Selective Insurance Group
Annual Report 2019

Plain-text annual report

S E L E C T I V E A N N U A L R E P O R T 2 0 1 9 2019 ANNUAL REPORT Building a Unique Company for Sustained Outperformance 2019 SUSTAINED OUTPERFORMANCE UNIQUE INSURANCE SOLUTIONS Selective continues to raise the bar and excel in a very competitive marketplace In 2019, Selective unveiled a new brand message that celebrates our unique employee-agent- customer paradigm. Throughout our 90+ year history, we have always put the customer first and evolved our products and services to meet their needs. Getting these "just right" for each customer is a promise that we deliver through unmatched collaboration between our employees, independent agency partners, and customers. Our new brand message, Be Uniquely InsuredSM, reflects our tireless work to understand, anticipate, and provide for the unique needs of each customer. The logo features three distinctive dots above the Selective typeface to symbolize the connectivity between employees, agents, and customers, who are the biggest dot at the forefront. This is a stance that ensures we deliver the finest insurance experience the industry has to offer. 7% Net Premiums Written 93.7% Combined Ratio 13% Net Investment Income After-Tax 13.3% Non-GAAP Operating Return on Equity* 8.3% Total Return to Shareholders Selective Insurance Group, Inc. is a New Jersey holding company for ten property and casualty insurance companies. Selective is the 41st† largest property and casualty company in the U.S. and rated 'A' (Excellent) by A.M. Best, which in 2019, upgraded Selective's financial strength outlook to 'positive.' We provide customized risk management solutions and value-added services that address every customer's unique needs. In partnership with our distribution partners, we offer standard and specialty insurance to businesses, public entities, and individuals through the following segments: Standard Commercial Lines 80% of business Standard Personal Lines 11% of business Excess & Surplus (E&S) Lines 9% of business * Non-GAAP (U.S. Generally Accepted Accounting Principles) operating income, non-GAAP operating income per diluted share, and non-GAAP operating return on equity are non-GAAP measures. Refer to the section entitled, “Financial Highlights of Results for Years Ended December 31, 2019, 2018, and 2017” 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, 2019 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 2018 net premiums written. 2019 FINANCIAL HIGHLIGHTS 2019 2018 Better (Worse) % or Point Change ($ 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 gains (losses) after-tax $2,679.4 $2,514.3 93.7% $129.6 6.5% $181.2 $10.5 95.0% $95.7 5.5% $160.5 ($39.6) Total invested assets $6,688.7 $5,960.7 $3.05 2.9% 9.1% $3.33 2.8% 9.2% $2,846.5 $2,586.1 $271.6 13.6% $264.4 13.3% 17.8% $8,797.2 $2,194.9 $4.53 $4.40 $0.83 $36.91 $178.9 10.2% $218.6 12.5% 18.1% $7,952.7 $1,791.8 $3.00 $3.66 $0.74 $30.40 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 2014-2019) $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 7% 1.3 pts 35% 1.0 pt 13% 127% 12% (8) % 0.1 pts (0.1) pts 10% 52% 3.4 pts 21 % 0.8 pts (0.3) pts 11% 22% 51% 20% 12% 21% SIGI S&P 500 S&P Prop/Cas 2014 2015 2016 2017 2018 2019 * Non-GAAP (U.S. Generally Accepted Accounting Principles) operating income, non-GAAP operating income per diluted share, and non-GAAP operating return on equity are non-GAAP measures. Refer to the section entitled, “Financial Highlights of Results for Years Ended December 31, 2019, 2018, and 2017” 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, 2019 for a reconciliation of the non-GAAP measures to the equivalent GAAP measures. SELECTIVE 2019 ANNUAL REPORT 1 2019 ANNUAL REPORT SHAREHOLDER LETTER Selective continues to excel in a very competitive insurance marketplace. Overall net premiums written (NPW) were up 7% in 2019, and our combined ratio was an excellent 93.7%. For the year, our Insurance Operations generated 6.5 points of return on equity (ROE). Investment results were brilliant, with net investment income, after-tax, up 13% to $181.2 million, contributing 9.1 points of ROE. Earnings per share (EPS) increased 51% to $4.53, and the ROE was 13.6%. Overall non-GAAP operating earnings per share were $4.40, up 20%, and the non-GAAP operating ROE was 13.3%. We finished the year on a strong note and should benefit from the effects of a commercial lines renewal pure pricing tailwind in 2020. Fourth-quarter renewal pure pricing reached 3.8%, which is in line with expected loss trend. We are well-positioned for this environment, with an attractive book of business, and the tools, technology, and people to execute on our plans. From a strategic standpoint, we continue to invest to make Selective a truly unique franchise within the insurance industry, one that is well-positioned to continue to generate sustained outperformance. Some of our achievements in 2019 include: • Delivering our sixth consecutive year of double-digit ROEs, which places us among a very elite group of peers that have generated similar results; • Delivering over 10 years of commercial lines renewal pure price increases that have matched or exceeded industry averages, as measured by the Willis Towers Watson Commercial Lines Insurance Pricing Survey (or CLIPS); • Issuing $300 million of 30-year senior notes in our inaugural institutional public debt offering, which significantly increases our financial flexibility and provides access to a pool of attractive long-term capital; • Being recognized for our superior operating and financial performance by rating agency A.M. Best, who changed the outlook on our ‘A’ financial strength ratings from stable to positive in October; • Reporting strong growth in our five newest expansion states, as well as from our approximately 100 newly added distribution partners in 2019; • Introducing our new tag line “Be Uniquely InsuredSM,” which recognizes how Selective and our independent agency partners address every customer’s unique needs with insurance fit just for them; 2 • Continuing to make progress on our omni-channel customer experience (CX) initiative, with ongoing roll-outs of proactive customer communications and value-added services aimed at increasing retention rates and hit ratios; • Receiving recognition as one of America’s Best Mid-Size Employers by Forbes; given the Company Award of Excellence by the Professional Insurance Agents (PIA), and the 2019 Innovation Award from Business Insurance for our Selective® Drive product; and • Building a solar energy facility at the Corporate office, which will generate approximately 4 million kWh of energy annually. John J. Marchioni, President and Chief Executive Officer and Gregory E. Murphy, Executive Chairman. MANAGEMENT TRANSITION It was a milestone year for us because we announced a well-developed management transition plan in October, with the Board of Directors appointing John Marchioni as Chief Executive Officer effective February 1, 2020. Having run our operations as President and Chief Operating Officer since 2013, I cannot think of anyone more capable of assuming the role. After 40 incredibly fulfilling years at Selective, the last 20 as Chief Executive Officer, I will serve as Executive Chairman for one year and continue to help with the leadership transition. I could not be more happy to pass the reins of the company to John, who I am confident will continue to transform Selective into a truly unique company in the marketplace and industry leader. – Greg Murphy Excellent financial results: We set a high bar for ourselves each year by establishing an ROE target that is well above our estimated weighted average cost of capital (WACC). This target forms the baseline for the financial performance component of all our employees’ compensation, ensuring that our interests are well aligned with those of our shareholders. For 2019, Selective’s non-GAAP operating ROE of 13.3% exceeded our 12.0% financial target. The 13.3% operating ROE was reduced by about 60 basis points, due to the significant after-tax net unrealized gains on the fixed income securities portfolio that increased our stockholders’ equity by 10%. These gains reflect the low-interest-rate environment and will reverse as the securities near maturity. Book value per share was up 21% for 2019. For 2020, we established a non-GAAP operating ROE target of 11%, primarily reflecting (i) the lower estimated WACC and (ii) the decline in interest rates that has pressured investment yields and increased GAAP equity. BOOK VALUE PER SHARE AND STOCKHOLDERS’ EQUITY GROWTH $38 $34 $30 $26 $22 $18 $14 $10 $36.91 $2,400 ) s n o i l l i m n i $ ( $2,000 $1,600 $1,200 $800 $400 $0 $17.80 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 GAAP Stockholders’ Equity Book Value Per Share MARKET CAPITALIZATION Solid share price performance: Our strong and consistent financial results have been rewarded by the equity market in recent years, leading to solid share price outperformance over the longer term. While Selective’s 8.2% total return to shareholders for 2019 underperformed the S&P 500 Index and peers, Selective’s shareholders experienced total returns averaging 20.9% annually over the past five years, compared to 13.2% on average for the S&P Property & Casualty insurance index and 11.7% on average for the S&P 500 Index. EXECUTION ON STRATEGIC PRIORITIES Successful execution on our strategic objectives has been key to driving our best-in-class operating and financial performance. Some of the key operational targets that we set for ourselves during 2019 included: (i) generating pricing at or above expected loss trend; (ii) continuing to execute on our strategy of profitable growth in our current markets and through geographic expansion; (iii) leveraging sophisticated tools and technology that enable better underwriting, pricing, and claims decisions; and (iv) delivering a superior omni-channel customer experience and value- added services to increase hit ratios and retention. • A focus on achieving adequate price: We have often said that “arithmetic has no mercy” and that the only way to produce adequate returns over the long-term is through the generation of overall renewal pure price increases at or above expected loss trend. We are very proud of our efforts, achieving overall renewal pure price increases that averaged 3.6% in 2019 and were in line with our expected loss trend. The level of price increases we obtained rose over the course of the past year, and we expect the favorable industry tailwinds to continue in 2020. Having obtained price increases that have consistently matched or exceeded the industry average as measured by CLIPS, we feel very good about the embedded profitability in our book. Looking forward as market pricing has begun to increase, we will continue to manage renewal pricing on a granular basis, targeting accounts that we feel are not priced commensurate with future profitability expectations. Our strong distribution relationships, sophisticated pricing tools, and culture of underwriting discipline enable us to successfully execute our pricing strategy, effectively managing our goals around profitability and retention rates. $3.9B • Leveraging superior distribution relationships to grow $4B $3 $2 $1 $0 $0.9B '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 profitably: Our stated long-term objective of obtaining a 3% Commercial Lines market share is built around appointing partner relationships that control approximately 25% of the premium in the states in which we compete, and seeking an average 12% share of each partner’s business. We have an additional Commercial Lines premium opportunity in excess of $2.7 billion over time if we hit our long-term targets, and we can achieve this without having to stretch our underwriting appetite or shift our risk profile. During 2019, we appointed approximately 100 new distribution partners, including those in our newly-opened geo-expansion states, bringing the total to over 1,350 distribution partners with approximately 2,300 SELECTIVE 2019 ANNUAL REPORT 3 storefronts. Our greenfield geographic expansion strategy has been tracking well and we opened five new markets over the past two years: New Hampshire and a Southwest hub incorporating Arizona, Colorado, Utah, and New Mexico. Current in-force premiums totaled approximately $66 million from these new states. • Deployment of sophisticated tools and technologies to enhance decision management capabilities and operating efficiencies: Examples include the deployment of our underwriting insights tool to new business underwriters, to provide model-driven guidance and real-time insights into how each piece of new business compares with similar accounts already in the portfolio. During 2019, we rolled out our Underwriting Workstation, which incorporates automated data retrieval and pre-fill and improves underwriting efficiency and exposure analysis. Our newly opened Innovation Lab at our Branchville, New Jersey headquarters will enhance our efforts to quickly identify and deploy improvements to our products, agency and customer experience, and operational efficiency. Continuing to invest in the build-out of these tools is core to our strategy and has been a key factor in driving our outperformance. • Making our communities safer and establishing Selective as a leader in customer experience: One of our major strategic initiatives has been to deliver a superior omni-channel customer experience that helps create a differentiated value proposition for our distribution partners and customers. Our self-service and digital-service offerings allow our customers to engage with us in a 24/7 environment. We now have a 360-degree view of our customers that allows us to build out a more proactive communication program, including customer-specific product and vehicle recalls, safety alerts, and other targeted notifications, as we seek to create more value for them. Our safety management team focuses on keeping customers safe by offering new products and value-added services. For example, our telematics-driven product, Selective® Drive, helps customers understand driving behaviors, fleet locations, and vehicle maintenance for commercial vehicles, while our recently introduced Security Mentor training helps customers understand cyber exposures and phishing scams. Strong customer adoption of these offerings validates the investments and allows us to continue differentiating Selective in a crowded marketplace. We spend about $2 million each year on safety management initiatives. Empowering positive change for society: We cannot be more proud of the many ways Selective positively contributes to society at large. Protecting our customers and helping them improve the safety of their businesses has defined us since our inception over 90 years ago. Helping our employees reach their full potential, supporting the communities in which we live and work, and leaving the environment better than we found it for future generations defines us as a corporate citizen. Part of our core initiatives at Selective is building a more sustainable environment for future generations. Our new solar facility will 4 annually generate approximately 4 million kWh of energy, which is the equivalent of powering up to 800 houses for a year. We invite you to read our Environmental, Social and Governance report on Selective.com, that outlines our efforts to create an ecosystem where people feel empowered to bring about positive change. GAAP COMBINED RATIOS 110% 105% 100% 95% 90% 101.2% 99.8% Reported Combined Ratio Underlying Combined Ratio* 93.7% 92.9% '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 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 2019 FINANCIAL RESULTS We generated record net income of $271.6 million and record non-GAAP operating income of $264.4 million. NPW were up 7% to $2.7 billion. While catastrophe losses for the industry were moderate relative to the prior two years, it was still an active year with earthquakes, hurricanes, wildfires, and severe convective storms. The industry exposure to significant catastrophe losses is pronounced, and the manner in which loss mitigation is implemented is critical to reducing the magnitude of these types of events. Our 93.7% combined ratio included 3.1 points of catastrophe losses, which was below our annual expectation of 3.5 points. Solid investment performance also was a major contributor to the year’s excellent financial performance, although a prolonged low interest rate environment will certainly put pressure on investment income going forward. Going into 2020, our balance sheet remains extremely strong with a record $2.2 billion of stockholders’ equity and a conservative 20.1% debt-to-capitalization ratio, which is comfortably below the upper end of our target range. We increased our quarterly shareholder dividend by 15% in 2019. • Standard Commercial Lines: Standard commercial lines business, which accounts for 80% of total NPW, had another excellent year, with NPW up 8% and an extremely strong 92.9% combined ratio. Results were driven by strong performance in larger lines such as general liability and workers compensation, although commercial auto results remain below our target levels and are being addressed. • Standard Personal Lines: Personal lines accounts for 11% of total NPW and had a profitable year, generating a 97.3% combined ratio. NPW was down 2% to $304.6 million, mainly due to the highly competitive personal auto marketplace, as new business was down 21% to $40.7 million. During 2019, we implemented average renewal pure price increases of 6.8% for personal auto. These price increases should benefit profitability when earned, but will likely continue to put pressure on new business. Our homeowners book was profitable for the year. The flood business, written on behalf of the government- backed National Flood Insurance Program, generated attractive fee income that helped the segment’s results. • Excess & Surplus Lines: The E&S segment, which accounts for 9% of total NPW, generated 4% NPW growth and a 95.9% combined ratio for the year. We are happy with the progress we have made to improve the profitability of this business through substantial targeted pricing actions, business mix shifts, enhanced underwriting standards, and improved claims practices. We will continue to operate this business opportunistically, focusing on achieving adequate margins while allowing the top line to vary depending on market conditions. CONCLUSION We would like to offer our sincere gratitude to Ronald L. O’Kelley for his 15 years of service as a Board member. Ron will be retiring from the Board at the 2020 Annual Meeting of Stockholders. He served as Chairman of the Audit Committee and designated Audit Committee financial expert for several years. During his tenure on the Board, Ron was a member of each standing Board Committee. Ron’s leadership, advice, financial knowledge, and forethought will be missed. Selective’s financial and operating achievements in recent years could not have been possible without the dedication and contributions of our outstanding employees. The high bar that we set for ourselves manifests itself in the excellent service we provide our customers and distribution partners each day, and the consistently strong financial results we continue to generate for our shareholders. Our sustainable competitive advantages of (1) true franchise value with our distribution partners, (2) unique field model enabled by sophisticated tools and technology, and (3) superior customer experience delivered by our best-in-class employees, truly set us apart. Selective is in its strongest financial and strategic position ever, and we expect to continue to execute on achieving our objectives in the coming years. INVESTMENT PORTFOLIO Gregory E. Murphy Executive Chairman John J. Marchioni President and Chief Executive Officer $6.7 billion as of 12/31/2019 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. Fixed Income: 91% (4% High yield) Short-term: 4% Equities: 1% Alternatives & Other: 4% Excellent investment income performance: After- tax net investment income of $181.2 was up 13% for the year. Investment income growth was driven by (i) active portfolio management, (ii) excellent operating cash flow that was 18% of NPW, and (iii) $106 million of net proceeds from our debt offering this year. The overall after-tax yield on the fixed income portfolio, including high-yield, was 2.9% at the end of the year. We continue to take a conservative approach in managing our investments, maintaining an average fixed income credit rating of ‘AA-’ and a relatively short fixed income and short-term investments portfolio duration of 3.6 years. SELECTIVE 2019 ANNUAL REPORT 5 A STRONG TRACK RECORD OF FINANCIAL OUTPERFORMANCE OUR COMPETITIVE ADVANTAGES For the past six consecutive years, Selective has generated double-digit non-GAAP operating ROEs, outperforming the industry average and truly setting us apart. Our success is driven, in large part, by leveraging our sustainable competitive advantages and commitment to providing for customers’ unique needs. OUR GROWING FOOTPRINT Selective delivers customized risk management solutions to address the unique needs of current and future customers in the following states: 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. Our field experts apply a data-driven approach using sophisticated tools to our underwriting and pricing practices to effectively deliver unique products and services to our distribution partners. Superior customer experience delivered by best-in-class employees Selective’s more than 2,300 employees are our most valuable asset and key to our continued success. Through them – and in collaboration with our independent insurance agency partners – we deliver our brand promise to uniquely insure our customers. By creating customized solutions, value-added services, and an exceptional 24/7 omni-channel service experience, we are able meet customers’ unique needs and rising expectations. True franchise value with distribution partners Selective works closely with more than 1,350 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. Standard Commercial (27 states) Standard Personal† (15 states) † Flood Insurance available in all 50 states Excess & Surplus (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 $2.7 billion. 6 A UNIQUE APPROACH TO PROTECTING OUR CUSTOMERS Today’s customers demand their business partners know them, value them, protect them, and make it easy to do business with them* – and these factors exemplify Selective’s unique value proposition. From our customizable risk management solutions and intuitive self-service tools, to our environmentally-friendly digital policy and billing offerings and innovative technologies, Selective is a truly differentiated company in the marketplace, and an industry leader. Our superior customer service • 24/7 personalized customer service accessible via phone, online, mobile app, and live chat Our ease of doing business • Improved navigation to simplify customer-facing technologies, including the Selective mobile app and online account portal • A 360-degree view of our customers to improve the ways we • Technology enhancements on our online new business connect, communicate, and collaborate with them • Expedited claims handling to smoothly resolve life’s unexpected issues Our unique offerings • Superior products used to create customized risk management solutions that meet the needs of businesses, public entities, and individuals • Safety management evaluations and service visits to help identify, prevent, and minimize losses • Proactive communication to customers, based on their self- directed preferences, to help avoid and manage risks Our corporate social responsibility • Helping customers put their lives back together after suffering a loss • Making our communities and customers feel safer • Providing financial security and capital to businesses and individuals • Making a positive difference in our communities through philanthropic donations totaling more than $500,000 annually submission portals make it easier for independent insurance agency partners to write new policies with us • Tailored and targeted marketing to strategically identified prospective customers who value the unique products and services we offer to drive new business to our independent insurance agent partners Our innovation mindset • Implementing initiatives that enhance the end user experience, serve new markets, and introduce new insurance products • Leveraging new and emerging technologies to positively impact insurance transactions and overall business operations • Award-winning† Selective® Drive, a sensor device and app, perpetuates safe driving behaviors and enables commercial fleet managers to monitor their vehicles *Source: KPMG “Me, My Life, My Wallet,” available at http://raconteur-2.instantmagazine.com/kpmg/ mmlmwdigital/contents/ † Selective was honored with a 2019 Innovation Award from Business Insurance for Selective® Drive SELECTIVE 2019 ANNUAL REPORT 7 MANAGEMENT TEAM John J. Marchioni President and Chief Executive Officer Shadi K. Albert Executive Vice President Insurance Strategy and Business Development John P. Bresney Executive Vice President Chief Information Officer Gordon J. Gaudet Executive Vice President Chief Innovation Officer Brenda M. Hall Executive Vice President Commercial Lines Chief Operating Officer Jeffrey F. Kamrowski Executive Vice President MUSIC Paul Kush Executive Vice President Chief Claims Officer Michael H. Lanza Executive Vice President General Counsel and Chief Compliance Officer Charles A. Musilli, III Executive Vice President Chief Human Resources Officer Vincent M. Senia Executive Vice President Chief Actuary Mark A. Wilcox Executive Vice President Chief Financial Officer 2019 FINANCIALS FORM 10-K 2019 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, 2019 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 07890 (Address of Principal Executive Offices) (Zip Code) 973 948-3000 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, par value $2 per share Trading Symbol SIGI Name of each exchange on which registered NASDAQ Global Select Market 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 No file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 Yes required to submit such files). No 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. 1 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 $4,357,013,702 on June 30, 2019. As of February 6, 2020, the registrant had outstanding 59,670,192 shares of common stock. Portions of the registrant’s definitive Proxy Statement for the 2020 Annual Meeting of Stockholders to be held on April 29, 2020 are incorporated by reference into Part III of this report. DOCUMENTS INCORPORATED BY REFERENCE 2 SELECTIVE INSURANCE GROUP, INC. Table of Contents Page No. PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. PART II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Item 15. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-looking Statements Introduction Critical Accounting Policies and Estimates Financial Highlights of Results for Years Ended December 31, 2019, 2018, and 2017 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 Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Consolidated Balance Sheets as of December 31, 2019 and 2018 Consolidated Statements of Income for the Years Ended December 31, 2019, 2018, and 2017 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018, and 2017 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2019, 2018, and 2017 Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018, and 2017 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 17 26 26 26 26 29 30 30 30 31 40 46 57 57 60 60 61 67 69 70 71 72 73 74 128 128 130 130 131 131 131 131 132 PART I Item 1. Business. Overview Selective Insurance Group, Inc. (“Parent”) is a New Jersey holding company incorporated in 1977. Our main office is located in Branchville, New Jersey. 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 2019, we were ranked as the 41st largest property and casualty group in the United States ("U.S."), based on 2018 net premiums written (“NPW”), in A.M. Best Company’s (“A.M. Best”) annual list of “Top 200 U.S. Property/Casualty Writers.” The property and casualty insurance market is highly competitive, with fragmented market share, particularly in standard commercial lines, and operates through three main distribution methods: (i) sales through independent insurance agents; (ii) direct sales to personal and commercial customers; and (iii) sales through captive insurance agents that are contracted to work exclusively with one insurance company. In this highly competitive and regulated industry, we acquire new business exclusively through independent insurance agents and have several strategic advantages as follows: (i) A franchise value distribution model in which we limit our insurance agency appointments to a small population of best-in-class partners in exchange for a commitment to receive a higher share of their premium writings; (ii) A unique field model in which our underwriting, claims, and safety management personnel are located in the geographic territories they serve. This field model is enhanced by sophisticated tools and technologies to inform underwriting, pricing, and claims decisions; and (iii) A commitment to deliver a superior omni-channel customer experience by providing customers with multiple channels from which they can choose to service their accounts. Our independent distribution partners contemplate financial strength ratings when recommending insurance carriers to customers, just as our customers contemplate these ratings in their purchasing decisions. Distribution partners generally recommend higher rated carriers to limit their liability for error and omission claims. Customers often have minimum insurer rating requirements in loans, mortgages, and other agreements securing real and personal property. We are rated by nationally recognized statistical rating organizations ("NRSROs") 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-” 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 2019, A.M. Best reaffirmed our rating of "A (Excellent)," their third highest of 13 financial strength ratings, and upgraded our outlook to "positive" from "stable." The rating reflects A.M. Best's view on our strong balance sheet, sustained profitability, favorable business profile, and appropriate enterprise risk management. In addition, the positive outlook reflects A.M. Best's view of our improved profitability over the past five years on an absolute basis and relative to our peers. We have been rated "A" or higher by A.M. Best for the past 89 years. Our Insurance Subsidiaries’ ratings by NRSRO are as follows: NRSRO A.M. Best Standard & Poor’s Global Ratings (“S&P”) Moody’s Investors Services (“Moody’s”) Fitch Ratings (“Fitch”) Financial Strength Rating A A A2 A+ 4 Outlook Positive Stable Stable Stable These 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+ Positive Stable Stable Stable Our S&P, Moody's, and Fitch financial strength and associated credit ratings affect our ability to access capital markets. 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 property and casualty insurance products and services provided in the standard marketplace to commercial enterprises; typically businesses, non-profit organizations, and local government agencies. This business represented approximately 80% of our total insurance operations’ NPW in 2019, 2018, and 2017, and is primarily sold in 27 states and the District of Columbia. The average premium per policyholder in 2019 is approximately $12,000. Standard Personal Lines, which is comprised of property and casualty insurance products and services provided primarily to individuals acquiring coverage in the standard marketplace. This business represented approximately 11% of our total insurance operations’ NPW in 2019, 2018, and 2017, and is sold in 15 states. The average premium per policyholder in 2019 is approximately $2,000. Standard Personal Lines includes flood insurance coverage sold through the National Flood Insurance Program ("NFIP"). Based on 2018 direct premiums written ("DPW") as reported in the S&P Market Intelligence platform, we are the fifth largest writer of this coverage through the NFIP. We write flood business in all 50 states and the District of Columbia. • E&S Lines, which is comprised of property and casualty insurance products and services provided to customers who are unable to obtain coverage in the standard marketplace. We currently only write commercial lines E&S coverages. This business represented approximately 9% of our total insurance operations’ NPW in 2019, 2018, and 2017, and is sold in all 50 states and the District of Columbia. The average premium per policyholder in 2019 is approximately $3,000. • 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 DPW plus premiums assumed from other insurers. NPW is equal to gross premiums less premiums 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. 5 The total of Amortization of deferred policy acquisition costs and Other insurance expenses, offset by Other income on our Consolidated Statements of Income, represents total underwriting expenses. Other income primarily includes installment fees, which are fees charged to customers paying their premiums on an installment basis. • 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”) and net unrealized gains and losses on public equities. Our income or loss 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 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. The loss and loss expense ratio is typically the largest contributor to our combined ratio and key drivers of this ratio include the amount of catastrophe and non-catastrophe property loss and loss expenses incurred, as well as the impact of prior year casualty reserve development. The impact of these amounts on both the combined ratio and the loss and loss expense ratio is calculated by dividing the related incurred loss and loss expense amounts by net premiums earned during the period. We principally use after-tax net investment income as the key measure in assessing the financial performance of our investments segment. We also assess the performance of our investments segment based on total return, which we calculate by adding after-tax net realized and unrealized gains or losses from our investments segment to after-tax net investment income. 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 return on equity ("ROE") and non-generally accepted accounting principles operating ROE ("non-GAAP operating ROE") as important measures of our overall financial performance. ROE is a measurement of profitability that is calculated by dividing net income by average stockholders' equity during the period. Non-GAAP operating ROE is similar to ROE, except that instead of net income, non-GAAP operating income is used in the calculation. Non-GAAP operating income differs from net income by the exclusion of: (i) after-tax net realized and unrealized gains and losses on investments; and (ii) after-tax debt retirement costs. We evaluate our segments, in part, based on their contribution to this company metric. For 2020, we have established a non-GAAP operating ROE target of 11% based on (i) our current estimated weighted average cost of capital, (ii) the current interest rate environment, and (iii) property and casualty insurance market conditions. For further details regarding our 2019 performance as it relates to return on equity, refer to "Financial Highlights of Results for Years Ended December 31, 2019, 2018, and 2017" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." of this Form 10-K. In addition to measuring and monitoring our results by segment using combined ratio and non-GAAP operating ROE metrics, we also monitor key operating leverage metrics, such as NPW to surplus and invested assets per dollar of stockholders’ equity. Our strategy incorporates maintaining a higher than average operating leverage ratio, defined as the NPW to policyholders' surplus ratio, for our collective insurance segments of between 1.4 - 1.6x, compared to the U.S. standard commercial and personal lines industry average of approximately 0.7x. We offset this risk with specific actions to reduce volatility in our underwriting results by: i. writing more small-to-medium size accounts within our Standard Commercial Lines segment, that have an average premium per policyholder size of approximately $12,000, with about 87% of our casualty lines business within this segment, having limits of $1 million or less. This excludes policies written in our workers compensation line of business, which do not have statutory policy limits; ii. maintaining disciplined planning and reserving practices, including ground-up reserve reviews for principally all lines of business quarterly; and 6 iii. purchasing significant levels of reinsurance protection, including a property catastrophe reinsurance program that limits the net after-tax impact of a 1 in 250 year catastrophe to 5% of our U.S. generally accepted accounting principles ("GAAP") equity and property and casualty excess of loss reinsurance agreements that limit the impact of individual property and casualty claims to $2 million per risk and per occurrence, respectively. For additional information regarding our reinsurance protection, refer to "Reinsurance" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." of this Form 10-K. We also maintain higher than average investment leverage than the industry, measured as our invested assets per dollar of stockholders’ equity of $3.05 compared to the U.S. commercial and personal lines average invested assets to surplus of $2.08. As a result of this higher than average ratio compared to industry peers, we have adopted a conservative investment management philosophy with fixed income securities (excluding our high yield fixed income securities) representing more than 91% of our invested assets. These fixed income securities have a weighted average credit rating of "AA-" and an effective duration, including short-term investments, of 3.6 years. For additional information regarding the design and credit quality characteristics of our investment segment, refer to "Credit Risk" in Item 7A. "Quantitative and Qualitative Disclosures About Market Risk." and Note 5. "Investments" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Insurance Operations Overview We derive all of our insurance operations revenue from selling insurance policies to businesses and individuals in return for insurance premiums. 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 for insured events covered under these policies. Loss and loss expense reserves are one of our critical estimates and represent the ultimate amounts we will need to pay in the future for claims and related expenses for insured losses that have not yet been settled and for unreported insurance claims. 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 the overall adequacy of our reserves through both internal and external actuarial reserve analyses. 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 enter into reinsurance contracts and arrangements with third parties that cover various policies that we issue to our customers. In addition, to protect our Insurance Subsidiaries, we maintain an internal reinsurance pooling agreement in which each company shares in premiums and losses based on certain specified percentages. 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: (i) employee injuries in the course of employment; (ii) bodily injury and/or property damage to a third party as a result of an insured’s negligent acts, omissions, or legal liabilities; and (iii) the obligation to defend our insured(s). Casualty claims may take several years, and for some casualty claims even several decades, to be reported and settled. 7 Our insurance premiums originate primarily from underwriting traditional property and casualty insurance policies. The following table shows the principal types of policies we write: Types of Policies Category of Insurance Standard Commercial Lines X X Standard Personal Lines E&S Lines Casualty Property Property/Casualty Commercial Property (including Inland Marine) Commercial Automobile General Liability (including Excess Liability/ Umbrella) Workers Compensation Businessowners' Policy Bonds (Fidelity and Surety) Homeowners Personal Automobile 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/Casualty Casualty Property/Casualty Property/Casualty Casualty Property X X X X X X X X X X X X Product Development and Pricing Our insurance policies are contracts with our insureds that specify the coverage amounts we will pay on 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. As our policies provide coverage for future events, we do not know the actual policy loss costs at the time we underwrite and issue it. 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 these with detailed analyses of our own historical statistical data, factoring in loss trends and other expected impacts. To develop our total rates, we add our own expense and profit provisions to these expected loss costs. In other cases, we develop rating structures and rates based on a combination of our own experience and aggregated market information. Generally, we prefer to rely on our own experience when 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 about our customers and their loss experience, and additional risk characteristics that drive loss experience. We use the output of these models to group our policies, or potential policies, based on their expected loss potential. In other cases, we use these models to develop factors in our rating plan. The predictive capabilities of these models are limited by the amount and quality of available statistical data, so we may supplement them with other aggregated market 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 41% 25% 17% 16% 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 Lines customers or our E&S Lines customers by SBU. No one customer accounts for 10% or more of our insurance operations in the aggregate. 8 We manage volatility in our underwriting results, in part, by writing a book of business that predominantly includes a smaller limit profile than the industry as a whole. The table below illustrates the percentage of accounts with total insured value and exposure limits at and below $1 million for property and casualty insurance accounts, respectively: Standard Commercial Lines Standard Personal Lines E&S Lines Property Casualty 79% 85% 97% 87%1 98% 98% 1Standard Commercial Lines excludes policies written in our workers compensation line of business, which do not have statutory policy limits. We also purchase significant levels of reinsurance protection, with participating reinsurers that have an average credit rating of "A" or better, that supports accounts that we write with larger exposure limits by limiting the impact of individual property and casualty losses to $2 million per risk and per occurrence, respectively. Geographic Markets We sell our insurance products and services in the following geographic markets: • • Standard Commercial Lines products and services are primarily sold in 27 states located in the Eastern, Midwestern, and Southwestern regions of the U.S. 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 U.S., 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, our six regional branches (referred to as our “Regions”), and our underwriting and claims service center in Richmond, Virginia. The table below lists our Regions and their principal office locations: Region Heartland New Jersey Northeast Mid-Atlantic Southern Southwest Office Location Indianapolis, 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 independent distribution partners: • • Standard Commercial Lines: independent retail agents; Standard Personal Lines: independent retail agents; and • E&S Lines: wholesale general agents. We generally pay our distribution partners commissions calculated as a percentage of DPW, often supplemented by amounts based on profitability or other considerations for business placed with us. We seek to compensate them fairly and consistently with market practices. No one independent distribution partner is responsible for 10% or more of our combined insurance operations' premium. Our top 20 distribution partners generated approximately 34% of our DPW in 2019. 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 U.S. We expect 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: (i) they represent more than one insurance 9 carrier; (ii) agency consolidation has resulted in increased buying power over insurance companies; and (iii) they provide a wider choice of insurance products and risk-based consultation to customers. We currently have approximately 1,350 distribution partners selling our Standard Commercial Lines business, and 770 of these distribution partners also sell our Standard Personal Lines business. These 1,350 distribution partners sell our products and services through approximately 2,300 office locations. We also have 6,000 office locations selling our flood insurance products. In our independently administered 2019 survey, we received an overall satisfaction score of 8.8 out of 10 and a net promoter score of 74 from our standard market distribution partners. The net promoter score represents how likely our agents are to recommend us to a future or current customer. A net promoter score can range from as low as –100 (when every customer is a detractor) to as high as 100 (when every customer is a promoter). We believe these scores highlight the professionalism and effectiveness of our employees, and the satisfaction of our independent distribution partners with our products, services, technologies, and customer experience. Wholesale General Agents Our distribution partners for our E&S Lines are 90 wholesale general agents with a combined 270 office locations. We have granted limited binding authority to these wholesale general agents for business that meets our prescribed underwriting and pricing guidelines. Marketing Our primary marketing strategy is to: • Use an empowered field underwriting model to provide our Standard Commercial Lines retail distribution partners with resources within close geographic proximity to their businesses and our mutual customers. For further discussion on this model, see the “Technology and Field Model” 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 focused on producer recruitment, sales training, enhancing customer experience, online marketing, and distribution operations. • Develop annual goals with each distribution partner, and then carefully monitor these 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 unique value-added products and services that customers seek. These unique products and services, along with our proactive communication and focus on a superior customer experience, help position us as a leader in the marketplace. Technology and Field Model We continue to evolve our technology and field model with an increasing focus on providing our customers with access to transactional capabilities and account information 24 hours a day, 7 days a week. Customers expect this level of access because of the technological and service experiences they have in retail and other consumer sectors. While many insurers offer such solutions in personal lines, we strive to be a digital and customer experience leader 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 provides our customers with on-demand self-service access to account information, and the ability to electronically pay their bills and report claims. We also provide value-added services, such as proactive messaging about vehicle and product recalls, adverse weather activity, and claim status updates. To further advance our initiative to be a leader in digital and customer experience, we recently opened an innovation lab at our corporate headquarters in Branchville, New Jersey, a facility that enables our efforts to identify and deploy improvements to our product, agency and customer experience, and operational efficiency. These efforts position us to offer customers an improved service experience, and better position us to demonstrate our long-term value proposition to our customers and distribution partners. For example, over the past year we introduced Selective® Drive to our customers. Selective® Drive is a 10 commercial vehicle fleet management tool that detects unsafe driving behaviors. In 2019, we were honored with a 2019 Innovation Award from Business Insurance acknowledging our leadership, ingenuity, and inventiveness for this new technology. Technology We leverage the use of technology in our business. We have made significant investments in information technology platforms, integrated systems, and Internet-based applications, and have been using predictive models for underwriting in our Standard Commercial Lines for over 15 years. We make these investments to provide: • Our distribution partners with access to accurate business information and the ability to process certain transactions with ease from their locations, seamlessly integrating those transactions into our systems. During 2019, we were recognized as an "All-Star Carrier" by Insurance Business America (IBA) for superior performance in eight key categories, one of which was technology and automation. We were the sole carrier to receive a five-star rating in every category. • Our customer service representatives with a customer-centric view of our policyholders, as opposed to a traditional policy-centric view, which helps us to better serve our customers when coupled with providing them 24/7 access to transactional capabilities discussed above. • Our underwriters with predictive underwriting and pricing tools to enhance profitability while efficiently growing the business by automating retrieval of relevant public information on existing policyholders and potential customers. • Our claims adjusters with predictive tools to indicate when claims are likely to escalate. 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 54% of our skilled technology capacity and are principally based in the U.S., although we do contract with some offshore service providers. 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 independent distribution partners, we employ a unique field model for both underwriting and claims, with various employees typically working from home offices near our distribution partners and customers. Our field employees build better and stronger relationships with our independent distribution partners because of their close proximity to them, and the resulting direct interaction with our distribution partners and customers. At December 31, 2019, we had approximately 2,400 employees, of which 650 worked in the field, 930 worked in one of our regional offices, and the remainder worked in our corporate office. Underwriting Process Our underwriting process by segment is as follows: • Our Standard Commercial Lines corporate underwriting department, led by a Chief Underwriting Officer ("CUO"), establishes and monitors our underwriting guidelines and philosophy for each industry segment and line of business. The CUO delegates and oversees underwriting authority throughout the organization using formal letter of authority grants based on an individual's job grade and expertise by type of industry and line of business. Our corporate underwriting department also works in coordination with our corporate actuaries to determine adequate pricing levels for all of our Standard Commercial Lines products. 11 Our regional underwriting operations, working under the authority granted by the CUO, handle the majority of individual underwriting and pricing decisions. New business is underwritten by Agency Management Specialists ("AMSs"), Small Business Teams, and Large Account Underwriters. Renewal policies are underwritten in one of our Regions by underwriters, and within our underwriting service center ("USC"), who are assigned a specific group of agents. Our AMSs are also responsible for managing the overall growth and profitability of our business with their assigned group of agents. Our field model provides a wide range of front-line safety management services focused on improving the safety and risk management programs, loss experience, and retention of our Standard Commercial Lines insureds. We have 90 safety management specialists who work in the field supporting our customers, and help us make better underwriting decisions for new and renewal business by understanding our customers' exposures and recommending safety enhancements to reduce the risk from those exposures. Our service mark for these services is “Safety Management: Solutions for a safer workplace”SM. Safety management services we provide include (i) risk evaluation and on-site 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. In addition to providing the above, the safety and well-being of our customers is a top priority, and over the past two years, we have embarked on initiatives to proactively service customers through the dissemination of notifications and alerts, to help them identify and mitigate loss occurrence, and provide them with tools and technologies that can reduce losses and improve their safety. Several examples of these notifications and alerts are as follows: (i) we provide vehicle recall notifications to our customers and distribution partners; (ii) we provide weather preparation notifications for large storms or hurricanes, including guides on structural improvements, roof and drainage maintenance, and measures to prevent plumbing from freezing or clogging; and (iii) we provide food and product recall notifications to specific customers with businesses tied to manufacturing, distribution, or food preparation that could impact their business. • Our Standard Personal Lines underwriting operations are centralized and highly automated. A significant portion of our new and renewal business is underwritten and priced through an automated template based on a filed class plan. Any underwriting exceptions are approved by our underwriting team under the direction of our CUO for Standard Personal Lines. • The wholesale general agents that place our E&S Lines provide front-line underwriting in accordance with our prescribed guidelines. Our underwriters approve accounts written outside of our prescribed guidelines. Our E&S Lines territory managers are focused on the generation of new opportunities to grow our E&S Lines. The USC assists our independent distribution partners by servicing certain Standard Commercial Lines and Personal Lines accounts. At the USC, all 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 on the USC-serviced premium. As of December 31, 2019, our USC was servicing NPW of $78.3 million, which represents 3% of our total NPW. Claims Management Timely claims processing ensuring that all coverage is provided is one of the most important services 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, (ii) maintenance of timely and adequate claims reserves, and (iii) claims handling by areas of expertise. 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. These field-based adjusters, known as Claims Management Specialists ("CMS"), handle low severity property claims and non-complex liability claims, and manage the overall agency claims relationship. CMSs are responsible for investigating and resolving the majority of our standard marketplace low severity commercial automobile bodily injury, general liability, and property losses. Property Claims Specialists ("PCSs") handle property claims with severities ranging from $10,000 to $100,000. CMSs and PCSs also form the basis of our catastrophe response team. 12 Strategically located throughout our footprint, they are able to provide highly responsive customer and distribution partner service to quickly resolve claims within their authority. We utilize specialized claims handling as follows: • Liability claims with high severity or technically complex losses are handled by the Complex Claims and Litigation Unit ("CCU"). The CCU specialists handle losses based on injury type or with expected severities greater than $250,000 in our Standard Commercial Lines and Standard Personal Lines, 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 by 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 or significant escalation risk are referred to the workers compensation strategic case management unit. • Low-severity, high-volume property claims are handled by the claims service center ("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. • We centralize the following claims to align the highest level of expertise: (i) asbestos and environmental claims; (ii) construction defect claims; and (iii) other latent claims, including those related to abuse and molestation. This structure allows us to provide experienced adjusting to each claim category. The CSC is co-located with the USC in Richmond, Virginia. The CSC receives first notices of loss from our customers and claimants about Standard Commercial Lines, Standard Personal Lines, and E&S Lines claims and manages routine, non-injury automobile and property claims. 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 our Regions or other specialized areas. We process our E&S Lines claims consistently with how we process our Standard Commercial Lines and Standard Personal Lines claims. E&S Lines claims are handled by our standard lines Regions and our CCU, and are segregated by line of business (property and liability), litigation, and complexity. In 2018, we introduced an improved fast tracking claims handling process ("SWIFT"), wherein parties can opt to settle low- severity automobile or property claims entirely through e-mail. SWIFT improves the customer experience and accelerates the claims handling process. Over 4,000 individuals have opted to have their claims managed through SWIFT, with payment often issued as quickly 24 hours from submission. The Special Investigative Unit ("SIU") supports all insurance operations and investigates potential insurance fraud and abuse, consistent with direction from regulatory bodies and trade associations. We have developed a proprietary SIU fraud detection model that identifies potential fraud cases early in the life of a 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 us. Many of our competitors, like us, rely on partners for the 13 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. Within each of our insurance segments, the property and casualty insurance market is highly competitive, and market share is fragmented among many companies, particularly in Standard Commercial Lines and E&S Lines. We compete with primarily regional and national insurers, mostly on the basis of price, coverage terms, claims service, customer experience, safety management services, ease of technology usage, and financial ratings. We also face increased competition from established direct-to-consumer insurers, as well as existing competitors and new entrants to the industry that 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 competitors may also provide expanded customer service and an enhanced customer experience beyond what traditional insurance platforms currently provide. Insurance Regulation Primary Oversight by the States in Which We Operate Insurance is a heavily regulated industry, primarily at the state level by virtue of the McCarran-Ferguson Act. The primary public policy behind insurance regulation is the protection of policyholders and claimants over all other constituencies, including shareholders. The types of insurance activities regulated by the states include the following: • Related to our financial condition: Oversight of matters such as minimum capital, surplus, solvency standards, accounting methods, form and content of statutory financial statements and other reports, loss and loss expense reserves, investments, reinsurance, dividend payments, other distributions to shareholders, security deposits, and periodic financial examinations. • Related to our property and casualty insurance business: Oversight of matters such as certificates of authority and other insurance company licenses, licensing and compensation of distribution partners, premium rates (which may not be excessive, inadequate, or unfairly discriminatory), policy forms, policy terminations, claims handling and practices, cybersecurity, data protection and customer privacy, 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: Oversight of insurance holding company system registration in every state where an insurance subsidiary is domiciled and reporting about developments that may materially affect the operations, management, or financial condition of the insurers, including change in control. NAIC Financial Monitoring Tools Our various state insurance regulators are members of the National Association of Insurance Commissioners ("NAIC"). The NAIC has established statutory accounting principles ("SAP") and other accounting reporting formats and model insurance laws and regulations governing insurance companies. An NAIC model statute only becomes a law after a state legislature enacts it or a regulation after a state insurance department promulgates it. The adoption of certain NAIC model laws and regulations, however, is a key aspect of the NAIC Financial Regulations Standards and Accreditation Program under which one state insurance department recognizes the financial examinations and reviews of another. The following are among the NAIC's various financial monitoring tools that are material to the regulators in states in which our Insurance Subsidiaries are organized: • The Insurance Regulatory Information System ("IRIS"). IRIS identifies 13 industry financial ratios and specifies “usual values” for each ratio. Departure from the usual values on four or more of the financial ratios can lead to inquiries from individual state insurance departments about certain aspects of an insurer's business. Our Insurance Subsidiaries have consistently met the majority of the IRIS ratio tests. • Risk-Based Capital ("RBC"). RBC is measured by four major areas of risk to which property and casualty insurers are exposed: (i) asset risk; (ii) credit risk; (iii) underwriting risk; and (iv) off-balance sheet risk. Regulators increase their scrutiny, up to and including intervention, as an insurer's total adjusted capital declines below three times its "Authorized Control Level." Based on our 2019 statutory financial statements prepared in accordance with SAP, the total adjusted capital for each of our Insurance Subsidiaries substantially exceeded three times their Authorized Control Level. 14 • Annual Financial Reporting Regulation (referred to as the "Model Audit Rule"). The Model Audit Rule, based closely on the Sarbanes-Oxley Act of 2002, as amended ("Sarbanes-Oxley Act"), regulates (i) auditor independence, (ii) corporate governance, and (iii) internal control over financial reporting. As permitted under the Model Audit Rule, the 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 an insurer to maintain a framework for identifying, assessing, monitoring, managing, and reporting on the “material and relevant risks” associated with the insurers' (or insurance groups') current and future business plans. ORSA, which the state insurance regulators of our Insurance Subsidiaries have adopted, requires an insurer to annually file an internal assessment of its solvency. While we underwrite risks only in the U.S., international regulatory developments, particularly related to the development of global capital standards and data privacy, may influence U.S. regulators in the development of domestic standards. 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. In 2016, the European Union ("EU") enacted Solvency II, which established new insurer capital adequacy and risk management requirements intended to reduce the possibility of consumer loss or market disruption by European insurers. At present, however, the only capital adequacy standard the NAIC has adopted is RBC. In 2016, the EU adopted the General Data Protection Regulation ("GDPR"), which took effect in 2018 and regulates data protection and privacy in the EU and the transfer of personal data outside the EU. GDPR gives individuals primary control over their personal data and attempts to simplify the regulatory environment for international businesses operating in the EU. While GDPR has no direct impact on U.S. companies like Selective that are not doing business in the EU, it and future data privacy actions by EU regulators may influence U.S. regulators over time. NRSROs Although not formal regulators, rating agencies also monitor our capital adequacy. Two that impact us are (i) A.M. Best's Capital Adequacy Ratio ("BCAR"), and (ii) S&P's capital model. Both examine the strength of an insurer's balance sheet and compare available capital to estimated required capital at various probability or rating levels. BCAR and the S&P model differ from the NAIC financial monitoring tools, particularly RBC. While RBC, BCAR, and the S&P capital model all show similar direction as circumstances change, they react differently to changes in economic conditions, underwriting and investment portfolio mix, and capital. Rating agencies also update and change their capital adequacy models and requirements over time more frequently than the NAIC financial monitoring tools. We analyze this divergence in capital adequacy models as we manage our capital, risk profile, and growth objectives. Federal Regulation While primarily regulated at the state level, we are subject to certain federal laws and regulations related to our business, including: • McCarran-Ferguson Act; • Terrorism Risk Insurance Program Reauthorization Act ("TRIPRA"); • NFIP, which is overseen by the Mitigation Division of the Federal Emergency Management Agency ("FEMA"); • The Medicare, Medicaid, and SCHIP Extension Act of 2007, which subjects our workers compensation business to Mandatory Medicare Secondary Payer Reporting; • The economic and trade sanctions of the Office of Foreign Assets Control (“OFAC”); • Various privacy laws related to possession of personal non-public information, including the following: Gramm-Leach-Bliley Act; Fair Credit Reporting Act; Drivers Privacy Protection Act; and Health Insurance Portability and Accountability Act. • The Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), which govern, among other things, publicly-traded companies and require or permit national stock exchanges or associations, such as the NASDAQ Stock Market, where our securities are listed, to mandate certain governance practices of their listed companies. In addition to enacting corporate governance reforms for publicly-traded companies, the Dodd-Frank Act, enacted in 2010 in response to the financial markets crises in 2008 and 2009, provided for some oversight of the business of insurance by the following: • Establishing the Federal Insurance Office (“FIO”) under the U.S. Department of the Treasury; and • Granting the Federal Reserve oversight of financial services firms designated as systemically important. 15 The FIO, in coordination with the Federal Reserve, state regulators, and other regulatory bodies, has been exploring group capital standards. We expect the NAIC to publish a draft group capital standard sometime in 2020. The FIO also (i) negotiated a covered agreement with the EU that, among other things, impacted reinsurance collateral requirements for foreign reinsurers, and (ii) has been gathering insurance market data as required under the Dodd-Frank Act. For additional information on the potential impact of regulation and changes in regulation on our business, refer to the risk factor related to regulation within Item 1A. “Risk Factors.” of this Form 10-K. 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. Our investment portfolio primarily consists of fixed income securities, which primarily includes corporate securities, asset-backed securities, mortgage-backed securities, and state and municipal obligations. As of December 31, 2019, approximately 19% of this portfolio was invested in non-fixed rate securities. Included in this 19% is a 12% allocation to floating rate securities that reset principally on the 90-day U.S. dollar-denominated London Interbank Offered Rate ("LIBOR"). We also hold both public and private equity securities, commercial mortgage loans, short-term investments, and other investments. Other investments primarily includes alternative investments. 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. For further information regarding our risks associated with the overall investment portfolio, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.” and Item 1A. “Risk Factors.” of this Form 10-K. For additional information about investments, see the section entitled, “Investments Segment,” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” and Note 5. "Investments" included in Item 8. “Financial Statements and Supplementary Data.” 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 six 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; Pension risk, which is the risk that the obligations under the Retirement Income Plan for Selective Insurance Company of America will exceed our expectations due to underperformance of the invested assets supporting those obligations or adverse changes in the assumptions used in the calculation of our pension liabilities; • Other risks, including a broad range of operational risks that can be difficult to quantify, such as talent, market conditions, economic, legal, regulatory, reputational, and strategic risks, as well as the risks of fraud, human failure, or failure of controls or systems, including, for example, a rapidly-evolving cybersecurity risk; and • Emerging risks, which include risks in each of the five categories above, but are either new, rapidly evolving, or increasing substantially compared to historical levels. For example, the increased frequency and intensity of severe wildfires, the exposures created by the legalization of cannabis, and the recent passage of reviver statutes for victims of abuse would all be considered emerging risks. Our internal control framework operates with a 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, who with oversight from the audit committee of our Board, provides independent, objective assurance as to the assessment of the adequacy and effectiveness of our internal control environment. Internal Audit also coordinates risk-based audits, compliance reviews, and other specific initiatives to evaluate and address risk within targeted areas of our business. 16 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 strategies. Our Board oversees our ERM process, and various committees of the Board oversee risks specific to their areas of supervision and report their activities and findings to the full Board. Management has formed an Executive Risk Committee that is responsible for the holistic monitoring and management of our risk profile. The Executive Risk Committee consists of the Chief Executive Officer, his direct reports and key operational and financial leaders, including the Chief Risk Officer. The Executive Risk Committee relies on several management committees, such as the Emerging Risk Committee and the Underwriting Committee, for detailed analysis and management of specific major risks. The Chief Risk Officer reports on the Executive Risk Committee's activities, analyses, and findings to the Board or the appropriate Board committee, and provides a quarterly update on certain risk metrics. In addition to the various Board and management committees and governance 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, and quantify, evaluate, and manage the significant risks we face. We rely on quantitative and qualitative tools to identify, prioritize, and manage our major risks, including proprietary and third- party computer modeling as well as various other analyses. The Executive Risk Committee meets at least quarterly and reviews and discusses various topics and the interrelation of our major risks, including, but not limited to, capital modeling results, capital adequacy, risk metrics, emerging risks, and sensitivity analysis. Where necessary, we also utilize the services of subject matter experts, such as external actuaries, third-party risk modeling firms, and information technology security experts. Consistent with the requirements of state insurance regulators, our Insurance Subsidiaries annually file their ORSA report, which is an internal assessment of our 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. 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 U.S. Securities and Exchange Commission ("SEC") all required disclosures, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements, and 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. 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. At this time, these are the significant risk factors which might affect, alter, or change our actions in executing our long-term capital strategy. These actions include, but are not limited to, contributing capital to any or all of the Insurance Subsidiaries, issuing additional debt or equity securities, repurchasing our equity securities, repurchasing our existing debt, or increasing or decreasing stockholders’ dividends. Risks Related to our Insurance Operations We are subject to losses from catastrophic events. Our financial results can be significantly negatively impacted by losses from natural and man-made catastrophes including, without limitation, hurricanes, tornadoes, windstorms, earthquakes, hail, severe winter weather, floods, and fires, some of 17 which may be related to climate change, and terrorism, including cyber-attacks and explosions. The frequency and severity of these catastrophes are inherently unpredictable. In recent years, the global insurance industry has seen an escalation in losses from catastrophes. The United Nation’s Intergovernmental Panel on Climate Change (“IPCC”) is an international body responsible for assessing climate change science. In 2018, the IPCC reported that human activities are estimated to have caused approximately 1.8°F of global warming above pre-industrial levels and that, if the trend continues at the current rate, it will reach 2.7°F above pre- industrial levels between 2030 and 2052. Climate change models project robust differences in global regional climate characteristics between 1.8°F and global warming of 2.7°F up to 3.6°F. These differences, whether attributable to human activities or natural, include increases in (i) mean temperature in most land and ocean regions, (ii) hot extremes in most inhabited regions, (iii) heavy precipitation in several regions, and (iv) the probability of drought and precipitation deficits in some regions. These differences and increases can impact weather patterns and the frequency and severity of catastrophes. Our insurance operations primarily write risks in the Eastern, Midwestern, and Southwestern regions of the U.S., and our most significant catastrophe exposures are (i) hurricanes impacting the Eastern U.S., (ii) terrorism events, and (iii) severe convective storms, including tornadoes. Single storms could adversely impact our financial results, but it is also possible that we could experience more than one severe catastrophic event in any given calendar year. We track our severe weather and catastrophe losses using definitions and information we obtain from ISO’s Property Claim Services unit, an internationally recognized expert on U.S. and U.S.-territory storm losses. Certain factors can impact our estimates of ultimate costs for catastrophes. Among these factors are the following: 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 or expanded interpretations of coverage; • Residual market assessment-related increases in our catastrophe losses; • Potential fraud and unscrupulous contractors inflating repair costs; • Higher loss adjustment expenses due to shortages of claims adjusters available to appraise damage; • Late claims reporting; • Escalation of business interruption costs due to infrastructure disruption; and • Whether the U.S. Secretary of Treasury certifies that a terrorist event is an act of terrorism under TRIPRA. An increase in catastrophe losses could reduce our net income and stockholders’ equity and could have a material adverse effect on our liquidity, financial strength, and debt ratings. In addition, if a catastrophe occurs near the end of a reporting period, it is possible we may have limited information available to estimate loss and loss expense reserves, which adds greater uncertainty. More detailed claims information may become available later, resulting in reserve changes in subsequent periods. Our loss and loss expense reserves may not be adequate to cover actual losses and expenses. We maintain reserves for our estimated liability for loss and loss expense associated with reported and unreported insurance claims. We base our estimates of loss and loss expense reserve amounts on known facts and circumstances, including our expectations of ultimate settlement and claim administration expenses, trends in claims severity and frequency, medical inflation trends, predictions of future events, and other subjective factors relating to our in-force insurance policies. There is no method for precisely estimating the ultimate liability for the settlement of claims. Reserve estimates may be impacted by a variety of broad economic, political, social, and legal developments or trends, such as inflation, judicial tort decisions, and various state legislative initiatives. Because of our inability to predict the timing and impact of these economic, political, social, and legal developments or trends, and the inherent uncertainty in estimating loss and loss expense reserves, we cannot be certain that the reserves we establish are adequate or will be so in the future. We regularly review our reserve adequacy and increase reserves if we believe they are inadequate or reduce them if we believe 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 liquidity, financial strength, and debt ratings. As we underwrite new business and renew existing business in future periods, we estimate future loss cost trends to help price our products to generate an adequate risk-adjusted return. To the extent our estimate of future loss cost trends proves to be understated, the pricing of our future new business and renewal business could be inadequate to meet estimated loss costs trends, which could result in our future loss and loss expense reserves being understated. 18 Three examples of how reserves might be affected by economic, political, social, or legal developments or trends: • • • If economic inflation is higher than our assumptions, our loss and loss expense reserves associated with our longer tail lines of business may prove to be insufficient. In particular, our workers compensation line of business is susceptible to this risk, given its extended payment pattern, and the current low medical inflationary environment compared to longer term medical inflation rates, which have historically been higher. State legalization of marijuana for medical and recreational use may significantly impact future claims emergence if marijuana use drives higher claims frequencies or severities. Several states have expanded or are exploring expanding the statute of limitations for civil actions alleging sexual abuse. By retroactively permitting claims for previously time-barred acts, these “reviver” laws may result in insurance claims that could significantly increase loss costs and require re-evaluation of previously-established reserves or the creation of new reserves. Since reviver statutes have been enacted, we have received notices of claims or potential claims for acts alleged to have occurred as far back as the 1950s. With no prior experience, we cannot estimate how many "reviver" claims notices we may receive. Most notices we have received are sent on behalf of claimants by attorneys unsure of what insurer or policy (if any) may have covered the alleged assailant or supervising entity and may not implicate insurance policies issued by us or a predecessor. For notices we have determined implicate an insured under a policy issued by us or a predecessor, we (i) have investigated or are investigating facts, (ii) have evaluated policy terms, and (iii) believe we have appropriate coverage defenses and reinsurance protections that have been considered in establishing our reserves. As coverage positions may be challenged through litigation or otherwise, we face litigation risks further discussed below in the Risk Factor entitled, “Incidental to our insurance operations, we are engaged in ordinary routine legal proceedings that, because litigation outcomes are inherently unpredictable, could impact our reputation and/or have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods.” For further discussion on our loss and loss expense reserves, please see the “Critical Accounting Policies and Estimates” section of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” of this Form 10- K. Our ability to reduce our risk exposure depends on the availability and cost of reinsurance. We transfer a significant portion of our underwriting risk exposure - specifically a portion of our loss and loss expense - to reinsurance companies in exchange for a specified portion of premiums. Most of our reinsurance contracts have annual terms. The availability, amount, and cost of reinsurance depend on market conditions, including the capacity of the retrocessional reinsurance market. This may fluctuate significantly and not necessarily correlate to the loss experience of our specific book of business. In general, reinsurance expense can be considered in our rating of insurance premium for our customers. Any increase in our reinsurance expense that cannot be passed on to our policyholders through rate increases will reduce our earnings. If we are unable to obtain reinsurance in amounts or on terms that we expected, our reinsurance expenses could increase, we may assume increased risk for individual or aggregate losses, and our ability to write future business could be adversely affected. Catastrophes impact a variety of property and casualty insurance lines, but historically commercial property and homeowners coverages have accounted for most of our catastrophe-related claims. To limit our exposure to catastrophe losses, we purchase catastrophe reinsurance. Catastrophe reinsurance could prove inadequate to our exposures if (i) we purchase an inadequate amount of reinsurance because of deficiencies or inaccuracies in the various modeling software programs we use to analyze the risk of the Insurance Subsidiaries, (ii) a major catastrophe loss exceeds the reinsurance limit or the financial capacity of one or more of our reinsurers, (iii) the frequency of catastrophe losses results in our Insurance Subsidiaries exceeding the aggregate limits under the catastrophe reinsurance treaty, or (iv) our reinsurance counterparties (a) are unable to access their reinsurance markets, or retrocessions, (b) suffer significant financial losses, (c) are sold, (d) cease writing reinsurance business, or (e) are unable or unwilling to satisfy their contractual obligations to us. Even with the benefits of reinsurance, our exposure to catastrophe risks could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. We may be subject to potentially significant losses from acts of terrorism. We are required to participate in TRIPRA, which was extended to December 31, 2027, for our Standard Commercial Lines and E&S Lines business. 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 significant deductible of specified losses before federal assistance is available. Our deductible of $359 million is based on a percentage of our prior year’s applicable 19 Standard Commercial Lines and E&S Lines premiums. For losses above the deductible in 2020, the federal government will pay 80% of losses to an industry limit of $100 billion, and the insurer retains 20%. Although TRIPRA’s provisions provide some mitigation to our loss exposure to a large-scale terrorist attack, our deductible could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. If the U.S. Secretary of Treasury does not certify certain future terrorist events, as was the case with the 2013 Boston Marathon bombing and the 2015 San Bernardino shootings, we could be required to pay terrorism-related covered losses without TRIPRA's risk-sharing benefits. Under TRIPRA, terrorism coverage is mandatory for all primary workers compensation policies. TRIPRA also applies to cyber liability insurance policies reported under a Terrorism Risk Insurance Program-eligible line of insurance. Insureds with non- workers compensation commercial policies have the option to accept or decline our terrorism coverage or negotiate with us for other terms. In 2019, 87% 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 opted to purchase terrorism coverage. We also sometimes elect 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 we offer in Standard Personal Lines exclude nuclear losses but do not exclude biological or chemical losses. Our current reinsurance programs generally provide coverage for conventional acts of foreign and domestic terrorism, but afford no coverage for NBCR events. We are exposed to credit risk. We have credit risk in several areas of our insurance operations, including from: • Our reinsurers, which are obligated to make payments to us under our reinsurance agreements. Reinsurance credit risk can fluctuate over time, increasing during periods of high catastrophe loss activity. Reinsurers generally manage their large loss exposure through their own reinsurance programs, known as retrocessions, to which we sometimes do not have full visibility. If our reinsurers experience any difficulty in collecting on their retrocession programs, or in reinstating retrocession coverage after a large loss, it could impede timely and full payment of our reinsurance claims. This means that we have direct and indirect counterparty credit risk from our reinsurers, which operate in a relatively small global community. • Certain life insurance companies from which we have purchased annuities for our customers under structured claims settlement agreements, if they fail to fulfill their obligations under the annuity contracts. • • Some of our distribution partners, who we allow to collect premiums due to us from our customers. Some of our customers, who are obligated to make premium and/or deductible payments directly to us. • The invested assets in our defined benefit plan. If financial 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 negatively impacted and the plan's expense, and our obligation to fund 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. We depend on distribution partners. We market and sell our insurance products through independent, non-employee distribution partners. Insurance law and regulation makes us responsible for the business practices and customer interactions of our distribution partners. Independent distribution partners have, and we expect will continue to have, a significant role in overall insurance industry. While our customers find advantages in using independent distribution partners, our reliance on independent distribution partners presents risks and challenges, including the following: • As independent distribution partners have access to products from multiple carriers and markets, we face competition in our distribution channel and must market our products and services to our distribution partners before they sell them to our mutual customers. • Our customers rely on our independent distribution partners, and some customers do not differentiate between their insurance agent and their insurance carrier. Developing brand recognition, particularly with these types of customers can be challenging and requires us to coordinate with our distribution partners. 20 • Growth in our market share is principally dependent on growth in the market share controlled by our distribution partners. Independent retail insurance agencies control 84% of standard commercial lines business and 35% of standard personal lines business in the U.S. Consequently, expansion of our Standard Personal Lines market opportunity could be more limited than our Standard Commercial Lines business. To address the discrepancy in agency control of Standard Personal Lines business, more competitors have focused on lower-cost "direct-to-the- customer" distribution models that emphasize digital ease and technological efficiencies. Continued advancements in "direct-to-the-customer" distribution models may impact the overall market share controlled by our independent distribution partners and make it more difficult for us to grow, or require us to establish relationships with more distribution partners. • Over the past several years, some publicly-traded and private equity-backed independent distribution partners have employed consolidation strategies to acquire other independent distribution partners and increase their market share ("Aggregators"). As more of our independent distribution partners become Aggregators, or are acquired by Aggregators, their influence and demands on our business could increase. It is possible that Aggregators could develop and implement strategies to consolidate their business with fewer insurance carriers and demand higher base and supplemental commissions. Aggregators accounted for approximately 28% of our DPW at December 31, 2019. Currently, no one distribution partner is responsible for 10% or more of our combined insurance operations' premium. Our financial condition and results of operations are impacted by the success of our independent distribution partners in marketing and selling our products and services. National and global economic conditions could materially adversely affect our business, results of operations, financial condition, and growth. 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. An economic downturn could also lead to increased credit and premium receivable risk, the failure of reinsurance counterparties and other financial institutions, limitations on our ability to issue new debt, reduced liquidity, and declines in the fair value of our financial strength. These and other economic factors could materially adversely affect our business, results of operations, financial condition, and growth. During 2019, 31% 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. A downgrade or a potential downgrade in our financial strength or credit ratings could result in a loss of business and could have a material adverse effect on our financial condition and results of operations. A significant financial strength rating downgrade, particularly from A.M. Best, would affect our ability to write new or renewal business with customers, some of whom are required under various third-party agreements to maintain insurance with a carrier with a specified minimum rating. In addition, downgrades in our credit ratings could make it more expensive for us to access capital markets. We cannot predict the possible rating actions NRSROs might take that could adversely affect our business or our potential actions in response. Any significant downgrade in our financial strength and credit ratings could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. For additional information on our current financial strength and credit ratings, refer to "Overview" in Item 1. "Business." of this Form 10-K. Markets for insurance products and services are highly competitive and subject to rapid technological change, and we may be unable to compete effectively. We offer our insurance products and services in a highly competitive market characterized by aggressive price competition and resulting downward pressure on gross margins, frequent introduction of new products and services, evolving industry standards, continual improvement in product pricing based on performance characteristics, rapid adoption of technological advancements by competitors, and price sensitivity on the part of consumers and businesses. Our ability to compete successfully depends heavily on our ability to ensure a continuing and timely introduction of innovative new products and services to the marketplace through digital platforms. We face substantial competition from a wide range of property and casualty insurance companies for customers, distribution partners, and employees. Competitors include public, private, and mutual insurance companies. 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. 21 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, such as Lemonade and Next, continue to emerge. 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 is also possible that companies conducting 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, reserve adequacy, 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 larger competitors 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 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 from a larger book of our own 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. We are subject to a variety of modeling risks that could have a material adverse impact on our business results. We rely on internally and third-party developed complex financial models, such as those that predict (i) underwriting results on individual risks and our overall portfolio, (ii) claims fraud, (iii) impacts from catastrophes, (iv) enterprise risk management capital scenarios, and (v) investment portfolio changes. We rely on these financial models to analyze historical loss costs and pricing, trends in claims severity and frequency, the occurrence of catastrophe losses, determining reinsurance attachment and exhaustion points, investment performance, portfolio risk, and our economic capital position. 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. Risks Related to Our Investments Segment Our investments are exposed to credit risk, interest rate fluctuation, and changes in value. We depend on income from our investment portfolio for a significant portion of our revenue and earnings. Our investments can be negatively affected by liquidity, credit deterioration, financial results, market and economic conditions, political risk, sovereign risk, interest rate fluctuations, or other factors. 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 counterparty 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 payment obligations. Additionally, we are exposed to interest rate risk primarily related to the market price, and cash flow variability, associated with changes in interest rates. As a result of these items, the value and liquidity of our cash, cash equivalents, and marketable and non-marketable securities may fluctuate substantially. Future fluctuations in the value of our cash, cash equivalents, and marketable and non-marketable securities could result in significant losses and could have a material adverse impact on our financial condition and operating results. Significant future declines in investment value also could require further OTTI charges. 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. We have securities tied to LIBOR, which is being eliminated by the end of 2021. As of December 31, 2019, approximately 19% of our fixed income securities portfolio was comprised of investment securities that have a non-fixed rate. Included in this 19% is a 12% allocation to floating rate securities that are primarily tied to the U.S. dollar-denominated London Interbank Offered Rate ("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, 22 and other derivative products, making it a primary metric in the global banking system. The U.K. Financial Conduct Authority ("FCA") determined that LIBOR should no longer 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, known as the Secured Overnight Financing Rate ("SOFR"). SOFR is based on short-term loans backed by Treasury securities, known as repurchase agreements or "repo" trades. ARRC announced a paced transition plan for this new rate, including specific steps and timelines designed to encourage adoption of SOFR. We are unclear whether the elimination of LIBOR and the transition to SOFR will have any material impact on the performance of our floating rate investments. 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. As the primary assets and 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 a higher level of subjectivity and unobservable inputs than substantially all of our other investments. 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. 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. 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. Risks Related to Evolving Laws, Regulation, and Public Policy Debates We are subject to complex and changing laws, regulations, and public policy debates that expose us to regulatory scrutiny, potential liabilities, increased costs, reputational harm, and other adverse effects on our business. Our operations are subject to complex and changing state and federal laws, regulations, and public policy debates on subjects, including, without limitation, the following: Pricing and underwriting practices; Privacy and data security; • • Claims practices; • Loss and loss adjustment expense reserves; • 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; • • Tax; • Antitrust; • Consumer protection; • Advertising; Sales; • • Billing and e-commerce; • • Digital platforms; • • Media and digital content; • Availability of third-party software applications and services; • Labor and employment; • Anti-money laundering; and • Environmental, health, and safety. Internet, telecommunications, and mobile communications; Intellectual property ownership and infringement; 23 We continue to monitor and be actively involved in the industry and public policy discussions around changes in legislation and regulation on these issues. Changes to laws and regulations can adversely affect our business by increasing our costs, limiting our ability to offer a product or service to customers, requiring changes to our business practices, or otherwise making our products and services less attractive to customers. If Congress were to enact a law that directly regulates insurance, particularly related to 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. If the NAIC were to adopt a specific group capital adequacy standard, it is possible that minimum capital requirements for insurers could be increased and adversely impact our growth and return on equity. We have implemented policies and procedures designed to ensure compliance with applicable laws and regulations, but we can provide no assurance that our employees, contractors, or independent distribution partners will not violate such laws and regulations or our policies and procedures. To some degree, we have multiple regulators whose authority may overlap and may have different interpretations and/or regulations related to the same legal issues. This creates the risk that one regulator's position or interpretation may conflict with that of another regulator on the same issue. 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. Insurers are subject to intense regulatory, political, and media scrutiny. We are subject to government market conduct review and investigations, legal actions, and penalties. There can be no assurance that our business will not be materially adversely affected by the outcomes of such examinations, investigations, or media scrutiny in the future. If we are found to have violated laws and regulations, it could materially adversely affect our reputation, financial condition, and operating results. Our business is subject to a variety of state, federal, and other laws, rules, policies, and other obligations regarding data protection. We are subject to federal, state, and international laws relating to the collection, use, retention, security, and transfer of personally identifiable information (“PII”). Federal laws include the Gramm-Leach-Bliley Act, the Fair Credit Reporting Act, the Drivers Privacy Protection Act, the Health Insurance Portability and Accountability Act, and the policies of the Federal Trade Commission. Several states, such as New York, Nevada, and California, have passed laws in this area, and other jurisdictions are considering imposing additional restrictions or creating new rights concerning PII. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction. Complying with emerging and changing requirements may cause us to incur substantial costs or require us to change our business practices. Noncompliance could result in significant reputational harm, penalties, and legal liability. We make statements about our use and disclosure of PII through our privacy policy, information provided on our website, and other public statements. If we fail to comply with these public statements or with other federal, state, and international privacy- related and data protection laws and regulations, we could be subject to proceedings by governmental entities and others. Such proceedings could impact our reputation and result in penalties, including ongoing audit requirements, and significant legal liability. Incidental to our insurance operations, we are engaged in ordinary routine legal proceedings that, because litigation outcomes are inherently unpredictable, could impact our reputation and/or have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods. We are engaged in ordinary routine legal proceedings incidental to our insurance operations that include: • Defense of or indemnity for third-party suits brought against our insureds; • Defense of actions brought against us by our insureds who disagree with our coverage decisions, some of which allege bad faith claims handling and seek extra-contractual damages, punitive damages, or other penalties; • Actions we file, primarily for declaratory judgment, seeking confirmation that we have made appropriate coverage decisions under our insurance contracts; • Actions brought against us or competitors alleging improper business practices and sometimes seeking class status. Such actions historically have included issues and allegations, without limitation, related to (i) unfairly discriminatory underwriting practices, including the impact of credit score usage, (ii) managed care practices, such as provider reimbursement, and (iii) automobile claims practices; and • Actions we file against third parties and other insurers for subrogation and recovery of other amounts we paid on behalf of our insureds. 24 From time-to-time, legal proceedings in which we are involved may receive attention from media based on their perceived newsworthiness and/or relationship to a variety of broad economic, political, social, and legal developments or trends. Such media stories could negatively impact our reputation. We expect that any potential ultimate liability for ordinary routine legal proceedings incidental to our insurance business, after consideration of provisions made for estimated losses, will not be material to our consolidated financial condition. Litigation outcomes, however, are inherently unpredictable even with meritorious defenses. The time a case is in litigation also is unpredictable, as state court dockets are increasingly overcrowded. Generally, the longer a case is in litigation the more expensive it can become. Because the amounts sought in certain of these actions are large or indeterminate, any adverse outcomes could have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods. 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 the Parent, or enter into transactions with affiliates may materially affect our ability to pay dividends on our common stock or repay our indebtedness. In 2020, the Insurance Subsidiaries have the ability to provide the Parent with $267 million in ordinary annual dividends under applicable state regulation; but their ability to pay dividends or make loans or advances is subject to the approval or review of their domiciliary state insurance regulators. For additional details regarding dividend restrictions, see Note 20. “Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds” in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. The Parent’s ability to pay dividends to shareholders is also impacted by covenants in its credit agreement (the “Line of Credit”) among the Parent, the lenders named therein (the “Lenders”), and the Bank of Montreal, Chicago Branch, as Administrative Agent, that obligate it to, among other things, maintain a minimum consolidated net worth and a maximum ratio of debt to capitalization. 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 a New Jersey corporation and an insurance holding company, we may be less attractive to potential acquirers and the value of our common stock could be adversely affected. We are a New Jersey company and provisions of the New Jersey Shareholders’ Protection Act and our Amended and Restated Certificate of Incorporation may discourage, delay, or prevent us from being acquired. A supermajority of our shareholders must approve (i) certain business combinations with interested shareholders, or (ii) any amendment to the related provisions of our Amended and Restated Certificate of Incorporation unless certain conditions are met. 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 and disinterested stockholders, and the price and payment of the consideration proposed in the business combination. In addition to considering the effects of any action on our shareholders (including any offer or proposal to acquire the Parent) , our Board may consider, in determining the best interests of the Parent: (i) the long-term, as well as the short-term, interests of the Parent and our shareholders, including the possibility that these interests may best be served by the continued independence of the Parent; (ii) the effects of the action on the Parent's employees, suppliers, creditors, and customers; and (iii) the effects of the action on the community in which the Parent operates. 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. Because we own insurance subsidiaries, any party seeking to acquire 10% or more of our stock must seek prior approval from the domiciliary insurance regulators of the subsidiaries and file extensive information regarding their business operations and finances. Risks Related to Our General Operations We are subject to attempted cyber-attacks and other cybersecurity risks. Our business heavily relies on information technology and application systems that may be accessed from, or are connected to, the Internet. As a result, we may be impacted by a malicious cyber-attack. Our systems also contain proprietary and confidential information, including PII, about our operations, employees, agents, and customers and their employees and 25 property. A malicious cyber-attack on (i) our systems, (ii) our distribution partners or their key operating systems, and (iii) any other of our third-party partners or vendors and their key operating systems may interrupt our ability to operate and impact our results of operations. We have implemented systems and processes intended to mitigate or secure, through encryption and authentication technologies, our information technology systems and prevent unauthorized access to, or loss of, sensitive data. Our security measures may not be sufficient for all eventualities, as cyber-attacks are continuing to evolve daily. We may be vulnerable to hacking, employee error, malfeasance, system error, faulty password management, or other irregularities. Any disruption or breach of our systems or data security could damage our reputation and result in monetary damages that are difficult to quantify, but could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. To mitigate this risk, we have and expect to continue to (i) conduct 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. We have insurance coverage for certain cybersecurity risks, including privacy breach incidents, that provides coverage up to $20 million above a $1 million deductible. Such coverage may be insufficient to indemnify all losses or types of claims that may arise. Our long-term strategy to deploy operational leverage is dependent on the success of our risk management strategies, and their failure could have a material adverse effect on our financial condition or results of operations. As an insurer, we assume 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, including purchasing significant amounts of reinsurance, a disciplined approach to reserving and a conservative investment philosophy, and to help mitigate our exposure to this risk. 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. Item 1B. Unresolved Staff Comments. None. Item 2. Properties. Our headquarters occupy a 315,000 square foot building located on a 56-acre site zoned for office and professional use in Branchville, New Jersey and is also the home to our newly-installed solar facility. The site is owned by a subsidiary that also owns abutting property in Frankford, New Jersey. We lease all our other facilities from unrelated parties. The principal office locations of our insurance operations are listed in the “Geographic Markets” section of Item 1. “Business.” of this Form 10-K. Our Investments operations are principally located in leased space in Farmington, Connecticut. 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. Incidental to our insurance operations, we are engaged in ordinary routine legal proceedings that, because litigation outcomes are inherently unpredictable, could have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods. For additional information regarding our legal risks, refer to Item 1A. “Risk Factors.” and Note 19. "Litigation" included in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. As of December 31, 2019, we have no material pending legal proceedings that could have a material adverse effect on our consolidated financial condition, results of operations, or cash flows. PART II Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. (a) Market Information Our common stock is traded on the NASDAQ Global Select Market under the symbol “SIGI.” (b) Holders We had 3,067 stockholders of record as of February 6, 2020, according to the records maintained by our transfer agent. 26 (c) Dividends Dividends on shares of our common stock are declared and paid at the discretion of the Board of Directors (the "Board") based on our results of operations, financial condition, capital requirements, contractual restrictions, and other relevant factors. We currently expect to continue to pay quarterly cash dividends on shares of our common stock in the future. On October 30, 2019, the Board approved a 15% increase in our dividend to $0.23 per share. In addition, on January 30, 2020, the Board declared a $0.23 per share quarterly cash dividend on common stock that is payable March 2, 2020, to stockholders of record as of February 14, 2020. (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, 2019: Plan Category (a) (b) Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) Equity compensation plans approved by security holders 1Weighted average remaining contractual life of options is 0.3 years. 2Includes 356,229 shares available for issuance under our Employee Stock Purchase Plan (2009); 1,728,471 shares available for issuance under the Stock Purchase Plan for Independent Insurance Agencies; and 3,208,968 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. 16.71 26,823 1 $ 5,293,668 2 (e) Performance Graph The following chart, produced by Research Data Group, Inc., depicts our performance for the period beginning December 31, 2014 and ending December 31, 2019, 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 27 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 2019: Period October 1 – 31, 2019 November 1 – 30, 2019 December 1 – 31, 2019 Total Number of Shares Purchased1 Average Price Paid Per Share 1,057 23 $ 194 74.58 64.57 63.93 Total Number of Shares Purchased as Part of Publicly Announced Programs Maximum Number of Shares that May Yet Be Purchased Under the Announced Programs — — — — — — — 72.78 Total 1These shares were purchased from employees in connection with the vesting of restricted stock units. These repurchases were made to satisfy tax withholding obligations with respect to those employees. 1,274 — $ 28 Item 6. Selected Financial Data. Five-Year Financial Highlights1 (All presentations are in accordance with Generally Accepted Accounting Principles ("GAAP") unless noted otherwise; number of weighted average shares and dollars in thousands, except per share amounts) 2019 2018 2017 2016 2015 Net premiums written Net premiums earned Net investment income earned Net realized and unrealized gains (losses)2 Total revenues Catastrophe losses Underwriting income Net income Comprehensive income Total assets Short-term debt Long-term debt Stockholders’ equity $ 2,679,424 2,597,171 222,543 14,422 2,846,491 81,001 163,993 271,623 431,329 8,797,150 — 550,597 2,194,936 Statutory premiums to surplus ratio Combined ratio Impact of catastrophe losses on combined ratio 1.4 x 93.7 % 3.1 pts Invested assets per dollar of stockholders' equity $ 3.05 Yield on investments, after tax Debt to capitalization ratio Return on average equity 2.9 % 20.1 13.6 2,514,286 2,436,229 195,336 (54,923) 2,370,641 2,291,027 161,882 6,359 2,237,288 2,149,572 130,754 (4,937) 2,069,904 1,989,909 121,316 13,171 2,586,080 2,469,984 2,284,270 2,131,852 88,023 121,173 178,939 105,832 67,299 154,336 168,826 204,946 59,735 151,933 158,495 151,970 59,055 149,029 165,861 136,648 7,952,729 7,686,431 7,355,848 6,904,433 — 439,540 1,791,802 — 439,116 1,712,957 — 438,667 1,531,370 60,000 328,192 1,398,041 1.4 95.0 3.6 3.33 2.8 19.7 10.2 1.4 93.3 2.9 3.32 2.1 20.4 10.4 1.4 92.9 2.8 3.50 1.9 22.3 10.8 1.5 92.5 3.0 3.64 1.9 21.7 12.4 Non-GAAP operating income3 Diluted non-GAAP operating income per share3 Non-GAAP operating ROE3 Per share data: Net income: Basic Diluted Dividends to stockholders Book value per share Price range of common stock: High Low Close Number of weighted average shares: Basic $ 264,418 218,567 184,898 161,704 157,300 $ $ 4.40 13.3 % 4.57 4.53 0.83 36.91 81.35 58.06 65.19 3.66 12.5 3.04 3.00 0.74 3.11 11.4 2.89 2.84 0.66 2.75 11.0 2.74 2.70 0.61 2.70 11.8 2.90 2.85 0.57 30.40 29.28 26.42 24.37 67.17 53.55 60.94 62.40 38.50 58.70 44.00 29.27 43.05 37.91 25.49 33.58 59,421 58,950 58,458 57,889 57,212 60,004 Diluted 1Refer to the Glossary of Terms attached to this Form 10-K as Exhibit 99.1 for definitions of terms used in these financial highlights. 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 the Financial Accounting Standards Board issued Accounting Standards Update 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. 3Non-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, the deferred tax asset charge that was recognized in 2017 in relation to the Tax Cuts and Jobs Act of 2017 ("Tax Reform"), and debt retirement costs could distort the analysis of trends. 59,713 58,156 58,747 59,357 29 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" in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. Our Standard Commercial Lines and Standard Personal Lines products and services are written through our nine insurance subsidiaries, some of which write flood business through the federal government's National Flood Insurance Program's ("NFIP") Write Your Own Program ("WYO"). Our Excess and Surplus ("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. Within the MD&A, all prior year amounts for non-catastrophe property losses, and the related ratios, have been adjusted to include the related loss expenses, which is consistent with the current year presentation. The MD&A will discuss and analyze our 2019 results compared to our 2018 results. For discussion and analysis of our 2018 results compared to our 2017 results, refer to Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations." of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. In the MD&A, we will discuss and analyze the following: Financial Highlights of Results for Years Ended December 31, 2019, 2018, and 2017; • Critical Accounting Policies and Estimates; • • Results of Operations and Related Information by Segment; • • • Off-Balance Sheet Arrangements; and • Contractual Obligations, Contingent Liabilities, and Commitments. Federal Income Taxes; Financial Condition, Liquidity, and Capital Resources; 30 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 consolidated financial statements ("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. At December 31, 2019, we had recorded $4.1 billion of gross loss and loss expense reserves and $3.5 billion of net loss and loss expense reserves. At December 31, 2018, these gross and net reserves were $3.9 billion and $3.4 billion, respectively. The Insurance Subsidiaries' liability duration was approximately 3.6 years at both December 31, 2019 and December 31, 2018. 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, 2019 and 2018: As of December 31, 2019 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 247,267 372,104 216,358 35,062 63,678 14,213 948,682 68,605 13,616 11,600 93,821 68,042 3,146 71,188 1,269,643 729,298 408,371 57,929 17,083 5,357 1,516,910 1,101,402 624,729 92,991 80,761 19,570 2,487,681 3,436,363 80,445 21,713 28,221 130,379 328,301 7,111 335,412 149,050 35,329 39,821 224,200 396,343 10,257 406,600 Total 4,067,163 1Includes general liability (94% of net reserves) and commercial auto liability coverages (6% of net reserves). 2Includes commercial property (85% of net reserves) and commercial auto property coverages (15% of net reserves). 1,113,691 2,953,472 $ 31 195,830 206,414 14,352 3,012 26,526 9,113 455,247 44,104 1,182 28,993 74,279 14,319 317 14,636 1,321,080 894,988 610,377 89,979 54,235 10,457 2,981,116 104,946 34,147 10,828 149,921 382,024 9,940 391,964 544,162 3,523,001 $ December 31, 2018 ($ 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 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 15,383 387,114 181,102 220,683 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 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 $ How reserves are established 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 based on the facts and circumstances known at that time. IBNR reserves are established at more aggregated levels than case basis reserves, and include provisions for (i) claims not yet reported, (ii) claims that have been reported, but current case reserves are not sufficient, (iii) claims that will be reopened in the future, and (iv) anticipated salvage and subrogation received. Initial loss and loss expense reserves are established as follows: i. At its inception, the current accident year’s reserves are recorded based upon the actuarial expectation for the ultimate loss and loss expense ratios. This approach reflects that, at inception, there is no actual loss data from which to project estimates. ii. Prior accident years’ ultimate losses and loss expenses are held constant from the prior period. Similar to the current accident year, the associated IBNR provision is set equal to the ultimate loss and loss expense minus the amounts paid and reserved in case for reported claims. The recorded loss and loss expense reserves are evaluated each quarter to determine if any adjustments are appropriate. In assessing reserve levels, management’s primary tool is the quarterly reserve review conducted by our internal actuaries, which results in comprehensive loss and loss expense projections by line of business. This review applies generally accepted actuarial techniques to our own loss and loss expense experience, to produce ultimate loss and loss expense estimates. In performing this review, the actuaries must create “reserve cohorts” that aggregate similar data in sufficient volume to increase statistical credibility, while maintaining appropriate differentiation among reserve cohorts. Various reserve projection methodologies are applied to these reserve cohorts. These methods require 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. The techniques applied include paid and incurred versions of the following approaches: aggregate loss and loss expense development, Bornhuetter- Ferguson, Berquist-Sherman, and claims count and severity methods. Ultimate loss and loss expenses are selected from the 32 various methods, considering the strengths and weaknesses of the methods as they apply to the specific line and accident year. The selected reserves by line of business and accident year are aggregated in order to assess the overall reserve adequacy. While these methods work effectively for prior accident years, they are less effective for the current accident year, which often has limited actual reported data from which to project. Therefore, the current accident year’s estimate is heavily dependent upon the loss and loss expense ratios that result from our detailed actuarial planning process. This process uses historical experience, adjusted for pricing changes, loss and loss expense trends, along with anticipated underwriting and claims improvements, to estimate ultimate loss and loss expense ratios for the current accident year. At the outset of the year, these estimates serve as the basis for establishing our reserves. As the year progresses, these projections are updated with actual price changes and updated loss trends to evaluate the original current accident year loss and loss expense ratios. Actual experience is also considered, including aggregate paid and incurred losses, and incurred claims counts and severities, when evaluating these loss and loss expense ratios. Where deemed appropriate, adjustments are made to the current accident year selected ultimate loss and loss expenses. The result of the reserve review is a set of ultimate loss and loss expense estimates by line of business, including the current and prior accident years. While this serves as the primary basis for determining the recorded IBNR reserves, other internal and external factors are considered. Internal factors include (i) changes to our underwriting and claims practice, (ii) supplemental data regarding claims reporting and settlement trends, (iii) exposure estimates for reported claims, along with recent development on those estimates with respect to individual large claims and the aggregate of all claims, (iv) the rate at which new large or complex claims are being reported, and (v) additional trends observed by claims personnel or reported to them by defense counsel. External factors considered include (i) legislative enactments, (ii) judicial decisions, (iii) social inflation and heightened awareness of sources of liability, and (iv) trends in general economic conditions, including the effects of inflation. After giving consideration to the items described above, management’s judgment is applied in determining any required IBNR adjustments, which are then established and recorded. Our loss and loss expense reserves are estimates of future events, the outcomes of which are not yet known. It is possible that actual outcomes will differ materially from the provisions established. While this risk cannot be eliminated, we review our indicated reserves quarterly and make adjustments to IBNR based on information available at that time. These changes in our IBNR estimates 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 the process described above, we have an external consulting actuary perform an independent review of our reserves semi-annually. While we do not explicitly rely on the results of the external consulting actuary's semi-annual independent reviews, we do review and discuss their findings and consider any insights and observations when establishing our reserves. While not required to be performed by an independent external actuary, our independent external actuary issues the annual statutory Statement of Actuarial Opinion for our Insurance Subsidiaries. Range of reasonable reserve estimates We have estimated a range of reasonably possible reserve estimates for net loss and loss expense claims of $3,156 million to $3,737 million at December 31, 2019 . This range reflects low and high reasonable reserve estimates determined by judgmentally adjusting the methods, factors and assumptions selected within the internal reserve review. This approach produces a range of reasonable reserve estimates, as opposed to a distribution of all possible outcomes. Therefore, it is possible that the final outcomes may fall above or below these amounts. The range does not include a provision for potential increases or decreases associated with asbestos, environmental, certain other continuous exposure claims, and other latent exposures, as traditional actuarial techniques cannot be effectively applied. 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 reserve estimates. 33 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; favorable or unfavorable. In 2019, we experienced overall net favorable prior year loss development of $50.3 million, compared to $29.9 million in 2018 and $39.2 million in 2017. The following table summarizes prior year development by line of business: (Favorable)/Unfavorable Prior Year Loss and Loss Expense Development ($ 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 2019 2018 2017 $ (5.0) 0.7 (68.0) 1.9 5.1 7.5 4.4 2.0 1.0 0.1 $ (50.3) (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) A detailed discussion of recent reserve development by line of business follows. Standard Market General Liability Line of Business At December 31, 2019, our general liability line of business had recorded reserves, net of reinsurance, of $1.3 billion, which represented 37% of our total net reserves. In 2019, this line experienced favorable development of $5.0 million, attributable to lower loss severities in accident years 2015 and 2016, partially offset by increases in the 2017 and 2018 accident years. During 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. By its nature, this line presents a diverse set of exposures, and can be influenced by a variety of developments, including legislative enactments, judicial decisions, and social inflation. Potential increases in either economic or social inflation could impact the loss trends for this line of business. Sources of social inflation could include decreased public trust in business, non- profit, social service, religious organizations, government, and the press that lead to increases in our loss expenses and or loss experience from (a) an increased number of claimants who engage lawyers earlier in the claims process and (b) higher awards and verdicts in litigation. We have exposure to abuse and molestation claims through insurance policies that we: (i) principally underwrite through our Community and Public Services ("CAPS") strategic business unit; and (ii) issue to schools, religious institutions, daycares, and other social services. Through 2017, our exposure to abuse and molestation risk had been increasing, reflective of the growth in our CAPS book. In 2018, we introduced more stringent underwriting eligibility guidelines and partnered with a third party to better assess exposure and introduce greater loss control measures. In 2019, we filed and approved significant rate increases for this exposure. These actions have limited our growth in this strategic business unit. We also have exposure to abuse and molestation claims from recently enacted state laws that extend the statute of limitations or permit windows to be opened for abuse and molestation claims and lawsuits that were previously barred by statutes of limitations. It is possible, as a result, that we may receive claims decades after the allegations occurred from coverages provided by predecessor companies that will require complex claims coverage determinations, potential litigation, and the need to collect from reinsurers under older reinsurance agreements. To better understand our exposure to abuse and molestation, we have instituted enhanced claims coding to identify and classify abuse and molestation claims. Our claims and actuarial departments actively monitor these claims to identify changes in frequency or severity and any emerging or shifting trends. While these actions should help us better understand this rapidly evolving exposure, the ultimate impact of social, political, and legal trends remains highly uncertain, and as a result, our loss and loss expense reserves remain highly uncertain. 34 Standard Market Workers Compensation Line of Business At December 31, 2019, our workers compensation line of business recorded reserves, net of reinsurance, of $895 million, which represented 25% of our total net reserves. During 2019, this line experienced favorable development of $68.0 million, driven by accident years 2017 and prior. During 2018, this line experienced favorable development of $83.0 million, driven by accident years 2017 and prior. During 2019, 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 improved our underwriting experience, there is always risk associated with change. Most notably, changes in operations, as well as potentially significant medical inflation, may inherently change paid and reported development patterns. While our reserve analyses incorporate methods that adjust for these changes, there remains a greater risk of fluctuation in the estimated reserves. In addition to the uncertainties associated with our actuarial assumptions and methodologies, the workers compensation line of business can be impacted by a variety of issues, such as the following: Unexpected changes in medical cost inflation - The industry is currently experiencing a period of lower claim cost inflation. Changes in our historical workers compensation medical costs, along with uncertainty regarding future medical inflation, creates the potential for additional variability in our reserves; Changes in statutory workers compensation benefits - Benefit changes may be enacted that affect all outstanding claims, including claims that have occurred in the past. Depending upon the social and political climate, these changes may either increase or decrease associated claim costs; Changes in utilization of the workers compensation system - These changes may be driven by economic, legislative, or other changes, such as increased use of pharmaceuticals, more complex medical procedures, changes in the life expectancy of permanently-injured workers, and availability of health insurance, among others. 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 $15.9 million in 2019 and $12.1 million in 2018. Standard Market Commercial Automobile Line of Business At December 31, 2019, our commercial automobile line of business had recorded reserves, net of reinsurance, of $610 million, which represented 17% of our total net reserves. In 2019, this line experienced no material prior year reserve development. In 2018, this line experienced unfavorable prior year reserve development of $36.7 million, which was mainly driven by higher than expected severities in accident years 2015 through 2017. 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, coupled with poor road quality, 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. Over the last several years, we have taken actions to improve the profitability of this line of business, including: • Taking meaningful rate and underwriting actions on our renewal portfolio. We will continue to leverage our predictive modeling and analytical capabilities to provide more granular insights 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 35 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, 2019, our personal automobile line of business had recorded reserves, net of reinsurance, of $105 million, which represented 3% of our total net reserves. In 2019, this line experienced unfavorable prior year reserve development of $4.4 million, mainly attributable to higher loss severities in accident year 2018. In 2018, this line experienced unfavorable prior year reserve development of $3.0 million, which was mainly attributable to an increase in accident years 2016 and 2017. Some of the sames issues affecting the commercial automobile line are also affecting this line. Increased miles driven and vehicle repair costs, poor road quality, coupled with social trends such as distracted driving, are likely causes of increased frequencies and rising severities. We continue to recalibrate our predictive models and refine our underwriting and pricing approaches. While we believe these changes will ultimately lead to improved profitability and greater stability, 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, 2019, our E&S casualty lines of business had recorded reserves, net of reinsurance, of $382 million, which represented 11% of our total net reserves. In 2019, this line experienced minimal unfavorable prior year reserve development . In 2018, this line experienced unfavorable prior year reserve development of $12.0 million, mostly associated with accident years 2015 and 2016. While we continue to build historical loss experience in this segment, our experience base is still significantly shorter than we have for our Standard Commercial Lines segment, therefore, our reserves for this line have greater uncertainty. 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 casualty lines results have improved over recent years. Our E&S casualty lines underwriting operations have exited from several targeted classes of business that have historically produced volatile results, which include commercial auto liability, liquor liability, and snow removal. Further support for casualty improvements were attributable to the following actions related to E&S casualty claims: • Over the course of late 2015 and early 2016, our E&S casualty lines claims handling function was aligned with our standard operations claims function. E&S casualty lines 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” and “non-litigated” categories. 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: 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 resulting in earlier identification of severe claims and 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 to increase their value proposition to our insureds and organization. These improvements may lead to changes in claims practices that affect average case reserve levels and claims settlement rates, which directly impact the data used to project ultimate loss and loss expense. While these changes increase the uncertainty in our estimates in the short term, we expect the longer-term benefit will be more refined management of the claims process. 36 Our internal reserve analyses incorporate certain actuarial projection methods that make adjustments for changes in case reserve adequacy and claims settlement rates. These methods adjust our historical loss experience to the current level of case adequacy or settlement rate, which provides a more consistent basis for projecting future development patterns. These methods have their own assumptions and judgments associated with them, therefore, as with any projection method, they are not definitive in and of themselves. Further, our various claims 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 ("U.S.") 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. 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 identified by management, there is no assurance that 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 to 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 and 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 (Decrease) to Future Calendar Year Reported Increase to Future Calendar Year Reported 10 % $ (130) $ 12 10 15 10 37 (80) (55) (10) (40) 130 80 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 (65) $ (30) (40) (10) (20) 65 30 40 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. However, these tables provide perspective into the sensitivity of each of these key assumptions. While the changes above represent outcomes based on reasonably likely changes to our underlying reserving assumptions, they do not represent a full range of possible outcomes. It is possible that our reserves could increase or decrease significantly more than or less than what is reflected in the tables above. 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 recorded net loss and loss expense reserves for these claims were $21.6 million as of December 31, 2019 and $22.8 million as of December 31, 2018. 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, 2019, asbestos claims constituted 23% of our $21.6 million net asbestos and environmental reserves, compared to 27% of our $22.8 million net asbestos and environmental reserves at December 31, 2018. 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. 38 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 primarily wrote Standard Personal Lines, and therefore, our exposure to asbestos and environmental claims has been limited. Other Latent Exposures In addition to asbestos and environmental reserves, we also have exposure to other latent and continuous trigger exposures in our ongoing portfolio. Examples include construction defect claims and abuse and molestation coverage for which states have expanded the statute of limitations. 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. The impact of social, political, and legal trends remains highly uncertain, and as a result, our loss and loss expense reserves on these claims remain highly uncertain. 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. generally accepted accounting principles ("GAAP"). Two key assumptions, the discount rate and the expected return on plan assets, are important elements of expense and 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 prices 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 decreased 113 basis points, to 3.33%, as of December 31, 2019, compared to 4.46% as of December 31, 2018. The decrease was driven by a decrease in interest rates and a contraction of corporate credit spreads in 2019. 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 decreased 70 basis points, to 5.80%, as of December 31, 2019, compared to 6.50% as of December 31, 2018. The decrease was due to lower expected returns within our longer-dated fixed income securities portfolio, as interest rates and credit spreads declined significantly in 2019. , Our pension and post-retirement benefit plan obligation was $408.5 million at December 31, 2019 and $350.0 million at December 31, 2018. Plan assets were $385.1 million at December 31, 2019 and $331.7 million at December 31, 2018. 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 on observable market data. The majority of securities in our equity portfolio have readily determinable fair values and, as such, are recorded 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 recorded 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 39 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 (d) 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 (d) 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 (c) of Note 2. "Summary of Significant Accounting Policies" and item (j) of Note 5. "Investments" within Item 8. "Financial Statements and Supplementary Data." of this Annual Report, respectively. Reinsurance Reinsurance recoverables on paid and unpaid 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 as, 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. However, reinsurers often purchase and rely on their own retrocessional reinsurance programs to manage their capital position and improve their financial strength ratings. The details of these retrocessional reinsurance programs are not always adequately disclosed, which can make it difficult to assess the inherent counterparty credit risk and exposure of our reinsurers. Our allowance for estimated uncollectible reinsurance totaled $4.4 million at December 31, 2019 and $4.5 million at December 31, 2018. We continually monitor developments that may impact recoverability from our reinsurers and have available to us contractually provided remedies if necessary. For further information regarding reinsurance, see the “Reinsurance” section below and Note 8. “Reinsurance” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. 40 Financial Highlights of Results for Years Ended December 31, 2019, 2018, and 20171 2019 vs. 2018 ($ in thousands, except per share amounts) 2018 2019 2017 2018 vs. 2017 Invested assets per dollar of stockholders' equity $ 3.05 Return on equity ("ROE") Statutory premiums to surplus ratio 13.6 % 1.4 x Financial Data: Revenues After-tax net investment income After-tax underwriting income Net income before federal income tax Net income Key Metrics: Combined ratio Per Share Amounts: Diluted net income per share Book value per share Dividends declared per share to stockholders Non-GAAP Information: Non-GAAP operating income2 Diluted non-GAAP operating income per share2 Non-GAAP operating ROE2 $ 2,846,491 2,586,080 181,161 129,554 336,390 271,623 93.7 % $ 4.53 36.91 0.83 160,481 95,727 211,721 178,939 95.0 3.33 10.2 1.4 3.00 30.40 0.74 10 % $ 13 35 59 52 2,469,984 5 % 118,520 100,318 261,968 168,826 35 (5) (19) 6 (1.3) pts 93.3 % (8) % $ pts 3.4 — 51 21 % 12 $ 3.32 10.4 1.4 2.84 29.28 0.66 1.7 pts — % (0.2) pts — 6 4 % 12 18 % 18 1.1 pts $ 264,418 218,567 21 % $ 184,898 4.40 13.3 % 3.66 12.5 20 0.8 pts 3.11 11.4 % 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, the deferred tax asset charge that was recognized in 2017 in relation to the Tax Cuts and Jobs Act of 2017 ("Tax Reform"), and debt retirement costs could distort the analysis of trends. 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 (gains) losses, before tax Debt retirement costs, before tax Tax on reconciling items Tax Reform impact Non-GAAP operating income Reconciliation of net income per diluted share to non-GAAP operating income per diluted share Net income per diluted share Net realized and unrealized (gains) losses, before tax Debt retirement costs, before tax Tax on reconciling items Tax Reform impact Non-GAAP operating income per diluted share $ $ $ $ 2019 2018 2017 271,623 (14,422) 4,175 3,042 — 264,418 178,939 54,923 — (15,295) — 218,567 168,826 (6,359) — 2,226 20,205 184,898 2019 2018 2017 4.53 (0.24) 0.07 0.04 — 4.40 3.00 0.92 — (0.26) — 3.66 Reconciliation of ROE to non-GAAP operating ROE 2019 2018 2017 ROE Net realized and unrealized (gains) losses, before tax Debt retirement costs, before tax Tax on reconciling items Tax Reform impact Non-GAAP operating ROE 13.6% (0.7) 0.2 0.2 — 13.3% 10.2 3.1 — (0.8) — 12.5 41 2.84 (0.11) — 0.04 0.34 3.11 10.4 (0.4) — 0.2 1.2 11.4 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 gains (losses) Total investments segment Debt retirement costs Tax Reform impact Other ROE 2019 2018 Change Points 2017 Change Points 5.8% 0.3 0.4 6.5 9.1 0.5 9.6 (0.2) — (2.3) 4.9 0.6 — 5.5 9.2 (2.3) 6.9 — — (2.2) 13.6% 10.2 0.9 (0.3) 0.4 1.0 (0.1) 2.8 2.7 (0.2) — (0.1) 3.4 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) In 2019, we generated net income per diluted share of $4.53, compared to $3.00 in 2018. Non-GAAP operating income per diluted share was $4.40 for 2019, compared to $3.66 for 2018. The 2019 non-GAAP operating income per diluted share results were primarily impacted by (i) lower levels of non-catastrophe property loss and loss expenses of $0.27 per diluted share, (ii) lower levels of catastrophe property losses of $0.17 per diluted share, (iii) higher levels of favorable prior year casualty reserve development of $0.21 per diluted share, and (iv) an increase in net investment income of $0.33 per diluted share. These improvements were partially offset by an increase in underwriting expenses of $0.21 per diluted share, mainly due to higher profit-based expenses to our employees and agents. In addition, net income per diluted share benefited from after-tax net realized and unrealized gains of $0.18 per diluted share in 2019, compared to $0.66 of after-tax net realized and unrealized losses per diluted share in 2018. 2019 marks our sixth consecutive year of double-digit operating ROEs, placing us among an elite group of insurance companies that have achieved this level of performance. Our non-GAAP operating ROE of 13.3% in 2019 was 130 basis points above our 2019 non-GAAP operating ROE target of 12%, and 80 basis points higher than our non-GAAP operating ROE in 2018. Despite exceeding our target, our 2019 non-GAAP operating ROE was negatively impacted by net unrealized after- tax gains of $169 million on our fixed income securities portfolio, which decreased our non-GAAP operating ROE by 60 basis points, and will lower our 2020 ROE by approximately 100 basis points. We generated 21% growth in book value per share in 2019 compared to 2018. In 2019, the strong growth in book value per share was driven by net income and the after-tax net unrealized gains on our fixed income securities portfolio, partially offset by dividends paid to shareholders. Insurance Operations Our insurance segments delivered profitable results in 2019, contributing to a combined ROE in the year of 6.5%. The 2019 ROE increased 1.0 point compared to 2018, reflecting a 1.3-point improvement in our combined ratio. The improvement was principally driven by (i) lower levels of non-catastrophe property loss and loss expenses and catastrophe property losses, and (ii) higher levels of favorable prior year casualty reserve development. These improvements were partially offset by a higher expense ratio of 0.6 points, which reflected a 0.5-point increase in profit-based expenses to our employees and compensation to our distribution partners. 42 The following table provides quantitative information for analyzing the combined ratio: All Lines ($ in thousands) Insurance Operations Results: 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 2019 2018 2019 vs. 2018 2017 2018 vs. 2017 $ 2,679,424 2,597,171 1,551,491 876,567 5,120 163,993 $ 59.7 % 33.8 0.2 93.7 2,514,286 2,436,229 1,498,134 808,939 7,983 121,173 61.5 33.2 0.3 95.0 7 % $ 7 2,370,641 2,291,027 4 8 (36) 35 % $ 1,345,074 786,983 4,634 154,336 6 % 6 11 3 72 (21) % (1.8) pts 58.7 % 2.8 pts 0.6 (0.1) (1.3) 34.4 0.2 93.3 (1.2) 0.1 1.7 Our 2019 results continued to reflect our efforts to: (i) achieve overall renewal pure price increases (3.6%) that were in line with expected loss trend; (ii) generate new business; and (iii) improve the underlying profitability of our business through various underwriting and claims initiatives. We continue to execute on our strategy for disciplined NPW growth, with 7% growth in 2019 compared to 2018. The growth in 2019 was primarily due to strong retention and new business growth, mainly in our Standard Commercial Lines. Our growth in 2019 was aided by the net appointment of about 80 retail agents, excluding agency consolidations. Loss and Loss Expenses The loss and loss expense ratio decreased 1.8 points in 2019, compared to the same prior year period, driven by the following: ($ in millions) Non-Catastrophe Property Loss and Loss Expenses Catastrophe Losses For the year ended December 31, Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Total Impact on Loss and Loss Expense Ratio (Favorable)/ Unfavorable Change in Ratio 2019 2018 $ 410.5 405.6 15.8 pts $ 16.6 81.0 88.0 3.1 pts 3.6 18.9 20.2 (1.3) 2.1 ($ in millions) Favorable Prior Year Casualty Reserve Development For the year ended December 31, Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio (Favorable)/ Unfavorable Change in Ratio 2019 2018 (61.0) (41.5) (2.3) pts (1.7) (0.6) 0.4 43 2019 2018 2017 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 $ (5.0) 4.0 (68.0) — — (69.0) — 6.0 6.0 2.0 Total (favorable) prior year casualty reserve development $ (61.0) (Favorable) impact on loss ratio (2.3) pts (9.5) 37.5 (83.0) (3.0) — (58.0) 1.5 3.0 4.5 12.0 (41.5) (1.7) (48.3) 36.0 (52.3) — (2.0) (66.6) 1.0 7.0 8.0 10.0 (48.6) (2.1) For qualitative discussions regarding reserve development, refer to the insurance segment sections below in "Results of Operations and Related Information by Segment." Investments Segment Net investment income, after tax, grew 13% in 2019 compared to 2018, principally driven by: (i) strong cash flow from operations that was 18% of NPW; (ii) $106 million in net proceeds from our 5.375% Senior Notes issuance on March 1, 2019; and (iii) active portfolio management. Net investment income, after tax, contributed 9.1 percentage points to ROE in 2019, compared to 9.2 points in 2018. Net realized and unrealized gains and losses increased ROE by 0.5 points in 2019, compared to a reduction of 2.3 points in 2018. The improvement of 2.8 points was primarily driven by the sales of securities within our investment portfolio in 2019. In 2019, we sold a significant portion of our public equity securities, generating $24.8 million of realized gains, compared to sales of certain fixed income securities in 2018 that resulted in losses. Other On March 1, 2019, Selective issued 5.375% Senior Notes with an aggregate principal amount of $300 million, the proceeds of which were used, in part, to redeem our 5.875% Senior Notes with an aggregate principal balance of $185 million that became callable in 2018. As a result of this redemption, we incurred after-tax debt retirement costs of $3.3 million, which reduced our ROE by 0.2 points in 2019. These costs have been excluded from non-GAAP operating income. Outlook We ended 2019 with record levels of GAAP equity, holding company cash and invested assets, statutory surplus, and strong financial results, which reflects our capital management and disciplined execution within our underwriting and investment functions. In the first quarter of 2019, we executed our first institutional public debt offering with the issuance of $300 million aggregate principal amount of 5.375% Senior Notes. For 2020, we have established a non-GAAP operating ROE target of 11% based on our current estimated weighted average cost of capital, the current interest rate environment, and property and casualty insurance market conditions. The reduction in our non-GAAP operating ROE target from 12% in 2019, to 11% in 2020, principally reflects a reduction in our weighted average cost of capital and the lower interest rate environment, which has put pressure on investment yields and increased our stockholders' equity. Looking ahead to 2020, there remain a number of areas that require our continued focus to maintain our financial position: • Actively managing the investment portfolio to minimize the impact of lower interest rates on after-tax yields while managing credit, duration, and liquidity risk. • Continuing to achieve written renewal pure price increases that meet or exceed expected loss trend. 44 • 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 over the longer term. 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 $2.7 billion. • Identifying opportunities to enhance operational efficiencies, including optimizing compensation and commission structures, and evaluating process improvements by better leveraging technologies, automation and robotics, and thereby driving our expense ratio down over time. In addition to maintaining our strong financial position in 2020 and beyond, we also continue to enhance our customer experience strategy, including by offering value-added technologies and services. During 2019, we made a number of enhancements to our self-service and digital service offerings, including (i) our “Selective® Drive” program, which was first introduced to certain commercial automobile policyholders through our distribution partners in the fourth quarter of 2018, (ii) proactive communications of product recalls, possible loss activity, policy changes, and risk management activities, (iii) Security Mentor, a product provided to our customers to better understand and manage cybersecurity risks, (iv) technology usage to reduce claim cycle time, such as SWIFTClaim® fast tracking, and (v) other digital self-service capabilities for our customers. Our new marketing tagline, "Be Uniquely Insured," was rolled out in 2019, and speaks to our differentiated value proposition for our customers and distribution partners. Investing in and building out technologies that improve the customer experience journey remains a core focus for us. Overall, we remain extremely pleased with our financial and strategic position heading into 2020. 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 2020 expectations, Conning, Inc. is currently forecasting a property and casualty industry combined ratio of 97.6%, including 4.5 points of catastrophe losses, with a non-GAAP operating ROE of 6.5%. (Source: ©2020 Conning, Inc. Used with permission.) Our guidance for 2020 is based on our current view of the marketplace and our more significant assumptions, including our pricing and loss trend expectations and estimates, underwriting improvements and claims initiatives, and our expected reinvestment yields, alternative investment income, portfolio asset allocation, and statutory tax rates. For 2020, we expect to generate the following results: • A GAAP combined ratio, excluding catastrophe losses, of 91.5%. This assumes no prior-year casualty reserve development; • Catastrophe losses of 3.5 points; • After-tax net investment income of $185 million, which includes $14 million after-tax net investment income from our alternative investments; • An overall effective tax rate of approximately 19.5%, which also includes an effective tax rate of 18.5% for net investment income, reflecting a tax rate of 5.25% for tax-advantaged municipal bonds, and a tax rate of 21% for all other items; and • Weighted average shares outstanding of 60.5 million on a diluted basis. 45 Results of Operations and Related Information by Segment Standard Commercial Lines Segment ($ 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 2019 2018 2019 vs. 2018 2017 2018 vs. 2017 $ 2,137,071 2,049,614 1,187,856 710,648 5,120 $ 145,990 58.0 % 34.7 0.2 92.9 1,975,683 1,912,222 1,141,038 654,097 7,983 109,104 59.7 34.2 0.4 94.3 8 % $ 1,858,735 7 4 9 (36) 1,788,499 1,008,150 626,201 4,634 % 6 7 13 4 72 34 % $ 149,514 (27) % (1.7) pts 56.3 % 3.4 pts 0.5 (0.2) (1.4) 35.0 0.3 91.6 (0.8) 0.1 2.7 NPW 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, 2019 2018 83 % 3.4 411.2 $ 83 3.5 381.2 The 1.7-point decrease in the loss and loss expense ratio in 2019 compared to 2018 was driven by the following: ($ in millions) Non-Catastrophe Property Losses Catastrophe Losses For the year ended December 31, Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Total Impact on Loss and Loss Expense Ratio (Favorable)/ Unfavorable Year-Over-Year Change 2019 2018 $ 283.6 273.9 13.8 pts $ 14.3 54.2 64.3 2.6 pts 3.4 16.4 17.7 (1.3) 2.5 ($ 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 (Favorable)/ Unfavorable Year- Over-Year Change 2019 2018 $ (69.0) (58.0) (3.4) pts (3.0) (0.4) 0.7 For quantitative information on the prior year development by line of business, see "Financial Highlights of Results for Years Ended December 2019, 2018, and 2017" above and for qualitative information about the significant drivers of this development, see the line of business discussions below. Our underwriting expense ratio increased by 0.5 points in 2019 compared to 2018, primarily driven by an increase in profit- based expenses to our employees and compensation to our distribution partners. 46 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 $ $ 2019 699,262 119,055 83 % 2.8 669,895 69,932 89.6 33 2018 2019 vs. 2018 639,720 112,683 83 2.6 616,187 70,268 88.6 32 9 % $ 6 — pts 0.2 9 % $ — 1.0 2017 594,816 110,069 83 % 2.6 569,217 98,229 82.7 32 2018 vs. 2017 8 % 2 — pts — 8 % (28) 5.9 NPW growth in 2019 compared to 2018 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 by 1.0 points in 2019, driven principally by lower favorable prior year casualty reserve development compared to 2018, as outlined in the table below. ($ in millions) For the year ended December 31, 2019 2018 (Favorable)/Unfavorable Prior Year Casualty Reserve Development Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Unfavorable Year-Over-Year Change $ (5.0) (9.5) (0.7) pts (1.5) 0.8 7.0 While the impact of the favorable prior year casualty reserve development on this line in 2019 was relatively minor, in 2018 we had 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. While this line experienced continued favorable prior year casualty reserve development in 2019, it is also exposed to the impacts of certain unfavorable recent trends, including social inflation and state laws enacted that extend the statute of limitations or open windows for previously time-barred actions. As these trends evolve, we continue to adjust our underwriting, pricing, and claims handling practices to better manage the risks these exposures present. Commercial Automobile ($ in thousands) NPW Direct new business Retention Renewal pure price increases NPE Underwriting loss Combined ratio % of total standard commercial NPW 2019 2018 2019 vs. 2018 $ 590,011 102,956 83 % 7.5 $ 554,256 (43,797) 107.9 28 518,942 94,442 83 7.3 493,093 (77,403) 115.7 26 14 % $ 9 — pts 0.2 2017 465,621 78,869 84 % 6.7 12 % $ 442,818 43 (7.8) (65,267) 114.7 25 2018 vs. 2017 11 % 20 (1) pts 0.6 11 % (19) 1.0 The increases in NPW shown in the table above reflect renewal pure price increases on this line, coupled with an increase in new business as we continue to write commercial automobile policies as part of our overall customer accounts. The growth in NPW of 14% in 2019 compared to 2018 reflects an 8% growth in vehicle counts and a 7.5% renewal pure price increase, reflecting our efforts to improve profitability on this line by actively implementing price increases in recent years. The 7.8-point decrease in the combined ratio in 2019 compared to 2018 was primarily driven by the items in the tables below. 47 ($ in millions) Non-Catastrophe Property Losses Catastrophe Losses For the year ended December 31, Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Total Impact on Loss and Loss Expense Ratio (Favorable)/ Unfavorable Year-Over-Year Change 2019 2018 $ 100.8 90.1 18.2 pts $ 18.3 2.1 2.9 0.4 pts 0.6 18.6 18.9 (0.3) 0.8 ($ in millions) For the year ended December 31, 2019 2018 (Favorable)/Unfavorable Prior Year Casualty Reserve Development Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio (Favorable) Year-Over-Year Change $ 4.0 37.5 pts 0.7 7.6 (6.9) (0.5) While the prior year casualty reserve development in 2019 was relatively minor, in 2018 we had unfavorable prior year casualty reserve development of 7.6 points, which was driven primarily by increases in frequencies and severities in accident years 2015 through 2017. This line of business remains an area of focus for both us and the industry, as profitability challenges continue to generate combined ratios that are higher than our risk-adjusted targeted combined ratio. To address profitability in this line, we have been actively implementing price increases, which averaged 7.5% in 2019. In addition to price increases, we have also been actively managing our new and renewal business, which we expect will have a positive impact on profitability through business mix improvement. Workers Compensation ($ in thousands) NPW Direct new business Retention Renewal pure price (decreases) increases NPE Underwriting income Combined ratio % of total standard commercial NPW 2019 2018 2019 vs. 2018 $ $ 309,322 60,139 84 % (2.8) 311,370 80,630 74.1 14 316,647 60,089 84 (0.2) 317,616 94,395 70.3 16 (2) % $ — — pts (2.6) (2) % $ (15) 3.8 2018 vs. 2017 (2) % (10) — pts (0.2) — % 53 (10.3) 2017 323,263 66,616 84 % — 317,982 61,693 80.6 17 NPW decreased slightly in 2019 compared to 2018, driven by renewal pure price decreases, partially offset by an increase in policy counts and stable retention as shown in the table above. The 3.8-point increase in the combined ratio in 2019 compared to 2018 was primarily attributable to lower favorable prior year reserve development of 4.3 points. The favorable reserve development for both periods was due to continued favorable medical severity trends impacting accident years 2017 and prior. Due to 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. The favorable prior year casualty reserve development for each year is outlined in the table below. ($ in millions) For the year ended December 31, 2019 2018 (Favorable) Prior Year Casualty Reserve Development Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Unfavorable/ (Favorable) Year-Over-Year Change $ (68.0) (83.0) (21.8) pts (26.1) 4.3 (9.7) While reported profitability on this line remains strong due to favorable emergence on prior year reserves, current accident year margins do not support the continued negative pricing levels that are being set by the National Council on Compensation 48 Insurance and independent state rating bureaus. A reduction or reversal in the trend of favorable frequencies and severities has the potential to significantly increase this line's combined ratio, which we are monitoring closely. Commercial Property ($ in thousands) NPW Direct new business Retention Renewal pure price increases NPE Underwriting income (loss) Combined ratio % of total standard commercial NPW $ $ 2019 373,809 88,527 82 % 3.3 353,834 21,639 93.9 17 2018 2019 vs. 2018 2017 2018 vs. 2017 342,027 76,391 82 3.1 329,660 (3,211) 101.0 17 9 % $ 16 — pts 0.2 7 % $ 774 (7.1) 322,343 73,951 82 % 1.7 311,932 31,976 89.7 17 6 % 3 — pts 1.4 6 % (110) 11.3 NPW growth in this line in 2019 compared to 2018 was primarily due to direct new business as outlined in the table above, coupled with strong retention and renewal pure price increases. The 7.1-point decrease in the combined ratio in 2019 compared to 2018 was driven by lower weather and non-weather related property losses, as shown in the table below. The higher 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. The higher catastrophe losses in 2018 included the impact of two hurricanes, Hurricane Florence and Hurricane Michael, and severe winter storms including Grayson and Riley that impacted our footprint states. Quantitative information regarding property losses is as follows: ($ in millions) For the year ended December 31, Non-Catastrophe Property Losses Impact on Loss Loss and Loss and Loss Expense Expense Ratio Incurred Catastrophe Losses Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio 2019 2018 $ 149.7 154.3 42.3 pts $ 46.8 44.9 51.7 12.7 pts 15.7 Total Impact on Loss and Loss Expense Ratio 55.0 62.5 (Favorable)/ Unfavorable Year-Over-Year Change (7.5) 11.1 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 2019 2018 2019 vs. 2018 2017 2018 vs. 2017 $ $ 304,592 307,739 211,300 88,179 8,260 68.6 % 28.7 97.3 309,277 304,441 206,752 84,925 12,764 67.9 27.9 95.8 (2) % $ 1 2 4 (35) % $ 0.7 pts 0.8 1.5 296,775 289,701 189,294 89,303 11,104 4 % 5 9 (5) 15 % 65.4 % 2.5 pts 30.8 96.2 (2.9) (0.4) NPW declined in 2019 compared to 2018, reflecting the impact of a decrease in direct new business as a result of a competitive marketplace. Retention decreased in 2019 compared to 2018, as we continue to achieve renewal pure price increases on our personal automobile line of business in excess of loss trends, while the industry has seen softening in rate activity. Additionally, the deteriorating competitive position on our automobile business has led to lower new homeowners business, as we typically write policies at the account level, which include both automobile and homeowners coverage. 49 ($ in millions) Retention Renewal pure price increases on NPW Direct new business premiums 2019 2018 83 % 5.0 40.7 $ 84 3.8 51.5 The loss and loss expense ratio increased 0.7 points in 2019 compared to 2018, the primary drivers of which were as follows: ($ in millions) Non-Catastrophe Property Losses Catastrophe Losses For the year ended December 31, Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Total Impact on Loss and Loss Expense Ratio Unfavorable Year-Over-Year Change 2019 2018 $ 104.7 105.3 34.0 pts $ 34.6 21.1 17.5 6.8 pts 5.7 40.8 40.3 0.5 3.6 ($ in millions) For the year ended December 31, 2019 2018 (Favorable)/Unfavorable Prior Year Casualty Reserve Development Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Unfavorable/ (Favorable) Year-Over-Year Change $ 6.0 4.5 pts 1.9 1.5 0.4 (1.3) The unfavorable prior year casualty reserve development in both years primarily related to our personal automobile book of business. The underwriting expense ratio increased 0.8 points in 2019 compared to 2018, reflecting an increase in profit-based expenses to our employees and distribution partners, driven by our strong overall insurance segments' underwriting results. E&S Lines Segment ($ in thousands) 2019 2018 Insurance Segments Results: NPW NPE Less: Loss and loss expense incurred Net underwriting expenses incurred Underwriting income (loss) Combined Ratios: Loss and loss expense ratio Underwriting expense ratio Combined ratio $ $ 237,761 239,818 152,335 77,740 9,743 63.5 % 32.4 95.9 229,326 219,566 150,344 69,917 (695) 68.5 31.8 100.3 2019 vs. 2018 2017 2018 vs. 2017 4 % $ 9 215,131 212,827 1 11 1,502 % $ 147,630 71,479 (6,282) (5.0) pts 0.6 (4.4) 69.4 % 33.6 103.0 7 % 3 2 (2) 89 % (0.9) pts (1.8) (2.7) Over the past two-year period, we have taken steps to exit certain underperforming classes of E&S Lines business that had produced volatile results in the past, while entering into a new distribution relationship in April 2018. The decision to exit certain underperforming classes negatively impacted our NPW growth in 2019, but we expect it to help improve our underwriting results. Renewal pure price increases in E&S Lines averaged 4.0% in 2019, 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 kept us on track to achieve our risk-adjusted profitability target for this segment. Quantitative information is as follows: ($ in millions) Overall renewal price increases Direct new business premiums 2019 2018 $ 4.0 % 96.8 4.7 98.0 50 The loss and loss expense ratio improvement in 2019 compared to 2018 was primarily attributable to a decrease in property losses and lower unfavorable prior year casualty reserve development. These were partially offset by an increase in current year loss costs of 2.3 points. Quantitative information regarding our property losses and prior year casualty reserve development are as follows: ($ in millions) Non-Catastrophe Property Losses Catastrophe Losses For the year ended December 31, Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Total Impact on Loss and Loss Expense Ratio (Favorable) Year-Over-Year Change 2019 2018 $ 22.2 26.4 9.3 pts $ 12.0 5.7 6.2 2.4 pts 2.8 11.7 14.8 (3.1) (2.7) ($ in millions) For the year ended December 31, 2019 2018 Unfavorable Prior Year Casualty Reserve Development Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio (Favorable)/ Unfavorable Year-Over-Year Change $ 2.0 12.0 pts 0.8 5.5 (4.7) 0.8 The unfavorable prior year casualty reserve development for 2019 was relatively minor. In 2018, we had unfavorable prior year casualty reserve development that was driven by higher than expected frequencies and severities in accident years 2015 and 2016. The 0.6-point increase in the underwriting expense ratio in 2019 compared to 2018 was primarily due to an increase in profit- based compensation to our distribution partners. 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 Company ("A.M. Best"). 51 The following illustrates the pooling percentages by Insurance Subsidiary as of December 31, 2019: 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 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. Our reinsurance protection 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 primarily 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 may also be 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 and purchased by Sompo Holdings Inc. in March 2017. 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. 52 Property Reinsurance The property catastrophe treaty, which covers both our standard market and E&S business, was renewed effective January 2020. 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 treaties. Overall catastrophe ceded premium for 2020 increased modestly primarily due to increases in expected underlying property premium. On a risk-adjusted basis, the expiring layers saw modest rate increases, in line with market conditions for loss-free accounts sharing our geographic footprint. We seek ways to minimize credit risk inherent in a reinsurance transaction by transacting with highly-rated reinsurance partners and purchasing collateralized reinsurance products, particularly for high-severity, low-probability events. The current reinsurance program includes $242 million in collateralized limit, primarily in the top layer of the catastrophe program. We continue to assess our property catastrophe exposure aggregations, modeled results, and effects of growth on our property portfolio, and strive to manage our exposure to individual large events balanced against the cost of reinsurance protections. Although we model various catastrophic perils, due to our geographic spread, the risk of hurricane continues to be the most significant natural catastrophe peril to which our portfolio is exposed. Below is a summary of the largest five actual hurricane losses that we experienced in the past 25 years: ($ 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 15.7 1 Net Loss2 45.6 40.2 3.0 15.7 13.8 Accident Year 2012 2011 1989 2003 2018 1This amount represents reported and unreported gross losses estimated as of December 31, 2019. 2Net loss does not include reinstatement premiums, taxes, or flood claims handling fees. We use the results of a third-party vendor model and proprietary analysis in our review of exposure to hurricane risk. The third-party vendor model provides a long-term view that closely relates modeled event frequency to historical hurricane activity and is adjusted to reflect assumptions for certain un-modeled costs, such as the impact of loss expenses, residual market assessments, and automobile-related losses. We believe that modeled estimates provide a range of potential outcomes and we review multiple estimates for purposes of understanding our catastrophic risk. Occurrence Exceedence Probability Modeled Losses ($ in thousands) 4.0% (1 in 25 year event) 2.0% (1 in 50 year event) 1.0% (1 in 100 year event) 0.67% (1 in 150 year event) 0.5% (1 in 200 year event) 0.4% (1 in 250 year event) 0.2% (1 in 500 year event) 1Gross losses include secondary uncertainty, demand and storm surge, and assumptions for certain un-modeled costs, such as the impact of loss expenses, residual market assessments, and automobile-related losses, which collectively increase our gross losses by approximately 13%. 2Net losses are after-tax losses net of catastrophe reinsurance including reinstatement premiums. 3Equity as of December 31, 2019. Net Losses2 29,276 30,336 35,318 52,087 56,675 103,698 399,605 % Net Losses as a Percent of Equity3 1 1 2 2 3 5 18 Gross Losses1 $173,267 289,049 464,576 643,902 747,583 841,970 1,227,158 Our current catastrophe reinsurance program exhausts at approximately 1 in 217 year return period, or events with 0.5% probability, based on a multi-model view of hurricane risk. Our actual gross and net losses incurred from 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, 2019 with the top layer renewed on January 1, 2020. The major terms of these treaties are consistent with the prior year. 53 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) $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 three reinstatements, $80 million in aggregate limits. 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 $40 million. Non-foreign terrorism losses (other than NBCR) are covered to the same extent as non- terrorism losses. Flood 100% reinsurance by the federal government’s WYO. None 54 Casualty Reinsurance The casualty excess of loss treaty, which covers both our standard market and E&S Lines business, was renewed on July 1, 2019 and is effective through June 30, 2020, 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: All NBCR losses are excluded. All other losses stemming from the acts of terrorism are subject to the following: - $3 million in excess of $2 million layer provides 27 reinstatements, $84 million annual aggregate limit; - $7 million in excess of $5 million layer provides five reinstatements, $42 million annual aggregate limit; - $9 million in excess of $12 million layer provides three reinstatements; $36 million annual aggregate limit; - $9 million in excess of $21 million layer provides one reinstatement, $18 million annual aggregate limit; - $20 million in excess of $30 million layer provides one reinstatement, $40 million annual aggregate limit; and - $40 million in excess of $50 million layer provides one reinstatement, $80 million annual aggregate limit. 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. Endurance Specialty Quota Share and Loss Development Cover (covers E&S Lines) We have other reinsurance treaties, such as our (i) Surety and Fidelity Excess of Loss Reinsurance Treaty, (ii) National Workers Compensation Reinsurance Pool Quota Share, which covers business assumed from the involuntary workers compensation pool, (iii) Equipment Breakdown Coverage Reinsurance Treaty, (iv) Multi-line Quota Share, which covers additional personal lines coverages, and (iv) Cyber Liability Quota Share, which covers our CyCurity® product. We regularly evaluate 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, review of our own loss experience, 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 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, including short-term investments, was 3.6 years as of December 31, 2019, compared to the Insurance Subsidiaries’ liability duration of approximately 3.6 years. The effective duration of the fixed income securities portfolio, including short-term investments, is monitored and managed to maximize yield while managing interest rate risk at an acceptable level. We maintain a well-diversified portfolio across sectors, with credit quality and maturities that provide ample liquidity. Purchases and sales are made with the intent of maximizing investment returns in the current market environment while balancing capital preservation. 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. 55 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. 2019 2018 Change 6,688,654 3.05 216,564 171,085 5,960,651 3.33 11,916 9,414 12% (8.4) 1,717 1,717 The 12% increase in invested assets at December 31, 2019 compared to December 31, 2018 was driven by (i) operating cash flow that was 18% of NPW; (ii) pre-tax net unrealized gains in our fixed income and equity securities portfolios of $205 million, due to a reduction in interest rates and tightening corporate credit spreads; and (iii) net proceeds of $106 million from the issuance of our 5.375% Senior Notes. Despite the 12% growth in invested assets in 2019, our GAAP equity increased by 22% in 2019 due to strong profitability and the after-tax impact of net unrealized gains in our fixed income securities portfolio, which led to the reduction in invested assets per dollar of stockholders' equity to $3.05 at December 31, 2019 from $3.33 at December 31, 2018. At December 31, 2019, our fixed income securities and short-term investment portfolio represented 96% of our total invested assets, compared to 95% at December 31, 2018. These portfolios maintained a weighted average credit rating of "AA-" as of both December 31, 2019 and 2018, with 97% and 98% of the securities within the portfolio being investment grade quality, respectively. The sector composition and credit quality of our major asset categories within our fixed income securities portfolio did not significantly change from December 31, 2018. Additionally, as of December 31, 2019, approximately 19% of our fixed income securities portfolio was comprised of investment securities that have a non-fixed base interest rate. Included in this 19% is a 12% allocation to floating rate securities that are primarily tied to the U.S. dollar-denominated London Interbank Offered Rate ("LIBOR"). For further details on the composition, credit quality, and the various risks to which our portfolio is subject, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.” of this Form 10-K. Net Investment Income The components of net investment income earned were as follows: ($ 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 $ 181,161 Effective tax rate Annual after-tax yield on fixed income securities Annual after-tax yield on investment portfolio 18.6% 2.9 2.9 2019 2018 2019 vs. 2018 2017 2018 vs. 2017 $ 203,255 178,104 14 % 153,230 16 % 6,996 6,653 18,778 (13,139) 222,543 41,382 7,764 3,472 17,799 (11,803) 195,336 34,855 160,481 17.8 2.8 2.8 (10) 92 6 (11) 14 19 13 0.8 pts 0.1 0.1 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 The increase in pre-tax net investment income of $27.2 million in 2019 compared to 2018, was driven primarily by: (i) cash flow from operations that was 18% of NPW; (ii) $106 million of net proceeds from our 5.375% Senior Notes issuance on March 1, 2019; and (iii) active portfolio management. 56 Realized and Unrealized Gains and Losses Our general philosophy for sales of securities is to reduce our exposure to securities and sectors based on economic evaluations and when the fundamentals for that security or sector have deteriorated, or to opportunistically trade out of securities to other securities with better economic return characteristics. Net realized and unrealized gains and losses for the indicated periods were as follows: ($ in thousands) Net realized gains (losses), excluding OTTI Unrealized losses recognized in income on equity securities OTTI charges Total net realized and unrealized gains (losses) 2019 2018 2017 $ $ 26,715 (8,649) (3,644) 14,422 (18,975) (29,369) (6,579) (54,923) 11,204 — (4,845) 6,359 The $69.3 million improvement in net realized and unrealized gains in 2019 compared to 2018 was primarily driven by the sales of securities within our investment portfolio in 2019. In 2019, we sold a significant portion of our public equity securities, generating $24.8 million of realized gains, compared to sales of certain fixed income securities in 2018 that resulted in losses. For additional information regarding our realized gains and losses, as well as our OTTI methodology, see Note 2. “Summary of Significant Accounting Policies” and Note 5. "Investments" in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. Federal Income Taxes The following table provides information regarding federal income taxes. ($ 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 2019 2018 2017 $ 64.8 — 64.8 21.0% 19.3% 19.3 32.8 — 32.8 21.0 15.5 15.5 93.1 20.2 72.9 35.0 35.6 27.8 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, excess tax benefits on our stock-based compensation awards, and executive compensation. Additionally, in 2018 we recognized tax rate benefits of approximately $3.8 million driven by capital losses that were carried back to prior tax years that were 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. We maintain liquidity at the parent primarily through (i) short-term investments that are generally maintained in “AAA” rated money market funds approved by the National Association of Insurance Commissioners (“NAIC”), (ii) high-quality, highly-liquid government and corporate fixed income securities; and (iii) a cash balance. In the aggregate, cash and investments at the Parent amounted to $278 million at December 31, 2019 and $146 million at December 31, 2018. 57 The increase in 2019 was primarily due to the $106 million in net proceeds from our 5.375% Senior Notes offering on March 1, 2019, and increased dividends from our Insurance Subsidiaries. The level of liquidity at the Parent may fluctuate based on various factors, including the amount and availability of dividends from our Insurance Subsidiaries, investment income, expenses, other liquidity needs of the Parent, and asset allocation investment decisions. Our target is to maintain liquidity at the Parent of at least two years its expected annual needs, which is currently estimated at approximately $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 equity and debt securities. We continue to monitor these sources, giving consideration to our long-term liquidity and capital preservation strategies. Insurance Subsidiary Dividends The Insurance Subsidiaries paid $110 million in dividends to the Parent in 2019. As of December 31, 2019, our allowable ordinary maximum dividend is $267 million for 2020. 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 Credit Agreement (the "Line of Credit") that obligate it, among other things, to maintain a minimum consolidated net worth and maximum ratio of consolidated debt to total capitalization. For additional information regarding dividend restrictions, refer to Note 20. “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 claims 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 On December 20, 2019, the Parent entered into a Line of Credit among the Parent, the lenders named therein (the “Lenders”), and the Bank of Montreal, Chicago Branch, as Administrative Agent. Under the Line of Credit, the Lenders have agreed to provide the Parent with a $50 million revolving credit facility, which can be increased to $125 million with the consent of the Lenders. The Line of Credit will mature on December 20, 2022 and has an interest rate, which varies and is based on, among other factors, the Parent’s debt ratings. This agreement replaced a prior credit agreement that the Parent terminated in conjunction with entering into the Line of Credit. For additional information regarding the Line of Credit and the representations, warranties, and covenants contained in such agreement, and the prior credit agreement, refer to Note 10. “Indebtedness” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. 58 Several of our Insurance Subsidiaries are members of certain branches of the Federal Home Loan Bank ("FHLB"), which provides those subsidiaries with additional access to 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. The following table provides information on the remaining capacity for FHLB borrowings based on these restrictions, as well as the amount of additional FHLB stock that would need to be purchased to allow these member companies to borrow their remaining capacity: ($ in millions) As of December 31, 2019 SICSC SICSE SICA SICNY Total Admitted Assets Borrowing Limitation Amount Borrowed Remaining Capacity Additional FHLB Stock Requirements $ 723.4 $ 571.0 2,696.3 494.5 $ 72.3 57.1 269.6 24.7 423.7 32.0 28.0 50.0 — 110.0 40.3 29.1 219.6 24.7 313.7 1.7 1.3 9.9 1.1 14.0 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, 2019 SICSC SICSE Total Admitted Assets as of December 31, 2019 Borrowing Limitation Amount Borrowed Remaining Capacity $ 723.4 571.0 $ $ 72.3 57.1 129.4 24.0 16.0 40.0 48.3 41.1 89.4 Short-term Borrowings There were no balances outstanding under the Line of Credit at December 31, 2019 or at any time during 2019, or the prior credit agreement at any time during 2019. During 2019, SICA borrowed an aggregate of $65 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 In the first quarter of 2019, the Parent issued $300 million of 5.375% Senior Notes at a discount of $5.9 million which, when coupled with debt issuance costs of approximately $3.3 million, resulted in net proceeds from the offering of $290.8 million. 59 The Parent used a portion of the proceeds to fully redeem the then outstanding $185 million aggregate principal amount of its 5.875% Senior Notes, with the remaining $106 million being used for general corporate purposes. For additional information on these transactions, refer to Note 10. “Indebtedness” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. The Parent had no other private or public issuances of stock or debt instruments during 2019. 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 2019, our Board of Directors approved an 15% increase in the quarterly cash dividend, to $0.23 from $0.20 per share. Our ability to meet our interest and principal repayment obligations on our debt, as well as our ability to continue to pay dividends to our stockholders, is dependent on liquidity at the Parent coupled with the ability of the Insurance Subsidiaries to pay dividends, if necessary, and/or the availability of other sources of liquidity to the Parent. Our next two principal repayments, each in the amount of $25 million, are due in 2021, with the next following principal payment due in 2026. Restrictions on the ability of the Insurance Subsidiaries to declare and pay dividends, without alternative liquidity options, could materially affect our ability to service debt and pay dividends on common stock. Capital Resources Capital resources provide protection for policyholders, furnish the financial strength to support the business of underwriting insurance risks, and facilitate continued business growth. At December 31, 2019, we had GAAP stockholders’ equity of $2.2 billion, of which $169 million was the result of an increase in unrealized gains on our fixed income portfolio primarily associated with lower interest rates. Statutory surplus was $1.9 billion at December 31, 2019. With total debt of $550.6 million, our debt-to-capital ratio was approximately 20.1% at December 31, 2019. 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, 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 $36.91 as of December 31, 2019, from $30.40 as of December 31, 2018, primarily due to $4.53 in net income per share and $2.83 in unrealized gains on our fixed income securities portfolio, which was partially offset by $0.83 in dividends to our shareholders. Off-Balance Sheet Arrangements At December 31, 2019 and December 31, 2018, 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 finance 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. 60 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. Our future cash payments associated with contractual obligations pursuant to operating and finance leases, debt, interest on debt obligations, and loss and loss expense as of December 31, 2019 are summarized below: Contractual Obligations ($ in millions) Operating leases Finance 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 Payment Due by Period Total Less than 1 year 1-3 years 3-5 years More than 5 years $ 34.0 0.8 560.0 651.5 1,246.3 4,067.2 (544.2) 3,523.0 8.3 0.5 — 29.1 37.9 1,084.5 (143.6) 940.9 10.8 0.3 50.0 57.1 118.2 1,298.6 (129.8) 1,168.8 6.2 — — 56.6 62.8 619.8 (70.1) 549.7 612.5 8.7 — 510.0 508.7 1,027.4 1,064.3 (200.7) 863.6 1,891.0 Total $ 4,769.3 978.8 1,287.0 For additional information regarding: (i) cross-default provisions associated with certain of our notes payable in the table above; or (ii) our Line of Credit, see Note 10. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." in this Form 10-K. In addition to the above, at December 31, 2019, we had certain contractual obligations that may require us to invest additional amounts into our investment portfolio, which are as follows: ($ in millions) Alternative and other investments Non-publicly traded collateralized loan obligations in our fixed income securities portfolio Non-publicly traded common stock within our equity portfolio Commercial mortgage loans Privately-placed corporate securities Total Amount of Obligation Year of Expiration of Obligation $ $ 219.2 35.4 3.9 10.0 15.0 283.5 2036 2030 2023 Less than 1 year Less than 1 year There is no certainty that any such additional investment will be required. We expect to have the capacity to repay or refinance these obligations as they come due. 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. 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 91% fixed income securities, 1% equity securities, 4% short-term investments, and 4% other 61 investments as of December 31, 2019. We do not directly hold derivatives, commodities, or other investments denominated in foreign currency. We have minimal foreign currency fluctuation risk within our alternative investment portfolio. 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, collateralized loan obligations ("CLO") and other asset-backed securities ("ABS"), and mortgage-backed securities ("MBS"). As of December 31, 2019, approximately 19% of our fixed income securities portfolio was comprised of investment securities that have a non-fixed base interest rate. Included in this 19% is a 12% allocation to floating rate securities where the base rate is primarily tied to the U.S. dollar-denominated London Interbank Offered Rate ("LIBOR"). Our strategy to manage interest rate risk is to purchase intermediate-term fixed income investments that are attractively priced in relation to perceived credit risks. Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates. As our fixed income securities portfolio contains interest rate-sensitive instruments, it may be adversely affected by changes in interest rates resulting from governmental monetary policies, domestic and international economic and political conditions, and other factors beyond our control. 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, including short term investments, at both December 31, 2019 and December 31, 2018 was 3.6 years, which is within our historical range. The Insurance Subsidiaries’ liability duration was approximately 3.6 years at December 31, 2019. 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. The following table presents the sensitivity analysis of interest rate risk as of December 31, 2019: ($ in thousands) Fixed income securities 2019 Interest Rate Shift in Basis Points -200 -100 0 100 200 Fair value of fixed income securities portfolio $ 6,527,669 6,333,983 6,117,595 5,900,088 5,682,254 Fair value change Fair value change from base (%) 410,074 216,388 6.7% 3.5% (217,507) (435,341) (3.6)% (7.1)% 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. 62 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, 2019 and December 31, 2018. Exposure to non-investment grade bonds represented approximately 4% and 2% of the total fixed income securities portfolio at December 31, 2019 and December 31, 2018, 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, 2019 and December 31, 2018: December 31, 2019 ($ in millions) U.S. government obligations Foreign government obligations Obligations of states and political subdivisions Corporate securities CLO and Other ABS Commercial mortgage-backed securities ("CMBS") Residential mortgage-backed securities ("RMBS") Total fixed income portfolio December 31, 2018 ($ in millions) U.S. government obligations Foreign government obligations Obligations of states and political subdivisions Corporate securities CLO and Other ABS CMBS RMBS Total fixed income portfolio Fair Value Carry Value Unrealized/ Unrecognized Gain (Loss) Weighted Average Credit Quality 116.2 18.5 1,235.0 1,964.6 793.0 538.3 1,452.0 6,117.6 116.2 18.5 1,234.7 1,963.7 793.0 538.3 1,452.0 6,116.4 3.5 0.5 62.2 81.5 2.5 23.6 43.0 216.8 AAA BBB+ AA- BBB+ AA- AA+ AAA AA- 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- $ $ $ $ 63 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, 2019: % of Total Weighted Average Credit Quality State Exposures of Municipal Bonds General Obligation ($ in thousands) New York California Texas1 New Jersey Washington Florida Pennsylvania Massachusetts Arizona Colorado Other Pre-refunded/escrowed to maturity bonds Total State & Local 13,777 39,702 49,788 — 20,679 3,175 — 892 5,545 4,769 112,428 250,755 30,276 281,031 $ $ Special Revenue 139,403 83,882 42,212 67,872 31,324 46,372 49,064 46,693 32,783 30,946 Fair Value 153,180 123,584 92,000 67,872 52,003 49,547 49,064 47,585 38,328 35,715 328,584 899,135 54,845 441,012 1,149,890 85,121 13% 10% 7% 5% 4% 4% 4% 4% 3% 3% 36% 93% 7% 953,980 1,235,011 100% AA- AA- AA A AA AA- AA- AA AA A+ AA- AA- AAA AA- % of Total Municipal Portfolio 23% 1Of the $49.8 million in state and local Texas general obligation bonds, $19 million represents investments in Texas Permanent School Fund bonds, which are considered to have lower risk as a result of the bond guarantee programs that support these bonds. 100% 77% Special revenue fixed income securities of municipalities (referred to as “special revenue bonds”) generally do not have the “full faith and credit” backing of the municipal or state governments, as do general obligation bonds, but special revenue bonds have a dedicated revenue stream for repayment. For our special revenue bonds, 70% of the dedicated revenue stream is comprised of the following: (i) essential services (55%), which is comprised of transportation, water and sewer, and electric; and (ii) education (15%), which includes school districts and higher education, including state-wide university systems. As such, we believe our special revenue bond portfolio is appropriate for the current environment. Corporate Securities For investment-grade corporate bonds, we address the risk of an individual issuer's default by maintaining a diverse portfolio of holdings. The primary risk related to non-investment grade corporate bonds is credit risk. A weak financial profile can lead to rating downgrades from the credit rating agencies, which can put further downward pressure on bond prices. Valuations on these bonds are related more directly to underlying operating performance than to general interest rates. Our holdings of non- investment grade corporate bonds, which typically exhibit weaker credit profiles and are subject to more risk of credit loss, represent 3% of our overall investment portfolio. The tables below provide details on our corporate bond holdings at December 31, 2019 and December 31, 2018: December 31, 2019 ($ in millions) Investment grade Non-investment grade Total corporate securities December 31, 2018 ($ in millions) Investment grade Non-investment grade Total corporate securities Fair Value Carry Value 1,775.9 188.7 1,964.6 1,775.0 188.7 1,963.7 Unrealized/ Unrecognized Gain (Loss) 79.8 1.7 81.5 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) $ $ $ $ Weighted Average Credit Quality A- B+ BBB+ Weighted Average Credit Quality A- B+ BBB+ 64 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, 2019 and December 31, 2018: December 31, 2019 ($ 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, 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 Fair Value Carry Value Unrealized/ Unrecognized Gain (Loss) Weighted Average Credit Quality 496.7 274.1 770.8 14.7 7.5 22.2 793.0 496.7 274.1 770.8 14.7 7.5 22.2 793.0 (2.4) 5.8 3.4 (0.8) (0.1) (0.9) 2.5 AA A+ AA B+ B+ B+ AA- 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 $ $ $ $ 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, 2019: ($ in thousands) (30)% (20)% (10)% 0% 10% 20% 30% Fair value of AFS equity portfolio $ 51,056 Fair value change (21,881) 58,349 (14,588) 65,643 (7,294) 72,937 80,231 7,294 87,525 14,588 94,818 21,881 Change in Equity Values in Percent 65 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, direct lending, mezzanine financing, distressed debt, infrastructure, and real estate. As of December 31, 2019, other investments represented 4% 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 $386.9 million in invested assets as of December 31, 2019, of which approximately 59% 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 claims 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, CLO and other ABS. 2These exposures include our alternative investments and other non-traded securities. Percentage of Invested Assets 74 % 22 4 100 % 66 Indebtedness (a) Long-Term Debt As of December 31, 2019, we had outstanding long-term debt of $550.6 million that matures as shown in the following table: ($ 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 5.375% Senior Notes Subtotal Unamortized debt issuance costs Finance lease obligations Total notes payable Year of Maturity Carrying Amount Fair Value 2019 $ 2021 2021 2026 2034 2035 2049 25,000 25,000 60,000 49,910 99,480 294,157 553,547 (3,687) 737 $ 550,597 24,901 24,875 63,002 66,365 123,104 357,025 659,272 The weighted average effective interest rate for our outstanding long-term debt was 5.2% at December 31, 2019. Our debt is not exposed to material changes in interest rates because the interest rates are fixed. Refer to Note 10. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K for information on our debt covenant provisions. (b) Short-Term Debt On December 20, 2019, the Parent entered into a Credit Agreement (the “Line of Credit”) under which the Parent has access to a $50 million revolving credit facility, which can be increased to $125 million with the consent of the Lenders. This Line of Credit will mature on December 20, 2022 and has an interest rate, which varies and is based on, among other factors, the Parent’s debt ratings. There were no balances outstanding under this Line of Credit or the previous credit facility at December 31, 2019, or at any time during 2019. Refer to Note 10. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K for additional information on our Line of Credit. 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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, 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, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 12, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. 67 Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Evaluation of the estimate of reserve for loss and loss expense As discussed in Notes 2 and 9 to the consolidated financial statements, the Company estimates the reserve for loss and loss expense (reserves) through an internal reserve analysis that relies upon generally accepted actuarial techniques supplemented with other internal and external information. The Company develops reserve estimates by line of business and, as experience emerges and other information develops, the reserve estimates are assessed in aggregate and adjusted as necessary. As of December 31, 2019, the Company recorded a liability of $4.07 billion for reserves. We identified the evaluation of the estimate of reserves for loss and loss expense as a critical audit matter. The process to evaluate the Company’s estimate of reserves involved a high degree of auditor judgment due to the inherent uncertainties in adjusting past experience for current developments and anticipated trends for predicting future events. These uncertainties may be affected by a number of considerations, including internal factors such as changes to underwriting and claim practices, and external factors such as economic conditions, legislative enactments, judicial decisions, and social trends. Evaluating the impact of all of these factors required specialized skills and auditor judgment. The primary procedures we performed to address this critical audit matter included the following. We tested, with the involvement of actuarial professionals when appropriate, certain internal controls related to the Company’s actuarial analyses and determination of the Company’s best estimate of recorded reserves. We also involved actuarial professionals with specialized skills and knowledge, who assisted in: • Evaluating the Company’s actuarial techniques by comparing them to generally accepted actuarial techniques; • Developing an independent estimate of reserves for certain lines of business using generally accepted actuarial • techniques; For other lines of business, assessing the Company's internal actuarial analysis by inspecting the assumptions and actuarial techniques used; • Developing an independent consolidated range of reserves based on generally accepted actuarial techniques and comparing to the Company's recorded reserves; and • Assessing any movement of the Company’s recorded reserves within the independent consolidated range of reserves. We have served as the Company's auditor since 1964. New York, New York February 12, 2020 /s/ KPMG LLP 68 Consolidated Balance Sheets December 31, ($ in thousands, except share amounts) ASSETS Investments: Fixed income securities, held-to-maturity – at carrying value (fair value: $21,975 – 2019; $38,317 – 2018) Fixed income securities, available-for-sale – at fair value (amortized cost: $5,879,986 – 2019; $5,270,798 – 2018) Equity securities – at fair value (cost: $72,061 – 2019; $138,114 – 2018) 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: $6,400 – 2019; $9,400 – 2018 Reinsurance recoverable, net of allowance for uncollectible accounts of: $4,400 – 2019; $4,500 – 2018 (Note 8) Prepaid reinsurance premiums (Note 8) Deferred federal income tax (Note 13) Property and equipment – at cost, net of accumulated depreciation and amortization of: $227,566 – 2019; $211,657 – 2018 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 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: 103,484,159 – 2019; 102,848,394 – 2018 Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) (Note 6) Treasury stock – at cost (shares: 44,023,006 – 2019; 43,899,840 – 2018) Total stockholders’ equity Commitments and contingencies (Notes 17 and 18) Total liabilities and stockholders’ equity See accompanying Notes to Consolidated Financial Statements. 2019 2018 $ 20,800 37,110 6,095,620 5,273,100 72,937 282,490 216,807 147,639 323,864 178,938 6,688,654 5,960,651 300 7,675 44,846 823,901 573,235 166,705 6,776 77,409 271,186 7,849 128,614 505 16,414 41,620 770,518 549,172 157,723 53,540 65,248 252,612 7,849 76,877 8,797,150 7,952,729 4,067,163 1,523,167 550,597 2,987 126,753 331,547 3,893,868 1,431,932 439,540 1,302 116,706 277,579 6,602,214 6,160,927 — — 206,968 418,521 2,080,529 81,750 (592,832) 2,194,936 205,697 390,315 1,858,414 (77,956) (584,668) 1,791,802 $ $ $ $ $ 8,797,150 7,952,729 69 Consolidated Statements of Income December 31, ($ in thousands, except per share amounts) Revenues: Net premiums earned Net investment income earned Net realized and unrealized gains (losses): Net realized investment gains (losses) on disposals Net unrealized losses on equity securities Other-than-temporary impairments Other-than-temporary impairments on fixed income securities recognized in other comprehensive income Total net realized and unrealized gains (losses) 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 2019 2018 2017 $ 2,597,171 222,543 2,436,229 195,336 2,291,027 161,882 26,715 (8,649) (3,644) — 14,422 12,355 (18,975) (29,369) (6,579) — (54,923) 9,438 11,204 — (4,809) (36) 6,359 10,716 2,846,491 2,586,080 2,469,984 1,551,491 1,498,134 1,345,074 535,973 358,069 33,668 30,900 495,042 331,318 24,419 25,446 469,236 333,097 24,354 36,255 2,510,101 2,374,359 2,208,016 Income before federal income tax 336,390 211,721 261,968 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. 60,640 4,127 64,767 35,012 (2,230) 32,782 62,184 30,958 93,142 271,623 178,939 168,826 4.57 4.53 3.04 3.00 2.89 2.84 $ $ $ 70 Consolidated Statements of Comprehensive Income December 31, ($ in thousands) Net income Other comprehensive income (loss), net of tax: Unrealized gains (losses) on investment securities: 2019 2018 2017 $ 271,623 178,939 168,826 Unrealized holding gains (losses) arising during year 168,021 (97,284) 43,015 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 disposals of available-for-sale securities Total unrealized gains (losses) on investment securities — (46) — 530 168,505 — 87 — 31,316 (65,881) 23 (116) 68 (4,537) 38,453 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 income (loss) Comprehensive income See accompanying Notes to Consolidated Financial Statements. (10,898) (8,906) (3,700) 2,099 (8,799) 159,706 431,329 $ 1,680 (7,226) (73,107) 105,832 1,367 (2,333) 36,120 204,946 71 Consolidated Statements of Stockholders’ Equity December 31, ($ in thousands, except share and per share amounts) 2019 2018 2017 Common stock: Beginning of year Dividend reinvestment plan Stock purchase and compensation plans 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 Cumulative effect adjustment due to adoption of lease guidance, net of tax (Note 3) Balance at beginning of year, as adjusted Net income Dividends to stockholders End of year Accumulated other comprehensive income (loss): 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 income (loss) End of year Treasury stock: Beginning of year Acquisition of treasury stock End of year Total stockholders’ equity Dividends declared per share to stockholders Common Stock, shares outstanding: Beginning of year Dividend reinvestment plan Stock purchase and compensation plan Acquisition of treasury stock End of year $ 205,697 44 1,227 206,968 390,315 1,510 26,696 418,521 204,569 47 1,081 205,697 367,717 1,379 21,219 390,315 203,241 57 1,271 204,569 347,295 1,395 19,027 367,717 1,858,414 1,698,613 1,568,881 — — 342 30,726 (5,707) — — — — 1,858,756 1,723,632 1,568,881 271,623 (49,850) 178,939 (44,157) 168,826 (39,094) 2,080,529 1,858,414 1,698,613 (77,956) — — (77,956) 159,706 81,750 (584,668) (8,164) (592,832) 20,170 (30,726) 5,707 (4,849) (73,107) (77,956) (15,950) — — (15,950) 36,120 20,170 (578,112) (6,556) (584,668) (572,097) (6,015) (578,112) $ $ 2,194,936 1,791,802 1,712,957 0.83 0.74 0.66 58,948,554 58,495,122 57,967,199 22,087 613,678 (123,166) 23,493 540,337 (110,398) 28,607 635,521 (136,205) 59,461,153 58,948,554 58,495,122 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. 72 Consolidated Statements of Cash Flows December 31, ($ in thousands) Operating Activities Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization Stock-based compensation expense Undistributed gains of equity method investments Distributions in excess of current year income of equity method investments Net realized and unrealized (gains) losses 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 Increase (decrease) in other liabilities Net cash provided by operating activities Investing Activities Purchase of fixed income securities, held-to-maturity Purchase of fixed income securities, available-for-sale Purchase of equity securities 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 Fixed asset disposals 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 Repayment of finance lease obligations Net cash provided by (used in) 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. $ 73 2019 2018 2017 $ 271,623 178,939 168,826 55,205 19,077 (12,773) 2,807 (14,422) 42 149,232 82,253 7,721 (53,383) (18,574) (3,226) (3,748) (39,337) 34,998 477,495 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 — (7,150) — (1,856,125) (2,918,203) (2,130,362) (46,397) (64,908) (94,344) (68,578) (61,931) (55,830) (6,087,909) (4,259,734) (4,280,553) 594,743 6,129,885 16,149 626,686 137,294 17,964 19,972 9 (30,986) (543,623) (47,675) (8,164) 8,243 355,757 (250,000) (977) 57,184 (8,944) 16,919 7,975 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 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) United States ("U.S.") generally accepted accounting principles ("GAAP"); and (ii) the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). All significant intercompany accounts and transactions are eliminated in consolidation. (b) Use of Estimates The preparation of our Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported financial statement balances, as well as the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. (c) Investments Portfolio Composition and Presentation in the Consolidated Balance Sheets Our investment portfolio is primarily comprised of fixed income securities. 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 agency obligations; • • • 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; • Collateralized loan obligations ("CLOs") and other asset-backed securities ("ABS"); • Residential mortgage-backed securities ("RMBS"); and • Commercial mortgage-backed securities ("CMBS"). We have designated substantially all of our fixed income securities portfolio as available-for-sale ("AFS"), with the remainder 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 recorded at either: (i) amortized cost; or (ii) market value at the date of transfer into the HTM category, adjusted for subsequent amortization. After-tax 74 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, CLO and other ABS are amortized over the expected life of the security based on future principal payments, giving additional consideration to prepayments. These prepayments are estimated based on historical and projected cash flows. Prepayment assumptions are reviewed quarterly and adjusted to reflect actual prepayments and changes in expectations. Future amortization of any premium and/or discount is adjusted to reflect the revised assumptions. Other Portfolio Holdings Equity securities may include common and non-redeemable preferred stocks. Equity securities with readily determinable fair values are recorded at fair value. Equity securities without readily determinable fair values are recorded at net asset value ("NAV") as a practical expedient. Short-term investments may include money market instruments, savings accounts, commercial paper, and fixed income securities purchased with a maturity of less than one year. We also enter into reverse repurchase agreements that are included in short-term investments. These repurchase agreements are fully collateralized by high-quality, readily-marketable instruments that support the principal amount. At maturity, we receive principal and interest income on these agreements. Short-term investments are generally recorded at cost, which approximates fair value. Other investments include alternative investments, which principally include limited partnership investments in private equity, private credit, real estate, and infrastructure investment funds, Federal Home Loan Bank stock (“FHLB stock”), and tax credit investments. Alternative investments are accounted for using the equity method, with income typically recognized on a one- quarter lag. The FHLB stock is recorded at cost. Accounting for our tax credit investments is dependent on the type of credit we have purchased, as follows: Federal low income housing tax credits are accounted for under the proportional amortization method; and • • All other tax credits in our investment portfolio are accounted for using the equity method. For federal tax credits accounted for under the equity method, we use the deferral method for recognizing the benefit of the tax credit with the related deferred revenue being recognized in our Consolidated Income Statement as a component of "Federal income tax expense" proportionately over the life of the investment. We categorize distributions from our investments accounted for using the equity method on our Consolidated Statements of Cash Flows using the cumulative earnings approach. Under this approach, distributions received are classified as cash flows from operating activities until such time that the cumulative distributions exceed cumulative earnings for the investment. When such an excess occurs, the current period distribution up to this excess amount is considered a return of investment and is classified as a cash flow from investing activities. We evaluate the alternative investments and tax credit investments included in our other investments portfolio to determine whether those investments are variable interest entities ("VIEs") and if so, whether consolidation is required. A VIE is an entity that either has equity investors that lack certain essential characteristics of a controlling financial interest or lack sufficient funds to finance its own activities without financial support provided by other entities. We consider several significant factors in determining if our investments are VIEs and if we are the primary beneficiary, including whether we have: (i) the power to direct activities of the VIE; (ii) the ability to remove the decision maker of the VIE; (iii) the ability to participate in making decisions that are significant to the VIE; and (iv) the obligation to absorb losses and the right to receive benefits that could potentially be significant to the VIE. We have reviewed our alternative and tax credit investments and have concluded that they are VIEs, but that we are not the primary beneficiary and therefore, consolidation is not required. Presentation in the Consolidated Statements of Income Net investment income earned on our Consolidated Statements of Income includes 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 Income recognized on our alternative and other investments accounted for under the equity method of accounting, except for federal tax credits, as discussed below. 75 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 gains and losses on the disposal of investment securities, which are determined on the basis of the cost of the specific investments sold; • Changes in unrealized gains or losses on our equity securities that are recorded at fair value; and • Other-than-temporary impairment ("OTTI") charges that are credit related or related to our intent to sell. 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 used in a DCF is one of the following: • The current yield in effect at the reporting date to accrete the beneficial interest for RMBS, CMBS, CLO and other ABS that were not of high credit quality at acquisition; • The effective interest rate in effect as of the reporting date for non-fixed rate securities; and • The effective interest rate implicit in the security at the date of acquisition for all other securities. DCFs may include, but are not necessarily limited to: (i) generating cash flows for each tranche considering tranche-specific data, market data, and other pertinent information, such as the historical performance of the underlying collateral, including net operating income generated by underlying properties, conditional default rate assumptions, loan loss severity assumptions, consensus projections, prepayment projections, and actual pool and collateral information; (ii) identifying applicable benchmark yields; and (iii) applying market-based tranche specific spreads to determine an appropriate yield by incorporating collateral performance, tranche-level attributes, trades, bids, and offers. 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. 76 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 FHLB stock) include a qualitative assessment of impairment indicators, which include, but are not limited to, the following: • An adverse development of the expected receipt of remaining tax credits and other tax benefits; and • A significant deterioration in the financial condition or liquidity of the Federal Home Loan Bank. If 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 carrying value of the investment through an OTTI charge to earnings. (d) Fair Values of Financial Instruments Assets The fair values of our investments are generated using various valuation techniques and are placed into the fair value hierarchy considering the following: (i) the highest priority is given to quoted prices in active markets for identical assets (Level 1); (ii) the next highest priority is given to quoted prices in markets that are not active or inputs that are observable either directly or indirectly, including quoted prices for similar assets in markets that are not active and other inputs that can be derived principally from, or corroborated by, observable market data for substantially the full term of the assets (Level 2); and (iii) the lowest priority is given to unobservable inputs supported by little or no market activity and that reflect our assumptions about the exit price, including assumptions that market participants would use in pricing the asset (Level 3). An asset’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. The techniques used to value our financial assets are as follows: Level 1 Pricing 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 generally recorded at cost, which approximates fair value. Given the liquid nature of our short-term investments, we generally validate their fair value by way of active trades within approximately one week of the financial statement close. Level 2 Pricing We utilize a market approach for our Level 2 securities, using primarily matrix pricing models prepared by external pricing services. Matrix pricing models use mathematical techniques to value debt securities by relying on the securities' relationship to other benchmark quoted securities, and not relying exclusively on quoted prices for specific securities, as the specific securities are not always frequently traded. As a matter of policy, we consistently use one pricing service as our primary source and secondary pricing services if prices are not available from the primary pricing service. Fixed income securities portfolio pricing is reviewed for reasonableness in the following ways: (i) comparing our pricing to other third-party pricing services as well as benchmark indexed pricing; (ii) comparing fair value fluctuations between months for reasonableness; and (iii) reviewing stale prices. If further analysis is needed, a challenge is sent to the pricing service for review and confirmation of the price. 77 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 Obligations of States and Political Subdivisions RMBS, CMBS, CLO and other ABS Foreign Government 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. Evaluations are based on yield curves that are developed based on factors such as: (i) benchmarks to issues with interest rates near prevailing market rates; (ii) established trading spreads over widely-accepted market benchmarks; (iii) yields on new issues; and (iv) market information from third-party sources such as reportable trades, broker- dealers, or issuers. Evaluations are based on a DCF, including: (i) generating cash flows for each tranche considering tranche-specific data, market data, and other pertinent information, such as historical performance of the underlying collateral, including net operating income generated by the underlying properties, conditional default rate assumptions, loan loss severity assumptions, consensus projections, prepayment projections, and actual pool and loan level collateral information; (ii) identifying applicable benchmark yields; and (iii) applying market-based tranche-specific spreads to determine an appropriate yield by incorporating collateral performance, tranche-level attributes, trades, bids, and offers. 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. 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 Based on the quoted market prices. Methodology Methodology 7.25% Senior Notes; 6.70% Senior Notes; 5.375% Senior Notes Based on matrix pricing models prepared by external pricing services. Borrowings from Federal Home Loan Banks Evaluations are performed using a DCF model based on current borrowing rates provided by the Federal Home Loan Banks that are consistent with the remaining term of the borrowing. (e) 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 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. (f) Share-Based Compensation Share-based compensation consists of all share-based payment transactions in which an entity acquires goods or services by issuing (or offering to issue) its shares, share units, share options, or other equity instruments. The cost resulting from all share-based payment transactions are recognized in the Financial Statements based on the fair value of both equity and liability awards. The fair value is measured at grant date for equity awards, whereas the fair value for liability awards are remeasured at each reporting period. The fair value of both equity and liability awards is recognized over the requisite service period. The requisite service period is typically the lesser of the vesting period or the period of time from the grant date to the date of retirement eligibility. The expense recognized for share-based awards, which, in some cases, contain performance criteria, is based on the number of shares or units expected to be issued at the end of the performance period. We repurchase the Parent’s stock from our employees in connection with tax withholding obligations, as permitted under our stock-based compensation plans. This activity is disclosed in our Consolidated Statements of Stockholders' Equity. 78 (g) 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 all, or a portion of, 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. (h) Property and Equipment Property and equipment used in operations, including certain costs incurred to develop or obtain computer software for internal use, are capitalized and recorded at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The following estimated useful lives can be considered as general guidelines: Asset Category Computer hardware Computer software Internally developed software Software licenses Furniture and fixtures Buildings and improvements Years 3 3 to 5 5 3 to 5 10 5 to 40 We recorded depreciation expense of $18.7 million, $19.5 million, and $17.8 million for 2019, 2018, and 2017, respectively. (i) Deferred Policy Acquisition Costs Deferred policy acquisition costs are limited to costs directly related to the successful acquisition of insurance contracts. Costs meeting this definition typically include, among other things, sales commissions paid to our distribution partners, premium taxes, and the portion of employee salaries and benefits directly related to time spent on acquired contracts. These costs are deferred and amortized over the life of the contracts. Accounting guidance requires a premium deficiency analysis to be performed at the level an entity acquires, services, and measures the profitability of its insurance contracts. We currently perform three premium deficiency analyses for our insurance operations, consistent with our reportable segments of Standard Commercial Lines, Standard Personal Lines, and E&S Lines. A combined ratio of over 100% does not necessarily indicate a premium deficiency, as any year's combined ratio includes a portion of underwriting expenses that are expensed at policy inception and therefore are not covered by the remaining unearned premium. In addition, investment income is not contemplated in the combined ratio calculation. There were no premium deficiencies for any of the reported years, as the sum of the anticipated loss and loss expense, unamortized acquisition costs, policyholder dividends, and other expenses for each segment did not exceed that segment’s related unearned premium and anticipated investment income. The investment yields assumed in the premium deficiency assessment for each reporting period, which were based on our actual average investment yield before tax as of the September 30 calculation date, were 3.5% for 2019, 3.3% for 2018, and 2.9% for 2017. (j) Goodwill Goodwill results from business acquisitions where the cost of assets and liabilities acquired exceeds the fair value of those assets and liabilities. A quantitative goodwill impairment analysis is performed if our quarterly qualitative analysis indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Goodwill is allocated to the reporting units for purposes of these analyses. Based on our analysis at December 31, 2019, goodwill was not impaired. (k) 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 79 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 review 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”). Generally accepted actuarial techniques 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 generally accepted actuarial techniques. 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, environmental, and abuse and molestation 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 exposures that do not lend themselves to generally accepted actuarial techniques 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, which are assessed in aggregate. 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 review is the primary basis for determining the recorded IBNR reserves, other internal and external factors are considered. Internal factors include (i) changes to our underwriting and claims practice, (ii) supplemental data regarding claims reporting and settlement trends, (iii) exposure estimates for reported claims, along with recent development on those estimates with respect to individual large claims and the aggregate of all claims, (iv) the rate at which new large or complex claims are being reported, and (v) additional trends observed by claims personnel or reported to them by defense counsel. External factors considered include (i) legislative enactments, (ii) judicial decisions, (iii) social inflation and heightened awareness of sources of liability, and (iv) trends in general economic conditions, including the effects of inflation. Loss reserves are estimates, and as such, we also consider a range of possible loss and loss expense reserve estimates. This range is determined at the beginning of each year, using prior year-end data, and reflects the fact that there is no single precise method for estimating the required reserves, due to the many factors that may influence the amounts ultimately paid. Considering the 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 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. 80 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. (l) 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. (m) Dividends to Policyholders We establish reserves for dividends to policyholders on certain policies, most significantly workers compensation policies. These dividends are based on the policyholders' loss experience. Dividend reserves are established based on past experience, adjusted for the effects of current developments and anticipated trends. The expense for these dividends is recognized over a period that begins at policy inception and ends with the payment of the dividend. We report these dividends within "Other insurance expenses" on the Consolidated Statements of Income. We do not issue policies that entitle the policyholder to participate in the earnings or surplus of our Insurance Subsidiaries. (n) Federal Income Tax We use the asset and liability method of accounting for income taxes. Current federal income taxes are recognized for the estimated taxes payable or refundable on tax returns for the current year. Deferred federal income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. We consider all evidence, both positive and negative, with respect to our federal tax loss carryback availability, expected levels of pre-tax financial statement income, and federal taxable income, when evaluating whether the temporary differences will be realized. In projecting future taxable income, we begin with budgeted pre-tax income adjusted for estimated non-taxable items. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we use to manage our businesses. A valuation allowance is established when it is more likely than not that some portion of the deferred tax asset will not be realized. A liability for uncertain tax positions is recorded when it is more likely than not that a tax position will not be sustained upon examination by taxing authorities. The effect of a change in tax rates is recognized in the period of enactment. If we were to be levied interest and penalties by the Internal Revenue Service (“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. (o) Leases We have various operating leases for office space, equipment, and fleet vehicles. In addition, we have various finance leases for computer hardware. We determine if an arrangement is a lease on the commencement date of the contract. Lease assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. The lease asset and liability are measured by the present value of the future minimum lease payments over the lease term. Our fleet vehicle leases include a residual value guarantee; however, it is not probable of being owed. Therefore, there is no impact to the lease liability or lease asset. To measure the present value, the discount rate available in the contract is used. If the discount rate is not readily determinable, our incremental borrowing rate is used. The lease asset is then adjusted to exclude lease incentives. We recognize variable lease payments in the periods in which the obligations for those payments are incurred. Our lease terms may include options to extend or terminate the lease at which time it is reasonably certain that we will exercise that option. Lease expense is calculated using the straight-line method. In addition, we have adopted accounting policy 81 elections to: (i) aggregate lease and non-lease components into a single lease component; and (ii) expense short-term leases on a straight-line basis over the lease term. (p) Pension Our pension 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 The Financial Accounting Standards Board ("FASB") 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 and 2019 (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. ASU 2016-02 allows for certain practical expedients, accounting policy elections, and a transition method election. We adopted practical expedients related to reassessing: (i) whether our existing contracts are, or contain, leases; (ii) lease classification for existing leases; and (iii) initial direct costs for existing leases. Additionally, we adopted 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 adopted ASU 2016-02 effective January 1, 2019. See Note 17. "Leases" in this Form 10-K for additional information regarding our leases and 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 nonemployees. We adopted ASU 2018-07 in the first quarter of 2019 and it did 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. We elected to early adopt the provisions related to removed disclosures in the fourth quarter of 2019 and will adopt the remaining disclosure requirements in the first quarter of 2020 as permitted under ASU 2018-13. As the requirements of this literature are disclosure only, ASU 2018-13 has no 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 accumulated other comprehensive income ("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. We elected to early adopt this update in the fourth quarter of 2019. As the requirements of this literature are disclosure only, ASU 2018-14 does not have impact our financial condition or results of operations. 82 Pronouncements to be effective in the future In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, as well as additional implementation guidance issued in 2018 and 2019 (collectively referred to as “ASU 2016-13”) that changes the way entities recognize impairment of financial assets. The new guidance requires immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets through the establishment of a valuation allowance. The valuation allowance is a measurement of expected losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Additionally, ASU 2016-03 requires the presentation of the impacted financial assets on the consolidated balance sheet net of the valuation allowance. We will adopt this guidance on January 1, 2020 and it will not be material to our financial condition or results of operations. We will apply a modified retrospective approach for the adoption and we anticipate recording a cumulative-effect adjustment to the opening balance of 2020 retained earnings, which is not expected to be material. Also, as prescribed in the literature, we will not adjust the amortized cost basis of any securities for which we had previously recorded an OTTI charge. The cumulative-effect adjustment to increase retained earnings represents the net adjustment required to establish valuation allowances on our held-to-maturity ("HTM") debt securities and to re-estimate valuation allowances on our trade receivables and reinsurance recoverables under ASU 2016-13. 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. We will adopt this guidance on January 1, 2020 and we do not expect that it will have a material impact to our financial condition or results of operations. In December 2019, the FASB issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (“ASU 2019-12”). Among other items, the amendments in ASU 2019-12 simplify the accounting treatment of tax law changes and year-to-date losses in interim periods. An entity generally recognizes the effects of a change in tax law in the period of enactment; however, there is an exception for tax laws with delayed effective dates. Under current guidance, an entity may not adjust its annual effective tax rate for a tax law change until the period in which the law is effective. This exception was removed under ASU 2019-12, thereby providing that all effects of a tax law change are recognized in the period of enactment, including adjustment of the estimated annual effective tax rate. Regarding year-to-date losses in interim periods, an entity is required to estimate its annual effective tax rate for the full fiscal year at the end of each interim period and use that rate to calculate its income taxes on a year-to-date basis. However, current guidance provides an exception that when a loss in an interim period exceeds the anticipate loss for the year, the income tax benefit is limited to the amount that would be recognized if the year-to-date loss were the anticipated loss for the full year. ASU 2019-12 removes this exception and provides that in this situation, an entity would compute its income tax benefit at each interim period based on its estimated annual effective tax rate. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact of this guidance on our financial condition and results of operations. 83 Note 4. Statements of Cash Flows Supplemental cash flow information for the years ended December 31, 2019, 2018, and 2017 is as follows: ($ in thousands) Cash paid during the period for: Interest Federal income tax Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases1 Operating cash flows from financing leases Financing cash flows from finance leases Non-cash items: Corporate actions related to fixed income securities, AFS2 Corporate actions related to equity securities2 Assets acquired under finance lease arrangements Assets acquired under operating lease arrangements1 2019 2018 2017 $ 25,089 55,825 8,138 16 977 61,369 14,250 824 13,808 23,992 29,193 — — 5,646 52,277 944 4,119 — 23,905 62,000 — — 4,121 22,511 4,725 278 — — Non-cash purchase of property and equipment 1Upon adoption of ASU 2016-02, effective January 1, 2019, we are required to disclose cash paid for amounts included in the measurement of operating lease liabilities, as well as supplemental non-cash information on operating lease liabilities arising from obtaining operating lease assets. 2Examples of corporate actions include exchanges, non-cash acquisitions, and stock-splits. 291 89 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, 2019 December 31, 2018 $ $ 300 7,675 7,975 505 16,414 16,919 Amounts included in restricted cash represent cash received from the National Flood Insurance Program ("NFIP"), which is restricted to pay flood claims under the Write Your Own Program. 84 Note 5. Investments (a) Net unrealized gains on investments included in OCI by asset class were as follows for the years ended December 31, 2019, 2018, and 2017: ($ in thousands) AFS securities: Fixed income securities Equity securities Total AFS securities HTM securities: Fixed income securities Total HTM securities Short-term securities Total net unrealized gains Deferred income tax Net unrealized gains, net of deferred income tax 2019 2018 2017 $ 215,634 — 215,634 31 31 23 215,688 (45,294) 170,394 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 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 Increase (decrease) in net unrealized gains in OCI, net of deferred income tax 38,453 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 the Tax Cuts and Jobs Act of 2017 ("Tax Reform"). (17,920) (65,881) 168,505 30,726 — — — — $ (b) Information regarding our HTM fixed income securities as of December 31, 2019 and December 31, 2018 was as follows: December 31, 2019 ($ in thousands) Obligations of state and political subdivisions Corporate securities Total HTM fixed income securities Amortized Cost $ $ 4,573 16,196 20,769 Net Unrealized Gains (Losses) Carrying Value Unrecognized Holding Gains Unrecognized Holding Losses Fair Value 7 24 31 4,580 16,220 20,800 342 834 1,176 (1) — (1) 4,921 17,054 21,975 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 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. 85 (c) Information regarding our AFS securities as of December 31, 2019 and December 31, 2018 were as follows: December 31, 2019 ($ 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 112,680 18,011 1,168,185 1,866,881 790,517 514,709 1,409,003 Unrealized Gains Unrealized Losses Fair Value 3,506 533 62,175 81,906 7,929 23,902 43,421 — (2) (270) (1,310) (5,434) (267) (455) (7,738) 116,186 18,542 1,230,090 1,947,477 793,012 538,344 1,451,969 6,095,620 Total AFS fixed income securities $ 5,879,986 223,372 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 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. (d) The severity of impairment on the securities in an unrealized/unrecognized loss position averaged approximately 1% of amortized cost at December 31, 2019 and approximately 2% at December 31, 2018. Quantitative information regarding unrealized losses on our AFS portfolio is provided below. Our HTM portfolio had less than $0.1 million in unrealized/ unrecognized losses at December 31, 2019 and $0.2 million in unrealized/unrecognized losses at December 31, 2018. December 31, 2019 Less than 12 months 12 months or longer Total ($ in thousands) AFS fixed income securities: Foreign government Obligations of states and political subdivisions Corporate securities CLO and other ABS CMBS RMBS Total AFS fixed income securities $ Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses 1,416 35,838 84,832 205,191 62,893 126,089 516,259 (2) (270) (480) (1,938) (264) (425) — — 20,182 204,385 828 5,375 — — (830) (3,496) (3) (30) (3,379) 230,770 (4,359) 1,416 35,838 105,014 409,576 63,721 131,464 747,029 (2) (270) (1,310) (5,434) (267) (455) (7,738) 86 December 31, 2018 Less than 12 months 12 months or longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses ($ in thousands) AFS fixed income securities: U.S. government and government agencies $ Foreign government Obligations of states and political subdivisions Corporate securities CLO and other ABS CMBS RMBS 6,693 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 (418) (14) (557) 29,856 13,690 239,619 (4,316) 1,120,905 (193) (1,200) (1,421) (8,119) 532,906 295,632 184,999 (592) (107) (2,631) (27,965) (6,943) (3,748) (3,081) Total AFS fixed income securities $ 2,142,433 (36,948) 275,174 2,417,607 (45,067) The $37.3 million decrease in the unrealized loss position reflected: (i) lower interest rates, with a 90-basis point decrease in the 2-year U.S. Treasury Note yields and a 77-basis point decrease in 10-year U.S. Treasury Note yields during 2019; and (ii) tightening option adjusted corporate credit spreads with a 60-basis point decrease in the Bloomberg Barclays U.S. Aggregate Corporate Bond Index during 2019. We do not currently intend to sell any of the securities in the tables above, nor will we be required to sell any of these securities. Considering these factors and our review of these securities under our OTTI policy as described in Note 2. “Summary of Significant Accounting Policies” of this Form 10-K, we have concluded that they are temporarily impaired as we believe: (i) they will mature at par value; (ii) they have not incurred a credit impairment; and (iii) future values of these securities will fluctuate with changes in interest rates. This conclusion reflects our current judgment as to the financial position and future prospects of the entity that issued the investment security and underlying collateral. (e) Fixed income securities at December 31, 2019, by contractual maturity are shown below. Mortgage-backed securities are included in the maturity tables using the estimated average life of each security. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Listed below are the contractual maturities of fixed income securities at December 31, 2019: ($ 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 $ 394,027 3,001,602 2,531,172 168,819 $ 6,095,620 1,211 13,856 5,733 — 20,800 1,229 14,820 5,926 — 21,975 (f) The following table summarizes our other investment portfolio by strategy: Other Investments December 31, 2019 December 31, 2018 ($ in thousands) Alternative Investments Private equity Private credit Real assets Total alternative investments Carrying Value Remaining Commitment Maximum Exposure to Loss1 Carrying Value Remaining Commitment Maximum Exposure to Loss1 $ 118,352 42,532 23,256 184,140 93,138 105,340 20,741 219,219 211,490 147,872 43,997 403,359 84,352 41,682 27,862 153,896 93,688 81,453 27,129 202,270 178,040 123,135 54,991 356,166 Other securities2 25,042 Total other investments 381,208 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. 25,042 178,938 — 202,270 219,219 436,026 216,807 32,667 32,667 — $ 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 87 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 2019 or 2018. The following is a description of our alternative investment strategies: Our private equity strategy includes the following: • Primary Private Equity: This strategy makes private equity investments, primarily in established large and middle market companies across diverse industries globally, with an emphasis on North America. • Secondary Private Equity: This strategy purchases seasoned private equity funds from investors desiring liquidity prior to normal fund termination. Investments are made across all sectors of the private equity market, including leveraged buyouts ("LBO"), venture capital, distressed securities, mezzanine financing, real estate, and infrastructure. • Venture Capital: In general, these investments are made principally by investing in equity securities of 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: • Direct Lending: This strategy provides privately negotiated loans to U.S. middle market companies. Typically, these are floating rate, senior secured loans diversified across industries. Loans are made to companies that may or may not have private equity sponsors to finance LBOs, recapitalizations, and acquisitions. • Mezzanine Financing: This strategy provides privately-negotiated fixed income securities, generally with an equity component, to LBO firms and private and publicly-traded large, mid, and small-cap companies to finance LBOs, recapitalizations, and acquisitions. • Opportunistic and Distressed Debt: This strategy makes investments in debt and equity securities of companies that are experiencing financial distress, operational issues, or dislocated pricing of publicly-traded securities. Investments include buying indebtedness of bankrupt or financially-troubled companies, small balance loan portfolios, special situations and capital structure arbitrage trades, commercial real estate mortgages, and similar non-U.S. securities and debt obligations. Our real assets strategy includes the following: • Infrastructure: This strategy invests in the equity or debt of cash flow generating assets, diversified across a variety of industries, including transportation, energy infrastructure, renewable power, such as wind and solar, social infrastructure, power generation, water, telecom, and other regulated entities principally located in North America and Western Europe. • Real Estate: This strategy invests in real estate in North America, Europe, and Asia via direct property ownership, joint ventures, mortgages, and investments in equity and debt instruments. Our alternative investment strategies may employ leverage and may use hedging to reduce foreign exchange or interest rate volatility. At this time, our alternative investment strategies do not include hedge funds. We typically cannot redeem our investments with the general partners of these investments; however, occasionally these partnerships can be traded on the secondary market. Once liquidation is triggered by clauses within the limited partnership agreements or at the funds’ stated end date, we will receive our final allocation of capital and any earned appreciation of the underlying investments, assuming we have not divested ourselves of our partnership interests prior to that time. We currently receive distributions from these alternative investments through the realization of the underlying investments or income generated in the limited partnerships. 88 The following tables set forth summarized financial information for our other investments portfolio, including the portion not owned by us. The investments are recorded 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 December 31, ($ in millions) Investments Total assets Total liabilities Total partners’ capital Income Statement Information 12 months ended September 30, ($ in millions) Net investment (loss) income Realized gains Net change in unrealized appreciation Net income before tax Insurance Subsidiaries' alternative investments income before tax 2019 2018 $ 43,857 45,432 5,670 39,762 2019 2018 2017 $ $ (8) 695 5,543 6,230 17.9 134 1,981 1,303 3,418 17.6 28,292 30,377 4,532 25,845 (143) 325 2,894 3,076 12.7 (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, 2019 or December 31, 2018. (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, 2019 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, 2019: ($ 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 $ $ — — — 7.2 59.0 66.2 — — — 17.9 77.6 95.5 22.8 4.0 0.3 — — 27.1 22.8 4.0 0.3 25.1 136.6 188.8 (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 2019 2018 2017 $ $ 203,255 6,996 6,653 18,778 (13,139) 222,543 178,104 7,764 3,472 17,799 (11,803) 195,336 153,230 6,442 1,526 12,871 (12,187) 161,882 89 (j) The following tables summarize OTTI by asset type for the periods indicated: Gross Included in OCI Recognized in Earnings 66 2,529 2,595 1,049 3,644 — — — — — 66 2,529 2,595 1,049 3,644 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) 2019 2018 2017 1,910 24,844 (16) (23) 26,715 (3,644) 23,071 (8,649) 14,422 (34,953) 18,695 (3) (2,714) (18,975) (6,579) (25,554) (29,369) (54,923) 36 612 587 96 670 1,219 3,220 1,435 1,435 190 4,845 6,944 4,629 (4) (365) 11,204 (4,845) 6,359 — 6,359 $ $ $ $ $ $ $ $ 2019 ($ in thousands) AFS fixed income securities: Obligations of states and political subdivisions Corporate securities Total AFS fixed income securities Other investments Total OTTI losses 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 (k) Net realized and unrealized gains and losses included the following: ($ in thousands) Net realized gains (losses) on the disposals of securities: Fixed income securities Equity securities Short-term investments Other investments Net realized gains (losses) on the disposal of securities OTTI charges Net realized gains (losses) Unrealized (losses) recognized in income on equity securities Total net realized and unrealized investment gains (losses) 90 Unrealized (losses) recognized in income on equity securities, as reflected in the table above, include the following: ($ in thousands) 2019 2018 Unrealized gains (losses) recognized in income on equity securities: On securities remaining in our portfolio at December 31, 2019 On securities sold in each respective period Total unrealized (losses) recognized in income on equity securities $ The components of net realized gains (losses) on disposals were as follows: 1,219 (9,868) (8,649) 2019 2018 2017 ($ 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 $ 1 (15) 6,899 (4,975) 24,980 (136) 24 (40) 6 (29) 2 — 5,460 (40,415) 23,203 (4,508) 7 (10) — (2,714) (18,975) (3,098) (26,271) (29,369) 44 (1) 10,193 (3,292) 5,829 (1,200) 2 (6) 494 (859) 11,204 Total net realized investment gains (losses) $ 26,715 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 $594.7 million, $2,030.7 million, and $1,197.9 million in 2019, 2018, and 2017, respectively. Proceeds from sale of equity securities were $137.3 million, $113.3 million, and $38.0 million in 2019, 2018, and 2017, respectively. Net realized gains (losses) in the table above were driven by the following: • • • 2019: Opportunistic sales in our equity portfolio. 2018: Higher trading volume driven by opportunistic sales in both our fixed income securities and equity portfolios. 2017: Higher trading volume in our fixed income securities portfolio related to a more active external investment management approach and opportunistic sales in our equity portfolio. Note 6. Comprehensive Income (a) The components of comprehensive income, both gross and net of tax, for 2019, 2018, and 2017 were as follows: 2019 ($ in thousands) Net income Components of OCI: Unrealized gains (losses) on investment securities: Unrealized holding gains during the year Amounts reclassified into net income: HTM securities Realized losses on disposals and OTTI of AFS securities Total unrealized 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 income Comprehensive income Gross Tax Net $ 336,390 64,767 271,623 212,683 44,662 168,021 (58) 671 213,296 (12) 141 44,791 (46) 530 168,505 (13,795) (2,897) (10,898) 2,657 (11,138) 202,158 538,548 558 (2,339) 42,452 107,219 2,099 (8,799) 159,706 431,329 $ 91 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 disposals and OTTI of AFS securities Total unrealized losses 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 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 disposals and OTTI of AFS securities Total unrealized 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 income Comprehensive income Gross Tax Net $ 211,721 32,782 178,939 (123,145) (25,861) (97,284) 110 39,641 (83,394) (11,273) 2,127 (9,146) (92,540) 119,181 23 8,325 (17,513) 87 31,316 (65,881) (2,367) (8,906) 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 $ $ $ (b) The balances of, and changes in, each component of AOCI (net of taxes) as of December 31, 2019 and 2018 were as follows: ($ in thousands) OTTI Related HTM Related All Other Investments Subtotal Net Unrealized (Losses) Gains on Investment Securities Defined Benefit Pension and Post-retirement Plans Total AOCI $ Balance, December 31, 2017 Cumulative effect adjustments1 Balance: December 31, 2017, as adjusted OCI before reclassifications Amounts reclassified from AOCI Net current period OCI Balance, December 31, 2018 OCI before reclassifications Amounts reclassified from AOCI Net current period OCI Balance, December 31, 2019 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. 80,648 (12,792) 67,856 (97,284) 31,316 (65,968) 1,888 168,021 530 168,551 170,439 80,575 (12,806) 67,769 (97,284) 31,403 (65,881) 1,888 168,021 484 168,505 170,393 (60,405) (12,213) (72,618) (8,906) 1,680 (7,226) (79,844) (10,898) 2,099 (8,799) (88,643) 20,170 (25,019) (4,849) (106,190) 33,083 (73,107) (77,956) 157,123 2,583 159,706 81,750 (59) (12) (71) — — — (71) — — — (71) (14) (2) (16) — 87 87 71 — (46) (46) 25 $ 92 The reclassifications out of AOCI are as follows: ($ in thousands) HTM related Unrealized (gains) losses on HTM disposals $ Amortization of net unrealized gains on HTM securities Realized losses (gains) on AFS Realized losses on AFS disposals and OTTI Defined benefit pension and post-retirement life plans Net actuarial loss Total defined benefit pension and post-retirement life Total reclassifications for the period $ Year ended December 31, 2019 Year ended December 31, 2018 Affected Line Item in the Consolidated Statements of Income (46) (12) (58) 12 (46) 671 671 (141) 530 582 2,075 2,657 (558) 2,099 2,583 137 Net realized and unrealized gains (losses) (27) Net investment income earned 110 Income before federal income tax (23) Total federal income tax expense 87 Net income 39,641 Net realized and unrealized gains (losses) 39,641 Income before federal income tax (8,325) Total federal income tax expense 31,316 Net income 450 Loss and loss expense incurred 1,677 Other insurance expenses 2,127 Income before federal income tax (447) Total federal income tax expense 1,680 Net income 33,083 Net income Note 7. Fair Value Measurements The financial assets in our investment portfolio are primarily measured at fair value as disclosed on the Consolidated Balance Sheets. The following table presents the carrying amounts and estimated fair values of our financial liabilities as of December 31, 2019 and 2018: ($ in thousands) Financial Liabilities Long-term debt: 7.25% Senior Notes 6.70% Senior Notes 5.875% Senior Notes 5.375% 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 Finance lease obligations Total long-term debt December 31, 2019 December 31, 2018 Carrying Amount Fair Value Carrying Amount Fair Value 66,365 123,104 — 357,025 24,901 24,875 63,002 659,272 $ 49,910 99,480 — 294,157 25,000 25,000 60,000 553,547 (3,687) 737 $ 550,597 57,032 107,075 177,230 — 24,218 24,162 58,905 448,622 49,907 99,462 185,000 — 25,000 25,000 60,000 444,369 (4,829) — 439,540 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. 93 The following tables provide quantitative disclosures of our financial assets that were measured and recorded at fair value at December 31, 2019 and 2018: December 31, 2019 ($ in thousands) Description Measured on a recurring basis: 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 Equity securities: Common stock1 Preferred stock Total equity securities Short-term investments Total assets measured at fair value Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets Measured at Fair Value $ $ 116,186 18,542 1,230,090 1,947,477 793,012 538,344 1,451,969 6,095,620 69,900 3,037 72,937 282,490 6,451,047 41,083 — — — 3,635 — — 44,718 32,145 3,037 35,182 265,306 345,206 75,103 18,542 1,230,090 1,930,426 772,343 538,344 1,451,969 6,016,817 — — — 17,184 6,034,001 — — — 17,051 17,034 — — 34,085 — — — — 34,085 December 31, 2018 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) Significant Other Observable Inputs (Level 2) 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 Equity securities: Common stock1 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 1In accordance with ASU 2015-07, investments amounting to $37.8 million and $37.3 million at December 31, 2019 and December 31, 2018, respectively, were measured at fair value using the net asset value per share (or its practical expedient) and have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to total assets measured at fair value. 94 The following table provides a summary of the changes in the fair value of securities measured using Level 3 inputs and related quantitative information during 2019: 2019 ($ in thousands) Fair value, December 31, 2018 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, 2019 Corporate Securities CLO and Other ABS Total $ — 7,409 7,409 (118) — — — — — 17,169 — (261) 245 (379) 245 21,282 21,282 — — (279) 18,853 — — (279) 36,022 (30,215) (30,215) $ 17,051 17,034 34,085 There were no material changes in the fair value of securities measured using Level 3 prices during 2018. 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, 2019 and 2018: December 31, 2019 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 5.375% 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) $ $ $ 4,921 17,054 21,975 66,365 123,104 357,025 24,901 24,875 63,002 $ 659,272 — — — — — — — — — — 4,921 17,054 21,975 66,365 123,104 357,025 24,901 24,875 63,002 659,272 — — — — — — — — — — 95 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 — — — — — — — — — — 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, 2027. TRIPRA requires private insurers and the U. S. government to share the risk of loss on future acts of terrorism certified by the U.S. Secretary of the Treasury. Under TRIPRA, each participating insurer is responsible for paying a deductible of specified losses before federal assistance is available. This deductible is based on a percentage of the prior year’s applicable Standard Commercial Lines and E&S Lines premiums. In 2020, our deductible, before tax, is approximately $359 million. For losses above the deductible, the federal government will pay 80% of losses to an industry limit of $100 billion, and the insurer retains 20%. The Insurance Subsidiaries remain liable to policyholders to the extent that any reinsurer becomes unable to meet their contractual obligations. In addition to this direct counterparty credit risk, we have indirect counterparty credit risk as our reinsurers often enter into their own reinsurance programs, or retrocessions, as part of managing their exposure to large losses. We evaluate and monitor the financial condition of our reinsurers under voluntary reinsurance arrangements to minimize our exposure to significant losses from reinsurer insolvencies. The allowance for uncollectible reinsurance recoverables was $4.4 million at December 31, 2019 and $4.5 million at December 31, 2018. 96 The following table represents our total reinsurance balances segregated by reinsurer to illustrate our concentration of risk throughout our reinsurance portfolio: ($ 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+”) All other reinsurers Total reinsurers Less: collateral2 Reinsurers, net of collateral As of December 31, 2019 As of December 31, 2018 Reinsurance Balances % of Reinsurance Balance Reinsurance Balances % of Reinsurance Balance $ $ $ 573,235 166,705 739,940 175,472 53,732 2,449 231,653 508,287 119,748 107,474 73,009 37,190 21,824 149,042 508,287 $ $ $ 24% 6 1 31 69 16 15 10 5 3 20 69% 549,172 157,723 706,895 170,453 55,167 3,602 229,222 477,673 112,841 101,835 69,102 37,519 17,686 138,690 477,673 (110,549) $ 397,738 (112,201) $ 365,472 24% 7 1 32 68 16 14 10 5 3 20 68% 1Considered to have minimal risk of default. 2Includes letters of credit, trust funds, and funds held against reinsurance recoverables. Under our reinsurance arrangements, which are prospective in nature, reinsurance premiums ceded are recorded as prepaid reinsurance and amortized over the remaining contract period in proportion to the reinsurance protection provided, or recorded periodically, as per the terms of the contract, in a direct relationship to the gross premium recording. Reinsurance recoveries are recognized as gross losses are incurred. The following table contains a listing of direct, assumed, and ceded reinsurance amounts for premiums written, premiums earned, and loss and loss expense incurred: ($ in thousands) Premiums written: Direct Assumed Ceded Net Premiums earned: Direct Assumed Ceded Net Loss and loss expense incurred: Direct Assumed Ceded Net 2019 2018 2017 3,084,451 24,339 (429,366) 2,679,424 2,993,157 24,399 (420,385) 2,597,171 1,714,880 22,879 (186,268) 1,551,491 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 $ $ $ $ $ $ 97 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 2019 2018 2017 $ (266,925) (259,119) (71,676) (248,053) (244,238) (144,967) (241,345) (235,088) (160,922) 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) 2019 2018 2017 Gross reserves for loss and loss expense, at beginning of year $ 3,893,868 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 537,388 3,356,480 1,601,780 (50,289) 1,551,491 579,527 805,443 1,384,970 3,523,001 544,162 Gross reserves for loss and loss expense at end of year $ 4,067,163 3,771,240 585,855 3,185,385 1,527,997 (29,863) 1,498,134 573,718 753,321 1,327,039 3,356,480 537,388 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 Our net loss and loss expense reserves increased by $166.5 million in 2019, $171.1 million in 2018, and $104.9 million in 2017. The loss and loss expense reserves are net of anticipated recoveries for salvage and subrogation claims, which amounted to $76.7 million for 2019, $67.7 million for 2018, and $64.8 million for 2017. The increase in net loss and loss expense reserves in 2019 was primarily driven by increases in exposure due to premium growth. This increase was partially offset by favorable prior year loss development, largely driven by the workers compensation line of business. In 2019, we experienced overall net favorable prior year loss development of $50.3 million, compared to $29.9 million in 2018 and $39.2 million in 2017. The following table summarizes the prior year reserve development by line of business: (Favorable)/Unfavorable Prior Year Development ($ 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 2019 2018 2017 $ (5.0) 0.7 (68.0) 1.9 5.1 7.5 4.4 2.0 1.0 0.1 $ (50.3) (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) The Insurance Subsidiaries had $50.3 million of favorable prior accident year reserve development during 2019, which included $61.0 million of net favorable casualty reserve development and $10.7 million of unfavorable property reserve development. The net favorable casualty reserve development was largely driven by the workers compensation line of business, which was impacted by continued favorable medical trends in accident years 2017 and prior. The Insurance Subsidiaries had $29.9 million of favorable prior accident year reserve development during 2018, which included $41.5 million of net favorable casualty reserve development and $11.6 million of unfavorable property reserve development. The net favorable casualty reserve development was largely driven by the workers compensation line of business, reflecting continued 98 favorable medical trends in accident years 2017 and prior. Partially offsetting this net favorable reserve development was $37.5 million of unfavorable casualty reserve development in the commercial auto line of business, driven by increases in frequencies and severities in accident years 2015 through 2017. In addition, our E&S casualty lines experienced unfavorable reserve development of $12.0 million in 2018. The Insurance Subsidiaries had $39.2 million of favorable prior accident year reserve development during 2017. The net favorable casualty reserve development was largely driven by the workers compensation and general liability lines of business in accident years 2014 and prior. Partially offsetting this net favorable reserve development was $36.0 million of unfavorable casualty reserve development in the commercial automobile line of business, which was primarily driven by accident years 2012 through 2016. In addition, our E&S casualty lines experienced unfavorable reserve development of $10.0 million in 2017, primarily related to accident years 2015 and 2016. (b) We have exposure to abuse and molestation claims within our general liability line of business through insurance policies that we issue to schools, religious institutions, daycares, and other social services. We also have exposure to abuse and molestation claims from recently enacted state laws that extend the statute of limitations or permit windows to be opened for abuse and molestation claims and lawsuits that were previously barred by statutes of limitations. The emergence of these claims is slow and highly unpredictable. There are significant uncertainties in estimating our exposure to abuse and molestation claims (for both case and IBNR reserves) resulting from (i) lack of relevant historical data, (ii) the delayed and inconsistent reporting patterns associated with these claims, (iii) the obligation of an insurer to defend a claim, (iv) the extent to which a party can prove the existence of coverage, and (v) uncertainty as to the number and identity of claimants. It is possible, as a result, that we may receive claims decades after the allegations occurred from coverages provided by us, including predecessor companies, that will require complex claims coverage determinations, potential litigation, and the need to collect from reinsurers under older reinsurance agreements. We do not discount to present value that portion of our loss and loss expense reserves expected to be paid in future periods. (c) Reserves established for liability insurance include exposure to asbestos and environmental claims. These claims have arisen primarily from insured exposures in municipal government, small non-manufacturing commercial risk, and homeowners policies. The emergence of these claims is slow and highly unpredictable. There are significant uncertainties in estimating our exposure to asbestos and environmental claims (for both case and IBNR reserves) resulting from 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 2019 Gross Net $ $ 6.3 12.1 10.3 28.7 5.1 7.3 9.2 21.6 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. 99 Historically, our asbestos and environmental claims have been significantly lower in volume than many other standard commercial lines carriers since, prior to the introduction of the absolute pollution exclusion endorsement in the mid-1980’s, we primarily wrote Standard Personal Lines, and therefore, our exposure to asbestos and environmental claims has been limited. The following table provides a roll forward of gross and net asbestos and environmental incurred loss and loss expense and related reserves thereon: ($ 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 2019 2018 2017 Gross Net Gross Net Gross Net $ $ $ $ $ $ 7,328 (375) (665) 6,288 22,692 723 (1,002) 22,413 30,020 348 (1,667) 28,701 6,097 (375) (665) 5,057 16,686 609 (763) 16,532 22,783 234 (1,428) 21,589 7,577 — (249) 7,328 20,838 3,059 (1,205) 22,692 28,415 3,059 (1,454) 30,020 6,346 — (249) 6,097 14,866 2,877 (1,057) 16,686 21,212 2,877 (1,306) 22,783 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 (d) The following is information about incurred and paid claims development as of December 31, 2019, net of reinsurance, as well as cumulative claim frequency and the associated 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 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 IBNR $ 950,114 973,742 977,959 956,600 943,118 922,404 915,131 907,074 904,561 902,258 1,042,576 1,061,667 1,062,233 1,056,107 1,033,518 1,023,726 1,019,351 1,013,115 1,013,175 1,065,437 1,071,290 1,020,655 998,028 973,089 973,644 1,044,142 1,062,045 1,047,230 1,021,007 1,002,316 973,411 987,763 968,536 984,858 1,107,513 1,133,798 1,146,990 1,124,014 1,104,218 1,100,208 38,152 44,453 50,942 72,970 83,392 1,114,081 1,130,513 1,144,830 1,138,313 1,119,441 111,657 1,188,608 1,203,634 1,227,142 1,199,734 205,126 1,270,110 1,313,372 1,313,585 336,155 1,413,800 1,461,603 501,519 1,483,945 Total 11,547,343 759,853 100 As of December 31, 2019 Cumulative Number of Reported Claims 94,526 104,861 104,148 91,326 95,081 94,128 94,579 98,014 104,187 93,947 All Lines (in thousands) Accident Year Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 $ 328,826 509,910 391,944 625,229 585,867 378,067 704,895 692,730 555,819 335,956 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 773,536 782,655 651,544 518,872 405,898 803,773 852,202 743,742 644,475 614,075 376,641 823,770 901,801 810,135 748,758 736,154 581,203 387,272 835,532 924,111 856,195 833,823 855,959 725,385 617,958 433,440 846,386 940,626 879,372 872,331 936,425 845,868 764,331 678,453 511,271 851,633 950,836 898,269 891,841 981,868 929,222 892,390 829,134 779,466 510,091 All outstanding liabilities before 2010, net of reinsurance 360,119 Liabilities for loss and loss expenses, net of reinsurance 3,392,713 Total 8,514,750 General Liability (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ 215,208 228,680 242,499 237,154 222,328 211,619 208,968 202,394 206,146 227,769 228,720 239,480 230,785 217,256 211,196 212,011 211,500 238,979 245,561 215,083 194,144 175,305 175,268 180,659 250,609 251,421 239,776 225,709 210,785 203,831 244,312 249,946 257,132 239,333 234,082 254,720 245,710 246,990 233,249 277,214 272,048 277,986 293,747 293,128 317,934 Accident Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 As of December 31, 2019 2019 205,322 213,485 182,085 202,697 237,125 219,204 263,245 301,384 336,326 347,150 IBNR 17,542 19,913 21,005 28,857 42,388 55,244 98,385 161,114 223,228 296,257 Cumulative Number of Reported Claims 12,705 11,649 9,994 10,378 10,586 10,381 10,526 10,706 10,656 8,626 Total 2,508,023 General Liability (in thousands) Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 $ 15,726 46,201 13,924 80,018 42,692 13,030 113,050 73,643 35,241 12,789 143,360 102,978 56,580 35,113 14,901 161,487 135,377 89,008 72,127 46,825 14,665 172,394 159,768 109,448 104,587 79,972 39,978 15,684 178,179 170,525 130,866 139,114 121,969 78,668 46,549 17,366 183,988 181,856 144,451 153,628 154,957 116,804 89,431 49,470 19,531 185,962 187,276 156,186 163,764 179,192 144,216 133,757 92,355 60,784 18,097 Accident Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 All outstanding liabilities before 2010, net of reinsurance 93,982 Liabilities for loss and loss expenses, net of reinsurance 1,280,416 Total 1,321,589 101 Workers Compensation (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ 198,371 214,469 212,815 211,030 214,916 212,448 208,155 204,423 199,539 205,238 218,973 214,743 215,114 210,591 205,708 200,674 194,821 203,864 208,036 199,360 195,197 188,596 187,359 183,314 199,794 194,318 187,658 173,160 166,662 162,787 199,346 187,065 182,579 172,515 164,420 193,729 194,639 183,604 179,642 196,774 184,946 176,248 195,202 184,306 193,894 Accident Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 As of December 31, 2019 2019 197,095 192,863 178,774 159,767 160,646 176,242 166,009 175,853 193,818 188,625 IBNR 19,514 22,717 24,605 26,260 28,320 27,927 41,146 53,654 74,399 100,336 Cumulative Number of Reported Claims 12,192 11,860 11,618 11,375 10,495 10,549 10,572 10,793 11,078 9,805 Total 1,789,692 Workers Compensation (in thousands) Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 $ 46,795 93,281 42,941 122,442 90,836 40,911 137,184 118,847 86,909 36,829 149,086 134,646 108,211 74,568 35,924 153,795 139,232 122,755 96,376 78,944 33,857 158,078 149,269 132,052 109,739 100,876 77,320 34,525 162,796 154,320 139,477 118,669 113,626 98,195 78,531 40,375 165,526 158,535 143,281 124,130 119,392 112,601 98,037 82,216 41,122 167,478 161,696 146,739 126,822 124,077 120,097 109,166 100,645 84,780 37,826 Accident Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 All outstanding liabilities before 2010, net of reinsurance Liabilities for loss and loss expenses, net of reinsurance 240,140 850,505 Total 1,179,326 Commercial Automobile (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited Accident Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 IBNR $ 187,562 189,305 187,778 181,923 179,854 172,969 173,157 173,471 173,080 174,006 183,044 182,325 178,421 172,617 174,882 174,514 173,507 179,551 191,947 183,527 184,289 184,367 186,128 184,633 188,289 205,282 209,197 207,994 210,410 207,975 200,534 212,725 216,824 219,925 218,172 220,994 240,958 253,074 259,495 255,187 274,367 285,302 301,274 329,389 347,908 172,995 173,401 185,357 209,602 217,334 260,565 285,304 324,291 352,487 385,212 682 899 1,920 2,928 4,831 7,966 21,279 57,165 109,922 183,477 Total 2,566,548 102 As of December 31, 2019 Cumulative Number of Reported Claims 25,512 25,524 24,160 25,722 27,714 29,340 31,167 32,474 35,034 33,438 Commercial Automobile (in thousands) Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 $ 68,098 99,254 69,849 128,015 99,196 73,316 146,913 121,576 105,371 76,469 163,513 142,507 127,235 109,893 80,810 167,227 157,291 148,669 140,015 117,169 91,347 169,100 166,082 168,114 169,850 148,884 132,260 106,022 169,793 170,000 176,656 189,626 180,701 175,866 155,720 117,287 171,693 170,913 179,501 200,750 202,821 211,515 200,701 178,823 134,867 171,941 172,365 181,353 202,622 209,655 238,142 233,939 220,422 193,788 149,538 Accident Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 All outstanding liabilities before 2010, net of reinsurance Liabilities for loss and loss expenses, net of reinsurance 3,904 596,686 Total 1,973,765 Businessowners' Policies (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited As of December 31, 2019 Cumulative Number of Reported Claims 3,920 4,960 5,543 3,482 4,064 3,959 3,843 3,864 4,159 3,210 Accident Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 IBNR $ 53,669 49,285 54,469 42,408 57,083 54,342 39,915 51,047 48,029 49,617 40,899 58,242 46,303 42,618 55,962 40,581 59,256 44,172 41,005 60,949 52,871 41,239 58,966 44,077 40,624 62,548 53,768 52,335 41,197 58,456 43,747 41,369 59,806 57,245 53,792 46,624 40,920 58,735 43,418 39,709 58,517 55,925 54,993 48,698 55,024 41,156 58,948 43,717 39,699 58,093 54,454 53,835 51,524 57,202 53,531 Total 512,159 333 362 703 803 1,390 3,235 4,245 10,252 12,432 15,068 Businessowners' Policies (in thousands) Accident Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 $ 20,821 28,131 27,884 31,027 37,362 22,199 34,705 41,011 31,833 17,412 37,819 46,444 35,089 26,592 28,914 38,900 52,114 37,215 30,845 40,584 24,189 40,279 55,856 38,766 34,760 44,911 36,014 24,655 40,395 57,045 40,627 37,993 49,460 42,710 36,848 21,865 40,439 57,365 41,326 38,464 52,940 46,571 39,973 31,337 29,995 Total All outstanding liabilities before 2010, net of reinsurance Liabilities for loss and loss expenses, net of reinsurance 40,823 57,380 41,356 39,085 55,458 49,073 45,308 36,950 39,791 27,718 432,942 7,530 86,747 103 Commercial Property (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited As of December 31, 2019 Cumulative Number of Reported Claims 7,669 9,038 8,517 5,713 6,515 6,404 6,739 6,886 8,240 6,722 Accident Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 IBNR $ 105,647 96,851 97,386 96,127 95,530 95,363 95,178 95,155 95,142 136,954 131,667 130,942 131,282 131,353 131,113 131,049 131,009 118,464 114,224 115,375 116,658 117,102 117,170 117,225 88,101 90,639 90,103 90,005 90,436 90,278 141,192 136,249 136,820 138,751 138,155 110,270 109,513 111,750 111,566 121,927 126,185 125,937 138,773 149,106 183,177 95,338 131,002 117,220 90,218 136,212 112,496 124,487 149,044 190,834 173,826 4 7 10 18 33 56 (96) (884) (329) 15,732 Total 1,320,677 Commercial Property (in thousands) Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 $ 69,543 91,918 94,538 94,602 127,580 81,528 95,111 129,579 108,834 60,244 95,270 130,681 111,503 87,874 101,131 95,147 131,060 114,699 90,446 132,909 79,048 95,156 131,115 116,291 90,350 136,634 106,182 83,966 95,150 131,089 116,625 90,840 137,883 109,829 118,789 99,047 95,138 131,100 116,671 90,696 137,418 110,994 122,930 142,338 135,416 95,334 131,092 116,674 90,646 136,008 110,969 123,828 148,589 184,813 130,891 Accident Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 All outstanding liabilities before 2010, net of reinsurance Liabilities for loss and loss expenses, net of reinsurance 237 52,071 Total 1,268,844 Personal Automobile (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2010 2011 2012 2013 2014 2015 2016 2017 2018 $ 103,340 110,075 112,346 109,515 107,490 107,405 107,224 107,054 106,887 113,232 116,164 113,686 112,993 114,241 113,830 113,988 113,921 113,771 114,921 109,832 109,324 110,294 110,300 109,795 108,417 109,620 106,225 106,703 107,759 107,680 102,250 109,325 106,757 107,452 106,821 96,387 99,698 92,727 100,214 99,570 98,032 100,202 101,880 105,139 111,594 Accident Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 As of December 31, 2019 Cumulative Number of Reported Claims IBNR 64 121 155 348 307 742 2,565 6,342 14,259 25,832 20,823 22,700 22,332 22,375 22,506 20,863 19,819 20,725 22,621 21,988 2019 106,785 114,056 109,701 107,916 107,104 98,718 101,140 103,653 113,569 114,043 Total 1,076,685 104 Personal Automobile (in thousands) Accident Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 $ 58,786 82,490 61,323 95,300 82,102 63,704 101,540 93,878 82,729 61,384 104,061 105,068 94,842 80,861 62,519 105,849 111,085 102,977 92,637 83,739 58,725 106,453 112,732 107,890 100,528 92,589 76,470 57,961 106,733 113,551 109,355 105,131 99,173 87,163 76,823 62,854 106,722 113,664 109,447 106,679 104,055 92,102 86,752 82,730 69,721 Total All outstanding liabilities before 2010, net of reinsurance Liabilities for loss and loss expenses, net of reinsurance 106,716 113,856 109,482 106,876 105,709 95,997 94,372 91,479 89,628 69,699 983,814 7,462 100,331 Homeowners (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited Accident Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 IBNR $ 68,373 67,525 103,804 63,285 98,211 87,260 61,927 97,761 82,744 73,670 62,462 94,167 86,560 72,528 80,111 62,402 94,543 86,667 71,494 82,461 76,637 62,339 94,183 86,271 72,145 83,637 76,400 60,105 62,392 94,378 86,330 71,714 83,844 76,559 60,931 59,167 62,402 94,587 86,483 72,148 83,539 74,723 62,391 67,978 62,961 62,380 94,572 86,567 72,318 83,824 74,978 61,723 70,365 68,526 64,306 Total 739,559 48 82 94 420 682 660 1,221 2,500 2,366 6,299 As of December 31, 2019 Cumulative Number of Reported Claims 9,132 15,111 16,941 7,749 8,773 7,746 6,885 7,370 7,554 6,468 Homeowners (in thousands) Accident Year Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 $ 43,699 58,638 71,668 60,295 89,963 69,056 61,106 91,718 79,584 50,664 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 62,155 92,185 82,720 65,528 61,561 62,227 93,312 84,250 67,838 76,007 52,589 62,241 93,720 85,196 69,775 79,751 70,078 42,252 62,272 94,007 85,562 71,776 81,664 72,202 57,333 45,466 62,283 94,412 85,642 72,197 82,583 72,927 59,546 63,290 49,430 Total All outstanding liabilities before 2010, net of reinsurance Liabilities for loss and loss expenses, net of reinsurance 62,329 94,458 85,897 72,433 82,836 74,079 60,082 67,193 64,137 49,680 713,124 5,316 31,752 105 E&S Casualty Lines (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited As of December 31, 2019 Cumulative Number of Reported Claims 815 1,332 2,045 2,280 2,071 2,799 2,859 2,614 2,392 1,679 Accident Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2011 2012 2013 2014 2015 2016 2017 2018 2019 IBNR $ 3,294 $ 8,127 4,106 7,102 42,367 3,369 9,853 42,621 55,468 4,299 12,207 43,175 60,309 55,316 3,831 10,273 46,149 67,099 63,505 75,498 3,055 9,652 46,165 69,112 69,929 76,432 94,451 4,932 10,228 45,988 67,647 71,719 82,404 96,416 91,438 5,168 12,119 46,444 68,972 71,206 90,488 104,655 95,783 98,324 Total 5,534 11,554 44,622 68,451 71,153 90,355 105,120 99,866 103,004 117,087 716,746 — 177 2,474 13,816 5,559 15,752 35,987 47,074 62,754 103,146 E&S Casualty Lines (in thousands) Accident Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2011 2012 2013 2014 2015 2016 2017 2018 2019 $ — $ — 1,218 806 3,722 2,570 3,200 7,914 2,715 3,574 6,445 16,430 9,470 2,353 4,078 9,954 25,064 21,980 12,234 3,036 4,513 9,912 32,343 35,200 25,571 13,057 3,720 4,610 10,256 36,278 46,108 43,877 29,389 16,195 5,057 4,908 9,819 38,298 51,142 53,780 50,712 33,950 14,672 5,509 Total All outstanding liabilities before 2010, net of reinsurance Liabilities for loss and loss expenses, net of reinsurance 5,362 9,604 39,832 54,974 60,092 64,529 56,581 34,179 21,337 4,422 350,912 109 365,943 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. 106 (e) The reconciliation of the net incurred and paid claims development tables to the liability for loss and loss expenses in the consolidated statement of financial position is as follows: (in thousands) 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, 2019 $ 1,280,416 850,505 596,686 86,747 52,071 9,399 2,875,824 100,331 31,752 10,664 142,747 365,943 8,199 374,142 3,392,713 195,830 206,414 14,352 3,012 26,526 9,113 455,247 44,104 1,182 28,993 74,279 14,319 317 14,636 544,162 130,288 Total gross liability for unpaid loss and loss expenses $ 4,067,163 107 (f) The table below reflects the historical average annual percentage payout of incurred claims by age. For example, the general liability line of business averages payout of 6.3% of its ultimate losses in the first year, 12.5% in the second year, and so forth. The following is supplementary information about average historical claims duration as of December 31, 2019: 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 6.3% 21.9 37.8 47.9 70.6 58.2 72.2 4.9 2 12.5 24.9 17.0 19.5 25.4 18.4 20.3 12.2 3 15.5 13.2 14.4 8.2 2.8 9.9 3.3 4 17.0 8.2 12.9 8.8 0.8 6.8 1.5 5 14.2 4.9 9.8 6.6 0.3 4.2 1.6 18.1 22.6 14.9 6 9.8 4.6 4.1 3.9 0.1 1.5 0.4 9.4 7 5.6 2.3 1.3 2.0 — 0.5 0.3 6.4 8 4.9 2.4 0.9 0.8 — 0.3 0.2 3.5 9 2.8 1.6 1.1 0.8 — 0.1 0.1 2.0 10 1.9 1.1 0.1 0.8 — 0.1 0.1 Note 10. Indebtedness The table below provides a summary of our outstanding debt at December 31, 2019 and 2018: Issuance Date Maturity Date Interest Rate Original Amount Unamortized Issuance Costs Debt Discount December 31, 2019 December 31, 2018 2019 Carry Value Outstanding Debt ($ in thousands) Description Long term Issuance: (1) Senior Notes 3/1/2019 3/1/2049 5.375% $ 300,000 (3,147) (5,843) 291,010 — Redemption: (1) Senior Notes 2/8/2013 2/9/2043 5.875% 185,000 Other Outstanding: (2) FHLBI (3) FHLBNY (3) FHLBNY (4) Senior Notes (5) Senior Notes Finance lease obligations1 Total long-term debt 12/16/2016 12/16/2026 8/15/2016 8/16/2021 7/21/2016 7/21/2021 11/3/2005 11/1/2035 11/16/2004 11/15/2034 3.03% 1.56% 1.61% 6.70% 7.25% 60,000 25,000 25,000 100,000 50,000 — — — — — — — — (355) (185) (520) (90) — 180,771 60,000 25,000 25,000 99,125 49,725 60,000 25,000 25,000 99,069 49,700 (3,687) (6,453) 550,597 439,540 737 — 1 Concurrent with the adoption of ASU 2016-02 discussed in Note 3. "Adoption of Accounting Pronouncements," finance lease obligations are now captured in Long-term debt on our Consolidated Balance Sheets. Short-term Debt Activity Short-term debt activity included the following in 2019: • On March 7, 2019, Selective Insurance Company of America ("SICA") borrowed short-term funds of $50 million from the FHLBNY at an interest rate of 2.64%. This borrowing was repaid on March 28, 2019. • On August 5, 2019, SICA borrowed short-term funds of $15 million from the FHLBNY at an interest rate of 2.29%. This borrowing was repaid on August 12, 2019. On December 20, 2019, the Parent entered into a Credit Agreement (the “Line of Credit”) among the Parent, the lenders named therein (the “Lenders”), and Bank of Montreal, Chicago Branch, as Administrative Agent. Under the Line of Credit, the Lenders have agreed to provide the Parent with a $50 million revolving credit facility, which can be increased to $125 million with the consent of the Lenders. The Line of Credit will mature on December 20, 2022 and has an interest rate, which varies and is based on, among other factors, the Parent’s debt ratings. The Parent, as borrower, was a party to a Credit Agreement, dated December 1, 2015, for a $30 million revolving credit facility, which could be increased to $50 million with the consent of the lenders, with the lenders named therein, and Wells Fargo Bank, National Association, as Administrative Agent (“Wells Fargo”), which was scheduled to mature on December 1, 2020 (the “Prior Credit Agreement”). In anticipation of entering into the Line of Credit, the Parent exercised termination rights under the Prior Credit Agreement by sending a termination letter to 108 Wells Fargo on December 20, 2019. The effective date of the termination of the Prior Credit Agreement was December 30, 2019. Our Line of Credit contains representations, warranties, and covenants that are customary for credit facilities of this type, including, without limitation, financial covenants under which we are obligated to maintain a minimum consolidated net worth, a maximum ratio of consolidated debt to total capitalization, and covenants limiting our ability to: (i) merge or liquidate; (ii) incur debt or liens; (iii) dispose of assets; (iv) make investments and acquisitions; and (v) engage in transactions with affiliates. The table below outlines information regarding certain covenants in the Line of Credit: Consolidated net worth1 Debt to total capitalization ratio1 1Calculated in accordance with the Line of Credit. Required as of December 31, 2019 Not less than $1.4 billion Not to exceed 35% Actual as of December 31, 2019 $2.1 billion 20.7% In addition to the above requirements, the Line of Credit contains a cross-default provision that provides that the Line of Credit will be in default if we fail to comply with any condition, covenant, or agreement (including payment of principal and interest when due on any debt with an aggregate principal amount of at least $20 million), which causes or permits the acceleration of principal. Additionally, the Line of Credit limits borrowings from the FHLBI and the FHLBNY to 10% of the respective member company's admitted assets for the previous year. Long-term Debt Activity (1) In the first quarter of 2019, we issued $300 million of 5.375% Senior Notes due 2049 at a discount of $5.9 million which, when coupled with debt issuance costs of approximately $3.3 million, resulted in net proceeds from the offering of $290.8 million. The 5.375% Senior Notes will pay interest on March 1 and September 1 of each year. The first payment was made on September 1, 2019. A portion of the proceeds from this debt issuance was used to fully redeem the $185 million aggregate principal amount of our 5.875% Senior Notes due 2043, with the remaining $106 million being used for general corporate purposes. The 5.875% Senior Notes had pre-tax debt retirement costs of $4.2 million, or $3.3 million after tax, which was recorded in Interest expense on the Consolidated Statements of Income in the first quarter of 2019. There are no financial debt covenants to which we are required to comply in regards to the 5.375% Senior Notes. (2) In the first quarter of 2009, 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, 2019 and December 31, 2018. Our investment provides us the ability to borrow approximately 20 times the total amount of the FHLBI common stock purchased with additional collateral, at comparatively low borrowing rates. The proceeds from the FHLBI borrowing on December 16, 2016 of $60 million were used to repay a $45 million borrowing from the FHLBI that was outstanding at the time, with the remaining $15 million used for general corporate purposes. All borrowings from the FHLBI require security. There are no financial debt covenants to which we are required to comply with in regards to these borrowings. For information on investments that are pledged as collateral for these borrowings, see Note 5. "Investments" above. (3) In the fourth quarter of 2015, SICA and Selective Insurance Company of New York ("SICNY") joined, and invested in, the FHLBNY, which provides them with access to additional liquidity. The aggregate investment for both subsidiaries was $3.1 million at December 31, 2019 and $2.7 million at December 31, 2018. Our investment provides us the ability to borrow approximately 20 times the total amount of the FHLBNY common stock purchased with additional collateral, at comparatively low borrowing rates. In 2016, SICA borrowed the following amounts from the FHLBNY: (i) $25 million in August 2016 at an interest rate of 1.56%, which is due on August 16, 2021; and (ii) $25 million in July 2016 at an interest rate of 1.61%, which is due on July 21, 2021. All borrowings from the FHLBNY require security. There are no financial debt covenants to which we are required to comply with in regards to these borrowings. For information on investments that are pledged as collateral for these borrowings, see Note 5. "Investments" above. (4) In November 2005, we issued $100 million of 6.70% Senior Notes due 2035. These notes were issued at a discount of $0.7 million resulting in an effective yield of 6.754%. Net proceeds of approximately $50 million were used to fund an irrevocable trust that subsequently funded certain payment obligations in respect of our outstanding debt. The remainder of the proceeds was used for general corporate purposes. The agreements covering these notes contain a standard default cross-acceleration provision that provides the 6.70% Senior Notes will enter a state of default upon the failure to pay principal when due or upon 109 any event or condition that results in an acceleration of principal of any other debt instrument in excess of $10 million that we have outstanding concurrently with the 6.70% Senior Notes. There are no financial debt covenants to which we are required to comply in regards to these notes. (5) In November 2004, we issued $50 million of 7.25% Senior Notes due 2034. These notes were issued at a discount of $0.1 million, resulting in an effective yield of 7.27%. We contributed $25 million of the bond proceeds to the Insurance Subsidiaries as capital. The remainder of the proceeds was used for general corporate purposes. The agreements covering these notes contain a standard default cross-acceleration provision that provides the 7.25% Senior Notes will enter a state of default upon the failure to pay principal when due or upon any event or condition that results in an acceleration of principal of any other debt instrument in excess of $10 million that we have outstanding concurrently with the 7.25% Senior Notes. There are no financial debt covenants to which we are required to comply in regards to these notes. Note 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. Also included in our Investment segment results are after-tax net realized and unrealized gains and losses, which are not included in non-GAAP operating income. 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 Eastern region of the country. In 2019, approximately 19% of NPW were related to insurance policies written in New Jersey. We had a goodwill balance of $7.8 million at both December 31, 2019 and 2018 on our Consolidated Balance Sheet that relates to our Standard Commercial Lines reporting unit. 110 The following summaries present revenues (net investment income and net realized and unrealized gains and losses on investments in the case of the Investments segment) and pre-tax income for the individual segments: Revenue by Segment ($ 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 gains (losses) Total Investments revenues Total revenues Years ended December 31, 2019 2018 2017 $ 554,256 311,370 669,895 353,834 105,252 35,726 19,281 10,889 493,093 317,616 616,187 329,660 103,412 33,991 18,263 8,180 442,818 317,982 569,217 311,932 100,266 29,086 17,198 9,488 2,060,503 1,920,402 1,797,987 172,606 127,543 7,590 1,466 309,205 182,864 56,954 — 239,818 222,543 14,422 236,965 168,250 128,961 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 $ 2,846,491 2,586,080 2,469,984 111 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 gain (loss), before federal income tax Underwriting gain (loss), after federal income tax Combined ratio ROE contribution Investments: Net investment income Net realized and unrealized investment gains (losses) Total investment segment income, before federal income tax Tax on investment segment income Total investment segment income, after federal income tax ROE contribution of after-tax net investment income Years ended December 31, 2019 2018 2017 $ 145,990 115,332 92.9% 5.8% 8,260 6,525 97.3% 0.3% 9,743 7,697 95.9% 0.4% $ $ 222,543 14,422 236,965 45,301 191,664 9.6% 109,104 86,192 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 6.9 149,514 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 Reconciliation of Segment Results to Income Before Federal Income Tax Years ended December 31, ($ in thousands) Underwriting gain (loss) Standard Commercial Lines Standard Personal Lines E&S Lines Investment income Total all segments Interest expense Corporate expenses 2019 2018 2017 $ 145,990 8,260 9,743 236,965 400,958 (33,668) (30,900) 336,390 109,104 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 Income, before federal income tax $ Note 12. Earnings per Share The following table provides a reconciliation of the numerators and denominators of basic and diluted earnings per share ("EPS"): 2019 ($ 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 $ 271,623 59,421 $ 4.57 — 583 Net income available to common stockholders $ 271,623 60,004 $ 4.53 112 2018 ($ 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 2017 ($ 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 $ $ 178,939 59,713 $ 3.00 Income (Numerator) Shares (Denominator) Per Share Amount 168,826 58,458 $ 2.89 — 899 Net income available to common stockholders $ 168,826 59,357 $ 2.84 Note 13. Federal Income Taxes (a) On December 22, 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 use discount factors based on industry experience and a corporate bond yield curve, which the Internal Revenue Service ("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 using 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 was being taken into income over eight years, beginning with 2018, at approximately $3.3 million per year. In June 2019, the IRS published the final 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 revised pre-tax decrease to our discounted loss reserves of $109.5 million, which resulted in a deferred tax asset of $23.0 million, a decrease from the $26.3 million estimate described above. The $23.0 million will be taken into income over eight years, beginning with the 2018 tax year, at approximately $2.9 million per year. 113 (b) A reconciliation of federal income tax on income at the corporate rate to the effective tax rate is as follows: ($ in thousands) 2019 2018 2017 Tax at statutory rate (21% in 2019 and 2018 and 35% in 2017) $ Tax-advantaged interest Dividends received deduction Executive compensation Stock-based compensation Tax Reform deferred tax write off Other 1 Federal income tax expense 70,642 (4,909) (443) 2,985 (3,253) — (255) $ 64,767 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 1 2018 includes approximately $3.8 million of capital loss carry back items to prior tax years at the previous 35% statutory tax rate. (c) The tax effects of the significant temporary differences that gave rise to deferred tax assets and liabilities were as follows: ($ in thousands) Deferred tax assets: Net loss reserve discounting Net unearned premiums Employee benefits Long-term incentive compensation plans Temporary investment write-downs 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 2019 2018 48,193 57,004 10,646 5,727 1,059 6,478 43,285 53,556 8,862 9,095 1,155 5,744 129,107 121,697 56,949 45,294 7,576 12,512 122,331 6,776 53,049 502 4,904 9,702 68,157 53,540 $ $ Net deferred income tax assets decreased by $46.8 million in 2019, primarily driven by a $44.8 million increase in gross deferred tax liabilities as reduced interest rates increased 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, 2019 or 2018. We do not have unrecognized tax expense or benefit as of December 31, 2019. We have analyzed our tax positions in all open tax years, which as of December 31, 2019 were 2016 through 2018. The 2018 tax year is currently under audit. We do not expect any material adjustments to arise out of the 2018 audit. We believe our tax positions will more likely than not be sustained upon examination, including related appeals or litigation. In the event we had a tax position that did not meet the more likely than not criteria, any tax, interest, and penalties incurred related to such a position would be reflected in "Total federal income tax expense" on our Consolidated Statements of Income. Note 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 $17.0 million in 2019, and $15.8 million in both 2018 and 2017. 114 (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 $0.3 million in 2019, $0.4 million in 2018, and $0.2 million in 2017. (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, 2019 and December 31, 2018 of $10.9 million and $9.5 million, respectively, for the Excess Plan and $6.6 million and $5.8 million, respectively, for the Retirement Life Plan. Expense recorded for the Excess Plan was $0.4 million in each of 2019, 2018, and 2017. Expense recorded for the Retirement Life Plan was $0.3 million in each of 2019, 2018, and 2017. The following tables provide details on the Pension Plan for 2019 and 2018: December 31, ($ in thousands) Change in Benefit Obligation: Benefit obligation, beginning of year Interest cost Actuarial losses (gains) Benefits paid Benefit obligation, end of year Change in Fair Value of Assets: Fair value of assets, beginning of year Actual return on plan assets, net of expenses Contributions by the employer to funded plans Benefits paid Fair value of assets, end of year Funded status Amounts Recognized in the Consolidated Balance Sheet: Liabilities Net pension liability, end of year Amounts Recognized in AOCI: Net actuarial loss Total Other Information as of December 31: Accumulated benefit obligation Weighted-Average Liability Assumptions as of December 31: Discount rate $ $ $ $ $ $ $ $ $ $ 115 Pension Plan 2019 2018 334,679 13,506 54,478 (11,642) 391,021 331,680 63,949 1,100 (11,642) 385,087 (5,934) (5,934) (5,934) 107,125 107,125 391,021 3.33% 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 ($ in thousands) Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income: 2019 Pension Plan 2018 2017 Net Periodic Benefit Cost (Benefit): Interest cost Expected return on plan assets Amortization of unrecognized actuarial loss Total net periodic pension cost (benefit)1 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 $ $ $ $ 13,506 (21,114) 2,575 (5,033) 11,643 (2,575) 9,068 12,428 (22,767) 1,981 (8,358) 12,600 (1,981) 10,619 Total recognized in net periodic benefit cost and other comprehensive income 1The components of net periodic pension cost (benefit) are included within "Loss and loss expense incurred" and "Other insurance expenses" on the Consolidated Statements of Income. 4,035 2,261 $ 12,490 (19,419) 2,001 (4,928) 3,594 (2,001) 1,593 (3,335) Weighted-Average Expense Assumptions for the years ended December 31: Discount rate Expected return on plan assets 2019 Pension Plan 2018 2017 4.46% 6.50 3.78 6.36 4.41 6.24 Our latest measurement date was December 31, 2019, at which time we decreased our expected return on plan assets to 5.80%, due to lower expected returns within our longer-dated fixed income portfolio, as interest rates and credit spreads declined significantly year-over-year. When determining the most appropriate discount rate to be used in the valuation, we consider, among other factors, our expected payout patterns of the Pension Plan's obligations as well as our investment strategy, and we ultimately select the rate that we believe best represents our estimate of the inherent interest rate at which our pension 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. Our discount rate decreased 113 basis points, to 3.33%, as of December 31, 2019, compared to 4.46% as of December 31, 2018, which resulted in a significant increase in the actuarial loss driving the increase in the benefit obligation for the period. The weighted average discount rate used to determine 2020 interest cost is 2.95%. 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 2020, we will continue to phase in adjustments to the asset allocation to steadily close the gap between the duration of the assets and the duration of the liabilities, provided certain improved funding targets are achieved. Over time, the target and actual asset allocations may change based on the funded status of the Pension Plan and market return expectations. The Pension Plan’s target ranges, as well as the actual weighted average asset allocation by strategy, at December 31 were as follows: Return seeking assets1 Liability hedging assets Short-term investments Total 1Includes limited partnerships. 2019 2018 Target Percentage Actual Percentage Actual Percentage 15%-70% 35%-75% - 100% 59% 38% 3% 100% 43% 38% 19% 100% 116 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 57% hedge against the projected benefit obligation. The Pension Plan had no investments in the Parent’s common stock as of December 31, 2019 or 2018. 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 equities and liability hedging funds include collective investment funds and fund of funds that utilize a market approach wherein the published prices in the active market for identical assets are used. These investments are traded at their net asset value per share. These investments are classified as Level 1 in the fair value hierarchy. • The investments in private limited partnerships 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 recorded 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 recorded at cost, which approximates fair value. Given the liquid nature of the underlying investments in overnight cash deposits and other short-term duration products, we have determined that a correlation exists between the deposit administration contract and other short-term investments, such as money market funds. As such, this investment is classified as Level 2 in the fair value hierarchy. For discussion regarding the levels within the fair value hierarchy, see Note 2. "Summary of Significant Accounting Policies." In addition, refer to Note 5. "Investments" for discussion regarding the limited partnership investment strategies, excluding the secondary private equity and direct lending strategies as these investments are currently not part of the Pension Plan's investment portfolio. 117 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, 2019 Fair Value Measurements at 12/31/19 Using Assets Measured at Fair Value At 12/31/19 Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) ($ in thousands) Description Return seeking assets: Equities: Global Equity Diversified Credit Real Assets Total Equities Limited partnerships (at net asset value)1: Real assets Private equity Private credit Total limited partnerships 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 $ 113,212 59,009 57,414 229,635 228 583 43 854 113,212 59,009 57,414 229,635 — — — — 230,489 229,635 114,395 30,997 145,392 8,824 2,215 11,039 114,395 30,997 145,392 8,824 — 8,824 — — — — — — — — — — — — — 2,215 2,215 2,215 — — — — — — — — — — — — — — — — Total invested assets $ 386,920 383,851 118 December 31, 2018 Fair Value Measurements at 12/31/18 Using ($ 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 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) $ 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 — — — — — — — — — — — — — — — Total invested assets — 1In accordance with ASU 2015-07, certain investments that are measured at fair value using the net asset value per share (or its practical expedient) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to total Pension Plan invested assets. 300,725 331,834 1,482 $ Contributions We presently do not anticipate contributing to the Pension Plan in 2020, as we have no minimum required contribution amounts. Benefit Payments ($ in thousands) Benefits Expected to be Paid in Future Fiscal Years: 2020 2021 2022 2023 2024 2025-2029 Note 15. Share-Based Payments Pension Plan $ 14,968 14,947 16,115 17,144 18,146 103,669 Active Plans As of December 31, 2019, 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 119 • 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 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, 2019 are as follows: As of December 31, 2019 Authorized Available for Issuance Awards Outstanding Stock Plan ESPP Agent Plan 4,750,000 1,500,000 3,000,000 3,208,968 356,229 1,728,471 760,639 — — 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, 2019 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. 1,985,129 59,729 Parent's Stock Compensation Plan for Non-employee Directors ("Directors Stock Compensation Plan") 1Awards outstanding under the 2005 Stock Plan consisted of 32,906 shares deferred by our non-employee directors and 26,823 stock options. Directors could elect to receive a portion of their annual compensation in shares of the Parent's common stock. 44,468 44,468 120 RSU Transactions A summary of the RSU transactions under our share-based payment plans is as follows: Unvested RSU awards at December 31, 2018 Granted in 2019 Vested in 2019 Forfeited in 2019 Unvested RSU awards at December 31, 2019 Number of Shares Weighted Average Grant Date Fair Value 846,305 $ 265,680 (337,525) (27,735) 746,725 $ 44.00 63.60 36.08 51.89 53.48 As of December 31, 2019, total unrecognized compensation expense related to unvested RSU awards granted under our Stock Plan was $8.9 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 $22.0 million for 2019, $18.0 million for 2018, and $16.0 million for 2017. In connection with vested RSUs, the total value of the DEUs that vested was $0.8 million in 2019 and 2018, and $0.9 million in 2017. Option Transactions A summary of the stock option transactions under our 2005 Stock Plan is as follows: Outstanding at December 31, 2018 Granted in 2019 Exercised in 2019 Forfeited or expired in 2019 Outstanding at December 31, 2019 Exercisable at December 31, 2019 Weighted Average Exercise Price Weighted Average Remaining Contractual Life in Years Aggregate Intrinsic Value ($ in thousands) 14.37 — 13.74 — 16.71 16.71 0.33 0.33 $ $ 1,300 1,300 Number of Shares 126,735 $ — (99,912) — 26,823 26,823 $ $ The total intrinsic value of options exercised was $5.2 million in 2019, $4.5 million in 2018, and $4.0 million in 2017. CIU Transactions The liability recorded in connection with our Cash Plan was $8.6 million at December 31, 2019 and $21.6 million at December 31, 2018. The decrease of $13 million in the liability recorded is primarily due to the structural changes we made to our Cash Plan in early 2017. The remaining cost associated with the CIUs is expected to be recognized over a weighted average period of 1.1 years. The CIU payments made were $18.4 million in 2019, $20.2 million in 2018, and $14.2 million in 2017. ESPP and Agent Plan Transactions A summary of ESPP and Agent Plan share issuances is as follows: ESPP Issuances Agent Plan Issuances 2019 2018 2017 72,952 47,888 70,448 41,134 75,093 49,794 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 121 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 2019 2.33% 6 months 1.2% 26% ESPP 2018 1.88 6 months 1.3 18 2017 1.07 6 months 1.3 24 The weighted-average fair value of options and stock per share, including RSUs granted under the Parent's stock plans, during 2019, 2018, and 2017 was as follows: RSUs ESPP: Six month option Discount of grant date market value Total ESPP Agent Plan: Discount of grant date market value 2019 2018 2017 $ 63.60 4.32 9.99 14.31 7.00 55.96 2.67 8.50 11.17 5.99 42.66 2.73 7.06 9.79 5.04 The fair value of the CIU liability is remeasured at each reporting period through the settlement date of the awards, which is three years from the date of grant based on an amount expected to be paid. A Monte Carlo simulation is performed to approximate the projected fair value of the CIUs that, in accordance with the CIU agreements established under the Cash Plan, is adjusted to reflect our performance on specified indicators compared to targeted peer companies. Expense Recognition The following table provides share-based compensation expense in 2019, 2018, and 2017: ($ in millions) Share-based compensation expense, pre-tax Income tax benefit, including the benefit related to stock grants that vested during the year Share-based compensation expense, after-tax 2019 2018 2017 $ $ 24.5 (8.2) 16.3 19.3 (7.0) 12.3 31.2 (15.0) 16.2 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 $11.0 million in 2019, $10.1 million in 2018, and $11.1 million in 2017. In return, the Insurance Subsidiaries paid standard market commissions, including supplemental commissions, to Rue Insurance of $2.0 million in 2019, $2.1 million in 2018, and $2.3 million in 2017. Amounts due to Rue Insurance at December 31, 2019 and December 31, 2018 were $0.3 million and $0.4 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 $1.3 million of contributions to the Foundation in 2019, $0.5 million in 2018, and no contributions in 2017. 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 February 4, 2020, BlackRock filed a Schedule 13G/A reporting beneficial ownership as of December 31, 2019, of 11.7% of our common stock. 122 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 $2.2 million in 2019, and $2.0 million in both 2018 and 2017. Amounts payable for such services at December 31, 2019 and December 31, 2018, were $1.1 million and $1.0 million, respectively. As part of our overall investment diversification, we invest in various BlackRock funds from time to time. These funds accounted for less than 1% of our invested assets at December 31, 2019 and December 31, 2018, and are predominately reflected in Equity securities on our Consolidated Balance Sheet. During 2019, with regard to BlackRock funds, we (i) purchased $21.7 million, (ii) sold $59.5 million, (iii) recognized a $5.7 million net realized and unrealized gain, and (iv) recorded $0.8 million in income. During 2018, we purchased $41.4 million in securities and recognized net realized and unrealized losses of $3.6 million. There were no material transactions related to these holdings in 2017. There were no amounts payable on the settlement of these investment transactions at December 31, 2019, December 31, 2018, or December 31, 2017. Our Pension Plan's investment portfolio contained investments in BlackRock funds of $144.2 million at December 31, 2019 and $131.9 million at December 31, 2018. During 2019, with regard to BlackRock funds, the Pension Plan (i) purchased $19.7 million, (ii) sold $44.1 million, and (iii) recorded net investment income of $36.7 million. In 2018, with regard to BlackRock funds, the Pension Plan (i) purchased $132.5 million, (ii) sold $125.6 million, and (iii) recorded net investment income of $9.3 million. In 2017, with regard to BlackRock funds, the Pension Plan (i) purchased $10.0 million, (ii) sold $4.1 million, and (iii) recorded net investment income of $25.2 million. In addition, our Deferred Compensation Plan and Retirement Savings Plan may offer our employees the option to invest in various BlackRock funds. All contracts and transactions with BlackRock were consummated in the ordinary course of business on an arm's-length basis. As of December 31, 2019, the Vanguard Group ("Vanguard") held 9.4% of our common stock. Vanguard is one of the world's largest investment management companies, offering low cost mutual funds, exchange-trade funds ("ETFs"), and 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 in the prior year, Vanguard filed the necessary filings with insurance regulatory authorities to disclaim control and we do not expect Vanguard to be deemed a controlling person by any insurance regulator. As part of our overall investment diversification, we may invest in various Vanguard funds from time to time. As of December 31, 2019, we had no investments in Vanguard funds, and our investment in these funds at December 31, 2018 was less than 1% of invested assets at that time and was recorded within Equity securities on our Consolidated Balance Sheet. During 2019, we sold $11.8 million of a Vanguard ETF, recorded dividend income of $0.2 million and recorded capital gains of $1.3 million from such ETF, with no amounts receivable on the settlement of this transaction at December 31, 2019. During 2018, we purchased $11.5 million of a Vanguard ETF and recorded dividend income of $0.4 million from such ETF, with no amounts payable on the settlement of this transaction at December 31, 2018. We had no transactions with Vanguard in 2017. Our Pension Plan's investment portfolio contained no investments in Vanguard funds at December 31, 2019 and December 31, 2018. Our Pension Plan's investment portfolio contained investments in Vanguard funds of $86.3 million in 2017. The Pension Plan had no transactions with Vanguard in 2019. During 2018 and 2017, the Pension Plan purchased $8.4 million and $5.2 million of Vanguard funds, respectively. In 2018, the Pension Plan sold $85.4 million of Vanguard funds. The Pension Plan recorded a net investment loss on Vanguard funds of $5.5 million in 2018, and net investment income of $9.1 million in 2017. 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. Leases We have various operating leases for office space, equipment, and fleet vehicles. In addition, we have various finance leases for computer hardware. Such lease agreements, which expire at various dates through 2030, are generally renewed or replaced by similar leases. 123 Upon adoption of ASU 2016-02 on January 1, 2019, we recorded operating lease right-of-use assets of $20.7 million with related lease liabilities of $21.0 million. The differential of $0.3 million was recognized, on an after-tax basis, as a cumulative- effect adjustment to the opening balance of retained earnings as of January 1, 2019. Financing lease right-of-use assets and the related lease liabilities were $0.9 million as of January 1, 2019. See Note 2. "Summary of Significant Accounting Policies" and Note 3. "Adoption of Accounting Pronouncements" in this Form 10-K for additional information regarding our accounting policy on leases and ASU 2016-02, respectively. The components of lease expense for the year ended December 31, 2019 were as follows: ($ in thousands) 2019 Operating lease cost, included in Other insurance expenses on the Consolidated Statements of Income Finance lease cost: Amortization of assets, included in Other insurance expenses on the Consolidated Statements of Income Interest on lease liabilities, included in Interest expense on the Consolidated Statements of Income Total finance lease cost Variable lease cost, included in Other insurance expenses on the Consolidated Statements of Income Short-term lease cost, included in Other insurance expenses on the Consolidated Statements of Income The following table provides supplemental information regarding our operating and finance leases. Weighted-average remaining lease term Operating leases Finance leases Weighted-average discount rate $ $ 8,808 984 16 1,000 48 2,165 December 31, 2019 years 6 2 Operating leases Finance leases1 3.4 % 2.1 1Prior to adoption of ASU 2016-02, our historical capital lease liabilities and assets were measured using an un-discounted cash flow stream due to immateriality of the capital lease population. Operating and finance lease asset and liability balances are included within the following line items on the Consolidated Balance Sheets: ($ in thousands) Operating leases Other assets Other liabilities Finance leases Property and equipment - at cost, net of accumulated depreciation and amortization Long-term debt At December 31, 2019, the maturities of our lease liabilities were as follows: $ $ December 31, 2019 ($ in thousands) Year ended December 31, 2020 2021 2022 2023 2024 Thereafter Total lease payments Less: imputed interest Less: leases that have not yet commenced Total lease liabilities Finance Leases Operating Leases Total 451 248 54 — — — 753 16 — 737 8,244 6,168 4,590 3,329 2,920 8,638 33,889 2,995 3,388 27,506 $ $ 124 26,535 27,506 731 737 8,695 6,416 4,644 3,329 2,920 8,638 34,642 3,011 3,388 28,243 At December 31, 2018, the maturities of our lease liabilities for capital and operating leases were as follows: ($ in thousands) Capital Leases Operating Leases Total 2019 2020 2021 2022 2023 Thereafter Total minimum payment required $ $ 728 141 22 — — — 891 7,762 7,355 5,083 3,641 2,900 9,698 36,439 8,490 7,496 5,105 3,641 2,900 9,698 37,330 Refer to Note. 4 "Statements of Cash Flows" in this Form 10-K for supplemental cash and non-cash transactions included in the measurement of operating and finance lease liabilities. Note 18. 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, 2019, we had purchased such annuities with a present value of $25.5 million for settlement of claims on a structured basis for which we are contingently liable. To our knowledge, there are no material defaults from any of the issuers of such annuities. (b) As of December 31, 2019, we have made commitments that may require us to invest additional amounts into our investment portfolio, which are as follows: ($ in millions) Alternative and other investments Non-publicly traded collateralized loan obligations in our fixed income securities portfolio Non-publicly traded common stock within our equity portfolio Commercial mortgage loans Privately-placed corporate securities Total Amount of Obligation Year of Expiration of Obligation $ $ 219.2 35.4 3.9 10.0 15.0 283.5 2036 2030 2023 Less than 1 year Less than 1 year There is no certainty that any such additional investment will be required. We expect to have the capacity to repay or refinance these obligations as they come due. Note 19. Litigation As of December 31, 2019, we do not believe we are involved in any legal action that could have a material adverse effect on our consolidated financial condition, results of operations, or cash flows. In the ordinary course of conducting business, we are parties in various legal actions. Most are claims litigation involving our Insurance Subsidiaries as either: (i) liability insurers defending or providing indemnity for third-party claims brought against our customers; (ii) insurers defending first-party coverage claims brought against them; or (iii) liability insurers seeking declaratory judgment on our insurance coverage obligations. We account for such activity through the establishment of unpaid loss and loss expense reserves. In ordinary course claims litigation, we expect that any potential ultimate liability, after consideration of provisions made for potential losses and costs of defense, will not be material to our consolidated financial condition, results of operations, or cash flows. From time to time, our Insurance Subsidiaries also are named as defendants in other legal actions, some of which assert claims for substantial amounts. Plaintiffs may style these actions as putative class actions and seek judicial certification of a state or national class for allegations involving our business practices, such as improper reimbursement of medical providers paid under workers compensation and personal and commercial automobile insurance policies or improper reimbursement for automobile parts. Similarly, our Insurance Subsidiaries can be named in individual actions seeking extra-contractual damages, punitive damages, or penalties, often alleging bad faith in the handling of insurance claims. We believe that we have valid defenses to these allegations and we account for such activity through the establishment of unpaid loss and loss expense reserves. In these other legal actions, we expect that any potential ultimate liability, after consideration of provisions made for estimated losses, will not be material to our consolidated financial condition. Nonetheless, litigation outcomes are inherently unpredictable and, because the amounts sought in certain of these actions are large or indeterminate, it is possible that any adverse outcomes could have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods. 125 Note 20. 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, 2019, the various state insurance departments of domicile have adopted the March 2019 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 2019 2018 2019 2018 2019 2018 2017 ($ 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 525.9 339.2 132.6 103.1 99.4 25.3 62.5 27.1 58.2 23.5 478.6 300.2 119.4 92.2 86.5 19.9 50.3 23.0 44.9 680.1 388.2 163.8 128.7 127.1 55.4 105.4 95.6 132.7 632.8 349.3 150.7 117.7 114.2 50.0 93.2 91.5 119.3 113.9 59.2 23.9 18.5 17.0 7.8 14.9 13.2 16.8 78.0 47.5 16.5 12.9 12.0 5.6 9.9 9.4 13.3 17.8 55.4 49.7 7.5 5.5 84.6 43.6 17.9 14.7 13.4 6.3 11.4 10.3 13.4 5.6 Total $ 1,396.8 1,232.8 1,932.4 1,768.4 292.7 210.6 221.2 (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 2019 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 and a maximum ratio of consolidated debt to total capitalization. As of December 31, 2019, the Parent had an aggregate of $278.0 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 $2.1 billion is predominately restricted due to the regulation associated with our Insurance Subsidiaries. In 2020, the Insurance Subsidiaries have the ability to provide for $266.7 million in annual dividends to the Parent; however, as regulated entities, these dividends are subject to certain restrictions, which are further discussed below. The Parent also has available to it other potential sources of liquidity, such as: 126 (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 $89.4 million as of December 31, 2019, 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 2019 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 2020, based on the 2019 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, 2019 2020 New Jersey New Jersey Indiana Indiana New York New Jersey New Jersey New Jersey New Jersey New Jersey $ $ $ 55.5 19.0 9.5 6.7 3.3 2.0 1.5 8.0 3.0 1.5 110.0 $ 98.4 53.7 23.9 18.6 12.7 7.6 14.7 12.9 16.8 7.4 266.7 127 Note 21. Quarterly Financial Information (unaudited, $ in thousands, except per share data) 2019 2018 2019 2018 2019 2018 2019 2018 First Quarter Second Quarter Third Quarter Fourth Quarter Net premiums earned Net investment income earned Net realized and unrealized gains (losses) Other income Total revenues Income before federal income taxes Net income Net income per share: Basic Diluted $ 632,573 591,828 642,619 604,836 653,620 614,277 668,359 625,288 50,618 13,451 2,320 43,231 58,505 (10,549) 2,179 4,027 3,053 45,553 (1,652) 3,179 55,826 (2,183) 3,162 52,443 (4,787) 2,538 698,962 626,689 708,204 651,916 710,425 664,471 73,694 61,348 19,931 18,925 90,225 72,266 72,525 58,819 71,178 56,150 67,130 55,435 57,594 54,109 (873) (37,935) 3,820 728,900 101,293 81,859 1,542 643,004 52,135 45,760 1.04 1.02 0.32 0.32 1.22 1.21 1.00 0.99 0.94 0.93 0.94 0.93 1.38 1.36 0.77 0.76 The addition of all quarters may not agree to annual amounts on the Financial Statements due to rounding. 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, 2019. 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, 2019, 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 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 128 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. 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, 2019, 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, 2019, 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, 2019 and 2018, 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, 2019, and the related notes and financial statement schedules I to V (collectively, the "consolidated financial statements"), and our report dated February 12, 2020 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 12, 2020 /s/ KPMG LLP 129 Item 9B. Other Information. In connection with the appointment of John J. Marchioni as President and Chief Executive Officer of Selective Insurance Group, Inc. (the "Parent”), effective February 1, 2020, Selective Insurance Company of America (“SICA”), a wholly-owned subsidiary of the Parent, entered into a new Employment Agreement (the “Employment Agreement”) with Mr. Marchioni (the “Executive”) on February 10, 2020 (the “Agreement Date”), effective as of February 1, 2020. As of the Agreement Date, Mr. Marchioni’s previous employment agreement with SICA terminated. The following table summarizes the principal provisions of the Employment Agreement. Defined terms used in this table, but not defined in this Form 10-K, have the meanings given to them in the Employment Agreement. Term Compensation Benefits Initial three year term ends on February 1, 2023, automatically renewed for additional one year periods unless terminated by either party with written notice. Base salary of $925,000 as of February 1, 2020. Eligible to participate in incentive compensation plan, stock plan, 401(k) plan, defined benefit pension plan and any other stock option, stock appreciation right, stock bonus, pension, group insurance, retirement, profit sharing, medical, disability, life insurance, relocation plan or policy, or any other plan, program, policy or arrangement of the Parent or SICA intended to benefit SICA’s employees generally. Vacation and Reimbursements Vacation time and reimbursements for ordinary travel and entertainment expenses in accordance with SICA’s policies. Perquisites Suitable offices, secretarial and other services, and other perquisites to which other executives of SICA are generally entitled. Severance and Benefits on Termination without Change in Control Severance and Benefits on Termination after Change in Control • • • • For Cause or Resignation by Executive other than for Good Reason: Salary and benefits accrued through termination date. Death or Disability: Two times: (i) Executive’s salary; plus (ii) average of three most recent annual cash incentive payments; provided that any such severance payments be reduced by life or disability insurance payments under policies with respect to which SICA paid premiums, paid in 12 equal installments. Without Cause by SICA, Relocation of Office over 50 Miles (without Executive’s consent), Resignation for Good Reason by Executive: - Two times: (i) Executive’s salary; plus (ii) average of three most recent annual cash incentive payments, paid in 12 equal installments. - Medical, dental, vision, disability, and life insurance coverage in effect for Executive and dependents until the earlier of 24 months following termination or commencement of equivalent benefits from a new employer. Stock Awards: Except for termination for Cause or resignation by the Executive other than Good Reason, immediate vesting and possible extended exercise period, as applicable, for any previously granted stock options, stock appreciation rights, cash incentive units, restricted stock, restricted stock units, and stock bonuses. For termination without Cause or resignation for Good Reason by Executive within two years following a Change in Control, Executive is entitled to: • Severance payment equal to the product of 2.99 and the greater of: (i) Executive’s salary plus target annual cash incentive payment; or (ii) Executive’s salary plus the average of Executive’s annual cash incentive payments for the three calendar years prior to the calendar year in which the termination occurs, paid in lump sum. Medical, dental, vision, disability, and life insurance coverage in effect for Executive and dependents until the earlier of period of 36 months following termination or commencement of equivalent benefits from a new employer. Stock awards, same as above, except that the initial number of cash incentive units is increased by 150%. • • Release; Confidentiality and Non- Solicitation Receipt of severance payments and benefits conditioned upon: • - Entry into release of claims; and - No disclosure of confidential or proprietary information or solicitation of employees to leave the Parent or its subsidiaries for a period of two years following the termination of the Employment Agreement. This summary table description of the Employment Agreement is qualified in its entirety by reference to the full text of the Employment Agreement, a copy of which is filed herewith as Exhibit 10.32. PART III Because we will file a Proxy Statement within 120 days after the end of the fiscal year ending December 31, 2019, 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 - 130 Election of Directors" sections of the Proxy Statement. These portions of the Proxy Statement are 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 3 - Ratification of Appointment of Independent Registered Public Accounting Firm" section of the Proxy Statement and is hereby incorporated by reference. 131 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, 2019 and 2018 Consolidated Statements of Income for the Years Ended December 31, 2019, 2018, and 2017 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018, and 2017 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2019, 2018, and 2017 Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018, and 2017 Notes to Consolidated Financial Statements, December 31, 2019, 2018, and 2017 (2) Financial Statement Schedules: Form 10-K Page 69 70 71 72 73 74 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, 2019 Schedule II Condensed Financial Information of Registrant at December 31, 2019, 2018, and 2017 and for the Years Ended December 31, 2019, 2018, and 2017 Schedule III Supplementary Insurance Information for the Years Ended December 31, 2019, 2018, and 2017 Schedule IV Reinsurance for the Years Ended December 31, 2019, 2018, and 2017 Schedule V Allowance for Uncollectible Premiums and Other Receivables for the Years Ended December 31, 2019, 2018, and 2017 Form 10-K Page 133 134 137 139 139 (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. 132 SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 2019 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: Banks, trusts and insurance companies Industrial, miscellaneous and all other Nonredeemable preferred stock Total equity securities Short-term investments Other investments Total investments 4,573 3,608 12,588 20,769 112,680 18,011 1,168,185 35,679 1,831,202 790,517 514,709 1,409,003 5,879,986 17,357 51,815 2,889 72,061 282,490 216,807 4,921 3,967 13,087 21,975 116,186 18,542 1,230,090 37,084 1,910,393 793,012 538,344 1,451,969 6,095,620 17,368 52,532 3,037 72,937 282,490 $ 6,472,113 4,580 3,673 12,547 20,800 116,186 18,542 1,230,090 37,084 1,910,393 793,012 538,344 1,451,969 6,095,620 17,368 52,532 3,037 72,937 282,490 216,807 6,688,654 See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. 133 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: $233,753 – 2019; $111,208 – 2018) $ 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: 103,484,159 – 2019; 102,848,394 – 2018 Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Treasury stock – at cost (shares: 44,023,006 – 2019; 43,899,840 – 2018) Total stockholders’ equity Total liabilities and stockholders’ equity SCHEDULE II December 31, 2019 2018 241,526 36,219 300 110,098 35,358 505 2,416,209 2,057,218 16,116 4,875 1,692 14,161 10,346 1,186 2,716,937 2,228,872 439,860 61,163 8,604 12,374 522,001 329,540 77,517 21,574 8,439 437,070 — — $ $ $ $ 206,968 418,521 2,080,529 81,750 (592,832) 2,194,936 $ 2,716,937 205,697 390,315 1,858,414 (77,956) (584,668) 1,791,802 2,228,872 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. 134 SELECTIVE INSURANCE GROUP, INC. (Parent Corporation) Statements of Income SCHEDULE II (continued) Year ended December 31, 2019 2018 2017 $ 110,004 7,301 207 117,512 33,426 30,900 64,326 100,060 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 ($ in thousands) Revenues: Dividends from subsidiaries Net investment income earned Net realized gains (losses) Total revenues Expenses: Interest expense Other expenses Total expenses Income before federal income tax 53,186 51,820 21,153 Federal income tax (benefit) expense: Current Deferred Total federal income tax benefit (16,080) 3,606 (12,474) (14,173) 3,141 (11,032) (22,187) 6,311 (15,876) Net income before equity in undistributed income of subsidiaries 65,660 62,852 37,029 Equity in undistributed income of subsidiaries, net of tax 205,963 116,087 131,797 Net income $ 271,623 178,939 168,826 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. 135 SELECTIVE INSURANCE GROUP, INC. (Parent Corporation) Statements of Cash Flows SCHEDULE II (continued) ($ in thousands) Operating Activities: Net income Year ended December 31, 2019 2018 2017 $ 271,623 178,939 168,826 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries, net of tax (205,963) (116,087) Stock-based compensation expense Net realized (gains) losses Amortization – other Changes in assets and liabilities: (Decrease) increase in accrued long-term stock compensation Decrease 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 equity securities Sale of equity securities 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 Proceeds from issuance of notes payable, net of debt issuance costs Principal payment on notes payable Net proceeds from stock purchase and compensation plans Principal payment on borrowings from subsidiaries Net cash provided by (used in) financing activities Net (decrease) increase in cash Cash, beginning of year Cash, end of year $ 19,077 (207) 4,614 (12,970) 1,651 (533) 3,919 81,211 (153,482) 10,579 20,189 (10,824) 10,828 (1,116,766) 1,116,253 (123,223) (47,675) (8,164) 290,757 (185,000) 8,243 (16,354) 41,807 (205) 505 300 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) (42,327) (29) 534 505 (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) (36,342) 76 458 534 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. 136 SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION Year ended December 31, 2019 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 $ 226,464 3,436,363 1,108,009 2,049,614 — 1,187,856 445,661 270,107 2,137,071 16,848 27,874 224,200 406,600 309,125 106,033 307,739 239,818 — — 211,300 152,335 34,477 55,835 53,702 21,905 304,592 237,761 ($ in thousands) Standard Commercial Lines Segment Standard Personal Lines Segment E&S Lines Segment Investments Segment — — — — 236,965 — — — — Total $ 271,186 4,067,163 1,523,167 2,597,171 236,965 1,551,491 535,973 345,714 2,679,424 1Includes “Net investment income earned” and “Total net realized and unrealized gains (losses)” on the Consolidated Statements of Income. 2“Other operating expenses” of $345,714 reconciles to the Consolidated Statements of Income as follows: Other insurance expenses Other income Total $ $ 358,069 (12,355) 345,714 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, 2018 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 — — — 140,413 206,752 150,344 — 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 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 gains (losses)” 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. 137 SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION Year ended December 31, 2017 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 $ 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 gains (losses)” 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. 138 SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES REINSURANCE Years ended December 31, 2019, 2018, and 2017 SCHEDULE IV ($ thousands) 2019 Premiums earned: Accident and health insurance Property and liability insurance Total premiums earned 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 Direct Amount Assumed from Other Companies Ceded to Other Companies Net Amount % of Amount Assumed to Net $ $ $ 17 2,993,140 2,993,157 19 2,808,745 2,808,764 24 2,647,464 2,647,488 — 24,399 24,399 — 25,831 25,831 — 25,831 25,831 17 420,368 420,385 — 2,597,171 2,597,171 19 398,347 398,366 — 2,436,229 2,436,229 24 382,268 382,292 — 2,291,027 2,291,027 — 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, 2019, 2018, and 2017 SCHEDULE V ($ in thousands) Balance, January 1 Additions Deductions Balance, December 31 2019 2018 2017 $ $ 13,900 2,730 (5,830) 10,800 14,600 4,022 (4,722) 13,900 11,480 6,414 (3,294) 14,600 See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. 139 EXHIBIT INDEX Exhibit Number 3.1 3.2 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8* 10.1+ 10.1a+ 10.2+ 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). Second Supplemental Indenture, dated as of March 1, 2019 between Selective Insurance Group, Inc. and U.S. Bank National Association, as Trustee, relating to the Company’s 5.375% Senior Notes due 2049 (incorporated by reference herein to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed March 1, 2019 File No. 001-33067). Description of the Company's Securities Registered Under Section 12 of the Securities Exchange Act of 1934. 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). 140 Exhibit Number 10.2a 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+ 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). 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). 141 Exhibit Number 10.15+ 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+ 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). 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). 142 Exhibit Number 10.29+ 10.30+ 10.31+ *10.32 10.33+ *10.34 10.35 10.36+ 10.37+ Employment Agreement between Selective Insurance Company of America and Gregory E. Murphy, effective as of February 1, 2020 (incorporated by reference herein to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed November 1, 2019, File No. 001-33067). Employment Agreement between Selective Insurance Company of America and Michael H. Lanza, dated as of December 23, 2008 (incorporated by reference herein to Exhibit 10.23e of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 001-33067). Employment Agreement between Selective Insurance Company of America and John J. Marchioni, dated as of September 10, 2013 (incorporated by reference herein to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed September 11, 2013, File No. 001-33067). Employment Agreement between Selective Insurance Company of America and John J. Marchioni, dated as of February 10, 2020. 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 Bank of Montreal, Chicago Branch, as Administrative Agent, dated as of December 20, 2019. 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). 143 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 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 Gregory E. Murphy. 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. ** 104 Cover Page Interactive Data File - formatted in Inline XBRL and included as Exhibit 101 * Filed herewith. ** Furnished and not filed herewith. + Management compensation plan or arrangement. (P) Paper filed. 144 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/ John J. Marchioni John J. Marchioni President 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 12, 2020 February 12, 2020 February 12, 2020 145 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/ John J. Marchioni John J. Marchioni President and Chief Executive Officer * John C. Burville Director * Terrence W. Cavanaugh Director * Robert Kelly Doherty Director * Thomas A. McCarthy Director * H. Elizabeth Mitchell Director * Michael J. Morrissey Director * Gregory E. Murphy Executive Chairman of the Board * 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 146 February 12, 2020 February 12, 2020 February 12, 2020 February 12, 2020 February 12, 2020 February 12, 2020 February 12, 2020 February 12, 2020 February 12, 2020 February 12, 2020 February 12, 2020 February 12, 2020 February 12, 2020 February 12, 2020 February 12, 2020 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. Exhibit 99.1 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 income security investments and declines in interest rates may result in an increase in the fair value of our existing fixed income security investments. 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 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. Book Value per Share: an expression of the value of an entity per outstanding share, which is calculated by dividing stockholders’ equity by the number of common shares outstanding as of a specified date. This metric is used by both investors and us in evaluating the financial strength of our company. 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. Direct New Business: premiums for all new policies sold directly by the insurance subsidiaries during a specific accounting period, without consideration given to reinsurance activities. 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. Invested Assets per Dollar of Stockholders' Equity Ratio: measure of investment leverage calculated by dividing invested assets by stockholders' equity. 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-Catastrophe Property Losses: Losses and loss expenses incurred that are attributable to property coverages that we have written throughout our lines of business, but exclude any such amounts that are related to catastrophe losses. 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, the deferred tax write-off that was recognized in 2017 in relation to the tax reform, and after-tax debt retirement costs. Non-GAAP operating income is used as an important financial measure by us, analysts, and investors, because the realization of investment gains and losses on sales 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, the deferred tax write-off, and the debt retirement costs 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, the deferred tax write-off that was recognized in 2017 in relation to the tax reform, and after- tax debt retirement costs. 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. Prior Year Casualty Reserve Development: Loss reserve development is the increase or decrease in incurred loss and loss expenses as a result of the re- estimation of these amounts at successive valuation dates. Prior year casualty reserve development is casualty loss reserve development related to prior accident years. 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. Retention is expressed as a ratio of renewed over expired business, based on aggregate line of business coverages provided to our customers. Return on Equity: measure of profitability that is calculated by dividing net income by average stockholders' equity during the period. 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. Exhibit 99.1 Glossary of Terms 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. Yield on Investments: Yield is the income earned on an investment, expressed as an annual percentage rate that is calculated by dividing income earned by the average invested asset balance. Yield can be calculated based on either pre- tax or after-tax income and can be calculated on the entire investment portfolio, or on a portion thereof, such as the fixed income securities portfolio. (This page intentionally left blank) (This page intentionally left blank) DIRECTORS Gregory E. Murphy 1997 Executive Chairman, Selective Insurance Group, Inc. Michael J. Morrissey, CFA 2008 President and Chief Executive Officer, International Insurance Society, Inc. John C. Burville, Ph.D, FIA, MAAA 2006 Retired, former Insurance Consultant to the Bermuda Government Cynthia (Cie) S. Nicholson 2009 Advisor Tangerine (formerly known as Feed Each Other/Forkcast) 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 John J. Marchioni 2019 President and Chief Executive Officer, Selective Insurance Group, Inc. 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. 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 2019 ANNUAL REPORT 9 OFFICERS Executive Chairman Gregory E. Murphy 1 President and Chief Executive Officer John J. Marchioni 1,2 Executive Vice Presidents Shadi K. Albert 2 Insurance Strategy and Business Development John P. Bresney 2 Chief Information Officer Gordon J. Gaudet 2 Chief Innovation Officer Brenda M. Hall 2 Commercial Lines Chief Operating Officer Jeffrey F. Kamrowski 2 MUSIC Paul Kush 2 Chief Claims Officer Michael H. Lanza 1,2 General Counsel and Chief Compliance Officer Charles A. Musilli, III 2 Chief Human Resources 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 Senior Vice Presidents Charles C. Adams 2 Regional Manager Mid-Atlantic Region Allen H. Anderson 2 Chief Underwriting Officer Personal Lines Jeffrey F. Beck 2 Government and Regulatory Affairs 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 G. Cunniff 1,2 Chief Risk Officer Fadi Elsaid 2 IT Infrastructure and Operations Joseph O. Eppers 1,2 Chief Investment Officer Kevin P. Forrey 2 Enterprise Delivery Services Anthony D. Harnett 1,2 Chief Accounting Officer Todd Hoivik 2 Commercial Lines Pricing and Research Martin Hollander 1,2 Chief Audit Executive Robert J. McKenna, Jr. 2 Enterprise Architecture and Information Security Ryan T. Miller 2 Regional Manager Southern Region 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 Nathan C. Rugge 2 Actuarial Reserving Brian C. Sarisky 2 Chief Underwriting Officer Commercial Lines Valerie Sparks 2 Regional Manager Southwest Region INVESTOR INFORMATION Annual Meeting Wednesday, April 29, 2020 - 9:00 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, 2019 (not including exhibits and documents incorporated by reference), the Proxy Statement for the 2020 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 2019 Annual Report. Website Visit us at www.Selective.com for information about Selective, including our latest financial news. S E L E C T I V E A N N U A L R E P O R T 2 0 1 9 40 Wantage Avenue • Branchville, New Jersey 07890 

Continue reading text version or see original annual report in PDF format above