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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
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'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
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'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
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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.
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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.
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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
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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.
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• 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.
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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.
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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
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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.
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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
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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.
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• 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.
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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,
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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;
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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.
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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
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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.
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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.
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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.
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(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
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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.
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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%
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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.
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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.
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40 Wantage Avenue • Branchville, New Jersey 07890