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