201
13,924
103,213
80,018
42,692
13,030
130,554
113,050
73,643
35,241
12,789
151,920
143,360
102,978
56,580
35,113
14,901
166,767
161,487
135,377
89,008
72,127
46,825
14,665
176,316
172,394
159,768
109,448
104,587
79,972
39,978
15,684
180,621
178,179
170,525
130,866
139,114
121,969
78,668
46,549
17,366
183,263
183,988
181,856
144,451
153,628
154,957
116,804
89,431
49,470
19,531
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
All outstanding liabilities before 2009, net of reinsurance
90,918
Liabilities for loss and loss expenses, net of reinsurance
1,175,230
Total
1,277,379
Workers Compensation
(in thousands, except for claim counts)
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
IBNR
$ 197,504
215,946
213,036
210,109
210,756
216,992
212,536
198,371
214,469
212,815
211,030
214,916
212,448
205,238
218,973
203,864
214,743
208,036
215,114
199,360
210,591
195,197
208,611
208,155
205,708
188,596
208,142
204,423
200,674
187,359
199,794
194,318
187,658
173,160
166,662
199,346
187,065
182,579
172,515
193,729
194,639
183,604
196,774
184,946
195,202
205,125
199,539
194,821
183,314
162,787
164,420
179,642
176,248
184,306
193,894
18,242
22,614
26,226
30,444
30,648
33,422
34,940
56,258
72,213
98,015
Total
1,844,096
111
As of
December 31, 2018
Cumulative
Number of
Reported
Claims
12,218
12,185
11,850
11,613
11,372
10,488
10,544
10,553
10,745
10,553
Workers Compensation
(in thousands)
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
$
37,885
87,299
46,795
117,019
93,281
42,941
133,116
122,442
90,836
40,911
145,417
137,184
118,847
86,909
36,829
154,726
149,086
134,646
108,211
74,568
35,924
160,529
153,795
139,232
122,755
96,376
78,944
33,857
164,336
158,078
149,269
132,052
109,739
100,876
77,320
34,525
167,894
162,796
154,320
139,477
118,669
113,626
98,195
78,531
40,375
171,205
165,526
158,535
143,281
124,130
119,392
112,601
98,037
82,216
41,122
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
All outstanding liabilities before 2009, net of reinsurance
Liabilities for loss and loss expenses, net of reinsurance
245,831
873,882
Total
1,216,045
Commercial Automobile
(in thousands, except for claim counts)
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
As of
December 31, 2018
Cumulative
Number of
Reported
Claims
24,749
25,406
25,398
24,025
25,556
27,528
29,092
30,855
32,122
32,895
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
IBNR
$199,541
191,079
182,724
169,858
166,682
187,562
189,305
187,778
181,923
162,911
179,854
161,251
161,923
161,300
172,969
173,157
173,471
174,006
183,044
182,325
178,421
172,617
174,882
174,514
179,551
191,947
183,527
184,289
184,367
186,128
188,289
205,282
209,197
207,994
210,410
200,534
212,725
216,824
219,925
220,994
240,958
253,074
255,187
274,367
301,274
161,057
173,080
173,507
184,633
207,975
218,172
259,495
285,302
329,389
347,908
Total 2,340,518
574
762
1,633
2,259
3,756
8,718
19,192
46,407
98,125
164,906
Commercial Automobile
(in thousands)
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
$
63,126
94,406
68,098
113,697
99,254
69,849
137,564
128,015
99,196
73,316
149,949
146,913
121,576
105,371
76,469
155,560
163,513
142,507
127,235
109,893
80,810
158,303
167,227
157,291
148,669
140,015
117,169
91,347
159,723
169,100
166,082
168,114
169,850
148,884
132,260
106,022
160,013
169,793
170,000
176,656
189,626
180,701
175,866
155,720
117,287
160,456
171,693
170,913
179,501
200,750
202,821
211,515
200,701
178,823
134,867
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
All outstanding liabilities before 2009, net of reinsurance
Liabilities for loss and loss expenses, net of reinsurance
3,842
532,320
Total
1,812,040
112
Businessowners' Policies
(in thousands, except for claim counts)
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
As of
December 31, 2018
Cumulative
Number of
Reported
Claims
3,474
3,918
4,959
5,542
3,482
4,062
3,952
3,823
3,808
3,823
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
IBNR
$ 48,535
51,762
53,669
46,645
49,285
54,469
43,828
42,408
57,083
54,342
43,553
39,915
51,047
48,029
49,617
44,938
40,899
58,242
46,303
42,618
55,962
44,299
40,581
59,256
44,172
41,005
60,949
52,871
44,273
41,239
58,966
44,077
40,624
62,548
53,768
52,335
43,933
41,197
58,456
43,747
41,369
59,806
57,245
53,792
46,624
44,028
40,920
58,735
43,418
39,709
58,517
55,925
54,993
48,698
55,024
Total
499,967
323
381
1,140
430
1,404
2,959
6,215
9,272
13,087
16,177
Businessowners' Policies
(in thousands)
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
$
18,915
29,612
20,821
32,689
28,131
27,884
36,073
31,027
37,362
22,199
40,052
34,705
41,011
31,833
17,412
42,895
37,819
46,444
35,089
26,592
28,914
43,358
38,900
52,114
37,215
30,845
40,584
24,189
43,448
40,279
55,856
38,766
34,760
44,911
36,014
24,655
43,547
40,395
57,045
40,627
37,993
49,460
42,710
36,848
21,865
43,596
40,439
57,365
41,326
38,464
52,940
46,571
39,973
31,337
29,995
All outstanding liabilities before 2009, net of reinsurance
Liabilities for loss and loss expenses, net of reinsurance
7,783
85,744
Total
422,006
Commercial Property
(in thousands, except for claim counts)
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
IBNR
$ 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
88,101
115,375
90,639
116,658
90,103
80,545
95,178
131,113
117,102
90,005
80,416
95,155
131,049
117,170
90,436
141,192
136,249
136,820
138,751
110,270
109,513
121,927
111,750
126,185
138,773
80,410
95,142
131,009
117,225
90,278
138,155
111,566
125,937
149,106
183,177
2
4
6
21
28
57
77
405
(76)
7,052
Total
1,222,005
113
As of
December 31, 2018
Cumulative
Number of
Reported
Claims
7,009
7,668
9,038
8,515
5,713
6,514
6,401
6,727
6,850
7,695
Commercial Property
(in thousands)
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
$
59,933
78,695
69,543
80,433
91,918
94,538
80,894
94,602
127,580
81,528
80,251
95,111
129,579
108,834
60,244
80,352
95,270
130,681
111,503
87,874
101,131
80,529
95,147
131,060
114,699
90,446
132,909
79,048
80,509
95,156
131,115
116,291
90,350
136,634
106,182
83,966
80,405
95,150
131,089
116,625
90,840
137,883
109,829
118,789
99,047
80,393
95,138
131,100
116,671
90,696
137,418
110,994
122,930
142,338
135,416
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
All outstanding liabilities before 2009, net of reinsurance
Liabilities for loss and loss expenses, net of reinsurance
69
58,980
Total
1,163,094
Personal Automobile
(in thousands, except for claim counts)
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
2009
2010
2011
2012
2013
2014
2015
2016
2017
$ 93,808
103,319
105,033
103,908
104,734
103,866
103,393
103,412
103,348
103,340
110,075
113,232
112,346
109,515
107,490
107,405
107,224
107,054
116,164
113,686
112,993
114,241
113,830
113,988
113,771
114,921
109,832
109,324
110,294
110,300
108,417
109,620
106,225
106,703
107,759
102,250
109,325
106,757
107,452
96,387
99,698
92,727
100,214
98,032
101,880
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
As of
December 31, 2018
Cumulative
Number of
Reported
Claims
IBNR
146
160
194
205
288
774
2,572
6,252
13,162
23,506
17,346
20,822
22,700
22,332
22,373
22,504
20,860
19,803
20,679
21,748
2018
103,303
106,887
113,921
109,795
107,680
106,821
99,570
100,202
105,139
111,594
Total
1,064,912
Personal Automobile
(in thousands)
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
$
51,039
71,911
58,786
86,431
82,490
61,323
96,229
95,300
82,102
63,704
100,566
101,540
93,878
82,729
61,384
102,187
104,061
105,068
94,842
80,861
62,519
102,322
105,849
111,085
102,977
92,637
83,739
58,725
102,437
106,453
112,732
107,890
100,528
92,589
76,470
57,961
103,009
106,733
113,551
109,355
105,131
99,173
87,163
76,823
62,854
103,010
106,722
113,664
109,447
106,679
104,055
92,102
86,752
82,730
69,721
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
All outstanding liabilities before 2009, net of reinsurance
Liabilities for loss and loss expenses, net of reinsurance
6,040
96,070
Total
974,882
114
Homeowners
(in thousands, except for claim counts)
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
IBNR
$ 47,636
44,511
68,373
42,609
67,525
103,804
40,313
63,285
98,211
87,260
61,927
97,761
82,744
82,745
73,670
40,400
62,462
94,167
86,560
72,528
80,111
40,465
62,402
94,543
86,667
71,494
82,461
76,637
40,457
62,339
94,183
86,271
72,145
83,637
76,400
60,105
40,451
62,392
94,378
86,330
71,714
83,844
76,559
60,931
59,167
40,500
62,402
94,587
86,483
72,148
83,539
74,723
62,391
67,978
62,961
Total
707,712
70
83
131
237
331
411
1,172
1,837
1,969
6,660
As of
December 31, 2018
Cumulative
Number of
Reported
Claims
5,634
9,132
15,109
16,939
7,747
8,770
7,744
6,869
7,299
7,062
Homeowners
(in thousands)
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
$
28,299
36,965
43,699
38,078
58,638
71,668
39,342
60,295
89,963
69,056
39,731
61,106
91,718
79,584
50,664
39,819
62,155
92,185
82,720
65,528
61,561
39,907
62,227
93,312
84,250
67,838
76,007
52,589
40,189
62,241
93,720
85,196
69,775
79,751
70,078
42,252
40,269
62,272
94,007
85,562
71,776
81,664
72,202
57,333
45,466
40,403
62,283
94,412
85,642
72,197
82,583
72,927
59,546
63,290
49,430
All outstanding liabilities before 2009, net of reinsurance
Liabilities for loss and loss expenses, net of reinsurance
6,107
31,106
Total
682,713
E&S Casualty Lines
(in thousands, except for claim counts)
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2011
2012
2013
2014
2015
2016
2017
2018
IBNR
$
885
3,294
8,127
1,053
4,106
7,102
42,367
938
3,369
9,853
42,621
55,468
728
4,299
12,207
43,175
60,309
55,316
96
3,055
9,652
46,165
69,112
69,929
76,432
94,451
737
4,932
10,228
45,988
67,647
71,719
82,404
96,416
91,438
739
5,168
12,119
46,444
68,972
71,206
90,488
104,655
95,783
98,324
Total
593,898
—
—
276
6,417
14,175
14,097
24,516
52,151
66,321
82,486
710
3,831
10,273
46,149
67,099
63,505
75,498
115
As of
December 31, 2018
Cumulative
Number of
Reported
Claims
274
813
1,321
2,022
2,266
2,040
2,746
2,732
2,353
1,734
E&S Casualty Lines
(in thousands)
Accident
Year
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
2011
2012
2013
2014
2015
2016
2017
2018
$
—
—
—
198
1,218
806
3,722
431
2,570
3,200
7,914
2,715
605
3,574
6,445
16,430
9,470
2,353
626
4,078
9,954
25,064
21,980
12,234
3,036
709
4,513
9,912
32,343
35,200
25,571
13,057
3,720
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
737
4,610
10,256
36,278
46,108
43,877
29,389
16,195
5,057
Total
All outstanding liabilities before 2009, net of reinsurance
Liabilities for loss and loss expenses, net of reinsurance
739
4,908
9,819
38,298
51,142
53,780
50,712
33,950
14,672
5,509
263,529
98
330,467
In 2011, the Parent purchased Mesa Underwriters Specialty Insurance Company ("MUSIC"), a wholly-owned E&S Lines
subsidiary of Montpelier Re Holdings, Ltd. Under the terms of the purchase agreement, the Parent acquired net loss and loss
reserves amounting to approximately $15 million. All development on this acquired business was fully reinsured as of the
acquisition date.
116
(d) The reconciliation of the net incurred and paid claims development tables to the liability for loss and loss expenses in the
consolidated statement of financial position is as follows:
(in thousands)
Net outstanding liabilities:
Standard Commercial Lines
General liability
Workers compensation
Commercial automobile
Businessowners' policies
Commercial property
Other Standard Commercial Lines
Total Standard Commercial Lines net outstanding liabilities
Standard Personal Lines
Personal automobile
Homeowners
Other Standard Personal Lines
Total Standard Personal Lines net outstanding liabilities
E&S Lines
Casualty lines
Property lines
Total E&S Lines net outstanding liabilities
Total liabilities for unpaid loss and loss expenses, net of reinsurance
Reinsurance recoverable on unpaid claims:
Standard Commercial Lines
General liability
Workers compensation
Commercial automobile
Businessowners' policies
Commercial property
Other Standard Commercial Lines
Total Standard Commercial Lines reinsurance recoverable on unpaid loss
Standard Personal Lines
Personal automobile
Homeowners
Other Standard Personal Lines
Total Standard Personal Lines reinsurance recoverable on unpaid loss
E&S Lines
Casualty lines
Property lines
Total E&S Lines reinsurance recoverable on unpaid loss
Total reinsurance recoverable on unpaid loss
Unallocated loss expenses
December 31, 2018
$
1,175,230
873,882
532,320
85,744
58,980
9,122
2,735,278
96,070
31,106
10,474
137,650
330,467
13,604
344,071
3,216,999
181,102
220,683
15,641
3,473
12,620
2,909
436,428
45,572
1,346
31,777
78,695
21,898
367
22,265
537,388
139,481
Total gross liability for unpaid loss and loss expenses
$
3,893,868
117
(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, 12.2% in the second year, and so forth.
The following is supplementary information about average historical claims duration as of December 31, 2018:
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 - casualty
1
6.5%
21.2
37.9
47.3
70.7
57.1
72.3
5.0
2
12.2
24.3
17.3
19.9
25.2
18.5
20.3
11.4
3
15.3
13.2
14.5
8.3
2.7
10.5
3.1
17.1
4
17.0
8.3
13.1
8.3
1.1
7.2
1.8
5
14.5
5.4
9.5
7.4
0.2
4.3
1.4
21.4
15.4
6
9.8
3.9
4.0
4.3
0.1
1.5
0.4
8.6
7
6.3
2.4
1.6
1.7
—
0.4
0.2
5.4
8
4.8
2.3
0.8
0.5
—
0.1
0.1
9
2.7
1.4
0.7
0.2
—
0.2
0.1
10
1.1
1.1
0.4
1.1
—
—
0.1
Note 10. Indebtedness
The table below provides a summary of our outstanding debt at December 31, 2018 and 2017:
Outstanding Debt1
($ in thousands)
Description
Long-term:
(1) FHLBI
(2) FHLBNY
(2) FHLBNY
(3) Senior Notes
(4) Senior Notes
(5) Senior Notes
Total long-term debt
Issuance
Date
Maturity
Date
Interest
Rate
Original
Amount
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
2018
Debt Discount
and Unamortized
Issuance Costs
Carry Value
December 31, 2018 December 31, 2017
—
—
—
(4,229)
(931)
(300)
(5,460)
60,000
25,000
25,000
180,771
99,069
49,700
439,540
60,000
25,000
25,000
180,430
99,011
49,675
439,116
1
Beginning on January 1, 2019, finance lease obligations will also be included in our outstanding debt balance upon the adoption of the new lease accounting
standard. For further information, refer to Note 3. "Adoption of Accounting Pronouncements, above.
Short-term Debt
SICA borrowed: (i) $75 million in short-term funds from the FHLBNY on February 27, 2018 at an interest rate of 1.75%,
which was repaid on March 20, 2018; and (ii) $55 million in short-term funds from the FHLBNY on March 28, 2018 at an
interest rate of 1.98%, which was repaid on April 18, 2018.
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, 2018 or at any time during 2018.
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.
118
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
1Calculated in accordance with the Line of Credit agreement.
Required as of
December 31, 2018
Not less than $1.3 billion
Not less than $750 million
Not to exceed 35%
Minimum of A-
Actual as of
December 31, 2018
$1.8 billion
$1.8 billion
19.7%
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. Additionally, the Line of Credit limits borrowings from the FHLBI and the FHLBNY to
10% of the respective member company's admitted assets for the previous year.
Long-term Debt
(1) In the first quarter of 2009, Selective Insurance Company of South Carolina ("SICSC") and Selective Insurance Company
of the Southeast ("SICSE"), which are collectively referred to as the "Indiana Subsidiaries" as they are domiciled in Indiana,
joined, and invested in, the FHLBI, which provides them with access to additional liquidity. The Indiana Subsidiaries’
aggregate investment in the FHLBI was $2.8 million at December 31, 2018 and December 31, 2017. Our investment provides
us the ability to borrow approximately 20 times the total amount of the FHLBI common stock purchased with additional
collateral, at comparatively low borrowing rates. The proceeds from the FHLBI borrowing on December 16, 2016 of $60
million were used to repay a $45 million borrowing from the FHLBI that was outstanding at the time, with the remaining $15
million used for general corporate purposes. All borrowings from the FHLBI require security. For information on investments
that are pledged as collateral for these borrowings, see Note 5. "Investments" above.
(2) 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 $2.7
million at December 31, 2018 and $2.6 million at December 31, 2017. Our investment provides us the ability to borrow
approximately 20 times the total amount of the FHLBNY common stock purchased with additional collateral, at comparatively
low borrowing rates. In 2016, SICA borrowed the following amounts from the FHLBNY: (i) $25 million in August 2016 at an
interest rate of 1.56%, which is due on August 16, 2021; and (ii) $25 million from the FHLBNY at an interest rate of 1.61%,
which is due on July 21, 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.
(3) In February 2013, we issued $185 million of 5.875% Senior Notes due 2043. The notes became callable by us on 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 that were outstanding at the time. 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.
(4) In November 2005, we issued $100 million of 6.70% Senior Notes due 2035. These notes were issued at a discount of $0.7
million resulting in an effective yield of 6.754%. Net proceeds of approximately $50 million were used to fund an irrevocable
trust that subsequently funded certain payment obligations in respect of our outstanding debt. The remainder of the proceeds
was used for general corporate purposes. The agreements covering these notes contain a standard default cross-acceleration
provision that provides the 6.70% Senior Notes will enter a state of default upon the failure to pay principal when due or upon
any event or condition that results in an acceleration of principal of any other debt instrument in excess of $10 million that we
have outstanding concurrently with the 6.70% Senior Notes. There are no financial debt covenants to which we are required to
comply in regards to these notes.
(5) In November 2004, we issued $50 million of 7.25% Senior Notes due 2034. These notes were issued at a discount of $0.1
million, resulting in an effective yield of 7.27%. We contributed $25 million of the bond proceeds to the Insurance Subsidiaries
as capital. The remainder of the proceeds was used for general corporate purposes. The agreements covering these notes
contain a standard default cross-acceleration provision that provides the 7.25% Senior Notes will enter a state of default upon
119
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 before and after-
tax underwriting results (net premiums earned, incurred loss and loss expense, policyholders dividends, policy
acquisition costs, and other underwriting expenses), return on equity ("ROE") contribution, and combined ratios.
• Our Investments segment is evaluated based on after-tax net investment income and its ROE contribution, as well
as after-tax net realized and unrealized gains and losses.
In computing the results of each segment, we do not make adjustments for interest expense or corporate expenses. We do not
maintain separate investment portfolios for the segments and therefore, do not allocate assets to the segments.
Our combined insurance operations are subject to certain geographic concentrations, particularly in the Northeast and Mid-
Atlantic regions of the country. In 2018, approximately 19% of NPW were related to insurance policies written in New Jersey.
We had a goodwill balance of $7.8 million at both December 31, 2018 and 2017 on our Consolidated Balance Sheet that relates
to our Standard Commercial Lines reporting unit.
The following summaries present revenues (net investment income and net realized gains on investments in the case of the
Investments segment) and pre-tax income for the individual segments:
Revenue by Segment
($ 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:
Casualty lines
Property lines
Miscellaneous income
Total E&S Lines revenue
Investments:
Net investment income
Net realized and unrealized investment (losses) gains
Total Investments revenues
Total revenues
Years ended December 31,
2018
2017
2016
$
493,093
317,616
616,187
329,660
103,412
33,991
18,263
8,180
442,818
317,982
569,217
311,932
100,266
29,086
17,198
9,488
398,942
308,233
527,859
293,438
97,754
23,227
16,030
7,782
1,920,402
1,797,987
1,673,265
168,250
128,961
7,230
1,257
305,698
164,313
55,253
1
219,567
195,336
(54,923)
140,413
153,147
129,699
6,855
1,228
290,929
157,366
55,461
—
212,827
161,882
6,359
168,241
142,876
130,973
6,758
1,098
281,705
151,638
51,844
1
203,483
130,754
(4,937)
125,817
$
2,586,080
2,469,984
2,284,270
120
Income Before and After Federal Income Tax
($ in thousands)
Standard Commercial Lines:
Underwriting gain, before federal income tax
Underwriting gain, after federal income tax
Combined ratio
ROE contribution
Standard Personal Lines:
Underwriting gain, before federal income tax
Underwriting gain, after federal income tax
Combined ratio
ROE contribution
E&S Lines:
Underwriting loss, before federal income tax
Underwriting loss, after federal income tax
Combined ratio
ROE contribution
Investments:
Net investment income
Net realized and unrealized investment (losses) gains
Total investment income, before federal income tax
Tax on investment income
Total investment income, after federal income tax
ROE contribution of after-tax net investment income
Reconciliation of Segment Results to Income Before Federal Income Tax
($ in thousands)
Underwriting gain (loss)
Standard Commercial Lines
Standard Personal Lines
E&S Lines
Investment income
Total all segments
Interest expense
Corporate expenses
Income, before federal income tax
Years ended December 31,
2018
2017
2016
$
109,104
86,192
149,514
97,184
91.6%
6.1
11,104
7,217
96.2%
0.4
(6,282)
(4,083)
103.0%
(0.3)
161,882
6,359
168,241
45,588
122,653
7.5
146,435
95,183
91.2%
6.4
12,419
8,072
95.6%
0.6
(6,921)
(4,499)
103.4%
(0.3)
130,754
(4,937)
125,817
30,621
95,196
6.5
94.3%
4.9%
12,764
10,084
95.8%
0.6%
(695)
(549)
100.3%
—%
195,336
(54,923)
140,413
19,560
120,853
6.9%
Years ended December 31,
2018
2017
2016
109,104
12,764
(695)
140,413
261,586
(24,419)
(25,446)
211,721
149,514
11,104
(6,282)
168,241
322,577
(24,354)
(36,255)
261,968
146,435
12,419
(6,921)
125,817
277,750
(22,771)
(35,024)
219,955
$
$
$
$
Note 12. Earnings per Share
The following table provides a reconciliation of the numerators and denominators of basic and diluted earnings per share
("EPS"):
2018
($ 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
$
178,939
58,950
$
3.04
—
763
Net income available to common stockholders
$
178,939
59,713
$
3.00
121
2017
($ 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
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
$
168,826
58,458
$
2.89
—
899
$
$
168,826
59,357
$
2.84
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
Note 13. Federal Income Taxes
(a) On December 22, 2017, the Tax Cuts and Jobs Act of 2017 ("Tax Reform") was signed into law, which among other
implications, reduced our statutory corporate tax rate from 35% to 21% beginning with our 2018 tax year. We revalued our
deferred tax inventory at December 31, 2017 to reflect this reduction, which resulted in a $20.2 million charge to income as
illustrated in the rate table below.
As of December 31, 2017, our accounting for the impact of Tax Reform on our deferred tax assets and liabilities was complete
with the exception of amounts related to loss reserve discounting. Prior to Tax Reform, we had elected to use our own loss
reserve payment patterns for determining the factors to be used for calculating our discounted loss reserves for federal income
tax purposes. Under Tax Reform, this election was eliminated and we are now required to utilize discount factors based on
industry experience and a corporate bond yield curve, which the IRS had not finalized as of December 31, 2017. Considering
this, at December 31, 2017, we calculated a pre-tax decrease to our discounted loss reserves of $35 million by utilizing the
industry experience approach under the tax law that existed prior to Tax Reform. This increased the deferred tax asset related
to loss reserves by $7.5 million. A Tax Reform transition rule allows this change in accounting method to be amortized into
expense over an eight-year period beginning in 2018. As a result, we established an offsetting deferred tax liability of $7.5
million as of December 31, 2017.
In the fourth quarter of 2018, the IRS published the loss reserve discount factors to be used for calculating the beginning and
ending 2018 discounted loss reserves under the industry experience approach. Based on these factors, we calculated a pre-tax
decrease to our discounted loss reserves of $125 million, which resulted in a deferred tax asset of $26.3 million, an increase
from the $7.5 million estimate described above. The $26.3 million adjustment is being taken into income over eight years,
beginning with 2018, at approximately $3.3 million per year.
(b) A reconciliation of federal income tax on income at the corporate rate to the effective tax rate is as follows:
($ in thousands)
Tax at statutory rate (21% in 2018 and 35% in 2017 and 2016)
Tax-advantaged interest
Dividends received deduction
Executive compensation
Stock-based compensation
Tax Reform deferred tax write off
Other 1
Federal income tax expense from continuing operations
2018
2017
2016
$
$
44,461
(5,518)
(647)
2,279
(3,093)
—
(4,700)
32,782
91,689
(11,510)
(1,961)
—
(4,281)
20,205
(1,000)
93,142
76,984
(12,126)
(1,114)
121
—
—
(2,405)
61,460
1
2018 includes approximately $3.8 million of capital loss carry back items to prior tax years at the previous 35% statutory tax rate.
122
In addition to the impact of Tax Reform discussed above, our statutory tax rate reconciliation for 2018 and 2017 benefited from
accounting literature implemented in 2017 that requires the tax effects of share-based compensation to be recognized in the
income tax provision. Prior to 2017, these amounts were recorded in additional paid-in capital.
(c) The tax effects of the significant temporary differences that gave rise to deferred tax assets and liabilities were as follows:
($ in thousands)
Deferred tax assets:
Net loss reserve discounting
Net unearned premiums
Employee benefits
Long-term incentive compensation plans
Temporary investment write-downs
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
2018
2017
43,285
53,556
8,862
9,095
1,155
—
5,744
38,771
50,267
8,606
12,221
1,044
54
5,784
121,697
116,747
53,049
502
4,904
9,702
68,157
53,540
47,484
26,183
2,500
8,590
84,757
31,990
$
$
Net deferred income tax assets increased by $21.6 million in 2018, driven by an $18.6 million decrease in gross deferred tax
liabilities as rising interest rates have reduced unrealized gains on our fixed income securities portfolio.
After considering all evidence, both positive and negative, with respect to our federal tax loss carryback availability, expected
levels of pre-tax financial statement income, and federal taxable income, we believe it is more likely than not that the existing
deductible temporary differences will reverse during periods in which we generate net federal taxable income or have adequate
federal carryback availability. As a result, we had no valuation allowance recognized for federal deferred tax assets at
December 31, 2018 or 2017.
We have analyzed our tax positions in all open tax years, which as of December 31, 2018 were 2015 through 2017, and 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. We are
not currently under a federal income tax audit for any tax year.
Note 14. Retirement Plans
(a) Selective Insurance Retirement Savings Plan (“Retirement Savings Plan”)
SICA offers a voluntary defined contribution 401(k) plan that is available to most of our employees and is a tax-qualified
retirement plan subject to ERISA. Expense recorded for this plan was $15.8 million in both 2018 and 2017, and $15.0 million
in 2016.
(b) Deferred Compensation Plan
SICA offers a non-qualified deferred compensation plan, the Selective Insurance Company of America 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 $0.4 million in 2018, $0.2 million in 2017, and $0.3 million in 2016.
123
(c) Retirement Income Plan and Retirement Life Plan
SICA maintains a defined benefit pension plan, the Retirement Income Plan for Selective Insurance Company of America (the
"Pension Plan"). This qualified, noncontributory plan is closed to new entrants and existing participants ceased accruing
benefits after March 31, 2016.
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, 2018 and December 31, 2017 of $9.5 million and $10.1 million, respectively, for
the Excess Plan and $5.8 million and $6.4 million, respectively, for the Retirement Life Plan. Expense recorded for the Excess
Plan was $0.4 million in both 2018 and 2017, and $0.5 million in 2016. Expense recorded for the Retirement Life Plan was
$0.3 million in each of 2018, 2017, and 2016.
The following tables provide details on the Pension Plan for 2018 and 2017:
December 31,
($ in thousands)
Change in Benefit Obligation:
Benefit obligation, beginning of year
Service cost
Interest cost
Actuarial (gains) losses
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
Pension Plan
2018
2017
364,411
—
12,428
(31,738)
(10,422)
334,679
363,673
(21,571)
—
(10,422)
331,680
(2,999)
(2,999)
(2,999)
98,057
98,057
334,679
4.46%
330,588
—
12,490
31,158
(9,825)
364,411
316,515
46,983
10,000
(9,825)
363,673
(738)
(738)
(738)
87,438
87,438
364,411
3.78
$
$
$
$
$
$
$
$
$
$
124
($ in thousands)
Components of Net Periodic Benefit Cost and Other Amounts Recognized in
Other Comprehensive Income:
2018
Pension Plan
2017
2016
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
$
$
$
$
$
—
12,428
(22,767)
1,981
(8,358)
12,600
(1,981)
10,619
2,261
—
12,490
(19,419)
2,001
(4,928)
3,594
(2,001)
1,593
(3,335)
1,647
12,336
(17,309)
6,299
2,973
11,316
(6,299)
5,017
7,990
The estimated net actuarial loss for the Pension Plan that will be amortized from AOCI into net periodic benefit cost during the
2019 fiscal year is $2.6 million.
Weighted-Average Expense Assumptions for the years ended December 31:
Discount rate
3.78%
4.41
2018
Pension Plan
2017
2016
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.
6.24
6.36
—
—
4.69
6.37
—
Our latest measurement date was December 31, 2018, at which time we increased our expected return on plan assets to 6.50%,
reflecting a higher expected allocation to risk-seeking assets in the portfolio.
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. The approach we utilize discounts the individual expected cash flows using the applicable spot rates
derived from the yield curve over the projected cash flow period. The weighted average discount rate used to determine 2019
interest cost is 4.12%.
Pension Plan Assets
Assets of the Pension Plan are invested to adequately support the liability associated with the Pension Plan's defined benefit
obligation. Our return objective is to exceed the returns of the plan's policy benchmark, which is the return the plan would have
earned if the assets were invested according to the target asset class weightings and earned index returns shown below. In
2019, we will continue to phase in adjustments to the asset allocation to steadily close the gap between the duration of the
assets and the duration of the liabilities, provided certain improved funding targets are achieved. Over time, the target and
actual asset allocations may change based on the funded status of the Pension Plan and market return expectations.
125
The Pension Plan’s target ranges, as well as the actual weighted average asset allocation by strategy, at December 31 were as
follows:
Return seeking assets1
Liability hedging assets
Short-term investments3
2018
2017
Target Percentage2
Actual Percentage
Actual Percentage
15%-70%
35%-75%
0%-2%
43%
38%
19%
58%
40%
2%
Total
1Includes limited partnerships.
2Target percent allocations may change over time based on the funded status of the plan and market return expectations.
3
The actual percentage of assets allocated to short-term investments is higher than our target as of December 31, 2018 due to portfolio rebalancing initiatives
that are expected to be completed during 2019. As part of this rebalancing initiative, $49 million, or 15%, of plan assets were redeployed into risk seeking
assets in January 2019. Excluding the impact of this redeployment, our short-term investments represented 5% of plan assets at December 31, 2018.
100%
100%
100%
The use of derivative instruments is permitted under certain circumstances for the Pension Plan portfolio, but may not be used
for unrelated speculative purposes or to create exposures that are not permitted in the Pension Plan's investment guidelines.
Within the liability hedging assets, derivatives may be used to mitigate interest rate risk and reduce the interest duration
mismatch between assets and liabilities of the Pension Plan to help insulate the funded status of the plan. We currently invest in
a U.S. Treasury overlay derivative strategy, within the funds in our liability hedging assets, to manage the interest rate duration
mismatch between the assets and liabilities of the Pension Plan. Considering the impact of this derivative overlay, the liability
hedging assets provide for an approximate 50% hedge against the projected benefit obligation.
The Pension Plan had no investments in the Parent’s common stock as of December 31, 2018 or 2017. For information
regarding investments in funds of our related parties, refer to Note 16. "Related Party Transactions" below.
The techniques used to determine the fair value of the Pension Plan's invested assets that appear on the following page are as
follows:
• The investments in the global equity and liability hedging funds are collective investment funds that utilize a market
approach wherein the published prices in the active market for identical assets are used. These investments are traded
at their net asset value per share. There are no restrictions as to the redemption of these investments nor do we have
any contractual obligations for further investment. These investments are classified as Level 1 in the fair value
hierarchy.
• The investments in private limited partnerships and other private equity securities are valued utilizing net asset value
as a practical expedient for fair value. These investments are not classified in the fair value hierarchy.
•
Short-term investments are 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.
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 Pension Plan invests in hedge funds, as part of its overall private asset strategy, with diversified exposure to a number of
underlying systematic strategies that include arbitrage, macro-oriented, and equity-related strategies. These positions are
expected to improve the risk-adjusted return of the portfolio given their lower volatility profile than public equities, with returns
that are generally uncorrelated to traditional asset classes over a complete market cycle.
126
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, 2018
Fair Value Measurements at 12/31/18 Using
Assets Measured at
Fair Value
At 12/31/18
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
($ in thousands)
Description
Return seeking assets:
Global equity
Private assets1:
Limited partnerships (at net asset value):
Real assets
Private equity
Private credit
Hedge fund
Total limited partnerships
Other private assets
Total private assets
Total return seeking assets
Liability hedging assets:
Fixed income
U.S. Treasury overlay
Total liability hedging assets
Cash and short-term investments:
Short-term investments
Deposit administration contracts
Total cash and short-term investments
$
113,409
113,409
16,818
878
262
7,889
25,847
3,780
29,627
143,036
106,000
18,528
124,528
62,788
1,482
64,270
—
—
—
—
—
—
—
113,409
106,000
18,528
124,528
62,788
—
62,788
—
—
—
—
—
—
—
—
—
—
—
—
—
1,482
1,482
1,482
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total invested assets
$
331,834
300,725
127
December 31, 2017
Fair Value Measurements at 12/31/17 Using
($ in thousands)
Description
Return seeking assets:
Long-duration fixed income:
Global asset allocation fund
Global equity:
Non-U.S. equity
U.S. equity
Total global equity
Private assets (limited partnerships, at net asset value)1:
Real assets
Private equity
Private credit
Hedge fund
Total limited partnerships
Other private assets
Total private assets
Total return seeking assets
Liability hedging assets:
Long-duration fixed income:
Extended duration fixed income
Total liability hedging assets
Cash and short-term investments:
Short-term investments
Deposit administration contracts
Total cash and short-term investments
Assets Measured at
Fair Value
At 12/31/17
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
$
41,309
41,309
67,989
66,353
134,342
16,305
1,096
460
15,192
33,053
980
34,033
209,684
146,837
146,837
4,939
1,615
6,554
67,989
66,353
134,342
—
—
—
—
—
—
—
175,651
146,837
146,837
4,939
—
4,939
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,615
1,615
—
—
—
—
—
—
—
—
—
980
980
980
—
—
—
—
—
Total invested assets
980
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.
327,427
363,075
1,615
$
Contributions
We presently do not anticipate contributing to the Pension Plan in 2019, as we have no minimum required contribution
amounts.
Benefit Payments
($ in thousands)
Benefits Expected to be Paid in Future
Fiscal Years:
2019
2020
2021
2022
2023
2024-2028
128
Pension Plan
$
13,920
13,869
15,026
16,159
17,134
99,197
Note 15. Share-Based Payments
Active Plans
As of December 31, 2018, the following four plans were available for the issuance of share-based payment awards:
• The 2014 Omnibus Stock Plan, As Amended and Restated Effective as of May 2, 2018 (the "Stock Plan");
• The Cash Incentive Plan, As Amended and Restated as of May 1, 2014 (the "Cash Plan");
• The Employee Stock Purchase Plan (2009) ("ESPP"); and
• The Amended and Restated Stock Purchase Plan for Independent Insurance Agencies (2010), Amended and Restated
as of February 1, 2017 (the "Agent Plan").
The following table provides information regarding the approval of these plans:
Plan
Approvals
Stock Plan
Cash Plan
ESPP
Agent Plan
Approved effective as of May 1, 2014 by stockholders on April 23, 2014.
Most recently amended and restated plan was approved effective May 2, 2018 by stockholders on May 2, 2018.
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, 2018 are as follows:
As of December 31, 2018
Authorized
Available for Issuance
Awards Outstanding
Stock Plan
ESPP
Agent Plan
4,750,000
1,500,000
3,000,000
3,461,192
429,181
1,776,359
864,478
—
—
129
Retired Plans
The following plans are closed for the issuance of new awards, although awards outstanding continue in effect according to the
terms of the applicable award agreements:
December 31, 2018
Plan
2005 Omnibus Stock Plan
("2005 Stock Plan")
Types of Share-Based Payments Issued
Reserve Shares
Awards Outstanding1
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.
2,099,403
174,003
Parent's Stock Compensation
Plan for Non-employee Directors
("Directors Stock Compensation
Plan")
1Awards outstanding under the 2005 Stock Plan consisted of 47,268 shares deferred by our non-employee directors and 126,735 stock options.
Directors could elect to receive a portion of their annual compensation in
shares of the Parent's common stock.
65,770
65,770
RSU Transactions
A summary of the RSU transactions under our share-based payment plans is as follows:
Unvested RSU awards at December 31, 2017
Granted in 2018
Vested in 2018
Forfeited in 2018
Unvested RSU awards at December 31, 2018
Number
of Shares
Weighted
Average
Grant Date
Fair Value
865,587
$
303,550
(303,606)
(19,226)
846,305
$
33.66
55.96
26.57
42.62
44.00
As of December 31, 2018, total unrecognized compensation expense related to unvested RSU awards granted under our Stock
Plan was $11.0 million. That expense is expected to be recognized over a weighted-average period of 1.7 years. The total
intrinsic value of RSUs vested was $18.0 million for 2018, $16.0 million for 2017, and $12.6 million for 2016. In connection
with vested RSUs, the total value of the DEUs that vested was $0.8 million in 2018, $0.9 million in 2017, and $0.7 million in
2016.
Option Transactions
A summary of the stock option transactions under our 2005 Stock Plan is as follows:
Outstanding at December 31, 2017
Granted in 2018
Exercised in 2018
Forfeited or expired in 2018
Outstanding at December 31, 2018
Exercisable at December 31, 2018
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life in Years
Aggregate
Intrinsic Value
($ in thousands)
15.38
—
16.62
—
14.37
14.37
0.80
0.80
$
$
5,903
5,903
Number
of Shares
229,864
$
—
(103,129)
—
126,735
126,735
$
$
The total intrinsic value of options exercised was $4.5 million in 2018, $4.0 million in 2017, and $2.3 million in 2016.
CIU Transactions
The liability recorded in connection with our Cash Plan was $21.6 million at December 31, 2018 and $37.0 million at
December 31, 2017. The remaining cost associated with the CIUs is expected to be recognized over a weighted average period
of 0.8 years. The CIU payments made were $20.2 million in 2018, $14.2 million in 2017, and $14.3 million in 2016.
130
ESPP and Agent Plan Transactions
A summary of ESPP and Agent Plan share issuances is as follows:
ESPP Issuances
Agent Plan Issuances
2018
2017
2016
70,448
41,134
75,093
49,794
88,432
69,867
Fair Value Measurements
The grant date fair value of RSUs is based on the market price of our common stock on the grant date, adjusted for the present
value of our expected dividend payments. The expense recognized for share-based awards is based on the number of shares or
units expected to be issued at the end of the performance period and the grant date fair value.
The grant date fair value of each option award is estimated using the Black Scholes option valuation model ("Black Scholes").
The following are the significant assumptions used in applying Black Scholes: (i) the risk-free interest rate, which is the
implied yield currently available on U.S. Treasury zero-coupon issues with an equal remaining term; (ii) the expected term,
which is based on historical experience of similar awards; (iii) the dividend yield, which is determined by dividing the expected
per share dividend during the coming year by the grant date stock price; and (iv) the expected volatility, which is based on the
volatility of the Parent's stock price over a historical period comparable to the expected term. In applying Black Scholes, we
use the weighted average assumptions illustrated in the following table:
Risk-free interest rate
Expected term
Dividend yield
Expected volatility
2018
1.88%
6 months
1.3%
18%
ESPP
2017
1.07
6 months
1.3
24
2016
0.47
6 months
1.7
31
The weighted-average fair value of options and stock per share, including RSUs granted for the Parent's stock plans, during
2018, 2017, and 2016 was as follows:
RSUs
ESPP:
Six month option
Discount of grant date market value
Total ESPP
Agent Plan:
Discount of grant date market value
2018
2017
2016
$
55.96
42.66
32.53
2.67
8.50
11.17
5.99
2.73
7.06
9.79
5.04
2.63
5.23
7.86
3.79
The fair value of the CIU liability is remeasured at each reporting period through the settlement date of the awards, which is
three years from the date of grant based on an amount expected to be paid. A Monte Carlo simulation is performed to
approximate the projected fair value of the CIUs that, in accordance with the CIU agreements established under the Cash Plan,
is adjusted to reflect our performance on specified indicators as compared to targeted peer companies.
Expense Recognition
The following table provides share-based compensation expense in 2018, 2017, and 2016:
($ in millions)
Share-based compensation expense, pre-tax
Income tax benefit, including the benefit related to stock grants that have vested during the year
Share-based compensation expense, after-tax
2018
2017
2016
$
$
19.3
(7.0)
12.3
31.2
(15.0)
16.2
30.3
(10.3)
20.0
131
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, which includes
the right to participate in the Agent Plan. Mr. Rue’s son is President, and an employee, of Rue Insurance, and owns more than
10% of the equity of Rue Insurance. 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 $10.1 million in 2018, $11.1 million in 2017, and $10.4 million in 2016. In return, the
Insurance Subsidiaries paid standard market commissions, including supplemental commissions, to Rue Insurance of $2.1
million in 2018, $2.3 million in 2017, and $2.1 million in 2016. Amounts due to Rue Insurance at December 31, 2018 and
December 31, 2017 were $0.4 million and $0.6 million, respectively. All contracts and transactions with Rue Insurance were
consummated in the ordinary course of business on an arm's-length basis.
In 2005, we established a private foundation, now named The Selective Insurance Group Foundation (the "Foundation"), under
Section 501(c)(3) of the Internal Revenue Code. The Board of Directors of the Foundation is comprised of some of the Parent's
officers. We made $0.5 million of contributions to the Foundation in 2018. We made no contributions to the Foundation in
2017 and 2016, respectively.
BlackRock, Inc., a leading publicly traded investment management firm (“BlackRock”), has purchased our common shares in
the ordinary course of its investment business and has previously filed Schedules 13G/A with the SEC. On January 31, 2019,
BlackRock filed a Schedule 13G/A reporting beneficial ownership as of December 31, 2018, of 14.2% of our common stock.
In connection with purchasing our common shares, BlackRock filed the necessary filings with insurance regulatory authorities.
On the basis of those filings, BlackRock is deemed not to be a controlling person for the purposes of applicable insurance law.
We are required to disclose related party information for our transactions with BlackRock. BlackRock is highly regulated,
serves its clients as a fiduciary, and has a diverse platform of active (alpha) and index (beta) investment strategies across asset
classes that enables it to tailor investment outcomes and asset allocation solutions for clients. BlackRock also offers the
BlackRock Solutions® investment and risk management technology platform, Aladdin®, risk analytics, advisory, and technology
services and solutions to a broad base of institutional and wealth management investors. We incurred expenses related to
BlackRock for services rendered of $2.0 million in both 2018 and 2017, and $0.4 million in 2016. Amounts payable for such
services at December 31, 2018 and December 31, 2017, were $1.0 million and $0.5 million, respectively.
As part of our overall investment diversification, we invest in various BlackRock funds from time to time. The market value of
these investments were $0.8 million at December 31, 2018, and $0.5 million at both December 31, 2017 and December 31,
2016. There were no material transactions related to these holdings in 2018 and 2017. During 2016, we sold $77.6 million of
these investments, which resulted in a $1.1 million gain on our investment portfolio. In addition, we recorded $2.3 million of
investment income on these funds in 2016. There were no amounts payable on the settlement of these investment transactions
at December 31, 2018 or December 31, 2017.
Our Pension Plan contained investments in BlackRock funds of $131.9 million at December 31, 2018 and $134.3 million at
December 31, 2017. We recorded a net investment loss on these funds of $9.3 million in 2018, net investment income of $25.2
million in 2017, and net investment income of $8.5 million in 2016. In addition, our Deferred Compensation Plan and
Retirement Savings Plan may offer our employees the option to invest in various BlackRock funds. All contracts and
transactions with BlackRock were consummated in the ordinary course of business on an arm's-length basis.
The Vanguard Group ("Vanguard"), one of the world's largest investment management companies, offers low cost mutual funds
and exchange-trade funds ("ETFs"), as well as other investment related services. On January 10, 2019, Vanguard filed a
Schedule 13G/A reporting beneficial ownership as of December 31, 2018, of 10.1% of our common stock. In connection with
purchasing our common shares, Vanguard filed the necessary filings with insurance regulatory authorities. On the basis of
those filings, we do not expect Vanguard to be deemed a controlling person for the purposes of applicable insurance law.
We are required to disclose related party information for our transactions with Vanguard. As part of our overall investment
diversification, we may invest in various Vanguard funds from time to time. During 2018, we purchased $11.5 million in a
Vanguard ETF and recorded dividend income of $0.4 million, with no amounts payable on the settlement of this transaction at
December 31, 2018. The market value of this fund in our investment portfolio at December 31, 2018 was $10.5 million. There
were no transactions with Vanguard in 2017 and 2016.
132
Our Pension Plan contained investments in Vanguard funds of $86.3 million at December 31, 2017, but no investment in these
funds existed at December 31, 2018. We recorded a net investment loss on these funds of $5.5 million in 2018, net investment
income of $9.1 million in 2017, and net investment income of $5.4 million in 2016. In addition, our Deferred Compensation
Plan and Retirement Savings Plan may offer our employees the option to invest in various Vanguard funds. All transactions
with Vanguard are consummated in the ordinary course of business on an arm's-length basis.
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, 2018, we had purchased such annuities with a present value of $21.0 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 $10.4
million in 2018, $10.8 million in 2017, and $12.3 million in 2016. We also lease computer hardware and software under capital
lease agreements expiring at various dates through 2022. See item (p) of Note 2. "Summary of Significant Accounting
Policies" in this Form 10-K for information on our accounting policy regarding leases.
In addition, certain of these leases are non-cancelable, and liability for payment will continue even though the leased asset may
no longer be in use. At December 31, 2018, the total future minimum rental commitments under non-cancelable leases were as
follows:
($ in millions)
Capital Leases
Operating Leases
Total
2019
2020
2021
2022
2023
After 2023
Total minimum payment required
$
$
0.7
0.1
—
—
—
—
0.8
7.8
7.4
5.1
3.6
2.9
9.7
36.5
8.5
7.5
5.1
3.6
2.9
9.7
37.3
(c) As of December 31, 2018, we had contractual obligations that expire at various dates through 2036 to invest up to an
additional $202.3 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. In
addition, as of December 31, 2018, we had the following contractual obligations: (i) $17.8 million to further invest in non-
publicly traded common stock within our equity portfolio that expire in 2023; and (ii) $40.4 million to further invest in non-
publicly traded CLOs in our fixed income securities portfolio that expire through 2030. We expect to have the capacity to
repay and/or refinance these obligations as they become due.
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 loss 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.
133
As of December 31, 2018, 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.
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 affect the determination of
statutory surplus, statutory net income, or risk-based capital (“RBC”). As of December 31, 2018, the various state insurance
departments of domicile have adopted the March 2018 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
2018
2017
2018
2017
2018
2017
2016
($ 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
478.6
300.2
119.4
92.2
86.5
19.9
50.3
23.0
44.9
17.8
455.5
276.1
112.9
86.2
78.8
16.1
42.1
21.4
34.5
632.8
349.3
150.7
117.7
114.2
50.0
93.2
91.5
609.7
325.1
144.1
111.8
106.5
46.3
84.9
89.9
119.3
109.0
78.0
47.5
16.5
12.9
12.0
5.6
9.9
9.4
13.3
84.6
43.6
17.9
14.7
13.4
6.3
11.4
10.3
13.4
13.7
49.7
45.6
5.5
5.6
72.2
41.2
17.4
13.4
12.9
5.9
11.5
9.7
12.6
5.5
Total
$ 1,232.8
1,137.3
1,768.4
1,672.9
210.6
221.2
202.3
(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 2018 statutory financial statements. In addition to statutory capital requirements, we are impacted by various
rating agency requirements related to certain rating levels. These required capital levels may be more than statutory
requirements.
(c) Restrictions on Dividends and Transfers of Funds
Our ability to declare and pay dividends on the Parent's common stock is dependent on liquidity at the Parent coupled with the
ability of the Insurance Subsidiaries to declare and pay dividends, if necessary, and/or the availability of other sources of
liquidity to the Parent.
In addition to regulatory restrictions on the availability of dividends that our Insurance Subsidiaries can pay to the Parent, the
maximum amount of dividends the Parent can pay our shareholders is limited by certain New Jersey corporate law provisions
that limit dividends if either: (i) the Parent would be unable to pay its debts as they became due in the usual course of business;
or (ii) the Parent’s total assets would be less than its total liabilities. The Parent’s ability to pay dividends to shareholders also
are impacted by covenants in its Line of Credit agreement that obligate it, among other things, to maintain a minimum
consolidated net worth, statutory surplus, and debt-to-capital ratio.
As of December 31, 2018, the Parent had an aggregate of $146.0 million in investments and cash available to fund future
dividends and interest payments. These amounts are not subject to any regulatory restrictions other than the standard state
insolvency restrictions noted above, whereas our consolidated retained earnings of $1.9 billion is predominately restricted due
134
to the regulation associated with our Insurance Subsidiaries. In 2019, the Insurance Subsidiaries have the ability to provide for
$210.0 million in annual dividends to the Parent; however, as regulated entities, these dividends are subject to certain
restrictions, which are further discussed below. The Parent also has available to it other potential sources of liquidity, such as:
(i) borrowings from our Indiana Subsidiaries; (ii) debt issuances; (iii) common 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 $70.5 million as of December 31, 2018, based on restrictions in these
agreements that limit borrowings to 10% of the admitted assets of the Indiana Subsidiaries. For additional restrictions on the
Parent's debt, see Note 10. "Indebtedness" in this Form 10-K.
Insurance Subsidiaries Dividend Restrictions
As noted above, the restriction on our net assets and retained earnings is predominantly driven by our Insurance Subsidiaries'
ability to pay dividends to the Parent under applicable laws and regulations. Under the insurance laws of the domiciliary states
of the Insurance Subsidiaries, New Jersey, Indiana, and New York, an insurer can potentially make an ordinary dividend
payment if its statutory surplus following such dividend is reasonable in relation to its outstanding liabilities, is adequate to its
financial needs, and the dividend does not exceed the insurer's unassigned surplus. In general, New Jersey defines an ordinary
dividend as a dividend whose fair market value, together with other dividends made within the preceding 12 months, is less
than the greater of 10% of the insurer's statutory surplus as of the preceding December 31, or the insurer's net income
(excluding capital gains) for the 12-month period ending on the preceding December 31. Indiana's ordinary dividend
calculation is consistent with New Jersey's, except that it does not exclude capital gains from net income. In general, New York
defines an ordinary dividend as a dividend whose fair market value, together with other dividends made within the preceding
12 months, is less than the lesser of 10% of the insurer's statutory surplus, or 100% of adjusted net investment income.
New Jersey and Indiana require notice of the declaration of any ordinary dividend distribution. During the notice period, the
relevant state regulatory authority may disallow all or part of the proposed dividend if it determines that the dividend is not
appropriate given the above considerations. New York does not require notice of ordinary dividends. Dividend payments
exceeding ordinary dividends are referred to as extraordinary dividends and require review and approval by the applicable
domiciliary insurance regulatory authority prior to payment.
The table below provides the following information: (i) quantitative data regarding all Insurance Subsidiaries' dividends paid
to the Parent in 2018 for debt service, shareholder dividends, and general operating purposes; and (ii) the maximum ordinary
dividends that can be paid to the Parent by the Insurance Subsidiaries in 2019, based on the 2018 statutory financial statements.
Dividends
($ in millions)
SICA
SWIC
SICSC
SICSE
SICNY
SICNE
SAICNJ
MUSIC
SCIC
SFCIC
Total
State of Domicile
Ordinary Dividends Paid
Maximum Ordinary Dividends
Twelve Months ended December 31, 2018
2019
New Jersey
New Jersey
Indiana
Indiana
New York
New Jersey
New Jersey
New Jersey
New Jersey
New Jersey
$
$
$
43.0
19.0
10.0
7.5
4.5
2.0
2.5
7.1
3.0
1.5
100.1
$
78.0
47.5
16.5
12.9
11.4
5.6
9.9
9.4
13.3
5.5
210.0
135
Note 20. Quarterly Financial Information
(unaudited, $ in thousands, except per share data)
2018
2017
2018
2017
2018
2017
2018
2017
Net premiums earned
$ 591,828
560,854
604,836
568,030
614,277
572,055
625,288
590,088
First Quarter
Second Quarter
Third Quarter
Fourth Quarter1
Net investment income earned
Net realized and unrealized (losses) gains2
Other income
Total revenues
Income before federal income taxes
Net income
Net income per share:
Basic
43,231
(10,549)
2,179
37,419
(1,045)
3,241
45,553
(1,652)
3,179
41,430
1,734
3,291
52,443
(4,787)
2,538
40,446
54,109
6,798
1,994
(37,935)
1,542
42,587
(1,128)
2,190
626,689
600,469
651,916
614,485
664,471
621,293
643,004
633,737
19,931
18,925
67,574
50,440
72,525
58,819
58,929
41,426
67,130
55,435
67,315
46,718
52,135
45,760
68,150
30,242
0.32
0.87
1.00
0.71
0.94
0.80
0.77
0.52
Diluted
0.51
1Results for the fourth quarter of 2017 include the impact of the $20.2 million write off of deferred tax assets required with the implementation of Tax Reform.
See Note 13. "Federal Income Taxes" above for additional information.
0.99
0.32
0.76
0.79
0.70
0.85
0.93
2Effective January 1, 2018, changes in unrealized gains and losses on our equity portfolio are recognized in income through "Net unrealized losses on equity
securities" on our Consolidated Statements of Income, as a result of our adoption of ASU 2016-01. See Note 3. "Adoption of Accounting Pronouncements"
above.
The addition of all quarters may not agree to annual amounts on the Financial Statements due to rounding.
136
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, 2018. 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, 2018, 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 2018 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.
137
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Selective Insurance Group, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Selective Insurance Group, Inc. and subsidiaries’ (the "Company") internal control over financial reporting as
of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
("PCAOB"), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, 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, 2018, and the related notes and financial statement schedules I to V (collectively, the "consolidated
financial statements"), and our report dated February 15, 2019 expressed an unqualified opinion on those consolidated
financial statements.
Basis for Opinion
The Company’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 are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
New York, New York
February 15, 2019
/s/ KPMG LLP
138
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 2018 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, 2018, 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 "Information
About Proposal 1 - 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.
139
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, 2018 and 2017
Consolidated Statements of Income for the Years Ended December 31, 2018, 2017, and 2016
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017, and 2016
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2018, 2017, and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017, and 2016
Notes to Consolidated Financial Statements, December 31, 2018, 2017, and 2016
(2) Financial Statement Schedules:
Form 10-K
Page
77
78
79
80
81
82
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, 2018
Schedule II
Condensed Financial Information of Registrant at December 31, 2018 and 2017 and for the Years Ended
December 31, 2018, 2017, and 2016
Schedule III
Supplementary Insurance Information for the Years Ended December 31, 2018, 2017, and 2016
Schedule IV
Reinsurance for the Years Ended December 31, 2018, 2017, and 2016
Schedule V
Allowance for Uncollectible Premiums and Other Receivables for the Years Ended December 31, 2018, 2017,
and 2016
Form 10-K
Page
141
142
145
147
147
(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.
140
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2018
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
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
Total fixed income securities, available-for-sale
Equity securities:
Common stock:
Public utilities
Banks, trusts and insurance companies
Industrial, miscellaneous and all other
Nonredeemable preferred stock
Total equity securities
Short-term investments
Other investments
Total investments
17,431
4,707
14,883
37,021
120,092
23,202
1,121,615
28,464
1,611,388
720,193
527,409
1,118,435
5,270,798
2,416
7,448
125,361
2,889
138,114
323,864
178,938
17,969
5,264
15,084
38,317
121,310
23,131
1,138,469
28,393
1,589,015
717,362
527,078
1,128,342
5,273,100
2,732
8,331
133,664
2,912
147,639
323,864
$
5,948,735
17,470
4,818
14,822
37,110
121,310
23,131
1,138,469
28,393
1,589,015
717,362
527,078
1,128,342
5,273,100
2,732
8,331
133,664
2,912
147,639
323,864
178,938
5,960,651
See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
141
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: $111,208 – 2018; $89,799 – 2017)
$
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: 102,848,394 – 2018; 102,284,564 – 2017
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income
Treasury stock – at cost (shares: 43,899,840 – 2018; 43,789,442 – 2017)
Total stockholders’ equity
Total liabilities and stockholders’ equity
SCHEDULE II
December 31,
2018
2017
110,098
35,358
505
89,872
24,080
534
2,057,218
2,013,304
14,161
10,346
1,186
22,266
13,239
871
2,228,872
2,164,166
329,540
77,517
21,574
8,439
437,070
329,116
78,443
37,017
6,633
451,209
—
—
$
$
$
$
205,697
390,315
1,858,414
(77,956)
(584,668)
1,791,802
$
2,228,872
204,569
367,717
1,698,613
20,170
(578,112)
1,712,957
2,164,166
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 Income
SCHEDULE II (continued)
Year ended December 31,
2018
2017
2016
$
100,060
3,425
(1,567)
101,918
24,652
25,446
50,098
80,096
2,044
(15)
82,125
24,721
36,251
60,972
61,014
1,259
(220)
62,053
24,030
35,020
59,050
($ in thousands)
Revenues:
Dividends from subsidiaries
Net investment income earned
Net realized losses
Total revenues
Expenses:
Interest expense
Other expenses
Total expenses
Income before federal income tax
51,820
21,153
3,003
Federal income tax (benefit) expense:
Current
Deferred
Total federal income tax benefit
(14,173)
3,141
(11,032)
(22,187)
6,311
(15,876)
(17,924)
(2,143)
(20,067)
Net income before equity in undistributed income of subsidiaries
62,852
37,029
23,070
Equity in undistributed income of subsidiaries, net of tax
116,087
131,797
135,425
Net income
$
178,939
168,826
158,495
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.
(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
Amortization – other
Changes in assets and liabilities:
(Decrease) increase in accrued long-term stock compensation
Decrease (increase) in net federal income taxes
Increase in other assets
Increase 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 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,
2018
2017
2016
$
178,939
168,826
158,495
(116,087)
14,507
1,567
567
(15,443)
11,246
(343)
1,712
76,665
(75,046)
6,849
45,099
(207,115)
195,846
(34,367)
(42,097)
(6,556)
7,252
—
(926)
(131,797)
12,089
15
678
4,988
3,811
(60)
714
59,264
(58,832)
10,465
31,819
(185,590)
179,292
(22,846)
(37,045)
(6,015)
7,599
—
(881)
(42,327)
(36,342)
(29)
534
505
$
76
458
534
(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
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.
144
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 2018
SCHEDULE III
Deferred
policy
acquisition
costs
Reserve
for loss
and loss
expense
Unearned
premiums
Net
premiums
earned
Net
investment
income1
Loss
and loss
expense
incurred
Amortization
of deferred
policy
acquisition
costs
Other
operating
expenses2
Net
premiums
written
$
206,391
3,283,531
1,020,054
1,912,222
— 1,141,038
412,420
249,660
1,975,683
18,070
28,151
223,223
387,114
304,085
107,793
304,441
219,566
—
—
206,752
150,344
33,617
49,005
51,308
20,912
309,277
229,326
($ in thousands)
Standard Commercial
Lines Segment
Standard Personal
Lines Segment
E&S Lines Segment
Investments Segment
—
—
—
—
140,413
—
—
—
—
Total
$
252,612
3,893,868
1,431,932
2,436,229
140,413
1,498,134
495,042
321,880
2,514,286
1Includes “Net investment income earned” and “Total net realized and unrealized (losses) gains” on the Consolidated Statements of Income.
2“Other operating expenses” of $321,880 reconciles to the Consolidated Statements of Income as follows:
Other insurance expenses
Other income
Total
$
$
331,318
(9,438)
321,880
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, 2017
Deferred
policy
acquisition
costs
Reserve
for loss
and loss
expense
Unearned
premiums
Net
premiums
earned
Net
investment
income1
Loss
and loss
expense
incurred
Amortization
of deferred
policy
acquisition
costs
Other
operating
expenses2
Net
premiums
written
$ 193,408
3,165,217
956,173
1,788,499
— 1,008,150
387,552
243,283
1,858,735
16,952
24,695
—
263,166
342,857
—
295,435
98,036
—
289,701
212,827
—
—
—
168,241
189,294
147,630
—
32,542
49,142
—
56,761
22,337
—
296,775
215,131
—
($ in thousands)
Standard Commercial
Lines Segment
Standard Personal
Lines Segment
E&S Lines Segment
Investments Segment
Total
$ 235,055
3,771,240
1,349,644
2,291,027
168,241
1,345,074
469,236
322,381
2,370,641
1Includes “Net investment income earned” and “Total net realized and unrealized (losses) gains” on the Consolidated Statements of Income.
2“Other operating expenses” of $322,381 reconciles to the Consolidated Statements of Income as follows:
Other insurance expenses
Other income
Total
$
$
333,097
(10,716)
322,381
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
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 2016
SCHEDULE III (continued)
Deferred
policy
acquisition
costs
Reserve
for loss
and loss
expense
Unearned
premiums
Net
premiums
earned
Net
investment
income1
Loss
and loss
expense
incurred
Amortization
of deferred
policy
acquisition
costs
Other
operating
expenses2
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
—
125,817
—
—
—
913,506
367,813
237,729
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
Total
$ 222,564
3,691,719
1,262,819
2,149,572
125,817
1,234,797
450,328
312,514
2,237,288
1Includes “Net investment income earned” and “Total net realized and unrealized (losses) gains” on the Consolidated Statements of Income.
2“Other operating expenses” of $312,514 reconciles to the Consolidated Statements of Income as follows:
Other insurance expenses
Other income
Total
$
$
321,395
(8,881)
312,514
See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
146
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
REINSURANCE
Years ended December 31, 2018, 2017, and 2016
SCHEDULE IV
($ thousands)
2018
Premiums earned:
Accident and health insurance
Property and liability insurance
Total premiums earned
2017
Premiums earned:
Accident and health insurance
Property and liability insurance
Total premiums earned
2016
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
$
$
$
19
2,808,745
2,808,764
24
2,647,464
2,647,488
32
2,484,683
2,484,715
—
25,831
25,831
—
25,831
25,831
—
28,214
28,214
19
398,347
398,366
—
2,436,229
2,436,229
24
382,268
382,292
—
2,291,027
2,291,027
—
363,357
363,357
32
2,149,540
2,149,572
—
1%
1%
—
1 %
1 %
—
1 %
1 %
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, 2018, 2017, and 2016
SCHEDULE V
($ in thousands)
Balance, January 1
Additions
Deductions
Balance, December 31
2018
2017
2016
$
$
14,600
4,022
(4,722)
13,900
11,480
6,414
(3,294)
14,600
10,122
4,669
(3,311)
11,480
See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
147
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 filed
November 26, 2002 File 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).
148
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. 001-33067).
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. 001-33067).
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. 001-33067).
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. 001-33067).
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. 001-33067).
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. 001-33067).
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. 001-33067).
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. 001-33067).
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. 2014 Omnibus Stock Plan as Amended and Restated Effective as of May 2,
2018 (incorporated by reference herein to Appendix A of the Company’s Definitive Proxy Statement filed
March 26, 2018 for its 2018 Annual Meeting of Stockholders, 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 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).
Selective Insurance Group, Inc. Non-Employee Directors’ Compensation and Deferral Plan, As Amended and
Restated Effective as of January 1, 2017 (incorporated by reference herein to Exhibit 10.18 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2016, File No. 001-33067).
149
Exhibit
Number
10.16+
10.17+
10.18+
10.19+
10.20+
10.21+
10.22+
10.23+
10.24+
10.25+
10.26+
10.27+
10.28+
10.29+
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) (P).
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).
Amended and Restated Selective Insurance Group, Inc. Stock Purchase Plan for Independent Insurance
Agencies (2010), Amended and Restated as of February 1, 2017 (incorporated by reference herein to Exhibit
10.26 to the Company's Annual Report on Form 10-K for the year ended December 31, 2016, File No.
001-33067).
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).
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).
150
Exhibit
Number
10.30+
10.31+
10.32
10.33
10.34+
10.35+
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 (incorporated by reference
herein to Exhibit 10.35 of the Company's Annual Report on Form 10-K for the year ended December 31, 2015,
File No. 001-33067).
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).
151
Exhibit
Number
*21
*23.1
*24.1
*24.2
*24.3
*24.4
*24.5
*24.6
*24.7
*24.8
*24.9
*24.10
*24.11
*24.12
*24.13
*31.1
*31.2
**32.1
Subsidiaries of Selective Insurance Group, Inc.
Consent of KPMG LLP.
Power of Attorney of Paul D. Bauer.
Power of Attorney of John C. Burville.
Power of Attorney of Terrence W. Cavanaugh.
Power of Attorney of Robert Kelly Doherty.
Power of Attorney of Thomas A. McCarthy.
Power of Attorney of H. Elizabeth Mitchell.
Power of Attorney of Michael J. Morrissey.
Power of Attorney of Cynthia S. Nicholson.
Power of Attorney of Ronald L. O'Kelley.
Power of Attorney of William M. Rue.
Power of Attorney of John S. Scheid.
Power of Attorney of J. Brian Thebault.
Power of Attorney of Philip H. Urban.
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.
(P) Paper filed.
152
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
(principal 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 15, 2019
February 15, 2019
February 15, 2019
153
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.
By: /s/ Gregory E. Murphy
Gregory E. Murphy
Chairman of the Board and Chief Executive Officer
*
Paul D. Bauer
Director
*
John C. Burville
Director
*
Terrence W. Cavanaugh
Director
*
Robert Kelly Doherty
Director
*
Thomas A. McCarthy
Director
*
H. Elizabeth Mitchell
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
154
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
February 15, 2019
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.
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: represents 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.
Diluted Weighted Average Shares Outstanding: represents weighted-
average common shares outstanding adjusted for the impact of any dilutive
common stock equivalents.
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.
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.
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.
Non-GAAP Operating Income: non-GAAP measure that is comparable to net
income with the exclusion of after-tax net realized and unrealized gains and
losses on investments, and the deferred tax write-off that was recognized in
2017 in relation to the tax reform. Non-GAAP operating income is used as an
important financial measure by us, analysts, and investors, because the
realization of investment gains and losses on sales in any given period is largely
discretionary as to timing. Realized and unrealized investment gains and losses,
other-than-temporary impairment charges included in earnings, and the
deferred tax write-off, could distort the analysis of trends.
Non-GAAP Operating Income per Diluted Share: non-GAAP measure that
is comparable to net income per diluted share with the exclusion of after-tax
net realized and unrealized gains and losses on investments and the deferred
tax write-off that was recognized in 2017 in relation to the tax reform.
Non-GAAP Operating Return on Equity: measurement of profitability that
reveals the amount of non-GAAP operating income generated by dividing non-
GAAP 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 all significant 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.
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.
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. 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.
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
DIRECTORS
Paul D. Bauer 1998
Independent Consultant, and retired,
former Executive Vice President and Chief Financial Officer,
Tops Markets, Inc.
Gregory E. Murphy 1997
Chairman and Chief Executive Officer,
Selective Insurance Group, Inc.
John C. Burville, Ph.D, FIA, MAAA 2006
Retired, former Insurance Consultant
to the Bermuda Government
Terrence W. Cavanaugh 2018
Independent Consultant, and retired,
former President and Chief Executive Officer,
Erie Indemnity Company
Robert Kelly Doherty 2015
Managing Partner, Caymen Advisors
and Caymen Partners
Thomas A. McCarthy 2018
Retired, former Executive Vice President and
Chief Financial Officer, CIGNA
H. Elizabeth Mitchell 2018
Retired, former President and Chief Executive Officer
of Renaissance Reinsurance U.S., Inc.
Michael J. Morrissey, CFA 2008
President and Chief Executive Officer,
International Insurance Society, Inc.
Cynthia (Cie) S. Nicholson 2009
Chief Marketing Officer,
Feed Marketplace, Inc. (formerly known as 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 LLP
J. Brian Thebault 1996
Lead Independent Director, Selective Insurance Group, Inc.
Partner, Thebault Associates
Philip H. Urban 2014
Retired, former President and
Chief Executive Officer, Grange Insurance
SELECTIVE 2018 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
George D. Dufala, Jr. 2
Insurance Operations
Gordon J. Gaudet 2
Chief Information Officer
Michael H. Lanza 1,2
General Counsel and
Chief Compliance Officer
Charles A. Musilli, III 2
Chief Human Resources Officer
George A. Neale 2
Chief Claims Officer
Vincent M. Senia 2
Chief Actuary
Mark A. Wilcox 1,2
Chief Financial Officer
1 Selective Insurance Group, Inc.
2 Selective Insurance Company of America
Martin Hollander 1,2
Chief Audit Executive
Jeffrey F. Kamrowski 2
MUSIC
Robert J. McKenna, Jr. 2
Enterprise Architecture and
Information Security
Ryan T. Miller 2
Regional Manager
Southern Region
Yanina Montau-Hupka 1,2
Chief Risk Officer
Rohit Mull 2
Chief Marketing Officer
Maria Orecchio 2
Deputy General Counsel
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
Chief Underwriting Officer,
Commercial Lines
Senior Vice Presidents
Charles C. Adams 2
Regional Manager
Mid-Atlantic Region
Shadi K. 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
Christopher Cunniff 2
Actuarial Reserving
Fadi Elsaid2
IT Infrastructure and Operations
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
INVESTOR
INFORMATION
Annual Meeting
Wednesday, May 1, 2019 - 8:30 a.m. (ET)
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:
EQ Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164
(866) 877.6351
Registrar and Transfer Agent
EQ 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
Senior Vice President
Chief Audit Executive
Internal.Audit@Selective.com
Executive Office
40 Wantage Avenue
Branchville, New Jersey 07890
(973) 948.3000
Shareholder Relations
Selective will provide by mail, free of charge, a copy
of its Annual Report on Form 10-K for the year ended
December 31, 2018 (not including exhibits and documents
incorporated by reference), the Proxy Statement for the
2019 Annual Meeting, and the annual report and proxy
materials for future Annual Meetings (once available) at
your request. Please direct all requests to:
Robyn P. Turner
Vice President
Assistant General Counsel and
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 2018 Annual Report.
Website
Visit us at www.Selective.com
for information about Selective,
including our latest financial news.
40 Wantage Avenue
Branchville, New Jersey 07890