Selective Insurance Group Annual Report 2020

Plain-text annual report

2020 YEAR IN REVIEW The year 2020 was full of incredible challenges and inspiring perseverance. Throughout, we demonstrated our primary purpose and value – making our policyholders and communities safer and restoring lives and businesses after an insured loss. We prioritize our customers, distribution partners, and employees, and are committed to providing them the support, assistance, and services they need. In 2020, this included providing customers with risk management solutions for their pandemic-induced evolving business models, virtual safety management and claims services, premium credits, ﬂexible payment plans, and technology enhancements that make it easier to connect anytime and anywhere. We put people ﬁrst and are stronger for it. 3% Growth in Net Premiums Written 94.9% Combined Ratio 10.5% Non-GAAP Operating Return on Common Equity* 2,400+ p yp y gg All employees collaborating from the safety of their homes $650k Donated to support our communities in need 2 Awards that recognize Selective as a great place to work 8.6 Overall Satisfaction (OSAT) score from customers on a 10-point scale About Selective Selective Insurance Group, Inc. is a New Jersey holding company for ten property and casualty insurance companies. Selective is the 38th† largest property and casualty company in the U.S. and rated “A” (Excellent) by AM Best Company. We are dedicated to serving our customers’ unique insurance needs through customized risk management solutions and value-added services. In collaboration with our distribution partners, we offer standard and specialty insurance to businesses, public entities, and individuals through the following segments: Excess & Surplus – 9% of business Selective offers Excess and Surplus Lines property, general liability, and inland marine products coverage through wholesale agents and brokers to customers in targeted industry segments, including artisan and general contractors; restaurants, bars and taverns; and vacant properties and habitation. Standard Commercial – 80% of business Selective provides commercial insurance to more than 80 industry segments through our Strategic Business Units that include Contractors; Mercantile and Service; Community and Public Services; Manufacturing and Wholesale; and Bonds. Unique risk management solutions, safety management expertise, customer-centric claims service, and a commitment to superior customer service position Selective as the carrier of choice for business insurance. Standard Personal – 11% of business Selective offers a number of customizable insurance solutions for drivers, renters, and homeowners. In addition, Selective is the 3rd^ largest Write Your Own (WYO) carrier in the National Flood Insurance Program, providing ﬂood building and contents coverage to homeowners and businesses across all 50 states. * † Non-GAAP (U.S. Generally Accepted Accounting Principles) operating income, non-GAAP operating income per diluted common share, and non-GAAP operating return on common equity are non-GAAP measures. Refer to the section entitled, “Financial Highlights of Results for Years Ended December 31, 2020, 2019, and 2018” 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, 2020 for a reconciliation of the non-GAAP measures to the equivalent GAAP measures. According to AM Best Company Top 200 U.S. Property/Casualty Writers, ranked by 2019 net premiums written. ^ According to SNL Financial based on 2019 data. 2020 FINANCIAL HIGHLIGHTS % or Point Change 2020 2019 Better (Worse) ($ in millions, except per share data) Insurance Operations Net premiums written Combined ratio Underwriting gain after-tax Return on common equity from insurance operations after-tax Investments Net investment income after-tax Net realized and unrealized investment (losses) gains after-tax $2,773.1 $2,679.4 94.9% $107.7 4.6% $184.6 ($3.3) 93.7% $129.6 6.5% $181.2 $10.5 Total invested assets $7,505.6 $6,688.7 $2.96 2.6% 7.8% $3.05 2.9% 9.1% $2,922.3 $2,846.5 $246.4 10.4% $249.7 10.5% 20.0% $9,687.9 $2,738.9 $2,538.9 $4.09 $4.15 $0.94 $42.38 $271.6 13.6% $264.4 13.3% 17.8% $8,797.2 $2,194.9 $2,194.9 $4.53 $4.40 $0.83 $36.91 Invested assets per dollar of common stockholders’ equity Annual after-tax yield on investment portfolio Return on common equity from net investment income after-tax Summary Data Total revenues Net income available to common stockholders Return on common equity Non-GAAP operating income* Non-GAAP operating return on common equity* Operating cash ﬂow as % of net premiums written Total assets Stockholders’ equity Common stockholders’ equity Per Common Share Data Diluted net income available to common stockholders Diluted non-GAAP operating income* Dividends to common stockholders Common stockholders’ equity AVERAGE ANNUAL RETURN Growth of a $10,000 investment (year-end 2015-2020) $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 3% (1.2) pts (17)% (1.9)% 2% (132)% 12% (3)% (0.3) pts (1.3) pts 3% (9)% (3.2) pts (6)% (2.8) pts 2.2 pts 10% 25% 16% (10)% (6)% 13% 15% SIGI S&P 500 S&P Prop/Cas 2015 2016 2017 2018 2019 2020 non-GAAP measures. Refer to the section entitled, “Financial Highlights of Results for Years Ended December 31, 2020, 2019, and 2018” 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, 2020 for a reconciliation of the non-GAAP measures to the equivalent GAAP measures. SELECTIVE 2020 ANNUAL REPORT 1 2020 ANNUAL REPORT SHAREHOLDER LETTER The year 2020 presented what will likely go down in history as one of the most signiﬁcant tests for Selective and our industry, and we are extremely proud of how we performed against this backdrop. From a ﬁnancial standpoint, we generated our seventh consecutive year of double-digit non-GAAP operating returns on average common equity (“ROE”), continuing a track record of consistent superior performance that puts us among an elite group of property and casualty insurance peers. But of equal importance, we came together as a company and helped our customers, distribution partners, and communities navigate through unprecedented challenges including the COVID-19 pandemic and a record frequency of catastrophe (CAT) losses, that caused widespread loss and suffering. As an insurance company, we see Selective’s primary purposes as: 1. helping customers put their lives and businesses back together after suffering an insured loss; 2. making our customers and communities safer; and year despite COVID-19-related impacts and 8.0 points of CAT losses that were 4.5 points above our expectations. A tailwind of rising commercial lines industry pricing allowed us to generate overall renewal pure pricing in line with expected loss trend. In addition, we increased retention rates and new business volumes, which is truly a testament to our franchise distribution partner relationships, superior underwriting capabilities, and excellent customer service. Thanks to the hard work of our best-in-class distribution partners and talented employees, we generated an overall ROE of 10.4% and non-GAAP operating ROE of 10.5%. Each year, we set a high bar by establishing a non-GAAP operating ROE target that is well above our estimated weighted average cost of capital – one that challenges us to perform at our best and aligns our incentive compensation structure with shareholder returns. For 2021, we have established a non-GAAP operating ROE target of 11%, close to 400 basis points over our current estimated weighted average cost of capital. Some of our key achievements in 2020 included: • Generating a solid 10.5% non-GAAP operating ROE, our seventh consecutive year of double-digit non-GAAP operating ROEs – an outstanding achievement in our industry; John J. Marchioni, President and Chief Executive Officer, and Gregory E. Murphy, Non-Executive Chairperson of the Board • Continuing our decade-long track record of achieving commercial lines renewal pure price increases that have matched or exceeded expected loss trend; • Delivering strong premium growth – driven by higher retention rates, greater new business volumes, and price increases; • Developing and implementing new techonologies such as MarketMax®, a distribution partner-facing platform that is already contributing to new business; 3. supporting economic expansion by providing protection against unexpected loss that allows businesses to invest in growth. The year’s events helped reinforce — more than ever — our value proposition to our customers, distribution partners, and communities. Our success would not have been possible without the exceptional dedication of our employees, who seamlessly pivoted to a virtual workplace and remained committed despite the challenging environment. Building a highly engaged team of employees and leaders has long been one of our core strategic imperatives. We ﬁrmly believe that creating a culture centered on the values of diversity, equity, and inclusion (DE&I) is essential to enable employees to contribute at their highest levels, while enhancing innovation and creativity. We took a number of steps during 2020 to raise awareness around DE&I within the company, as well as increase the level of diversity at all levels within the organization. By working towards the beneﬁt of all of our stakeholders, we believe we will reward our shareholders with sustained superior ﬁnancial and operating performance over time. SETTING A HIGH BAR AND DELIVERING SOLID PERFORMANCE: Selective continued to excel on all fronts in what was clearly a very challenging year. Overall, net premiums written (NPW) were up 3% in 2020, which was negatively impacted by approximately four percentage points due to COVID-19-related events. Our combined ratio was an excellent 94.9% for the 2 • Optimizing our capital structure through the issuance of $200 million of perpetual preferred stock with a dividend rate of 4.60%, and initiating an opportunistic $100 million share repurchase authorization; • Publishing our inaugural environmental, social, and governance (ESG) report that highlights our various sustainability efforts; and • Maintaining our superior ﬁnancial strength ratings from the various agencies, including a positive outlook from AM Best Company; • Driving a range of DE&I initiatives, including updating hiring, retention, and promotion practices, and adding DE&I as a performance measure and incentive compensation criteria for our leadership team. • Continuing to make communities safer through advancements in our omni-channel customer experience (CX) initiatives that provide customers with proactive safety messages via their preferred method of communication. Our award-winning MySelective mobile app makes it easy for customers to view their coverages or submit a claim. • Adding four new independent directors to our Board to enhance expertise and diversity; STRONG SHARE PRICE PERFORMANCE Over recent years, our strong and consistent ﬁnancial results have been rewarded by the equity market, leading to solid long-term share price outperformance. BBOOK VALUE PER COMMON SHARE AND CCOMMON STOCKHOLDERS’ EQUITY GGROWTH • We experienced the highest volume of natural CAT events in a decade, and our team delivered the excellent claims service, investigation, and coverage analysis for which we are known. We resolved our CAT losses efficiently and quickly, helping to restore our customers’ lives and businesses. By early 2021, 98% of our covered 2020 CAT losses had been fully paid and closed. $50.00 $40.00 $30.00 NET PREMIUMS WRITTEN $3B $2 $1 $0 $2.8B $1.4B '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 $3,000 $42.38 $2,500 ) s n o i l l i m n i $ ( $2,000 $1,500 $1,000 $500 $0.00 $18.97 $20.00 $10.00 $0.00 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 GAAP Common Stockholders' Equity Book Value Per Common Share Selective’s total 2020 shareholder return of 4.5% trailed the S&P 500 Index, which was up 18.4%, but was in line with the performance for the S&P Property and Casualty insurance index. Over the past ﬁve- and ten-year periods, Selective’s shareholders experienced total returns exceeding the S&P 500 Index (ﬁve-year: 16.4% compared to 15.2%; and ten-year: 16.2% compared to 13.9%). MANAGEMENT TRANSITION AND ADDITION OF NEW MEMBERS TO OUR BOARD OF DIRECTORS On February 1, 2020, I assumed responsibility as Chief Executive Officer, having served as President and Chief Operating Officer since 2013. After 20 years as Chief Executive Officer, Gregory Murphy transitioned into the role of Executive Chairperson, providing invaluable guidance and advice over the past year. Greg has now been appointed Non-Executive Chairperson of the Board. In September, we announced the appointment of four new members to our Board of Directors, reﬂecting our commitment to enhancing diversity, building a culture of innovation and creativity, and delivering a superior customer experience. Each new independent director brings tremendous breadth of experience in a wide range of ﬁelds, including sales, digital marketing, branding, ﬁnance, and Fintech. We are delighted to welcome Ainar D. Aijala, Jr., Lisa Rojas Bacus, Wole C. Coaxum, and Stephen C. Mills to our Board. – John Marchioni SELECTIVE 2020 ANNUAL REPORT 3 data retrieval and pre-ﬁll, and meaningfully improves underwriting efficiency and exposure analysis. Our agency- facing MarketMax® tool has been rolled out to 250 of our distribution partners so far. It continues to show meaningful potential to generate leads and new business opportunities for us. We are also early in the rollout of a new agency interface for small business, designed to dramatically streamline the quoting and issuance process for this key component of our business. For our excess and surplus lines (E&S) segment, our enhanced automation platform was rolled out for new business in late 2020, enhancing our competitive position in this market. • Establishing Selective as a leader in customer experience: One of our major strategic initiatives has been to deliver a superior omni-channel customer GAAP Combined Ratio Underlying Combined Ratio* 94.9% 90.1% '15 '16 '17 '18 '19 '20 The achievement of our targeted strategic initiatives has contributed to strong GAAP and underlying combined ratios. *Underlying combined ratio excludes catastrophe losses and prior year casualty reserve development. experience, creating a differentiated value proposition for our customers and distribution partners. Our self-service and digital-service offerings allow customers to engage us 24 / 7 – in their chosen manner. Our redesigned MySelective mobile app has received a number of awards and accolades. Our Safety Management and Claims organizations have also implemented technologies and services that have enabled us to deliver exceptional customer service in a virtual environment. Customer surveys conducted in 2020 suggest we have been able to deliver the same high level of service in a virtual environment. EXECUTION ON STRATEGIC PRIORITIES Our steadfast focus on execution of our strategic objectives has been instrumental in generating our strong operating and ﬁnancial performance. Some of our key initiatives include: • Growing premium and proﬁt: In recent years, we have generated above-average premium growth in conjunction with industry-leading proﬁtability. This track record has been enabled by strong relationships with our distribution partners, superior underwriting tools and technologies, and a culture of underwriting discipline. We are proud of our track record of achieving price increases that have consistently matched or exceeded loss trend over the past decade. We manage renewal pure pricing on a granular basis, targeting accounts that we feel are not priced commensurate with future proﬁtability expectations, allowing us to successfully balance our proﬁtability and growth objectives. COMBINED RATIOS • Positioning our 110% '14 '11 '13 '12 '10 101.4% 95% 90% 100.2% 105% 100% business for long-term growth: Our long-term growth objectives include appointing distribution partner relationships that control approximately 25% of the premium in the states where we write business, and obtaining a 12% share of commercial lines premiums across those relationships. Within our current footprint, this translates to a 3% commercial lines market share, providing approximately $3 billion in additional premium opportunity without having to stretch our underwriting appetite or shift our risk proﬁle. We currently have approximately 1,400 retail distribution partners with over 2,400 storefronts. In 2020, we appointed 90 new distribution partners. Our growth through greenﬁeld expansion has proven very successful, including the most recent extension of our footprint into New Hampshire and the Southwest states of Arizona, Colorado, Utah, and New Mexico. Over the next two years, we are likely to further expand our geographic footprint, with rollouts of our product expected in Vermont, Alabama, and Idaho, pending regulatory approval. • Enhancing underwriting capabilities and operating efficiencies with sophisticated tools and technologies: We are focused on providing our underwriters with best-in-class tools and technologies that enable them to make better decisions faster. We have deployed a workﬂow management tool, which includes automated 4 • Investing in developing talent and culture that will carry us into the future: Building a highly engaged team of employees and leaders has long been a key strategic priority in achieving our goal of generating superior operating and ﬁnancial performance over time. We have invested considerably in enhancing our employees’ talent and capabilities to empower them to assume leadership roles in the future. We have implemented several initiatives to increase diversity at all levels within the organization, including changes to hiring, retention, and promotion practices. We have also made our senior leaders accountable for promoting DE&I initiatives within the Company, including through performance evaluation and compensation metrics. We are committed to promoting a welcoming culture that celebrates diverse talent, individual identity, and different points of view — and empowers employees to contribute new ideas that support our continued and growing success. 2020 FINANCIAL RESULTS We generated net income of $246 million ($4.09 per diluted share) and non-GAAP operating income of $250 million ($4.15 per diluted share). Net premiums written were up 3% compared with the prior year to $2.8 billion, including approximately four percentage points of negative impact from COVID-19. Our 94.9% combined ratio included 8.0 points of CAT losses, which were well above our 2020 expectation of 3.5 points. Investment performance was a solid contributor to the strong ﬁnancial results this year despite signiﬁcant market volatility. Going into 2021, our balance sheet remains extremely strong with a record $2.7 billion of stockholders’ equity and a conservative 16.7% debt-to-capitalization ratio. We increased our quarterly shareholder dividend by 9% in 2020, and our Board authorized a $100 million share repurchase program. We issued $200 million of perpetual preferred stock at a dividend rate of 4.60%, as we sought to optimize our capital structure and cost of capital. A summary of our results by segment are included below: • Standard Commercial Lines: Standard commercial lines business, which accounts for 80% of total NPW, had another excellent year, with NPW up 4% compared with the prior year, and a 92.9% combined ratio. The underlying combined ratio (excluding CAT losses and prior-year casualty reserve development) was 91.4%. Results beneﬁted from continued strong proﬁtability in larger lines such as general liability and workers compensation, and improvement in the commercial auto line. • Standard Personal Lines: Personal lines business accounts for 11% of total NPW, and had a challenging year due to elevated CAT losses, generating a 105.2% combined ratio. The underlying combined ratio was a 79.3%. NPW was down 3% compared with the prior year to $295 million, driven by increased competition. In 2020, we narrowed our focus to the mass affluent customer NON-GAAP OPERATING RETURN ON COMMON EQUITY* 15% 12% 9% 6% 3% 0% '14 '15 '16 '17 '18 '19 '20 who is less price sensitive and derives greater value from unique insurance solutions. This strategy optimizes our focus on the alignment of product, customer service, and technology capabilities. The ﬂood business within our personal lines segment is written on behalf of the government-backed National Flood Insurance Program, and generated attractive fee income that helped the results of this segment. • Excess & Surplus Lines: The E&S segment, which accounts for 9% of total NPW, generated 4% premium growth and a 99.9% combined ratio for the year. CAT losses impacted the combined ratio by 8.4 points in 2020, which was 6.0 points higher than the prior year. The underlying combined ratio was a strong 91.5%. We have made substantial progress in recent years to improve the proﬁtability of this business through targeted pricing and underwriting actions. We will continue to operate this business opportunistically, focusing on achieving adequate margins, while allowing the top line to vary depending on market conditions. Our new E&S automation platform – rolled out for new business in late 2020 – should help drive premium growth. CONCLUSION Our strong ﬁnancial and operating performance would not be possible without the contributions of our outstanding employees, who performed their roles with utmost dedication during challenging times, and our best-in-class distribution partners. By setting a high bar for ourselves in serving the needs of our customers, distribution partners, and the communities we serve, we strive to build a sustainable platform that will be an industry leader for years to come. Our competitive advantages of (i) a unique ﬁeld model enabled by sophisticated tools and technology, (ii) true franchise value with our distribution partners, and (iii) superior customer experience delivered by our talented employees, are true differentiators in the marketplace, and help drive our ﬁnancial outperformance. 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. * Non-GAAP (U.S. Generally Accepted Accounting Principles) operating income, non-GAAP operating income per diluted common share, and non-GAAP operating return on common equity are non-GAAP measures. Refer to the section entitled, “Financial Highlights of Results for Years Ended December 31, 2020, 2019, and 2018” 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, 2020 for a reconciliation of the non-GAAP measures to the equivalent GAAP measures. John J. Marchioni President and Chief Executive Officer Gregory E. Murphy Non-Executive Chairperson of the Board SELECTIVE 2020 ANNUAL REPORT 5 WHO WE ARE, WHERE WE ARE OUR COMPETITIVE ADVANTAGES OUR FOOTPRINT By setting a high bar for ourselves in serving the needs of our customers, distribution partners, and local communities, we strive to build a sustainable platform that will be an industry leader for years to come. Our competitive advantages are true differentiators in the marketplace, and help drive our ﬁnancial performance. 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 underwriting and safety management personnel who are located in the geographic territories they serve and a claims operation organized regionally by claims specialty with local resources who manage our customer relationships — is key to our agency value proposition and underwriting quality. Our ﬁeld experts apply a data-driven approach using sophisticated tools for our underwriting and pricing practices to effectively deliver unique products and services to our customers and distribution partners. Superior customer experience delivered by dedicated employees Selective’s more than 2,400 employees are our most important asset and key to our continued success. Through them — and in collaboration with our distribution partners — we deliver our brand promise to provide unique insurance solutions. 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 best-in-class distribution partners Selective works closely with approximately 1,400 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 and the District of Columbia) Standard Personal† (15 states) † Flood Insurance available in all 50 states Excess & Surplus (50 states) SUSTAINABLE PROFITABLE GROWTH na ner Sustainable growth creates long-term value for our customers, distribution partners, employees, and shareholders. In 2021, we will resume our geographic expan expansion program and plan to make our unique insurance solutions available to businesses in Vermont, Alabama, and Idaho next year, pending regulatory approval. This initiative advances our long-term growth plans and supports our long-term objective to achieve a 3% market share in our Standard Commercial Lines footprint states. To accomplish this, we are working with our distribution partners to increase their market share to at least 25% of their state’s available premium and grow our share of their business to 12%. OUR CUSTOMER-FOCUSED SERVICES We maintain a relentless focus on our customers to ensure we serve their unique needs with customized solutions and value-added services. Self-Service Capabilities 43% of customers are registered on Selective.com and the MySelective mobile app to access tools and information. This improved service experience lets customers view their policy, report a claim, pay their bills, and access auto insurance cards. Refreshed MySelective 4.6-star app store rating (up from 2.6) on a 5-pt scale. The MySelective mobile app was updated in 2020 with an improved design, enhanced functionality, and streamlined information to make it easier for customers to manage their accounts on-the-go. Proactive Communications 65% of customers have opted in to receive email messages that provide valuable information. In 2020, we sent timely messages to keep customers informed and connected, including inclement weather and safety alerts, billing notices, and claims handling updates. Safety Services To help ensure the safety of our customers, we offer risk evaluation assessmments, online educational resources, thermographic infrared surveys, and much mmore. In addition, several employees have earned the esteemed Praesidium Guarrdian Certiﬁcation, with 42 more from across the company expected to graduatte by mid-2021, to provide expert advice and help organizations prevent or mitiggate abuse or molestation of vulnerable children and adults. Live Chat Live chat sessions on Selective.com and the MySelective mobile app helped customers and distribution partners quickly and conveniently get answers to address their billing, payment, and self-service questions. MySelective was recognized with the Platinum Award for “Best Mobile Design” from the Best Mobile App Awards 2020 Summer Awards. SELECTIVE 2020 ANNUAL REPORT 7 Through a health pandemic, economic hardships, and some of the worst catastrophes in the past decade, Selective has remained dedicated to serving customers, distribution partners, and employees. The year 2020 underscored the importance of our work and the value of the investments we’ve made in customer experience that allow us to truly shine for our customers. Cybersecurity tools and resources, including free access to online training modules, helped protect customers and distribution partners against the rise in cyber crime during the pandemic. Analysis of Voice of the Customer surveys provided insights into customer sentiments to ensure we actively addressed their areas of concern related to the pandemic. 52% of all safety management evaluations were conducted virtually to identify risks without risking anyone’s health. Customized safety solutions help businesses, public entities, and individuals prevent and/or minimize losses. 24 / 7 omni-channel service experience ensured that customers and distribution partners had access to the information they needed when they needed it. SUPPORTING OUR EMPLOYEES Selective’s commitment to our employees during the pandemic has been demonstrated by a quick transition to an almost entirely remote work environment, frequent communication, including regular town halls with our President and Chief Executive Officer, and surveys to inform strategies to best support our employees’ various personal and professional needs. In March 2020, we seamlessly transitioned all 2,400+ employees to work from home. Equipped all employees with technology and enhanced collaboration tools to make it easier to work from home and stay connected. Enabled ﬂexible work schedules to help employees balance their personal and professional commitments. Launched a working caregiver employee resource group to bring together employees seeking support, guidance, and friendship to balance their work and home life. Increased communications and hosted monthly town hall events to address employees’ questions and keep them informed. A record-level of natural catastrophic events devastated communities throughout 2020, making it the worst year in the past decade for weather disasters. Our core company value – service excellence – underscores our commitment to responding to our customers promptly and with empathy, especially after experiencing a covered loss. SWIFTClaim® (or “Service With Improved Fast Tracking”) saved valuable time and effort to help customers get their payments quickly. Strict safety protocols were established for claims inspections that needed to be conducted in-person. Multiple technologies were deployed to enable claims inspections to be conducted virtually. Increased communication with customers to keep them up to date on the processing of their claims through their satisfactory conclusion. SERVICE EXCELLENCE IN ACTION Despite the magnitude of catastrophic weather events in 2020, 98% of the reported losses were fully paid and closed by early 2021. Selective deployed its Catastrophe Response Van (aka the CAT Van) to eight regional areas hit hard by natural disasters to help impacted customers in need. This physical representation of our dedication to serving customers, distribution partners, and communities is staffed with employees who can assist with ﬁeld inspections, claims questions, and issuing manual checks. The CAT Van made stops from South Carolina up through New England immediately after Hurricane Isaias and throughout the Midwest to help customers impacted by the derecho event. LEADING WITH PURPOSE Selective is committed to serving our customers responsibly, helping the communities in which we operate, enabling the professional success of our employees, maintaining the highest levels of ethics and integrity, and protecting the environment. SUPPORTING THE ENVIRONMENT We strive to create a sustainable workplace for our employees, our community, and our planet, with an objective towards preserving our environment for future generations. As a property and casualty insurance company, we understand risks associated with climate change and the threat of increased frequency and severity of large catastrophic losses. We will not make any new direct debt or equity investments in companies that generate more than 30% of their revenues from thermal coal mining or energy production from coal. Our solar farm at our corporate headquarters generates four million kWh of power annually that we sell to others. We reduced our use of natural resources through energy- efficient LED lights in our corporate headquarters and regional offices and automatic plumbing ﬁxtures that minimize water usage. We decreased paper usage in our offices and transitioned 27% of customers to paperless insurance policies, a take-up rate well ahead of insurance industry benchmarks. BUILDING THE LEADERS OF TOMORROW Our future success depends on our ability to attract and retain the best talent and build a diverse and inclusive workforce that fosters innovation, inspiration, and community. We offer more than 25,000 skills training courses and resources and a variety of instructor- led training courses. We initiated several new leadership and talent development programs and initiatives at all levels of the organization. Our Ignite College Internship and Momentum Trainee programs create a strong pipeline of talented and diverse future employees. We have implemented many initiatives to increase diversity at all levels within the organization, including changes to hiring, retention, and promotion practices. Our senior leaders are held accountable for promoting diversity, equity, and inclusion initiatives, including through performance evaluations and compensation metrics. We believe that a welcoming culture that celebrates diverse talent, individual identity, and different points of view empowers employees to contribute new ideas that support our continued and growing success. 10 INVESTING IN OUR COMMUNITIES Supporting successful and thriving communities where we live, work, and serve is essential for our business. It also, simply put, is the right thing to do. Through our Selective Insurance Group Foundation and our generous employees and distribution partners, we are working to make a difference in our communities. We donated more than $650,000 to nonproﬁt organizations in 2020 that provide health and human services, promote civic responsibility, and support home, auto, and business safety. We matched $37,500 in donations made by employees and $34,700 in contributions made by agency partners. We increased the number of Volunteer Days to enable employees with medical training to treat COVID-19 patients throughout the pandemic. We donated 400 laptops to under-resourced students in and around Cleveland, OH, to help bridge the digital divide. HERE ARE A FEW OF THE MANY WAYS SELECTIVE EMPLOYEES MADE A DIFFERENCE DURING 2020 Frank DelVecchio, Commercial Lines Underwriter in Selective’s Mid-Atlantic Region, created more than 300 face shields using his 3D printer that he delivered to nurses, retirement homes, and ﬁre departments. Daniel Newman, IT Services Team Lead in Selective’s Glastonbury, CT office, used his medical training to volunteer at a homeless shelter during the pandemic to treat homeless men and women afflicted with COVID-19. Employees like Jason Bailey, Visual Design Project Leader at Selective’s corporate headquarters, and their family members built 33 bikes for children in need during the holiday season. More than 270 bikes were built and donated over the past 14 years. Tiffany Johnson, Large Account Underwriter in Selective’s Northeast Region, sewed face masks that she delivered to her local police department. Claim Supervisors Barbara Araujo and Mary Beth Hutchison in Selective’s Richmond, VA office and David Zweier, Vice President, Project Management Office at Selective’s corporate headquarters, all donated food to local hospital workers. SELECTIVE 2020 ANNUAL REPORT 11 MANAGEMENT TEAM John J. Marchioni President and Chief Executive Officer Shadi K. Albert Executive Vice President Insurance Strategy and Business Development Lucinda (Cyndi) Bennett Executive Vice President Chief Human Resources Officer 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 Vincent M. Senia Executive Vice President Chief Actuary Mark A. Wilcox Executive Vice President Chief Financial Officer 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, 2020 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 Trading Symbol (s) Name of each exchange on which registered Common Stock, par value $2 per share Depositary Shares, each representing a 1/1,000th interest in a share of 4.60% Non- Cumulative Preferred Stock, Series B, without par value SIGI The Nasdaq Stock Market LLC SIGIP The Nasdaq Stock Market LLC 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 ☒ Yes ☐ No file such reports), and (2) has been subject to such filing requirements for the past 90 days. Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐ ☒ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No The aggregate market value of the voting company common stock held by non-affiliates of the registrant, based on the closing price on the NASDAQ Global Select Market, was $3,092,111,015 on June 30, 2020. As of February 4, 2021, the registrant had outstanding 59,882,189 shares of common stock. Portions of the registrant’s definitive Proxy Statement for the 2021 Annual Meeting of Stockholders to be held on April 28, 2021, 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. 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, 2020, 2019, and 2018 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, 2020 and 2019 Consolidated Statements of Income for the Years Ended December 31, 2020, 2019, and 2018 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019, and 2018 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020, 2019, and 2018 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018 Notes to Consolidated Financial Statements Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Controls and Procedures 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 Accountant Fees and Services Exhibit and Financial Statement Schedules 4 20 33 33 33 33 36 37 37 37 37 46 51 63 63 66 66 67 74 76 77 78 79 80 81 134 134 136 136 136 136 136 137 3 PART I Item 1. Business. Overview Selective Insurance Group, Inc. (“Parent”) is a New Jersey holding company incorporated in 1977 that owns ten property and casualty insurance subsidiaries that sell products and services only in the United States ("U.S."). Various state departments of insurance (i) license nine of our subsidiaries as admitted carriers to write specific lines of property and casualty insurance in the standard marketplace and (ii) authorize the tenth subsidiary as a non-admitted carrier to write property and casualty insurance in the excess and surplus ("E&S") lines market. We refer throughout this document to our ten insurance subsidiaries collectively as the “Insurance Subsidiaries” and to the Parent and the Insurance Subsidiaries collectively as "we," “us,” or “our.” We make limited use of Parent as necessary to distinguish the holding company from the Insurance Subsidiaries. Our main office is located in Branchville, New Jersey. Our common and preferred stock are listed and traded on the NASDAQ Global Select Market under the symbols “SIGI” and "SIGIP," respectively. In 2020, AM Best Company (“AM Best”) ranked us as the 38th largest property and casualty group in its annual list of “Top 200 U.S. Property/Casualty Writers,” based on 2019 net premiums written (“NPW”). Since our founding in 1926, we have a long and successful history in the property and casualty industry, including an "A" or higher AM Best financial strength rating for the past 90 years. The property and casualty insurance market is highly regulated and competitive with fragmented market share, particularly in standard commercial lines. The market has three main distribution methods: (i) sales through appointed independent insurance agents; (ii) direct sales to personal and commercial customers, including, but not limited to, internet-based platforms; and (iii) sales through captive insurance agents employed by or contracted to sell exclusively with one insurance company. We distribute our property and casualty products exclusively through independent insurance agents. Strategic Advantages We have three key sustainable competitive advantages: (i) A unique field model in which our underwriting and safety management personnel are located in the geographic territories they serve, and a claims operation that specializes regionally and dedicates resources locally to manage our customer relationships. We enhance our field model with sophisticated tools and technologies to inform underwriting, pricing, and claims decisions; (ii) A franchise value distribution model in which we focus our independent insurance agency appointments to a small number of high quality partners with whom we have longstanding and close business relationships; and (iii) A superior omnichannel customer experience provided by best-in-class employees, enhanced by digital platforms and value-added services to increase customer engagement. 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 AM Best rating. In the fourth quarter of 2020, AM Best reaffirmed (i) our rating of "A (Excellent)," the third highest of their 13 financial strength ratings, and (ii) our outlook of "positive." Our Insurance Subsidiaries’ ratings by NRSRO are as follows: NRSRO Financial Strength Rating AM Best Standard & Poor’s Global Ratings (“S&P”) Moody’s Investors Services (“Moody’s”) Fitch Ratings (“Fitch”) A A A2 A+ Outlook Positive Stable Stable Stable Our independent distribution partners contemplate financial strength ratings when recommending insurance carriers to customers, and many of our customers also contemplate them in their purchasing decisions. Distribution partners generally recommend higher rated carriers to limit their potential liability for error and omission claims. Most of our customers often have minimum insurer rating requirements in loans, mortgages, and other agreements securing real and personal property. 4 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 AM Best S&P Moody’s Fitch Credit Rating bbb+ BBB Baa2 BBB+ Long-Term Credit Outlook 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. Human Capital We recognize that sustainable human capital complements and contributes to superior longer-term financial performance. We are committed to maintaining a safe and inclusive workplace that promotes diversity and provides attractive benefits to our approximately 2,400 employees. In 2020, we were designated as a Great Place to Work CertifiedTM organization, with 91% of employees identifying us as a great place to work. We discuss our approach to (i) physical, financial, and social well-being of our employees; (ii) talent development and employee retention; and (iii) diversity and inclusion more fully below. Physical, Financial, and Social Well-Being of our Employees We invest significantly in our employees' physical, financial and social well-being, which is essential to retaining the best talent. We regularly analyze and adjust compensation to ensure both internal equity and external market alignment. To support the financial well-being of our employees and their families, we offer competitive financial benefit programs, including a 401(k) plan with both employer and employer matching contributions, an employee stock purchase plan with the opportunity to purchase company stock at a discount, a tuition reimbursement program, and a student loan repayment program. To promote the health and well-being of our employees, we also offer competitive and convenient health and wellness programs. We also support the social well-being of our employees, encouraging them to be connected with their colleagues and communities through various programs, such as paid time-off for volunteer work and matching charitable donations. Talent Development and Employee Retention We invest significant time and resources on training and development to assist our employees in fulfilling their professional potential and having rewarding careers. We are committed to ongoing learning, personal growth, and continuous improvement. Our employees have access to a variety of live instructor-led training courses and extensive online skills training courses and resources. We also have leadership and talent development programs and initiatives at all levels of the organization. Among these are our Next Generation of Leaders program, through which we identify internal leaders on whom we focus development opportunities so they will be well prepared to lead us in the future. We continue to focus on talent development programs and employee retention. For the year, our employee turnover rate was approximately 7%. Employees with over 20 years of service represented approximately 17% of all employees. In 2019, Forbes recognized us as one of "America's Best Midsize Employers." Diversity and Inclusion We recognize that when employees with diverse cultural backgrounds, ideas and experiences work together, it fosters innovation. We have initiatives to increase representation and cultivate greater inclusion of people with differences in gender, ethnicity, race, age, sexual orientation, gender identity, and socio-economic background. We have taken steps to (i) promote greater diversity in first-level management positions to create a pipeline to increase future diversity in senior and executive leadership, and (ii) increase members of our Board of Directors ("Board") who have diverse backgrounds with a wide range of skills and experience, including the addition of three directors who are Black and Latinx. As of December 31, 2020, women represented 57% of our non-officer workforce and 31% of our officer workforce. We have three women on our Board, and increasing the representation of women in senior management roles is a prioritized goal. Our ethnic diversity for officers and non-officers is consistent with the national average for financial services, but our objective is to increase this representation over time. Currently, approximately 82% of our workforce is White; and 18% of our workforce is a combination of Black, Latinos, Asians, and all other ethnicities combined. 5 Coronavirus ("COVID-19") Pandemic Our strategic competitive advantages described above, strong financial position, effective operations, and experienced leadership team have positioned us well to address the ongoing challenges of COVID-19. During the year, governmental (international, federal, state, and local) actions to contain or delay the spread of COVID-19 resulted in directives requiring social distancing, operational alteration or temporary closure of most non-essential businesses, and the “sheltering-in-place” of many non-essential workers. Under most governmental directives, insurance is considered an essential business. Our information technology ("IT") infrastructure and security, which previously supported over 675 home-based employees, made for a smooth and effective transition of all of our office-based employees to a temporary work-from-home environment, while still maintaining expected customer and agent service levels. Most of our local independent distribution partners also transitioned to a remote work environment. Our strong relationships with — and continued support for — them enabled us to successfully maintain the excellent service-levels we delivered pre-pandemic, for claims handling, underwriting, premium audit processes, and safety management services. Because most employees have been working remotely since March 2020, we have changed some regular communication methods and increased video conferencing and collaboration tools on robust and secure applications. Throughout 2020, our President and Chief Executive Officer hosted regular company-wide virtual town hall meetings to provide organizational updates and address areas of general employee concern. To keep our employees fully informed about COVID-19-related developments, we (i) disseminated regular health, safety, and other communications, (ii) established an on-line coronavirus center with information, links to valuable resources, and helpful videos, and (iii) continued our pre-COVID-19 online “pulse surveys” to gauge employees’ views on various issues. Our employees have rated our communications around COVID-19 positively. Our methods to communicate with customers, prospects, agents, and vendors generally have shifted towards digital and virtual platforms. Our underwriting, claims, premium audit, and safety management functions have replaced their former typically in- person meetings with virtual or video-enabled interactions, although some limited site visits still occur. To ensure we maintain providing a superior omnichannel customer experience as one of our three key strategic advantages, we have developed the ability to respond to our customers in their preferred method of communication — whether by phone, email, or social media. Our internal operations continue to function effectively during COVID-19. We continue to process claims, underwrite our policies, and operate our corporate functions at the same high standards to which we have always adhered. We effectively managed the implementation of various customer support initiatives during this challenging time, including (i) billing accommodations for our customers that we announced in early 2020, coupled with the implementation of certain state-specific regulations that provided for the deferral of premium payments without cancellations for up to 90 days, and (ii) a credit to our personal and commercial automobile customers with in-force policies equivalent to 15% of their April and May premiums due to the unprecedented nature of the government directives and the associated favorable claims frequency impact. We entered the COVID-19 pandemic in the strongest financial position in our history, with a high level of embedded profitability in our underwriting and investment portfolios, and strong financial strength ratings. This positioned us well to withstand the COVID-19-related economic downturn, market volatility and heightened uncertainty. For further information regarding the financial impacts of COVID-19, refer to Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations.” of this Form 10-K. Additionally, for more information on the COVID-19-related impacts on our control environment, see the "Enterprise Risk Management" discussion below. Segments We have four reportable segments: • • Standard Commercial Lines, which represents 74% of consolidated revenues, 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 80% of our total insurance operations’ NPW in 2020, and is primarily sold in 27 states and the District of Columbia. The average premium per policyholder in 2020 was approximately $12,900. Standard Personal Lines, which represents 10% of consolidated revenues, is comprised of property and casualty insurance products and services provided primarily to individuals acquiring coverage in the standard marketplace. This business represented 11% of our total insurance operations’ NPW in 2020, and is sold in 15 states. The average premium per policyholder in 2020 was approximately $2,400. Standard Personal Lines includes flood insurance coverage sold through the National Flood Insurance Program ("NFIP"). Based on 2019 direct premiums written 6 ("DPW") as reported in the S&P Market Intelligence platform, we are the third 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 represents 8% of consolidated revenues, 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 9% of our total insurance operations’ NPW in 2020, and is sold in all 50 states and the District of Columbia. The average premium per policyholder in 2020 was approximately $3,100. Investments, which represents 8% (including net realized and unrealized gains and losses) of consolidated revenues, 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 from 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 incurred during a policy's term; (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. Total underwriting expenses are the total of Amortization of deferred policy acquisition costs and Other insurance expenses, offset by Other income on our Consolidated Statements of Income. Other income primarily includes installment fees, which are fees charged to customers paying their premiums on an installment basis. Net investment income from our 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 commercial mortgage loans, (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 our investments segment. Realized gains and losses from our investment portfolio is the result of (i) security disposals through sales, calls, and redemptions, (ii) losses on securities for which we have the intent to sell, (iii) credit loss expense or benefit, and (iv) net unrealized gains and losses on equity securities. Net income (or loss) available to common stockholders on our Consolidated Statements of Income also includes (i) corporate expenses, which includes expenses of the Parent consisting of long-term incentive compensation to employees, and other general corporate expenses, (ii) interest on our debt obligations, (iii) federal income taxes, and (iv) dividends to preferred shareholders. We use net income (or loss) available to common stockholders and non-GAAP operating income as measures of financial performance. Non-GAAP operating income differs from net income available to common stockholders by the exclusion of (i) after-tax net realized and unrealized gains and losses on investments, and (ii) after-tax debt retirement costs. We use combined ratio as the key performance measure in assessing 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 income or expense. The loss and loss expense ratio is typically the largest contributor to our combined ratio and key drivers are the amount of catastrophe and non-catastrophe property loss and loss expenses incurred, current year casualty loss estimates, and the impact of prior year casualty reserve development. 7 We principally use after-tax net investment income as the key measure in assessing the financial performance of our investments segment. We also assess total return, which we calculate by adding pre-tax net realized and unrealized investment gains or losses (including losses on securities we intend to sell and credit loss expense or benefit) to pre-tax net investment income. Our investment philosophy includes setting certain risk and return objectives for the fixed income, equity, and other investment portfolios and comparing our returns for each portfolio to a weighted-average benchmark of comparable indices. We also use return on common equity ("ROE") and non-generally accepted accounting principles operating return on common equity ("non-GAAP operating ROE") as important measures of our overall financial performance. ROE is a profitability measurement calculated by dividing net income available to common stockholders by average common stockholders' equity during the period. Non-GAAP operating ROE is calculated by dividing non-GAAP operating income available to common stockholders by average common stockholders' equity during the period. We evaluate our segments, in part, based on their contribution to non-GAAP operating ROE. We establish our non-GAAP operating ROE target annually 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 2021, our non-GAAP operating ROE target is 11%. For further details regarding our 2020 performance as it relates to ROE, refer to "Financial Highlights of Results for Years Ended December 31, 2020, 2019, and 2018" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." of this Form 10-K. 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 common stockholders’ equity. We believe we have a lower financial risk profile and strong financial strength compared to the industry driven by: • Our Standard Commercial Lines segment underwriting risk appetite, which is focused on small-to-medium sized accounts, with risks generally characterized as low-to-medium hazard. Our average premium per policyholder is approximately $12,900, with about 87% of our casualty lines business in this segment having limits of $1 million or less (excluding workers compensation policies, as they do not have limits); • Maintaining sophisticated pricing reviews and disciplined financial planning and reserving practices. The latter includes quarterly ground-up reserve reviews for principally all lines of business, semi-annual independent external reserve reviews, and year-end regulatory actuarial reserve opinions issued by an independent external actuary; • Purchasing significant levels of reinsurance, including a property catastrophe reinsurance program that limits the net after-tax impact of a 1 in 250 year catastrophe to about 4% 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 $2 million per occurrence, respectively; and • Maintaining a conservative investment portfolio principally invested in high quality and liquid fixed income and short- term investments with a modest allocation to risk assets. As a result of our strong financial strength and lower financial and underwriting risk profile, we operate with higher operating leverage than the industry as a whole. We define operating leverage as the ratio of NPW to policyholders' surplus, and we target a ratio between 1.35x and 1.55x. Our operating leverage at December 31, 2020 was 1.30x, compared to the U.S. standard commercial and personal lines industry average of approximately 0.7x, as reported in Conning, Inc.'s Fourth Quarter 2020 Property-Casualty Forecast & Analysis. Our higher operating leverage results in higher investment leverage than the industry. We define investment leverage as invested assets per dollar of common stockholders’ equity. Our investment leverage at December 31, 2020 was $2.96 compared to the U.S. commercial and personal lines average invested assets to surplus of $2.07. Because we have higher investment leverage, we have adopted a conservative investment management philosophy with fixed income securities and short-term investments, representing more than 92% of our invested assets. These fixed income securities and short-term investments currently have a weighted average credit rating of "AA-" and an effective duration of 3.8 years. Subject to economic and market conditions; however, we expect to modestly increase our exposure to credit risk within our fixed income securities portfolio by continuing to reinvest proceeds from the non-sale disposal activity primarily related to "AAA" rated agency-backed residential mortgage-backed securities ("RMBS") into other high quality, but non-AAA rated fixed income sectors, as we find the risk adjusted returns more attractive. Over the coming quarters, we expect the average credit rating will decrease from "AA-" to "A+" and remain there for the foreseeable future; however, we do not anticipate a material shift in the overall risk/return characteristics of our fixed income securities portfolio. For additional information about the design and 8 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. Our strategy of operating with higher operating and investment leverage than the industry as a whole allows us to generate more ROE from our underwriting and investment portfolios. We generate 0.9 points of ROE for each point on the combined ratio, and 2.4 points of ROE for each point of pre-tax investment yield. This allows us to generate strong returns for our shareholders and we believe it is a competitive advantage, particularly in a low interest rate environment. 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 in the future to pay 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 is an inherently uncertain process, requiring the application of estimation techniques and a considerable degree of judgment. We regularly review our overall reserve position 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." and Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. As part of our risk management efforts associated with the sale of our products and services, we use reinsurance to protect our capital resources and insure us against losses on the risks we underwrite. We enter into reinsurance contracts and arrangements with third parties that cover various policies 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. Products and Services The types of insurance we sell in our insurance operations fall into two broad categories: • • 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 have long tails and may take several years and, in some situations, even decades to be reported and settled. Property insurance, which generally covers the financial consequences of accidental loss of an insured’s real and/or personal property or earnings. Property claims are generally reported and settled in a relatively short period of time. 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 Commercial Property (including Inland Marine) Commercial Automobile Standard Personal Lines E&S Lines X X X Standard Commercial Lines X X X X X X 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. X X X X X Category of Insurance Property Property/Casualty Casualty Casualty Property/Casualty Casualty Property/Casualty Property/Casualty Casualty Property 9 Product Development and Pricing Our insurance policies are contracts with our policyholders that specify the losses we cover and the amounts we will pay on a covered loss. We develop our coverages by (i) adopting policy 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 policy forms, or (iii) modifying third-party policy forms. In developing products and services, we consider market demands, based on competitive research and feedback from our independent distribution partners, and the potential impact the product or service will have in making our customer’s commercial or personal endeavors safer. Our policies provide coverage for future events, so the actual individual policy loss costs are unknown at the point of sale. Determining pricing for coverage requires us to consider many variables. Like most property and casualty insurance companies, our loss data alone is not sufficiently credible to independently establish the complex sets of loss costs and rating variables required for our products. Therefore, we often adopt loss costs and rating structures filed by statistical rating agencies, such as ISO and NCCI. We typically modify these loss costs or factors based on actuarial analyses of our own historical statistical data, to the extent that data is credible, factoring in loss trends and other expected impacts. The resulting loss costs are converted to premium rates, by adding in provisions for our company expense and profit. In some cases, we supplement the indicated rates with competitive market information to determine our final selected rates. We have developed predictive models for many of our Standard Commercial and Standard Personal Lines, which we use to further refine the statistical rating agencies' rating plans, or to independently develop our own plans. Predictive models analyze historical statistical data related to various risk characteristics that drive loss experience. For our Standard Commercial Lines, we use the output of these models to group our policies, or potential policies, based on their expected loss potential, which serve as input into the underwriting and pricing process for individual risks. For our Standard Personal Lines, we use these models to develop factors in our filed rating plans. In all cases, the predictive capabilities of these models are dependent on the quantity and quality of available statistical data. Therefore, we may supplement them with other competitive market information or underwriting judgment. Customers and Customer Markets We categorize our Standard Commercial Lines customers into the following strategic business units ("SBUs"): Contractors Mercantile and Services Community and Public Services Manufacturing and Wholesale Bonds Total Standard Commercial Lines Percentage of Standard Commercial Lines 42% General contractors and trade contractors Description 25% 16% 16% 1% 100% Retail, office, lessors risk/property owners, automobile services and golf courses Public entities, social services, religious institutions, and schools Manufacturers, wholesalers, and distributors 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. We manage volatility in our underwriting results, in part, by writing accounts that have a lower limits profile. 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 78% 84% 97% Casualty 87%1 98% 98% 1Standard Commercial Lines excludes policies written in our workers compensation line of business, which do not have statutory policy limits, but are covered by our casualty excess of loss treaty, which provides coverage for losses above $2 million. We also purchase significant levels of reinsurance from reinsurers with an average credit rating of "A" or better. Our reinsurance program supports our ability to write accounts with larger policy limits by limiting the impact of individual property and casualty losses to $2 million per risk and $2 million per occurrence, respectively. 10 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. However, flood insurance, which is reported in this segment, 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. Our growth strategy also includes a measured geographic expansion plan focused on organic growth. We plan to expand our current 27-state Standard Commercial Lines segment footprint to 30 by 2022, with the additions of Idaho, Vermont, and Alabama subject to regulatory approval. We also anticipate further geographic expansion in other selected states beyond 2022. Ultimately, we expect to be licensed to distribute our Standard Commercial Lines insurance policies in the 48-state Continental U.S. and the District of Columbia. This expansion will position us to cover customers that are based in our core geographic footprint that have additional exposures currently outside of our core footprint, allowing us to compete against insurers with national footprints. 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 main 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 has offices in Dresher, 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 36% of our DPW, excluding the flood line of business, in 2020. Independent Retail Agents A 2020 Independent Insurance Agents & Brokers of America study reported that independent retail insurance agents and brokers write approximately 85% of standard commercial lines insurance and 36% 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 they generally represent multiple insurance carriers. This provides the customer with a wider choice of insurance products, more competitive pricing, and individualized risk-based consultation. We have approximately 1,400 distribution partners selling our Standard Commercial Lines business, and 850 of these distribution partners also sell our Standard Personal Lines business. These 1,400 distribution partners sell our products and services through approximately 2,400 office locations. We also have approximately 6,000 distribution partners selling our flood insurance products. 11 Wholesale General Agents Our distribution partners for our E&S Lines are 90 wholesale general agents with a combined 300 office locations. We have granted limited binding authority to these wholesale general agents for risks that meet our prescribed underwriting and pricing guidelines. Marketing Our primary marketing strategy is to: • • • • Use an empowered field underwriting model to provide our distribution partners with resources within close geographic proximity to their businesses and our mutual customers. For further discussion on this model, see the “Technology, Innovation, 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 of our product development efforts, and (iii) providing education and development programs focused on producer recruitment, sales training, enhancing customer experience, online marketing, and distribution operations, all of which are designed to help them profitably grow and succeed in today's market. Develop annual goals with each distribution partner, and then carefully monitor 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, Innovation, and Field Model We continue to evolve our technology and field model by maintaining a strong focus on innovation. This allows us to provide our customers with "around the clock" digital access to account information and transactional capabilities. While many insurers offer such digital customer solutions in personal lines, we strive to be a digital and customer experience leader in all three segments of our insurance operations. Technology We leverage technology in our business. We have made significant investments in IT platforms, integrated systems, and Internet-based applications, and have utilized predictive models for over 15 years in our Standard Commercial Lines underwriting. We make these technology investments to provide: • • • • Our distribution partners with accurate business information and the ability to easily process policy transactions that seamlessly integrate into our systems. During 2020, we were recognized as a "Five-Star Carrier" by Insurance Business America (IBA) for superior performance in seven of the eight key categories, one of which was technology and automation. Our service representatives with a customer-centric view of our policyholders, as opposed to a traditional policy- centric view, which helps us to respond faster to customer inquiries and complements our on-demand access to digital transactional capabilities. Our underwriters with advanced underwriting and pricing tools that enhance profitability and enable premium growth by providing pricing guidance and automating the retrieval of relevant public information on existing policyholders and potential customers. Our claims adjusters with predictive tools that indicate which claims are likely to escalate, or result in fraud, subrogation, or litigation. As part of our digital strategy, we provide our Standard Commercial Lines and Standard Personal Lines customers with a mobile application and a web-based portal, both of which we encourage policyholders to adopt for on-demand self-service 12 access to account information, electronic bill payment, and claims reporting. We also provide other digital value-added services to all of our customers, such as proactive messaging about vehicle and product recalls, adverse weather, and claim status. For example, we launched a proactive communication message to our customers regarding notification of adjuster assignment, which during 2020 resulted in a decrease of adjuster transfers and adjuster inquiries by approximately 1,000 cases per month, or approximately a 40% reduction. We manage our IT projects through an Enterprise Project Management Office (“EPMO”). 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, including external and internal costs and any projected net present value of project benefits, and (v) provide non-technology project management consulting services to the rest of the organization. The EPMO, which includes senior management representatives from all major business and corporate areas, meets regularly to review all major initiatives and receives reports on the status of other projects. The EPMO is an important factor in the success of our business strategy and technology implementations. Our primary technology operations are located in Branchville, New Jersey and Glastonbury, Connecticut. To augment our internal resources, we have agreements with multiple consulting, IT, and supplemental staffing service providers. Collectively, these mainly U.S.-based providers supply approximately 54% of our skilled technology capacity. We retain management oversight of all projects and ongoing IT production operations. If we were to terminate an existing technology service provider, we have procedures in place to be able to manage an efficient transition to new vendors without significant impact to our operations. Innovation To advance (i) an organizational culture of innovation, (ii) our nimbleness, (iii) our digital and customer experience initiatives, and (iv) our long-term value proposition to our customers and distribution partners, we have undertaken several important strategic actions. We: • • • Created a team dedicated to innovation and continuous improvement under a chief innovation officer. This team was established to (i) apply proven innovation techniques and methods for identifying, prioritizing, and advancing strategic innovative ideas and opportunities, (ii) stay abreast of the key industry and insurance technology trends that impact our customers, distribution partners, and employees, and (iii) further expand our culture of innovation by providing training and skill-building opportunities, facilitating departmental and cross-functional strategy and innovation sessions, and leading relevant communities of interest that intersect with the lifecycle of innovation; Opened an innovation lab at our corporate headquarters to spur innovation generally and further our efforts to identify and deploy product, agency and customer experience, and operational efficiency improvements; and Established an Insurtech Investment Committee to review and take action on potential investment opportunities in technology and Insurtech vehicles that may positively impact our business or the industry. These efforts position us to offer customers an improved service experience and better position us to demonstrate our long-term value proposition to our customers and distribution partners. Our digital and customer experience initiatives have helped us introduce the following solutions: • • SelectiveGOSM - a free-to-customer driving mobile application that we launched in late 2020 to our Standard Personal Lines customers in certain states, which provides driver performance features to help customers improve their driving with detailed feedback on speeding, harsh braking, rapid acceleration, and more. Selective® Drive - a free-to-customer, commercial vehicle fleet management tool that we launched in 2019 that detects unsafe driving behaviors and provides additional information to help our customers manage their vehicles and drivers. In addition, during the second half of 2020, we began rolling out a new platform within our Standard Commercial Lines segment designed to streamline the quoting and issuance of new small business policies for our distribution partners. We generally consider small business to be lower hazard business in specific industry classifications with premiums less than $25,000. Writing small business has always been a core part of our strategy. Technology, as well as the number of market participants in this space, has been advancing rapidly in recent years. We launched a multi-year strategy with an emphasis on improving the ease and speed of writing small business, and are reinforcing our commitment to our distribution partners in this market by offering a best-in-class small business experience. We are advancing the user experience of our rating platform by streamlining the amount of information required to generate a quote. This new small business platform has been deployed for 13 our businessowners' policies and commercial automobile lines of business. The enhanced system allows our agents to quote and issue over 400 businessowners' classes, including Professional Offices, Florists, Technology, and Funeral Homes. Our plans include adding additional capabilities and more lines of business in 2021 to help us maximize new business growth and share of small business with our distribution partners. Field Model To support our independent distribution partners, we employ a unique field model in which (i) our Standard Commercial Lines underwriting and safety management personnel are located in the geographic territories they serve and (ii) our claims operation is organized regionally by claim specialty with local resources who manage our customer relationships. This field model builds better and stronger relationships with our independent distribution partners due to our field employees' close proximity and direct interaction with them and our customers. We enhance the field model with our sophisticated tools and technologies to inform underwriting, pricing, safety management, and claims decisions. At December 31, 2020, we had approximately 2,400 employees, of whom 675 are normally home-based, 950 are in our regional offices, and the remainder are in our corporate office. Currently, as a result of the COVID-19 pandemic, the majority of our office-based employees are temporarily working remotely from home. Underwriting Process Our underwriting process by segment is as follows: • Standard Commercial Lines: Our Standard Commercial Lines corporate underwriting department oversees our underwriting guidelines and philosophy for each industry segment and line of business. The Chief Underwriting Officer ("CUO") delegates underwriting authority throughout the organization through formal letters of authority based on an individual underwriter's job grade and industry and line of business expertise. Our corporate underwriting department also coordinates with our corporate actuaries to determine adequate pricing levels for all Standard Commercial Lines products. Under the authorities delegated by the CUO, our regional underwriting operations make the majority of individual underwriting and pricing decisions. New business is underwritten by Agency Management Specialists ("AMSs"), with contributions from Production Underwriters, Small Business Teams, and Large Account Underwriters. Renewal business is underwritten in each Region, but some business is renewed in our underwriting service center ("USC"), where underwriters are assigned to specific agents. With this model, production resources are focused on new opportunities with our agents, which provides capacity for the best profitable growth opportunities. In addition, our separate group of renewal underwriters remain focused on retaining our best accounts and driving profit improvement goals within the portfolio. Our field model also provides a wide range of Standard Commercial Lines customer-focused safety management services focused on improving safety and risk management programs, loss experience, and retention including: • • • • Risk evaluation, and virtual and on-site improvement surveys intended to evaluate potential exposures and provide solutions for mitigation; 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; Thermographic infrared surveys used to identify potential electrical hazards; and Occupational Safety and Health Administration construction and general industry certification training. We brand these services as “Safety Management: Solutions for a safer workplace.”SM We have 83 safety management specialists supporting policyholders in the field. These specialists regularly interact with customers and prospective accounts. They provide advice on risk mitigation for perils such as property damage as well as liability risks, including how to avoid abuse claims. By understanding our customers' exposures and recommending safety enhancements to reduce the risk from those exposures, our safety management specialists help us make better new and renewal underwriting decisions, while helping customers improve the safety of their operations. To further our safety management efforts, over the past two years we have embarked on initiatives to proactively service policyholders with notifications and alerts, risk identification and mitigation of potential loss occurrence, and tools and technologies that can reduce losses and improve safety. Examples include: Vehicle recall notifications to our policyholders and distribution partners; • • Weather preparation notices for large storms or hurricanes, including guides on structural improvements, roof and drainage maintenance, and measures to prevent plumbing from freezing or clogging; and 14 • • • Food and product recall notifications to policyholders in food manufacturing, distribution, or preparation. Standard Personal Lines: Our Standard Personal Lines underwriting operations are centralized and highly automated. The majority of our new and renewal business is underwritten and priced through an automated system reflecting our filed rates and rules. Exceptions are approved under the direction of our Standard Personal Lines CUO. For long-term growth in this segment, we are actively repositioning our Standard Personal Lines business to provide our insurance products to a customer base that is less price sensitive, and more focused on insurance product coverage and service. E&S Lines: Our E&S territory managers focus on marketing our product capabilities, training on our guidelines and automation and collection of market intelligence with our wholesale general agents. In return, our wholesale general agents provide front-line underwriting for new business and renewals pursuant to our prescribed guidelines. Our underwriters review all exceptions submitted by our wholesale general agents for approval, revision or declination based on individual account risk characteristics. Our USC services certain Standard Commercial Lines and Standard Personal Lines accounts designated by our independent distribution partners. All of our USC employees are licensed agents who respond to policyholder inquiries about insurance coverage, billing transactions, and other matters. For the convenience of our handling of USC transactions, our distribution partners agree to receive a slightly lower than standard commission on the associated premium. As of December 31, 2020, our USC was servicing NPW of $85.5 million, which represents 3% of our total NPW. Claims Management Timely and appropriate investigation of a claim's facts and circumstances in light of our policy's terms, conditions, and exclusions is one of the most important services we provide to our policyholders, their claimants, and our distribution partners. It also is one of the critical factors in achieving underwriting profitability. In the fourth quarter of 2020, we restructured our claims management process to more effectively administer claims. To address the increasing complexity of coverage evaluation, construction methods, and litigation, we have structured our claims organization to emphasize: • • • • Claims handling by technical areas of expertise, such as auto liability, general liability, property, and workers compensation; Claims customer managers and agency executives ("CAEs") who have responsibility for enhancing the relationship among our policyholders, agents, and our claims operation. The CAEs provide a single point-of-contact for our large account customers and distribution partners. They work with our regional underwriters to ensure appropriate claims service delivery, communicate trends, and discuss results and client services; Cost-effective delivery of claims services and control of loss and loss expense; and Timely and adequate claims reserving and resolution. We deploy specialized claims handling as follows: • • • Liability claims with high severity or technically complex losses are handled by the Complex Claims and Litigation Unit ("CCU"). The CCU specialists handle losses based on injury type or with expected severities greater than $250,000 in our Standard Commercial Lines and Standard Personal Lines. Litigated matters not meeting the CCU criteria are handled within our litigation unit, where regional litigation managers supervise teams of litigation adjusters aligned by jurisdiction and technical experience. E&S claims are handled by a dedicated group with specific expertise in E&S coverages, which differ from and often provide more limited coverages than Standard Lines offerings. • Workers compensation claims are handled by a centralized team in Charlotte, North Carolina. Medical-only and lost- time adjusters, who are aligned and trained by jurisdiction, manage non-complex workers compensation claims within our footprint. Claims with high exposure or significant escalation risk are referred to 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 (e.g. employee dishonesty and equipment breakdown losses) are handled by a small group of specialists in the CSC. The CSC has adopted the use of virtual claims handling tools in order to quickly assess the value of smaller claims and pay them in a timely and appropriate manner. • The Large Loss Unit ("LLU") handles complex property claims, typically those greater than $100,000. 15 • We centralize the following claims to align the highest level of expertise: (i) asbestos and environmental claims; (ii) construction defect claims; and (iii) other latent claims, including those related to abuse or molestation. The CSC is co-located with the USC in Richmond, Virginia. The CSC receives first notices of loss from our customers and claimants about Standard Commercial Lines, Standard Personal Lines, and E&S Lines claims and manages routine, non-injury automobile and property claims. The CSC, which assigns claims to our specialized claims handling groups as warranted by complexity, is organized to: • • • • Reduce claims settlement times on first- and third-party automobile property damage claims; Increase the use of body shops, glass repair shops, and car rental agencies with which we have negotiated discounted rates and specified service levels; Handle and settle small property claims; and Investigate and negotiate auto liability claims. The CSC uses a virtual automobile appraisal process managed by our team of appraisers from remote locations. This allows the CSC to process automobile physical damage claims faster and more efficiently. It also allows us to accumulate substantial data that will help us make ongoing improvements to our appraisal function. The Special Investigative Unit ("SIU") supports all insurance operations and investigates potential insurance fraud and abuse, consistent with law and direction from regulatory bodies and trade associations. The SIU adheres to uniform internal procedures to improve detection and take action on potentially fraudulent claims. We have developed a proprietary SIU fraud detection model that identifies potential fraud cases early in a claim's life. The SIU supervises anti-fraud training for all claims adjusters and AMSs. Its operation sends a clear message that we will not tolerate fraud against our policyholders or us. Our practice (and usually our legal requirement) is to notify the proper authorities of SIU findings. Insurance Operations Competition We face substantial competition in the insurance marketplace, including from public, private, and mutual insurance companies, some of which have better brand recognition and/or lower cost of capital. Many of our competitors, like us, rely on independent partners for the distribution of their products and services. Other insurance carriers either employ their own agents who only represent them, or use a combination of distribution partners, captive agents, and direct marketing. 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 primarily with regional and national insurers, mostly based on 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, and existing competitors and new entrants that may have a lower cost structure and leverage digital technology that may offer enhanced servicing capabilities or enhanced customer experience. 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 mainly consists of fixed income securities, which primarily includes corporate securities, asset-backed securities, mortgage-backed securities, and state and local municipal obligations. As of December 31, 2020, 13% of this portfolio was invested in 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. The primary objective of our investment portfolio is to maximize after-tax net investment income subject to our risk appetite, market conditions, and our desire for long-term growth in book value. Our investment strategy and objectives are managed by our Management Investment Committee, and are executed by our internal investment team and relationships with multiple external investment managers. This committee is comprised of senior management and is responsible for setting and implementing the investment objectives and the asset allocation, administering investment policies, selecting qualified external investment managers and advisors, and monitoring performance, transactions, and certain risk metrics, in the execution of our investment strategy. Members of this committee are appointed by our Board's Finance Committee. The Finance Committee reviews and makes recommendations to our Board with respect to certain financial affairs and our policies, including, but not limited to, investments and investment policies and guidelines, financial planning, capital structure and management, dividend policy and dividends, share repurchases, and strategic plans and transactions. 16 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. Regulation Primary Oversight by the States in Which We Operate Insurance is regulated, primarily at the state level, because of the McCarran-Ferguson Act. The primary public policy behind insurance regulation is protecting policyholders and claimants over all other constituencies, including shareholders. Insurance activities regulated by the states include the following: • • • Our ability to meet financial requirements to be able to pay claimants: Oversight of matters such as: minimum capital; surplus; solvency standards; accounting methods; form and content of statutory financial statements and other reports; loss and loss expense reserves; investments; reinsurance; dividend payments and other distributions to shareholders; security deposits; and periodic financial examinations. Protection of policyholders: Related to our property and casualty insurance business, oversight of matters such as: certificates of authority and other insurance company licenses; licensing and compensation of distribution partners; premium rates (required to not be excessive, inadequate, or unfairly discriminatory); policy forms; policy terminations; claims handling and related practices; cybersecurity; data protection and customer privacy; reporting of premium and loss statistical information; periodic market conduct examinations; unfair trade practices; mandatory participation in shared market mechanisms, such as assigned risk pools and reinsurance pools; mandatory participation in state guaranty funds; and mandated continuing workers compensation coverage post-termination of employment. Protection of policyholders, claimants, and shareholders: Related to our ownership of the Insurance Subsidiaries, oversight of matters such as: registration of insurance holding company systems in states where we have domiciled insurance subsidiaries, reporting about intra-holding company system developments, and required pre-approval of certain transactions that may materially affect the operations, management, or financial condition of the insurers, including dividends and change in control. NAIC Financial Monitoring Tools Our various state insurance regulators are members of the National Association of Insurance Commissioners ("NAIC"). The NAIC has established statutory accounting principles ("SAP") and other accounting reporting formats and model insurance laws and regulations governing insurance companies. The adoption of certain NAIC model laws and regulations is a key aspect of the NAIC Financial Regulations Standards and Accreditation Program, under which state insurance departments recognize the financial examinations and reviews done by other state insurance departments, which benefits insurance companies operating in multiple states by avoiding overlapping examinations. However, an NAIC model statute only becomes a law after a state legislature enacts it, and an NAIC model rule only becomes a regulation after a state insurance department promulgates it. The following are among the NAIC's various financial monitoring tools, most predicated on NAIC model laws and regulations that are material to the regulators in states in which our Insurance Subsidiaries are organized: • • • The Insurance Regulatory Information System ("IRIS"). IRIS identifies 13 industry financial ratios and specifies “usual values” for each ratio. Departure from the usual values on four or more of the financial ratios can lead to inquiries from individual state insurance departments about certain aspects of an insurer's business. Our Insurance Subsidiaries have consistently met the majority of the IRIS ratio tests. Risk-Based Capital ("RBC"). RBC is measured by four major areas of risk to which property and casualty insurers are exposed: (i) asset risk; (ii) credit risk; (iii) underwriting risk; and (iv) off-balance sheet risk. Regulators increase their scrutiny, up to and including intervention, as an insurer's total adjusted capital declines below three times its "Authorized Control Level." Based on our 2020 statutory financial statements prepared in accordance with SAP, the total adjusted capital for each of our Insurance Subsidiaries substantially exceeded three times their Authorized Control Level. Annual Financial Reporting Regulation (referred to as the "Model Audit Rule"). The Model Audit Rule, based closely on the Sarbanes-Oxley Act of 2002, as amended ("Sarbanes-Oxley Act"), regulates (i) auditor independence, (ii) corporate governance, and (iii) internal control over financial reporting. As permitted under the Model Audit Rule, the 17 Audit Committee of the Board of the Parent can also serve as the audit committee of each of our Insurance Subsidiaries, even if the Parent is not an insurance entity. • Own Risk and Solvency Assessment ("ORSA"). ORSA requires an insurer to maintain a framework for identifying, assessing, monitoring, managing, and reporting on the “material and relevant risks” associated with the insurers' (or insurance groups') current and future business plans. ORSA, which the state insurance regulators of our Insurance Subsidiaries have adopted, requires an insurer to annually file an internal assessment of its solvency. For more information on our internal process of assessing our major risks, refer to the "Enterprise Risk Management" section below. NRSROs Rating agencies, although not formal regulators, also monitor our capital adequacy. Two are (i) AM Best Company, with its Capital Adequacy Ratio ("BCAR"), and (ii) S&P, with its capital model. Both examine the strength of an insurer's balance sheet and compare available capital to estimated required capital at various probability or rating levels. BCAR and the S&P model differ from the NAIC financial monitoring tools, particularly RBC. While RBC, BCAR, and the S&P capital model all show similar direction as circumstances change, they react differently to changes in economic conditions, underwriting and investment portfolio mix, and capital. Rating agencies also update and change their capital adequacy models and requirements more frequently than the NAIC does its financial monitoring tools. We analyze this divergence in capital adequacy models as we manage our capital, risk profile, and growth objectives. Federal Regulation While primarily regulated at the state level, our business is subject to certain federal laws and regulations, including: • • • • • • • The McCarran-Ferguson Act; The Terrorism Risk Insurance Program Reauthorization Act ("TRIPRA"); The NFIP, which is overseen by the Mitigation Division of the Federal Emergency Management Agency ("FEMA"); The Medicare, Medicaid, and SCHIP Extension Act of 2007, which subjects our workers compensation business to Mandatory Medicare Secondary Payer Reporting; The economic and trade sanctions of the Office of Foreign Assets Control (“OFAC”); Various privacy laws related to possession of personal non-public information, including the following: ◦ ◦ ◦ ◦ Gramm-Leach-Bliley Act; Fair Credit Reporting Act; Drivers Privacy Protection Act; and Health Insurance Portability and Accountability Act. The Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), which govern, among other things, publicly-traded companies and require or permit national stock exchanges or associations, such as the Nasdaq Stock Market LLC, where our securities are listed, to mandate certain governance practices of their listed companies. The Dodd-Frank Act, enacted in 2010 in response to the 2008 and 2009 financial markets crises, provided for some public company corporate governance reforms and some oversight of the business of insurance, including: • • Establishing the Federal Insurance Office (“FIO”) under the U.S. Department of the Treasury; and Granting the Federal Reserve oversight of financial services firms designated as systemically important. The FIO, consistent with its Dodd-Frank Act (i) negotiated a covered agreement with the European Union that, among other things, impacted reinsurance collateral requirements for foreign reinsurers, and (ii) has been gathering insurance market data. For additional information on the potential impact of regulation and changes in regulation on our business, refer to the risk factor related to regulation within Item 1A. “Risk Factors.” of this Form 10-K. Enterprise Risk Management As a property and casualty holding company, our Insurance Subsidiaries are in the business of taking risk. We categorize our major risks into six broad categories: • Asset risk, which stems primarily from our investment portfolio and reinsurance recoverables and includes credit and market risk; 18 • • • • • Underwriting risk, which is the risk that our insured losses exceed 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 investment losses or borrowing expense; Pension risk, which is the risk that our obligations under the Retirement Income Plan for Selective Insurance Company of America exceed our expectations because the invested assets supporting those obligations underperform or there are adverse changes in the assumptions we used to calculate the pension liabilities; Other risks, which include a broad range of operational risks, many difficult to quantify, such as talent/human capital, market conditions, economic, legal, regulatory, reputational, and strategic risks - as well as the risks of fraud, human failure, modeling risks, inadequate business continuity plans, or failure of controls or systems, including, rapidly- evolving cybersecurity risk; and Emerging risks, which include risks in each of the other five categories, but are new, rapidly evolving, or increasing substantially compared to historical levels. For example, we consider the increased frequency and intensity of severe wildfires, the exposures created by the legalization of cannabis, the recent passage of reviver statutes for victims of abuse, the various potential impacts from climate change, and the significant economic and societal impacts from the COVID-19 pandemic, all to be emerging risks. Our internal control framework deploys three-lines of defense: • • • The first line of defense are the individual business functions that deliberately assume, own, and manage the risk on a daily operational basis. The second line of defense is responsible for risk oversight and also supports the first line to understand and manage risk. Our Chief Risk Officer, who reports to the Chief Financial Officer, leads a dedicated risk team responsible for this second line. The third line of defense is our Internal Audit team that, with oversight from our Board's audit committee, provides independent, objective assurance as to the assessment of the adequacy and effectiveness of our internal control environment. Internal Audit also coordinates risk-based audits, compliance reviews, and other specific initiatives to evaluate and address risk within targeted areas of our business. We use Enterprise Risk Management (“ERM”) as part of our governance and control process to take an entity-wide view of our major risks and their potential impact. We designed our ERM framework 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 the various Board committees oversee risks specific to their areas of supervision and report their activities and findings to the Board. Management has formed an Executive Risk Committee ("ERC") that is responsible for the holistic monitoring and management of our risk profile. The ERC consists of the Chief Executive Officer, his direct reports and key operational and financial leaders, including the Chief Risk Officer. The ERC 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 ERC's activities, analyses, and findings to the Board or the appropriate Board committee, and provides a quarterly update on certain risk metrics. High-quality, effective ERM is best achieved as a shared organizational cultural value that is the responsibility of every employee. We have developed processes and tools that we believe support a culture of risk management and create a robust organizational ERM framework. We also designed our compensation policies and practices, as well as our governance framework and Board leadership structure, 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 and various other analyses. The ERC meets at least quarterly to review and discuss various topics and the interrelation of our major risks, including, without limitation, capital modeling results, capital adequacy, risk metrics, emerging risks, and sensitivity analysis. When appropriate, we engage subject matter experts, such as external actuaries, third- party risk modeling firms, and IT and cybersecurity consultants. Annually, our Insurance Subsidiaries file their ORSA report, an internal solvency assessment developed by the Chief Risk Officer in coordination with the ERC, with their domiciliary regulator after review by our Board. 19 COVID-19 has been a significant emerging risk and a focus of the ERC in 2020, and will continue to remain a focus into 2021. To monitor and manage COVID-19-related developments, our ERC met daily in March, multiple times a week through April, transitioned to weekly meetings in May, June, and July, and since has met monthly. The ERC continues to actively review and address all significant operational, compliance, and financial risk matters related to COVID-19. This oversight includes matters such as employee health and safety, facilities matters, operational business continuity, IT including third-party vendors, regulatory developments, premium collections, past due accounts, investments, liquidity, capital, cash flow, claims activity, and other key business metrics. Our Management Investment Committee, which has oversight of our investment portfolio, also met weekly in the early days of the COVID-19-related financial market disruption, transitioned to meeting every two weeks, and now meets monthly. This committee has carefully reviewed detailed portfolio metrics and market projections and, during the crisis, has communicated and met regularly with our portfolio managers, allowing it to make proactive investment decisions on an informed basis. Our Board met weekly with senior executives through April, transitioned to bi-weekly meetings in May, June, and July, and since has met monthly to ensure appropriate corporate governance and oversight. We have not had to modify our existing internal controls or processes in any significant way in response to the pandemic and we have not experienced any material impact to our internal control environment over financial reporting despite having the majority of our employees working remotely in response to the pandemic. We are continually monitoring and assessing COVID-19-related current events to minimize their potential impact on our internal controls and their design and operating effectiveness. Given the COVID-19-related governmental actions and directives, remote access to critical systems is required. For several years, our IT security strategy has emphasized endpoint controls for cloud computing and employee mobility. This strategy leveraged a virtual private network with multi-factor authentication that is supplemented by a virtual desktop infrastructure, where necessary or appropriate, to create a highly-available and centrally-managed end-user environment. The technology supporting this strategy was already in use by our 675 home-based employees, as well as anyone working remotely on an ad hoc basis. As a result, our cybersecurity program was well-positioned to support increased remote working arrangements and respond to an increase in attempted attacks to exploit the COVID-19 outbreak without rolling back controls. Our cybersecurity strategy also has always included an information security education and awareness program that combines training with testing aligned to key security exposures, including phishing and social engineering, which is an ongoing challenge for our employees and vendors. We recently strengthened our phishing risk management by deploying multiple technology-driven controls that include malicious content checks, malicious link blocking, and reputation-based rules. The cybersecurity program also anticipated an increase in attempts to disrupt our information systems and deployed safeguards to prevent interruption to key customer and agent-facing technologies. Our risk governance structure facilitates robust risk dialogue across all levels and disciplines of the organization. It also promotes robust risk management practices, which served us well in 2020 as we evaluated and managed the emerging risk of COVID-19. 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 generate 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. We also provide access to these filed materials on our Internet website, www.Selective.com. Item 1A. Risk Factors. Certain risk factors can significantly impact our business, liquidity, capital resources, results of operations, financial condition, and debt ratings. These risk factors might affect, alter, or change actions we might take executing our long-term capital strategy. Examples include, without limitation, contributing capital to any or all of the Insurance Subsidiaries, issuing additional debt and/or equity securities, repurchasing our existing debt and/or equity securities, or increasing or decreasing stockholders’ dividends. We operate in a continually changing business environment and new risk factors emerge from time to time. Consequently, we can neither predict such new risk factors nor assess the potential future impact, if any, they might have on our business. 20 Risks Related to COVID-19 Governmental actions to contain or delay the spread of the COVID-19 pandemic since early March 2020 have disrupted ordinary business commerce and impacted financial markets. These governmental actions, for which we cannot predict the extent, duration, and possible alteration based on future COVID-19-related developments, could materially and adversely affect our results of operations, financial position, and liquidity. These actions generally have: • • • • • • • • • • • • • Negatively impacted the global and United States domestic economies, with some sectors such as travel and leisure, retail, energy, and real estate more significantly affected than others; Increased unemployment; Increased international, federal, state, and local government budget deficits, which has led to adverse rating actions against certain governmental units and increased the general risk of government debt default that could impact the value of related fixed income securities; Induced significant volatility in financial markets; Decreased valuations in markets for equity, fixed income, and alternative investments in certain sectors; Impacted individual income and business revenue, and increased the number of individuals and businesses experiencing financial distress with the potential for insolvency; Decreased premium collections, late payment fees, and reinstatement fees; Generated state and federal legislative or executive branch proposals to (i) require insurance policies to retroactively cover COVID-19-related losses expressly excluded under the terms of some property insurance policies, and (ii) presume that COVID-19 is a work-related illness for certain employees under workers compensation policies; Generated state insurance department bulletins or orders requesting or mandating premium credits and rebates on certain insurance policies that may exceed actual COVID-19-related frequency experience decreases; Disrupted commerce, supply chains, and travel to varying degrees; Increased expense management focus by individuals and all-sized businesses; Increased the demand for and/or limited the availability of certain types of medical resources; and Increased e-commerce, video, phone, and other methods of remote trade and business transaction. The economic impacts of the COVID-19-related governmental actions may impact our revenue, loss and loss expense, liquidity, or regulatory capital and surplus, and operations, particularly as these relate, without limitation, to the following: Impact on Our Insurance Operations • • • Because our general liability and workers compensation policies provide for premium audit to assure pricing for actual risk exposure, we must estimate return premium that we may owe policyholders for revenues and payrolls lowered by the extent and duration of the COVID-19-related governmental directives and related economic contraction. Such return premiums could be significant and will impact our underwriting results. Our results include the impact of a $75 million return audit and mid-term endorsement premium accrual recorded in the first quarter of 2020, which reflects our estimate of reduced exposures on the in-force workers compensation and general liability portfolio as of March 31, 2020. As of December 31, 2020, we had a remaining accrual of $24.8 million. In the second quarter of 2020, we offered a credit equal to 15% of insureds’ premiums for our standard lines commercial automobile and personal automobile lines of insurance for April and May totaling $19.7 million. This two-month premium credit was based on a limited amount of claims reporting data reflecting the impact of the COVID-19-related governmental directives on miles driven, which has reduced claims frequencies. Due to the sudden and dynamic nature of these impacts, we did not rely upon traditional actuarial analysis to support these credits. We will not know the actual impact of the COVID-19-related governmental actions until some point in the future. Should the various governmental directives be extended or reinstated due to increased infection rates, we may give further premium credit to our customers to the extent supported by further analysis. Based on the continued COVID-19- related economic impact, state insurance commissioners may take other regulatory actions requiring additional premium credits in commercial and personal automobile and other lines, and we face the risk that we may be required to return more premium than is warranted by our filed rating plans and actual loss experience. All of our commercial property and businessowners' policies require direct physical loss of or damage to property by a covered cause of loss to trigger a business interruption claim. Whether COVID-19-related contamination, the existence of a pandemic, and/or the resulting government shutdown orders cause physical loss of or damage to property continues to be the subject of much debate and litigation. We cannot predict the outcome of that litigation. Our practice is to include in, or attach to, all standard lines commercial property and businessowners' policies an 21 exclusion that states that all loss or property damage caused by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness, or disease is not a covered cause of loss. We offer some limited coverages that could apply in COVID-19-related claims and circumstances, primarily tied to clean-up and food-contamination that are subject to sub-limits. Approximately 95% of our commercial property and businessowners' policies include the very specific and regulatory approved virus exclusion. • We purchase a significant amount of reinsurance, including a property catastrophe reinsurance program and property and casualty excess of loss reinsurance treaties. In response to the COVID-19 pandemic and recent increased catastrophic loss activity, the reinsurance industry is seeking to tighten contractual terms and conditions, reduce reinsurance capacity, and increase its pricing for reinsurance protection. Tightened terms and conditions include introducing new coverage exclusions, such as excluding losses related to communicable diseases, particularly for business interruption losses in property treaties and, to a lesser extent, in casualty treaties. To the extent we are exposed to losses on our primary policies from risks, such as communicable disease, these losses will most likely be excluded from coverage under our new reinsurance treaties, and we now face increased underwriting risk. This increased underwriting risk could increase our net loss and loss expenses and increase the volatility in our underwriting results. We experienced risk-adjusted reinsurance price increases at our January 1, 2021 renewals that were at rates higher than we are likely able to generate on the underlying insurance policies we sell. • In response to the COVID-19 pandemic, there currently are various public policy debates and legislative and regulatory proposals at both the federal and state levels: ◦ Certain states have proposed legislation that would impose liability (including retroactively) for COVID-19- related business interruption losses on policies that do not provide such coverage terms. We cannot predict the outcome of such proposals. We believe that if any of these proposals were enacted, they could impair future commercial activity and would likely be determined unconstitutional after being challenged through litigation. Nonetheless, if such proposals were enacted and upheld as constitutional, they could have a material impact on our profitability, liquidity, and overall financial condition and results of operations. ◦ We are aware of four future pandemic insurance proposals being discussed in Washington, D.C., only one of which has been introduced as proposed legislation. Three of the proposals provide for insurer participation and put insurer capital at risk to various degrees. If any of the proposals involving insurer at risk capital were enacted, it could have a material impact on our profitability, liquidity, and overall financial condition and results of operations. ◦ Certain state insurance departments have indicated that they currently (i) will not approve the filing of rate increases or decreases related – or unrelated – to COVID-19, and (ii) are suspending, limiting, or restricting the approval or attachment of new virus-related exclusions. To the extent any of these regulatory actions do not permit us to modify our rating plans, they could have a material impact on our profitability, liquidity, and overall financial condition and results of operations. • • Limited medical resources availability could result in medical inflation and complicate, delay and/or extend medical treatment that could impact exposure on workers compensation, general liability, and personal and commercial automobile claims. Economic inflation could increase our loss and loss expense reserves, particularly associated with our longer tail lines of business. • We may have increased workers compensation loss and loss expenses if policyholders' employees in high-risk roles of essential businesses contracted COVID-19 in the workplace. We may experience higher frequency of workers compensation claims, particularly as state legislative or executive order proposals are enacted that create presumptions that the contraction of COVID-19 by an essential business employee who interacted with the public is work-related. We also may see an extension of workers compensation benefits if employees do not have jobs to which they can return. • We may experience an increase in liability claims against our policyholders related to business practices as remote- office work-from-home employees return to their pre-COVD-19 office and business locations. This may be exacerbated by an active plaintiffs’ bar seeking to generate COVID-19-related claim activity. • Loss frequency and severity could increase related to our auto and property coverages due to, among other things, 22 • • disruptions in supply chains and changes in business practices and individual behaviors resulting from the shelter-in- place and social distancing measures, such as arson and fraud. Due to the COVID-19-related governmental orders, we may experience delayed reporting of losses, settlement negotiations, and trial of disputed claims that may disrupt our normal claims resolution processes and trends. Service levels could deteriorate if significant numbers of our (i) employees were to be simultaneously infected by COVID-19, whether working remotely or in one of our offices, and/or (ii) remote employees or key business partners are unable to work effectively while sheltering-in-place. Examples of potential work impacts include local internet disruption that prevents access to our virtual private network or similar unavoidable events. Because our employees are working remotely, it also is possible that we will be subject to increased cybersecurity attacks from bad actors. Impact on our Investment Operations • The COVID-19 pandemic and the related governmental orders may result in further significant equity and debt market volatility that could impact our net investment income due to the following: ◦ ◦ ◦ ◦ ◦ Financial market volatility is reflected in our alternative investment portfolio performance; A change in spreads on fixed income securities may create mark-to-market investment valuation losses and volatility in unrealized capital gains, which will impact GAAP equity; Losses on securities that we intend to sell may increase, as we give our third-party investment managers flexibility to take advantage of the spread widening in fixed income securities, particularly in asset classes more significantly impacted by COVID-19-related governmental directives and to which the Federal Reserve Board is providing liquidity and structural support; Economic inflation related to COVID-19 issues could be higher or lower than our expectations and impact our investment returns; and A potential increase in credit risk associated with municipal bonds for which repayment is supported by dedicated revenue streams that may be impacted by COVID-19. Impact on our Capital Position, Liquidity and Financial Leverage • Out of an abundance of caution, we significantly increased our short-term debt during the first quarter of 2020 to enhance our liquidity and provide us with additional financial flexibility due to the market volatility and economic uncertainty from the COVID-19 pandemic. These short-term borrowings totaled $302 million, and we invested the proceeds in high-quality money market funds and fixed income securities. In addition to the $302 million of short- term borrowings, our GAAP equity decreased from $2.2 billion at December 31, 2019 to $2.1 billion at March 31, 2020, driven by a reduction in net unrealized gains in our investment portfolio. The combination of the additional borrowings and lower GAAP equity resulted in an increase in our debt to total capitalization ratio from 20.1% at December 31, 2019 to 28.9% at March 31, 2020, above our longer term target of 25%. • We subsequently repaid these short-term borrowings by December 31, 2020. The reduction in the short-term borrowings, as well as an increase in our GAAP equity to $2.7 billion at December 31, 2020, inclusive of our issuance on December 2, 2020, of $200.0 million of 4.60% non-cumulative preferred stock ("Preferred Stock"), has decreased our debt to total capitalization ratio to 16.7% at December 31, 2020. Despite the improvement in our capital position and a reduction in our debt to total capitalization since the first quarter of 2020, the ongoing COVID-19 pandemic, in future periods, could cause a reduction in our GAAP income or equity, decrease our liquidity, and result in an increase in our debt to total capitalization. This could impact our financial strength ratings and impair our business. 23 Risks Related to our Insurance Operations We are subject to losses from catastrophic events. Losses from natural and human-made catastrophes including, without limitation, hurricanes, tornadoes, windstorms, earthquakes, hail, severe winter weather, derechos, floods, and fires, some related to climate change - and terrorism, including cyber-attacks, civil unrest, and explosions, can negatively impact our financial results. The frequency and severity of these catastrophes are inherently unpredictable. In recent years, the global insurance industry has seen an escalation in the frequency and severity of 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 in its "Special Report on Global Warming of 1.5°C" 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 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 including hurricanes, severe convective storms, and wildfires. The IPCC's 2019 "Special Report on Climate Change and Land" reinforced these findings. Our insurance operations primarily write risks in the Eastern, Midwestern, and Southwestern regions of the U.S. Our most significant catastrophe exposures are (i) hurricanes impacting the Eastern U.S., (ii) terrorism events, (iii) severe convective storms, including hailstorms and tornadoes, and (iv) winter storms. Single storms could adversely impact our financial results, but it is also possible that we could experience more than one severe catastrophic event in any given calendar year. We track our severe weather and catastrophe losses using definitions and information we obtain from ISO’s Property Claim Services unit, an internationally recognized expert on U.S. storm losses. Certain factors can impact our estimates of ultimate costs for catastrophes, including: Inability to access portions of the impacted areas following a catastrophic event; i. ii. Scarcity of necessary labor and materials that delay repairs and increase our loss costs; iii. Regulatory uncertainties, including new or expanded interpretations of coverage; iv. Residual market assessment-related increases in our catastrophe losses; v. Potential fraud and inflated repair costs, partly driven by (a) demand surge post-event, and (b) opportunistic service providers; vi. Higher loss adjustment expenses due to shortages of claims adjusters available to appraise damage; vii. Late claims reporting; viii. Escalation of business interruption costs due to infrastructure disruption; and ix. Whether the U.S. Secretary of Treasury certifies a terrorist event as an act of terrorism under TRIPRA. An increase in catastrophe losses likely will reduce our net income and stockholders’ equity and could have a material adverse effect on our liquidity, financial strength, and debt ratings. The closer a catastrophe occurs to the end of a reporting period, the more likely it is we have limited information to estimate loss and loss expense reserves, adding greater uncertainty to our estimates. More detailed claims information available after the end of a reporting period may result in 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 loss and loss expense reserve estimates on known facts and circumstances, including our expectations of ultimate settlement and claim administration expenses, trends in claims severity and frequency, medical inflation trends, predictions of future events, and other subjective factors relating to our in-force insurance policies. There is no method for precisely estimating the ultimate liability for the settlement of claims. Reserve estimates may be impacted by a variety of broad economic, political, social, and legal developments or trends, such as inflation, judicial tort decisions, and various state legislative initiatives. Because we cannot predict the timing and impact of these economic, political, social, and legal developments or trends, and estimating loss and loss expense reserves is inherently uncertain, we cannot be sure the reserves we establish are adequate or will be so in the future. We review our reserve position quarterly and adjust the reserve position accordingly. An increase in reserves (i) reduces net income and stockholders’ equity, and (ii) could have a material adverse effect on our liquidity, financial strength, and debt 24 ratings. As we underwrite new business and renew existing business, we estimate future loss cost trends in pricing our products to generate an adequate risk-adjusted return. If our estimate of future loss cost trends proves to be understated, our pricing of future new and renewal business may be inadequate to meet estimated loss costs trends, understating our future loss and loss expense reserves. The COVID-19 pandemic is an example of how loss and loss expense reserves might be affected by economic, political, social, or legal developments or trends. Two additional examples are: • • If economic inflation, including medical inflation, is higher than our assumptions, our loss and loss expense reserves associated with our longer tail lines of business may prove to be insufficient. In particular, our workers compensation line of business is susceptible to this risk, given its extended payment pattern and the current low medical inflationary environment compared to long-term medical inflation rates, which have historically been higher. Several states have expanded or are exploring expanding the statute of limitations for civil actions alleging sexual abuse. By retroactively permitting claims for previously time-barred acts, these “reviver” laws may result in insurance claims that could significantly increase loss costs and require re-evaluation of previously-established reserves or the creation of new reserves. Since reviver statutes have been enacted, we have received notices of claims or potential claims for acts alleged to have occurred as far back as the 1950s. Without prior experience, we cannot estimate how many "reviver" claims notices we may receive. Most notices we have received are sent on behalf of claimants by attorneys unsure of what insurer or policy (if any) may have covered the alleged assailant or supervising entity and may not implicate insurance policies issued by us or a predecessor. For notices we have determined implicate an insured under a policy issued by us or a predecessor, we (i) have investigated or are investigating facts, (ii) have evaluated policy terms, and (iii) believe we have appropriate coverage defenses and reinsurance protections that have been considered in establishing our reserves. As coverage positions may be challenged through litigation or otherwise, we face litigation risks further discussed below in the Risk Factor entitled, “Incidental to our insurance operations, we are engaged in ordinary routine legal proceedings that, because litigation outcomes are inherently unpredictable, could impact our reputation and/or have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods.” For further discussion on our loss and loss expense reserves, please see the “Critical Accounting Policies and Estimates” section of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” and Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Our ability to reduce our risk exposure depends on the availability and cost of reinsurance. We transfer a significant portion of our underwriting risk exposure - specifically a portion of our loss and loss expense - to reinsurance companies in exchange for a specified portion of premiums. Most of our reinsurance contracts have annual terms. The availability, amount, and cost of reinsurance depend on market conditions, including retrocessional reinsurance market capacity. This may fluctuate significantly and not necessarily correlate to the loss experience of our specific book of business. In general, we can consider catastrophe reinsurance expense in our filed rates and rating plans. Any other disproportionate increase in our reinsurance expense that we cannot include in our filed rates and rating plans will reduce our earnings. If we do not obtain expected reinsurance amounts or terms, our reinsurance expenses could increase, we may assume increased risk for individual or aggregate losses, and our ability to write future business could be adversely affected. Catastrophes impact many property and casualty insurance lines, but commercial property and homeowners coverages historically have accounted for most of our catastrophe-related claims. To limit our exposure to catastrophe losses, we purchase catastrophe reinsurance. It is possible that our reinsurance coverage could be inadequate, particularly if: • We do not purchase sufficient amounts of reinsurance because of defects or inaccuracies in the various modeling • • • software programs we use to analyze our Insurance Subsidiaries' risk; A major catastrophe loss exceeds the purchased reinsurance limit or is within the limits, but exceeds the financial capacity of one or more of our reinsurers; The frequency of catastrophe losses increases and our Insurance Subsidiaries' insured losses exceed the aggregate limits of the catastrophe reinsurance treaty or our Insurance Subsidiaries experience an aggregation of losses that fall below our per occurrence reinsurance retention; or Our reinsurance counterparties (a) are unable to access their reinsurance markets, or retrocessions, (b) suffer significant financial losses, (c) are sold, (d) cease writing reinsurance business, or (e) are unable or unwilling to satisfy their contractual obligations to us. 25 Typically, our reinsurance contracts align with our primary insurance policies. For example, if our primary insurance policies provide coverage for a loss, then our reinsurance contracts typically provide coverage as well (subject to any specific exclusions the reinsurance contracts may contain). In response to the COVID-19 pandemic and recent increased catastrophic loss activity, the reinsurance industry has sought to tighten contractual terms and conditions, reduce reinsurance capacity, and increase pricing. Tightened terms and conditions include introducing new coverage exclusions, such as excluding losses related to cyber risk and communicable diseases, particularly for business interruption losses in property treaties and, to a lesser extent, in casualty treaties. To the extent we are exposed to losses on our primary policies from risks, such as cyber and communicable disease, that are now principally excluded from coverage under our reinsurance treaties, we face increased underwriting risk. The increased underwriting risk could increase our net loss and loss expenses and increase the volatility in our underwriting results. Decreased reinsurance capacity also would increase our underwriting risk if we cannot fully place our existing reinsurance treaties upon renewal. We experienced risk-adjusted reinsurance price increases at our January 1, 2021 renewals that were at rates higher than we are likely to generate on the underlying insurance policies we sell. This will negatively impact our underwriting profitability in 2021. Even with the benefits of reinsurance, our exposure to catastrophe risks could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. We 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 $369 million is based on a percentage of our prior year’s applicable Standard Commercial Lines and E&S Lines premiums. For losses above the deductible in 2021, the federal government will pay 80% of losses, 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 happened 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. We also could be required to pay terrorism- related losses for customers who declined terrorism coverage. 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 2020, 86% of our Standard Commercial Lines non-workers compensation policyholders purchased terrorism coverage that included nuclear, biological, chemical, and radioactive ("NBCR") events. Many 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. TRIPRA has never covered personal lines of business. Our homeowner policies in Standard Personal Lines exclude nuclear losses, but they 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 face 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 industry catastrophe losses. Reinsurers generally manage their large loss exposure through their own reinsurance programs, or retrocessions, about which we do not always have the full details. If our reinsurers have difficulty collecting on their retrocession programs or in reinstating retrocession coverage after a large loss, we may not receive timely or full payment of our reinsurance claims. This means that we have direct and indirect counterparty credit risk to our reinsurers and the reinsurance industry, which is global but relatively small. 26 • • • Certain life insurance companies obligated to our policyholders or claimants under annuities we purchased as part of structured claims settlements, if they fail to fulfill their annuity contract obligations. Some of our independent distribution partners, who collect premiums from our policyholders for us. Some policyholders directly obligated to us for premium and/or deductible payments, the timing of which may be impacted by mandated payment moratoriums. Our exposure to credit risk could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. We 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 premium production. While our customers find advantages in using independent distribution partners, our reliance on independent distribution partners presents risks and challenges, including: • • • • Competition in our distribution channel, as independent distribution partners have access to products from multiple carriers and markets, and we must market our products and services to our distribution partners before they sell them to our mutual customers. Challenges in developing brand recognition that require us to closely coordinate with our distribution partners, as some customers cannot differentiate their insurance agent from their insurance carrier. Our market share growth is tied to the growth in market share controlled by our distribution partners. Independent retail insurance agencies control 85% of standard commercial lines business and 36% of standard personal lines business in the U.S. Consequently, expansion of our Standard Personal Lines market opportunity could be more limited than our Standard Commercial Lines business. More competitors have focused on lower-cost "direct-to-the- customer" distribution models that emphasize digital ease and technological efficiencies to address the discrepancy in agency control of Standard Personal Lines business. Continued advancements in "direct-to-the-customer" distribution models may impact the overall market share controlled by our independent distribution partners and make it more difficult for us to grow, or require us to establish relationships with more distribution partners. Aggregation and consolidation of our independent distribution partners and their market share, as some publicly- traded and private equity-backed independent distribution partners have deployed consolidation strategies to acquire other independent distribution partners and increase their market share ("Aggregators") over the last decade. If more of our independent distribution partners become Aggregators, or are acquired by Aggregators, Aggregator demands and influence on our business could increase. For example, Aggregators could develop and implement strategies to consolidate their business with fewer insurers and demand higher base and supplemental commissions. Aggregators accounted for approximately 33% of our DPW at December 31, 2020, up from 20% three years ago. Currently, no one distribution partner is responsible for 10% or more of our combined insurance operations' premium. Our financial condition and results of operations are impacted by our independent distribution partners' success in marketing and selling our products and services. National and global economic conditions could adversely and materially affect our business, results of operations, financial condition, and growth. Unfavorable economic developments, such as those that occurred during the COVID-19 pandemic, could adversely affect our earnings if our policyholders need less insurance coverage, cancel existing insurance policies, modify coverage, or choose not to renew with us. An economic downturn also could lead to increased credit and premium receivable risk, failure of reinsurance counterparties and other financial institutions, limitations on our ability to issue new debt, reduced liquidity, and declines in our investments' fair value and financial strength ratings. These potential events and other economic factors could adversely and materially affect our business, results of operations, financial condition, and growth. During 2020, 29% of DPW in our Standard Commercial Lines business was based on payroll/sales of our underlying policyholders. An economic downturn in which our policyholders experience declines in revenue or employee count could adversely affect our audit and endorsement premium in our Standard Commercial Lines. 27 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 AM Best, would affect our ability to write new or renewal business. Most policyholders are required by various third-party agreements to use a carrier with a specified minimum AM Best or S&P rating. Downgrades in our credit ratings also could make it more expensive for us to access capital markets. We cannot predict the possible rating actions NRSROs might take that could adversely affect our 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 downward pressure on gross margins, introduction of new products and services, evolving industry standards, continual improvement in product pricing based on performance characteristics, rapid competitor adoption of technological advancements, and consumer and business price sensitivity. Our ability to compete successfully depends heavily on our ability to ensure timely and consistent introduction of innovative new products and services 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 owned by or operated cooperatively for insureds and, unlike us, do not have shareholders who evaluate return on equity performance. Consequently, some competitors may be able to price their products more competitively. The Internet has emerged as a significant competitive marketplace for existing and new competitors. Established insurance competitors, such as The Progressive Corporation, are beginning to explore broader digital offerings on the Internet, while new competitors, such as Lemonade, Root, Metromile, and Next, continue to emerge. Because the Internet makes it easier and less expensive to bundle products and services, it also is possible that companies conducting business on the Internet, in the future, could enter the insurance business or form strategic alliances with insurers. Changes in competitors and competition, particularly on the Internet, could cause changes in the supply or demand for insurance and adversely affect our business. The increasing importance of the Internet, technology, and digital strategy in our industry also highlights our need to attract and retain employees in difficult-to-fill data science, advanced analytics, and IT roles – and the potential negative impact if we fail in so doing. We have less loss experience data than our larger competitors. Insurers rely on access to reliable data about their policyholders 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. Because we use and rely on the aggregated industry loss data assembled by rating bureaus under the anti-trust exemptions of the McCarran-Ferguson Act, we likely would be at a competitive disadvantage to larger insurers if Congress repealed the McCarran-Ferguson Act. We expect the use of data science and analytics to continue to increase and become more complex and accurate, particularly with larger sets of relevant data. Some larger competitors have significantly more data about the performance of their underwritten risks. In comparison, we may not have sufficient volumes of loss experience data to analyze and project our future costs as accurately or granularly. To supplement our data, we use industry loss experience from ISO, AAIS, NCCI, and other publicly available sources. While relevant, industry data may not correlate specifically to the performance of risks we have underwritten and may not be as predictive as data on a larger book of our own business. We are subject to various modeling risks that could have a material adverse impact on our business results. We rely on complex financial and other statistical models, developed internally and by third parties, that predict (i) underwriting results on individual risks and our overall portfolio, (ii) claims fraud and other claims impacts, such as escalation, (iii) impacts from catastrophes, (iv) enterprise risk management capital scenarios, and (v) investment portfolio changes. We rely on these financial and other statistical models to analyze historical loss costs and pricing, trends in claims severity and frequency, the occurrence of catastrophe losses, determining reinsurance attachment and exhaustion points, investment performance, portfolio risk, and our economic capital position. Flaws in these financial and other statistical models, or in the embedded assumptions, could lead to increased losses. We believe that statistical models are extremely valuable in monitoring and controlling risk, but they are not a substitute for senior management's experience or judgment. 28 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, including changes in U.S. Presidential administration, sovereign risk, interest rate fluctuations, or other factors. Our investment portfolio's value 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. Consequently, 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 have a material adverse impact on our financial condition and operating results. Significant future declines in investment value also could require further losses recorded on securities we intend to sell and credit losses. 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 may be eliminated by the end of 2021. As of December 31, 2020, approximately 13% of our fixed income securities portfolio was comprised of floating rate securities tied to the U.S. dollar-denominated London Interbank Offered Rate ("LIBOR"), expected to be eliminated by the end of 2021. The global banking industry has used LIBOR as a primary metric to calculate interest rates for numerous types of debt obligations, including personal and commercial loans, interest rate swaps, and other derivative products. In anticipation of LIBOR's elimination, the U.S. Federal Reserve established the Alternative Reference Rates Committee ("ARRC") to select a replacement index for U.S. Dollar LIBOR. The ARRC, comprised of a broad group of private-market participants, including banks, asset managers, insurers, and industry regulators, identified the Secured Overnight Financing Rate ("SOFR") as the recommended benchmark rate to replace LIBOR. SOFR is based on overnight repurchase agreement transactions backed by Treasury securities. The ARRC announced a paced transition plan for this new rate, including specific steps and timelines designed to encourage the adoption of SOFR. We continue to monitor the potential impact, if any, the elimination of LIBOR and the transition to SOFR will have on our floating rate investments' performance. 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. 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, so their valuation 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 produce additional variability in our net investment income. The determination of the amount of credit losses taken on our investments is highly subjective and could materially impact our results of operations or our financial position. The determination of the amount of credit losses taken on our investments is based on our periodic evaluation and assessment of our investments and known and inherent risks associated with the various asset classes. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates its evaluations regularly and reflects changes in credit losses at the time of evaluation. There can be no assurance that management has accurately assessed the level of credit losses taken as reflected in our Financial Statements. For further information about our evaluation and considerations for determining whether a security has a credit loss, please refer to “Critical Accounting Policies and Estimates” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” of this Form 10-K. 29 Risks Related to Evolving Laws, Regulation, and Public Policy Debates We are subject to complex and changing laws, regulations, and public policy debates that expose us to regulatory scrutiny, potential liabilities, increased costs, reputational harm, and other adverse effects on our business. Our operations are subject to complex and changing state and federal laws, regulations, and public policy debates on subjects, including, without limitation, the following: Pricing and underwriting practices; • Claims practices; • Loss and loss adjustment expense reserves; • Exiting geographic markets and/or canceling or non-renewing policies; • Environmental, social, and governance ("ESG") issues, including ESG investment mandates; • Assessments for guaranty funds and second-injury funds, and other mandatory assigned risks and reinsurance; • • The types, quality, and concentration of investments we make; • Minimum capital requirements for the Insurance Subsidiaries; Dividends from our Insurance Subsidiaries to the Parent; • Privacy and data security; • Tax; • Antitrust; • Consumer protection; • Advertising; • Sales; • Billing and e-commerce; • Intellectual property ownership and infringement; • Digital platforms; • Internet, telecommunications, and mobile communications; • • Media and digital content; • • • • Workplace environmental, health, and safety issues. Availability of third-party software applications and services; Labor and employment; Anti-money laundering; and We continue to monitor and engage in industry and public policy discussions about related legislative and regulatory changes. 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 enacted a law directly regulating insurance, particularly insurer solvency oversight, and state regulators remained responsible for rate approval, we could be subject to a conflicting and inconsistent regulatory framework that could impact our profitability and capital adequacy. While we underwrite risks only in the U.S., international regulatory developments, particularly in the European Union (“EU”) related to global capital standards, may influence U.S. regulators as they develop or revise domestic regulatory standards. The International Association of Insurance Supervisors proposed Basic Capital Standards for Global Systemically Important Insurers and a uniform capital framework for internationally active insurers in 2014. Two years later, the EU enacted Solvency II, which established new insurer capital adequacy and risk management requirements intended to reduce the possibility of consumer loss or market disruption by European insurers. Despite these international regulatory changes and continued public policy discussion, RBC remains the NAIC capital adequacy standard. The FIO, in coordination with the Federal Reserve, state regulators, and other regulatory bodies, has been exploring group capital standards. In the fourth quarter of 2020, the NAIC's Group Capital Calculation Working Group adopted the basic structure of its new Group Capital Calculation, along with the model law changes necessary to incorporate it as a requirement for U.S. insurance groups in state law. We have implemented policies and procedures designed to ensure compliance with applicable laws and regulations. However, we can provide no assurance that our employees, contractors, or independent distribution partners will not violate such laws and regulations 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 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. 30 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 Federal Trade Commission policies. Several states, like New York, Nevada, and California, have passed laws in this area, and other jurisdictions are considering imposing additional restrictions or creating new rights concerning PII. These laws continue to develop and 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. In the same year that it adopted Solvency II, the EU adopted the General Data Protection Regulation ("GDPR"). Effective since 2018 after a two-year implementation period, GDPR regulates data protection and privacy in the EU and transfers of personal data outside the EU. GDPR’s main tenet is to give individuals primary control over their personal data. While GDPR has no direct impact on U.S. companies like us without an EU presence, it and any future EU data privacy actions may influence U.S. regulators over time. We make statements about our use and disclosure of PII through our privacy policy, information provided on our website, and other public statements. If we fail to comply with these public statements or federal, state, and international privacy-related and data protection laws and regulations, we could be subject to litigation or governmental actions. Such proceedings could impact our reputation and result in penalties, including ongoing audit requirements and significant legal liability. We are engaged in ordinary routine legal proceedings incidental to our insurance operations that, because litigation outcomes are inherently unpredictable, could impact our reputation and/or have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods. We are engaged in ordinary routine legal proceedings incidental to our insurance operations that include: • • • • • Defense of or indemnity for third-party suits brought against our insureds; Defense of actions brought against us by our insureds who disagree with our coverage decisions, some of which allege bad faith claims handling and seek extra-contractual damages, punitive damages, or other penalties; Actions we file, primarily for declaratory judgment, seeking confirmation that we have made appropriate coverage decisions under our insurance contracts; Actions brought against us or competitors alleging improper business practices and sometimes seeking class status. Such actions historically have included issues and allegations, without limitation, related to (i) unfairly discriminatory underwriting practices, including the impact of credit score usage, (ii) managed care practices, such as provider reimbursement, and (iii) automobile claims practices; and Actions we file against third parties and other insurers for subrogation and recovery of other amounts we paid on behalf of our insureds. From time-to-time, legal proceedings in which we are involved may receive media attention based on their perceived newsworthiness and/or relationship to a variety of broad economic, political, social, and legal developments or trends. Such media stories could negatively impact our reputation. We expect that any potential ultimate liability for ordinary routine legal proceedings incidental to our insurance business will not be material to our consolidated financial condition after considering estimated loss provisions. Litigation outcomes, however, are inherently unpredictable even with meritorious defenses. The time a case is in litigation also is unpredictable, as state court dockets are increasingly overcrowded. Generally, the longer a case is in litigation the more expensive it can become. Because the amounts sought in certain of these actions are large or indeterminate, any adverse outcomes could have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods. 31 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 our Insurance Subsidiaries' ability 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 preferred stock and common stock, or repay our indebtedness. In 2021, the Insurance Subsidiaries can provide the Parent with $241 million in ordinary annual dividends under applicable state regulation. Still, their ability to pay dividends or make loans or advances is subject to their domiciliary state insurance regulator's approval or review. For additional details regarding dividend restrictions, see Note 22. “Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds” in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. The Parent’s ability to pay dividends to its common stockholders is also impacted by covenants in its credit agreement (the “Line of Credit”) among the Parent, the lenders named therein (the “Lenders”), and the Bank of Montreal, Chicago Branch, as Administrative Agent, that obligate it to, among other things, maintain a minimum consolidated net worth and a maximum ratio of debt to capitalization. Under the terms of our Preferred Stock, the Parent's ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, shares of its common stock or any shares of the Parent that rank junior to, or on parity with, the Preferred Stock will be subject to certain restrictions if the Parent does not declare and pay (or set aside) dividends on the Preferred Stock for the last preceding dividend period. For additional details about the Line of Credit’s financial covenants, see Note 11. “Indebtedness” in Item 8. "Financial Statements and Supplementary Data" of this Form 10-K. For additional details about conditions related to our Preferred Stock, see Note 17. "Preferred Stock" in Item 8. "Financial Statements and Supplementary Data" of this Form 10-K. Because we are a New Jersey corporation and an insurance holding company, 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: (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 deprive our common shareholders of an opportunity to receive a premium over the prevailing market price in the event of a hostile takeover and may adversely affect the value of our common stock. Because we own insurance subsidiaries, any party seeking to acquire 10% or more of our common stock must seek prior approval from the subsidiaries' domiciliary insurance regulators and file extensive information about their business operations and finances. Risks Related to Our General Operations We, our distribution partners, and our vendors are subject to attempted cyber-attacks, other cybersecurity risks, and system availability risk. Our business heavily relies on IT and application systems that may be accessed from, or are connected to, the Internet. Consequently, a malicious cyber-attack could affect us. Our systems also contain proprietary and confidential information, including PII, about our operations, employees, agents, and customers and their employees and 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, damage our reputation and result in monetary damages that are difficult to quantify, and have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. 32 We have implemented systems and processes, through encryption and authentication technologies, intended to mitigate or secure our IT 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, result in monetary damages that are difficult to quantify, and 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, which provides coverage up to $30 million above a $1 million deductible. Such coverage may be insufficient to indemnify all losses or types of claims that may arise. In addition to cyber-attack risk, we face system availability risk. Our business relies heavily on various IT and application systems that may be impacted by an unplanned loss of availability unrelated to malicious cyber-attacks. A failure in one or more systems, including those at facilities where we or our vendors operate systems, may interrupt our ability to operate and negatively impact our results of operations. 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 policyholders. 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 and mitigate our operational leverage risk with several 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. 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 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. Our facilities provide adequate space for our present needs and, if additional space is needed, should 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 21. "Litigation" included in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. As of December 31, 2020, 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.” 33 (b) Holders We had 3,051 common stockholders of record as of February 4, 2021, according to the records maintained by our transfer agent. (c) Dividends Dividends on shares of our common stock are declared and paid at the discretion of the Board of Directors (the "Board") based on our results of operations, financial condition, capital requirements, contractual restrictions, and other relevant factors. We currently expect to continue to pay quarterly cash dividends on shares of our common stock in the future. On October 28, 2020, the Board approved a 9% increase in our common stock dividend to $0.25 per share. In addition, on January 28, 2021, the Board declared a $0.25 per share quarterly cash dividend on common stock that is payable March 1, 2021, to stockholders of record as of February 12, 2021. (d) Securities Authorized for Issuance under Equity Compensation Plans The following table provides information about our common stock authorized for issuance under equity compensation plans as of December 31, 2020: (a) (b) (c) Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))1 Plan Category Equity compensation plans approved by security holders 1Includes 257,088 shares available for issuance under our Employee Stock Purchase Plan (2009); 1,659,233 shares available for issuance under the Stock Purchase Plan for Independent Insurance Agencies; and 2,959,819 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. — $ 4,876,140 — (e) Performance Graph The following chart, produced by Research Data Group, Inc., depicts our performance for the period beginning December 31, 2015, and ending December 31, 2020, as measured by total stockholder return on our common stock compared with the total return of the NASDAQ Composite Index and a select group of peer companies comprised of NASDAQ-listed companies in SIC Code 6330-6339, Fire, Marine, and Casualty Insurance. This performance graph is not incorporated into any other filing we have made with the U.S. Securities and Exchange Commission ("SEC") and will not be incorporated into any future filing we may make with the SEC unless we so specifically 34 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 2020: Period October 1 – 31, 2020 November 1 – 30, 2020 December 1 – 31, 2020 Total Number of Shares Purchased1 Average Price Paid Per Share — $ — 215 — — 66.98 Total Number of Shares Purchased as Part of Publicly Announced Programs2 Approximate Dollar Value of Shares that May Yet Be Purchased Under the Announced Programs2 — — — — — — Total 1We purchased these shares from employees to satisfy tax withholding obligations associated with the vesting of their restricted stock units. 2On December 2, 2020, we announced that our Board authorized a $100 million share repurchase program, which has no set expiration or termination date. Our repurchase program does not obligate us to acquire any particular amount of our common stock, and the repurchase program may be suspended or discontinued at any time at our discretion. The timing and amount of any share repurchases under the authorization will be determined by management at its discretion and based on market conditions and other considerations. 66.98 215 — $ $100 million 35 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) Net premiums written Net premiums earned Net investment income earned Net realized and unrealized investment (losses) gains2 Total revenues Catastrophe losses Underwriting income Net income available to common stockholders Comprehensive income Total assets Long-term debt Stockholders’ equity 2020 $ 2,773,092 2,681,814 227,107 (4,217) 2,922,274 215,378 136,349 246,355 384,791 9,687,913 550,743 2,738,889 Statutory premiums to surplus ratio Combined ratio Impact of catastrophe losses on combined ratio 1.30 x 94.9 % 8.0 pts Invested assets per dollar of common stockholders' equity $ 2.96 Yield on investments, after tax Debt to capitalization ratio Return on average common equity 2.6 % 16.7 10.4 2019 2,679,424 2,597,171 222,543 14,422 2018 2,514,286 2,436,229 195,336 (54,923) 2017 2,370,641 2,291,027 161,882 6,359 2016 2,237,288 2,149,572 130,754 (4,937) 2,846,491 2,586,080 2,469,984 2,284,270 81,001 163,993 271,623 431,329 88,023 121,173 178,939 105,832 8,797,150 7,952,729 550,597 439,540 2,194,936 1,791,802 1.39 93.7 3.1 3.05 2.9 20.1 13.6 1.42 95.0 3.6 3.33 2.8 19.7 10.2 67,299 154,336 168,826 204,946 7,686,431 439,116 1,712,957 1.42 93.3 2.9 3.32 2.1 20.4 10.4 59,735 151,933 158,495 151,970 7,355,848 438,667 1,531,370 1.41 92.9 2.8 3.50 1.9 22.3 10.8 Non-GAAP operating income3 Non-GAAP operating income per common share (diluted)3 Non-GAAP operating return on average common equity3 Per common share data: Net income available to common stockholders: Basic Diluted Dividends paid per common share $ 249,686 264,418 218,567 184,898 161,704 4.15 10.5 % $ $ 4.12 4.09 0.94 4.40 13.3 4.57 4.53 0.83 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 Book value per common share 42.38 36.91 30.40 29.28 26.42 Price range of common stock: High Low Close Number of weighted average common shares: Basic Diluted 70.89 37.05 66.98 59,862 60,293 81.35 58.06 65.19 67.17 53.55 60.94 62.40 38.50 58.70 44.00 29.27 43.05 59,421 60,004 58,950 59,713 58,458 59,357 57,889 58,747 1Refer to the Glossary of Terms attached to this Form 10-K as Exhibit 99.1 for definitions of terms used in these financial highlights. 2Beginning in 2018, changes in unrealized gains and losses on our equity portfolio are recognized in income through "Net realized and unrealized investment (losses) gains" on our Consolidated Statements of Income. 3Non-GAAP measure. Refer to the "Financial Highlights of Results Years Ended December 31, 2020, 2019, and 2018" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K for the definition. 36 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” defined in the Private Securities Litigation Reform Act of 1995 (“PSLRA”). The PSLRA provides a safe harbor under the Securities Act of 1933, as amended, and the Exchange Act for forward-looking statements. These statements relate to our intentions, beliefs, projections, estimations or forecasts of future events or future financial performance and involve known and unknown risks, uncertainties and other factors that may cause us or the industry’s actual results, levels of activity, or performance to be materially different from those expressed or implied by the forward-looking statements. In some cases, you may identify forward-looking statements by use of 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 what federal securities laws may require, to publicly update or revise any forward-looking statements, regardless of new information, future events, or other unknowns. Factors that could cause our actual results to differ materially from those projected, forecasted, or estimated in our forward- looking statements are discussed in further detail in Item 1A. “Risk Factors.” of this Form 10-K. These risk factors may not be exhaustive. We operate in a constantly changing business environment, 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 any new factor or combination of factors may cause actual results to differ materially from any forward-looking statements. Given these risks, uncertainties, and assumptions, the forward-looking events we discuss in this report might not occur. Introduction We classify our business into four reportable segments: • • • • Standard Commercial Lines; Standard Personal Lines; E&S Lines; and Investments. For more details about these segments, refer to Note 1. "Organization" and Note 12. "Segment Information" in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. We write our Standard Commercial and Standard Personal Lines products and services through nine of our insurance subsidiaries, some of which participate in the federal government's National Flood Insurance Program's ("NFIP") Write Your Own Program ("WYO"). We write our E&S products through another subsidiary, Mesa Underwriters Specialty Insurance Company, which provides us with a nationally-authorized non-admitted platform for customers who generally cannot obtain coverage in the standard marketplace. Collectively, we refer to our ten insurance subsidiaries as the "Insurance Subsidiaries". The following is Management's Discussion and Analysis ("MD&A") of the consolidated results of operations and financial condition, as well as known trends and uncertainties, that may have a material impact in future periods. The MD&A discusses and analyzes our results in 2020 compared to 2019. Investors should read the MD&A in conjunction with Item 8. "Financial Statements." of this Form 10-K. For discussion and analysis of our 2019 results compared to 2018, refer to Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations." of our Annual Report on Form 10- K for the fiscal year ended December 31, 2019. In the MD&A, we will discuss and analyze the following: • • • • • • • Critical Accounting Policies and Estimates; Financial Highlights of Results for Years Ended December 31, 2020, 2019, and 2018; Results of Operations and Related Information by Segment; Federal Income Taxes; Financial Condition, Liquidity, and Capital Resources; Off-Balance Sheet Arrangements; and Contractual Obligations, Contingent Liabilities, and Commitments. Critical Accounting Policies and Estimates We have identified the policies and estimates critical to our business operations and the understanding of our results of operations. In preparing our consolidated financial statements ("Financial Statements"), we are required to make estimates and 37 assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our Financial Statements, and the reported amounts of revenue and expenses during the reporting period. We offer no assurances that actual results will be the same as those estimates, and it is possible they will differ materially. The policies and estimates we consider most critical to the preparation of the Financial Statements involved (i) reserves for loss and loss expense, (ii) investment valuations and the allowance for credit losses on available-for-sale ("AFS") fixed income securities, (iii) reinsurance, (iv) allowance for credit losses on premiums receivable, and (v) accrual for auditable premium. Reserves for Loss and Loss Expense Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the claim to us, and the final settlement of the claim. To recognize liabilities for unpaid loss and loss expense, insurers establish reserves as balance sheet liabilities representing an estimate of amounts needed to pay reported and unreported net loss and loss expense. At December 31, 2020, we had recorded $4.3 billion of gross loss and loss expense reserves and $3.7 billion of net loss and loss expense reserves. At December 31, 2019, these gross and net reserves were $4.1 billion and $3.5 billion, respectively. The Insurance Subsidiaries' liability duration was approximately 3.7 years at December 31, 2020, up slightly from 3.6 years at December 31, 2019. The following tables provide case and incurred but not reported (“IBNR”) reserves for loss and loss expenses, and reinsurance recoverable on unpaid loss and loss expense as of December 31, 2020 and 2019: $ As of December 31, 2020 ($ 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 Loss and Loss Expense Reserves Case Reserves IBNR Reserves Total Reinsurance Recoverable on Unpaid Loss and Loss Expense Net Reserves 275,133 359,344 246,428 39,047 60,254 5,247 985,453 60,860 15,456 10,498 86,814 80,506 9,401 89,907 1,363,508 721,437 410,123 62,517 38,228 15,073 1,638,641 1,080,781 656,551 101,564 98,482 20,320 2,610,886 3,596,339 79,596 31,926 30,013 141,535 336,596 9,164 345,760 140,456 47,382 40,511 228,349 417,102 18,565 435,667 215,136 210,450 11,611 6,849 21,760 2,853 468,659 42,403 847 29,589 72,839 12,195 576 12,771 1,423,505 870,331 644,940 94,715 76,722 17,467 3,127,680 98,053 46,535 10,922 155,510 404,907 17,989 422,896 554,269 3,706,086 Total 4,260,355 1Includes general liability (95% of net reserves) and commercial auto liability coverages (5% of net reserves). 2Includes commercial property (92% of net reserves) and commercial auto property coverages (8% of net reserves). 3,098,181 1,162,174 $ 38 $ December 31, 2019 ($ 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 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 10,257 406,600 195,830 206,414 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 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). 2,953,472 1,113,691 $ How reserves are established Reserves for loss and loss expense includes case reserves on reported claims and reserves known as incurred but not reported ("IBNR") reserves. Case reserves are estimated on each individual claim, and based on claim-specific facts and circumstances known at the time. The case reserves may be adjusted upward or downward as the specific facts and circumstances change. IBNR reserves are established at more aggregated levels and include provisions for (i) claims not yet reported, (ii) future development on reported claims, (iii) previously closed claims that will be reopened in the future, and (iv) anticipated salvage and subrogation recoveries. For additional information on our accounting policy for reserves for loss and loss expense, refer to Note. 2. “Summary of Significant Accounting Policies” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. Our robust reserve process relies upon internal reserve reviews performed quarterly, based upon our own loss experience, with consideration given to various internal and external factors. In addition to our internal reserve reviews, we have an external consulting actuary perform an independent review of our reserves semi-annually. We do not rely on the external consulting actuary's report for recording our reserves; however, we do review and discuss our respective observations regarding trends, key assumptions and actuarial methodologies. While not required to be performed by an independent external actuary, our independent external actuary issues the annual statutory Statements 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 of $3,250 million to $3,893 million at December 31, 2020. 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, and certain other continuous exposure claims, which by their nature are more variable and, therefore, traditional actuarial techniques cannot be effectively applied. The range of reasonable reserve estimates as of December 31, 2020 has expanded relative to December 31, 2019. This is partially due to the growth in reserves commensurate with our growth in net premiums earned ("NPE"), but also recognizes the additional risks in the reserve portfolio presented by the unique legislative, judicial, economic and social environment resulting from COVID-19. Some of these uncertainties may not be resolved for an extended period of time. 39 Changes in Reserve Estimates (Loss Development) Our quarterly reserve process may lead to changes in the recorded reserves for prior accident years, which is referred to as favorable or unfavorable prior year loss and loss expense development. In 2020, we experienced net favorable prior year loss development of $72.9 million, compared to $50.3 million in 2019 and $29.9 million in 2018. The following table summarizes prior year development by line of business: (Favorable)/Unfavorable Prior Year Loss and Loss Expense Development ($ 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 2020 2019 2018 $ (35.0) 7.1 (60.0) 3.9 9.2 7.7 (1.8) — (4.0) — (5.0) 0.7 (68.0) 1.9 5.1 7.5 4.4 2.0 1.0 0.1 $ (72.9) (50.3) (9.5) 36.7 (83.0) (1.5) 7.5 9.8 3.0 12.0 (4.8) (0.1) (29.9) A detailed discussion of recent reserve development by line of business follows. Standard Market General Liability Line of Business At December 31, 2020, our general liability line of business had recorded reserves, net of reinsurance, of $1.4 billion, which represented 38% of our total net reserves. In 2020, this line experienced favorable development of $35.0 million, attributable to lower loss severities in accident years 2017 and prior. During 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 year. By its nature, this line presents a diverse set of exposures. General liability losses and loss trends are influenced by a variety of factors, including legislative enactments, judicial decisions, and economic and social inflation. Economic inflation directly impacts our claims severities, such as increasing costs of raw materials, medical procedures and labor costs. Social inflation may impact both the frequency and severity of claims by impacting (i) the propensity for a claimant to file a claim, (ii) the percentage of claimants who engage lawyers, and (iii) the nature of judicial verdicts and amount of the associated awards. We have exposure to abuse or molestation claims through insurance policies that we (i) principally underwrite through our Community and Public Services ("CAPS") strategic business unit and (ii) issue to schools, religious institutions, day-care facilities, and other social services. Through 2017, our exposure to abuse or molestation risk had been increasing, reflective of the growth in our CAPS book. In 2018, we introduced more stringent underwriting eligibility guidelines and partnered with a third party to better assess exposure and introduce greater loss control measures. In 2019, we filed and approved significant rate increases for this exposure. These actions have limited our growth in this strategic business unit. We also have exposure to abuse or molestation claims from recently enacted state laws that extend the statute of limitations or permit windows for abuse or molestation claims and lawsuits to be filed that statutes of limitations previously barred. Consequently, we may receive claims decades after the alleged acts occurred for policies issued by predecessor companies that will involve complex claims coverage determinations, potential litigation, and the need to collect from reinsurers under older reinsurance agreements. To better understand our exposure to abuse or molestation, we have instituted enhanced claims coding to identify and classify abuse or molestation claims. Our claims and actuarial departments actively monitor these 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. The COVID-19 pandemic presents additional risk to this line in several forms. First, as businesses reopen, they may be susceptible to claims alleging customers contracting COVID-19 due to unsafe business practices. Hiring practices may also be called into question as businesses re-staff. In addition to COVID-19-specific claims, changes in claims reporting or settlement 40 practices may have been, and may continue to be, affected by several factors, including individual's propensity to bring a claim during the shut-down, court closures, and other behavioral and procedural changes. Standard Market Workers Compensation Line of Business At December 31, 2020, our workers compensation line of business recorded reserves, net of reinsurance, of $870 million, which represented 23% of our total net reserves. During 2020, this line experienced favorable development of $60.0 million, driven by accident years 2018 and prior. During 2019, this line experienced favorable development of $68.0 million, driven by accident years 2017 and prior. During both 2020 and 2019, this line experienced 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 also risk associated with change. Most notably, changes in operations may inherently change paid and reported development patterns. While our reserve analyses incorporate methods that adjust for these changes, 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 other issues, such as the following: Unexpected changes in medical cost inflation - The industry is currently experiencing a period of lower claim cost inflation. Changes in our historical workers compensation medical costs, along with uncertainty regarding future medical inflation, creates the potential for additional variability in our reserves; Changes in statutory workers compensation benefits - Benefit changes may be enacted that affect all outstanding claims, 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. COVID-19-related impacts - While we are not a major insurer of front-line workers (e.g. medical, hospital, etc.), we do have potential exposure to employees contracting COVID-19 in the course of their employment. These claims may be asserted under "presumption statutes" implemented by certain states, shifting the burden of proof from the claimant to the insurer. Furthermore, the significant impact to unemployment, coupled with injured workers delaying non- essential procedures, may extend the duration of non-COVID-19 claims. Standard Market Commercial Automobile Line of Business At December 31, 2020, our commercial automobile line of business had recorded reserves, net of reinsurance, of $645 million, which represented 17% of our total net reserves. In 2020, this line experienced unfavorable prior year development of $7.1 million, driven by higher loss severities in accident years 2016 through 2019 and higher than expected frequencies in accident year 2019. In 2019, this line experienced no material prior year reserve development. For both us and the industry, the commercial automobile line had experienced unfavorable trends in recent years. Increased frequencies were 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. The onset of the COVID-19 pandemic in early 2020, along with governmental "stay-at-home" orders, dramatically reduced miles driven and road traffic, significantly reducing claims frequency. While miles driven has increased, activity remains modestly below expected levels. Conversely, both entering the pandemic and post-pandemic, we have seen rising severities on both bodily injury and property damage claims. The average value of our bodily injury paid loss settlements has increased, which may relate to a trend we have seen of more claimants using attorneys in the claims process. Increasing property damage severities may be tied to the increased repair costs for increasingly complex vehicles that incorporate more technology. These trends may be further exacerbated during the economic slow-down, where less vehicles were on the road, but driving at higher speeds. 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 about where we should focus our actions. Aggressively managing new business pricing and hazard mix, co-underwriting selected higher hazard classes by the field and home office, providing better recognition of risk drivers, and improved pricing. 41 • • 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. Standard Market Personal Automobile Line of Business At December 31, 2020, our personal automobile line of business had recorded reserves, net of reinsurance, of $98 million, which represented 3% of our total net reserves. In 2020, this line experienced favorable prior year reserve development of $1.8 million, mainly attributable to lower loss severities in accident year 2019. In 2019, this line experienced unfavorable prior year reserve development of $4.4 million, mainly attributable to higher loss severities in accident year 2018. Some of the same issues affecting the commercial automobile line are also affecting this line. Furthermore, the COVID-19- related impact of reduced frequency was more pronounced in this line, with similar potential for higher average severities. Aside from the COVID-19-related temporary impacts, the underlying trends of increased miles driven and vehicle repair costs, poor road quality, and 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, the resulting changes to our exposure profile may impact paid and reported development patterns, thereby increasing the uncertainty in the reserves in the near-term. E&S Casualty Lines of Business At December 31, 2020, our E&S casualty lines of business had recorded reserves, net of reinsurance, of $405 million, which represented 11% of our total net reserves. Our E&S casualty lines results have improved over recent years. Our E&S casualty lines underwriting operations have exited several targeted classes of business that historically have produced volatile results, including commercial auto liability, liquor liability, and snow removal. While we continue to build historical loss experience in this segment, its history remains more limited than for our Standard Commercial Lines segment. Furthermore, the composition of the E&S book has changed over time, which may impact loss and loss expense development patterns. These factors increase the uncertainty in the reserve estimates for this line. Recent E&S casualty claims actions have created further casualty improvements: • • In 2020, we created a dedicated E&S claims team within our corporate claims function to bring greater expertise and consistency to E&S claims handling. Claims have been segregated into “litigated” and “non-litigated” categories, separate teams with specialized skill sets handling each category. • We implemented the following operational and expense improvement initiatives for outside adjusters and legal counsel: ◦ Maximized use of staff counsel, increasing staff where necessary to support claims volume; ◦ ◦ Heightened focus on legal budgeting and expense management; and Implemented a panel counsel review process. We believe that these actions identify severe claims earlier, create earlier claims resolutions, and improve outcomes. However, claims operation changes can impact claims reserving and settlement patterns. Reserve estimate uncertainty increases after claims operational changes because it takes time for the patterns to stabilize. Other impacts creating additional loss and loss expense reserve uncertainty Claims Initiative Impacts Consistent with our strategic imperative to optimize operational efficiency, our Claims Department is continually identifying areas for improvement and efficiency to increase our value proposition to policyholders. 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 may increase uncertainty in our estimates in the short term, we expect refined management of the claims process to be the longer-term benefit. COVID-19 presented some unique dynamics within our Claims department. Particularly during the early part of the pandemic, with less new claims being reported, the claims department placed greater focus on the existing claims inventory, leading to a speed-up of claim closures. This speed-up stabilized over the course of the year, with closure rates returning closer to pre- pandemic levels. 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 42 or settlement rate, which provides a more consistent basis for projecting future development patterns. These methods have their own associated assumptions and judgments and, like any projection method, are not definitive in and of themselves. Economic Inflationary Impacts United States ("U.S.") monetary policy and global economic conditions may bring additional uncertainty related to inflationary trend. Changes in inflation affect the ultimate settlement costs for many of our lines of business, with the greatest impact in the longer-tailed lines such as general liability and workers compensation. Therefore, uncertainty about future inflation or deflation creates the potential for additional reserve variability in 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 without limitation: • • • • The selection of loss and loss expense development factors; The weight to be applied to each individual actuarial projection method; Projected future loss trends; and Expected claim frequencies, severities, and ultimate loss and loss expense ratios for the current accident year. The importance of any single assumption depends on several considerations, such as the line of business and the accident year. If the actual experience emerges differently than the assumptions used in the process to establish reserves, changes in our reserve estimate are possible that may be material to the results of operations in future periods. Below are sensitivity tests that highlight potential impacts to loss and loss expense reserves for the major casualty lines of business under different scenarios. These tests consider each assumption and line of business individually, without any consideration of correlation between lines of business and accident years. Therefore, the results do not constitute an actuarial range. While the figures represent possible impacts from variations in certain key assumptions, there is no assurance that future loss and loss expense emergence will be consistent with either our current or alternative sets of assumptions. While the sources of reserve variability 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, the current accident year expected loss and loss expense ratios are also a key assumption. These ratios are developed through a rigorous process of projecting recent accident years' experience to an ultimate settlement basis, and then adjusting them 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 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 displays estimated impacts from changes in expected reported loss and loss expense development patterns for our major casualty lines of business. It shows reserve impacts by line of business if the actual calendar year incurred amounts are greater or less than current expectations by the selected percentages. While the selected percentages by line are judgmental, they are based on the reserve range analysis and the actual historical reserve development for the line of business. The second table displays 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 % $ (140) $ 18 15 15 10 (105) (80) (10) (40) 140 105 80 10 40 43 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 (Decrease) to Current Accident Year Expected Loss and Loss Expense Ratio Increase to Current Accident Year Expected Loss and Loss Expense Ratio $ 10 pts 10 10 10 10 $ (70) (30) (45) (10) (20) 70 30 45 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 on the sensitivity of each key assumption. While the changes represent outcomes based on reasonably likely changes to our underlying reserving assumptions, they do not represent a full range of possible outcomes. Our reserves could increase or decrease significantly more or significantly less than what the tables above reflect. Asbestos and Environmental Reserves Our general liability, excess liability, and homeowners reserves include exposure to asbestos and environmental claims. The emergence of these claims occurs over an extended period and is highly unpredictable. The total recorded net loss and loss expense reserves for these claims were $21.4 million as of December 31, 2020 and $21.6 million as of December 31, 2019. “Environmental claims” are claims alleging bodily injury or property damage from pollution or other environmental contaminants other than asbestos. 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) residential underground storage tank leaks, mainly in New Jersey. The landfill claims stem primarily from insured exposures in municipal government, and small non-manufacturing commercial risks. Some of these claims relate to specific landfill sites on the National Priorities List (“NPL”) by the United States Environmental Protection Agency (“USEPA”). We currently have reserves for six policyholders related to three NPL sites. The underground storage tank claims relate largely to our homeowners policies. In 2007, we introduced a fuel oil system exclusion on our New Jersey homeowners policies that greatly limited this exposure from that point forward. “Asbestos claims” are claims for bodily injury alleged to have occurred from exposure to products containing asbestos. Our primary exposure arises from policies issued to various distributors of asbestos-containing products, such as electrical and plumbing materials. At December 31, 2020, asbestos claims constituted 23% of our $21.4 million net asbestos and environmental reserves, compared to 23% of our $21.6 million net asbestos and environmental reserves at December 31, 2019. Our asbestos and environmental claims are handled in our centralized and specialized asbestos and environmental claim unit. That unit establishes case reserves on individual claims based upon the facts and circumstances known at a given point in time, which are supplemented by bulk IBNR reserves. Estimating IBNR reserves for asbestos and environmental claims is difficult because these claims have delayed and inconsistent reporting patterns. In addition, there are significant uncertainties associated with estimating critical reserve assumptions, such as average clean-up costs, third-party costs, potentially responsible party shares, allocation of damages, litigation and coverage costs, and potential state and federal legislative changes. Prior to the introduction of the absolute pollution exclusion endorsement in the mid-1980's, we primarily wrote Standard Personal Lines, which has limited our exposure to asbestos and environmental claims. Other Latent Exposures We also have other latent and continuous trigger exposures in our ongoing portfolio. Examples include claims for construction defect and abuse or molestation, for which states have increased and expanded the statute of limitations. We manage our exposure to these liabilities through our underwriting and claims practices and, like asbestos and environmental claims, a dedicated claims unit handles these claims. The impact of social, political, and legal trends on these claims remains highly uncertain, so our loss and loss expense reserves on these claims remain highly uncertain. These exposures remain in our ongoing portfolio, and as such, are reserved in aggregate, with other exposures within the line of business reserves. 44 Investment Valuation and the Allowance for Credit Losses on AFS Fixed Income Securities Investment Valuation The fair value of our investment portfolio is defined under accounting guidance as the exit price or the amount that would be (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 are recorded at fair value with changes in unrealized gains or losses recognized through income. Our available-for-sale ("AFS") fixed income securities portfolio is recorded at fair value, and the related unrealized gains or losses are reflected in stockholders' equity, net of tax. For our AFS fixed income securities portfolios, fair value is a key factor in the measurement of (i) losses on securities for which we have the intent to sell, and (ii) changes in the allowance for credit losses. We have categorized our investment portfolio, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1), the next level of priority to observable data from similar securities that have traded in the marketplace, typically using matrix pricing (Level 2), and the lowest priority to unobservable inputs (Level 3). The fair value of approximately 98% of our investments measured at fair value are classified as either Level 1 or Level 2 in the fair value hierarchy. Fair value measurements in Level 1 represent quoted prices in active markets for identical assets. The fair value of our Level 2 securities are determined by external pricing services, for which we have evaluated the pricing methodology used and determined that the inputs used are observable. Less than 2.0% of our investments measured at fair value are classified as Level 3 in the fair value hierarchy. Fair value measurements in Level 3 are based on unobservable market inputs because the related securities are not traded on a public market. For additional information regarding the valuation techniques used for our Level 3 securities, refer to item (d) of Note 2. "Summary of Significant Accounting Policies" within Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Allowance for Credit Losses on AFS Fixed Income Securities When fixed income securities are in an unrealized loss position and we do not intend to sell the security, we record an allowance for credit losses for the portion of the unrealized loss due to an expected credit loss. We estimate expected credit losses on these securities by performing a discounted cash flow (“DCF”). The allowance for credit losses is the excess of amortized cost over the greater of (i) our estimate of the present value of expected future cash flows, or (ii) fair value. The allowance for credit losses cannot exceed the unrealized loss and therefore it may fluctuate with changes in the fair value of the security. Factors considered in the determination of the allowance for credit losses require significant judgment and include, but are not limited to, our evaluation of the projected cash flow stream from the security. We also consider the need to record losses on securities for which we have the intent to sell that are in an unrealized loss position. The various COVID-19-related governmental directives impacted the financial markets, which became volatile earlier in the year. This volatility increased gross unrealized losses on our AFS fixed income securities portfolio from $7.7 million at December 31, 2019, to $116.9 million at March 31, 2020. Since the end of the first quarter, the financial markets have improved and gross unrealized losses were reduced to $11.5 million at December 31, 2020. We analyzed these unrealized losses for credit loss in accordance with our existing accounting policy, which includes performing DCF analyses on each security at the lot level and analyzing these DCFs using various economic scenarios. In performing these DCF analyses, we calculate the present value of future cash flows using various models specific to the major security types in our portfolio. These models use security-specific information and forecasted macroeconomic data to determine possible expected credit loss scenarios based on projected changes in the economy. The forecasted economic data incorporated in the models is based on the Federal Reserve Board’s annual supervisory stress test review on certain large banks and financial institutions. We also have the ability to incorporate internally-developed forecast information into the models as we deem appropriate. In developing our best estimate of the allowance for credit losses, we consider our outlook as to the probability of the various scenarios occurring. Based on these analyses, we recorded an allowance for credit losses of $4.0 million in 2020 on our AFS fixed income portfolio. After considering the allowance for credit losses, the remaining unrealized losses on this portfolio was $11.5 million. We believe that the volatility and increased unrealized loss balance was driven by fluctuating and widening credit spreads tied to financial market uncertainty about the various COVID-19-related governmental directives. If the assumptions used in our DCF analyses or our outlook as to the occurrence probability of our DCF model scenarios were to change, our allowance for credit losses and the resulting credit loss expense could be material to our results of operations. 45 For additional information regarding our allowance for credit losses on AFS fixed income securities, see item (c) of Note 2. "Summary of Significant Accounting Policies" and item (i) of Note 5. "Investments" within Item 8. "Financial Statements and Supplementary Data." of this Form 10-K, respectively. Reinsurance Reinsurance recoverables on paid and unpaid loss and loss expense represent estimates of the portion of such liabilities that we will recover from reinsurers. Each reinsurance contract is analyzed to ensure that sufficient risk is transferred to properly record the transactions as reinsurance in the Financial Statements. Amounts recovered from reinsurers are recognized as assets contemporaneously and in a manner consistent with, the paid and unpaid losses associated with the reinsured policies. An allowance for credit losses on our reinsurance recoverable balance 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. Details regarding retrocessional reinsurance programs are not always transparent, which can make it difficult to assess our reinsurers' exposure to counterparty credit risk. The credit quality of our reinsurers is also impacted by other factors, such as their reserve adequacy, investment portfolio, regulatory capital position, catastrophe aggregations, and risk management expertise. In addition, contractual language interpretations and willingness to pay valid claims can impact our allowance for estimated uncollectible reinsurance. Our allowance for estimated uncollectible reinsurance totaled $1.8 million at December 31, 2020, a decrease from $4.4 million at December 31, 2019, as we refined our methodology and implemented the new credit loss standard in 2020. We continually monitor developments that may impact recoverability from our reinsurers, for which we have contractual remedies if necessary. For further information regarding reinsurance, see the “Reinsurance” section below and Note 9. “Reinsurance” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. Allowance for Credit Losses on Premiums Receivable We estimate an allowance for credit losses on our outstanding premiums receivable balance at each reporting date. In determining this allowance, we use a method that considers the aging of the receivable based on the effective year of the related policy and our historical credit loss experience. We also contemplate expected macroeconomic conditions over the expected receivables collection period, which is short-term in nature because most balances are collected within two years of policy issuance. We increased our allowance for credit losses to $21.0 million during 2020 from $6.4 million at December 31, 2019, to reflect (i) the higher risk of non-payment due to the significant COVID-19-related decline in economic activity, (ii) the individualized payment flexibility we offered our customers, and (iii) our suspension of the effect of policy cancellations, late payment notices, and late or reinstatement fees. Our last suspensions expired in early August 2020. It could take over a year to realize this collections process, and we expect the actual reserve write-offs to materialize over the course of 2021. Future COVID-19-related economic instability or governmental directives could ultimately impact our estimates and assumptions for credit losses on premiums receivable. Consequently, a change in our allowance estimate may be material to our results of operations in future periods. For additional details about this estimate, see Note 8. "Allowance for Credit Losses on Premiums Receivable" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Accrual for Auditable Premium We estimate auditable premium, which we either bill or return on expired policies based on exposure levels (i.e. payroll or sales), when it is reasonably possible to do so based on historical trends adjusted for the uncertainty of future economic conditions. If we determine it is not reasonably possible to estimate this premium, we do not do so. In the first quarter of 2020, we recorded a $75 million return audit and mid-term endorsement premium accrual in response to the COVID-19 pandemic and the anticipated decline in payroll and sales exposures on the workers compensation and general liability lines of business. During the remainder of the year, we applied premium adjustments for endorsements and audits against our accrual, resulting in a remaining $24.8 million accrual as of December 31, 2020. We currently anticipate the balance of the return audit premiums will occur through the middle of 2021. Since April 2020, through active engagement between our underwriters, distribution partners, and insureds, we have set exposure levels to reflect our best estimate of how the current environment may impact our policies. As a result, we have not accrued for additional or return premium on any policies since that time. Further economic instability and renewed or extended COVID-19-related governmental directives ultimately could impact our estimates and assumptions, and consequently, changes in this liability estimate may be material to the results of operations in future periods. For additional details about this estimate, see Note 9. "Reinsurance" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. 46 Financial Highlights of Results for Years Ended December 31, 2020, 2019, and 20181 2020 vs. 2019 ($ in thousands, except per share amounts) 2020 2019 2018 2019 vs. 2018 Financial Data: Revenues After-tax net investment income After-tax underwriting income Net income before federal income tax Net income Net income available to common stockholders Key Metrics: Combined ratio $ 2,922,274 2,846,491 3 % $ 2,586,080 10 % 184,612 107,716 302,988 246,355 246,355 94.9 % 181,161 129,554 336,390 271,623 271,623 93.7 3.05 13.6 1.39 4.53 36.91 0.83 2 (17) (10) (9) (9) 160,481 95,727 211,721 178,939 178,939 13 35 59 52 52 1.2 pts (3) % $ (3.2) pts (0.09) pts 95.0 % 3.33 10.2 1.42 (1.3) pts (8) % 3.4 pts (0.03) pts (10) $ 15 % 13 3.00 30.40 0.74 Invested assets per dollar of common stockholders' equity $ 2.96 Return on average common equity ("ROE") Statutory premiums to surplus ratio 10.4 % 1.30 x Per Common Share Amounts: Diluted net income per share Book value per share Dividends declared per share to common stockholders $ 4.09 42.38 0.94 Non-GAAP Information: Non-GAAP operating income2 Diluted non-GAAP operating income per common share2 Non-GAAP operating ROE2 $ 249,686 264,418 (6) % $ 218,567 4.15 10.5 % 4.40 13.3 (6) (2.8) pts 3.66 12.5 % 1Refer to the Glossary of Terms attached to this Form 10-K as Exhibit 99.1 for definitions of terms used in this financial review. 2Non-GAAP operating income is a measure that is comparable to net income available to common stockholders with the exclusion of after-tax net realized and unrealized gains and losses on investments, and after-tax debt retirement costs. Non-GAAP operating income is used as an important financial measure by us, analysts, and investors because the realization of investment gains and losses on sales of securities in any given period is largely discretionary as to timing. In addition, net realized and unrealized investment gains and losses on investments that are charged to earnings and the debt retirement costs could distort the analysis of trends. Reconciliations of net income available to common stockholders, net income available to common stockholders per diluted common share, and ROE to non-GAAP operating income, non-GAAP operating income per diluted common share, and non- GAAP operating ROE, respectively, are provided in the tables below: Reconciliation of net income available to common stockholders to non-GAAP operating income ($ in thousands) Net income available to common stockholders Net realized and unrealized losses (gains), before tax Debt retirement costs, before tax Tax on reconciling items Non-GAAP operating income Reconciliation of net income available to common stockholders per diluted common share to non-GAAP operating income per diluted common share Net income available to common stockholders per diluted common share Net realized and unrealized losses (gains), before tax Debt retirement costs, before tax Tax on reconciling items Non-GAAP operating income per diluted common share $ $ $ $ 2020 2019 2018 246,355 4,217 — (886) 249,686 271,623 (14,422) 4,175 3,042 264,418 178,939 54,923 — (15,295) 218,567 2020 2019 2018 4.09 0.07 — (0.01) 4.15 4.53 (0.24) 0.07 0.04 4.40 Reconciliation of ROE to non-GAAP operating ROE 2020 2019 2018 ROE Net realized and unrealized losses (gains), before tax Debt retirement costs, before tax Tax on reconciling items Non-GAAP operating ROE 10.4 % 0.2 — (0.1) 10.5 % 13.6 (0.7) 0.2 0.2 13.3 47 51 21 % 12 21 % 20 0.8 pts 3.00 0.92 — (0.26) 3.66 10.2 3.1 — (0.8) 12.5 The components of our ROE are as follows: ROE Components Standard Commercial Lines Segment Standard Personal Lines Segment E&S Lines Segment Total insurance operations Investment income Net realized and unrealized (losses) gains Total investments segment Debt retirement costs Other ROE 2020 2019 Change Points 2018 Change Points 5.1 % (0.5) — 4.6 7.8 (0.1) 7.7 — (1.9) 10.4 % 5.8 0.3 0.4 6.5 9.1 0.5 9.6 (0.2) (2.3) 13.6 (0.7) (0.8) (0.4) (1.9) (1.3) (0.6) (1.9) 0.2 0.4 4.9 0.6 — 5.5 9.2 (2.3) 6.9 — (2.2) (3.2) 10.2 0.9 (0.3) 0.4 1.0 (0.1) 2.8 2.7 (0.2) (0.1) 3.4 In 2020, we generated a 10.5% non-GAAP operating ROE, which fell slightly below our 11% target for the year and our 2019 return of 13.3%. Our 2020 non-GAAP operating ROE was negatively impacted by net unrealized after-tax gains on our fixed income securities portfolio, which increased our GAAP equity and decreased our non-GAAP operating ROE by approximately 120 basis points. Nevertheless, we consider this an impressive result in the context of COVID-19, significant catastrophe loss activity, and a prolonged low interest rate environment that has continued to put downward pressure on our investment portfolio returns. The following is a more detailed discussion of these items. COVID-19 • A $75 million return audit and mid-term endorsement premium accrual recorded in the first quarter of 2020 to reflect our estimate of reduced exposures on our March 31 inforce policies due to the significant economic slowdown and the anticipated decline in payroll and sales exposures in the workers compensation and general liability lines of business. During the remainder of the year, we recorded $50.2 million of mid-term endorsement and negative audit premium adjustments against this $75 million accrual. As of December 31, 2020, we had a remaining accrual of $24.8 million. Net of reduced losses and commissions, the earned impact of the return audit and mid-term endorsement premium accrual lowered pre-tax underwriting results by $15.3 million, in 2020. • • • A $19.7 million reduction in net premiums written ("NPW") recorded in the second quarter of 2020 to reflect a then voluntary credit to our personal and commercial automobile customers with in-force policies equivalent to 15% of their April and May premiums due to the unprecedented nature of the COVID-19-related governmental directives and the associated favorable claims frequency impact. During the second quarter of 2020, the premium credits were offset by an equal reduction in loss and loss expenses, as claims frequency on our personal and commercial automobile lines of business declined due to governmental directive-induced reduced miles driven. As the number of vehicles we insure has not significantly declined, frequencies are returning closer to normal levels as the COVID-19-related governmental directives terminate and there is uncertainty about potential impacts to severities. A $13.5 million, pre-tax, increase to our allowance for credit losses on premiums receivable reflecting an increase in credit risk due to billing accommodations that we offered our customers, sometimes in collaboration with or at the direction of our regulators. These accommodations included individualized payment flexibility and suspended the effect of policy cancellations, late payment notices, and late or reinstatement fees. The impact of offering billing accommodations while suspending cancellations increased earned but uncollected premiums. The majority of these state regulations have expired as of the end of 2020; however, our allowance for credit losses on premiums receivable of $21.0 million is expected to cover anticipated write-offs that will occur over the corresponding collections cycle, which could last more than a year. A $5.0 million, pre-tax, ultimate net loss estimate for losses related to a small portion of our property policies that provide a $25,000 sub-limited coverage for specified extra expenses to clean or disinfect a property when ordered by a Board of Health. Overall, these four items (i) reduced pre-tax underwriting results by $33.8 million, or $0.44 per diluted common share, (ii) increased the combined ratio by 1.1 points, and (iii) decreased our ROE by 1.1 points. 48 Offsetting these COVID-19 specific items was a lower level of reported claim frequencies due to the reduced economic activity and other factors. These lower frequencies directly impacted our property lines loss experience. The impact of these lower than expected non-catastrophe property losses (including automobile physical damage losses) resulted in an approximate 1.2 point benefit to our combined ratio. We also reduced our 2020 commercial and personal auto casualty loss costs to partially reflect these lower frequencies for these shorter-tail lines of business, which benefited the combined ratio by 0.4 points. No other casualty lines were adjusted. These modest adjustments to our casualty loss estimates recognize the ongoing inherent uncertainty presented by COVID-19, including the potential for late reported claims and higher severities. We will continue to monitor these trends as we progress through 2021. After March 2020, due to the impact of COVID-19, we suspended business travel and entertainment in most of our regions. We also deferred some projects and new hires for a period of time. These items, which we expect to revert back to more normal levels later in 2021, benefited our 2020 expense ratio by approximately 0.7 points. In total, we estimate the impact of the lower non-catastrophe property losses, the reduction in our loss ratio due to lower miles driven, and the benefit to the expense ratio all discussed above, collectively more than offset the negative impact from the COVID-19 specific accruals. We estimate the net benefit to our 2020 combined ratio was approximately 1.2 points. Catastrophe Losses We experienced a significant level of catastrophe losses in 2020, driven by industry-wide U.S. catastrophe loss activity that significantly exceeded the 5- and 10-year historical means of approximately 4 points. Catastrophes included hurricanes, with several making landfall, convective storms, hail storms, wildfires, and civil unrest. Our combined ratio in 2020 included 8.0 points of catastrophe losses, which was close to our highest level in over 20 years. The $215.4 million of catastrophe losses in 2020 compared to $81.0 million in 2019 reduced net income by $106.2 million, and ROE by 4.5 points. Investment Portfolio Returns After-tax investment income increased 2% in 2020 compared to 2019, driven by higher returns on alternative investments in our other investment portfolio. Returns on these holdings are recorded on a one-quarter lag, and the strong capital market performance in the second and third quarters of 2020 drove the higher returns. These returns, coupled with (i) operating cash flows that were 20% of 2020 NPW and (ii) proceeds from our preferred stock offering, increased invested assets by 12% during 2020. However, the increase in invested assets did not keep pace with the increase in common stockholders' equity. Accordingly, investment leverage declined, as reflected in invested assets per dollar of common stockholders' equity, which ended 2020 at $2.96, down from $3.05 at December 31, 2019. After-tax portfolio yields also were lower than a year ago, at 2.6% for 2020 compared to 2.9% for 2019, driven by a lower interest rate environment. The reduced investment leverage, coupled with lower portfolio yields, has resulted in a lower investment income contribution to ROE, which was 7.8% in 2020 compared to 9.1% in 2019. Despite the significant economic impacts described above, we experienced favorable prior year casualty reserve development of $85 million in 2020 compared to $61 million in 2019, which is discussed in more detail in the "Insurance Operations" section of "Results of Operations and Related Information by Segment" below. In 2020, we generated our seventh consecutive year of double-digit non-GAAP operating ROEs, with a 10.5% non-GAAP operating ROE. We also grew book value per common share 15% in 2020 compared to 2019, reflecting $4.09 per diluted common share of net income available to common stockholders and $2.25 per diluted common share of after-tax net unrealized gains on our fixed income securities portfolio that were partially offset by $0.94 per diluted common share of dividends paid to common stockholders. On December 2, 2020, we issued $200 million of 4.60% non-cumulative perpetual preferred stock, which marks the first preferred stock offering in our 94-year history and is a demonstration of our investors' confidence in our value proposition and our continued success. In conjunction with this offering, our Board of Directors ("Board") authorized a $100 million share repurchase program. We intend to be disciplined and opportunistic with our buyback program, repurchasing shares when we believe returns are attractive over the long-term for our shareholders. Outlook For 2021, we established a non-GAAP operating ROE target of 11%, which is in line with our 2020 target. We based our 2021 target on our current estimated weighted average cost of capital, the current interest rate environment, and property and casualty insurance market conditions. Our ROE target sets a high bar for our financial performance, challenges us to perform at our best, and aligns our incentive compensation structure with shareholder interests. We enter 2021 in the strongest financial position in our Company's long history, and we are very well positioned to continue delivering growth and profitability. 49 Looking ahead to 2021, a number of areas require our continued focus to position us for ongoing success: • • • • Delivering on our strategy for continued disciplined growth, driven by greater share of wallet in our agents’ offices, the addition of new agents, and geographic expansion over the longer term. We continue to work to achieve our longer-term Standard Commercial Lines 3% market share target in our 27 primary operating states, which represents an additional $3 billion premium opportunity. Our strategy is to appoint distribution partners representing approximately a 25% market share and seeking an average 12% share of wallet, or percentage of these partners' books of business. In addition, we anticipate re-starting our geographic expansion strategy. The five states that we opened during 2017 and 2018, including a new Southwest region, are all performing ahead of expectations. Over the next two years, we plan to open three additional states subject to regulatory approval, Idaho, Vermont, and Alabama, , and we plan to open others in subsequent years. Our long-term goal is to have national capabilities, although we will follow a measured and disciplined approach to identifying and opening new markets. Continuing to achieve written renewal pure price increases that meet or exceed expected loss trend, while delivering on our strategy for continued disciplined growth. While we continue to navigate a challenging economic environment, we are comfortable with the overall price adequacy of our book of business. Delivering a superior omnichannel customer experience by offering value-added technologies and services. We have significantly enhanced our customer experience capabilities over the last several years, and we provide our customers with various digital and self-service offerings. Investing in and building out technologies that improve the customer experience journey remains a core focus for us. Building a culture that fosters innovation and idea generation that is centered on the values of diversity, equity and inclusion, as we seek to develop a group of specially trained leaders to take our company into the future. For 2021, our full-year guidance is as follows: • • • • A GAAP combined ratio, excluding catastrophe losses, of 91.0%. This assumes no prior-year casualty reserve development; Catastrophe losses of 4.0 points; After-tax net investment income of $182 million, which includes $16 million after-tax gains from our alternative investments; An overall effective tax rate of approximately 20.5%, which also includes an effective tax rate of 19.0% for net investment income and 21% for all other items; and • Weighted average shares outstanding of 60.5 million on a diluted basis. 50 Results of Operations and Related Information by Segment Insurance Operations The following table provides quantitative information for analyzing the combined ratio: All Lines ($ in thousands) Insurance Operations 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 2020 2019 2020 vs. 2019 2018 2019 vs. 2018 $ 2,773,092 2,681,814 1,635,823 905,830 3,812 $ 136,349 61.0 % 33.8 0.1 94.9 2,679,424 2,597,171 1,551,491 876,567 5,120 163,993 59.7 33.8 0.2 93.7 3 % $ 2,514,286 7 % 3 5 3 (26) 2,436,229 1,498,134 808,939 7,983 (17) % $ 121,173 7 4 8 (36) 35 % 1.3 pts 61.5 % (1.8) pts — (0.1) 1.2 33.2 0.3 95.0 0.6 (0.1) (1.3) Our NPW increased 3% in 2020 compared to 2019, reflecting (i) overall renewal pure price increases of 4.3%, (ii) increased retention, and (iii) new business of $579.7 million in 2020 compared to $548.7 million in 2019. The net appointment of 42 retail agents, excluding agency consolidations, also contributed to our new business growth. This solid growth in a challenging economic environment reflects the strong relationships we have with our best-in-class distribution partners, our sophisticated underwriting and pricing tools, and excellent customer servicing capabilities. The rate of NPW growth in 2020 was negatively impacted by approximately 4 percentage points due to the following: • • Our $75 million estimate of audit and endorsement return premium related to lower payroll and sales exposures on the workers compensation and general liability lines of business resulting from the economic impacts of the COVID-19 pandemic. A $19.7 million premium credit to our personal and commercial automobile policyholders. Because of the unprecedented nature of the COVID-19-related governmental directives and the associated expected short-term favorable claims frequency impact, we obtained regulatory approval during April to provide this premium credit to our personal and commercial automobile customers. The premium credit to customers with in-force policies was equivalent to 15% of their April and May premiums. Loss and Loss Expenses The increase in the loss and loss expense ratio in 2020, compared to 2019, was primarily the result of the following: ($ 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 2020 2019 2018 $ 410.0 410.5 405.6 15.3 pts $ 15.8 16.6 215.4 81.0 88.0 8.0 pts 3.1 3.6 23.3 18.9 20.2 4.4 (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 2020 2019 2018 (85.0) (61.0) (41.5) (3.2) pts (2.3) (1.7) (0.9) (0.6) 0.4 51 2020 2019 2018 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 Total Standard Commercial Lines Homeowners Personal automobile Total Standard Personal Lines E&S $ (35.0) 10.0 (60.0) — (85.0) — — — — Total (favorable) prior year casualty reserve development $ (85.0) (Favorable) impact on loss ratio (3.2) pts (5.0) 4.0 (68.0) — (69.0) — 6.0 6.0 2.0 (61.0) (2.3) (9.5) 37.5 (83.0) (3.0) (58.0) 1.5 3.0 4.5 12.0 (41.5) (1.7) In addition to the prior year casualty reserve development, current year casualty loss costs were 1.7 points lower in 2020 compared to 2019, driven by decreases in frequencies reflecting reductions in miles driven due to the COVID-19-related governmental directives impacting our commercial and personal automobile lines of business. For qualitative discussions regarding reserve development, refer to the insurance segment sections below. Underwriting Expenses Our underwriting expense ratio was 33.8% in 2020, which was flat compared to 2019. The expense ratio included 1.1 points of COVID-19 specific items, which included the $13.5 million addition to our allowance for credit losses on premiums receivable and lower net earned premiums from the audit premium accrual and premium credits. Excluding these COVID-19 specific items, our underlying expense ratio of 32.7% reflected our ongoing expense management initiatives, and about 70 basis points of temporary expense reductions mainly due to the lower travel, and entertainment expenses, and other expenses as a result of COVID-19. Standard Commercial Lines Segment ($ 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 2020 2019 2020 vs. 2019 2018 2019 vs. 2018 $ 2,230,636 2,143,184 1,245,627 742,014 3,812 $ 151,731 58.1 % 34.6 0.2 92.9 2,137,071 2,049,614 1,187,856 710,648 5,120 145,990 58.0 34.7 0.2 92.9 4 % $ 1,975,683 5 5 4 (26) 1,912,222 1,141,038 654,097 7,983 4 % $ 109,104 % 8 7 4 9 (36) 34 % 0.1 pts 59.7 % (1.7) pts (0.1) — — 34.2 0.4 94.3 0.5 (0.2) (1.4) NPW growth in this segment in 2020 compared to 2019 reflected (i) renewal pure price increases, (ii) new business growth, and (iii) increased retention as shown below: ($ in millions) Retention Renewal pure price increases on NPW Direct new business 52 For the Year Ended December 31, 2020 2019 85 % 4.4 421.1 $ 83 3.4 411.2 Consistent with our overall insurance operations, NPW growth in 2020 was negatively impacted by approximately 4 percentage points due to the following: • • Our $75 million estimate of audit and endorsement return premium related to the impact of COVID-19 on our workers compensation and general liability lines of business. A $15.4 million premium credit to our commercial automobile customers related to reduced miles driven and loss frequency due to the COVID-19 pandemic. Consistent with the fluctuations in NPW, the increase in NPE in 2020 compared to 2019 reflected the items discussed above. The 0.1-point increase in the loss and loss expense ratio in 2020 compared to 2019 was driven by the following: ($ 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 Total Impact on Loss and Loss Expense Ratio (Favorable)/Unfavorable Year-Over-Year Change 2020 2019 $ 296.2 283.6 13.8 pts $ 13.8 117.8 54.2 5.5 pts 2.6 19.3 16.4 2.9 (1.3) ($ in millions) For the year ended December 31, 2020 2019 $ (Favorable) Prior Year Casualty Reserve Development Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio (Favorable) Year-Over-Year Change (85.0) (69.0) (4.0) pts (3.4) (0.6) (0.4) In addition to the prior year casualty reserve development above, current year casualty loss costs were 1.2 points lower in 2020 compared to 2019, driven by decreased claim frequencies in our commercial automobile line of business reflecting reductions in miles driven due to the COVID-19-related governmental directives. For quantitative information on the prior year development by line of business, see "Financial Highlights of Results for Years Ended December 2020, 2019, and 2018" above and for qualitative information about the significant drivers of this development, see the line of business discussions below. 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 $ $ 2020 716,119 122,159 85 % 3.9 694,019 103,262 85.1 32 2019 699,262 119,055 83 2.8 669,895 69,932 89.6 33 2020 vs. 2019 2 % $ 3 2 pts 1.1 4 % $ 48 (4.5) 2018 639,720 112,683 2019 vs. 2018 % 9 6 83 % — pts 2.6 616,187 70,268 88.6 32 % 0.2 9 — 1.0 NPW in 2020 benefited from higher retention and renewal pure price increases. These items were partially offset by a $41.0 million reduction in audit and mid-term endorsement premiums, primarily driven by the COVID-19 pandemic, discussed in the "Insurance Operations" section above. The combined ratio decreased 4.5 points in 2020, driven principally by an increase in favorable prior year casualty reserve development compared to 2019, as outlined in the table below. ($ in millions) (Favorable) Prior Year Casualty Reserve Development For the year ended December 31, 2020 2019 Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio (Favorable)/Unfavorable Year-Over-Year Change $ (35.0) (5.0) (5.0) pts (0.7) (4.3) 0.8 53 In 2020, the prior year reserve development was primarily attributable to favorable reserve development on loss severities in accident years 2017 and prior. While this line experienced favorable prior year casualty reserve development in 2020, we remain cautious about the inherent uncertainty presented by COVID-19, including the potential for late reported claims and higher severities. Additionally, this line is exposed to other unfavorable trends, including social inflation and state laws enacted that extend the statute of limitations or open windows for previously time-barred actions. We will continue to monitor these trends in 2021. Commercial Automobile ($ in thousands) NPW Direct new business Retention Renewal pure price increases NPE Underwriting loss Combined ratio % of total standard commercial NPW $ $ 2020 658,930 112,893 86 % 8.1 615,181 (3,126) 100.5 30 2019 590,011 102,956 83 7.5 554,256 (43,797) 107.9 28 2020 vs. 2019 12 % $ 10 3 pts 0.6 11 % $ 93 (7.4) 2019 vs. 2018 14 % 9 — pts 0.2 12 % 43 (7.8) 2018 518,942 94,442 83 % 7.3 493,093 (77,403) 115.7 26 The increases in NPW shown in the table above reflect 8.1% renewal pure price increases, higher retention, and an increase in new business as in-force vehicle counts increased 7%. The increase in 2020 was partially offset by a $15.4 million premium credit to our commercial automobile customers as a result of the COVID-19 pandemic. The 7.4-point decrease in the combined ratio in 2020 compared to 2019 was primarily driven by the items in the tables below. ($ in millions) Non-Catastrophe Property Losses Catastrophe Losses For the year ended December 31, Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Total Impact on Loss and Loss Expense Ratio (Favorable) Year-Over-Year Change 2020 2019 $ 92.2 100.8 15.0 pts $ 18.2 3.4 2.1 pts 0.6 0.4 15.6 18.6 ($ in millions) Unfavorable 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 Year-Over-Year Change 2020 2019 $ 10.0 4.0 pts 1.6 0.7 (3.0) (0.3) 0.9 (6.9) The 2020 prior year casualty reserve development was primarily attributable to unfavorable reserve development on loss severities in accident years 2016 through 2019 and higher than expected frequencies in accident year 2019. The lower combined ratio in 2020 also reflected a 6.7-point reduction in the current year casualty loss costs. This reduction primarily relates to the impact of strong renewal pure price increases we have earned in this line of business over the last several years and underwriting actions we have taken to improve profitability. Current year loss costs also benefited from decreases in claim frequencies reflecting reduced miles driven related to the COVID-19-related governmental directive. This line of business remains an area of focus for us and most of the industry. Profitability challenges continue to generate combined ratios higher than our risk-adjusted targets and the inherent uncertainty COVID-19 presents includes the potential for late reported claims and higher severities. We will continue to (i) actively implement price increases consistent with levels experienced in 2020, and (ii) enhance our underwriting tools to improve the accuracy of our rating information to prevent premium leakage. We also have been actively managing our new and renewal business, and we expect our actions will positively impact profitability through business mix improvement. 54 Workers Compensation ($ in thousands) NPW Direct new business Retention Renewal pure price decreases NPE Underwriting income Combined ratio % of total standard commercial NPW $ $ 2020 270,168 51,078 84 % (2.0) 278,062 70,897 74.5 12 2019 2020 vs. 2019 309,322 60,139 84 (2.8) 311,370 80,630 74.1 14 (13) % $ (15) — pts 0.8 (11) % $ (12) 0.4 2018 316,647 60,089 84 % (0.2) 317,616 94,395 70.3 16 2019 vs. 2018 (2) % — — pts (2.6) (2) % (15) 3.8 In addition to the drivers in the table above, the 2020 NPW was impacted by a $28.7 million reduction in audit and mid-term endorsement premiums driven by the COVID-19 pandemic, which is discussed in the "Insurance Operations" section above. The increase in the combined ratio in 2020 compared to 2019 was primarily driven by less favorable prior year casualty reserve development, as follows: ($ 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 Unfavorable/(Favorable) Year-Over-Year Change 2020 2019 $ (60.0) (68.0) (21.6) pts (21.8) 0.2 4.3 The favorable reserve development for both periods was due to continued favorable medical severity trends impacting accident years 2018 and prior. Due to the length of time that injured workers can receive medical treatment, decreases in medical inflation can cause favorable loss development across an extended number of accident years. While reported profitability on this line remains strong due to favorable emergence on prior year reserves, current accident year margins do not support the continued negative pricing levels being set by the National Council on Compensation Insurance and independent state rating bureaus. A reduction or reversal in the trend of favorable frequencies and severities has the potential to significantly increase this line's combined ratio, which we monitor 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 $ $ 2020 413,194 94,697 84 % 4.6 388,120 (21,296) 105.5 19 2019 373,809 88,527 82 3.3 353,834 21,639 93.9 17 2020 vs. 2019 11 % $ 7 2 pts 1.3 2018 342,027 76,391 82 % 3.1 10 % $ 329,660 (198) 11.6 (3,211) 101.0 17 2019 vs. 2018 9 % 16 — pts 0.2 7 % 774 (7.1) NPW growth in this line in 2020 compared to 2019 was driven by (i) renewal pure price increases, (ii) new business growth, and (iii) increased retention. Quantitative information regarding property losses is as follows: ($ in millions) Non-Catastrophe Property Losses Catastrophe Losses For the year ended December 31, 2020 2019 Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio $ 168.6 149.7 43.4 pts $ 42.3 90.2 44.9 23.3 pts 12.7 Total Impact on Loss and Loss Expense Ratio 66.7 55.0 (Favorable)/ Unfavorable Year-Over-Year Change 11.7 (7.5) Higher catastrophe losses in 2020 compared to 2019 were driven by the events mentioned in "Financial Highlights of Results for Years Ended December 31, 2020, 2019, and 2018" discussion above. 55 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 2020 2019 2020 vs. 2019 2018 2019 vs. 2018 $ $ 295,166 299,140 233,260 81,388 (15,508) 78.0 % 27.2 105.2 304,592 307,739 211,300 88,179 8,260 68.6 28.7 97.3 (3) % $ (3) 10 (8) (288) % $ 309,277 304,441 206,752 84,925 12,764 (2) % 1 2 4 (35) % 9.4 pts 67.9 % 0.7 pts (1.5) 7.9 27.9 95.8 0.8 1.5 NPW declined in 2020 compared to 2019, driven by new business that did not increase enough to compensate for the non- renewed policies reflected in our 83% retention ratio. Additionally, 2020 included a $4.3 million premium credit to our Standard Personal Lines customers as a result of the COVID-19 pandemic, which reduced the year-over-year NPW growth rate by 1 percentage point. ($ in millions) Retention Renewal pure price increases on NPW Direct new business premiums 2020 2019 83 % 2.5 44.7 $ 83 5.0 40.7 The reduction in NPE in 2020 compared to 2019 reflects the decreases in NPW discussed above. The loss and loss expense ratio increased 9.4 points in 2020 compared to 2019, the primary drivers of which were as follows: ($ in millions) Non-Catastrophe Property Losses Catastrophe Losses For the year ended December 31, Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Total Impact on Loss and Loss Expense Ratio Unfavorable Year-Over-Year Change 2020 2019 $ 86.0 104.7 28.7 pts $ 34.0 77.5 21.1 25.9 pts 6.8 54.6 40.8 13.8 0.5 ($ in millions) Unfavorable Prior Year Casualty Reserve Development For the year ended December 31, Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio Unfavorable/(Favorable) Year-Over-Year Change 2020 2019 $ — 6.0 — pts 1.9 (1.9) 0.4 In addition to the items above, current year casualty loss costs were 2.6 points lower in 2020 as compared to 2019 driven by our personal automobile line of business reflecting decreases in claim frequencies as a result of reductions in miles driven due to the COVID-19-related governmental directives. 56 E&S Lines Segment ($ in thousands) 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 2020 2019 2020 vs. 2019 2018 2019 vs. 2018 $ $ 247,290 239,490 156,936 82,428 126 65.5 % 34.4 99.9 237,761 239,818 152,335 77,740 9,743 63.5 32.4 95.9 4 % $ — 3 6 (99) % $ 229,326 219,566 150,344 69,917 (695) 2.0 pts 68.5 % 2.0 4.0 31.8 100.3 4 % 9 1 11 1,502 % (5.0) pts 0.6 (4.4) NPW increased 4.0% in 2020 due to increases in direct new business and renewal pure price. After two consecutive years in which we exited underperforming classes of business, our focus has shifted to profitably growing segments of our E&S book that have demonstrated underwriting profitability, and identifying new profitable segments to grow. Quantitative information is as follows: ($ in millions) Overall renewal price increases Direct new business premiums 2020 2019 $ 6.2 % 113.9 6.0 96.8 The 2.0-point increase in the loss and loss expense ratio in 2020 compared to 2019 was primarily attributable to an increase in property losses. This was partially offset by lower unfavorable prior year casualty reserve development and a decrease in current year loss costs of 3.7 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 2020 2019 $ 27.9 22.2 11.6 pts $ 9.3 20.0 5.7 8.4 pts 2.4 20.0 11.7 ($ in millions) Unfavorable 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 Year-Over-Year Change 2020 2019 $ — 2.0 — pts 0.8 We had no prior year casualty reserve development in 2020, which was a slight improvement over 2019, when unfavorable prior year casualty reserve development was relatively minor. The 2.0-point increase in the underwriting expense ratio in 2020 compared to 2019 was primarily driven by increases in the bad debt provision during 2020 of 1.5 points. Reinsurance We use reinsurance to protect our capital resources and insure 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. 57 (Favorable)/ Unfavorable Year-Over-Year Change 8.3 (3.1) (0.8) (4.7) Reinsurance Pooling Agreement The primary purposes of the reinsurance pooling agreement among our Insurance Subsidiaries are to: • • • Pool or share proportionately the underwriting profit and loss results of property and casualty insurance underwriting operations through reinsurance; Reduce administration expenses; and Permit all of the Insurance Subsidiaries to obtain a uniform rating from AM Best Company ("AM Best"). The following illustrates the pooling percentages by Insurance Subsidiary as of December 31, 2020: 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 can increase our underwriting capacity, accepting larger individual risks and aggregations 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 a specified dollar threshold are known as retention. Reinsurance does not legally discharge us from liability under the terms and limits of our policies, but it does make our reinsurer liable to us for the amount of liability we cede to them. Our reinsurers often rely on their own reinsurance programs, or retrocessions, to manage their large loss exposures. The size of the global reinsurance community is relatively small. If our reinsurers are unable to collect on their retrocessional programs, it may impair their ability to pay us for the amounts we cede to them. Consequently, our reinsurers present us with direct and indirect counterparty credit risk. We attempt to mitigate this credit risk by (i) pursuing relationships with reinsurers rated “A-” or higher by AM Best and/or (ii) obtaining collateral to secure reinsurance obligations. Some of our reinsurance treaties permit us to terminate or commute them — or require the reinsurer to post collateral if the reinsurer's financial condition or rating deteriorates. We monitor our reinsurers' financial condition, and we review the quality of reinsurance recoverables and reserves for uncollectible reinsurance. For additional information regarding our reinsurance counterparty credit risk, see Note 9. "Reinsurance" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. We have reinsurance contracts that separately cover our property and casualty insurance business that can be segregated into the following key categories: • • Property Reinsurance, which includes our (i) property excess of loss treaties purchased for protection against large individual property losses and (ii) property catastrophe treaties purchased to provide protection for the overall property portfolio against severe catastrophic events. We primarily use facultative reinsurance for large individual property risks greater than our property excess of loss treaty capacity. Casualty Reinsurance, which provides protection for both individual large casualty losses and catastrophic casualty losses involving multiple claimants or insureds. We also may use facultative reinsurance for large individual casualty risks in excess of our treaty capacity. 58 • • Terrorism Reinsurance, which provides a federal reinsurance backstop, behind the protection built into our property and casualty reinsurance treaties, for terrorism losses covered under the Terrorism Risk Insurance Program Reauthorization Act (“TRIPRA”). For further information about TRIPRA, see Item 1A. “Risk Factors.” of this Form 10-K. Flood Reinsurance, for which all of the premiums and losses related to our participation in the WYO (for which we also receive a servicing fee) are 100% ceded to the federal government. Property Reinsurance We renewed the property catastrophe treaty, which covers both our standard market and E&S business, effective January 1, 2021. For the main property catastrophe excess of loss treaty program, we maintained our expiring retention. We also purchased an additional $50 million in limit at the top of our program, thereby extending the coverage to $785 million in excess of a $40 million retention. We also renewed the separate catastrophe treaty of $35 million in excess of $5 million that covers events outside our 2015 22-state footprint and supports (i) our standard lines geographic expansion into Arizona, New Hampshire, Colorado, Utah, and New Mexico and (ii) our growing E&S property book. Both treaties were renewed on substantially the same terms as the expiring treaties except (i) restrictions in coverage were imposed related to the systemic perils of communicable disease and (ii) first party cybersecurity coverage, an expected result consistent with current market conditions. Consequently, the property catastrophe program now excludes coverage for communicable disease, but it retains reduced reinsurance coverage for cybersecurity risks. Despite these new limitations, coverage for traditionally covered property perils was maintained. Overall catastrophe ceded premium for 2021 increased due to three factors: (i) increases in underlying property exposures in line with our growing overall portfolio; (ii) the new additional $50 million of coverage purchased at the top of our treaty to maintain stability in our net risk profile; and (iii) a reinsurance environment characterized by higher risk- adjusted pricing, more rigorous underwriting, and reduced capacity. These dynamics were fueled by such factors as the uncertainty surrounding the impact of COVID-19, lower interest rates, and elevated catastrophe loss activity. However, 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 to minimize credit risk within our reinsurance program by transacting with highly-rated reinsurance partners and, where feasible, purchasing collateralized reinsurance products, particularly for high-severity, low-probability events. The current reinsurance program includes $281 million in collateralized limit, primarily in the top layer of the catastrophe program. We continue to assess our property catastrophe exposure aggregations, modeled results, and effects of premium growth on our property portfolio. We strive to balance our exposure to individual large events against the cost of reinsurance protections. We model various catastrophic perils, and hurricane risk continues to be our portfolio's most significant natural catastrophe peril because of the geographic location of the risks we insure. The table below illustrates the impact of the five largest hurricane losses we have experienced in the last 30 years: ($ in millions) Hurricane Name Superstorm Sandy Hurricane Irene Hurricane Hugo Hurricane Isabel Tropical Storm Isaias Actual Gross Loss $125.5 44.8 26.4 25.1 19.1 1 Net Loss2 45.6 40.2 3.0 15.7 18.6 Accident Year 2012 2011 1989 2003 2020 1This amount represents reported and unreported gross losses estimated as of December 31, 2020. 2Net loss does not include reinstatement premiums, taxes, or flood claims handling fees. We review our exposure to hurricane risk by examining the results of a third-party vendor model and proprietary analysis. The third-party vendor model provides a long-term view that closely relates modeled event frequency to historical hurricane activity and is adjusted to reflect assumptions for certain non-modeled costs, such as the impact of loss expenses, residual market assessments, and automobile-related losses. We believe that modeled estimates provide a range of potential outcomes, and we review multiple estimates to understand our catastrophic risk. 59 Occurrence Exceedence Probability Modeled Losses ($ 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 uncertainty associated with damage/loss estimation, demand and storm surge, and assumptions for certain un-modeled costs, such as the impact of loss expenses, residual market assessments, and automobile-related losses, which collectively increase our gross losses by approximately 13%. 2Net losses are after-tax losses net of catastrophe reinsurance including reinstatement premiums. 3GAAP Equity as of December 31, 2020. % Net Losses2 29,923 34,554 39,206 60,220 62,062 107,070 414,519 Net Losses as a Percent of GAAP Equity3 1 1 1 2 2 4 15 Gross Losses1 $182,916 304,764 489,387 682,261 778,401 899,633 1,290,100 Our current catastrophe reinsurance program exhausts at an approximately 1 in 220 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 hurricanes making U.S.-landfall will vary, perhaps materially, from our estimated modeled losses. The property excess of loss treaty, which covers both our standard market and E&S business, was renewed on July 1, 2020, with the top layer renewed on January 1, 2021. The major terms of these treaties are consistent with the prior year. The following table summarizes of our property reinsurance treaties and arrangements covering our Insurance Subsidiaries: PROPERTY REINSURANCE ON INSURANCE PRODUCTS Treaty Name Property Catastrophe Excess of Loss (covers all insurance operations) Property Excess of Loss (covers all insurance operations) Reinsurance Coverage $785 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 $825 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. Terrorism Coverage 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 60 Casualty Reinsurance We renewed the casualty excess of loss treaty, which covers both our standard market and E&S Lines business, on July 1, 2020, on substantially the same terms as the treaty expiring June 30, 2020. The following table summarizes our casualty reinsurance treaties and arrangements covering our Insurance Subsidiaries: CASUALTY REINSURANCE ON INSURANCE PRODUCTS Treaty Name Casualty Excess of Loss (covers all insurance operations) Reinsurance Coverage There are six layers covering 100% of $88 million in excess of $2 million. Losses other than terrorism losses are subject to the following: - $3 million in excess of $2 million layer provides 28 reinstatements, $87 million annual aggregate limit; - $7 million in excess of $5 million layer provides six reinstatements, $49 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. Terrorism Coverage 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 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. 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) Endurance Specialty Quota share and Loss Development Cover, which provides protection for losses on policies written prior to the acquisition and any development on reserves established by MUSIC as of the date of acquisition, (iv) Equipment Breakdown Coverage Reinsurance Treaty, (v) Multi-line Quota Share, which covers additional personal lines coverages, and (vi) Cyber Liability Quota Share. We regularly evaluate our overall reinsurance program, and we try to develop effective ways to manage the transfer of risk. We base our analysis on a comprehensive process that includes periodic analysis of modeling results and review of our own loss experience, aggregation of exposures, exposure growth, diversification of risks, limits written, projected reinsurance costs, reinsurer financial strength, and projected impact on earnings, equity, and statutory surplus. We strive to balance reinsurer credit quality, price, terms, and our appetite to retain a certain level of risk. Investments Segment The primary objective of the investment portfolio is to maximize after-tax net investment income and the overall total return of the portfolio, while maintaining a high credit quality core fixed income securities portfolio and managing our duration risk profile. The effective duration of the fixed income securities portfolio, including short-term investments, was 3.8 years as of December 31, 2020, compared to the Insurance Subsidiaries' liability duration of 3.7 years. The effective duration 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. Our fixed income securities and short-term investment portfolios represented 92% of our invested assets at December 31, 2020, and 96% of our invested assets at December 31, 2019. These portfolios had a weighted average credit rating of “ AA- ” as of both dates, with investment grade holdings representing 96% of these portfolios at December 31, 2020 and 97% as of December 31, 2019. We have been actively engaged in monitoring and managing the exposure to credit risk in our portfolio associated with the impact of the COVID-19 pandemic and related economic conditions during 2020. We have also been managing the portfolio's exposure to floating rate securities, which reset principally to 90-day LIBOR. Given the reduction in the valuation of U.S. public equities and the significant widening of high yield credit spreads earlier in the year, we modestly increased our allocation to risk-seeking assets during 2020 as we identify attractive investment opportunities. Despite the strong performance of our portfolio, the average after-tax new money yield on fixed income purchases continued to decline as treasury rates remained low 61 and credit spreads continued to tighten throughout the year. Given the current environment, we continue to reinvest proceeds from the non-sale disposal activity primarily related to "AAA" rated agency-backed RMBS into other high quality, but non- AAA rated fixed income sectors, as we find the risk adjusted returns more attractive. Over the coming quarters, we expect the average credit rating will decrease to "A+" from "AA-" and remain there for the foreseeable future; however, we do not anticipate a material shift in the overall risk/return characteristics of our fixed income securities portfolio. 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. Total Invested Assets ($ in thousands) Total invested assets $ Invested assets per dollar of common stockholders' equity Unrealized gain – before tax1 Unrealized gain – after tax1 1Includes unrealized gain on fixed income securities and equity securities. 2020 2019 Change 7,505,599 2.96 395,207 312,214 6,688,654 3.05 216,564 171,085 12 % (3) 82 82 Invested assets increased $817 million at December 31, 2020, compared to December 31, 2019, primarily driven by (i) $554.0 million in operating cash flow, (ii) a $178.6 million increase in pre-tax net unrealized gains, and (iii) $195.1 million in net proceeds from the issuance of preferred stock. For additional information regarding the issuance of preferred stock, see Note 17. "Preferred Stock" in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. The increase in unrealized gains on our fixed income securities portfolio increased our book value per common share by $2.25, and was driven principally by a significant decline in benchmark United States Treasury rates. Net Investment Income The components of net investment income earned were as follows: ($ in thousands) Fixed income securities Equity securities CMLs Short-term investments Other investments Investment expenses Net investment income earned – before tax Net investment income tax expense Net investment income earned – after tax $ 184,612 Effective tax rate Annual after-tax yield on fixed income securities Annual after-tax yield on investment portfolio 18.7 % 2.6 2.6 2020 $ 203,926 2019 203,255 2020 vs. 2019 2018 2019 vs. 2018 — % 178,104 14 % 9,286 844 1,821 26,922 (15,692) 227,107 42,495 6,996 — 6,653 18,778 (13,139) 222,543 41,382 181,161 18.6 2.9 2.9 33 n/m (73) 43 (19) 2 3 2 0.1 pts (0.3) (0.3) 7,764 — 3,472 17,799 (11,803) 195,336 34,855 160,481 17.8 2.8 2.8 (10) n/m 92 6 (11) 14 19 13 0.8 0.1 0.1 pts Income on our fixed income portfolio was flat in 2020 compared to 2019, as strong operating cash flows constituting 20% of NPW, were offset by lower yields on this portfolio, as reflected in the table above. Income from alternative investments in our other investment portfolio drove the increase in investment income earned in 2020 compared to 2019. Results on these holdings are recorded on a one-quarter lag, and the strong capital market performance in the second and third quarters of 2020, which followed the significant COVID-19-related volatility in the first quarter of 2020, drove this portfolio's higher returns during the year. Additionally, there was a year-over-year decrease in income on our short-term investments. 62 Realized and Unrealized Investment Gains and Losses When evaluating securities for sale, our general philosophy is to reduce our exposure to securities and sectors based on economic evaluations of whether the fundamentals for that security or sector have deteriorated or the timing is appropriate 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) on disposals Net unrealized gains (losses) on equity securities Net credit loss on fixed maturities, AFS Net credit benefit on fixed maturities, HTM Losses on securities for which we have the intent to sell Net OTTI losses recognized earnings Total net realized and unrealized investment (losses) gains 2020 2019 2018 $ $ 9,148 7,939 (5,042) 4 (16,266) (4,217) 26,715 (8,649) (3,644) 14,422 (18,975) (29,369) (6,579) (54,923) Realized and unrealized investment gains (losses) were significantly impacted by COVID-19-related market volatility in the first quarter of 2020, and substantially all of the $16.3 million of losses on securities we intend to sell were recorded in that quarter to provide our investment managers flexibility to trade and optimize our investment portfolio. The majority of these losses on securities we intend to sell related to corporate securities in our AFS fixed income portfolio. Net realized gains of $9.2 million in 2020 were driven by the active management of our AFS fixed income portfolio during the year, and were lower than net gains of $26.7 million in 2019, which were driven by opportunistic sales in our equity securities portfolio. For additional information regarding our losses on securities we intend to sell and our methodology for estimating the allowance for credit losses, see Note 2. “Summary of Significant Accounting Policies” and Note 5. "Investments" in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. Federal Income Taxes The following table provides information regarding federal income taxes. ($ in millions) Federal income tax expense Effective tax rate 2020 2019 2018 $ 56.6 18.7 % 64.8 19.3 32.8 15.5 The effective tax rate in the table above differs from the statutory rate of 21% principally due to: (i) the benefit of tax- advantaged interest and dividend income; and (ii) the impact of excess tax benefits on our stock-based compensation awards, partially offset by certain disallowances of executive compensation. See Note 14. “Federal Income Taxes” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K for further information regarding the following: (i) a reconciliation of our effective tax rate to the statutory rate of 21%; and (ii) details regarding our net deferred tax liability and asset. Financial Condition, Liquidity, and Capital Resources Capital resources and liquidity reflect our ability to generate cash flows from business operations, borrow funds at competitive rates, and raise new capital to meet operating and growth needs. We actively managed capital resources and liquidity in 2020, as we increased liquidity early in the year out of an abundance of caution at the onset of the COVID-19 pandemic, repaid those borrowings by year-end, and issued our first preferred stock offering during the fourth quarter of 2020. These activities will be further discussed in the "Liquidity" section below. Liquidity We manage liquidity by focusing on generating sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. We also adjust our liquidity in light of economic or market conditions, as discussed further below. Capital Market Activities In the fourth quarter of 2020, we enhanced our capital structure flexibility at the Parent by issuing $200 million of 4.60% non- cumulative perpetual preferred stock. Net proceeds after issuance costs were approximately $195 million. The Parent is using these proceeds for general corporate purposes, which may include the repurchase of common stock under a $100 million share repurchase program authorized by our Board in conjunction with the preferred stock offering. No shares were repurchased under this authorization in the fourth quarter of 2020. For additional information on the preferred stock transaction, refer to Note 17. “Preferred Stock” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. The Parent had no other private or public issuances of stock or debt instruments during 2020. 63 Short-term Borrowings We significantly increased liquidity at the Insurance Subsidiaries and the Parent during the first quarter of 2020 amid the COVID-19 pandemic, which was followed by a period of extreme volatility and uncertainty in the financial markets. In the aggregate, we borrowed $302 million from the FHLBNY, the FHLBI, and our Parent’s line of credit agreement out of an abundance of caution to reduce the likelihood of becoming a forced seller of invested assets to fund operations if there were a significant slowdown in premium payments as a result of the COVID-19 pandemic. We felt this was prudent given our focus on small-to-medium size business and our geographic footprint as we expected that some customers may have significant cash flow disruptions due to the COVID-19-related governmental orders and the economic slowdown. Furthermore, the ultimate viability of some of our commercial customers' businesses depend, in part, on the depth and duration of the economic slowdown, their participation in any federal fiscal stimulus packages, and whether their business is considered essential or non- essential. We routinely monitor our cash positions daily as part of our liquidity management process, and during 2020, we did not experience any material change in our daily cash collections despite the impact of the pandemic. Considering this, we repaid all of our short-term borrowings by December 31, 2020. For further information regarding these borrowings, see Note 11. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Sources of Liquidity Sources of cash for the Parent historically have consisted of dividends from the Insurance Subsidiaries, the investment portfolio held at the Parent, borrowings under third-party lines of credit, 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. The Parent’s investment portfolio provides liquidity primarily through (i) short-term investments generally maintained in “AAA” rated money market funds approved by the National Association of Insurance Commissioners, (ii) high-quality, highly- liquid government and corporate fixed income securities, (iii) equity securities, and (iii) a cash balance. In the aggregate, Parent cash and total investments amounted to $490 million at December 31, 2020, and $278 million at December 31, 2019. The increase in 2020 compared to 2019 was primarily due to net proceeds from our preferred stock offering. The Parent's liquidity may fluctuate based on various factors, including the amount and availability of dividends from our Insurance Subsidiaries, investment income, expenses, other Parent cash needs, such as dividends payable to shareholders, and asset allocation investment decisions. Our target for the Parent is to maintain liquidity matching at least twice its expected annual needs, which is currently estimated to be approximately $180 million. Insurance Subsidiary Dividends The Insurance Subsidiaries generate liquidity through insurance float, which is created by collecting premiums and earning investment income before claims are paid. The period of 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. The Insurance Subsidiaries paid $105 million in dividends to the Parent in 2020. As of December 31, 2020, our allowable ordinary maximum dividend is $241 million for 2021. Any Insurance Subsidiary dividends to the Parent are (i) subject to the approval and/or review of its domiciliary state insurance regulator and (ii) generally are payable only from earned surplus reported in its statutory annual statements as of the preceding December 31. Although insurance regulators have approved past dividends historically, there is no assurance that they will approve future dividends that may be declared. New Jersey corporate law also limits the maximum amount of dividends the Parent can pay our shareholders if either (i) the Parent would be unable to pay its debts as they became due in the usual course of business or (ii) the Parent’s total assets would be less than its total liabilities. The Parent’s ability to pay dividends to shareholders is also impacted by (i) covenants in its credit agreement (discussed below under "Line of Credit") that obligate it, among other things, to maintain a minimum consolidated net worth and a maximum ratio of consolidated debt to total capitalization, and (ii) the terms of our preferred stock that prohibit dividends to be declared or paid on our common stock if dividends are not declared and paid, or made payable, on all outstanding preferred stock for the latest completed dividend period. For additional information regarding dividend restrictions and financial covenants, where applicable, see Note 11. “Indebtedness,” Note 17. “Preferred Stock” and Note 22. “Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. 64 Line of Credit On December 20, 2019, the Parent entered into a Credit Agreement with the lenders named therein (the “Lenders”) and the Bank of Montreal, Chicago Branch, as Administrative Agent ("Line of Credit"). Under the Line of Credit, the Lenders have agreed to provide the Parent with a $50 million revolving credit facility that can be increased to $125 million with the Lenders' consent. The Line of Credit will mature on December 20, 2022, and has a variable interest rate based on, among other factors, the Parent’s debt ratings. For additional information regarding the Line of Credit agreement and corresponding representations, warranties, and covenants, refer to Note 11. “Indebtedness” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. As the following table shows, several of our Insurance Subsidiaries are members of certain branches of the Federal Home Loan Bank ("FHLB"), which provides those subsidiaries with additional access to liquidity: Branch Federal Home Loan Bank of Indianapolis ("FHLBI") Federal Home Loan Bank of New York ("FHLBNY") Insurance Subsidiary Member SICSC1 SICSE1 SICA SICNY 1These subsidiaries are jointly referred to as the "Indiana Subsidiaries" as they are domiciled in Indiana. The Line of Credit permits aggregate borrowings from the FHLBI and the FHLBNY up to 10% of the respective member company’s admitted assets for the previous year. Additionally, as SICNY is domiciled in New York, its FHLBNY borrowings are limited by New York insurance regulations to the lower of 5% of admitted assets for the most recently completed fiscal quarter, or 10% of admitted assets for the previous year-end. All FHLBI and FHLBNY borrowings are required to be secured by investments pledged as collateral. For additional information regarding collateral outstanding, refer to Note 5. "Investments" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. The following table provides information on the remaining capacity for FHLB borrowings based on these restrictions, as well as the amount of additional FHLB stock that would need to be purchased to allow these member companies to borrow their remaining capacity: ($ in millions) As of December 31, 2020 SICSC SICSE SICA SICNY Total Admitted Assets Borrowing Limitation Amount Borrowed Remaining Capacity Additional FHLB Stock Requirements $ 763.2 608.0 2,840.3 527.8 $ $ 76.3 60.8 284.0 26.4 447.5 32.0 28.0 50.0 — 110.0 44.3 32.8 234.0 26.4 337.5 0.3 0.2 10.5 1.2 12.2 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. 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, 2020 SICSC SICSE Total Admitted Assets as of December 31, 2020 Borrowing Limitation Amount Borrowed Remaining Capacity $ 763.2 608.0 $ $ 76.3 60.8 137.1 24.0 16.0 40.0 52.3 44.8 97.1 Uses of Liquidity The Parent's liquidity generated from the sources discussed above is used, among other things, to pay dividends to our shareholders. Dividends on shares of the Parent's common and preferred stock are declared and paid at the discretion of the Board based on our operating results, financial condition, capital requirements, contractual restrictions, and other relevant factors. In October 2020, our Board approved a 9% increase in the quarterly cash dividend, to $0.25 from $0.23 per share. 65 Our ability to meet our interest and principal repayment obligations on our debt, as well as our ability to continue to pay dividends to our stockholders, is dependent on (i) liquidity at the Parent, (ii) the ability of the Insurance Subsidiaries to pay dividends, if necessary, and/or (iii) the availability of other sources of liquidity to the Parent. The Parent has the following upcoming principal payments due: • • • $25 million to FHLBNY on July 21, 2021; $25 million to FHLBNY on August 16, 2021; and $60 million to FHLBI on December 16, 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 and preferred stock. Capital Resources Capital resources ensure we can pay policyholder claims, furnish the financial strength to support the business of underwriting insurance risks, and facilitate continued business growth. At December 31, 2020, we had GAAP stockholders’ equity of $2.7 billion and statutory surplus of $2.1 billion. With total debt of $550.7 million at December 31, 2020, our debt-to-capital ratio was 16.7%. For additional information on our statutory surplus, see Note 22. "Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Our cash requirements include, without limitation, principal and interest payments on various notes payable, dividends to stockholders, payment of claims, payment of commitments under limited partnership agreements, capital expenditures, and other operating expenses, including 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 we maintain at the holding company and operating subsidiary levels. As part of our long-term capital strategy, we strive to maintain capital metrics that support our targeted financial strength relative to the macroeconomic environment. Based on our analysis and market conditions, we may take a variety of actions, including, without limitation, contributing capital to the Insurance Subsidiaries, issuing additional debt and/or equity securities, repurchasing existing debt, 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. We have an attractive book of business and solid capital base, positioning us well to take advantage of market opportunities that may arise. Book value per share increased to $42.38 as of December 31, 2020, from $36.91 as of December 31, 2019, primarily due to $4.09 in net income per diluted common share and $2.25 in unrealized gains on our fixed income securities portfolio, which was partially offset by $0.94 in dividends to our common shareholders. Off-Balance Sheet Arrangements At December 31, 2020 and December 31, 2019, we had no material relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Consequently, we are not exposed to any material financing, liquidity, market, or credit risk related to off-balance sheet arrangements. 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 “Reserve for Loss and Loss Expense” section in the "Critical Accounting Policies and Estimates" section of this MD&A and in Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K, we maintain case reserves and estimates of reserves for loss and loss expense IBNR consistent with industry practice. Using generally accepted actuarial reserving techniques, we project our estimate of ultimate loss and loss expense at each reporting date. Given that the loss and loss expense reserves are estimates, as described in detail under the “Critical Accounting Policies and Estimates” section of this MD&A and in Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K, the payment of actual loss and loss expense is generally not fixed as to amount or timing. Due to this uncertainty, financial accounting standards prohibit us from discounting these reserves to their present value. Additionally, estimated losses as of the financial statement date do not consider the impact of estimated losses 66 from future business. Therefore, the projected settlement of the reserves for net loss and loss expense will differ, perhaps significantly, from actual future payments. The projected paid amounts by year in the table below 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 loss and loss expense reserve payments, so the timing and amounts of the actual payments will be affected by many factors. 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, 2020 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 $ 45.1 0.5 560.0 622.4 1,228.0 4,260.4 554.2 3,706.2 8.4 0.3 50.0 28.8 87.5 1,171.2 141.2 1,030.0 12.2 0.2 — 56.6 69.0 1,357.3 134.4 1,222.9 8.3 — — 56.6 64.9 644.7 72.4 572.3 637.2 16.2 — 510.0 480.4 1,006.6 1,087.2 206.2 881.0 1,887.6 Total $ 4,934.2 1,117.5 1,291.9 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 11. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." in this Form 10-K. In addition to the above, at December 31, 2020, 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 Total Amount of Obligation Year of Expiration of Obligation $ $ 215.7 37.7 2.0 4.4 259.8 2036 2030 2021 Less than 1 year There is no certainty that any such additional investment will be required, and we expect to have the capacity to repay or refinance these obligations as they come due. We have issued no material guarantees on behalf of others and have no trading activities involving non-exchange traded contracts accounted for at fair value. We have no material transactions with related parties other than those disclosed in Note 18. “Related Party Transactions” included in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Market Risk The fair value of our assets and liabilities are subject to market risks — primarily interest rate risk, credit risk, equity price risk, and liquidity risk related to our investment portfolio — and fluctuations in the value of our alternative investment portfolio. The allocation of our portfolio was 86% fixed income securities, 1% commercial mortgage loans, 4% equity securities, 5% short-term investments, and 4% other investments as of December 31, 2020. 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. 67 We manage our investment portfolio to mitigate risks associated with various financial market scenarios. We, however, will assume 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, 2020, approximately 13% of our fixed income securities portfolio was comprised of floating rate securities where the base rate is primarily tied to the U.S. dollar-denominated London Interbank Offered Rate ("LIBOR"). Our strategy to manage interest rate risk is to purchase intermediate-term fixed income investments that are attractively priced in relation to perceived credit risks. Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates. As our fixed income securities portfolio contains interest rate-sensitive instruments, it may be adversely affected by changes in interest rates resulting from governmental monetary policies, domestic and international economic and political conditions, and other factors beyond our control. All else being equal, a rise in interest rates will decrease the fair value of our existing fixed income investments, and a decline in interest rates will result in an increase in the fair value of our existing fixed income investments. However, new and reinvested money used to purchase fixed income securities would benefit from rising interest rates and would be negatively impacted by falling interest rates. We seek to mitigate our interest rate risk associated with holding fixed income investments by monitoring and 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 December 31, 2020, was 3.8 years, which is within our historical range. The Insurance Subsidiaries’ liability duration was approximately 3.7 years at December 31, 2020. We use an interest rate sensitivity analysis to measure the potential loss or gain in future earnings, fair values, or cash flows of market sensitive fixed income securities. The sensitivity analysis hypothetically assumes an instant parallel 200 basis point shift in interest rates up and down in 100 basis point increments from the date of the Financial Statements. We use fair values to measure the potential loss. This analysis is not intended to provide a precise forecast of the effect of changes in market interest rates and equity prices on our income or stockholders’ equity. These calculations also do not consider (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, 2020: ($ in thousands) Fixed income securities Fair value of fixed income securities portfolio Fair value change Fair value change from base (%) 2020 Interest Rate Shift in Basis Points -200 -100 — 100 200 $ 6,832,056 358,127 6,695,209 221,279 6,473,929 6,227,449 (246,480) 5,980,988 (492,941) 5.5 % 3.4 % (3.8)% (7.6)% 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, 2020, and December 31, 2019. Exposure to non-investment grade bonds represented approximately 5% of the total fixed income securities portfolio at December 31, 2020, and 4% at December 31, 2019. We actively monitored and managed the credit risk exposure in our portfolio associated with the impact of the COVID-19 pandemic and related economic conditions during 2020. We also managed the portfolio's exposure to floating rate securities, which reset principally to 90-day LIBOR. Given the reduction in the valuation of U.S. public equities and the significant widening of high yield credit spreads earlier in the year, we modestly increased our allocation to risk assets during 2020 as we identified attractive investment opportunities. Despite the strong performance of our portfolio, the average after-tax new money yield on fixed income security purchases continued to decline as U.S. Treasury rates remained low and credit spreads continued to tighten throughout the year. Given the current environment, we continue to reinvest proceeds from the non-sale disposal activity, primarily related to "AAA" rated agency-backed residential mortgage-backed securities ("RMBS"), into other high 68 quality, but "non-AAA" rated fixed income sectors, as we find the risk adjusted returns more attractive. Over the coming quarters, we expect the average credit rating will decrease to "A+" from "AA-" and remain there for the foreseeable future; however, we do not anticipate a material shift in the overall risk/return characteristics of our fixed income securities portfolio. Details on the credit quality of our invested assets at December 31, 2020 are provided below: December 31, 2020 ($ in millions) Short-term investments Fixed income securities: U.S. government obligations Foreign government obligations State and municipal obligations Corporate securities MBS: RMBS: Agency RMBS Non-agency RMBS Total RMBS Commercial mortgage- backed securities ("CMBS") Total mortgage-backed securities CLO and other ABS: Auto Aircraft CLOs Credit cards Other ABS Total CLOs and Other ABS Total securitized assets Total fixed income securities and short-term investments Total fixed income securities and short-term investments by credit rating percentage Commercial mortgage loans Equity securities: Common stock1 Preferred stock Total equity securities Other investments: Alternative investments: Private equity Private credit Real assets Total alternative investments Other investments Total other investments Total invested assets $ Amortized Cost Fair Value 410 $ 410 $ % of Yield to Invested Assets Worst 5.5 % 0.1 % Effective Duration in Years 0.00 Average Life in Years 0.00 AAA $ 382 AA $ 27 A $ — $ BBB 1 Non- Investment Grade 1 $ Not Rated $ — Credit Rating 110 116 1.5 17 18 0.2 1,164 2,165 1,252 2,341 16.7 31.2 904 95 999 621 954 98 1,052 12.7 1.3 14.0 668 8.9 1,620 1,720 22.9 43 53 659 17 243 45 51 661 17 253 0.6 0.7 8.8 0.2 3.4 1,015 2,635 1,027 2,746 13.7 36.6 6,500 6,884 91.7 0.7 1.3 1.0 1.7 1.0 1.7 1.0 1.6 1.3 0.5 6.0 3.0 0.3 2.4 2.8 1.8 1.5 4.5 5.0 5.4 4.7 2.5 1.0 2.3 4.6 3.2 2.4 3.2 1.1 1.4 3.4 1.8 2.7 3.8 6.3 5.8 5.0 6.2 3.2 2.7 3.2 5.9 113 — 225 14 954 44 998 586 4.2 1,584 2.3 3.6 4.5 1.4 5.3 4.5 4.3 35 — 357 17 68 477 2,062 3 2 613 123 — 5 5 40 45 6 1 206 — 9 222 267 — 9 354 881 — 47 47 31 78 3 16 32 — 139 190 268 — 7 60 1,092 — 1 1 11 12 — 31 16 — 28 75 87 — — — 232 — — — — — 1 3 48 — 9 62 62 4.9 2,795 1,034 1,512 1,247 295 — — — — — — — — — — — 1 — 1 2 2 2 46 47 0.6 3.8 2.8 7.0 300 2 302 157 54 20 309 4.1 2 — 4.1 310 157 54 20 2.1 0.7 0.3 3.1 0.5 3.5 100 231 35 266 231 35 266 7,114 $ 7,508 — — — — — — — — — — — — — — — — — — — — 40.6 % 15.0 % 22.0 % 18.1 % — — — — — — — — — — — — — — 27 — — — — — — 20 — 1 1 — — — — — — — — — — — — — — — — $2,795 — — — — — — $1,034 $1,539 — — — $1,268 $ 4.3 % — % — — — 309 — 309 1 1 — 157 54 — 20 — — 231 — 35 — 266 $576 295 1Includes investments in exchange traded funds, mutual funds, business development corporations, and real estate investment trusts. Amounts may not foot due to rounding. On a quarterly basis, we review our invested assets for concentrations of credit risk. The sectors representing more than 10% of our invested assets at December 31, 2020 were (i) special revenue bonds within our state and municipal obligations portfolio (13%), (ii) the financial sector within corporate securities (14%), and (iii) agency-backed securities within our RMBS portfolio (13%). Each of these sector holdings are discussed in more detail below. 69 State and Municipal Obligations Our state and municipal obligations represented 17% of our invested assets at December 31, 2020. The following table details the top 10 state exposures at December 31, 2020: State Exposures of Municipal Bonds ($ in thousands) New York California Texas1 New Jersey Florida Pennsylvania Washington Massachusetts Colorado Ohio Other Pre-refunded/escrowed to maturity bonds Total General Obligation State & Local 9,605 49,197 39,450 — 3,071 — 20,533 902 4,680 2,321 100,569 230,328 41,044 271,372 $ $ Special Revenue 141,563 83,733 50,090 68,201 49,902 52,953 30,704 41,802 36,102 33,154 322,253 910,457 70,104 980,561 Fair Value 151,168 132,930 89,540 68,201 52,973 52,953 51,237 42,704 40,782 35,475 422,822 1,140,785 111,148 1,251,933 % of Total 12% 11% 7% 5% 4% 4% 4% 3% 3% 3% 34% 91% 9% 100% Weighted Average Credit Quality AA- AA- AA A AA- AA- AA AA A+ A+ AA- AA- AAA AA- % of Total Municipal Portfolio 22 % % of Total Investment Portfolio 4 % 1Of the $39.5 million in state and local Texas general obligation bonds, $19 million represents investments in Texas Permanent School Fund bonds, which are considered to have lower risk as a result of the bond guarantee programs that support these bonds. 100 % 17 % 78 % 13 % Special revenue fixed income securities of municipalities (referred to as “special revenue bonds”) represent 13% of our total invested assets at December 31, 2020. These securities generally do not have the “full faith and credit” backing of the municipal or state governments, as do general obligation bonds, but special revenue bonds have a dedicated revenue stream for repayment. For our special revenue bonds, 67% of the dedicated revenue stream is comprised of the following: (i) essential services (53%), which is comprised of transportation, water and sewer, and electric; and (ii) education (14%), which includes school districts and higher education, including state-wide university systems. As such, we believe our special revenue bond portfolio is appropriate for the current environment. Corporate Securities Our corporate securities represented 31% of our invested assets at December 31, 2020. For investment-grade corporate bonds, we address the risk of an individual issuer's default by maintaining a diverse portfolio of holdings. The primary risk related to non-investment grade corporate bonds is credit risk. A weak financial profile can lead to credit rating downgrades, which can put further downward pressure on bond prices. Valuations on these bonds are related more directly to underlying operating performance than to general interest rates. Our holdings of non-investment grade corporate bonds, which typically exhibit weaker credit profiles and are subject to more risk of credit loss, represent 3% of our overall investment portfolio. The tables below provide details on our corporate bond holdings at December 31, 2020 and December 31, 2019: December 31, 2020 ($ in millions) Investment grade Non-investment grade Total corporate securities December 31, 2019 ($ in millions) Investment grade Non-investment grade Total corporate securities Fair Value Carry Value $ $ 2,109.2 232.1 2,341.3 2,108.3 232.1 2,340.4 Unrealized/ Unrecognized Gain (Loss) 173.8 5.7 179.5 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 Weighted Average Credit Quality A- B+ BBB+ Weighted Average Credit Quality A- B+ BBB+ 70 The following table provides the sector composition of this portfolio at December 31, 2020 and 2019: December 31, 2020 Weighted Average Credit Rating A- % of Fixed Income Portfolio 16 % $ Fair Value 1,048.5 December 31, 2019 Weighted Average Credit Rating A- % of Fixed Income Portfolio 15 % BBB+ BBB+ BBB BBB+ BBB BBB+ B BBB- BBB BBB+ BBB+ 4 2 2 1 2 1 1 — 3 1 32 Fair Value 925.2 259.7 129.8 136.0 81.6 104.7 37.6 65.6 26.7 158.5 39.2 4 2 2 2 2 1 1 1 3 2 281.3 150.2 144.5 109.0 100.5 76.4 71.4 40.0 204.9 114.6 BBB+ BBB+ BBB- BBB+ BBB BBB+ B BBB- BBB BBB+ BBB+ ($ in millions) Financials Consumer non-cyclicals Communications Consumer cyclicals1 Technology Energy Utilities Bank loans Basic materials Other industrials Other Total corporate securities 2,341.3 36 1,964.6 1Included in consumer cyclicals are travel and leisure, as well as retail exposures. As illustrated in the table above, within our allocation to corporate securities, financials is our most significant industry concentration at 16% of our fixed income securities portfolio at December 31, 2020. The corporate securities portfolio allocation to financials is well-diversified by issuer and has a weighted average credit rating of “A-”. No individual issuer comprised more than 1% of our fixed income securities portfolio at December 31, 2020. In our "Risks Related to COVID-19" risk factor in Item 1A. Risk Factors of this Form 10-K, we also identified certain industries, namely travel, leisure, retail, energy, and real estate, as being negatively impacted by COVID-19. Travel, leisure, and retail are included in consumer cyclicals in the table above. Our exposure to these sectors within our consumer cyclicals portfolio as of December 31, 2020 was as follows: • • • Travel: $39.0 million fair value, $0.8 million net unrealized loss, “BBB” weighted average credit rating; Leisure: $20.4 million fair value, $1.0 million net unrealized gain, “BB” weighted average credit rating; and Retail: $29.0 million fair value, $2.1 million net unrealized gain, “BBB+” weighted average credit rating. Overall, our allocation to these sectors negatively impacted by COVID-19 is not significant, and these positions were in an aggregate net unrealized gain at December 31, 2020. The net unrealized gain position of the consumer cyclical and energy sectors at December 31, 2020, and 2019, was as follows: ($ in millions) Consumer cyclicals Energy December 31, 2020 December 31, 2019 $ $ 7.5 7.6 4.7 3.8 While these sectors are not material to our fixed income securities portfolio, we continue to monitor them in light of the impact of the COVID-19 pandemic. Mortgage-Backed Securities (RMBS and CMBS Portfolios) Mortgage-backed securities represent our most significant exposure to real estate, and further breakdown of this exposure is provided in the table above. Agency RMBS represented 91% of our RMBS allocation, and 13% of our invested assets, as of December 31, 2020. These securities are rated “AAA" and had an unrealized gain of approximately $50 million as of December 31, 2020. To additionally manage and mitigate exposure on our RMBS and CMBS portfolios, we perform analysis both at the time of purchase and as part of the ongoing portfolio evaluation. This analysis includes review of loan-to-value ratios, geographic spread of the assets securing the bond, delinquencies in payments on the underlying mortgages, gains/losses on sales, evaluations of projected cash flows, as well as other information that aids in determination of the health of the underlying assets. We consider the overall credit environment, economic conditions, the investment's total projected return, and overall portfolio asset allocation in deciding to purchase or sell these securities. 71 CLO and Other ABS Portfolio For CLO and other ABS, the primary risk is credit risk. We manage this risk by evaluating a number of factors, including the deal's structure, the credit quality of underlying loans or assets, the composition of the underlying portfolio, and the portfolio manager's track record and capabilities. We monitor key performance metrics, including over-collateralization, interest coverage, and cash flows, on an on-going basis. We consider the overall credit environment, economic conditions, the investment's total projected return, and overall portfolio asset allocation in our deciding to purchase or sell CLO and other ABS. Other ABS includes structured note obligations and securities collateralized by loans and other financial assets, including, without limitation, auto loans, credit card receivables, equipment leases, and student loans. The tables below provide details on our CLO and other ABS holdings at December 31, 2020, and December 31, 2019: December 31, 2020 ($ 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, 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 Fair Value Carry Value Unrealized/ Unrecognized Gain (Loss) Weighted Average Credit Quality $ 611.6 351.9 963.5 49.2 13.9 63.1 611.6 351.9 963.5 49.2 13.9 63.1 $ 1,026.6 1,026.6 4.1 10.4 14.5 (2.3) 0.1 (2.2) 12.3 AA+ A+ AA BB- B BB- AA- 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- Equity Price Risk Our equity securities portfolio is exposed to risk from potential volatility in equity market prices. We attempt to minimize equity price risk exposure by maintaining a diversified portfolio and limiting concentrations in any one company or industry. The following table presents the hypothetical increases and decreases in 10% increments in market value of the equity portfolio as of December 31, 2020: ($ in thousands) (30)% (20)% (10)% Fair value of AFS equity portfolio $ 217,257 Fair value change (93,110) 248,294 (62,073) 279,330 (31,037) 0% 310,367 10% 341,404 31,037 20% 372,440 62,073 30% 403,477 93,110 Change in Equity Values in Percent In addition to our equity securities, we invest in certain other investments that are also subject to price risk. Our other investments primarily include alternative investments in private limited partnerships that invest in various strategies such as private equity, direct lending, mezzanine financing, distressed debt, infrastructure, and real estate. As of December 31, 2020, 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 72 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. 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-publicly traded securities. Percentage of Invested Assets 68 % 27 5 100 % Indebtedness (a) Long-Term Debt As of December 31, 2020, we had outstanding long-term debt of $550.7 million that matures as shown in the following table: ($ in thousands) Financial liabilities Long-term debt 1.61% Borrowings from FHLBNY 1.56% Borrowings from FHLBNY 3.03% Borrowings from FHLBI 7.25% Senior Notes 6.70% Senior Notes 5.375% Senior Notes Subtotal Unamortized debt issuance costs Finance lease obligations Total notes payable Year of Maturity Carrying Amount Fair Value 2020 $ 2021 2021 2026 2034 2035 2049 25,000 25,000 60,000 49,914 99,499 294,241 553,654 (3,419) 508 $ 550,743 25,182 25,198 67,513 66,148 127,886 383,669 695,596 The weighted average effective interest rate for our outstanding long-term debt was 5.2% at December 31, 2020. Our debt is not exposed to material changes in interest rates because the interest rates are fixed. Refer to Note 11. "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") with 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 that can be increased to $125 million with the Lenders' consent. The Line of Credit will mature on December 20, 2022 and has a variable interest rate based on, among other factors, the Parent’s debt ratings. For additional information regarding the Line of Credit agreement and corresponding representations, 73 warranties, and covenants, refer to Note 11. “Indebtedness” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. Refer to Note 11. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K for additional information on our short-term borrowing activity. 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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, 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, 2020, 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, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Estimate of reserve for loss and loss expense As discussed in Notes 2 and 10 to the consolidated financial statements, the Company estimates the reserve for loss and loss expense (reserves) through an internal reserve review that relies upon methods consistent with actuarial standards of practice supplemented with other internal and external information. The Company develops reserve estimates by line of business and, as experience emerges and other information develops, the reserve estimates are assessed in aggregate and adjusted as necessary. As of December 31, 2020, the Company recorded a liability of $4.26 billion for reserves. 74 We identified the evaluation of the estimate of reserves for loss and loss expense as a critical audit matter. The process to evaluate the Company’s estimate of reserves involved a high degree of subjective auditor judgment due to the inherent uncertainties in adjusting past experience for current development and anticipating trends for predicting future events. These uncertainties may be affected by a number of considerations, including internal factors, such as changes to underwriting and claims practices, supplemental data regarding claims reporting and settlement trends, exposure estimates for reported claims, potential large or complex claims, and additional trends observed by claims personnel or defense counsel, and external factors such as legislative and regulatory enactments, judicial trends and decisions, social trends, and trends in general economic conditions. Evaluating the impact of these factors on the estimate of reserves also required specialized actuarial skills and knowledge. The following are the primary procedures we performed to address this critical audit matter. With the involvement of actuarial professionals, when appropriate, we evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s internal reserve review and determination of the Company’s best estimate of recorded reserves. We also involved actuarial professionals with specialized skills and knowledge, who assisted in: • • • • • evaluating the Company’s actuarial methods by comparing them to methods consistent with actuarial standards of practice; developing an independent estimate of reserves for certain lines of business using methods consistent with actuarial standards of practice; for certain other lines of business, assessing the Company's internal reserve review by evaluating the assumptions and actuarial methods used; developing a consolidated range of reserves and comparing it to the Company's recorded reserves; assessing movement of the Company’s recorded reserves within the consolidated range of reserves. We have served as the Company's auditor since 1964. New York, New York February 12, 2021 /s/ KPMG LLP 75 Consolidated Balance Sheets December 31, ($ in thousands, except share amounts) ASSETS Investments: Fixed income securities, held-to-maturity – at carrying value (fair value: $18,001 – 2020; $21,975 – 2019) Less allowance for credit losses Fixed income securities, held-to-maturity, net of allowance for credit losses Fixed income securities, available-for-sale – at fair value (allowance for credit losses: $3,969 – 2020; amortized cost: $6,073,517 – 2020; $5,879,986 – 2019) Commercial mortgage loans – at carrying value (fair value: $47,289 – 2020) Less: allowance for credit losses Commercial mortgage loans, net of allowance for credit losses Equity securities – at fair value (cost: $301,551 – 2020; $72,061 – 2019) Short-term investments Other investments Total investments (Notes 5 and 7) Cash Restricted cash Interest and dividends due or accrued Premiums receivable Less: allowance for credit losses (Note 8) Premiums receivable, net of allowance for credit losses Reinsurance recoverable Less: allowance for credit losses (Note 9) Reinsurance recoverable, net of allowance for credit losses Prepaid reinsurance premiums (Note 9) Deferred federal income tax (Note 14) Property and equipment – at cost, net of accumulated depreciation and amortization of: $240,150 – 2020; $227,566 – 2019 Deferred policy acquisition costs (Note 2) Goodwill (Note 12) Other assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities: Reserve for loss and loss expense (Note 10) Unearned premiums Long-term debt (Note 11) Current federal income tax Deferred federal income tax (Note 14) Accrued salaries and benefits Other liabilities Total liabilities Stockholders’ Equity: Preferred stock of $0 par value per share (Note 17): Authorized shares: 5,000,000; Issued shares: 8,000 with $25,000 liquidation preference per share - 2020; no shares issued or outstanding - 2019 Common stock of $2 par value per share: Authorized shares 360,000,000 Issued: 104,032,912 – 2020; 103,484,159 – 2019 Additional paid-in capital Retained earnings Accumulated other comprehensive income (Note 6) Treasury stock – at cost (shares: 44,127,109 – 2020; 44,023,006 – 2019) Total stockholders’ equity Commitments and contingencies (Notes 19 and 20) Total liabilities and stockholders’ equity See accompanying Notes to Consolidated Financial Statements. 76 $ $ $ $ $ 2020 2019 16,846 (22) 16,824 6,455,928 46,306 — 46,306 310,367 409,852 266,322 7,505,599 394 14,837 45,004 857,014 (21,000) 836,014 589,269 (1,777) 587,492 170,531 — 77,696 288,578 7,849 153,919 9,687,913 4,260,355 1,618,271 550,743 14,021 27,096 114,868 363,670 6,949,024 20,800 — 20,800 6,095,620 — — — 72,937 282,490 216,807 6,688,654 300 7,675 44,846 830,301 (6,400) 823,901 577,635 (4,400) 573,235 166,705 6,776 77,409 271,186 7,849 128,614 8,797,150 4,067,163 1,523,167 550,597 2,987 — 126,753 331,547 6,602,214 200,000 — 208,066 438,985 2,271,537 220,186 (599,885) 2,738,889 206,968 418,521 2,080,529 81,750 (592,832) 2,194,936 $ 9,687,913 8,797,150 Consolidated Statements of Income December 31, ($ in thousands, except per share amounts) Revenues: Net premiums earned Net investment income earned Net realized and unrealized investment (losses) gains Other income Total revenues Expenses: Loss and loss expense incurred Amortization of deferred policy acquisition costs Other insurance expenses Interest expense Corporate expenses Total expenses Income before federal income tax Federal income tax expense: Current Deferred Total federal income tax expense Net income Preferred stock dividends Net income available to common stockholders Earnings per common share: Net income available to common stockholders - Basic Net income available to common stockholders - Diluted See accompanying Notes to Consolidated Financial Statements. 2020 2019 2018 2,681,814 227,107 (4,217) 17,570 2,597,171 222,543 14,422 12,355 2,436,229 195,336 (54,923) 9,438 2,922,274 2,846,491 2,586,080 1,635,823 1,551,491 1,498,134 560,271 366,941 30,839 25,412 535,973 358,069 33,668 30,900 495,042 331,318 24,419 25,446 2,619,286 2,510,101 2,374,359 302,988 336,390 211,721 60,059 (3,426) 56,633 60,640 4,127 64,767 35,012 (2,230) 32,782 246,355 271,623 178,939 — — — 246,355 271,623 178,939 4.12 4.09 4.57 4.53 3.04 3.00 $ $ $ $ $ 77 Consolidated Statements of Comprehensive Income December 31, ($ in thousands) Net income Other comprehensive income (loss) ("OCI"), net of tax: Unrealized gains (losses) on investment securities: Unrealized holding gains (losses) arising during year Unrealized losses on securities with credit loss recognized in earnings Amounts reclassified into net income: Held-to-maturity securities Net realized losses on disposals and losses on intent-to-sell available-for-sale ("AFS") securities Credit loss expense Total unrealized gains (losses) on investment securities Defined benefit pension and post-retirement plans: Net actuarial gain (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. 2020 2019 2018 $ 246,355 271,623 178,939 133,104 (6,459) (19) 4,247 3,984 134,857 168,021 — (46) 530 — 168,505 (97,284) — 87 31,316 — (65,881) 1,197 (10,898) (8,906) 2,382 3,579 138,436 384,791 $ 2,099 (8,799) 159,706 431,329 1,680 (7,226) (73,107) 105,832 78 Consolidated Statements of Stockholders’ Equity December 31, ($ in thousands, except share and per share amounts) Preferred stock: Beginning of year Issuance of preferred stock End of year 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 Preferred stock issuance costs 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 Cumulative effect adjustment due to adoption of guidance on allowance for credit losses, net of tax (Note 3) Balance at beginning of year, as adjusted Net income Dividends to preferred stockholders Dividends to common 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 preferred share Dividends declared per common share Preferred Stock, shares outstanding: Beginning of year Issuance of preferred stock End of year Common Stock, shares outstanding: Beginning of year Dividend reinvestment plan Stock purchase and compensation plan Acquisition of treasury stock End of year See accompanying Notes to Consolidated Financial Statements. 79 2020 2019 2018 $ $ $ $ — 200,000 200,000 206,968 58 1,040 208,066 418,521 1,645 (5,416) 24,235 438,985 2,080,529 — — — 1,435 2,081,964 246,355 — (56,782) 2,271,537 81,750 — — 81,750 138,436 220,186 (592,832) (7,053) (599,885) 2,738,889 — 0.94 — 8,000 8,000 — — — 205,697 44 1,227 206,968 390,315 1,510 — 26,696 418,521 1,858,414 — — 342 — 1,858,756 271,623 — (49,850) 2,080,529 (77,956) — — (77,956) 159,706 81,750 (584,668) (8,164) (592,832) 2,194,936 — 0.83 — — — — — — 204,569 47 1,081 205,697 367,717 1,379 — 21,219 390,315 1,698,613 30,726 (5,707) — — 1,723,632 178,939 — (44,157) 1,858,414 20,170 (30,726) 5,707 (4,849) (73,107) (77,956) (578,112) (6,556) (584,668) 1,791,802 — 0.74 — — — 59,461,153 28,890 519,863 (104,103) 59,905,803 58,948,554 22,087 613,678 (123,166) 59,461,153 58,495,122 23,493 540,337 (110,398) 58,948,554 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 losses (gains) Loss on disposal of fixed assets Changes in assets and liabilities: Increase in reserves for loss and loss expense, net of reinsurance recoverables Increase in unearned premiums, net of prepaid reinsurance Decrease in net federal income taxes Increase in premiums receivable Increase in deferred policy acquisition costs Increase in interest and dividends due or accrued Decrease in accrued salaries and benefits Increase in other assets 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 commercial mortgage loans Purchase of equity securities Purchase of other investments Purchase of short-term investments Sale of fixed income securities, available-for-sale Proceeds from commercial mortgage loans 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 preferred stockholders Dividends to common stockholders Acquisition of treasury stock Net proceeds from stock purchase and compensation plans Preferred stock issued, net of issuance costs Proceeds from borrowings Repayment of borrowings Repayment of finance lease obligations Net cash provided by (used in) financing activities Net increase (decrease) 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. $ 80 2020 2019 2018 $ 246,355 271,623 178,939 59,350 16,227 (12,408) 3,472 4,217 22 181,839 91,278 7,708 (13,171) (17,392) (158) (13,264) (27,927) 27,897 554,045 — (1,723,818) (46,506) (230,813) (79,598) (5,762,725) 487,087 201 5,635,463 3,888 1,019,132 1,320 5,375 24,884 — (22,064) (688,174) — (54,486) (7,053) 8,411 195,063 587,000 (587,000) (550) 141,385 7,256 7,975 15,231 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 — (1,856,125) — (46,397) (64,908) (6,087,909) 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 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 (7,150) (2,918,203) — (94,344) (68,578) (4,259,734) 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 Notes to Consolidated Financial Statements Note 1. Organization Selective Insurance Group, Inc., through its subsidiaries, (collectively referred to as “we,” “us,” or “our”) offers standard commercial, standard personal, and excess and surplus ("E&S") lines property and casualty insurance products. Selective Insurance Group, Inc. (referred to as the “Parent”) was incorporated in New Jersey in 1977 and its corporate headquarters is located in Branchville, New Jersey. The Parent’s common and preferred stock are publicly traded on the NASDAQ Global Select Market under the symbols “SIGI” and "SIGIP," respectively. We have provided a glossary of terms as Exhibit 99.1 to this Form 10-K, which defines certain industry-specific and other terms that are used in this Form 10-K. We classify our business into four reportable segments, which are as follows: • • • • Standard Commercial Lines – comprised of property and casualty insurance products and services provided in the standard marketplace to commercial enterprises, which are typically businesses, non-profit organizations, and local government agencies. Standard Personal Lines – comprised of property and casualty insurance products and services, including flood insurance coverage, provided primarily to individuals acquiring coverage in the standard marketplace. E&S Lines – comprised of property and casualty insurance products and services provided to customers who have not obtained coverage in the standard marketplace. Investments – invests the premiums collected by our insurance operations, as well as amounts generated through our capital management strategies, which may include the issuance of debt and equity securities. Note 2. Summary of Significant Accounting Policies (a) Principles of Consolidation The accompanying consolidated financial statements (“Financial Statements”) include the accounts of the Parent and its subsidiaries, and have been prepared in conformity with: (i) United States ("U.S.") generally accepted accounting principles ("GAAP"); and (ii) the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). All significant intercompany accounts and transactions are eliminated in consolidation. (b) Use of Estimates The preparation of our Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported financial statement balances, as well as the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. (c) Investments Portfolio Composition and Presentation in the Consolidated Balance Sheet Our investment portfolio is primarily comprised of fixed income securities. We also hold equity securities, short-term investments, and other investments. In 2020, we began investing in commercial mortgage loans (“CMLs”). A description of our portfolio holdings, and the related presentation in our Consolidated Balance Sheet, is provided below. Fixed Income Portfolio We hold the following types of securities in our fixed income securities portfolio: • • • • • • • U.S. government and government agency obligations; Foreign government obligations; State and municipal obligations, including special revenue and general obligation bonds; Corporate securities, which may include investment grade and below investment grade bonds, bank loan investments, 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 the holdings in our fixed income portfolio as available-for-sale ("AFS"). These securities are reported at fair value in our Consolidated Balance Sheet. The after-tax difference between fair value and cost or 81 amortized cost is reflected in stockholders’ equity as a component of accumulated other comprehensive income (loss) ("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. Accrued interest on our fixed income securities is recorded as a component of “Interest and dividends due or accrued” on our Consolidated Balance Sheet. If accrued interest is due but not paid within 90 days, we reverse the delinquent amount and record this reversal through earnings as a component of “Net investment income earned” on our Consolidated Statement of Income. Other Portfolio Holdings CMLs are loans secured by commercial property, such as an office building, multi-family apartment complex, industrial warehouse, or shopping center. We may acquire investments in CMLs through (i) direct originations under a loan syndication arrangement or (ii) a marketplace purchase. We record our investment in CMLs on the settlement date of the loan. Our CMLs are classified as held-for-investment and reported at amortized cost, net of the applicable allowance for credit losses ("ACL"), on our Consolidated Balance Sheet. Interest is recorded using the effective yield method and accrued interest on our CMLs is recorded as a component of “Interest and dividends due or accrued” on our Consolidated Balance Sheet. Equity securities may include common and non-redeemable preferred stocks. Equity securities with readily determinable fair values are reported at fair value. Equity securities without readily determinable fair values are reported 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 reported at fair value. Other investments are primarily comprised of alternative investments, which are limited partnership investments in private equity, private credit, and real estate strategies. These alternative investments are accounted for using the equity method, with income typically recognized on a one-quarter lag. Because these alternative investments are recorded under the equity method of accounting, the valuation and income recognized on these investments may be impacted by volatility in the financial markets. In addition to our alternative investments, our other investment portfolio includes Federal Home Loan Bank stock (“FHLB Stock”) and tax credit investments. The FHLB Stock is reported at cost. Accounting for our tax credit investments is dependent on the type of credit we have purchased, as follows: • • Federal low income housing tax credits are accounted for under the proportional amortization 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 Statement of Cash Flows using the cumulative earnings approach. Under this approach, distributions received are classified as cash flows from operating activities until such time that the cumulative distributions exceed cumulative earnings for the investment. When such an excess occurs, the excess portion of the current period distribution is considered a return of investment and is classified as a cash flow from investing activities. We evaluate the alternative investments and tax credit investments included in our other investments portfolio to determine whether those investments are variable interest entities ("VIEs") and if so, whether consolidation is required. A VIE is an entity that either has equity investors that lack certain essential characteristics of a controlling financial interest or lack sufficient 82 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 Statement of Income Net Investment Income Earned Net investment income earned on our Consolidated Statement of Income includes the following: • • • • • Interest income, as well as amortization and accretion, on fixed income securities; Interest income on CMLs; Dividend income on equity securities; Interest income on our short-term investments; and Income recognized on our alternative and other investments accounted for under the equity method of accounting, except for federal tax credits, as discussed below. Income related to federal tax credits (either low income housing tax credits or other federal credits) is recorded in our Consolidated Statement of Income as a component of “Federal income tax expense” proportionately over the life of the investment. Net Realized and Unrealized Investment (Losses) Gains Net realized and unrealized investment losses and gains on our Consolidated Statement of Income include the following: • • • • Realized gains and losses on the 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; Losses on securities for which we have the intent to sell, which are discussed further below; and Net credit loss expense or benefit resulting from changes in the ACL related to our investment portfolio, which also is discussed further below. Losses on securities for which we have the intent to sell and ACL on AFS Fixed Income Securities and Short-Term Investments We review our fixed income securities in an unrealized loss position to determine (i) if we have the intent to sell the security, or (ii) if it is more likely than not we will be required to sell the security before its anticipated recovery. If we determine that we have the intent or likely requirement to sell the security, we write down its amortized cost to its fair value. In writing down amortized cost, any amount previously recorded as an ACL is reversed and any incremental reduction in amortized cost is recorded directly to earnings as a component of “Net realized and unrealized investment (losses) gains” on our Consolidated Statement of Income. When fixed income securities are in an unrealized loss position and we do not record any losses on securities for which we intend to sell, we record an ACL for the portion of the unrealized loss due to an expected credit loss. We estimate expected credit losses on fixed income securities by performing a discounted cash flow (“DCF”). The ACL is the equal to the excess of amortized cost over the greater of: (i) our estimate of the present value of expected future cash flows, or (ii) fair value. The ACL is recorded as a contra-asset reflected in the carrying value of the investment on the Consolidated Balance Sheet. The initial ACL and any subsequent changes are recorded to earnings as a component of “Net realized and unrealized investment (losses) gains” on our Consolidated Statement of Income. Any remaining unrealized loss is the non-credit amount and is recorded in AOCI. The ACL cannot exceed the unrealized loss of an AFS security and therefore it may fluctuate with changes in the fair value of the security. The ACL is written off against the amortized cost basis in the period in which it is determined uncollectible. Our DCF analyses calculate the present value of expected future cash flows using various models specific to the major security types in our portfolio. These models use security-specific information as well as forecasted macroeconomic data to determine possible expected credit loss scenarios based on projected changes in the economy. The forecasted economic data incorporated into the models is based on the Federal Reserve Board’s annual supervisory stress test review on certain large banks and financial institutions. We also have the ability to incorporate internally-developed forecast information into the models as we deem appropriate. The discount rate used in a DCF is one of the following: • The current yield in effect at the reporting date to accrete the beneficial interest for RMBS, CMBS, CLO and other ABS that were not of high credit quality at acquisition; 83 • • 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. We do not record a valuation allowance on the accrued interest balance associated with our fixed income securities as we reverse delinquent amounts on a timely basis. We consider a fixed income security to be past due at the time any principal or interest payments become 90 days delinquent. ACL on CMLs We evaluate our CMLs on a quarterly basis for expected credit losses. If we hold a CML with a specific credit concern, we record an individual ACL on that loan. For all other CMLs, we record an ACL on the pool of loans based on lifetime expected credit losses. The ACL is recorded as a contra-asset reflected in the carrying value of our CMLs on the Consolidated Balance Sheet. Our initial ACL and any subsequent changes are recorded to earnings as a component of “Net realized and unrealized investment (losses) gains” on our Consolidated Statement of Income. We utilize a forecasting model to estimate lifetime expected credit losses at a loan level under multiple economic scenarios. The scenarios use macroeconomic data such as unemployment and inflation to project property-specific operating income and capitalization rates that are used to estimate the value of the future operating income stream. This information, coupled with historical data about mortgage loan performance, is used to project the probability of default, the amount of loss given a default, and the resulting lifetime expected loss. Losses on securities for which we have the intent to sell and Credit Losses on Other Investments If we determine that we intend to sell a holding in our investment portfolio and the expected proceeds are less than the recorded value of the investment, we will record a loss on those securities we intend to sell in earnings as a component of “Net realized and unrealized investment (losses) gains” on our Consolidated Statement of Income. Additionally, we review our alternative investment portfolio for potential credit losses through, among other items, 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 potential credit loss on our other investments (tax credits and FHLB Stock) include a qualitative assessment of credit indicators, which include, but are not limited to, the following: • • An adverse development of the expected receipt of remaining tax credits and other tax benefits; and A significant deterioration in the financial condition or liquidity of the Federal Home Loan Bank. If we do not record a loss on a security we intend to sell, and we expect a credit loss on a holding in our other investments portfolio, we record a charge to earnings as a component of “Net realized and unrealized investment (losses) gains” on our Consolidated Statement of Income. (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. 84 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 recorded at 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 fixed income securities by relying on the securities' relationship to other benchmark quoted securities, and not relying exclusively on quoted prices for specific securities, as the specific securities are not always frequently traded. As a matter of policy, we consistently use one pricing service as our primary source and secondary pricing services if prices are not available from the primary pricing service. Fixed income security pricing is reviewed for reasonableness by (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, (iii) reviewing stale prices, and (iv) internally reviewing prices for reasonableness if a price from another third-party source is not available. If further analysis is needed, a challenge is sent to the pricing service for review and confirmation of the price. Further information on our Level 2 asset pricing is included in the following table: Security Type Methodology Corporate Securities including preferred stocks classified as Fixed Income Securities, and U.S. Government and Government Agencies Obligations of States and Political Subdivisions RMBS, CMBS, CLO and other ABS Foreign Government Level 3 Pricing Security Type CMLs 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. Methodology Evaluations are performed by a third-party and are based on matrix pricing. For fixed rate loans, the matrix process uses a yield build up approach to create a pricing yield, with components for base yield, credit quality spread, property type spread, and a weighted average life spread. Floating rate loans are priced with a target quality spread over the swap curve. In addition to our CML portfolio, certain securities in our AFS fixed income portfolio are priced using unobservable inputs. These valuations are primarily based on broker quotes, or they are received from other third-party sources, for which there is a 85 lack of transparency as to the inputs used to generate the valuation. The quantitative detail of these unobservable inputs is neither provided to us, nor reasonably available to us. Liabilities The techniques used to value our notes payable are as follows: Level 2 Pricing Security Type 7.25% Senior Notes; 6.70% Senior Notes; 5.375% Senior Notes Borrowings from Federal Home Loan Banks Methodology Based on matrix pricing models prepared by external pricing services. 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 Credit Losses on Premiums Receivable We estimate an ACL on our outstanding premiums receivable balance at each reporting date. In determining this allowance, we use a method that considers the aging of the receivable, based on the effective year of the related policy, along with our historical receivable loss experience. We also contemplate expected macroeconomic conditions over the expected collection period, which are short-term in nature because the majority of the balances are collected within two years of policy issuance. As experienced during the COVID-19 pandemic, in contemplating our ACL on premiums receivable we also consider (i) the higher risk of non-payment due to a significant decline in economic activity, (ii) individualized payment flexibility offered to our customers, and (iii) moratoriums on policy cancellations, late payment notices, and late or reinstatement fees. Changes in our ACL are charged to earnings as credit loss expense or benefit, which is a component of "Other insurance expenses" on our Consolidated Statements of Income, with an offsetting ACL recorded as a contra-asset reflected in the carrying value of the receivable. We charge write-offs against the allowance when we determine the account to be uncollectible after considering information obtained from our collection efforts. (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 Statement of Stockholders' Equity. (g) Reinsurance The “Reinsurance recoverable” balance on our Consolidated Balance Sheet represents our estimate 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 would consider a recoverable balance from a reinsurer to be past due if payment is not received by the first day following the invoice due date. We require collateral to secure reinsurance recoverable balances 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." The collateral received is typically in the form of a letter of credit, trust funds, or funds withheld against reinsurance recoverables. We estimate an ACL on our outstanding reinsurance recoverable balance at each reporting date. Credit risk is mitigated to the extent we have obtained collateral. As part of our estimation of the ACL, we reduce the recoverable balance by the amount of the collateral. We then pool the uncollateralized balances by similar risk characteristics, including the financial strength rating of the reinsurer, and use a probability-of-default methodology to calculate the allowance. Historical default rates are sourced from AM Best and are coupled with severity assumptions in developing a baseline scenario. We then stress this scenario by incorporating forecasts of industry catastrophe losses and economic factors sourced through third-party data providers. In 86 developing our best estimate of the allowance for credit losses, we consider our outlook as to the probability of each of these scenarios occurring. Changes in our ACL are charged to earnings as credit loss expense, which is a component of “Loss and loss expense incurred” on our Consolidated Statement of Income, with an offsetting ACL recorded as a contra-asset reflected in the carrying value of the recoverable balance. We charge write-offs against the ACL when we determine the recoverable balance to be uncollectible after considering information obtained from our efforts to collect amounts due or through a review of the financial condition of the reinsurer. (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 Software licenses Internally developed software Furniture and fixtures Buildings and improvements Years to to to 3 5 5 5 10 40 3 3 5 We recorded depreciation expense of $21.5 million, $18.7 million, and $19.5 million for 2020, 2019, and 2018, 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 3.0% for 2020, 3.5% for 2019, and 3.3% for 2018. (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, 2020, goodwill was not impaired. (k) Reserve for Loss and Loss Expense Reserves for loss and loss expense includes case reserves on reported claims and reserves known as incurred but not reported ("IBNR") reserves. Case reserves are estimated on each individual claim, and based on claim-specific facts and circumstances known at the time. The case reserves may be adjusted upward or downward as the specific facts and circumstances change. IBNR reserves are established at more aggregated levels and include provisions for (i) claims not yet reported, (ii) future development on reported claims, (iii) previously closed claims that will be reopened in the future, and (iv) anticipated salvage and subrogation recoveries. 87 We evaluate our reserves quarterly, through our comprehensive reserve review process and adjustments to recorded reserves are made accordingly. The primary input in evaluating reserve levels is the quarterly reserve review prepared by our internal actuaries, which provides comprehensive loss and loss expense projections. Our reviews are based primarily on our own loss experience, organized by line of business. Where sufficient statistical credibility exists, we may further segment the experience by coverage within line, or by geographic area. Generally accepted actuarial methodologies are applied to these reserve groups to produce ultimate loss and loss expense projections. Typically, we organize our experience by accident year and age, which lends itself to the application of various loss development methods. These methods rely on historical claims reporting and payment patterns to project ultimate loss or expense for open accident years. Consideration is also given to the prior loss estimate, particularly for longer-tailed lines of business and the current accident year. For the current accident year, this expectation comes from our detailed actuarial planning process. The initial estimate is adjusted over time as actual experience emerges. These methods require numerous assumptions, such as the selection of loss and loss expense development factors and the weight applied to each individual projection method, among others. Therefore, no single method can be interpreted as definitive. Instead, ultimate loss and loss expenses are selected based upon the various methods, considering the strengths and weaknesses of each as it applies to the specific line of business and accident year. Certain liabilities, by their nature, do not lend themselves to loss development methods. Examples includes property catastrophes (low frequency/high severity, unique events), latent claims (where losses are incurred over an extended period of time), and unallocated loss expenses (loss expenses that cannot be attributed to a specific claim). Alternate development techniques are used for these liabilities, which include individual claims reviews, calendar year counts and averages, aggregate benchmark measures such as paid and incurred “survival ratios,” and others. These approaches often require additional assumptions and a greater amount of professional judgement. 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. Furthermore, the selected ultimate losses are separated into their components of claim frequency and severity, along with their associated trends, to provide additional insight. While these ultimate loss and loss expense estimates serve as the primary basis for determining the recorded IBNR reserves, other internal and external factors are considered in our overall reserve review. 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, (iv) potential large or complex claims, and (v) additional trends observed by claims personnel or defense counsel. External factors considered include (i) legislative and regulatory enactments, (ii) judicial trends and decisions, (iii) social trends, including the impacts of social inflation, and (iv) trends in general economic conditions, including the effects of inflation, including impacts to medical costs, raw materials, and labor. For example, 2020 presented unique impacts related to COVID-19, such as governmental "stay-at- home" directives and their economic impacts, judicial interpretations of insurance coverages, and social and behavioral changes. While these impacts are uncertain and continue to evolve, they were key considerations in the reserving process. The combination of the IBNR estimates along with the case reserve estimates on individual claims results in our total reserves for loss and loss expense. These reserves are expected to be sufficient for settling loss and loss expense obligations under our policies on unpaid claims, including changes in the volume of business written, claims frequency and severity, the mix of business, claims processing, and other items that management expects to affect our ultimate settlement of loss and loss expense. However, our loss and loss expense reserves are estimates of future events, the outcomes of which are not yet known. As with all estimates, they carry inherent uncertainty, which may be driven by internal factors, such as changes to our claims or underwriting operations, or external factors, such as changes in legislative, judicial, economic, or social trends. Furthermore, actual outcomes are impacted by inherent randomness, such as the actual number of accidents/incidents, or the occurrence or non-occurrence of a single large event. Because of these uncertainties, it is possible that actual outcomes will differ materially from the reserves established. While this risk cannot be eliminated, we review our reserves quarterly based upon the information available at that time, and make adjustments to our ultimate loss and loss expense estimates accordingly. These changes in our ultimate loss and loss expense estimates are reflected in the Consolidated Statements of Income for the period in which such estimates are changed. Any changes in the liability estimate could be material to the results of operations in future periods. Loss reserves are estimates, and as such, we also consider a range of possible loss and loss expense reserve estimates. This range is determined at the beginning of each year, using prior year-end data, and reflects the fact that there is no single precise method for estimating the required reserves, due to the many factors that may influence the amounts ultimately paid. We do not discount to present value that portion of our loss and loss expense reserves expected to be paid in future periods. Our loss and loss expense reserves implicitly include anticipated recoveries for salvage and subrogation claims. 88 Claims are counted at the occurrence, line of business, and policy level. For example, if a single occurrence (e.g. an automobile accident) leads to a claim under an automobile 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. (l) Revenue Recognition Premiums written are recognized as revenue over the period that coverage is provided using the semi-monthly pro-rata method. Unearned premiums and prepaid reinsurance premiums represent that portion of premiums written that are applicable to the unexpired terms of policies in force. The Insurance Subsidiaries' net premiums written (“NPW”) include direct insurance policy writings, plus reinsurance assumed, 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) when it is reasonably possible to do so based on historical trends adjusted for the uncertainty of future economic conditions. If we determine it is not reasonably possible to estimate this premium, we do not do so. (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 Statement 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, these amounts would be recognized as a component of “Total federal income tax expense” on the Consolidated Statement of Income. (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, the residual value guarantee is not probable of being owed. Therefore, there is no impact to the lease liability or lease asset. To measure the present value, we use the discount rate in the contract. If the discount rate is not readily determinable, our incremental borrowing rate is used. The lease asset is then adjusted to exclude lease incentives. We recognize variable lease payments in the periods in which the obligations for those payments are incurred. In calculating a lease liability, we include options to extend or terminate the lease if it is reasonably certain that we will exercise such option. Lease expense is calculated using the straight-line method. In addition, we have adopted accounting policy elections to: (i) aggregate lease and non-lease components into a single lease component; and (ii) expense short-term leases on a straight-line basis over the lease term. 89 (p) Pension Our pension 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 employees are currently entitled, based on the average life expectancy of the employees. Our funding policy provides that payments to our pension trust shall be equal to the minimum funding requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"), plus additional amounts that the Board of Directors ("Board") of Selective Insurance Company of America (“SICA”) may approve from time to time. Two key assumptions, the discount rate and the expected return on plan assets, are important elements of expense and/or liability measurement. We evaluate these key assumptions annually unless facts indicate that a more frequent review is required. The discount rate enables us to state expected future cash flows at their present value on the measurement date. The purpose of the discount rate is to determine the interest rates inherent in the price at which pension benefits could be effectively settled. Our discount rate selection is based on high-quality, long-term corporate bonds. To determine the expected long-term rate of return on the plan assets, we consider the current and expected asset allocation, as well as historical and expected returns on each plan asset class. Other assumptions involve demographic factors such as retirement age and mortality. A portion of our plan assets is allocated to a liability hedging strategy through which we have an expectation that our plan assets will move in tandem with a portion of the plan liabilities, helping to mitigate funding ratio volatility. Note 3. Adoption of Accounting Pronouncements In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-13, Financial Instruments - Credit Losses, and subsequent additional implementation guidance (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 an ACL. The ACL 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 ACL. We adopted this guidance on January 1, 2020, applied a modified retrospective approach for the adoption, and recorded a net cumulative-effect adjustment to increase the opening balance of 2020 retained earnings by $1.4 million, after tax. As prescribed in ASU 2016-13, we did not adjust the amortized cost basis of any securities for which we previously had recorded other-than-temporary impairment ("OTTI") losses. The cumulative-effect increase to retained earnings represents the net adjustment required to (i) establish the ACL on our held-to-maturity ("HTM") debt securities and (ii) re-estimate the ACL on our premiums receivables and reinsurance recoverables under ASU 2016-13. See Note 2. "Summary of Significant Accounting Policies" of this Form 10-K for accounting policy updates related to ASU 2016-13. Additionally, see Note 5. "Investments," Note 8. "Allowance for Credit Losses on Premiums Receivable," and Note 9. "Reinsurance" of this Form 10-K for additional information regarding expected credit losses related to the respective financial assets. 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 by removing certain disclosures, and modifying and adding disclosure requirements. The additional disclosure requirements include (i) the change in unrealized gains and losses for the period included in other comprehensive income (“OCI”) for recurring Level 3 fair value measurements held at the end of the reporting period, and (ii) the range and weighted average of significant observable inputs used to develop Level 3 fair value measurements. We adopted the provisions related to removed disclosures in the fourth quarter of 2019 and adopted the remaining disclosure requirements in the first quarter of 2020. As it requires disclosure only, ASU 2018-13 has no impact on our financial condition or results of operations. In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a cloud computing hosting service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted this guidance prospectively on January 1, 2020, and it did not have a material impact on our financial condition or results of operations. Pronouncements to be effective in the future In December 2019, the FASB issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (“ASU 2019-12”). Among other items, ASU 2019-12 simplifies the accounting treatment of tax law changes and year-to-date losses in interim periods. An entity generally recognizes the effects of a change in tax law in the period of enactment; however, there is an exception for tax laws with delayed effective dates. Under current guidance, an entity may not adjust its annual effective tax 90 rate for a tax law change until the period in which the law is effective. ASU 2019-12 provides that all effects of a tax law change, including adjustment of the estimated annual effective tax rate, are recognized in the period of enactment. For year-to-date losses in interim periods, an entity is required currently 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. When an interim period loss exceeds the anticipated 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 limitation and allows an entity to compute its income tax benefit at each interim period based on its estimated annual effective tax rate. We will adopt this guidance on January 1, 2021 and it will not have a material impact to our financial condition, cash flows, or results of operations upon adoption. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions to the guidance in GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. Companies can elect to adopt ASU 2020-04 as of the beginning of the interim period that includes March 2020, or any date thereafter through December 31, 2022. We are currently evaluating the impact of this guidance on our financial condition and results of operations. Note 4. Statements of Cash Flows Supplemental cash flow information for the years ended December 31, 2020, 2019, and 2018 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 leases Operating cash flows from financing leases Financing cash flows from finance leases Non-cash items: Corporate actions related to fixed income securities, AFS1 Corporate actions related to fixed income securities, HTM1 Corporate actions related to equity securities1 Assets acquired under finance lease arrangements Assets acquired under operating lease arrangements Non-cash purchase of property and equipment 1Examples of corporate actions include exchanges, non-cash acquisitions, and stock-splits. 2020 2019 2018 $ 30,464 47,000 9,498 15 550 55,446 2,589 10,890 324 22,390 590 25,089 55,825 8,138 16 977 61,369 — 14,250 824 13,808 89 23,992 29,193 — — 5,646 52,277 — 944 4,119 — 291 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, 2020 December 31, 2019 $ $ 394 14,837 15,231 300 7,675 7,975 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. 91 Note 5. Investments (a) Net unrealized gains on investments included in OCI by asset class were as follows for the years ended December 31, 2020, 2019, and 2018: ($ in thousands) AFS securities: Fixed income 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 2020 2019 2018 $ 386,380 386,380 215,634 215,634 7 7 6 31 31 23 386,393 (81,142) 305,251 215,688 (45,294) 170,394 2,302 2,302 89 89 — 2,391 (502) 1,889 Cumulative effect adjustment due to accounting change for equity unrealized1 Cumulative effect adjustment due to accounting changes for stranded tax assets1 Increase (decrease) in net unrealized gains in OCI, net of deferred income tax 1Upon adoption of ASU 2016-01, we recognized a $30.7 million cumulative-effect adjustment to the opening balance of AOCI, which represents the after-tax net unrealized gain on our equity portfolio as of December 31, 2018. 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. 168,505 134,857 — — — — $ 30,726 (17,920) (65,881) (b) Information regarding our AFS securities as of December 31, 2020 and December 31, 2019 were as follows: December 31, 2020 ($ 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 RMBS CMBS Cost/ Amortized Cost 110,038 16,801 1,159,588 2,152,203 1,014,820 999,485 620,582 Total AFS fixed income securities $ 6,073,517 Allowance for Credit Losses Unrealized Gains Unrealized Losses Fair Value — (1) (4) (2,782) (592) (561) (29) (3,969) 6,239 1,569 87,564 180,971 20,166 53,065 48,348 397,922 (137) (3) (11) (2,340) (7,843) (201) (1,007) (11,542) 116,140 18,366 1,247,137 2,328,052 1,026,551 1,051,788 667,894 6,455,928 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 RMBS CMBS Cost/ Amortized Cost 112,680 18,011 1,168,185 1,866,881 790,517 1,409,003 514,709 Unrealized Gains Unrealized Losses Fair Value 3,506 533 62,175 81,906 7,929 43,421 23,902 — (2) (270) (1,310) (5,434) (455) (267) (7,738) 116,186 18,542 1,230,090 1,947,477 793,012 1,451,969 538,344 6,095,620 Total AFS fixed income securities $ 5,879,986 223,372 92 The following table provides a roll forward of the allowance for credit losses on our AFS fixed income securities for 2020: 2020 ($ in thousands) Current Provisions for Securities without Prior Allowance Beginning Balance Increase (Decrease) on Securities with Prior Allowance, excluding intent (or Requirements) to Sell Securities Reductions for Securities Sold Reductions for Securities Identified as Intent (or Requirement) to Sell during the Period Foreign Government Obligations of states and political subdivisons Corporate Securities $ CLO and other ABS RMBS CMBS Total AFS fixed income securities $ — — — — — — — 19 4 3,645 722 623 29 5,042 — — — — — — — (18) — (781) (113) (62) — (974) Ending Balance 1 4 2,782 592 561 29 — — (82) (17) — — (99) 3,969 During 2020, we did not have any write-offs or recoveries of our AFS fixed income securities and we did not purchase any assets with credit deterioration, so these items are not included in the table above. As disclosed in Note 2. "Summary of Significant Accounting Policies," we do not evaluate accrued interest on our AFS securities for expected credit loss as we write-off these balances in a timely manner. As of December 31, 2020, accrued interest on AFS securities amounted to $43.8 million and we did not record any write-offs of accrued interest during 2020. (c) Quantitative information about unrealized losses on our AFS portfolio is provided below. Less than 12 months 12 months or longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses December 31, 2020 ($ 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 RMBS CMBS 11,519 1,122 2,223 65,187 261,746 18,227 55,482 Total AFS fixed income securities $ 415,506 (137) (3) (11) (2,152) (2,995) (194) (616) (6,108) — — — 2,400 165,661 1,181 16,093 185,335 — — — (188) (4,848) (7) (391) (5,434) 11,519 1,122 2,223 67,587 427,407 19,408 71,575 600,841 (137) (3) (11) (2,340) (7,843) (201) (1,007) (11,542) December 31, 2019 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 RMBS CMBS — 1,416 35,838 84,832 205,191 126,089 62,893 Total AFS fixed income securities $ 516,259 — (2) (270) (480) (1,938) (425) (264) (3,379) — — — 20,182 204,385 5,375 828 230,770 — — — (830) (3,496) (30) (3) (4,359) — 1,416 35,838 105,014 409,576 131,464 63,721 747,029 — (2) (270) (1,310) (5,434) (455) (267) (7,738) 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 credit loss policy as described in Note 2. “Summary of Significant Accounting Policies” of this Form 10-K, we have concluded that no ACL is required on these balances. This conclusion reflects our current judgment as to the financial position and future prospects of the entity that issued the investment security and underlying collateral. (d) Fixed income securities at December 31, 2020, 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 93 contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Listed below are the contractual maturities of fixed income securities at December 31, 2020: ($ 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 $ 433,241 3,639,658 1,910,480 472,549 $ 6,455,928 1,132 15,692 — — 16,824 1,149 16,852 — — 18,001 (e) The following table summarizes our other investment portfolio by strategy: Other Investments December 31, 2020 December 31, 2019 ($ in thousands) Alternative Investments Private equity Private credit Real assets Total alternative investments Other securities Carrying Value Remaining Commitment Maximum Exposure to Loss1 Carrying Value Remaining Commitment Maximum Exposure to Loss1 $ 157,276 54,017 19,659 230,952 35,370 100,905 98,330 16,493 215,728 — 258,181 152,347 36,152 446,680 35,370 118,352 42,532 23,256 184,140 32,667 93,138 105,340 20,741 219,219 — 211,490 147,872 43,997 403,359 32,667 Total other investments 436,026 1In addition to the amounts in this table, previously recognized tax credits are subject to the risk of recapture. We do not consider this significant and therefore do not include in this table. 482,050 219,219 266,322 216,807 215,728 $ We have reviewed various investments included in the table above and have concluded that they are VIEs, but that we are not the primary beneficiary and therefore, consolidation is not required. We do not have a future obligation to fund losses or debts on behalf of these investments; however, we are contractually committed to make additional investments up to the remaining commitment outlined above. We did not provide any non-contractual financial support at any time during 2020 or 2019. The following is a description of our alternative investment strategies: Our private equity strategy includes the following: • • • Primary Private Equity: This strategy makes private equity investments, primarily in established large and middle market companies across diverse industries globally, with an emphasis on North America. Secondary Private Equity: This strategy purchases seasoned private equity funds from investors desiring liquidity prior to normal fund termination. Investments are made across all sectors of the private equity market, including leveraged buyouts ("LBO"), venture capital, distressed securities, mezzanine financing, real estate, and infrastructure. Venture Capital: In general, these investments are made principally by investing in equity securities of startup companies and small-to-medium sized privately-held corporations with strong long-term growth potential. This strategy makes private equity investments in seed stage, early stage, late stage, and growth equity 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 94 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. The following tables show gross summarized financial information for our other investments portfolio, including the portion we do not own. The investments are carried under the equity method of accounting. The last line in the income statement information table below reflects our portion of the aggregate results that are included in our Financial Statements. As the majority of these investments report results to us on a one quarter lag, the summarized financial statement information is as of, and for the 12-month period ended, September 30: Balance Sheet Information December 31, ($ in millions) 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 Alternative investment income included in "Net investment income earned" on our Consolidated Statements of Income 2020 2019 $ 55,145 58,819 6,744 52,075 2020 2019 2018 $ $ (26) 1,452 4,898 6,324 26.5 (8) 695 5,543 6,230 17.9 43,857 45,432 5,670 39,762 134 1,981 1,303 3,418 17.6 (f) 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, 2020 or December 31, 2019. (g) 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, 2020 to comply with insurance laws. We retain all rights regarding all securities pledged as collateral. 95 178,104 — 7,764 3,472 17,799 (11,803) 195,336 28,672 (47,647) (18,975) (29,369) (6,579) (54,923) The following table summarizes the market value of these securities at December 31, 2020: ($ in millions) U.S. government and government agencies Obligations of states and political subdivisions RMBS CMBS Total pledged as collateral FHLBI Collateral FHLBNY Collateral State and Regulatory Deposits Total $ $ — — 125.0 7.0 132.0 — — 178.1 36.3 214.4 20.1 5.1 — — 25.2 20.1 5.1 303.1 43.3 371.6 (h) The components of pre-tax net investment income earned were as follows: ($ in thousands) Fixed income securities CMLs Equity securities Short-term investments Other investments Investment expenses Net investment income earned 2020 2019 2018 $ $ 203,926 844 9,286 1,821 26,922 (15,692) 227,107 203,255 — 6,996 6,653 18,778 (13,139) 222,543 (i) The following tables summarize net realized and unrealized investment gains and losses for the periods indicated: ($ in thousands) Gross gains on sales Gross losses on sales Net realized gains (losses) on disposals Net unrealized gains (losses) on equity securities Net credit loss (expense) benefit on fixed maturities, AFS Net credit loss benefit (expense) on fixed maturities, HTM Losses on securities for which we have the intent to sell Net OTTI losses recognized in earnings Net realized and unrealized gains (losses) 2020 2019 2018 $ $ 18,893 (9,745) 9,148 7,939 (5,042) 4 (16,266) (4,217) 31,910 (5,195) 26,715 (8,649) (3,644) 14,422 Unrealized (losses) recognized in income on equity securities, as reflected in the table above, include the following: ($ in thousands) Unrealized gains (losses) recognized in income on equity securities: On securities remaining in our portfolio at end of period On securities sold in period Total unrealized (losses) recognized in income on equity securities 2020 2019 2018 $ $ 7,936 3 7,939 1,219 (9,868) (8,649) (3,098) (26,271) (29,369) Proceeds from the sales of AFS fixed income securities were $487.1 million, $594.7 million, and $2,030.7 million in 2020, 2019, and 2018, respectively. Proceeds from the sales of equity securities were $1.3 million, $137.3 million, and $113.3 million in 2020, 2019, and 2018, respectively. Net realized gains (losses) on disposals in the table above were driven by the following: • • • 2020: Active management of the fixed income securities portfolio. 2019: Opportunistic sales in our equity portfolio. 2018: Higher trading volume driven by opportunistic sales in both our fixed income securities and equity portfolios. Losses on securities for which we have the intent to sell of $16.3 million were recorded in 2020 to provide our investment managers flexibility to trade and optimize our investment portfolio. Corporate securities accounted for $12.1 million of the losses on securities for which we have the intent to sell. 96 Note 6. Comprehensive Income (a) The components of comprehensive income, both gross and net of tax, for 2020, 2019, and 2018 were as follows: 2020 ($ in thousands) Net income Components of OCI: Unrealized gains (losses) on investment securities: Unrealized holding gains during the year Unrealized losses on securities with credit loss recognized in earnings Amounts reclassified into net income: HTM securities Net realized losses on disposals and losses on intent-to-sell AFS securities Credit loss expense Total unrealized gains on investment securities Defined benefit pension and post-retirement plans: Net actuarial gain Amounts reclassified into net income: Net actuarial loss Total defined benefit pension and post-retirement plans Other comprehensive income Comprehensive income 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 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 97 Gross Tax Net $ 302,988 56,633 246,355 168,487 (8,176) (24) 5,376 5,042 170,705 1,515 3,015 4,530 175,235 478,223 35,383 (1,717) (5) 1,129 1,058 35,848 318 633 951 36,799 93,432 133,104 (6,459) (19) 4,247 3,984 134,857 1,197 2,382 3,579 138,436 384,791 Gross Tax Net 336,390 64,767 271,623 212,683 (58) 671 213,296 (13,795) 2,657 (11,138) 202,158 538,548 44,662 (12) 141 44,791 (2,897) 558 (2,339) 42,452 107,219 168,021 (46) 530 168,505 (10,898) 2,099 (8,799) 159,706 431,329 $ $ $ Gross Tax Net $ 211,721 32,782 178,939 (123,145) (25,861) (97,284) 110 39,641 (83,394) 23 8,325 (17,513) 87 31,316 (65,881) (11,273) (2,367) (8,906) 2,127 (9,146) (92,540) 119,181 $ 447 (1,920) (19,433) 13,349 1,680 (7,226) (73,107) 105,832 (b) The balances of, and changes in, each component of AOCI (net of taxes) as of December 31, 2020 and 2019 were as follows: ($ in thousands) Balance, December 31, 2018 OCI before reclassifications Amounts reclassified from AOCI Net current period OCI Balance, December 31, 2019 OCI before reclassifications Amounts reclassified from AOCI Net current period OCI Balance, December 31, 2020 Net Unrealized (Losses) Gains on Investment Securities Credit Loss Related1 $ $ (71) — — — (71) (6,459) 3,984 (2,475) (2,546) HTM Related 71 — (46) (46) 25 — (19) (19) 6 All Other Investments Subtotal 1,888 168,021 530 168,551 170,439 133,104 4,247 137,351 307,790 1,888 168,021 484 168,505 170,393 126,645 8,212 134,857 305,250 Defined Benefit Pension and Post-retirement Plans (79,844) (10,898) 2,099 (8,799) (88,643) 1,197 2,382 3,579 (85,064) Total AOCI (77,956) 157,123 2,583 159,706 81,750 127,842 10,594 138,436 220,186 1Represents change in unrealized loss on securities with credit loss recognized in earnings. The reclassifications out of AOCI are as follows: ($ in thousands) HTM related Year ended December 31, 2020 Year ended December 31, 2019 Affected Line Item in the Consolidated Statements of Income Unrealized gains on HTM disposals Amortization of net unrealized gains on HTM securities $ Net realized losses on disposals and losses on intent-to-sell AFS securities Net realized losses on disposals and losses on intent-to-sell AFS securities Credit loss related Credit loss expense Defined benefit pension and post-retirement life plans Net actuarial loss Total defined benefit pension and post- retirement life (16) (8) (24) 5 (19) 5,376 5,376 (1,129) 4,247 5,042 5,042 (1,058) 3,984 647 2,368 3,015 (633) 2,382 (46) Net realized and unrealized investment (losses) gains (12) Net investment income earned (58) Income before federal income tax 12 Total federal income tax expense (46) Net income 671 Net realized and unrealized investment (losses) gains 671 Income before federal income tax (141) Total federal income tax expense 530 Net income — Net realized and unrealized investment (losses) gains — Income before federal income tax — Total federal income tax expense — Net income 582 Loss and loss expense incurred 2,075 Other insurance expenses 2,657 Income before federal income tax (558) Total federal income tax expense 2,099 Net income Total reclassifications for the period $ 10,594 2,583 Net income 98 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, 2020 and 2019: ($ in thousands) 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 Subtotal long-term debt Unamortized debt issuance costs Finance lease obligations Total long-term debt December 31, 2020 December 31, 2019 Carrying Amount Fair Value Carrying Amount Fair Value $ 49,914 99,499 294,241 25,000 25,000 60,000 553,654 (3,419) 508 66,148 127,886 383,669 25,182 25,198 67,513 695,596 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 $ 550,743 $ 550,597 For discussion regarding the fair value techniques of our financial instruments, refer to Note 2. "Summary of Significant Accounting Policies" of this Form 10-K. The following tables provide quantitative disclosures of our financial assets that were measured and recorded at fair value at December 31, 2020 and 2019: December 31, 2020 ($ 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 RMBS CMBS Total AFS fixed income securities Equity securities: Common stock1 Preferred stock Total equity securities Short-term investments 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 116,140 18,366 1,247,137 2,328,052 1,026,551 1,051,788 667,894 6,455,928 308,632 1,735 310,367 409,852 40,960 — — — — — — 40,960 261,846 1,735 263,581 405,400 709,941 75,180 18,366 1,244,243 2,257,352 970,176 1,051,788 667,894 6,284,999 — — — 4,452 6,289,451 — — 2,894 70,700 56,375 — — 129,969 — — — — 129,969 Total assets measured at fair value $ 7,176,147 99 December 31, 2019 ($ in thousands) Description Measured on a recurring basis: AFS fixed income securities: Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets Measured at Fair Value U.S. government and government agencies $ Foreign government Obligations of states and political subdivisions Corporate securities CLO and other ABS RMBS CMBS Total AFS fixed income securities Equity securities: Common stock1 Preferred stock Total equity securities Short-term investments 116,186 18,542 1,230,090 1,947,477 793,012 1,451,969 538,344 6,095,620 69,900 3,037 72,937 282,490 41,083 — — — 3,635 — — 44,718 32,145 3,037 35,182 265,306 75,103 18,542 1,230,090 1,930,426 772,343 1,451,969 538,344 6,016,817 — — — 17,184 — — — 17,051 17,034 — — 34,085 — — — — Total assets measured at fair value 34,085 1Investments amounting to $46.8 million and $37.8 million at December 31, 2020 and December 31, 2019, 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. These investments are not redeemable and the timing of liquidations of the underlying assets is unknown at each reporting period. 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. 6,034,001 6,451,047 345,206 $ 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 2020: 2020 ($ in thousands) Fair value, December 31, 2019 Total net (losses) gains for the period included in: OCI Net realized and unrealized (losses) gains Net investment income earned Purchases Sales Issuances Settlements Transfers into Level 3 Transfers out of Level 3 Fair value, December 31, 2020 Change in unrealized (losses) gains for the period included in earnings for assets held at period end Change in unrealized gains (losses) for the period included in OCI for assets held at period end Obligations of states and political subdivisions Corporate Securities CLO and Other ABS Total — 4 — — — — — — 2,890 — 2,894 — 4 17,051 17,034 34,085 (785) (1,046) 21 46,150 — — (283) 9,592 — 70,700 (1,046) (785) 1,883 (237) 6 25,785 — — (2,638) 31,520 (16,978) 56,375 1,102 (1,283) 27 71,935 — — (2,921) 44,002 (16,978) 129,969 (237) (1,283) 1,883 1,102 $ $ 100 2019 ($ in thousands) Fair value, December 31, 2018 Total net (losses) gains for the period included in: OCI Net realized and unrealized (losses) gains Net investment income earned 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 — 17,051 (261) — 245 (379) — 245 21,282 21,282 — — (279) 18,853 (30,215) 17,034 — — (279) 36,022 (30,215) 34,085 Change in unrealized gains (losses) for the period included in earnings for assets held at period end — — — 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, 2020 and 2019: December 31, 2020 Fair Value Measurements Using ($ in thousands) Financial Assets HTM: Obligations of states and political subdivisions Corporate securities Total HTM fixed income securities CMLs 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) $ $ $ $ $ 4,795 13,206 18,001 47,289 66,148 127,886 383,669 25,182 25,198 67,513 695,596 — — — — — — — — — — — 4,795 13,206 18,001 — — — — 47,289 66,148 127,886 383,669 25,182 25,198 67,513 695,596 — — — — — — — 101 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 — — — — — — — — — — Note 8. Allowance for Credit Losses on Premiums Receivable The following table provides a roll forward of the ACL on our premiums receivable balance for 2020: ($ in thousands) Balance at beginning of year Cumulative effect adjustment1 Balance at beginning of year, as adjusted Current period provision for expected credit losses Write-offs charged against the allowance for credit losses Recoveries $ $ ACL, end of year 1See Note 3. "Adoption of Accounting Pronouncements" above for additional information regarding our adoption of ASU 2016-13. $ December 31, 2020 6,400 1,058 7,458 16,751 (3,754) 545 21,000 In 2020, we recognized an additional allowance for credit losses of $13.5 million, net of write-offs and recoveries. We based this increase on an evaluation of the recoverability of our premiums receivable in light of (i) the billing accommodations we announced during the first quarter of 2020, and (ii) the impact of certain state regulations that provided for deferral of payments without cancellation for a period up to 90 days and increased earned but uncollected premiums. The billing accommodations included individualized payment flexibility and suspending the effect of policy cancellations, late payment notices, and late or reinstatement fees. Note 9. 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 (proportional) 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 2021, our deductible, before tax, is approximately $369 million. For losses above the deductible, the federal government will pay 80% of losses to an industry limit of $100 billion, and the insurer retains 20%. 102 The Insurance Subsidiaries remain liable to policyholders to the extent that any reinsurer becomes unable to meet their contractual obligations. In addition to this direct counterparty credit risk, we have indirect counterparty credit risk as our reinsurers often enter into their own reinsurance programs, or retrocessions, as part of managing their exposure to large losses and improving their financial strength ratings. The credit quality of our reinsurers is also impacted by other factors, such as their reserve adequacy, investment portfolio, regulatory capital position, catastrophe aggregations, and risk management expertise. We evaluate and monitor the financial condition of our reinsurers under voluntary reinsurance arrangements to minimize our exposure to significant losses from reinsurer insolvencies. Contractual language interpretations and willingness to pay valid claims can impact our allowance for estimated uncollectible reinsurance. The following table provides (i) a disaggregation of our reinsurance recoverable balance by financial strength rating, and (ii) an aging analysis of our past due reinsurance recoverable balances as of December 31, 2020: ($ in thousands) Financial strength rating of rated reinsurers A++ A+ A A- B++ B+ Total rated reinsurers Non-rated reinsurers Federal and state pools Other than federal and state pools Total non-rated reinsurers Total reinsurance recoverable, gross Less: ACL Total reinsurance recoverable, net Current Past Due Total Reinsurance Recoverables December 31, 2020 $ $ $ $ $ 37,464 $ 354,846 105,652 2,139 56 — 102 $ 2,452 415 — 324 — 500,157 $ 3,293 $ 82,575 2,676 85,251 585,408 $ $ $ — $ 568 568 3,861 $ $ $ 37,566 357,298 106,067 2,139 380 — 503,450 82,575 3,244 85,819 589,269 (1,777) 587,492 The following table provides a rollforward of the allowance for credit losses on our reinsurance recoverable balance for 2020: ($ in thousands) Balance at beginning of year Cumulative effect adjustment1 Balance at beginning of year, as adjusted Current period provision for expected credit losses Write-offs charged against the allowance for credit losses Recoveries ACL, end of year 1See Note 3. "Adoption of Accounting Pronouncements" for additional information regarding our adoption of ASU 2016-13. $ $ $ December 31, 2020 4,400 (2,903) 1,497 280 — — 1,777 103 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 (AM Best rated "A+") Hannover Ruckversicherungs AG (AM Best rated "A+") AXIS Reinsurance Company (AM Best rated "A") Swiss Re Group (AM Best rated "A+") Transatlantic Reinsurance Company (AM Best rated “A+”) All other reinsurers Total reinsurers Less: collateral2 Reinsurers, net of collateral As of December 31, 2020 Reinsurance Balances % of Reinsurance Balance As of December 31, 2019 % of Reinsurance Balance Reinsurance Balances $ $ $ $ 587,492 170,531 758,023 178,532 52,053 1,625 232,210 525,813 116,885 115,084 78,090 33,179 24,320 158,255 525,813 (130,169) 395,644 $ $ $ $ 25 % 6 — 31 69 15 15 10 4 3 22 69 % 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 (110,549) 397,738 24 % 6 % 1 31 69 16 15 10 5 3 20 69 % 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 2020 2019 2018 3,204,512 24,288 (455,708) 2,773,092 3,108,687 25,010 (451,883) 2,681,814 1,822,034 17,201 (203,412) 1,635,823 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 $ $ $ $ $ $ 104 Direct premiums written ("DPW") increased by 4% in 2020 compared to an increase of 7% in 2019. The decline in our DPW growth rate was primarily attributable to the following: i. Audit and endorsement premiums that decreased by $82.5 million compared to the prior year. This decrease was primarily due to lower payroll and sales exposures on the workers compensation and general liability lines of business resulting from the economic impacts of the COVID-19 pandemic and includes the impact of the $75 million accrual that was recorded in the first quarter of 2020, $24.8 million of which remained an accrual at December 31, 2020. ii. A $19.7 million premium credit to our personal and commercial automobile policyholders. Because of the unprecedented nature of the COVID-19-related governmental directives and the associated expected short-term favorable claims frequency impact, we obtained regulatory approval during April to provide this premium credit to our personal and commercial automobile customers. The premium credit to customers with in-force policies was equivalent to 15% of their April and May premiums. Consistent with the fluctuations in DPW, the increase in direct premiums earned in 2020 compared to 2019 was muted by the items discussed above. Direct and ceded loss and loss expenses incurred in 2020 were primarily impacted by increased catastrophe losses. The increase was due to the severity of the storms and individual claims that met the retention for our property excess of loss treaty. Net catastrophe losses were $215.4 million in 2020 compared to $81.0 million in 2019. The ceded premiums and losses related to our participation in the NFIP, under which 100% of our flood premiums and loss and loss expense are ceded to the NFIP, were as follows: Ceded to NFIP ($ in thousands) Ceded premiums written Ceded premiums earned Ceded loss and loss expense incurred 2020 2019 2018 $ (274,042) (271,598) (78,993) (266,925) (259,119) (71,676) (248,053) (244,238) (144,967) Note 10. 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) Gross reserves for loss and loss expense, at beginning of year Less: reinsurance recoverable on unpaid loss and loss expense, at beginning of year1 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 2020 $ 4,067,163 547,066 3,520,097 1,708,755 (72,932) 1,635,823 642,586 807,248 1,449,834 3,706,086 554,269 2019 3,893,868 537,388 3,356,480 1,601,780 (50,289) 1,551,491 579,527 805,443 1,384,970 3,523,001 544,162 2018 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 Gross reserves for loss and loss expense at end of year 1Includes an adjustment of $2.9 million related to our adoption of ASU 2016-13. Refer to Note 3. "Adoption of Accounting Pronouncements" for additional information. 4,260,355 4,067,163 $ 3,893,868 Our net loss and loss expense reserves increased by $183.1 million in 2020, $166.5 million in 2019, and $171.1 million in 2018. The loss and loss expense reserves are net of anticipated recoveries for salvage and subrogation claims, which amounted to $80.9 million for 2020, $76.7 million for 2019, and $67.7 million for 2018. The increase in net loss and loss expense reserves in 2020 was primarily driven by increases in exposure due to premium growth. This increase in our net loss and loss expense reserves was partially offset by favorable prior year loss development. In 2020, we experienced overall net favorable prior year loss development of $72.9 million, compared to $50.3 million in 2019 and $29.9 million in 2018. 105 The following table summarizes the prior year reserve development by line of business: (Favorable)/Unfavorable Prior Year Development ($ 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 2020 2019 2018 $ (35.0) 7.1 (60.0) 3.9 9.2 7.7 (1.8) — (4.0) — (5.0) 0.7 (68.0) 1.9 5.1 7.5 4.4 2.0 1.0 0.1 $ (72.9) (50.3) (9.5) 36.7 (83.0) (1.5) 7.5 9.8 3.0 12.0 (4.8) (0.1) (29.9) The Insurance Subsidiaries had $72.9 million of favorable prior accident year reserve development during 2020, which included $85.0 million of net favorable casualty reserve development and $12.1 million of unfavorable property reserve development. The net favorable casualty reserve development was largely driven by the workers compensation and general liability lines of business. Workers compensation was impacted by continued favorable medical trends in accident years 2018 and prior, and general liability development was attributable to lower loss severities in accident years 2017 and prior. Partially offsetting this net favorable reserve development was $10 million of unfavorable casualty reserve development in the commercial auto line of business ($7.1 million net of property reserve development), driven by unfavorable reserve development on loss severities in accident years 2016 through 2019, and higher than expected frequencies in accident year 2019. 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, reflecting 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 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 automobile 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. (b) We have exposure to abuse or 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 or molestation claims from recently enacted state laws that extend the statute of limitations or permit windows to be opened for abuse or 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 or 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 (i) lack of relevant historical data, (ii) the delayed and inconsistent reporting patterns associated with these claims, and (iii) 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. 106 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. Traditional accident year loss development methods cannot be applied because past loss history is not necessarily indicative of future behavior. Instead, we review the experience by calendar year and rely on alternative metrics, such as paid and incurred survival ratios. 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. 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 2020 Gross Net $ $ 6.3 12.7 9.5 28.5 5.0 8.0 8.4 21.4 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 2020 2019 2018 Gross Net Gross Net Gross Net $ $ $ $ $ $ 6,288 320 (354) 6,254 5,057 320 (354) 5,023 22,413 16,532 (447) 310 (474) 340 22,276 16,398 28,701 21,589 (127) (44) (154) (14) 28,530 21,421 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 (d) The following is information about incurred and paid claims development as of December 31, 2020, net of reinsurance, as well as cumulative claim frequency and the associated IBNR liabilities. During the experience period, we implemented a series of underwriting and claims-related initiatives, as well as, claims management changes. These initiatives focused on exiting underperforming books of business, 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. 107 All Lines (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited Accident Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 $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 1,009,162 1,065,437 1,071,290 1,020,655 998,028 973,089 973,644 973,411 968,536 1,044,142 1,062,045 1,047,230 1,021,007 1,002,316 987,763 984,858 962,091 973,739 1,107,513 1,133,798 1,146,990 1,124,014 1,104,218 1,100,208 1,089,529 1,114,081 1,130,513 1,144,830 1,138,313 1,119,441 1,108,860 IBNR 36,641 41,426 57,866 60,028 77,855 1,188,608 1,203,634 1,227,142 1,199,734 1,180,829 126,935 1,270,110 1,313,372 1,313,585 1,288,526 206,627 1,413,800 1,461,603 1,457,415 342,256 1,483,945 1,523,041 539,113 1,591,972 820,762 Total 12,185,164 As of December 31, 2020 Cumulative Number of Reported Claims 105,039 104,343 91,539 95,366 94,594 95,203 98,918 105,772 101,631 85,549 All Lines (in thousands) Accident Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2011 $ 391,944 2012 585,867 378,067 2013 2014 2015 2016 2017 2018 2019 2020 692,730 555,819 335,956 782,655 651,544 518,872 405,898 852,202 743,742 644,475 614,075 376,641 901,801 810,135 748,758 736,154 581,203 387,272 924,111 856,195 833,823 855,959 725,385 617,958 433,440 940,626 879,372 872,331 936,425 845,868 764,331 678,453 511,271 950,836 898,269 891,841 981,868 929,222 892,390 829,134 779,466 510,091 957,391 905,816 904,825 1,002,157 967,857 983,852 954,792 942,893 781,462 572,302 Total 8,973,347 All outstanding liabilities before 2011, net of reinsurance 364,395 Liabilities for loss and loss expenses, net of reinsurance 3,576,212 General Liability (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2011 2012 2013 2014 2015 2016 2017 2018 2019 $ 227,769 228,720 239,480 230,785 217,256 211,196 212,011 211,500 213,485 238,979 245,561 215,083 194,144 175,305 175,268 180,659 182,085 250,609 251,421 239,776 225,709 210,785 203,831 202,697 244,312 249,946 257,132 239,333 234,082 237,125 254,720 245,710 246,990 233,249 219,204 277,214 272,048 293,747 277,986 293,128 263,245 301,384 317,934 336,326 347,150 Accident Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 As of December 31, 2020 2020 209,846 178,285 195,697 229,679 214,176 252,733 289,883 345,224 356,363 361,554 IBNR 13,501 15,055 19,110 29,018 38,182 61,329 114,160 182,931 248,289 311,657 Cumulative Number of Reported Claims 11,691 10,034 10,397 10,652 10,537 10,753 11,096 11,350 10,531 6,990 Total 2,633,440 108 General Liability (in thousands) Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 $ 13,924 42,692 13,030 73,643 35,241 12,789 102,978 135,377 56,580 35,113 14,901 89,008 72,127 46,825 14,665 159,768 109,448 104,587 79,972 39,978 15,684 170,525 130,866 139,114 121,969 78,668 46,549 17,366 181,856 144,451 153,628 154,957 116,804 89,431 49,470 19,531 187,276 156,186 163,764 179,192 144,216 133,757 92,355 60,784 18,097 190,650 158,397 169,847 187,352 157,071 164,136 131,980 108,421 58,284 21,858 Accident Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 All outstanding liabilities before 2011, net of reinsurance 95,458 Liabilities for loss and loss expenses, net of reinsurance 1,380,902 Total 1,347,996 Workers Compensation (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2011 2012 2013 2014 2015 2016 2017 2018 2019 $ 205,238 218,973 214,743 215,114 210,591 205,708 200,674 194,821 192,863 203,864 208,036 199,360 195,197 188,596 187,359 183,314 178,774 199,794 194,318 187,658 173,160 166,662 162,787 159,767 199,346 187,065 182,579 172,515 164,420 160,646 193,729 194,639 183,604 179,642 176,242 196,774 184,946 176,248 166,009 195,202 184,306 175,853 193,894 193,818 188,625 Accident Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 As of December 31, 2020 2020 191,875 177,658 157,645 159,604 172,572 156,540 162,672 181,151 188,596 168,643 IBNR 21,900 23,181 23,321 25,582 22,368 29,220 34,474 48,883 69,909 97,510 Cumulative Number of Reported Claims 11,863 11,624 11,382 10,495 10,551 10,582 10,808 11,111 10,267 7,017 Total 1,716,956 Workers Compensation (in thousands) Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 $ 42,941 90,836 40,911 118,847 86,909 36,829 134,646 108,211 74,568 35,924 139,232 122,755 96,376 78,944 33,857 149,269 132,052 109,739 100,876 77,320 34,525 154,320 139,477 118,669 113,626 98,195 78,531 40,375 158,535 143,281 124,130 119,392 112,601 98,037 82,216 41,122 161,696 146,739 126,822 124,077 120,097 109,166 100,645 84,780 37,826 163,554 148,750 129,224 127,858 124,046 115,159 110,645 105,903 77,878 29,559 Accident Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 All outstanding liabilities before 2011, net of reinsurance Liabilities for loss and loss expenses, net of reinsurance 243,766 828,146 Total 1,132,576 109 Commercial Automobile (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited Accident Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 IBNR $ 174,006 183,044 182,325 178,421 172,617 174,882 174,514 173,507 173,401 172,684 179,551 191,947 183,527 184,289 184,367 186,128 184,633 185,357 184,477 188,289 205,282 209,197 207,994 210,410 207,975 209,602 208,040 200,534 212,725 216,824 219,925 218,172 217,334 216,461 220,994 240,958 253,074 259,495 260,565 261,386 255,187 274,367 285,302 285,304 290,359 301,274 329,389 324,291 322,197 347,908 352,487 345,547 385,212 398,346 381,654 Total 2,781,151 205 811 1,694 2,096 2,729 8,469 22,447 47,298 111,327 195,279 Commercial Automobile (in thousands) As of December 31, 2020 Cumulative Number of Reported Claims 25,651 24,295 25,886 27,896 29,590 31,465 32,775 35,418 35,703 28,366 Accident Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 $ 69,849 99,196 73,316 121,576 105,371 76,469 142,507 127,235 109,893 80,810 157,291 148,669 140,015 117,169 91,347 166,082 168,114 169,850 148,884 132,260 106,022 170,000 176,656 189,626 180,701 175,866 155,720 117,287 170,913 179,501 200,750 202,821 211,515 200,701 178,823 134,867 172,365 181,353 202,622 209,655 238,142 233,939 220,422 193,788 149,538 172,413 183,098 205,064 212,481 249,905 264,858 262,349 243,713 221,590 139,016 All outstanding liabilities before 2011, net of reinsurance 3,848 Liabilities for loss and loss expenses, net of reinsurance 630,512 Total 2,154,487 Businessowners' Policies (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited Accident Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 IBNR $ 54,469 57,083 54,342 51,047 48,029 49,617 58,242 46,303 42,618 55,962 59,256 44,172 41,005 60,949 52,871 58,966 44,077 40,624 62,548 53,768 52,335 58,456 43,747 41,369 59,806 57,245 53,792 46,624 58,735 43,418 39,709 58,517 55,925 54,993 48,698 55,024 58,948 43,717 39,699 58,093 54,454 53,835 51,524 57,202 53,531 58,697 43,444 39,358 57,302 52,325 53,367 48,067 62,427 59,466 71,836 516 117 554 616 1,178 1,877 5,981 12,432 12,872 17,392 Total 546,289 110 As of December 31, 2020 Cumulative Number of Reported Claims 4,961 5,545 3,483 4,066 3,963 3,847 3,885 4,229 3,541 5,019 Businessowners' Policies (in thousands) Accident Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 $ 27,884 37,362 22,199 41,011 31,833 17,412 46,444 35,089 26,592 28,914 52,114 37,215 30,845 40,584 24,189 55,856 38,766 34,760 44,911 36,014 24,655 57,045 40,627 37,993 49,460 42,710 36,848 21,865 57,365 41,326 38,464 52,940 46,571 39,973 31,337 29,995 57,380 41,356 39,085 55,458 49,073 45,308 36,950 39,791 27,718 57,385 42,075 39,212 55,708 49,839 48,786 40,359 44,316 41,587 43,376 All outstanding liabilities before 2011, net of reinsurance Liabilities for loss and loss expenses, net of reinsurance 7,773 91,419 Total 462,643 Commercial Property (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited As of December 31, 2020 Cumulative Number of Reported Claims 9,038 8,517 5,715 6,516 6,406 6,741 6,900 8,280 7,262 9,494 Accident Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 IBNR $ 136,954 131,667 130,942 131,282 131,353 131,113 131,049 131,009 131,002 118,464 114,224 115,375 116,658 117,102 117,170 117,225 117,220 88,101 90,639 90,103 90,005 90,436 90,278 90,218 141,192 136,249 136,820 138,751 138,155 136,212 110,270 109,513 111,750 111,566 112,496 121,927 126,185 125,937 124,487 138,773 149,106 149,044 183,177 190,834 173,826 130,994 117,200 90,486 136,237 112,582 123,567 153,664 192,558 177,075 232,060 9 6 11 13 24 60 (289) (841) (738) 37,050 Total 1,466,423 Commercial Property (in thousands) Accident Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 $ 94,538 127,580 81,528 129,579 108,834 60,244 130,681 111,503 87,874 101,131 131,060 114,699 90,446 132,909 79,048 131,115 116,291 90,350 136,634 106,182 83,966 131,089 116,625 90,840 137,883 109,829 118,789 99,047 131,100 116,671 90,696 137,418 110,994 122,930 142,338 135,416 131,092 116,674 90,646 136,008 110,969 123,828 148,589 184,813 130,891 131,083 116,673 90,917 135,928 112,117 123,601 152,018 192,698 172,768 164,613 All outstanding liabilities before 2011, net of reinsurance Liabilities for loss and loss expenses, net of reinsurance 175 74,182 Total 1,392,416 111 Personal Automobile (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2011 2012 2013 2014 2015 2016 2017 2018 2019 $ 113,232 116,164 113,686 112,993 114,241 113,830 113,988 113,921 114,056 113,771 114,921 109,832 109,324 110,294 110,300 109,795 109,701 108,417 109,620 106,225 106,703 107,759 107,680 107,916 102,250 109,325 106,757 107,452 106,821 107,104 96,387 99,698 92,727 100,214 99,570 98,718 98,032 100,202 101,140 101,880 105,139 103,653 111,594 113,569 114,043 Accident Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 As of December 31, 2020 Cumulative Number of Reported Claims IBNR 31 78 121 (42) 295 452 1,607 5,597 13,260 30,333 22,700 22,333 22,376 22,508 20,865 19,824 20,739 22,668 22,804 16,309 2020 114,038 109,634 107,803 107,106 98,588 99,544 103,260 112,030 115,688 95,625 Total 1,063,316 Personal Automobile (in thousands) Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 $ 61,323 82,102 63,704 93,878 82,729 61,384 105,068 94,842 80,861 62,519 111,085 102,977 92,637 83,739 58,725 112,732 107,890 100,528 92,589 76,470 57,961 113,551 109,355 105,131 99,173 87,163 76,823 62,854 113,664 109,447 106,679 104,055 92,102 86,752 82,730 69,721 113,856 109,482 106,876 105,709 95,997 94,372 91,479 89,628 69,699 113,996 109,554 107,419 106,478 97,275 98,080 97,628 99,982 92,162 53,407 Accident Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 All outstanding liabilities before 2011, net of reinsurance Liabilities for loss and loss expenses, net of reinsurance 6,902 94,237 Total 975,981 Homeowners (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited Accident Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 IBNR $ 103,804 98,211 87,260 97,761 82,744 73,670 94,167 86,560 72,528 80,111 94,543 86,667 71,494 82,461 76,637 94,183 86,271 72,145 83,637 76,400 60,105 94,378 86,330 71,714 83,844 76,559 60,931 59,167 94,587 86,483 72,148 83,539 74,723 62,391 67,978 62,961 94,572 86,567 72,318 83,824 74,978 61,723 70,365 68,526 64,306 94,524 86,519 71,948 83,525 74,673 61,735 70,064 69,832 72,772 37 44 49 442 483 442 1,822 3,129 2,765 109,033 16,218 Total 794,625 112 As of December 31, 2020 Cumulative Number of Reported Claims 15,111 16,942 7,749 8,773 7,750 6,892 7,385 7,596 6,970 9,003 Homeowners (in thousands) Accident Year Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 $ 71,668 89,963 69,056 91,718 79,584 50,664 92,185 82,720 65,528 61,561 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 93,312 84,250 67,838 76,007 52,589 93,720 85,196 69,775 79,751 70,078 42,252 94,007 85,562 71,776 81,664 72,202 57,333 45,466 94,412 85,642 72,197 82,583 72,927 59,546 63,290 49,430 94,458 85,897 72,433 82,836 74,079 60,082 67,193 64,137 49,680 94,452 85,899 72,446 82,831 74,052 61,187 67,767 65,348 67,631 83,838 All outstanding liabilities before 2011, net of reinsurance Liabilities for loss and loss expenses, net of reinsurance 4,985 44,159 Total 755,451 E&S Casualty Lines (in thousands, except for claim counts) Incurred Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited Accident Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 IBNR $ 8,127 $ 7,102 42,367 9,853 42,621 55,468 12,207 43,175 60,309 55,316 10,273 46,149 67,099 63,505 75,498 9,652 46,165 69,112 69,929 76,432 94,451 10,228 45,988 67,647 71,719 82,404 96,416 91,438 12,119 46,444 68,972 71,206 90,488 11,554 44,622 68,451 71,153 90,355 13,344 44,348 68,029 70,846 90,126 104,655 105,120 104,730 95,783 98,324 99,866 99,395 103,004 117,087 103,184 118,298 103,872 Total 816,172 408 2,126 13,032 2,352 12,518 25,507 26,778 41,204 78,482 90,970 As of December 31, 2020 Cumulative Number of Reported Claims 1,337 2,055 2,299 2,101 2,844 2,925 2,727 2,637 2,278 1,138 E&S Casualty Lines (in thousands) Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance Unaudited 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 $ — $ 806 3,722 3,200 7,914 2,715 6,445 16,430 9,470 2,353 9,954 25,064 21,980 12,234 3,036 9,912 32,343 35,200 25,571 13,057 3,720 10,256 36,278 46,108 43,877 29,389 16,195 5,057 9,819 38,298 51,142 53,780 50,712 33,950 14,672 5,509 9,604 39,832 54,974 60,092 64,529 56,581 34,179 21,337 4,422 10,744 40,615 55,988 64,698 71,421 69,448 53,238 39,174 17,812 3,695 Accident Year 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 All outstanding liabilities before 2011, net of reinsurance 121 Liabilities for loss and loss expenses, net of reinsurance 389,460 Total 426,833 113 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. (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, 2020 $ 1,380,902 828,146 630,512 91,419 74,182 16,359 3,021,520 94,237 44,159 10,751 149,147 389,460 16,085 405,545 3,576,212 215,136 210,450 11,611 6,849 21,760 2,853 468,659 42,403 847 29,589 72,839 12,195 576 12,771 554,269 129,874 Total gross liability for unpaid loss and loss expenses $ 4,260,355 114 (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, 12.2% in the second year, and so forth. The following is supplementary information about average historical claims duration as of December 31, 2020: 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% 21.8 37.5 48.6 70.0 58.4 71.9 4.1 2 12.2 25.6 17.3 19.4 25.7 18.8 20.4 12.0 3 15.7 13.5 14.1 8.5 2.8 9.6 3.3 4 17.0 8.1 12.7 8.9 1.0 6.7 1.7 5 14.9 4.3 10.0 6.7 0.4 4.2 1.7 17.4 21.7 13.5 6 9.8 3.6 4.6 3.7 — 1.3 0.3 9.0 7 6.0 3.5 1.6 1.5 0.1 0.5 0.1 7.2 8 5.1 2.0 0.8 0.2 0.1 0.2 0.1 3.5 9 2.0 1.6 0.9 0.2 0.1 0.2 0.1 2.0 10 1.8 1.2 0.3 0.2 0.1 0.1 0.3 2.0 Note 11. Indebtedness The table below provides a summary of our outstanding debt at December 31, 2020 and 2019: Outstanding Debt ($ in thousands) Description Long term Issuance Date Maturity Date Interest Rate Original Amount Unamortized Issuance Costs Debt Discount December 31, 2020 December 31, 2019 2020 Carry Value (1) Senior Notes 3/1/2019 3/1/2049 5.375 % 300,000 $ 2,934 5,759 291,307 291,010 (2) FHLBI (3) FHLBNY (3) FHLBNY (4) Senior Notes (5) Senior Notes 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 — — — 319 166 — — — 501 86 60,000 25,000 25,000 99,180 49,748 60,000 25,000 25,000 99,125 49,725 Finance lease obligations Total long-term debt $ 3,419 6,346 508 550,743 737 550,597 Short-term Debt Activity Short-term debt activity included the following in 2020: • • • • On February 18, 2020, SICA borrowed short-term funds of $85 million from the FHLBNY at an interest rate of 1.81%. This borrowing was refinanced upon its maturity on March 18, 2020, at a lower interest rate of 0.68% and was subsequently repaid on September 18, 2020. On March 12, 2020, SICA borrowed $100 million from the FHLBNY at an interest rate of 0.78%. This borrowing was refinanced upon its maturity on (i) September 14, 2020, at a lower interest rate of 0.36%, and again on (ii) November 16, 2020, at a lower interest rate of 0.33%. This borrowing was repaid on December 16, 2020. On March 19, 2020, Selective Insurance Company of South Carolina ("SICSC") and Selective Insurance Company of the Southeast ("SICSE") borrowed $39 million and $28 million, respectively, from the FHLBI at an interest rate of 0.58%. These borrowings were repaid on December 14, 2020. On March 24, 2020, the Parent borrowed $50 million on its line of credit issued by the Bank of Montreal at an interest rate of 2.244%. This borrowing was repaid on May 8, 2020. 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. Prior to this Line of Credit, 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”). This agreement was terminated on December 30, 2019. 115 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, 2020 Not less than $1.6 billion Not to exceed 35% Actual as of December 31, 2020 $2.5 billion 17.9% 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 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, SICSC and 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 $5.7 million at December 31, 2020 and $2.8 million at December 31, 2019. 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, 2020 and December 31, 2019. 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 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. 116 (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 12. Segment Information We evaluate the results of our four reportable segments 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 primarily evaluated after-tax net investment income and its ROE contribution. After- tax net realized and unrealized gains and losses, which are not included in non-GAAP operating income, are also included in our Investment segment results. In computing each segment's results, we do not make adjustments for interest expense or corporate expenses. No segment has a separate investment portfolio or allocated assets. Our combined insurance operations are subject to certain geographic concentrations, particularly in the Eastern region of the country. In 2020, approximately 18% of NPW were related to insurance policies written in New Jersey. We also had a goodwill balance of $7.8 million at both December 31, 2020 and 2019 on our Consolidated Balance Sheet that relates to our Standard Commercial Lines reporting unit. 117 The following summaries present revenues (net investment income and net realized and unrealized gains and losses on investments in the case of the Investments segment) and pre-tax income for the individual segments: Revenue by Segment ($ 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 (losses) gains Total Investments revenues Total revenues Years ended December 31, 2020 2019 2018 $ 615,181 278,062 694,019 388,120 110,210 36,742 20,850 15,512 554,256 311,370 669,895 353,834 105,252 35,726 19,281 10,889 493,093 317,616 616,187 329,660 103,412 33,991 18,263 8,180 2,158,696 2,060,503 1,920,402 165,020 125,405 8,715 2,058 301,198 174,408 65,082 — 239,490 227,107 (4,217) 222,890 2,922,274 $ 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 2,846,491 2,586,080 118 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 (loss) gain, before federal income tax Underwriting (loss) 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 (losses) gains 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 Reconciliation of Segment Results to Income Before Federal Income Tax ($ in thousands) Underwriting gain (loss) Standard Commercial Lines Standard Personal Lines E&S Lines Investment income Total all segments Interest expense Corporate expenses Income, before federal income tax Years ended December 31, 2020 2019 2018 $ 151,731 119,867 145,990 115,332 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 92.9 % 5.1 % (15,508) (12,251) 105.2 % (0.5)% 126 100 99.9 % — % 227,107 (4,217) 222,890 41,609 181,281 7.8 % Years ended December 31, 2020 2019 2018 151,731 (15,508) 126 222,890 359,239 (30,839) (25,412) 302,988 145,990 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 $ $ $ $ Note 13. Earnings per Share The following table provides a reconciliation of the numerators and denominators of basic and diluted earnings per share ("EPS"): 2020 ($ in thousands, except per share amounts) Basic EPS: Net income available to common stockholders Effect of dilutive securities: Stock compensation plans Diluted EPS: Income Shares (Numerator) (Denominator) Per Share Amount $ 246,355 59,862 $ 4.12 — 431 Net income available to common stockholders $ 246,355 60,293 $ 4.09 119 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 Shares (Numerator) (Denominator) Per Share Amount $ 271,623 59,421 $ 4.57 — 583 Net income available to common stockholders $ 271,623 60,004 $ 4.53 2018 ($ in thousands, except per share amounts) Basic EPS: Net income available to common stockholders Effect of dilutive securities: Stock compensation plans Diluted EPS: Income Shares (Numerator) (Denominator) Per Share Amount $ 178,939 58,950 $ 3.04 — 763 Net income available to common stockholders $ 178,939 59,713 $ 3.00 Note 14. Federal Income Taxes (a) A reconciliation of federal income tax on income at the corporate rate (21%) to the effective tax rate is as follows: ($ in thousands) Tax at statutory rate Tax-advantaged interest Dividends received deduction Executive compensation Stock-based compensation Other Federal income tax expense 2020 2019 2018 $ $ 63,627 (4,730) (514) 2,246 (1,846) (2,150) 56,633 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 (b) 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 (liability) asset 2020 2019 54,240 60,842 8,943 5,472 6,037 7,195 48,193 57,004 10,646 5,727 1,059 6,478 142,729 129,107 60,601 81,142 14,760 13,322 169,825 (27,096) 56,949 45,294 7,576 12,512 122,331 6,776 $ $ Net deferred federal income tax decreased by $33.9 million in 2020, which was primarily driven by a decrease in interest rates resulting in a $35.8 million increase in gross deferred tax liabilities associated with unrealized gains on our fixed income securities portfolio. 120 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, 2020 or 2019. We do not have unrecognized tax expense or benefit as of December 31, 2020. We have analyzed our tax positions in all open tax years, which as of December 31, 2020 were 2017 through 2020. 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 15. Retirement Plans (a) Selective Insurance Retirement Savings Plan (“Retirement Savings Plan”) and the Selective Insurance Company of America Deferred Compensation Plan ("Deferred Compensation 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. In addition, SICA offers a Deferred Compensation Plan to a group of management or highly compensated employees as a method of recognizing and retaining such employees. Expenses recorded for these plans were $18.6 million in 2020, $17.3 million in 2019, and $16.2 million in 2018. (b) Retirement Income Plan SICA maintains a defined benefit pension plan, the Retirement Income Plan for Selective Insurance Company of America (the "Pension Plan"). This qualified, noncontributory plan is closed to new entrants and existing participants ceased accruing benefits after March 31, 2016. 121 The following tables provide details on the Pension Plan for 2020 and 2019: December 31, ($ in thousands) Change in Benefit Obligation: Benefit obligation, beginning of year Interest cost Actuarial losses Benefits paid Benefit obligation, end of year Change in Fair Value of Assets: Fair value of assets, beginning of year Actual return on plan assets, net of expenses Contributions by the employer to funded plans Benefits paid Fair value of assets, end of year Funded status Amounts Recognized in the Consolidated Balance Sheet: Assets Liabilities Net pension assets (liabilities), end of year Amounts Recognized in AOCI: Net actuarial loss Other Information as of December 31: Accumulated benefit obligation Weighted-Average Liability Assumptions as of December 31: Discount rate ($ in thousands) Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income: 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 (gain) loss Reversal of amortization of net actuarial loss Total recognized in other comprehensive income $ $ $ $ $ $ $ $ $ $ $ $ $ Pension Plan 2020 2019 391,021 11,312 35,276 (12,448) 425,161 385,087 60,077 — (12,448) 432,716 7,555 7,555 — 7,555 101,414 425,161 2.68 % 2020 Pension Plan 2019 2018 11,312 (21,907) 2,817 (7,778) (2,894) (2,817) (5,711) 13,506 (21,114) 2,575 (5,033) 11,643 (2,575) 9,068 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. (13,489) 4,035 $ 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) 107,125 391,021 3.33 12,428 (22,767) 1,981 (8,358) 12,600 (1,981) 10,619 2,261 Weighted-Average Expense Assumptions for the years ended December 31: Discount rate Expected return on plan assets 2020 Pension Plan 2019 2018 3.33 % 5.80 4.46 6.50 3.78 6.36 122 Our latest measurement date was December 31, 2020, at which time we decreased our expected return on plan assets to 5.40%, due to lower expected returns within our longer-dated fixed income portfolio, as interest rates 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 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 65 basis points, to 2.68%, as of December 31, 2020, compared to 3.33% as of December 31, 2019, which drove the increase in the benefit obligation for the period. The weighted average discount rate used to determine 2021 interest cost was 2.06%. 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 2021, 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. 2020 2019 Target Percentage Actual Percentage Actual Percentage Minimum Maximum 50 % 70 % - 100 % 70% 80% - 100 % 64 % 35 % 1 % 100 % 59 % 38 % 3 % 100 % The use of derivative instruments is permitted under certain circumstances for the Pension Plan portfolio, but may not be used for unrelated speculative purposes or to create exposures that are not permitted in the Pension Plan's investment guidelines. 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 to help insulate the funded status of the plan. Considering the impact of this derivative overlay, the liability hedging assets provide for an approximate 65% hedge against the projected benefit obligation. The Pension Plan had no investments in the Parent’s common stock as of December 31, 2020 or 2019. For information regarding investments in funds of our related parties, refer to Note 18. "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 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 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." 123 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. 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, 2020 Fair Value Measurements at 12/31/20 Using Assets Measured at Fair Value At 12/31/20 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 $ 142,320 73,762 61,585 277,667 73 400 29 502 142,320 73,762 61,585 277,667 — — — — 278,169 277,667 99,490 52,756 152,246 3,273 2,073 5,346 99,490 52,756 152,246 3,273 — 3,273 — — — — — — — — — — — — — 2,073 2,073 2,073 — — — — — — — — — — — — — — — — Total invested assets $ 435,761 433,186 124 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 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. Contributions We presently do not anticipate contributing to the Pension Plan in 2021, as we have no minimum required contribution amounts. Benefit Payments ($ in thousands) Benefits Expected to be Paid in Future Fiscal Years: 2021 2022 2023 2024 2025 2026-2030 Note 16. Share-Based Payments Pension Plan $ 14,658 15,213 16,408 17,439 18,440 105,076 Active Plans As of December 31, 2020, the following four plans were available for the issuance of share-based payment awards: The 2014 Omnibus Stock Plan, As Amended and Restated Effective as of May 2, 2018 (the "Stock Plan"); The Cash Incentive Plan, As Amended and Restated as of May 1, 2014 (the "Cash Plan"); The Employee Stock Purchase Plan (2009) ("ESPP"); and The Amended and Restated Stock Purchase Plan for Independent Insurance Agencies (2010), Amended and Restated as of November 1, 2020 (the "Agent Plan"). • • • • 125 The following table provides information regarding the approval of these plans: Plan Stock Plan Cash Plan ESPP Agent Plan Approvals Approved effective as of May 1, 2014 by stockholders on April 23, 2014. 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, effective November 1, 2020, by the Salary and Employee Benefits Committee of the Parent's Board on October 26, 2020. 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, 2020 are as follows: As of December 31, 2020 Authorized Available for Issuance Awards Outstanding Stock Plan ESPP Agent Plan 4,750,000 1,500,000 3,000,000 2,959,819 257,088 1,659,233 686,325 — — 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, 2020 Plan 2005 Omnibus Stock Plan ("2005 Stock Plan") Parent's Stock Compensation Plan for Non-employee Directors ("Directors Stock Compensation 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. 1,958,306 32,906 Directors could elect to receive a portion of their annual compensation in shares of the Parent's common stock. 44,468 44,468 1Awards outstanding under the 2005 Stock Plan represent shares deferred by our non-employee directors. 126 RSU Transactions A summary of the RSU transactions under our share-based payment plans is as follows: Unvested RSU awards at December 31, 2019 Granted in 2020 Vested in 2020 Forfeited in 2020 Unvested RSU awards at December 31, 2020 Number of Shares 746,725 $ 247,680 (311,951) (14,780) 667,674 $ Weighted Average Grant Date Fair Value 53.48 62.91 44.50 60.30 61.02 As of December 31, 2020, total unrecognized compensation expense related to unvested RSU awards granted under our Stock Plan was $9.2 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 $20.6 million for 2020, $22.0 million for 2019, and $18.0 million for 2018. In connection with vested RSUs, the total value of the DEUs that vested was $0.7 million in 2020 and $0.8 million in 2019 and 2018. Option Transactions A summary of the stock option transactions under our 2005 Stock Plan is as follows: Outstanding at December 31, 2019 Granted in 2020 Exercised in 2020 Forfeited or expired in 2020 Outstanding at December 31, 2020 Exercisable at December 31, 2020 Weighted Average Exercise Price Weighted Average Remaining Contractual Life in Years Aggregate Intrinsic Value ($ in thousands) Number of Shares 26,823 $ — 26,823 — — $ — $ 16.71 — 16.71 — — — 0.00 0.00 $ $ — — The total intrinsic value of options exercised was $1.3 million in 2020, $5.2 million in 2019, and $4.5 million in 2018. CIU Transactions The liability recorded in connection with our Cash Plan was $8.2 million at December 31, 2020 and $8.6 million at December 31, 2019. The remaining cost associated with the CIUs is expected to be recognized over a weighted average period of 1.2 years. The CIU payments made were $2.3 million in 2020, $18.4 million in 2019, and $20.2 million in 2018. The decrease of $16.1 million in payments in 2020 compared to 2019 was primarily due to the structural changes we made to our Cash Plan in early 2017. ESPP and Agent Plan Transactions A summary of ESPP and Agent Plan share issuances is as follows: ESPP Issuances Agent Plan Issuances 2020 2019 2018 99,141 69,238 72,952 47,888 70,448 41,134 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. 127 The grant date fair value of each option award is estimated using the Black Scholes option valuation model ("Black Scholes"). The following are the significant assumptions used in applying Black Scholes: (i) the risk-free interest rate, which is the implied yield currently available on U.S. Treasury zero-coupon issues with an equal remaining term; (ii) the expected term, which is based on historical experience of similar awards; (iii) the dividend yield, which is determined by dividing the expected per share dividend during the coming year by the grant date stock price; and (iv) the expected volatility, which is based on the volatility of the Parent's stock price over a historical period comparable to the expected term. In applying Black Scholes, we use the weighted average assumptions illustrated in the following table: Risk-free interest rate Expected term Dividend yield Expected volatility 2020 0.76 % 6 months 1.6 % 37 % ESPP 2019 2.33 6 months 1.2 26 2018 1.88 6 months 1.3 18 The weighted-average fair value of options and stock per share, including RSUs granted under the Parent's stock plans, during 2020, 2019, and 2018 was as follows: RSUs ESPP: Six month option Discount of grant date market value Total ESPP Agent Plan: Discount of grant date market value 2020 2019 2018 $ 62.91 4.82 8.61 13.43 5.73 63.60 4.32 9.99 14.31 7.00 55.96 2.67 8.50 11.17 5.99 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 2020, 2019, and 2018: ($ 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 2020 2019 2018 $ $ 19.8 (5.7) 14.1 24.5 (8.2) 16.3 19.3 (7.0) 12.3 Note 17. Preferred Stock We have 5,000,000 shares of preferred stock authorized, with no par value, of which (i) 300,000 shares are designated Series A junior preferred stock, which have not been issued, and (ii) 8,000 shares have been issued as Series B in 2020 as discussed below. On December 2, 2020, we issued 8.0 million depository shares, each representing a 1/1,000th interest in a share of our perpetual 4.60% Non-Cumulative Preferred Stock, Series B, without par value, with a liquidation preference of $25,000 per share (equivalent to $25.00 per depository share) (“Preferred Stock”), for net proceeds of $194.6 million. Dividends are recorded when declared and, if declared are payable quarterly in arrears on the 15th day of March, June, September, and December. If a dividend is not declared and paid or made payable on all outstanding shares of the Preferred Stock for the latest completed dividend period, no dividends may be declared or paid on our common stock and we may not purchase, redeem, or otherwise acquire our outstanding common stock. The Preferred Stock is redeemable at our option in whole or in part, from time to time, on or after December 15, 2025 at a redemption price equal to $25,000 per share of Preferred Stock (equivalent to $25.00 per depository share), plus unpaid dividends attributable to the then current dividend period. Prior to December 15, 2025, the Preferred Stock is redeemable at the Company’s option, in whole but not in part, within 90 days of the occurrence of (a) a rating agency event at a redemption price equal to $25,500 per share of Preferred Stock (equivalent to $25.50 per depository share), plus unpaid dividends attributable to the current dividend period in circumstances where a rating agency changes its criteria used to assign equity credit to securities like the Preferred Stock; or (b) a regulatory capital event at a redemption price equal to $25,000 per share of Preferred Stock 128 (equivalent to $25.00 per depository share), plus unpaid dividends attributable to the current dividend period in circumstances where a capital regulator such as a state insurance regulator changes or proposes to change capital adequacy rules. Note 18. Related Party Transactions William M. Rue, a Director of the Parent, is Chairman of, and owns more than 10% of the equity of Rue Holding Company, which owns 100% 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 Holding Company. Mr. Rue’s daughter is an employee of Rue Insurance and owns less than 10% of the equity of Rue Holding Company. 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 both 2020 and 2019, and $10.1 million in 2018. In return, the Insurance Subsidiaries paid standard market commissions, including supplemental commissions, to Rue Insurance of $1.8 million in 2020, $2.0 million in 2019, and $2.1 million in 2018. Amounts due to Rue Insurance at December 31, 2020 and December 31, 2019 were $0.2 million and $0.3 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 the Foundation is comprised of some of the Parent's officers. We made $0.5 million of contributions to the Foundation in 2020 and 2018, and $1.3 million in 2019. BlackRock, Inc., a leading publicly-traded investment management firm (“BlackRock”), has purchased our common shares in the ordinary course of its investment business and has previously filed Schedules 13G/A with the SEC. On January 27, 2021, BlackRock filed a Schedule 13G/A reporting beneficial ownership as of December 31, 2020, of 11.2% of our common stock. In connection with purchasing our common shares, BlackRock filed the necessary filings with insurance regulatory authorities. On the basis of those filings, BlackRock is deemed not to be a controlling person for the purposes of applicable insurance law. We are required to disclose related party information for our transactions with BlackRock. BlackRock is highly regulated, serves its clients as a fiduciary, and has a diverse platform of active (alpha) and index (beta) investment strategies across asset classes that enables it to tailor investment outcomes and asset allocation solutions for clients. BlackRock also offers the BlackRock Solutions® investment and risk management technology platform, Aladdin®, risk analytics, advisory, and technology services and solutions to a broad base of institutional and wealth management investors. We incurred expenses related to BlackRock for services rendered of $2.0 million in 2020, $2.2 million in 2019, and $2.0 million in 2018. Amounts payable for such services at December 31, 2020 and December 31, 2019, were $1.3 million and $1.1 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, 2020 and December 31, 2019, and are predominately reflected in Equity securities on our Consolidated Balance Sheet. During 2020, with regard to BlackRock funds, we (i) purchased $62.2 million, (ii) recognized net unrealized losses of $0.2 million, and (iii) recorded in $0.4 million income. We did not make any sales for BlackRock funds in 2020. During 2019, we purchased $21.7 million in securities, (ii) sold $59.5 million, (iii) recognized net realized and unrealized gains of $5.7 million, and (iv) recorded $0.8 million in income. During 2018, we purchased $41.4 million in securities and recognized a net realized and unrealized loss of $3.6 million. There were no amounts payable on the settlement of these investment transactions at December 31, 2020 and December 31, 2019. Our Pension Plan's investment portfolio contained investments in BlackRock funds of $191.8 million at December 31, 2020 and $144.2 million at December 31, 2019. During 2020, with regard to BlackRock funds, the Pension Plan (i) purchased $56.7 million, (ii) sold $44.9 million, and (iii) recorded net investment income of $35.8 million. In 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 $9.3 million. In addition, our Deferred Compensation Plan and Retirement Savings Plan may offer our employees the option to invest in various BlackRock funds. All contracts and transactions with BlackRock were consummated in the ordinary course of business on an arm's-length basis. 129 NOTE 19. Leases We have various operating leases for office space, equipment, and fleet vehicles. In addition, we have various finance leases for computer hardware. Such lease agreements, which expire at various dates through 2030, are generally renewed or replaced by similar leases. The components of lease expense for the year ended December 31, 2020 were as follows: ($ in thousands) 2020 2019 Operating lease cost, included in Other insurance expenses on the Consolidated Statements of Income $ 9,498 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 550 15 565 758 Short-term lease cost, included in Other insurance expenses on the Consolidated Statements of Income $ 2,011 8,808 984 16 1,000 48 2,165 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 Operating leases Finance leases December 31, 2020 December 31, 2019 8 2 2.3 1.6 years 6 2 3.4 % 2.1 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, 2020, the maturities of our lease liabilities were as follows: $ $ 40,215 41,674 502 508 December 31, 2020 December 31, 2019 ($ in thousands) Year ended December 31, 2021 2022 2023 2024 2025 Thereafter Total lease payments Less: imputed interest Less: leases that have not yet commenced Total lease liabilities Finance Leases Operating Leases Total $ $ 330 127 56 — — — 513 5 — 508 8,372 6,788 5,411 4,690 3,572 16,234 45,067 3,393 — 41,674 130 26,535 27,506 731 737 8,702 6,915 5,467 4,690 3,572 16,234 45,580 3,398 — 42,182 At December 31, 2019, the maturities of our lease liabilities for capital and operating leases were as follows: ($ 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 8,695 6,416 4,644 3,329 2,920 8,638 34,642 3,011 3,388 28,243 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 20. 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, 2020, we had purchased such annuities with a present value of $29.1 million for settlement of claims on a structured basis for which we are contingently liable. To our knowledge, there are no material defaults from any of the issuers of such annuities. (b) As of December 31, 2020, we have made commitments that may require us to invest additional amounts into our investment portfolio, which are as follows: ($ 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 Total Amount of Obligation Year of Expiration of Obligation $ $ 215.7 37.7 2.0 4.4 259.8 2036 2030 2021 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 21. Litigation As of December 31, 2020, 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 (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. All of our commercial property and businessowners' policies require direct physical loss of or damage to property by a covered cause of loss. It also is our practice to include in, or attach to, all standard lines commercial property and businessowners' policies an exclusion that states that all loss or property damage caused by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness, or disease is not a covered cause of loss ("Virus Exclusion"). Whether COVID-19 related contamination, the existence of COVID-19 pandemic, and the resulting COVID-19 related government shutdown orders cause physical loss of or damage to property is the subject of much public debate and first- party coverage litigation against some insurers, including us. The Virus Exclusion also is the subject of first-party coverage litigation against some insurers, including us. We cannot predict the outcome of litigation over these two coverage issues, including interpretation of provisions similar or identical to those in our insurance policies. 131 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. Note 22. 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, 2020, the various state insurance departments of domicile have adopted the March 2020 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 ($ in millions) SICA Selective Way Insurance Company ("SWIC") SICSC SICSE SICNY Selective Insurance Company of New England ("SICNE") Selective Auto Insurance Company of New Jersey ("SAICNJ") New Jersey MUSIC Selective Casualty Insurance Company ("SCIC") Selective Fire and Casualty Insurance Company ("SFCIC") New Jersey New Jersey New Jersey New Jersey $ 574.2 New Jersey Indiana Indiana New York New Jersey 2020 2019 2020 2019 2020 525.9 339.2 132.6 103.1 99.4 25.3 62.5 27.1 58.2 23.5 739.4 430.0 182.8 143.5 139.4 61.2 114.9 103.9 147.5 62.1 680.1 388.2 163.8 128.7 127.1 55.4 105.4 95.6 132.7 55.4 81.8 54.0 20.8 16.8 15.3 6.8 12.9 11.4 16.2 6.4 374.0 148.6 115.9 111.7 30.0 70.0 34.4 71.1 29.2 2019 113.9 59.2 23.9 18.5 17.0 7.8 14.9 13.2 16.8 7.5 2018 78.0 47.5 16.5 12.9 12.0 5.6 9.9 9.4 13.3 5.5 Total $1,559.1 1,396.8 2,124.7 1,932.4 242.4 292.7 210.6 (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 2020 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 132 are impacted by (i) covenants in its Line of Credit that obligate it, among other things, to maintain a minimum consolidated net worth and a maximum ratio of consolidated debt to total capitalization, and (ii) the terms of our preferred stock that prohibit dividends to be declared or paid on our common stock if dividends are not declared and paid, or made payable, on all outstanding preferred stock for the latest completed dividend period. As of December 31, 2020, the Parent had an aggregate of $490.2 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 $2.3 billion are predominately restricted due to the regulation associated with our Insurance Subsidiaries. In 2021, the Insurance Subsidiaries have the ability to provide for $241.0 million in annual dividends to the Parent; however, as regulated entities, these dividends are subject to certain restrictions, which are further discussed below. The Parent also has available to it other potential sources of liquidity, such as: (i) borrowings from our Indiana Subsidiaries; (ii) debt issuances; (iii) common and preferred 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 $97.1 million as of December 31, 2020, 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 11. "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 2020, which was used 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 2021, based on the 2020 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, 2020 2021 New Jersey New Jersey Indiana Indiana New York New Jersey New Jersey New Jersey New Jersey New Jersey $ $ $ 46.6 22.5 7.5 5.3 3.0 2.2 5.9 6.0 5.2 0.8 105.0 $ 81.8 54.1 20.8 16.8 13.9 6.7 12.9 11.4 16.2 6.4 241.0 133 Note 23. Quarterly Financial Information (unaudited, $ in thousands, except per share data) 2020 2019 2020 2019 2020 2019 2020 2019 First Quarter Second Quarter Third Quarter Fourth Quarter Net premiums earned Net investment income earned Net realized and unrealized (losses) gains Other income Total revenues Income before federal income taxes Net income Net income available to common stockholders Net income available to common stockholders per common share: Basic Diluted $ 651,703 632,573 630,671 642,619 694,541 653,620 704,899 668,359 55,967 (44,666) 1,825 50,618 13,451 2,320 34,444 12,649 4,683 58,505 68,185 4,027 3,053 7,721 6,119 55,826 (2,183) 3,162 664,829 698,962 682,447 708,204 776,566 710,425 15,997 15,236 15,236 73,694 61,348 61,348 42,693 34,183 34,183 90,225 72,266 72,266 85,257 69,875 69,875 71,178 56,150 56,150 68,511 20,079 4,943 798,432 159,041 127,061 127,061 57,594 (873) 3,820 728,900 101,293 81,859 81,859 0.26 0.25 1.04 1.02 0.57 0.57 1.22 1.21 1.17 1.16 0.94 0.93 2.12 2.10 1.38 1.36 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, 2020. 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, 2020, 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 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 134 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, 2020, 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, 2020, 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, 2020 and 2019, 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, 2020, and the related notes and financial statement schedules I to V (collectively, the "consolidated financial statements"), and our report dated February 12, 2021 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, 2021 /s/ KPMG LLP 135 PART III Because we will file a Proxy Statement within 120 days after the end of the fiscal year ending December 31, 2020, this Annual Report on Form 10-K omits certain information required by Part III and incorporates by reference certain information included in the Proxy Statement. Item 10. Directors, Executive Officers and Corporate Governance. Information about our executive officers, Directors, and all other matters required to be disclosed in Item 10. "Directors, Executive Officers and Corporate Governance." appears under the "Executive Officers" and "Information About Proposal 1 - Election of Directors" sections of the Proxy Statement. These portions of the Proxy Statement are hereby incorporated by reference. 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 Accountant Fees and Services. Information about the fees and services of our principal accountants appears under "Fees of Independent Registered Public Accounting Firm" in the "Information About Proposal 4 - Ratification of Appointment of Independent Registered Public Accounting Firm" section of the Proxy Statement and is hereby incorporated by reference. 136 PART IV Item 15. Exhibit and 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, 2020 and 2019 Consolidated Statements of Income for the Years Ended December 31, 2020, 2019, and 2018 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019, and 2018 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2020, 2019, and 2018 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018 Notes to Consolidated Financial Statements, December 31, 2020, 2019, and 2018 (2) Financial Statement Schedules: Form 10-K Page 76 77 78 79 80 81 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, 2020 Schedule II Condensed Financial Information of Registrant at December 31, 2020, 2019, and 2018 and for the Years Ended December 31, 2020, 2019, and 2018 Schedule III Supplementary Insurance Information for the Years Ended December 31, 2020, 2019, and 2018 Schedule IV Reinsurance for the Years Ended December 31, 2020, 2019, and 2018 Schedule V Allowance for Credit Losses on Premiums and Other Receivables for the Years Ended December 31, 2020, 2019, and 2018 Form 10-K Page 138 139 142 143 143 (3) Exhibits: The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index, which is incorporated by reference and immediately precedes the exhibits filed with or incorporated by reference in this Form 10-K. 137 SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 2020 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 Residential mortgage-backed securities Commercial 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 Commercial mortgage loans Short-term investments Other investments Total investments 4,795 2,579 10,627 18,001 116,140 18,366 1,247,137 73,821 2,254,231 1,026,551 1,051,788 667,894 6,455,928 17,474 291,158 1,735 310,367 4,505 2,436 9,898 16,839 110,038 16,801 1,159,588 68,269 2,083,934 1,014,820 999,485 620,582 6,073,517 18,366 281,619 1,566 301,551 46,306 409,865 266,322 $ 7,114,400 4,507 2,464 9,853 16,824 116,140 18,366 1,247,137 73,821 2,254,231 1,026,551 1,051,788 667,894 6,455,928 17,474 291,158 1,735 310,367 46,306 409,852 266,322 7,505,599 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. (Parent Corporation) Balance Sheets ($ in thousands, except share amounts) Assets: Fixed income securities, available-for-sale - at fair value (allowance for credit losses: $22 – 2020; amortized cost $272,256 – 2020; $233,753 – 2019 Equity securities Short-term investments Other 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 of $0 par value per share: Authorized shares: 5,000,000; Issued shares: 8,000 with $25,000 liquidation preference per share – 2020; no shares issued or outstanding – 2019 Common stock of $2 par value per share: Authorized shares: 360,000,000 Issued: 104,032,912 – 2020; 103,484,159 – 2019 Additional paid-in capital Retained earnings Accumulated other comprehensive income Treasury stock – at cost (shares: 44,127,109 – 2020; 44,023,006 – 2019) Total stockholders’ equity Total liabilities and stockholders’ equity SCHEDULE II December 31, 2020 2019 290,428 159,524 36,425 3,392 394 241,526 — 36,219 — 300 2,754,012 2,416,209 11,040 2,218 1,959 16,116 4,875 1,692 3,259,392 2,716,937 440,235 59,611 8,238 12,419 520,503 439,860 61,163 8,604 12,374 522,001 $ $ $ $ $ 200,000 — 208,066 438,985 206,968 418,521 2,271,537 2,080,529 220,186 (599,885) 2,738,889 $ 3,259,392 81,750 (592,832) 2,194,936 2,716,937 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. 139 SELECTIVE INSURANCE GROUP, INC. (Parent Corporation) Statements of Income SCHEDULE II (continued) ($ in thousands) Revenues: Dividends from subsidiaries Net investment income earned Net realized and unrealized investment gains (losses) Total revenues Expenses: Interest expense Other expenses Total expenses Year ended December 31, 2020 2019 2018 $ 104,992 7,579 1,756 114,327 29,220 25,412 54,632 110,004 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 Income before federal income tax 59,695 53,186 51,820 Federal income tax (benefit) expense: Current Deferred Total federal income tax benefit (10,987) 473 (10,514) (16,080) 3,606 (12,474) (14,173) 3,141 (11,032) Net income before equity in undistributed income of subsidiaries 70,209 65,660 62,852 Equity in undistributed income of subsidiaries, net of tax 176,146 205,963 116,087 Net income Preferred stock dividends Net income available to common stockholders $ $ 246,355 271,623 178,939 — — — 246,355 271,623 178,939 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. 140 SELECTIVE INSURANCE GROUP, INC. (Parent Corporation) Statements of Cash Flows SCHEDULE II (continued) ($ in thousands) Operating Activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Year ended December 31, 2020 2019 2018 $ 246,355 271,623 178,939 Equity in undistributed income of subsidiaries, net of tax Stock-based compensation expense Net realized and unrealized investment (gains) losses Undistributed losses of equity method investments Amortization – other Changes in assets and liabilities: Decrease in accrued long-term stock compensation Decrease in net federal income taxes Increase in other assets (Decrease) increase in other liabilities Net cash provided by operating activities Investing Activities: Purchase of fixed income securities, available-for-sale Purchase of equity securities Purchase of short-term investments Purchase of other investments Redemption and maturities of fixed income securities, available-for-sale Sale of fixed income securities, available-for-sale Sale of equity securities Sale of short-term investments Capital contribution to subsidiaries Net cash used in investing activities Financing Activities: Dividends to preferred stockholders Dividends to common stockholders Acquisition of treasury stock Proceeds from borrowings Repayment of borrowings Net proceeds from stock purchase and compensation plans Preferred stock issued, net of issuance costs Principal payment on borrowings from subsidiaries Net cash provided by (used in) financing activities Net increase (decrease) in cash Cash, beginning of year Cash, end of year (176,146) 16,227 (1,756) 672 1,080 (366) 5,549 (317) (390) 90,908 (89,726) (157,411) (523,961) (4,065) 26,877 23,276 — 523,813 (30,000) (231,197) — (54,486) (7,053) 50,000 (50,000) 8,411 195,063 (1,552) 140,383 94 300 394 $ (205,963) 19,077 (207) — 4,614 (12,970) 1,651 (533) 3,919 81,211 (116,087) 14,507 1,567 — 567 (15,443) 11,246 (343) 1,712 76,665 (153,482) (10,824) (75,046) — (1,116,766) (207,115) — 10,579 20,189 10,828 1,116,253 — (123,223) — (47,675) (8,164) 290,757 (185,000) 8,243 — (16,354) 41,807 (205) 505 300 — 6,849 45,099 — 195,846 — (34,367) — (42,097) (6,556) — — 7,252 — (926) (42,327) (29) 534 505 See accompanying Report of Independent Registered Public Accounting Firm. Information should be read in conjunction with the Notes to Consolidated Financial Statements of Selective Insurance Group, Inc. and its subsidiaries. Both items are in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. 141 SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION Year ended December 31, 2020 SCHEDULE III ($ in thousands) Standard Commercial Lines Segment Standard Personal Lines Segment E&S Lines Segment Investments Segment 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 $ 246,494 13,803 28,281 — 3,596,340 228,348 435,667 — 1,196,243 308,183 113,845 — 2,143,184 299,140 239,490 — — 1,245,627 — 233,260 — 156,936 — 222,890 474,322 30,694 55,255 — 271,504 50,694 27,173 — Total 1Includes “Net investment income earned” and “Net realized and unrealized investment (losses) gains” on the Consolidated Statements of Income. 2“Other operating expenses” of $349,371 reconciles to the Consolidated Statements of Income as follows: $ 288,578 1,618,271 1,635,823 2,681,814 4,260,355 560,271 222,890 349,371 Other insurance expenses Other income Total $ $ 2,230,636 295,166 247,290 — 2,773,092 366,941 (17,570) 349,371 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, 2019 Other Unearned operating expenses2 ($ in thousands) premiums Standard Commercial Lines Segment 1,108,009 270,107 Standard Personal Lines Segment 309,125 53,702 E&S Lines Segment 106,033 21,905 Investments Segment — — Total 1,523,167 345,714 1Includes “Net investment income earned” and “Net realized and unrealized investment (losses) gains” on the Consolidated Statements of Income. 2“Other operating expenses” of $345,714 reconciles to the Consolidated Statements of Income as follows: Net premiums earned 2,049,614 307,739 239,818 — 2,597,171 Loss and loss expense incurred — 1,187,856 — 211,300 152,335 — 236,965 — 1,551,491 236,965 Deferred policy acquisition costs $ 226,464 16,848 27,874 — $ 271,186 Reserve for loss and loss expense 3,436,363 224,200 406,600 — 4,067,163 Net investment income1 Amortization of deferred policy acquisition costs 445,661 34,477 55,835 — 535,973 Other insurance expenses Other income Total $ $ Net premiums written 2,137,071 304,592 237,761 — 2,679,424 358,069 (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 ($ in thousands) Standard Commercial Lines Segment Standard Personal Lines Segment E&S Lines Segment Investments Segment Deferred policy acquisition costs $ 206,391 18,070 28,151 — Reserve for loss and loss expense 3,283,531 223,223 387,114 — Unearned premiums 1,020,054 304,085 107,793 — Net premiums earned 1,912,222 304,441 219,566 — Net investment income1 Loss and loss expense incurred — 1,141,038 — 206,752 — 150,344 — 140,413 Amortization of deferred policy acquisition costs 412,420 33,617 49,005 — Other operating expenses2 249,660 51,308 20,912 — Total 1,431,932 321,880 1Includes “Net investment income earned” and “Net realized and unrealized investment (losses) gains” on the Consolidated Statements of Income. 2“Other operating expenses” of $321,880 reconciles to the Consolidated Statements of Income as follows: $ 252,612 2,436,229 3,893,868 1,498,134 140,413 495,042 Other insurance expenses Other income Total $ $ Net premiums written 1,975,683 309,277 229,326 — 2,514,286 331,318 (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. 142 SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES REINSURANCE Years ended December 31, 2020, 2019, and 2018 SCHEDULE IV ($ thousands) 2020 Premiums earned: Accident and health insurance Property and liability insurance Total premiums earned 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 Direct Amount Assumed from Other Companies Ceded to Other Companies Net Amount % of Amount Assumed to Net $ $ $ 13 3,108,674 3,108,687 17 2,993,140 2,993,157 19 2,808,745 2,808,764 — 25,010 25,010 — 24,399 24,399 — 25,831 25,831 13 451,870 451,883 17 420,368 420,385 19 398,347 398,366 — 2,681,814 2,681,814 — 2,597,171 2,597,171 — 2,436,229 2,436,229 — 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. SCHEDULE V SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES ALLOWANCE FOR CREDIT LOSSES ON PREMIUMS AND OTHER RECEIVABLES Years ended December 31, 2020, 2019, and 2018 ($ in thousands) Balance, January 1 Cumulative effect adjustment1 Balance at the beginning of the period, as adjusted Additions Deductions Balance, December 31 1 2020 2019 2018 $ $ 10,800 (1,845) 8,955 17,576 (3,754) 22,777 13,900 — 13,900 2,730 (5,830) 10,800 14,600 — 14,600 4,022 (4,722) 13,900 See Note 3. "Adoption of Accounting Pronouncements" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K for additional information regarding our adoption of ASU 2016-13. See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. 143 EXHIBIT INDEX Exhibit Number 3.1 3.2 3.3 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 Amended and Restated Certificate of Incorporation of Selective Insurance Group, Inc., filed May 4, 2010, as amended by Certificate of Correction thereto, dated August 17, 2020 and effective May 4, 2010 (incorporated by reference herein to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q filed October 29, 2020, File No. 001-33067). Certificate of Amendment of the Restated Certificate of Incorporation of Selective Insurance Group, Inc., with respect to the 4.60% Non-Cumulative Preferred Stock, Series B of Selective Insurance Group, Inc., filed with the State of New Jersey Department of Treasury and effective December 7, 2020 (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 8-A filed December 8, 2020, 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). Deposit Agreement, dated as of December 9, 2020, among the Company and Equiniti Trust Company, acting as Depositary, Registrar and Transfer Agent, and the holders from time to time of the depositary receipts described therein (incorporated by reference herein to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed December 9, 2020, File No. 001-33067). 4.9* Description of the Company's Securities Registered Under Section 12 of the Securities Exchange Act of 1934. 144 Exhibit Number 10.1+ 10.1a+ 10.1b+ 10.2+ 10.2a+ 10.2b+ 10.3+ 10.4+ 10.5+ 10.6+ 10.7+ 10.8+ 10.9+ 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). Amendment No. 2 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 Quarterly Report on Form 10-Q filed May 5, 2020, File No. 001-33067). Selective Insurance Company of America Deferred Compensation Plan (2005), As Amended and Restated Effective as of January 1, 2010 (incorporated by reference herein to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, File No. 001-33067). Amendment No 1. to Selective Insurance Company of America Deferred Compensation Plan (2005) (incorporated by reference herein to Exhibit 10.2a of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, File No. 001-33067). 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). 10.10+ 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). 145 Exhibit Number 10.11+ 10.12+ 10.13+ 10.14+ 10.15+ Selective Insurance Group, Inc. 2005 Omnibus Stock Plan As Amended and Restated Effective as of May 1, 2010 (incorporated by reference herein to Appendix C of the Company’s Definitive Proxy Statement for its 2010 Annual Meeting of Stockholders filed March 25, 2010, File No. 001-33067). Selective Insurance Group, Inc. 2014 Omnibus Stock Plan as Amended and Restated Effective as of May 2, 2018 (incorporated by reference herein to Appendix A of the Company’s Definitive Proxy Statement filed March 26, 2018 for its 2018 Annual Meeting of Stockholders, File No. 001-33067). Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Director Stock Option Agreement (incorporated by reference herein to Exhibit 10.9 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, File No. 000-08641). Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Automatic Director Stock Option Agreement (incorporated by reference herein to Exhibit 2 of the Company’s Definitive Proxy Statement for its 2005 Annual Meeting of Stockholders filed April 6, 2005, File No. 000-08641). Selective Insurance Group, Inc. Non-Employee Directors’ Compensation and Deferral Plan, As Amended and Restated Effective as of January 1, 2017 (incorporated by reference herein to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 2016, File No. 001-33067). 10.16+ (P) Deferred Compensation Plan for Directors (incorporated by reference herein to Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1993, File No. 000-08641). 10.17+ 10.18+ 10.19+ 10.20+ 10.21+ 10.22+ 10.23+ 10.24+ 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 November 1, 2020 (incorporated by reference herein to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed October 29, 2020, 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). 146 Exhibit Number 10.25+ 10.26+ 10.27+ 10.28+ 10.29+ 10.30+ 10.31+ 10.32 10.33 10.34+ 10.35+ 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, 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 John J. Marchioni, dated as of February 10, 2020 (incorporated by reference herein to Exhibit 10.32 of the Company’s Annual Report on Form 10-K filed February 12, 2020, File No. 001-33067). Employment Agreement between Selective Insurance Company of America and Mark A. Wilcox, dated as of October 28, 2016 (incorporated by reference herein to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed October 31, 2016, File No. 001-33067). Employment Agreement between Selective Insurance Company of America and Michael H. Lanza, dated as of March 2, 2020 (incorporated by reference herein to Exhibit 10.1 of the Company's Current Report on Form 8- K filed March 2, 2020, 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 (incorporated by reference herein to Exhibit 10.34 of the Company’s Annual Report on Form 10-K filed February 12, 2020, File No. 001-33067). Form of Indemnification Agreement between Selective Insurance Group, Inc. and each of its directors and executive officers, as adopted on May 19, 2005 (incorporated by reference herein to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed May 20, 2005, File No. 000-08641). Selective Insurance Group, Inc. Non-Employee Directors’ Deferred Compensation Plan (incorporated by reference herein to Exhibit 10.27 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, File No. 001-33067). Amendment No. 1 to the Selective Insurance Group, Inc. Non-Employee Directors’ Deferred Compensation Plan (incorporated by reference herein to Exhibit 10.27a of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, File No. 001-33067). 147 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 *24.14 *24.15 *24.16 *31.1 *31.2 **32.1 **32.2 *99.1 ** 101 ** 104 Subsidiaries of Selective Insurance Group, Inc. Consent of KPMG LLP. Power of Attorney of Ainar D. Aijala, Jr. Power of Attorney of Lisa Rojas Bacus. Power of Attorney of John C. Burville. Power of Attorney of Terrence W. Cavanaugh. Power of Attorney of Wole C. Coaxum. Power of Attorney of Robert Kelly Doherty. Power of Attorney of Thomas A. McCarthy. Power of Attorney of Stephen C. Mills. 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 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. Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. Glossary of Terms. The following financial statements from the Company's Annual report on Form 10-K for the year ended December 31, 2020, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (II) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders' Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements. The cover page from the Company's Annual Report on Form 10-K for the year ended December 31, 2020, formatted in iXBRL * Filed herewith. ** Furnished and not filed herewith. + Management compensation plan or arrangement. (P) Paper filed. 148 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, 2021 February 12, 2021 February 12, 2021 149 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 * Ainar D. Aijala, Jr. Director * Lisa Rojas Bacus Director * John C. Burville Director * Terrence W. Cavanaugh Director * Wole C. Coaxum Director * Robert Kelly Doherty Director * Thomas A. McCarthy Director * Stephen C. Mills Director * H. Elizabeth Mitchell Director * Michael J. Morrissey Director * Gregory E. Murphy Non-Executive Chairperson of the Board * Cynthia S. Nicholson Director * William M. Rue Director * John S. Scheid Director * J. Brian Thebault Director * Philip H. Urban Director 150 February 12, 2021 February 12, 2021 February 12, 2021 February 12, 2021 February 12, 2021 February 12, 2021 February 12, 2021 February 12, 2021 February 12, 2021 February 12, 2021 February 12, 2021 February 12, 2021 February 12, 2021 February 12, 2021 February 12, 2021 February 12, 2021 February 12, 2021 * By: /s/ Michael H. Lanza Michael H. Lanza Attorney-in-fact February 12, 2021 151 Glossary of Terms Accident Year: accident year reporting focuses on the cost of the losses that occurred in a given year regardless of when reported. These losses are calculated by adding all payments that have been made for those losses occurring in a given calendar year (regardless of the year in which they were paid) to any current reserve that remains for losses that occurred in that given calendar year. Agent (Independent Retail Insurance Agent): a distribution partner who recommends and markets insurance to individuals and businesses; usually represents several insurance companies. Insurance companies pay agents for business production. Allocated loss 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 Common Share: an expression of the value of an entity per outstanding common share, which is calculated by dividing common 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. 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: 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. Exhibit 99.1 Invested Assets per Dollar of Common Stockholders' Equity Ratio: measure of investment leverage calculated by dividing invested assets by common 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 available to common stockholders with the exclusion of after-tax net realized and unrealized gains and losses on investments, and after-tax debt retirement costs. Non-GAAP operating income is used as an important financial measure by us, analysts, and investors, because the realization of investment gains and losses on sales of securities in any given period is largely discretionary as to timing. In addition, net realized and unrealized investment gains and losses on investments that are charged to earnings and the debt retirement costs could distort the analysis of trends. Non-GAAP Operating Income per Diluted Common Share: non-GAAP measure that is comparable to net income available to common stockholders per diluted common share with the exclusion of after-tax net realized and unrealized gains and losses on investments, and after-tax debt retirement costs. Non-GAAP Operating Return on Common Equity: measurement of profitability that reveals the amount of non-GAAP operating income generated by dividing non-GAAP operating income by average common 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. Customers: another term for policyholders; purchase our insurance products or services. individuals or entities that Premiums Written: premiums for all policies sold during a specific accounting period. Diluted Weighted Average Common 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. 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). 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 Common Equity: measure of profitability that is calculated by dividing net income available to common stockholders by average common 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. Frequency: a measure of the rate at which claims occur that is generally calculated by dividing the number of claims by a measure of exposure, such as earned premium or earned exposure units. 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. Severity: A measure of the average cost of claims that provides an indication of the amount of damage that is, or may be, inflicted by a loss. In general, severity is calculated by dividing loss and loss expenses incurred by the number of claims. 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. 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. 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. 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. 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 expenses: loss adjustment expenses other than allocated loss adjustment expenses. Exhibit 99.1 Glossary of Terms Underwriting: insurer’s process of reviewing applications submitted for insurance coverage, deciding whether to provide all or part of the coverage requested, and determining applicable premiums and terms and conditions of coverage. Underwriting Result: underwriting income or loss; represents premiums earned less insurance losses and loss expenses, underwriting expenses, and dividends to policyholders. This measure of performance is used by management and analysts to evaluate profitability of underwriting operations and is not intended to replace GAAP net income. Unearned Premiums: portion of a premium that a company has written but has yet to earn because a portion of the policy is unexpired. Wholesale General Agent: distribution partner authorized to underwrite on behalf of a surplus lines insurer through binding authority agreements. Insurance companies pay wholesale general agents for business production. Yield on Investments: Yield is the income earned on an investment, expressed as an annual percentage rate that is calculated by dividing income earned by the average invested asset balance. Yield can be calculated based on either pre-tax or after-tax income and can be calculated on the entire investment portfolio, or on a portion thereof, such as the fixed income securities portfolio. (This page intentionally left blank) DIRECTORS Gregory E. Murphy 1997 Non-Executive Chairperson of the Board Selective Insurance Group, Inc. Ainar D. Aijala, Jr. 2020 Retired, former Senior Advisor, Deloitte Lisa Rojas Bacus 2020 Retired, former Executive Vice President and Chief Marketing Officer, Cigna John C. Burville, Ph.D, FIA, MAAA 2006 Retired, former Insurance Consultant to the Bermuda Government Terrence W. Cavanaugh 2018 Independent Consultant, and retired, former President and Chief Executive Officer, Erie Indemnity Company Wole C. Coaxum 2020 Chief Executive Officer, Mobility Capital Finance 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 Stephen C. Mills 2020 Retired, former President and General Manager, New York Knicks H. Elizabeth Mitchell 2018 Retired, former President and Chief Executive Officer, Renaissance Reinsurance U.S., Inc. Michael J. Morrissey, CFA 2008 pp Special Advisor and former President and Chief Executive Officer, International Insurance Society, Inc. Cynthia (Cie) S. Nicholson 2009 Advisor, former Chief Marketing Officer, Tangelo (formerly known as Tangerine/Feed Each Other/Forkcast) 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 2020 ANNUAL REPORT 13 OFFICERS President and Chief Executive Officer John J. Marchioni 1,2 Executive Vice Presidents Shadi K. Albert 2 Insurance Strategy and Business Development Lucinda (Cyndi) Bennett 2 Chief Human Resources Officer 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 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 Giunero Floro 2 Chief Marketing 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 Strategy and Execution Ryan T. Miller 2 Regional Manager Southern Region 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 28, 2021 - 9:00 a.m. (ET) Virtual format via live audiocast at www.virtualshareholdermeeting.com/SIGI2021 Executive Office 40 Wantage Avenue Branchville, New Jersey 07890 (973) 948.3000 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 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, 2020 (not including exhibits and documents incorporated by reference), the Proxy Statement for the 2021 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 2020 Annual Report. Website Visit us at www.Selective.com for information about Selective, including our latest ﬁnancial news. 40 Wantage Avenue • Branchville, New Jersey 07890

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