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OUR FOOTPRINT
Standard Personal
(15 states)
Standard Commercial
(30 states and the District of Columbia,
including Idaho, Alabama, and Vermont,
which opened in 2022)
Flood and Excess & Surplus
(50 states)
OUR BUSINESS
Selective Insurance Group, Inc. (NASDAQ: SIGI) is a New
Jersey holding company for ten property and casualty insurance
companies with $10.8 billion in assets as of December 31, 2022.
A customer-centric 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, non-profits, public entitites, and
individuals through the following segments:
Standard Personal,
including Flood
Excess & Surplus
10%*
9%*
81%*
Standard
Commercial
*Percent of business based on 2022 net premiums written.
OUR YEAR IN REVIEW
12%
Growth in net
premiums
written
$232M
Net investment
income after-tax
A+
AM Best
financial strength
rating
95.1%
Combined
ratio
9
Consecutive years of
double-digit non-GAAP
operating return on
common equity
12.4%
Non-GAAP operating
return on common
equity^
8.34
Overall customer
satisfaction score
(on a 10-point scale)
^
Non-GAAP (U.S. Generally Accepted Accounting Principles) operating income, non-GAAP operating income per diluted common share, and non-GAAP operating return on common equity are
non-GAAP measures. Refer to the section entitled “Financial Highlights of Results for Years Ended December 31, 2022, 2021, and 2020” in Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 for a reconciliation of the non-GAAP measures to the equivalent
GAAP measures.
2022 FINANCIAL HIGHLIGHTS
% or Point Change
2022
2021
Better (Worse)
($ in millions, except per share data)
Insurance Operations
Net premiums written
Combined ratio
Underwriting income 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
$3,573.6
$3,189.7
95.1%
$131.8
5.4%
$232.2
$(90.7)
92.8%
$172.7
6.5%
$263.0
$13.9
Total invested assets
$7,837.5
$8,027.0
$3.37
2.9%
9.4%
$2.88
3.4%
9.9%
$3,558.1
$3,379.2
$215.7
8.8%
$306.4
12.4%
22.5%
$10,802.3
$2,527.6
$2,327.6
$3.54
$5.03
$1.14
$38.57
$394.5
14.8%
$380.6
14.3%
24.2%
$10,461.4
$2,982.9
$2,782.9
$6.50
$6.27
$1.03
$46.24
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
Book value
AVERAGE ANNUAL RETURN
Growth of a $10,000
investment
$25,000
$20,000
$15,000
$10,000
(year-end 2017-2022)
$5,000
$0
12%
2.3 pts
(24)%
(1.1) pts
(12)%
(752)%
(2)%
17%
(0.5) pts
(0.5) pts
5%
(45)%
(6.0) pts
(19)%
(1.9) pts
(1.7) pts
3%
(15)%
(16)%
(46)%
(20)%
11%
(17)%
SIGI
S&P 500
S&P Prop/Cas
*
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, 2022, 2021, and 2020” in Item 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 for a reconciliation of the non-GAAP measures to the equivalent GAAP measures.
2017
2018
2019
2020
2021
2022
SELECTIVE 2022 ANNUAL REPORT 1
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2022 ANNUAL REPORT
SHAREHOLDER LETTER
Dear Shareholders:
• Continued financial flexibility: At year-end 2022, our balance
2022 was a remarkable year for Selective. We demonstrated
our resiliency and ability to manage effectively through several
macroeconomic challenges. We proudly delivered a superior
omni-channel service experience to customers and independent
insurance agency partners, opportunities for our employees, and
strong results for our shareholders.
Our effective
execution enabled
us to generate a
12.4% non-GAAP
operating return
on common equity
(“ROE”), our
ninth consecutive
year of delivering
double-digit
returns. Very few
in our industry
can match that
track record.
Despite elevated
catastrophe losses,
rising inflation,
and capital market
volatility over the
past nine years,
we delivered
annualized total
shareholder return
of approximately
16%. Over
that period, we
also generated
about 10% annual growth in tangible book value per share plus
accumulated dividends, the metric we view as the best long-term
indicator of property and casualty industry value creation. Our
results reflect the success of our underwriting discipline and
profitable growth strategies.
John J. Marchioni
Chairman, President and
Chief Executive Officer
I firmly believe we have the tools, technology, talent, and
distribution partner relationships to continue generating strong
and sustainable performance – regardless of market conditions –
in 2023 and well into the future.
2022 FINANCIAL HIGHLIGHTS:
• Strong bottom-line performance: Non-GAAP operating ROE
of 12.4% outperformed our full-year 2022 operating ROE
target of 11% because of our disciplined underwriting strategy.
Net income available to common stockholders was $216 million
($3.54 per diluted common share), and non-GAAP operating
income was $306 million ($5.03 per diluted common share).
sheet remained extremely strong. During the year, we
increased our quarterly shareholder dividend by 7%, to $0.30
per share. We also had approximately $84 million in remaining
capacity under our Board-authorized $100 million share
repurchase program.
• Strong share price outperformance: Selective’s 2022 total
shareholder return was 9.7%, meaningfully exceeding the
S&P 500 Index’s 18.1% decline. Over the past ten years, total
annualized shareholder returns of 18.4% have exceeded the
S&P 500 Index’s 12.6% average annual performance.
HISTORICAL NON-GAAP OPERATING
ROEs* RELATIVE TO PEER AVERAGE
15%
12%
9%
6%
3%
0%
'15
'16
'17
'18
'19
'20 '21
'22
SIGI
Peer Avg.
HISTORICAL TOTAL RETURN: SIGI VS.
BENCHMARKS (DECEMBER 31, 2022)
25%
20%
15%
10%
5%
0%
SIGI
S&P Prop/Cas
S&P 500
%
2
7
1
.
%
7
9
.
%
1
.
0
1
%
2
0
1
.
%
4
9
.
%
4
8
1
.
%
8
3
1
.
%
6
2
1
.
1 Year
5 Years
10 Years
%
1
.
8
1
-
*
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, 2022, 2021, and 2020” 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, 2022 for a reconciliation of the non-GAAP
measures to the equivalent GAAP measures.
2
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2022 STRATEGIC AND OPERATING
HIGHLIGHTS:
• We advanced our geographic expansion strategy by launching
our commercial lines products in Vermont, Idaho, and Alabama.
We are on target to open West Virginia and Maine as expected
in early 2024. Over time, an expanded footprint will enhance
our access to new business, further reduce our geographic
concentration risk, and help us better serve our customers and
distribution partners.
• We appointed 118 new agencies, bringing the total to
approximately 1,500 agencies and 2,600 storefronts.
• We resumed premium growth in our personal lines segment,
driven by strong market acceptance of our product designed
for mass affluent customers.
• We published our inaugural Task Force for Climate-Related
Financial Disclosures (TCFD) report, significantly enhancing
our climate strategy disclosure.
EXECUTION OF KEY STRATEGIC
PRIORITIES
Our strong financial performance this past year provides us the
financial flexibility to continue executing our strategic objectives
that support profitable growth over the long term, despite an
uncertain near-term macroeconomic backdrop.
Maintaining underwriting discipline and pricing adequacy is a top
priority. We built the organizational muscle and underwriting
focus to effectively manage profitability and retention rates,
even in the current dynamic loss-trend environment. Our
commitment to underwriting discipline has positioned us well in
recent years, permitting us to adjust our go-to-market strategy
and prices as necessary.
COMMERCIAL LINES PRICING AND
RETENTION
We continue to develop and implement new tools and technologies
to create operating efficiencies and strengthen our market
position. Our recent investments to enhance our small business
and E&S technology platforms position us well for the future.
Our commitment to continuous improvement includes enhancing
customers’ experience with Selective at every touchpoint. This is
critical to becoming a stronger competitor. We made significant
investments in digital capabilities that enable our customers to
engage in their chosen manner and increase the adoption of our
self-service platform and value-added services, all expected to
increase future retention.
BOARD MEMBER RETIREMENTS
As we look ahead to our many opportunities, I want to recognize
three long-standing Board members – John C. Burville; Michael
J. Morrissey; and William M. Rue – who are retiring at the 2023
Annual Meeting of Stockholders, having reached our mandatory
retirement age. Each played an integral role in our success,
providing valuable insights and guidance throughout their tenure.
We thank them for their strategic counsel and wish them the best.
CONCLUSION
Our outstanding 2022 performance gives us a solid foundation
to advance our near-term strategic priorities and position us for
consistent long-term growth and value creation. We could not
have accomplished this without all our supporters. I want to thank
our shareholders for their investment in our business and strategy
and their confidence in our management teams’ continued
execution. I’d also like to thank our customers and distribution
partners for their continued trust in our operations.
Most importantly, I want to thank our talented employees, whose
dedication and efforts continue to strengthen our customer and
distribution partner relationships and drive our organization. I am
confident their work furthering our unique culture will drive our
success in the future.
Every day, our interactions with our customers and agency
partners reinforce the importance of our role in rebuilding lives and
businesses, making communities safer, and supporting economic
expansion. We recognize and appreciate our responsibilities to the
communities we serve as an employer providing a great place to
work, as a safety resource helping mitigate risks, and as a neighbor
supporting safe, sustainable, just, and diverse communities.
Responsibility empowers our people to be and do their very best.
Our 2023 Annual Meeting of Stockholders will be held virtually,
allowing attendance from anywhere in the world. We hope you will
join us.
John J. Marchioni
Chairman, President and
Chief Executive Officer
SELECTIVE 2022 ANNUAL REPORT 3
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UNIQUELY
SUPPORTING OUR COMMUNITIES
We are committed to understanding and mitigating risk, serving our customers responsibly, and providing timely
claims service, while being environmentally aware.
Our unique operating model includes regionally based Underwriting, Claims, and Safety Management
professionals with technical expertise to service our policyholders, their claimants, and our distribution partners,
helping to mitigate exposure to loss before it happens, and restore lives and businesses after an insured loss occurs.
Our risk management solutions demonstrate to our customers and distribution partners what it means to
Be Uniquely Insured® with Selective. We carefully develop these solutions to address our customers’ needs and seek
new, innovative approaches to help them build resilience to, and protect against, risks that could negatively impact
their lives and businesses.
Value-added products and services help reduce or mitigate risks, such as the
removal of personally identifiable information from passenger vehicles
declared a total loss and availability of award-winning home
security monitoring tools.
Artificial intelligence-assisted software helps our
Commercial Lines customers identify and adjust
high-risk body positions or movements that
can lead to severe injuries and costly workers
compensation claims.
Thermographic infrared surveys for
Commercial Lines customers identify
potential electrical hazards that could
lead to fire risks.
Our proactive notifications, including
weather alerts and food, vehicle, and
product recalls, help build customers’
awareness and prevent losses.
Our sophisticated digital and self-service
capabilities provide customers with a seamless
omni-channel experience. Over half of our
customers use our award-winning MySelective
mobile app to report claims, pay bills, access
auto insurance cards, and view auto insurance
policies on demand.
Our 3.8-megawatt DC ground-
mount and garage canopy solar
photovoltaic facilities at our
corporate headquarters are expected
to generate approximately five
million kWh of renewable energy
annually that we sell to others.
We understand that climate change increases the unpredictability of
weather-related loss frequency and severity. This poses a long-term
risk to our customers’ lives and businesses. We believe it is our corporate
responsibility to help mitigate climate change impacts for all stakeholders. In
2022, we published our Task Force on Climate-Related Financial Disclosures
report that focuses on four core elements of our climate approach. To read it, please
visit www.Selective.com/about-selective/corporate-social-responsibility.
4
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… AND DOING SOCIAL GOOD
We are committed to promoting a welcoming culture that celebrates diverse talent, individual identity,
different points of view and experiences, and has a positive impact in the communities where we live,
work, and serve.
24%
Percent of employees who participate in one or more
employee resource group (ERG), such as our Black,
Military and Veterans (launched in 2022), Pride Alliance,
Women in IT, and Working Caregivers ERGs or our
Women at Work affinity group. Additional groups are
expected to launch in 2023.
Items donated by
employees to benefit
4,800+
charities that support
our neighbors in need,
including bicycles built and
gifted during the holidays.
Hours volunteered by employees to
give back to their local community and
help make a difference.
4,000+
Approximately
$950,000
Donated by
the Selective
Insurance Group
Foundation to charities
that help build safe, sustainable,
just, and diverse communities.
5,450
Hours committed by employees for diversity
and inclusion training to cultivate a culture that
embraces, practices, and monitors the attitudes,
values, and goals of acceptance; addresses biases; and
fosters diverse viewpoints and opinions.
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SELECTIVE 2022 ANNUAL REPORT 5
MANAGEMENT TEAM
John J. Marchioni
Chairman of the Board,
President and
Chief Executive Officer
Lucinda (Cyndi) Bennett
Executive Vice President,
Chief Human Resources Officer
John P. Bresney
Executive Vice President,
Chief Information Officer
Joseph O. Eppers
Executive Vice President,
Chief Investment Officer
Brenda M. Hall
Executive Vice President,
Chief Operating Officer,
Standard Lines
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
Rohit Mull
Executive Vice President,
Chief Marketing and
Innovation Officer
Vincent M. Senia
Executive Vice President,
Chief Actuary
Mark A. Wilcox
Executive Vice President,
Chief Financial Officer
6
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2022
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)
Registrant's telephone number, including area code: (973) 948-3000
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
SIGIP
The Nasdaq Stock Market LLC
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.
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
☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☒
☐
Accelerated filer
Smaller reporting company
☐
☐
Emerging growth company
☐
1
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.
☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based
compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).
☐
☐
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 $5,158,579,316 on June 30, 2022. As of January 31, 2023, the registrant had outstanding 60,338,831
shares of common stock.
Portions of the registrant’s definitive Proxy Statement for the 2023 Annual Meeting of Stockholders to be held on May 3, 2023, are
incorporated by reference into Part III of this report.
DOCUMENTS INCORPORATED BY REFERENCE
2
SELECTIVE INSURANCE GROUP, INC.
Table of Contents
PART I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Reserved
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, 2022, 2021, and 2020
Results of Operations and Related Information by Segment
Federal Income Taxes
Liquidity and Capital Resources
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Consolidated Balance Sheets as of December 31, 2022 and 2021
Consolidated Statements of Income for the Years Ended December 31, 2022, 2021, and 2020
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021, and 2020
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022, 2021, and 2020
Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021, and 2020
Notes to Consolidated Financial Statements
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibit and Financial Statement Schedules
Item 16.
Form 10-K Summary
Page
No.
4
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35
35
35
35
36
36
36
37
37
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48
62
62
66
73
75
76
77
78
79
80
133
133
135
135
135
135
135
135
135
136
147
3
PART I
Item 1. Business.
Overview
Selective Insurance Group, Inc. ("Parent") is a New Jersey insurance holding company incorporated in 1977 that owns ten
property and casualty insurance subsidiaries ("Insurance Subsidiaries"). The Insurance Subsidiaries sell products and services
only in the United States ("U.S.") and exclusively through independent insurance agents and wholesale brokers. 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 the Parent and the
Insurance Subsidiaries collectively as "we," "us," or "our," using Parent only to distinguish it from the Insurance Subsidiaries.
We also use specific property and casualty industry-related terms defined in a glossary attached as Exhibit 99.1 to this Form 10-
K.
Our main office is in Branchville, New Jersey. We list our common (stock symbol “SIGI”) and preferred (stock symbol
“SIGIP”) stocks on the Nasdaq Global Select Market. In 2022, AM Best Company ("AM Best") ranked us as the 37th largest
property and casualty group in its annual "Top 200 U.S. Property/Casualty Writers" list based on 2021 net premiums written
("NPW"). Our current AM Best financial strength rating is "A+" (Superior). Since our founding in 1926, we have a long and
successful history in the property and casualty insurance industry.
Strategic Advantages
We have three key sustainable competitive advantages:
• A distribution model that emphasizes franchise value, meaning we focus on appointing and having meaningful,
close business relationships with high-quality, independent distribution partners who value our relationships and
provide us the opportunity to grow profitably with them;
• A unique operating model in which we (i) locate our Standard Commercial Lines underwriting and safety
management personnel in the geographic territories they serve, (ii) organize our claims operation regionally by
specialty, with local personnel managing our customer, claimant, and agency relationships, and (iii) provide our
teams with sophisticated tools and technologies to inform underwriting, pricing, safety management, and claims
decisions; and
• Our best-in-class employees provide a superior omnichannel customer and agency experience, enhanced by digital
platforms and value-added services to increase customer engagement and retention.
Several nationally recognized statistical rating organizations ("NRSROs") issue opinions on our financial strength, operating
performance, strategic position, and ability to meet policyholder obligations, 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
Stable
Stable
Stable
Stable
We believe our AM Best rating has the greatest influence on our ability to write insurance business. Our independent
distribution partners recommend insurance carriers based partly on financial strength ratings to limit their potential liability for
customer error and omission claims. Similarly, most customers consider ratings in their purchasing decisions because they
have loans, mortgages, and other real and personal property security agreements that require they purchase insurance from
carriers with minimum rating requirements.
4
These NRSROs also rate our long-term debt creditworthiness. Credit ratings indicate our ability to timely meet our obligations,
and they are important factors in our overall funding profile and ability to access certain types of liquidity. Our current senior
debt credit ratings are as follows:
NRSRO
AM Best
S&P
Moody’s
Fitch
Credit Rating
a-
BBB
Baa2
BBB+
Long-Term Credit Outlook
Stable
Stable
Stable
Stable
Our ability to access capital markets is most impacted by our S&P, Moody's, and Fitch financial strength and credit ratings.
Segments
We have four reportable segments:
•
•
•
•
Standard Commercial Lines, which represents 77% of Total revenues and 81% of our 2022 total NPW. We sell our
Standard Commercial Lines property and casualty insurance products and services to commercial enterprises,
typically businesses, non-profit organizations, and local government agencies, primarily in 30 states and the District
of Columbia. Our average 2022 Standard Commercial Lines premium per policyholder was approximately $15,300.
Standard Personal Lines, which represents 9% of Total revenues and 9% of our 2022 total NPW. We sell our
Standard Personal Lines property and casualty insurance products and services primarily to individuals in 15 states.
Our average 2022 Standard Personal Lines premium per policyholder was approximately $2,600. Standard Personal
Lines includes flood insurance coverage sold in all 50 states and the District of Columbia through the Write Your
Own ("WYO") program of the National Flood Insurance Program ("NFIP"). Based on 2021 direct premiums written
("DPW") as reported in the S&P Market Intelligence platform, we are the fourth-largest WYO carrier.
E&S Lines, which represents 9% of Total revenues and 10% of 2022 NPW and is sold in all 50 states and the
District of Columbia. We sell our E&S Lines property and casualty insurance products and services to commercial
customers unable to obtain coverage in the standard marketplace, generally because of unusual or high-risk
exposures. E&S insurers are exempt from many standard market requirements, including form and rate regulation.
E&S carriers may write an insurance policy if three separate standard line carriers have rejected the risk to be
insured. Our average 2022 E&S lines premium per policyholder was approximately $3,800.
Investments, which represents 5% (including net realized and unrealized gains and losses) of Total revenues, invests
the (i) premiums collected by our Insurance Subsidiaries and (ii) amounts generated through our capital management
strategies, including debt and equity securities issuance.
We derive nearly all of our income/loss in three ways:
•
Underwriting income/loss from our insurance operations. DPW, gross premiums, NPW, and net premiums earned
(“NPE”) are components of evaluating underwriting income/loss. DPW are what we bill policyholders for insurance
coverage and services. Gross premiums are DPW plus premiums assumed from other insurers and mandatory pools
and associations. NPW are calculated by subtracting premiums ceded to reinsurers from gross premiums. NPE is
NPW recognized as revenue ratably over a policy’s term. Underwriting income/loss is NPE less insurance
operations-related expenses.
Insurance operations-related expenses fall into three categories on our Consolidated Statements of Income: (i) "Loss
and loss expense incurred," which includes losses associated with claims and loss expenses for adjusting claims
incurred during a policy's term, net of losses and loss expenses ceded to reinsurers; (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, recognized ratably over a policy's term; and (iii) "Other
insurance expenses," which includes acquisition and other insurance-related expenses not otherwise classified as
"Loss and loss expense incurred" or "Amortization of deferred policy acquisition costs" incurred in maintaining
policies and policyholder dividends. These expenses include, but are not limited to, certain labor expenses,
depreciation expense, and policyholder dividends.
5
Total underwriting expenses are the sum 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 charged to customers paying their premiums in installments.
Net investment income earned 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, (iii) income generated from our alternative investments portfolio, partially offset by (iv)
investment expenses.
Net realized and unrealized gains and losses on investment securities from our investments segment. Net realized
and unrealized gains and losses from our investment portfolio result from (i) security disposals through sales, calls,
and redemptions, (ii) losses on securities that we intend 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, including long-term employee incentive compensation and other general corporate expenses, (ii) interest on our debt
obligations, (iii) federal income taxes, and (iv) dividends to preferred stockholders.
We use net income (or loss) available to common stockholders and non-U.S. generally accepted accounting principles
("GAAP") operating income as measures of financial performance. Non-GAAP operating income differs from net income
available to common stockholders by excluding after-tax net realized and unrealized gains and losses on investments. We use
this non-GAAP measure because it is an important financial measure used by us, analysts, and investors because the timing of
realized and unrealized investment gains and losses on securities in any given period is largely discretionary. In addition, net
realized and unrealized investment gains and losses on investments could distort the analysis of trends.
We use the combined ratio as the key performance measure in assessing the underwriting profitability of our insurance
operations. The combined ratio is calculated by adding (i) the loss and loss expense ratio, which is the ratio of net loss and loss
expense incurred 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 one
over 100% indicates an underwriting loss. The combined ratio does not reflect net investment income earned, net realized and
unrealized investment gains or losses, federal income taxes, interest expense, or corporate expenses. The loss and loss expense
ratio typically has the most significant impact on our combined ratio. Key inputs in our loss and loss expense ratio include
catastrophe and non-catastrophe property loss and loss expenses incurred, current year casualty loss estimates, and prior year
casualty reserve development.
We use after-tax net investment income earned as the main measure of our investments segment's financial performance. We
also assess total return, calculated as the ratio of the sum of pre-tax (i) net investment income, (ii) net realized and unrealized
investment gains or losses (including losses on securities we intend to sell and credit loss expense or benefit) in income, and
(iii) unrealized investment gains or losses included in accumulated other comprehensive income or loss, to average invested
assets. Our investment philosophy includes setting specific risk and return objectives for the fixed income, equity, and
alternative investment portfolios and comparing each to a weighted-average benchmark of comparable indices.
Other important measures of our overall financial performance that we consider include return on common equity ("ROE") and
non-GAAP operating return on common equity ("non-GAAP operating ROE"). Our basis for using this non-GAAP measure is
consistent with our use of non-GAAP operating income described above. ROE is calculated by dividing net income available
to common stockholders by average common stockholders' equity. Non-GAAP operating ROE is calculated by dividing non-
GAAP operating income available to common stockholders by average common stockholders' equity. We evaluate our
segments, in part, based on their contribution to non-GAAP operating ROE. We establish our non-GAAP operating ROE target
based on the sum of (i) our current estimated weighted average cost of capital and (ii) an appropriate spread over our estimated
weighted average cost of capital. We also consider the current interest rate environment and property and casualty insurance
industry market conditions. For 2023, we increased our non-GAAP operating ROE target to 12%, from 11% in 2022, to reflect
a higher weighted average cost of capital.
For further details about our 2022 results compared to these performance measures, refer to "Financial Highlights of Results for
Years Ended December 31, 2022, 2021, and 2020" in Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations." of this Form 10-K.
Other key financial metrics we measure include operating leverage and investment leverage.
6
We define operating leverage as the ratio of NPW to statutory surplus. We target a ratio between 1.35x and 1.55x. Our
operating leverage at December 31, 2022 was 1.44x, compared to the U.S. standard commercial and personal lines industry
average of approximately 0.8x that Conning, Inc. reported in its Fourth Quarter 2022 Property-Casualty Forecast & Analysis
(Source: ©2023 Conning, Inc. Used with permission.). We are comfortable operating our business with operating leverage
above the industry average, as we believe we have a lower financial risk profile than the industry, as noted below.
Because we write more longer-tail casualty insurance than shorter-tail property insurance, our operating leverage is higher than
the industry average. We also operate with 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, 2022 was $3.37,
compared to the average invested assets to statutory surplus of $2.27 that Conning, Inc. reported for the U.S. commercial and
personal lines in its Fourth Quarter 2022 Property-Casualty Forecast & Analysis (Source: ©2023 Conning, Inc. Used with
permission.). To better manage the risks of our higher investment leverage, we have adopted a conservative investment
management philosophy, with fixed income securities and short-term investments representing 90% of our invested assets.
As of December 31, 2022, our fixed income securities and short-term investments had a weighted average credit rating of
"AA-" and an effective duration of 4.1 years, compared to "A+" and 3.9 years as of December 31, 2021. For additional
information about our investments segment's design and credit quality characteristics, see "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.
We believe our financial risk profile is lower than the industry because:
•
Our Standard Commercial Lines segment underwriting risk appetite is focused on small-to-medium sized accounts,
with risks weighted more towards low- to medium-hazard than high-hazard. Our average premium per policyholder is
approximately $15,300, with about 86% of this segment's casualty lines business having limits of $1 million or less
(excluding workers compensation policies, which have no limits), and about 92% of this segment's property lines of
business having limits of $3 million or less;
• We have sophisticated pricing tools and maintain disciplined financial planning and reserving practices. We conduct
quarterly ground-up reserve reviews for most lines of business, with semi-annual reserve reviews by an independent
third-party actuary who issues our year-end regulatory actuarial reserve opinions;
• We purchase significant levels of reinsurance, including (i) a property catastrophe reinsurance program that limits the
net after-tax impact of a 1-in-250 year catastrophe to about 7% of our GAAP equity, and (ii) property and casualty
excess of loss reinsurance agreements that limit our retained losses of individual property claims losses to $3 million
per risk and casualty claims to $2 million per occurrence; and
• We maintain a conservative investment portfolio, with high quality and liquid fixed income and short-term
investments, and roughly a 10%-14% allocation to risk assets.
Our strong financial strength and lower financial and underwriting risk profile have permitted us to operate with higher
operating leverage than most of our industry. This strategy requires us to balance growth and profit, providing us the
opportunity to generate higher underwriting and investment portfolio ROEs when profitable. We generate (i) 1.1 points of ROE
for each point on the combined ratio and (ii) 2.6 points of ROE for each point of pre-tax investment yield. In 2022, our
underwriting and investment income helped generate an 8.8% ROE and a 12.4% non-GAAP operating ROE, with the latter
exceeding our 11% ROE target. For further details about our 2022 ROE results, please see "Financial Highlights of Results
for Years Ended December 31, 2022, 2021, and 2020" in Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations." of this Form 10-K.
Insurance Operations
Overview
We generate our insurance operations' revenue by selling insurance policies and services in return for insurance premiums.
One-year term policies constitute the vast majority of our sales. 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 accounting estimates and represent the ultimate amounts we will need in
the future to pay covered claims and related expenses that have not yet been settled or reported. Estimating reserves as of any
7
given date is an inherently uncertain process, requiring estimation techniques and a considerable degree of judgment. We
regularly analyze our overall reserve position through internal and external actuarial reserve reviews. For a discussion of 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.
To protect our capital resources and manage the risks associated with our insured risks, we purchase reinsurance from and enter
into other risk transfer agreements with third parties. Our insurance subsidiaries transfer risks through an internal reinsurance
pooling agreement by which each shares in premiums and losses based on specified percentages. For information regarding our
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
Our Insurance Subsidiaries sell insurance that falls into two broad categories:
•
•
Casualty insurance, which generally covers the financial consequences of (i) injuries employees suffer in the course of
employment, (ii) third-party bodily injury and/or property damage from an insured's negligent acts, omissions, or legal
liabilities, and (iii) our obligation to defend our insured(s) for covered claims. Casualty claims are long-tailed,
regularly taking several years to be reported and settled — and even longer in certain situations.
Property insurance, which generally covers accidental loss to an insured's real property, personal property, and/or
property loss-related earnings. Property claims are usually reported and settled in a relatively short period from the
date of loss.
The following table shows the principal types of property and casualty insurance policies we underwrite and issue:
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
1The majority of our flood loss exposure relates to our participation in the NFIP's WYO program, to which we cede 100% of our flood insurance premiums and
losses. Our Standard Personal Lines segment results include our WYO policies issued to Standard Personal Lines and Standard Commercial Lines customers.
X
X
X
X
X
Category of
Insurance
Property
Property/Casualty
Casualty
Casualty
Property/Casualty
Casualty
Property/Casualty
Property/Casualty
Casualty
Property
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 claim. 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, profitability,
competitive research, feedback from our independent distribution partners, and the product or service's potential to make our
customers' commercial or personal endeavors safer.
Our policies provide coverage for future events, so we do not know the actual individual policy loss costs at the time of sale.
We consider many variables in determining pricing for coverage. Like most property and casualty insurers, our loss data is not
sufficiently credible to independently establish the complex sets of loss costs and rating variables that our products require.
Consequently, we often adopt loss costs and rating structures that statistical rating agencies, such as ISO and NCCI, file with
state insurance regulators. We typically modify these loss costs or factors based on actuarial analyses of our credible historical
statistical data, factoring in loss trends and other expected impacts. We combine the resulting loss costs with expense and profit
provisions to develop premium rates. We sometimes supplement the indicated rates with market information to determine our
final filed rates.
8
We have developed predictive models for many of our Standard Commercial Lines and Standard Personal Lines. We use these
models to refine statistical rating agencies' rating plans or independently develop our own rating plans. Predictive models
analyze historical statistical data about various risk characteristics that drive loss experience. For our Standard Commercial
Lines, we use the output of these models to group existing or potential policies based on their expected loss potential. These
groupings are inputs in the individual risk underwriting and pricing process. We use these models to develop factors in our
filed Standard Personal Lines rating plans. The predictive capabilities of our models depend on the quantity and quality of
available statistical data, and we may supplement them with other 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
43%
25%
16%
15%
1%
100%
Description
General contractors and trade contractors
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 or E&S Lines customers into SBUs. No one customer accounts for 10% or
more of our insurance operations in the aggregate.
We manage our underwriting volatility by focusing on accounts with lower-limits profiles. The following table lists each
segment's respective percentage of property and casualty accounts with total insured value and exposure limits of $1 million or
less:
Standard Commercial Lines
Standard Personal Lines
Property
76%
76%
Casualty
86%1
96%
E&S Lines
1Standard Commercial Lines excludes workers compensation policies without statutory policy limits covered by our casualty excess of loss reinsurance treaty,
which provides coverage for losses above $2 million.
99%
96%
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 individual property and casualty
retained losses to $3 million per risk for property claims and $2 million per occurrence for casualty claims. For information
regarding our 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.
Geographic Markets
We sell our insurance products and services in the following geographic markets:
•
•
•
Standard Commercial Lines products and services are primarily sold in 30 states in the contiguous U.S. and the
District of Columbia.
Standard Personal Lines products and services are primarily sold in 15 states in the Eastern, Midwestern, and
Southwestern regions of the U.S. Flood insurance, 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.
We began writing Standard Commercial Lines business in Vermont in June 2022 and Alabama and Idaho in October 2022.
This expansion allows us to issue policies to customers with exposures in these states, permitting us to compete more
effectively against nationwide insurers and diversify our portfolio risk. Ultimately, we plan to expand our Standard
Commercial Lines footprint to most of the contiguous U.S.
9
We manage and support our business from offices in (i) Branchville, New Jersey, where we have our corporate headquarters,
(ii) Farmington, Connecticut, the principal office for investment operations, (iii) Glastonbury, Connecticut, used by several
corporate areas, but primarily our information technology ("IT") department, (iv) Richmond, Virginia, the location of our
underwriting and claims service center ("USC"), and (v) six regional branches, with locations shown in the following table:
Region
Heartland
New Jersey
Northeast
Mid-Atlantic
Southern
West
Office Location
Indianapolis, Indiana
Hamilton, New Jersey
Branchville, New Jersey
Allentown, Pennsylvania, and Hunt Valley, Maryland
Charlotte, North Carolina
Scottsdale, Arizona
Our E&S Lines have offices in Scottsdale, Arizona and Dresher, Pennsylvania. Our Flood business has offices in Branchville,
New Jersey, and Miami, Florida. Our Staff Counsel operation, which defends our policyholders with employee-lawyers, has
seven leased offices in the Eastern region of the U.S.
Distribution Channel
The property and casualty insurance market is highly competitive and regulated, and has fragmented market share, particularly
in standard commercial lines. The market has three main distribution methods: (i) sales through appointed independent
insurance agents and wholesale brokers; (ii) direct sales to personal and commercial customers, including Internet-based digital
platforms; and (iii) sales through captive insurance agents employed by or contracted to sell exclusively for one insurer.
By segment, we use the following types of independent distribution partners to sell our insurance products and services:
•
•
•
Standard Commercial Lines: Independent retail agents;
Standard Personal Lines: Independent retail agents; and
E&S Lines: Wholesale general agents.
We seek to compensate our distribution partners fairly and consistently with market practices, generally paying them
commissions calculated as a percentage of DPW, with supplemental amounts paid based on profitability and considerations for
increased premium or policy counts. No one independent distribution partner is responsible for 10% or more of our combined
insurance operations' premium. Our top 20 distribution partners generated approximately 40% of our DPW, excluding E&S
Lines and the flood line of business, in 2022.
Independent Retail Agents and Standard Lines
A 2022 Independent Insurance Agents & Brokers of America study estimated there are 40,000 independent property/casualty
insurance agents and brokers in the U.S., up 11% from their 2020 study. We expect that independent retail insurance agents —
representing most of our independent distribution partners — will remain a significant force in overall insurance industry
premium production. Their business model, representing multiple insurance carriers, gives customers a broader choice of
insurance products, more competitive pricing, and individualized risk-based consultation.
We have approximately 1,500 distribution partners selling our standard lines products and services through approximately
2,600 office locations. About 800 of these distribution partners sell our personal lines products. Approximately 6,300
distribution partners sell our flood insurance products.
Wholesale General Agents and E&S Lines
We have approximately 80 wholesale general agents, with an aggregated 340 office locations, selling our E&S Lines business.
We have granted these wholesale general agents limited binding authority for risks meeting our prescribed underwriting and
pricing guidelines.
Marketing
Our primary marketing strategy is to:
•
Use an empowered field underwriting model for Standard Commercial Lines to provide our distribution partners with
resources near their businesses and our mutual customers. For further discussion on this model, see the "Technology,
Innovation, and Operating Model" section below.
10
•
•
•
Develop a distribution model that emphasizes the franchise value of appointment to sell our Insurance Subsidiaries'
products and services to the principals and producers of our high-quality independent insurance agency partners. To
help our agency partners grow profitability and succeed, we establish meaningful and close business relationships by
(i) soliciting, gathering, and acting on their feedback and that of our mutual customers on various topics, including our
products and services and brand awareness, (ii) advising them on our new product offerings, and (iii) providing
education and development programs focused on producer recruitment, sales training, customer experience
enhancement, online marketing, and distribution operations.
Develop and carefully monitor annual goals with each distribution partner on (i) the types and mix of risks they place
with us, (ii) new business and renewal retention expectations, (iii) customer service and engagement rates, (iv) new
business and renewal pricing, and (v) the profitability of the business they place with us.
Develop brand recognition and meaningful customer engagement through a data-driven multi-channel marketing
strategy focused on delivering a superior customer experience. We expect this integrated marketing and customer
engagement approach will position us as a marketplace leader and (i) afford us a dynamic view of the changing
marketplace and customer expectations, (ii) provide us insight into unique value-added products and services with the
greatest impact on each customer, and (iii) help drive business acquisition and retention, and brand health.
Technology, Innovation, and Operating Model
We continue to evolve our technology and operating model, maintaining a strong focus on innovation and providing our
customers and distribution partners with "around the clock" digital access to account information and transactional capabilities.
While many insurers offer digital customer solutions for personal lines, we strive to be a digital and customer experience leader
in all three insurance operation segments.
Technology
We leverage technology in our business and invest significantly in IT platforms, integrated systems, and cloud-based solutions.
We make these technology investments to provide:
•
•
•
•
Our distribution partners with accurate business information and seamless integration with our systems, permitting
easy policy transaction processing;
Our service representatives with a customer account-centric view of our policyholders, reducing customer inquiry
response time and complementing customer access to on-demand digital transactional capabilities;
Our underwriters with advanced underwriting and pricing tools and predictive models that provide guidance and
automatic retrieval of relevant public information on existing and potential policyholders, enhancing profitability and
enabling premium growth; and
Our claims adjusters with predictive tools to identify specific claims likely to experience escalating losses, fraud,
subrogation opportunities, or litigation.
Our digital strategy provides our Standard Commercial Lines and Standard Personal Lines customers with a mobile application
and a self-service portal branded MySelective. Our mobile application (i) received Best Mobile App Awards' Platinum Award
for "Best Mobile Design" in the summer of 2020, (ii) received the PropertyCasualty360 Insurance Innovators Award in the area
of customer experience in 2021, and (iii) was the Gold Stevie Winner in the "Sales and Marketing Mobile Application - New
Version" category in 2021. As of December 31, 2022, 50% of our customers registered for MySelective, compared to 47% as
of December 31, 2021. MySelective gives policyholders on-demand self-service access to account information, electronic bill
payment, and claims reporting. We continue to provide customers with additional digital value-added services, such as
proactive messaging about vehicle and product recalls, adverse weather, and claim status.
Our primary technology operations are in Branchville, New Jersey, and Glastonbury, Connecticut. We have agreements with
multiple consulting, IT, and supplemental staffing service providers to augment our internal resources. Collectively, these
providers supply approximately 53% of our skilled technology capacity, with 74% of their resources overseas. We retain
management oversight of all projects and ongoing IT production operations. We have procedures to manage an efficient
transition to new technology vendors without significantly impacting our operations if we terminate any current service
provider.
11
Cybersecurity
Our business relies heavily on IT and application systems connected to or accessed from the Internet. This connection increases
the risk that a malicious cyber-attack could impact us. Our systems also contain proprietary and confidential information about
our operations, employees, agents, and customers and their employees and property, including personally identifiable
information. A dedicated unit implements cybersecurity controls and reports on cybersecurity risks. We work with industry-
leading security consulting and technology partners and follow security-minded design principles. The cybersecurity team
receives oversight and executive support through engagement with our Executive Risk Committee ("ERC"). Similarly, the
team works with our Enterprise Risk Management ("ERM") function on business alignment and cybersecurity insurance
purchasing. Our cybersecurity program balances responsiveness to rapidly-changing threats with ensuring the long-term health
of our IT security environment. It focuses on six key areas:
•
•
•
•
•
•
Proactive cybersecurity, including cyber threat hunting, ethical hacking campaigns, and periodic cybersecurity
program assessments;
Reactive cybersecurity processes that we regularly test using incident response and disaster recovery exercises based
on realistic scenarios;
Endpoint controls that provide data encryption, threat detection, malicious software defense, and data backups;
Identity and access management controls that include multi-factor authentication and additional safeguards for
employees with elevated privileges;
Employee cyber risk awareness programs that leverage general education, role-based training, and simulated phishing
attacks; and
Third-party risk management and security standards, including due diligence, continuous monitoring, and cyber risk
scoring.
We monitor various IT performance and security metrics across these six key areas. The Parent's Board of Directors ("Board")
receives regular updates on the strength of our cyber risk control environment, emerging cyber threat issues, and the results of
external assessments by outside security consultants. Two of the Board's directors have earned cybersecurity oversight
certifications from a corporate directors organization.
For further information regarding our risks associated with cyber-attacks, see Item 1A. "Risk Factors." of this Form 10-K. For
additional information regarding our ERM function and ERC, see the "Corporate Governance, Sustainability and Social
Responsibility" section in Item 1. "Business." of this Form 10-K.
Innovation
To maintain our culture of innovation and long-term value proposition to our customers and distribution partners, we have the
following mechanisms in place:
•
•
•
A dedicated innovation team under our Chief Marketing and Innovation Officer. We established this team to (i) apply
proven innovation techniques and methods for identifying, prioritizing, and advancing strategic, innovative ideas and
opportunities, (ii) stay apprised of critical industry and insurance technology trends that impact our customers,
distribution partners, and employees, and (iii) expand our innovation culture 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.
An innovation lab at our corporate headquarters to spur innovation and further our efforts to identify and deploy
product, agency and customer experience, and operational efficiency improvements. We conduct innovation design
work (i) in-person, using our innovation lab at our corporate headquarters, (ii) virtually, combining live facilitation
with collaboration software and digital whiteboard and polling capabilities, and (iii) utilizing hybrid capabilities,
mixing live attendance and digital capabilities at our innovation lab with attendees at remote locations.
A Strategic Investment Committee to consider potential investment opportunities, including technology and Insurtech
platforms that may positively impact our business or the industry.
12
Operating Model
We believe our unique operating model is a competitive advantage. To support and build better and stronger relationships with
our independent distribution partners, our (i) Standard Commercial Lines underwriting and safety management personnel are
located in the geographic territories they serve, (ii) claims operation is organized regionally by specialty, with local personnel
managing our customer, claimant, and distribution partner relationships, and (iii) teams are provided with sophisticated tools
and technologies to inform underwriting, pricing, safety management, and claims decisions.
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. Through formal letters of
authority, our Chief Underwriting Officer ("CUO") delegates underwriting authority after assessing an underwriter's
job grade, industry, and line of business expertise. Our corporate underwriting department coordinates with our
actuarial department to determine adequate pricing levels for all Standard Commercial Lines products.
Under the CUO's delegated authorities, our regional underwriting operations make most individual policyholder
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 primarily handled in each region, with support from our USC, which assigns underwriters to specific
distribution partners.
Our operating model also focuses on improving safety and risk management programs, loss experience, and retention,
including:
•
•
•
•
Risk evaluation and virtual and on-site improvement surveys that evaluate potential exposures and provide
solutions for mitigation;
Internet-based safety management educational resources, including an extensive library of coverage-specific
safety materials, videos, and online courses, such as defensive driving and employee educational safety
courses;
Thermographic infrared surveys that 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 86 Safety Management
Specialists ("SMS") in the field supporting our policyholders locally. These specialists regularly interact with current
and prospective customers. Their safety enhancement and best practices recommendations reduce our customers'
property, liability, and workers compensation risks, including higher profile risks like sexual abuse. Their account-
specific analyses let our underwriters better understand our customers' exposures, enhancing our new business and
renewal underwriting decisions.
Over the past three years, we have embarked on safety management initiatives to proactively service policyholders
with notifications and alerts, identify risks and mitigate potential loss occurrence, and provide tools and technologies
that improve safety and reduce losses. 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 clogged or frozen plumbing;
•
•
Food and product recall notifications to policyholders in food manufacturing, distribution, and preparation;
and
Customer self-assessments of workplace hazards, with best practices recommendations tailored to the
customer's specific risks.
13
In 2022, we continued to expand capabilities in our new Standard Commercial Lines agency interface platform
designed to streamline new small business policy quoting and issuance. Writing small business – lower hazard risks in
specific industry classes with less than $25,000 in premium – is a core part of our strategy. In recent years, the small
business market has become more competitive, with more carriers using technology dedicated to new business
generation. We continue to execute a multi-year strategy to (i) improve small business writing ease and speed for our
distribution partners and (ii) offer a best-in-class small business customer experience. We enhanced our rating
platform's user experience by reducing the amount of information required to be inputted before quote generation. In
2023, we plan to add additional business capabilities to help us maximize new small business growth with our
distribution partners.
•
•
Standard Personal Lines: Our Standard Personal Lines underwriting operations are centralized and highly automated.
Most new and renewal business is underwritten and priced through an automated system reflecting our filed rates and
rules. Exceptions to our internal underwriting guidelines are approved under the direction of our Standard Personal
Lines CUO. For long-term growth, we are actively repositioning our Standard Personal Lines business to better serve
the mass affluent market, where we believe our strong coverage and servicing capabilities will be more competitive.
E&S Lines: Our E&S Relationship and Underwriting Managers focus on marketing our product capabilities to
wholesale general agents, training them on underwriting guidelines and automation, and collecting market intelligence
from them. In return, our wholesale general agents provide front-line new and renewal underwriting and policy
administration services per guidelines we prescribe. Our small commercial E&S underwriters review all requested
exceptions or declinations based on individual account risk characteristics. Our middle market E&S commercial
underwriters write larger accounts and receive complete submissions for individual account risk characteristics from
wholesale general agents, making underwriting and pricing decisions based on them. Wholesale general agents who
submit middle market commercial risks do not have the authority to quote or bind accounts on our behalf.
Our independent distribution partners designate Standard Commercial Lines and Standard Personal Lines accounts to be
serviced by our USC. All USC employees are licensed agents who respond to policyholder inquiries about insurance coverage,
billing transactions, and other matters. For the convenience of us handling USC transactions, our distribution partners agree to
receive a slightly lower than standard commission on the associated premium. As of December 31, 2022, our USC was
servicing NPW of $99.1 million, representing 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 an essential service we provide to our policyholders, their claimants, and our distribution partners. 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, with each business line having a specialized claims unit focused on high severity or technically
complex losses and litigation;
Claims customer managers and agency executives ("CAEs") who are responsible for enhancing the relationship among
our policyholders, distribution partners, and 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 deliver appropriate
claims service, communicate trends, and discuss results and client services;
Cost-effective delivery of claims services and control of loss and loss expense. Our Claims Service Center manages
our high volume, low severity automobile and property claims, leveraging virtual adjusting tools that provide prompt
and efficient service to our customers; and
Timely and adequate claims reserving and resolution.
We have been executing a multi-year claims system modernization strategy to improve the efficiency of our claims
organization's processing ability through improved workflows and enhanced capabilities for our employees, customers, and
distribution partners. In 2022, we rolled out a new digital claim intake method for our workers' compensation claims. We are
actively testing a new unique digital claim intake method for automobile and property claims. It allows claimants to readily
provide more robust information, improving our adjuster assignment and overall claims cycle speeds.
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Our Special Investigative Unit ("SIU") supports all insurance operations and investigates potential insurance fraud and abuse,
consistent with law and direction from regulatory bodies and non-profit organizations dedicated to combating and preventing
insurance crime. The SIU adheres to uniform internal procedures to improve detection and act on potentially fraudulent claims.
We have developed a proprietary SIU fraud detection model that identifies potential fraud cases early in a claim's life. 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 from public, private, and mutual insurance companies with
varying levels of brand recognition, scale and operational efficiency, capital bases, book of business diversification, and cost of
capital. Like us, many competitors rely on independent partners to distribute their products and services. Other insurance
carriers either employ their own agents, who represent only them, or use a combination of distribution partners, captive agents,
and direct marketing.
The property and casualty insurance market is highly competitive in each of our insurance segments, with market share
fragmented among many companies, particularly in Standard Commercial Lines and E&S Lines. We compete primarily with
regional and national insurers on coverage terms, claims service, customer experience, safety management services, ease of
technology usage, price, and financial strength ratings. We also face increased competition from established direct-to-consumer
insurers, existing competitors, and new entrants, many with lower cost structures and digital technology with enhanced
servicing and customer experience capabilities.
Investments Segment
Our investment portfolio's objectives are to maximize after-tax net investment income and generate long-term book value per
share growth. We maximize the portfolio's overall total return by investing our insurance operation's premiums and the
amounts generated through our capital management strategies, including debt and equity security issuances. We balance those
objectives against prevailing market conditions, capital preservation considerations, and our enterprise risk-taking appetite. We
maintain (i) a well-diversified portfolio across issuers, sectors, and asset classes; and (ii) a high credit quality fixed income
securities portfolio with a duration and maturity profile at an acceptable risk level that provides ample liquidity. Our fixed
income securities primarily include corporate, asset-backed, and mortgage-backed securities, and state and local municipal
obligations. We also invest in public equity securities, commercial mortgage loans, short-term investments, alternative
investments, and other investments. Alternative investments primarily include limited partnership investments in private
equity, private credit, and real estate strategies. Other investments include Federal Home Loan Bank ("FHLB") stock and tax
credit investments.
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 "Investments Segment" section 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 regulation and taxation is primarily overseen at the state level because of the U.S. Congress's delegation in the
McCarran-Ferguson Act. The primary public policy behind insurance regulation is protecting policyholders and claimants over
all other constituencies, including shareholders. Property and casualty insurance activities regulated by the states include the
following:
•
•
Protection of claimants: Oversight of financial matters to ensure claims-paying ability, including minimum capital;
statutory 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: Oversight of matters including certificates of authority and other insurance company
licenses; licensing and compensation of distribution partners; underwriting criteria; premium rates (required not to 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,
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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 including registration of insurance holding company systems in states where we have domiciled
insurance subsidiaries, reporting about intra-holding company system developments, self-assessment of current and
future risks, including cybersecurity and climate change, 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"), which
has established statutory accounting principles ("SAP") and other accounting reporting formats and model insurance laws and
regulations governing insurance companies. An NAIC model statute, however, only becomes law after state legislative
enactments, and an NAIC model rule only becomes a regulation after state insurance department promulgation. Adopting
specific NAIC model laws and regulations is a condition of the NAIC Financial Regulations Standards and Accreditation
Program. This program permits state insurance departments to recognize and rely on the financial examinations and reviews
their counterparts conduct, creating efficiencies and limiting overlapping examinations of the same insurance companies.
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. Departure from the usual values on four or more 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 most 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 the NAIC required
capital level. Based on our 2022 statutory financial statements prepared in accordance with SAP, all our Insurance
Subsidiaries had total adjusted capital substantially exceeding the regulatory action levels defined by the NAIC.
Annual Financial Reporting Regulation (referred to as the "Model Audit Rule"). The Model Audit Rule, based closely
on the Sarbanes-Oxley Act of 2002, as amended ("Sarbanes-Oxley Act"), regulates (i) auditor independence, (ii)
corporate governance, and (iii) internal control over financial reporting. As permitted under the Model Audit Rule, the
Audit Committee of our Board serves as the audit committee of each of our Insurance Subsidiaries, even though 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 "material and relevant risks" associated with the insurers' (or insurance
groups') current and future business plans. ORSA, which the state domicile insurance regulators of our Insurance
Subsidiaries have adopted, requires an insurer to annually file an internal assessment of the adequacy of its risk
management framework and current and projected future solvency position. For more information on our internal
process of assessing our significant risks, refer to the "Corporate Governance, Sustainability and Social
Responsibility" section below.
Group Capital Calculation ("GCC"). In the fourth quarter of 2020, the NAIC adopted the basic structure of the GCC,
along with a model law to enable the GCC after state legislative enactment. The calculation provides state insurance
regulators with additional analytical information for assessing group risks and capital adequacy, complementing the
existing holding company disclosures and analyses. The GCC expands the existing RBC calculation to include (i)
capital requirements for other regulated entities in the group, and (ii) defined capital calculations for other group
entities that are unregulated. Our New Jersey state insurance regulators adopted the GCC model law in 2022. Based
on our 2022 statutory financial statements prepared in accordance with SAP, our GCC ratio exceeds the regulatory
action minimum threshold.
NRSROs
Rating agencies monitor our capital adequacy but are not formal regulators. Two are (i) AM Best, with its Capital Adequacy
Ratio ("BCAR"), and (ii) S&P, with its capital model. Both evaluate the strength of an insurer's balance sheet comparing
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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 show similar direction as
simulation scenarios change, they react differently to variations in economic conditions, underwriting and investment portfolio
mix, and capital. We regularly evaluate our capital adequacy relative to each of these capital models to ensure we can
effectively pursue our business strategies. Rating agencies also revise and update their capital adequacy models and
requirements more frequently than the NAIC updates its financial monitoring tools.
Federal Regulation
While primarily regulated at the state level, our business is subject to federal laws and regulations, including:
•
•
•
•
•
•
•
The McCarran-Ferguson Act;
The Terrorism Risk Insurance Program Reauthorization Act ("TRIPRA");
The NFIP, 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 possessing 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”)
govern publicly-traded companies and require or permit national stock exchanges or associations, such as the Nasdaq
Stock Market LLC, where we list our equity securities, to mandate certain governance practices.
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 authority under the 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
regulation risk factor within Item 1A. "Risk Factors." of this Form 10-K.
Corporate Governance, Sustainability and Social Responsibility
We strive to maintain a high level of ethics and integrity in our business practices. We are committed to understanding and
mitigating risk, serving our customers responsibly, enabling our employees’ professional success and work/life balance, and
helping the communities in which we live, work, and serve, while being environmentally responsible.
Corporate Governance
Strong governance, oversight, and transparency are the foundation of our financial and operating success. We have a mature
risk culture and governance structure that are cornerstones of our risk management framework, and are designed to enhance the
decision making process and strengthen risk-reward evaluations.
Our internal control framework follows the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
model, deploying three lines of defense:
•
The first line of defense is the individual business functions that deliberately assume, own, and manage the risk on a
daily operational basis.
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•
•
The second line of defense is responsible for risk oversight, supporting the first line to understand, monitor, and
manage our risk profile through an ERC and dedicated risk team.
The third line of defense is our Internal Audit team, which provides separate, objective assurance in assessing the
adequacy and effectiveness of our internal control environment with oversight from our Board's Audit Committee.
Internal Audit also coordinates risk-based audits, compliance reviews, and other specific initiatives to evaluate and
address risk within targeted areas of our business.
Our risk governance structure consists of the following major components:
Risk
Oversight
• Executive Committee
• Finance Committee
• Corporate Governance & Nominating Committee ("CGNC")
• Salary & Employee Benefits Committee
• Audit Committee
Board of Directors
2 STRATEGY SETTING AND ESTABLISHING RISK
TOLERANCE
Management & Operating Committees
• Management Investment Committee ("MIC")
Risk
Management
• Underwriting Committee
• Emerging Risk Committee
• Enterprise Project Management Office ("EPMO")
• Large Claims Committee
• Reserve Committee
• Executive Risk Committee ("ERC")
• Sustainability Committee
• Disclosure Committee
• Market Security Committee ("MSC")
• Supported by individual business units and functional areas.
2 APPETITE AND LIMIT GOVERNANCE
Enterprise Risk Management Function
Risk
Identification
& Reporting
Board Oversight
Our Board's function is one of oversight and guidance. The Board and its committees ("Board Committees") oversee our
business performance and management team ("Management"). The Board reviews and discusses Management reports about
our performance and significant issues. The majority of our Board is independent.
Our Board oversees our ERM process, and all Board Committees oversee risks specific to their areas of supervision and report
their activities and findings to the entire Board.
Management and Operating Committees
Our Chief Executive Officer (“CEO”) directs our business strategy's implementation. Management regularly reports to the
Board on significant events, issues, and risks that may materially affect our business or financial performance. A description of
each Management committee and our ERM function follows:
MIC — Responsible for (i) setting and implementing the investment objectives and asset allocation, (ii) administering
investment policies, (iii) selecting qualified external investment managers and advisors, and (iv) monitoring performance,
transactions, and specific risk metrics, including ones related to climate change. Our investment team and external investment
managers execute our investment strategy and objectives. The MIC meets formally eight times per year, with additional
meetings as necessary.
Underwriting Committee — Responsible for overseeing authority delegation throughout our underwriting operations and
reviewing and making decisions on any underwriting transaction and/or action that is outside of a CUO's authority. This
committee meets as appropriate and evaluates a variety of information related to specific accounts presented, including key
projected catastrophe modeling metrics when considering a large property account, as well as underwriting and market
considerations.
Emerging Risk Committee — Responsible for identifying and monitoring new and evolving risk issues that could significantly
impact our financial strength, reputation, or long-term strategy. This committee meets quarterly.
EPMO — Responsible for the oversight of large-scale projects. Our EPMO framework uses a consistent methodology to
review the return on investment for each major capital expenditure (such as IT system purchases). Projects above a certain
dollar threshold require Board approval. 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)
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review project status, including external and internal costs and any associated projected financial 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 primary business and corporate areas, meets regularly to review all significant initiatives
and receives status reports on other projects. The EPMO is an important factor in the success of our business strategy and
technology implementations. The EPMO meets monthly and as needed.
Large Claims Committee — Responsible for the oversight of claims that: (i) have or are likely to exceed a reinsurance policy
coverage limit; (ii) have a bad faith exposure of $15 million or more; (iii) are likely to generate significant bad publicity; or (iv)
potentially create a significant legal precedent on an insurance coverage issue. The Large Claims Committee also approves
reserves and payments for claims over the Chief Claim Officer’s authority. This committee meets on an as-needed basis.
Reserve Committee — Responsible for monitoring loss and loss expense reserve levels and taking management actions
regarding financial recording of reserves. The reserve committee meets quarterly.
ERC — Responsible for the holistic evaluation and supervision of our risk profile, and determining future risk management
actions supporting our overall risk profile. The ERC provides management oversight of our ERM function. The ERC relies on
several management committees to analyze and manage specific major risks, including the Emerging Risk Committee and the
Underwriting Committee. At least quarterly, the ERC meets to review and discuss various topics and the interrelation of our
significant risks, including, without limitation, capital modeling results, capital adequacy, risk metrics, emerging risks, and
sensitivity analysis.
Sustainability Committee — Reports to senior management on significant public issues relating to sustainability. It also
develops or opines on ESG-related policies and procedures. The committee meets quarterly.
Disclosure Committee — Responsible for establishing and implementing procedures to ensure compliance with Regulation FD
and other applicable securities laws. This committee meets at least two times every quarter.
MSC — Responsible for reinsurance purchase decisions, approval of individual reinsurers on our panel, reinsurer counterparty
risk, and monitoring catastrophe risk. The MSC is comprised of executives and senior leaders with diverse financial and
underwriting expertise. The MSC meets at least twice a year before each major treaty renewal.
ERM Function
The ERM unit is responsible for identifying, measuring, monitoring, and reporting key and aggregated enterprise-wide risks to
the ERC and the Board. The ERM unit works with other functional areas to develop appropriate responses to identified risks
and supports the successful execution of our business strategy.
We rely on quantitative and qualitative tools to identify, prioritize, and manage our major risks, including proprietary and third-
party computer modeling and other analyses. When appropriate, we engage subject matter experts, such as external actuaries,
third-party risk modeling firms, and IT and cybersecurity consultants. Our Insurance Subsidiaries annually file with their
domiciliary regulators an ORSA report, an internal solvency assessment developed by the Chief Risk Officer ("CRO") in
coordination with the ERC and reviewed by our Board.
We categorize our major risks into five broad categories:
•
•
•
•
Asset risk, stemming primarily from our investment portfolio and reinsurance recoverables and includes credit and
market risk;
Underwriting risk, which is the risk 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 our contractual obligations as they become due because we
cannot liquidate assets or obtain adequate funding without incurring unacceptable investment losses or borrowing
expenses;
Other risks, which include a broad range of operational risks, many challenging to quantify, such as talent/human
capital, market conditions, economic, legal, regulatory, reputational, and strategic risks – as well as the risks of fraud,
19
human failure, modeling risks, inadequate business continuity plans, or failure of controls or systems, including
cybersecurity risk; and
•
Emerging risks, which include risks in the other categories that are new, rapidly evolving, or increasing substantially
compared to historical levels. For example, we consider (i) heightened levels of economic inflation, (ii) the enactment
of reviver statutes for abuse victims, (iii) climate change, (iv) the increased threat of cyber incidents, and (v) the
significant economic impacts from the ongoing Russian war against Ukraine and the economic and societal impacts of
the COVID-19 pandemic, including disrupted supply chains and products, services, and labor shortages, and other
emerging risk.
The table below maps our management and operating committees to their responsibilities for our five major risks.
Major Risk
Category
Asset Risk
Underwriting Risk
Liquidity Risk
Other Risks
Emerging Risks
Emerging
Risk
Committee MIC
X
X
MSC
X
X
X
X
Disclosure
Committee EPMO
Reserve
Committee
X
X
X
Large
Claims
Committe
e
X
X
ERC
X
X
X
X
X
Underwriting
Committee
Sustainability
Committee
X
X
X
Our risk governance structure facilitates effective risk conversations across all levels and disciplines of the organization and
promotes strong risk management practices. All our strategies and controls, however, have inherent limitations. We cannot be
certain that an event or series of unanticipated events will (i) occur or not occur, and generate losses greater than we expect, and
(ii) 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 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.
Sustainability and Social Responsibility
Our sustainability and social responsibility initiatives are focused on (i) developing our human capital to create a highly
engaged and diverse team of employees and leaders who will guide us into the future, (ii) helping us understand and attempt to
mitigate the environmental impact that climate change has on our business and operations, and (iii) providing customers with
empathetic claims service and risk mitigation solutions.
Human Capital
We recognize that developing and protecting our human capital, and providing a mutually beneficial employee experience,
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 2,520 employees. In 2022,
we were (i) designated as a Great Place to Work CertifiedTM organization for the third year in a row, (ii) recognized by
DiversityJobs as one of their top employers showing continual dedication and commitment to establishing a diverse workforce
and culture, and (iii) recognized by Forbes as one of "America's Best Mid-Size Employers."
Physical, Social, and Financial Well-Being of our Employees
We invest significantly in our employees' physical, social, and financial well-being, which is essential to attracting and retaining
the best talent. We are committed to fair pay and regularly analyze and adjust compensation to ensure internal equity and
external market alignment. We offer competitive financial benefit programs to support the financial well-being of our
employees and their families. Among the offerings are a 401(k) plan with non-elective and employer matching contributions,
an employee stock purchase plan allowing discounted stock purchases, and tuition reimbursement and student loan repayment.
Most employees are eligible to participate in our annual cash incentive program, funded and paid based on the achievement of
our financial and strategic objectives. Employees above certain levels are eligible to participate in our long-term stock-based
incentive compensation program. We also offer a wide range of competitive and convenient health and wellness programs. To
support our employees' social well-being, we encourage connections 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 in (i) training and development to assist our employees in fulfilling their professional
potential and having rewarding careers, and (ii) efforts to retain our best talent and foster a positive work-life balance. We are
committed to ongoing employee learning, personal growth, and continuous improvement. Our employees have access to
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various live instructor-led training courses and over 26,000 online skills training courses and resources. We also have
leadership and talent development programs and initiatives at all levels of the organization. Examples include our (i) Next
Generation of Leaders program, which identifies early- and mid-career management for focused development opportunities that
prepare them for future senior leadership, (ii) RISE (Retain Include Support Engage) program, which is an accelerated
professional development program for diverse individual contributors interested in first-level management positions, and (iii)
our Ignite College Internship and Momentum Trainee programs, which provide collaboration and cross-functional events and
experiences for interns and early-career employees.
Of our 2,520 employees at December 31, 2022, 980 are normally home-based; 840 are in our regional offices; and the
remainder are in our corporate office. Our Flexible Work Location Policy permits most office-based employees to work
remotely 60% of the time. Our employee turnover rate in 2022 was approximately 15%. Employees with over 20 years of
service represented approximately 16% of our workforce.
Diversity, Equity, and Inclusion
We recognize that collaboration by employees with diverse backgrounds, ideas, and experiences can foster innovation,
improving operational performance, product and service development, customer experience, market opportunities, and revenue.
We have initiatives to increase representation and cultivate greater inclusion of people with different ethnicity, race, age, sexual
orientation, gender identities and expressions, and socio-economic backgrounds. Recent initiatives include (i) increasing
gender and racial diversity through our Next Generation of Leaders program, (ii) sponsoring various employee resource groups
for women, Black, LGBTQ+, and military and veteran employees, (iii) introducing a professional development program
focused on under-represented groups, (iv) implementing business objectives tied to supporting and participating in diversity,
equity, and inclusion initiatives, (v) enhanced hiring, retention, and promotion practices intended to increase diversity at all
organizational levels, including expanding university recruiting efforts to include historically Black colleges and universities,
(vi) partnering with the National African American Insurance Association for services and employee programming for our
employee's use, and (vii) adding new directors with diverse backgrounds, skills, experience, ethnicity, and race to our Board.
As of December 31, 2022, women represented 58% of our non-officer workforce and 33% of our officer workforce, compared
to 58% and 32% at December, 31, 2021, respectively. Increasing the representation of women in first-level, middle, and 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. Approximately 78% of our workforce was
White at year-end 2022, compared to 80% at year-end 2021, and 22% were a combination of Black, Latin, Asian, and all other
ethnicities combined, compared to 20% at December, 31, 2021. We have a diverse board, with five directors on our Board
identifying as part of one or more underrepresented groups.
Environmental
As a property and casualty insurance company, we understand that climate change creates greater unpredictability of weather-
related loss frequency and severity. This poses a long-term risk to the lives and livelihoods of our customers and our business.
Our efforts to help address climate change and its associated impacts are centered on (i) prudent oversight and management of
catastrophe risk exposure, (ii) helping our customers through responsive claims handling, safety management, and proactive
weather alerts, (iii) allocating capital away from specific environmentally hazardous classes through underwriting and
investment initiatives, and (iv) reducing our carbon footprint. Understanding and helping mitigate climate change perils for our
business and customers is core to our operations and strategy. We believe these efforts (i) contribute to our corporate
responsibility to help mitigate the impact of climate change, and (ii) will reward our shareholders with sustained superior
financial and operating performance over time.
The Emerging Risk Committee identified climate change as a high-level emerging risk that it reviews at least quarterly with the
ERC and our Board. The ERM unit, the ERC, and Management stay informed on key climate change risk developments
through industry publications, webinars, conferences, and regular engagement with outside sources, such as our reinsurance
brokers, investment managers, and trade associations.
Responsibility for measurement, assessment, and monitoring the mitigation of the physical risks and transition risks due to
climate change resides with our ERM function. Physical risks arise from the changing frequency, severity, and characteristics
of acute events, such as hurricanes, floods, and wildfires. These risks can directly affect our underwriting results, impact the
long-term viability of certain business lines we write, and potentially impact our investment portfolio. Transition risks arise
from society’s transition towards a low-carbon economy, driven by policy and regulations, low-carbon technology
advancement, and shifting sentiment and societal preferences.
Due to our business risk profile and geographic concentration in the Northeast and Mid-Atlantic states, hurricane peril is our
most significant natural catastrophe exposure, driving the “tail” of our modeled catastrophe loss distribution. This risk has
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influenced our decision to geographically diversify our underwriting portfolio and set rigorous coastal property exposure
guidelines. In addition to managing our peak hurricane exposure risk, we seek to manage our exposures to other perils, such as
severe convective storms, winter storms, flooding, and wildfires. We do not write crop insurance, have minimal exposure to
private flood, and have a small geographic footprint in the Western U.S., so our exposures to certain weather-related perils,
such as droughts, wildfires, and flooding, tend to be relatively modest. We monitor our investment exposure to carbon-
intensive industries as a measure of our vulnerability to climate-related risks involved with the transition to a low-carbon
economy.
The ERM unit evaluates our catastrophe risk exposure relative to our established tolerances. This evaluation incorporates the
results of third-party vendor models and proprietary analysis in its review of exposure to hurricane and other perils on both a
gross and net basis. For quantitative information on the modeled results of our underwriting property portfolio by peril, refer to
the "Reinsurance" section in "Results of Operations and Related Information by Segment" of Item 7. "Management’s
Discussion and Analysis of Financial Condition and Results of Operations."
Managing Climate-related Risks
For information regarding our risks associated with climate change, refer to risks identified with the symbol "
"Risk Factors." of this Form 10-K.
" in Item 1A.
Insurance Operations
In managing our insurance operations' physical climate-related risks, we model our property portfolio for hurricanes and other
wind events semi-annually in July and January. Wildfire risk, which presents significantly lower exposure for our portfolio, is
modeled annually in July. For some time, we have not underwritten specific environmentally-hazardous risks related to
production from coal mines, thermal coal plants, or oil sands extraction because they are outside our underwriting appetite.
Our underwriting controls employ authority levels in writing large individual property risks and large property accounts that
could create or exacerbate a property aggregation issue. If any individual location exceeds the CUO's property limit authority,
it must be approved by the Underwriting Committee, comprised of the Standard Lines Chief Operating Officer, CFO,
Commercial Lines CUO, Executive Vice President of E&S Lines, and CRO. When considering large property accounts, the
Underwriting Committee typically reviews an evaluation of property aggregations in the particular county and state, and
projections of marginal impact on our aggregate modeled losses assuming we wrote the risk. The discussion covers our
catastrophe risk aggregation appetite and the appropriate pricing for taking the increased risk aggregation.
Our established catastrophic risk tolerance requires that no more than 10% of stockholders’ equity is exposed to a loss from a
hurricane event at a 99.6% confidence level (1-in-250 year event or 0.4% probability) on a net of reinsurance and after-tax
basis. For additional quantitative and qualitative information about our modeled results by scenario on stockholders' equity,
refer to the "Reinsurance" section in "Results of Operations and Related Information by Segment" of Item 7. "Management’s
Discussion and Analysis of Financial Condition and Results of Operations."
We believe that we have created an effective control environment for managing natural catastrophe risk on a gross exposure
basis by (i) setting overall portfolio growth expectations, (ii) monitoring actual results and property aggregations, (iii) having
appropriate underwriting authority controls around our largest accounts, and (iv) consistently focusing on appropriate pricing of
catastrophe risk.
Investments
We are beginning to incorporate ESG considerations into our investment process. To establish appropriate ESG investment
governance, we maintain (i) a well-diversified portfolio across issuers, sectors, and asset classes; and (ii) a high credit quality
fixed income securities portfolio with a duration and maturity profile at an acceptable risk level that provides ample liquidity.
In addition, we are working with our third-party investment managers to ensure they incorporate ESG guidelines and protocols
into their investment process while managing our mandates. Our investment strategy considers climate change risk by
prohibiting any new direct equity or debt investments in thermal coal enterprises, including those generating 30% or more of
their (i) revenue from the ownership, exploration, mining, or refining of thermal coal, or (ii) electricity generation from thermal
coal. We believe that as we transition to a low-carbon economy, the value of these assets could be at greater risk.
Other
In addition to mitigating insurance operations and investment risk, we:
•
Have robust plans to ensure operational continuity if we suffer unforeseen or catastrophic events. We have business
continuity plans for our key data processing facility (Disaster Recovery Plan), the leadership team (Executive Crisis
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Management Plan), and significant operational areas. We review and update these plans at least annually, the same as
other testing, including “tabletop” exercises and planned hands-on tests.
•
•
Track our Scope 1 and Scope 2 carbon (“CO2”) emissions; however, as an insurance holding company, we are not a
meaningful greenhouse gas ("GHG") emitter relative to entities in many other industries. Our Scope 1 emissions
include consumption of natural gas, diesel, refrigerant, and fuel usage under our Fleet program, and our Scope 2
emissions comprise our electricity usage.
Built ground-mount and garage-canopy solar photovoltaic facilities at our corporate headquarters. The facilities are
expected to generate approximately five million kWh of electricity annually, and we sell the solar renewable energy
credits to others. Since we sell these solar renewable energy credits, our renewable energy production does not reduce
our GHG emissions, however, they do contribute to the production of cleaner energy.
Ongoing Initiatives
Our objective is to continue to reduce our carbon emissions over the long term. We have many initiatives that we expect will
reduce GHG emissions over time. Some include:
•
Upgrades to our corporate headquarters building management system, which should reduce heating and cooling natural
gas consumption;
Transitioning our Fleet from gasoline to hybrid vehicles over the next three to five years;
Conversion of all corporate headquarters light bulbs to LED;
Hybrid work schedule going forward; and
•
•
•
• Migration of our information technology systems from our corporate headquarters' data center to the cloud.
We have also implemented several initiatives at our corporate headquarters to lower our environmental impact, including:
•
•
•
•
•
•
Enhanced waste management and recycling;
Repurposing commingled recyclables;
Installed electric vehicle charging stations for employee use;
Elimination of Styrofoam products in our cafeteria;
Recycling and more efficient energy use of electronic equipment; and
Reducing our water usage through automatic plumbing features.
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, which
are accessible on the SEC's website, www.SEC.gov. These filings are also available at www.Selective.com shortly after filing
such material with the SEC. Our website and the information contained or linked in it are not part of this Annual Report.
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 to execute 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
common 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 their potential future impact on our
business, if any.
Risks Related to our Insurance Operations
We are subject to losses from catastrophic events.
Losses from natural and human-made catastrophes can negatively impact our financial results. Examples include, without
limitation, hurricanes, tornadoes, windstorms, earthquakes, hail, severe convective storms, severe winter weather, derechos,
floods, and fires, some related to climate change, and criminal and terrorist acts, including cyber-attacks, civil unrest, and
explosions. The frequency and severity of these catastrophes are inherently unpredictable, and the frequency and severity of
catastrophe losses have increased globally in recent years. Although we use sophisticated catastrophe modeling techniques to
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manage our catastrophe exposure, catastrophe models provide estimates, and actual exposure and loss experience may
materially differ. For example, catastrophe models did not fully estimate the potential for some recent catastrophe loss activity
(such as Hurricane Ida-related severe flooding in the Mid-Atlantic and Northeast in 2021 and Winter Storm Elliott freeze losses
in December 2022) and the concurrent recent economic inflation on construction costs. Unmodeled or under-modeled
catastrophe risks could result in understated catastrophe exposure, and our actual catastrophe losses could be higher.
Our insurance operations primarily write risks in the Eastern, Midwestern, and Southwestern regions of the U.S. Our most
significant natural and/or human-made catastrophe exposures are (i) hurricanes impacting the Eastern U.S., (ii) severe
convective storms, including hailstorms and tornadoes, (iii) winter storms, (iv) earthquakes, and (v) terrorism events. 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 authority on insured property
losses from catastrophes in the U.S., Puerto Rico, and the U.S. Virgin Islands.
Certain factors can impact our estimates of ultimate costs for natural and/or human-made catastrophes, including:
•
•
•
•
•
Inability to access portions of the affected areas after a catastrophic event;
Scarcity of necessary labor and materials that delay repairs and increase our loss costs;
Regulatory uncertainties, including new or expanded interpretations of coverage;
Residual market assessment-related increases in our catastrophe losses;
Potential fraud and inflated repair costs, partly driven by (a) demand surge post-event, and (b) opportunistic service
providers;
Higher loss adjustment expenses due to shortages of claims adjusters available to appraise damage;
Late claims reporting;
Escalation of business interruption costs due to infrastructure disruption; and
•
•
•
• Whether the U.S. Secretary of the Treasury certifies an event as a terrorist act under TRIPRA.
Natural catastrophes
Temperature changes can impact weather patterns and the frequency and/or severity of catastrophes, including hurricanes,
severe convective storms, wildfires, and flooding — all of which could cause our catastrophe losses to increase relative to
historical levels. The United Nation’s Intergovernmental Panel on Climate Change ("IPCC") is an international body
responsible for assessing climate change science. In 2021, the IPCC estimated in its “Sixth Assessment Report: Physical
Science Basis” that human activities (i) have caused approximately 1.1°C of global warming to date above pre-industrial levels
and (ii) this could rise to an increase between 1.2°C and 3.0°C above pre-industrial levels between 2041 and 2060.
Climate change models also project significant differences in global regional warming above pre-industrial levels, depending on
future levels of climate mitigation and geographic location. These global regional differences, whether attributable to nature or
human activities, 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.
Human-made catastrophes
Cybersecurity
The risk of a wide-scale criminal or terrorist cyber-attack has become more significant and has drawn increased attention from
IT and national security experts, U.S. policymakers, the U.S. military, and the insurance industry. There is general recognition
that a wide-scale cyber-attack that simultaneously impacts multiple victims is more likely, and insurance industry systemic risk
has increased. We have identified three primary sources of potential insured exposure to cyber losses: (i) cyber-specific
policies designed to cover both first-party and third-party losses; (ii) affirmative cyber coverage grants included in other types
of policies, such as commercial property or businessowners policies; and (iii) "silent cyber" exposures, otherwise known as
non-affirmative cyber exposures, which describes cyber risk that is neither expressly covered nor excluded in insurance
policies. This exposure may exist if courts, regardless of intent, interpret policy forms without specific related coverage
exclusions to provide coverage for a cyber-related incident.
We provide cyber-specific policies to our commercial lines and personal lines customers through 100% reinsured solutions with
highly-rated specialty cyber markets. These solutions allow us to meet our customers' needs for cyber insurance while
mitigating our underwriting risk, as we develop our expertise in the cyber insurance market.
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Beyond our cyber-specific policies, our other insurance policies provide some first- and third-party cyber coverages:
• We offer limited first-party affirmative cyber coverage in our commercial property and businessowners' policy forms.
•
We limited our "silent cyber" exposure through an affirmative coverage grant subject to a sub-limit.
Our base property forms typically include a coverage grant of $2,000 or $10,000. Most of our property policies also
contain an affirmative endorsement providing "virus and harmful code" coverage subject to a sub-limit. Over 90% of
our policies with virus/harmful code coverage on commercial property, businessowners', commercial output policy, or
inland marine forms have sub-limits of $25,000 or lower. For policies effective October 1, 2022, we implemented
cyber incident exclusions that exclude malicious cyber except for the sub-limited coverage provided in the base ISO
coverage forms and our property and businessowners' property “virus and harmful code” extension endorsements.
These exclusions clarify coverage and have no premium impact.
• Most of our general liability and businessowners' policies specifically exclude cyber-related liability losses, except for
"bodily injury." Our specific cyber-exclusion and liability forms' lack of affirmative sub-limited cyber coverage,
effectively limit most "silent cyber" exposure. However, any related potential exposures are subject to our casualty
reinsurance program, which has no cyber-related loss exclusion.
By statute, workers compensation policies do not have cyber exclusions, and a cyber-attack-related workplace injury
could trigger coverage.
•
Terrorism
We are required to participate in TRIPRA, now 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 $480 million deductible is based on a percentage of our prior year’s applicable Standard
Commercial Lines and E&S Lines premiums. In 2023, the federal government will pay 80% of losses above the deductible,
with the insurer retaining 20%. Although TRIPRA will mitigate some of 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 the Treasury does not certify specific terrorist events (as occurred 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.
Our primary workers compensation policies are required to cover terrorism risk, so TRIPRA applies to those policies. Insureds
with non-workers compensation commercial policies can accept or decline our terrorism coverage or negotiate with us for other
terms. In 2022, 85% of our Standard Commercial Lines non-workers compensation policyholders purchased terrorism
coverage that included nuclear, biological, chemical, and radioactive ("NBCR") events. TRIPRA also applies to cyber liability
insurance policies reported under a Terrorism Risk Insurance Program-eligible line of insurance.
Many states mandate that commercial property policies cover fire following an act of terrorism - regardless of whether the
insured purchased 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 Standard Personal
Lines homeowner policies exclude nuclear losses but not biological, chemical, or conventional terrorism losses. Our current
reinsurance programs cover some losses from conventional foreign and domestic terrorism acts but not NBCR events.
An increase in natural or man-made catastrophe losses, including a systemic cyber-attack that produces an aggregation of
property and/or casualty cyber losses, 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 we have limited information to estimate loss and loss expense reserves, increasing the uncertainty of our estimates.
More detailed claims information available after a reporting period may result in reserve changes in subsequent periods.
Our loss and loss expense reserves may not adequately cover actual losses and expenses.
We maintain reserves for our estimated liability for loss and loss expense associated with reported and unreported insurance
claims. Estimating loss and loss expense reserves is inherently uncertain, and there is no method for precisely estimating the
ultimate liability for the settlement of claims. We base our loss and loss expense reserve estimates on our internal
comprehensive reserve review, which uses our own loss experience, claims payment and reporting patterns, and our view of
underlying claims frequency and severity trends. We supplement the estimates with other subjective considerations, including
projected impacts from economic, political, social, and legal developments or trends, such as inflation, continually evolving
trends driven by the post-COVID-19 pandemic environment, judicial trends and tort decisions, and various state legislative
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initiatives. We cannot predict the timing or impact of these developments or trends with certainty, and 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
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 future loss cost trend estimates prove to be understated, our pricing of future
new and renewal business could be inadequate to cover actual loss costs, and our future loss and loss expense reserves could be
understated.
Two examples of how loss and loss expense reserves might be affected by economic, political, social, or legal developments or
trends are:
•
•
If inflation, including medical and social inflation, is higher than our assumptions, our loss and loss expense reserves
for our longer tail lines of business could be insufficient. For example, 2022 inflation rates reflected in the overall
consumer price index ("CPI"), the Core CPI, and the Producer Price Index, were higher than 2021. We, however, do
not know how long elevated inflation will persist. Our workers compensation line of business is particularly
susceptible to inflation because of its extended payment pattern and exposure to medical care services and
commodities. While relatively less affected by recent rising inflation rates, these medical care costs could have a more
material impact on our overall loss and loss expense reserves if they were to rise significantly or persist for an
extended period. Our short-tail property lines of business are also susceptible to inflation because of their exposure to
increased labor and material costs.
Various states have expanded or could expand the statute of limitations for civil actions alleging sexual abuse. By
retroactively permitting previously time-barred claims, these "reviver" laws may result in insurance claims that could
significantly increase loss costs and require a re-evaluation of previously-established reserves or the creation of new
reserves. Since reviver statutes have been enacted, we have received some notices of claims or potential claims for
acts alleged to have occurred, some dating as far back as the 1950s. Without prior experience, we cannot estimate how
many "reviver" claims notices we may receive. Most notices (i) are blanket notices sent by attorneys representing
claimants unsure of the alleged assailant or supervising entity's insurer or policy (if any) and (ii) may not implicate any
of our or a predecessor's insurance policies. For those we determine implicate one of our or a predecessor's policy, we
(i) have investigated or are investigating facts, (ii) have evaluated policy terms, (iii) believe we have appropriate
coverage defenses to most of these claims and/or sufficient reinsurance protections, and (iv) have considered these
factors in establishing our reserves, which we believe provide a reasonable estimate of the aggregate ultimate net
exposure for these claims. Our coverage positions may be challenged through litigation or otherwise, so we face
litigation risks. These are discussed further below in the Risk Factor entitled, "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."
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 to third parties through reinsurance contracts. These contracts provide
reimbursement of losses exceeding specified amounts or percentages of premiums. Typically, our reinsurance coverages align
with the coverages offered under our primary insurance policies.
The availability, quality, amount, and cost of reinsurance depend on market conditions, including retrocessional reinsurance
market capacity. Most of our reinsurance contracts have annual terms. Consequently, reinsurance costs may fluctuate
significantly, not necessarily correlating to the loss experience of our specific book of business. State insurance regulators
generally permit us to consider catastrophe reinsurance expense in our filed rates and rating plans. However, the conditions and
timing of regulatory approval may not align with the actual expense of new reinsurance terms. Disproportionate increases in
our reinsurance expense that we cannot include in our filed rates and rating plans will reduce our earnings. If we are unable to
negotiate desired reinsurance amounts or terms, we may experience (i) increased reinsurance expense, (ii) increased risk
retention on individual or aggregate claim losses, and (iii) limitations on our ability to write future business.
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Commercial property and homeowners coverages have historically accounted for most of our catastrophe-related claims. To
limit our exposure to catastrophe losses, we purchase catastrophe reinsurance. Our reinsurance coverage may prove to 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 (i) the purchased reinsurance limit or (ii) the financial capacity of one or more of our
reinsurers even if the loss is within the purchased limit;
The combination of multiple catastrophe events in a single year is such that our Insurance Subsidiaries' insured losses
exceed the aggregate limits of the catastrophe reinsurance treaty or our Insurance Subsidiaries experience an unusually
large number of catastrophe losses that fall below our per occurrence reinsurance retention;
Our reinsurance counterparties (i) are unable to access their reinsurance markets, or retrocessions, (ii) suffer significant
financial losses, (iii) are sold, (iv) cease writing reinsurance business, or (v) are unable or unwilling to satisfy their
contractual obligations to us; or
The catastrophe losses insured in our primary policies are excluded from coverage in our reinsurance contracts.
•
•
•
•
Recent economic, geopolitical, and insured loss events have increased global reinsurance market uncertainty. The impacts of
(i) higher inflation-related reinsurance demand, (ii) reduced capacity due to reinsurer investment portfolio losses, (iii) weakened
Euro-United States dollar currency exchange rates, (iv) recent Hurricane Ian-related reinsurer losses, (v) poor reinsurer
profitability over the past six years, and (vi) investor and reinsurer concerns about the potential impacts of climate change have
caused an increase in reinsurance prices and reduced the availability of reinsurance. How reinsurance supply and demand will
adjust in the coming months and years is uncertain. To the extent we are exposed to primary policy losses from risks, such as
cyber and communicable disease, now principally excluded from coverage under our reinsurance treaties, we face increased
underwriting risk. Some of our reinsurance contracts also contain coverage wording that restricts our ability to cede potential
losses related to terrorism, strikes, riots, or civil unrest. Increased underwriting risk could increase our net loss and loss
expense, increasing our underwriting results volatility. Decreased reinsurance capacity also would increase our underwriting
risk if we cannot fully place our existing reinsurance treaty coverage on renewal. If our reinsurers have difficulty collecting
their retrocession programs or reinstating retrocession coverage after a large loss, our reinsurance claims may not be paid timely
or in full.
Even with the benefits of reinsurance, our catastrophe risk exposure could have a material adverse effect on our results of
operations, liquidity, financial condition, financial strength, and debt ratings.
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 us payments under our reinsurance agreements. Reinsurance credit risk
can fluctuate over time, increasing during periods of high industry catastrophe and liability losses. Reinsurers
generally manage their significant loss exposure through their own reinsurance programs, or retrocessions, about
which we do not always have the full details. If our reinsurers experience difficulty collecting on their retrocession
programs or 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 a global but concentrated market.
Certain life insurance companies, if they fail to fulfill their contractual obligations to our policyholders or claimants
under annuities we purchased as part of structured claims settlements.
Some of our independent distribution partners, who collect premiums from policyholders for us.
Some policyholders, who are 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 our distribution partners' business practices and customer interactions. Independent
distribution partners have – and we expect will continue to have – a significant role in overall insurance industry premium
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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 we must market our products and services to our independent distribution
partners who have access to products from multiple carriers and markets.
Brand recognition challenges because we closely coordinate marketing with our distribution partners and some
customers cannot differentiate their insurance agent from their insurer.
Our market share growth is tied to our distribution partners' market share. Consequently, growth in our Standard
Personal Lines could be more limited than in our Standard Commercial Lines. Competitors have focused on lower-
cost "direct-to-customer" distribution models that emphasize digital ease and efficiencies to address the discrepancy
in agency control of standard personal lines business. Continued advancements in "direct-to-customer" distribution
models may impact our independent distribution partners' overall market share, 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 39% of our DPW at December 31, 2022, up from 33% three years ago. 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 increased inflation levels, 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. Inflation
could significantly impact our claims severity across multiple lines of business and could result in adverse reserve development.
Heightened economic inflation levels could also cause higher interest rates, likely increasing unrealized losses within our
portfolio of fixed income securities and lowering total returns from our other invested assets. 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 2022, 27% of DPW in our Standard Commercial Lines business was based
on payroll or sales of our underlying policyholders. An economic downturn in which our policyholders have declining revenue
or employee count could adversely affect our total written premium, including audit and endorsement premium.
We write business domestically in the United States, and our insurance operations do not have direct exposure to businesses or
individuals in Russia or Ukraine. We do not have material exposure to investments subject to embargoes or Russian
reinsurance counterparties. However, the ongoing Russian war against Ukraine is impacting global economic, banking,
commodity, and financial markets, exacerbating ongoing economic challenges, including inflation and supply chain disruption,
which influence insurance loss costs, premiums, and investment valuation.
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, primarily with lenders, to maintain insurance
policies from a carrier with a minimum AM Best or S&P rating. Credit rating downgrades could also make it more expensive
to access capital markets. We cannot predict the rating actions NRSROs could take that might adversely affect our business or
our potential responses. Any significant downgrade in our financial strength and credit ratings below an "A-" 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.
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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 consumer and business price
sensitivity, aggressive price competition and improvements based on performance characteristics and large data sets that can
compact underwriting margins, new products and services, evolving industry standards, and rapid adoption of technological
advancements. Our ability to compete successfully depends heavily on our timely and consistent introduction of innovative
new products and services.
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 relative operating costs, lower capital costs, or greater capacity to absorb or diversify more 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 ROE performance. Consequently,
some competitors may be able to price their products more competitively.
The Internet has emerged as a significant competitive digital marketplace for existing and new competitors. Established
insurance competitors, like The Progressive Corporation, are beginning to explore broader digital Internet offerings. New
competitors with variations on traditional business models have emerged, such as Lemonade, Root, and Next. Because the
Internet makes it easier and less expensive to bundle products and services, it also is possible that non-insurance companies
conducting business on the Internet could enter the insurance business or form strategic alliances with insurers in the future.
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 demands that we attract and
retain employees in difficult-to-fill data science, advanced analytics, and IT roles – or suffer potential negative impacts.
We have less loss experience data than our larger competitors.
Insurers depend 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 depend on the aggregated industry loss data assembled
by rating bureaus under the antitrust 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 importance of data science and analytics to increase, becoming more complex and accurate 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. We supplement our data with industry loss experience from Verisk, AAIS, NCCI, and other publicly available
sources. While relevant, industry data may not correlate specifically to the performance of our underwritten risks or 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, to 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, claims severity and frequency trends,
catastrophe losses, reinsurance attachment and exhaustion points, investment performance, portfolio risk, and our economic
capital position. Flaws in financial and statistical models and their embedded assumptions could lead to increased losses. For
example, a significant component of climate change risk is that the frequency and severity of extreme weather events may
evolve differently relative to historical levels – leading to greater model uncertainty. The increase in the frequency of land-
falling hurricanes and tropical storms in the U.S. over the past five years could partly be climate change-related. In addition,
increasing insurance regulatory interest in data and model use, combined with any potential restrictions on traditional rating
factors or model use, could have a material adverse impact on our financial condition and operating results. Our statistical
models are extremely useful in monitoring and controlling risk, but they are no substitute for senior management's experience
or judgment.
29
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 (i) liquidity, (ii) credit deterioration, (iii) financial results, (iv) public equity and/or debt market
changes, (v) economic conditions, including heightened levels of economic inflation and any ongoing post-COVID-19
pandemic impacts, (vi) political risk, (vii) sovereign risk, (viii) interest rate fluctuations, or (ix) other factors, including climate
change risk and civil unrest.
Our investment portfolio's value is subject to credit risk from our held securities' issuers, guarantors, and financial guarantee
insurers, and other counterparties in certain transactions. Defaults on any of our investments by any issuer, guarantor, financial
guarantee insurer, or other counterparty could reduce our net investment income and increase net realized 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 amount of our cash and cash equivalents, and the value and liquidity of our
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 that have a material adverse impact
on our financial condition and operating results.
Our investment portfolio is exposed to climate change-related transition and physical investment risks.
•
•
Transition risks arise from society’s transition to a low-carbon economy, driven by policy and regulations, low-carbon
technology advances, and shifting public sentiment and societal preferences. This transition to renewable energy
sources may lead to (i) stranded assets in sectors with high carbon footprints or those closely tied to carbon-based
economic activity, such as the fossil fuel and automotive industries, (ii) increased costs for infrastructure reinvestment
and replacement, and litigation defense of carbon-intensive sectors, (iii) lower corporate profitability, (iv) lower
property values, and (v) lower household wealth. The Paris Agreement Capital Transition Assessment defines the
carbon-intensive sectors as the most exposed to transition risks: oil and gas, coal, power, automotive, cement,
aviation, and steel. As of December 31, 2022, carbon intensive sectors within our fixed income securities portfolio
represented less than 4% of our total invested assets, down from 5% as of December 31, 2021.
Physical investment risks include the risk of investment losses on our commercial and residential mortgage-backed
securities that are exposed to climate-related catastrophic losses that can cause business disruption, destroy capital,
increase costs to recover from disasters, reduce revenue, and cause population displacement and migration. These, in
turn, can lower residential and commercial property values, household wealth, and corporate profitability, all
potentially creating financial and credit market losses impacting insurer asset values. As of December 31, 2022, about
69% of our residential mortgage-backed securities were backed by government agencies. We generally invest in the
top tranches of commercial mortgage-backed securities, which limit potential losses from property value declines.
Significant future investment value declines could require further losses recorded on securities we 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 will be eliminated on June 30, 2023.
As of December 31, 2022, approximately 11% of our fixed income securities portfolio had floating rate securities primarily tied
to 90-day U.S. dollar-denominated London Interbank Offered Rate ("LIBOR"). Historically, the global banking industry has
used LIBOR as a primary metric to calculate interest rates for certain 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 U.S. Dollar replacement index. 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 LIBOR-replacement benchmark rate. SOFR is based on
overnight repurchase agreement transactions backed by U.S. 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. Effective June 30, 2023,
LIBOR will cease to exist, requiring remaining floating rate securities to transition to SOFR. Consequently, our fixed income
securities portfolio may be subject to (i) interest rate and prepayment risk associated with the resetting of our floating rate
coupons from LIBOR to SOFR, (ii) potential rating agency downgrades, (iii) reduced trading liquidity on securities with
30
insufficient fallback transition language, and (iv) lower returns associated with basis risk from a reference rate mismatch
between liabilities and assets in certain securitized assets. We continue to monitor the potential impact LIBOR's elimination
and the transition to SOFR will have on our floating rate investments' performance. We have and will continue to evaluate and
monitor other LIBOR risks across the organization.
We are subject to the risks inherent in investing in private limited partnerships.
Our alternative investments include private limited partnerships that invest in various strategies, such as private equity, private
credit, and real assets. The primary assets and liabilities underlying in these limited partnership investments 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 we record these limited partnership
investments under the equity method of accounting, any valuation decreases could negatively impact our results of operations.
Determining 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 quarterly 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,
reflecting changes in credit losses. There can be no assurance that management has accurately assessed the level of credit
losses recorded 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.
Risks Related to Evolving Laws, Regulations, 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;
•
ESG-related issues, including ESG investment mandates;
•
Climate change, including potential liability for related public disclosures;
•
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
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.
31
If Congress passed legislation regulating insurer solvency oversight and state regulators remained responsible for rate approval,
we could be subject to a conflicting regulatory framework that could impact our profitability and capital adequacy.
While we underwrite risks only in the U.S., international regulatory developments, primarily capital adequacy and risk
management requirements in the European Union ("EU"), may influence U.S. regulators as they develop or revise domestic
regulatory 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 and drafted model law changes that provide for its adoption as a state law
requirement for U.S. insurance groups. Our New Jersey state insurance regulators adopted the GCC model law in 2022. Based
on our 2022 statutory financial statements prepared in accordance with SAP, our GCC ratio exceeds the regulatory action
minimum threshold. If the GCC requirements or our financial position changes, it could increase the amount of capital our
Insurance Subsidiaries are required to hold.
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. Consequently, we have 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.
Insurers are subject to regulatory, political, and media scrutiny. We are subject to government market conduct reviews 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 various state, federal, and other laws, rules, policies, and other obligations regarding data
protection.
We are subject to federal and state 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 Unfair and Deceptive Acts and Practices laws.
Several states, like New York, Nevada, Colorado, Virginia, 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.
The EU adopted the General Data Protection Regulation ("GDPR") in 2016 but it did not become effective until 2018. 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. Because we do not write coverages in the EU, GDPR does not directly
impact us. Some U.S. states have subsequently incorporated individual-control mechanisms into state privacy laws. Future EU
data privacy actions likely will influence U.S. regulators over time.
We make statements about our use and disclosure of PII in our privacy policy, on our website, and in other public venues. If
we fail to comply with these public statements or federal and state 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 are inherently
unpredictable and 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;
32
•
•
Actions brought against competitors or us 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 various broad economic, political, social, and legal developments or trends. Such media
stories could negatively impact our reputation.
We expect 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 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.
Additionally, we do not have any material litigation risks related to climate change.
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.
Based on these restrictions, the maximum ordinary annual dividends the Insurance Subsidiaries can provide the Parent in 2023
is $283 million. Their ability to pay dividends or make loans or advances, however, is subject to domiciliary state insurance
regulators' 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 stockholders is also impacted by covenants in its credit agreement (the "Line of
Credit") among the Parent, the named lenders (the "Lenders"), and Wells Fargo Bank, National Association, as Administrative
Agent. These covenants obligate the Parent to, among other things, maintain a minimum consolidated net worth and a
maximum ratio of debt to capitalization. Our preferred stock's terms limit 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 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. "Equity" 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 our common stock's value 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, and short-term interests of the Parent and our shareholders, including the
possibility that these interests may best be served by the Parent's continued independence; (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.
33
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 a hostile takeover and could 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. The New Jersey Department of Banking and Insurance Commissioner, who regulates seven of our Insurance
Subsidiaries, also considers whether (i) the acquisition of control of an insurer would be adverse to the public interest or the
protection of existing and future policyholders or (ii) persons seeking control would use control adversely to the public interest
or the protection of policyholders.
Risks Related to Our General Operations
We and our distribution partners and vendors are subject to attempted cyber-attacks and other cybersecurity and system
availability risks.
Our business heavily relies on IT and application systems connected to or accessed from the Internet. Consequently, a
malicious cyber-attack could affect us. Our systems also house 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.
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. As cyber-attacks continue to evolve daily,
our security measures may not be sufficient for all eventualities. We may be vulnerable to hacking, employee error,
malfeasance, system error, faulty password management, or other irregularities. These risks may be higher or lower for our
third-party providers depending on the maturity of their security program, and we review their control environments to the
extent possible and practical, aligning the risk exposure with our business requirements and risk tolerances. Any disruption or
breach of our systems or data security could damage our reputation, result in difficult to quantify monetary damages, 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 may be insufficient to indemnify against all arising losses or types of claims.
In addition to cyber-attack risk, we face system availability risk. Our business relies heavily on various IT and application
systems. We have robust business continuity plans designed to minimize the duration and impact of an unexpected loss of
availability of any of these systems. Nevertheless, we could experience an event that impacts one or more of these systems,
including those based in facilities where our vendors or we operate. This may interrupt our ability to operate and negatively
impact our results of operations, despite our business continuity plans.
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 using above-average operational
leverage, measured as the ratio of NPW to our equity or statutory 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 an underwriting risk appetite focused on small-to-medium-sized accounts. We do this by using significant
reinsurance, a disciplined reserving approach, 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. Given our higher-than-industry average operating leverage, an event or series of unanticipated events could have a
more material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings
compared to our industry.
Item 1B. Unresolved Staff Comments.
None.
34
Item 2. Properties.
Our headquarters is a 315,000 square foot building on an owned 56-acre site zoned for office and professional use in
Branchville, New Jersey. We lease all our other operating 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.
We are routinely engaged in legal proceedings incidental to our insurance operations that have inherently unpredictable
outcomes and 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, 2022,
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.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
(a) Market Information
Our common stock is traded on the Nasdaq Global Select Market under the symbol "SIGI."
(b) Holders
We had 2,872 common stockholders of record as of January 31, 2023, according to our transfer agent's records.
(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
expect to continue to pay quarterly cash dividends on shares of our common stock in the future.
On November 2, 2022, the Board approved a 7% increase in our common stock dividend to $0.30 per share. In addition, on
February 2, 2023, the Board declared a $0.30 per share quarterly cash dividend on common stock that is payable March 1,
2023, to stockholders of record as of February 15, 2023.
(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, 2022:
(a)
Number of
securities to be
issued upon exercise of
outstanding options,
warrants and rights
(b)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(c)
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))1
Plan Category
Equity compensation plans approved by security holders
1Includes 1,116,863 shares available for issuance under our Employee Stock Purchase Plan (2021); 1,551,498 shares available for issuance under the Stock
Purchase Plan for Independent Insurance Agencies; and 2,474,585 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.
— $
—
5,142,946
35
(e) Performance Graph
The following chart, produced by Research Data Group, Inc., depicts our performance for the period beginning December 31,
2017, and ending December 31, 2022, comparing total stockholder return on our common stock to the total return of (i) the
NASDAQ Composite Index and (ii) a select group of peer companies comprised of NASDAQ-listed companies in SIC Code
6330-6339, Fire, Marine, and Casualty Insurance.
We have not incorporated this performance graph into any other filings we have made with the SEC. Unless we otherwise
specifically state, it will not be incorporated by reference into any future SEC filings. This performance graph shall not be
deemed "soliciting material" or be "filed" with the SEC unless we specifically request so or incorporate it by reference in any
SEC filings we make.
(f) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information about our purchases of our common stock in the fourth quarter of 2022:
Period
October 1 – 31, 2022
November 1 – 30, 2022
December 1 – 31, 2022
Total Number of
Shares Purchased1
Average Price
Paid Per Share
686 $
294
1,894
91.01
93.17
91.25
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
—
—
—
84.2
84.2
84.2
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 our Board authorized a $100 million share repurchase program with no set expiration or termination date. Our
repurchase program does not obligate us to acquire any particular amount of our common stock. Management will determine the timing and amount of any
share repurchases under the authorization at its discretion based on market conditions and other considerations.
2,874 $
— $
91.39
84.2
Item 6. Reserved.
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking Statements
The terms "Company," "we," "us," and "our" refer to Selective Insurance Group, Inc. (the "Parent"), and its subsidiaries, except
as expressly indicated or the context otherwise requires. Certain statements in this Annual Report on Form 10-K, including
information incorporated by reference, are “forward-looking statements” as defined by the Private Securities Litigation Reform
Act of 1995 (“PSLRA”). The PSLRA provides a safe harbor under the Securities Act of 1933 and the Securities Exchange Act
of 1934 for forward-looking statements. These statements relate to our intentions, beliefs, projections, estimations, or forecasts
36
of future events and financial performance. They involve known and unknown risks, uncertainties, and other factors that may
cause our or industry actual results, activity levels, or performance to materially differ from those expressed or implied by the
forward-looking statements. In some cases, forward-looking statements include the words “may,” “will,” “could,” “would,”
“should,” “expect,” “plan,” “anticipate,” “target,” “project,” “intend,” “believe,” “estimate,” “predict,” “potential,” “pro forma,”
“seek,” “likely,” “continue,” or comparable terms. Our forward-looking statements are only predictions, and we can give no
assurance that such expectations will prove correct. We undertake no obligation, other than as federal securities laws may
require, to publicly update or revise any forward-looking statements for any reason.
Factors that could cause our actual results to differ materially from what we project, forecast, or estimate in forward-looking
statements are discussed in further detail in Item 1A. “Risk Factors.” of this form 10-K. These risk factors may not be
exhaustive. We operate in a constantly changing business environment, and new risk factors may emerge anytime. We can
neither predict these new risk factors nor assess their impact, if any, on our businesses or the extent any 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;
Excess and Surplus 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, 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 2022 results compared to 2021. Investors should read the MD&A in conjunction with Item 8. "Financial
Statements and Supplementary Data." of this Form 10-K. For discussion and analysis of our 2021 results compared to 2020,
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, 2021.
In the MD&A, we discuss and analyze the following:
•
•
•
•
•
Critical Accounting Policies and Estimates;
Financial Highlights of Results for Years Ended December 31, 2022, 2021, and 2020;
Results of Operations and Related Information by Segment;
Federal Income Taxes; and
Liquidity and Capital Resources.
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. The policies and estimates we considered most critical to the preparation of the Financial Statements involved (i)
reserves for loss and loss expense, (ii) investment valuation and the allowance for credit losses on available-for-sale ("AFS")
fixed income securities, and (iii) reinsurance.
37
Reserves for Loss and Loss Expense
Significant time can elapse between the occurrence of an insured loss, the reporting of the claim to us, and the final settlement
and payment of the claim. To recognize liabilities for unpaid loss and loss expense, insurers establish reserves as balance sheet
liabilities. 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, 2022 and 2021:
Total
757,513
1Includes our flood loss exposure related to our participation in the NFIP's WYO program, to which we cede 100% of our flood losses.
2Includes general liability (96% of net reserves) and commercial auto liability coverages (4% of net reserves).
3Includes commercial property (90% of net reserves) and commercial auto property coverages (10% of net reserves).
3,718,196
5,144,821
1,426,625
$
As of December 31, 2022
($ in thousands)
General liability
Workers compensation
Commercial automobile
Businessowners' policies
Commercial property
Other
Total Standard Commercial Lines
Personal automobile
Homeowners
Other1
Total Standard Personal Lines
E&S casualty lines2
E&S property lines3
Total E&S Lines
December 31, 2021
($ in thousands)
General liability
Workers compensation
Commercial automobile
Businessowners' policies
Commercial property
Other
Total Standard Commercial Lines
Personal automobile
Homeowners
Other1
Total Standard Personal Lines
E&S casualty lines2
E&S property lines3
E&S Lines
Loss and Loss Expense Reserves
Case
Reserves
IBNR
Reserves
Total
Reinsurance
Recoverable on
Unpaid Loss and
Loss Expense
Net Reserves
$
358,967
347,992
299,444
43,456
81,377
11,030
1,142,266
61,499
13,237
111,355
186,091
88,965
9,303
98,268
1,624,148
694,777
578,283
89,429
133,523
12,576
3,132,736
79,060
42,051
33,100
154,211
416,299
14,950
431,249
1,983,115
1,042,769
877,727
132,885
214,900
23,606
4,275,002
140,559
55,288
144,455
340,302
505,264
24,253
529,517
246,736
199,057
14,271
19,277
81,970
4,443
565,754
36,529
7,124
132,525
176,178
11,397
4,184
15,581
Loss and Loss Expense Reserves
Case
Reserves
IBNR
Reserves
Total
Reinsurance
Recoverable on
Unpaid Loss and
Loss Expense
Net Reserves
$
345,996
351,705
271,729
41,603
76,406
3,671
1,091,110
60,871
13,709
44,301
118,881
94,839
9,080
103,919
1,427,326
700,304
476,176
67,786
46,975
22,474
2,741,041
82,468
35,602
33,115
151,185
361,875
12,892
374,767
1,773,322
1,052,009
747,905
109,389
123,381
26,145
3,832,151
143,339
49,311
77,416
270,066
456,714
21,972
478,686
213,253
196,670
15,480
6,828
22,277
2,136
456,644
40,941
2,392
64,975
108,308
11,672
2,017
13,689
1,736,379
843,712
863,456
113,608
132,930
19,163
3,709,248
104,030
48,164
11,930
164,124
493,867
20,069
513,936
4,387,308
1,560,069
855,339
732,425
102,561
101,104
24,009
3,375,507
102,398
46,919
12,441
161,758
445,042
19,955
464,997
4,002,262
Total
578,641
1Includes our flood loss exposure relates to our participation in the NFIP's WYO program, to which we cede 100% of our flood losses.
2Includes general liability (95% of net reserves) and commercial auto liability coverages (5% of net reserves).
3Includes commercial property (91% of net reserves) and commercial auto property coverages (9% of net reserves).
4,580,903
1,313,910
3,266,993
$
38
The Insurance Subsidiaries' net loss and loss expense reserves duration was approximately 3.1 years at December 31, 2022,
down from 3.5 years at December 31, 2021.
How reserves are established
Reserves for loss and loss expense include case reserves on reported claims and IBNR reserves. Case reserves are estimated on
each individual claim based on claim-specific facts and circumstances known at the time. Case reserves may be adjusted up or
down as the claim's specific facts and circumstances change. IBNR reserves are established at more aggregated levels, and they
include provisions for (i) claims not yet reported, (ii) future development on reported claims, (iii) closed claims that could
reopen in the future, and (iv) anticipated salvage and subrogation recoveries.
Our thorough reserving process relies on quarterly internal reserve reviews, based on our own loss experience, with
consideration given to various internal and external factors. Changes in claim dynamics may inherently change paid and
reported development patterns. While the selections in our reserve analyses aim to account for these impacts, there remains an
increased risk of variability in the estimated reserves. 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 to determine our recorded reserves; however, we review and discuss with the consulting actuary our respective
observations regarding trends, key assumptions, and actuarial methodologies. While not required, our independent consulting
actuary issues the annual statutory Statements of Actuarial Opinion for our Insurance Subsidiaries. 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.
Range of Reasonable Reserve Estimates
We have estimated a range of reasonable reserve estimates for net loss and loss expense of $3,920 million to $4,662 million at
December 31, 2022. 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, and does not represent a distribution of all possible outcomes. Therefore, the final outcomes may be greater
than or less than these amounts.
The range of reasonable reserve estimates increased as of December 31, 2022, relative to December 31, 2021. This increase
primarily relates to the growth in reserves commensurate with our growth in net premiums earned ("NPE").
Changes in Reserve Estimates (Loss Development)
Our quarterly reserving process may lead to changes in the recorded reserves for prior accident years, referred to as favorable or
unfavorable prior year loss and loss expense development. In 2022, we experienced net favorable prior year loss development
of $78.9 million, compared to $82.9 million in 2021 and $72.9 million in 2020. The following table summarizes prior year
development by line of business:
(Favorable)/Unfavorable Prior Year Loss and Loss Expense Development
($ in millions)
General liability
Commercial automobile
Workers compensation
Businessowners' policies
Commercial property
Bonds
Homeowners
Personal automobile
E&S casualty lines
E&S property lines
Other
Total
2022
2021
2020
$
$
(5.0)
22.5
(70.0)
(7.3)
(1.6)
(10.0)
(0.6)
0.5
(5.0)
(2.5)
0.1
(78.9)
(29.0)
13.3
(58.0)
(0.4)
(2.6)
—
1.8
(0.2)
(7.0)
(0.8)
—
(82.9)
(35.0)
7.1
(60.0)
3.9
9.2
—
7.7
(1.8)
—
(4.0)
—
(72.9)
A detailed discussion of recent reserve development by line of business follows.
Standard Market General Liability Line of Business
At December 31, 2022, our general liability line of business had recorded reserves, net of reinsurance, of $1.7 billion,
representing 40% of our total net reserves. In 2022, this line experienced favorable development of $5.0 million, attributable to
favorable inception-to-date claim frequencies in accident years 2020 and 2021. In 2021, this line experienced favorable
development of $29.0 million, attributable to improved loss severities in accident years 2018 and prior.
39
By its nature, general liability presents a diverse set of exposures. Losses and loss trends are influenced by various factors,
including legislative enactments, judicial decisions, and economic and social inflation. Economic inflation directly impacts our
claims severities by increasing the costs of raw materials, medical procedures, and labor. Social inflation may impact both the
frequency and severity of claims by affecting (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, which influence settlement
values going forward. We monitor claim litigation rates regularly and have observed modest increases in the percentage of
claims with attorney involvement in recent periods. This trend and the impact of previous court closures are affecting the time
to settle claims.
We have exposure to abuse or molestation claims, mainly through insurance policies that we (i) 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. These customers within our CAPS business unit represented approximately 10% of our
total Standard Commercial Lines NPW in both 2022 and 2021. Through 2017, our exposure to abuse or molestation risk
increased, reflective of our CAPS book's growth. In 2018, we implemented more stringent underwriting eligibility guidelines
and partnered with a third party to better assess exposure and enhance loss control measures. In 2019, we filed and approved
significant rate increases for this exposure. We continue to monitor each jurisdiction's statute of limitations to ensure our rate
level accounts for the changing exposure as best we reasonably can. While these underwriting and pricing actions have been
necessary to ensure the profitability of the portfolio going forward, they have limited our CAPS growth in recent years.
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 that will involve complex claims coverage
determinations, potential litigation, higher defense costs, and potentially the need to collect from reinsurers under older
reinsurance agreements. Our claims and actuarial departments actively monitor these claims to identify changes in frequency or
severity and any emerging or shifting trends. While this should help us better understand this rapidly evolving exposure, the
ultimate impact of social, political, and legal trends remains highly uncertain, and may significantly impact the ultimate
settlement values for these claims.
Standard Market Workers Compensation Line of Business
At December 31, 2022, our workers compensation line of business had recorded reserves, net of reinsurance, of $844 million,
representing 19% of our total net reserves. During 2022, this line experienced favorable reserve development of $70.0 million,
due to favorable inception-to-date claim frequencies in accident year 2020, and improved loss severities in accident years 2020
and prior. Similarly, this line experienced favorable reserve development during 2021 of $58.0 million, driven by accident
years 2019 and prior. During both 2022 and 2021, the lower loss emergence than expected was partly due to: (i) medical
inflation that was lower than originally anticipated; and (ii) various claims initiatives we have implemented. Because of the
length of time injured workers can receive related medical treatment, decreases in medical inflation can cause favorable loss
development over an extended number of accident years.
A variety of issues can impact the workers compensation line of business, such as:
Unexpected changes in medical cost inflation – The industry is currently experiencing a period of lower medical claim
cost inflation. However, alongside elevated inflation as measured by the Consumer Price Index, medical costs are also
beginning to rise, though to a lesser degree. Changes in our historical workers compensation medical costs, along with
potential changes in future medical inflation, can create 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, but have not yet been settled. Depending on 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 pharmaceutical prescriptions, more complex medical procedures, changes in
permanently injured workers' life expectancy, and health insurance availability.
Standard Market Commercial Automobile Line of Business
At December 31, 2022, our commercial automobile line of business had recorded reserves, net of reinsurance, of $863 million,
which represented 20% of our total net reserves. In 2022, this line experienced unfavorable prior year reserve development of
$22.5 million, driven by increased severities in the 2021 accident year. In 2021, this line experienced unfavorable prior year
reserve development of $13.3 million, driven by higher loss severities in accident years 2016 through 2019.
40
For both us and the industry, the commercial automobile line has experienced unfavorable trends in recent years. Pre-
pandemic, increased frequencies were likely due to increased miles driven related to lower unemployment, poor road quality,
and an increase in distracted driving. The pandemic and the governmental "stay-at-home" orders issued in early 2020
dramatically reduced miles driven and road traffic, significantly reducing claims frequency in 2020. At the same time, along
with industry reporting of dramatic increases in risky driving behaviors, such as speeding, distracted driving, and driving while
under the influence, traffic deaths per mile driven increased significantly. As miles driven increased in 2021 and 2022, fatality
rates per mile driven have somewhat tempered, but remain well above pre-pandemic levels. This, along with the impacts of
social inflation, continue to put pressure on claim severities in this line. As of the end of 2022, frequencies remained somewhat
below pre-pandemic levels due to shifts in commuting patterns and fewer low-speed crashes.
Increasing property damage and physical damage severities relate to (i) elevated repair costs for increasingly complex vehicles
that incorporate more technology, (ii) longer periods of rental reimbursement costs for claims, and (iii) recent inflationary
impacts and disruptions to the supply chain. Continued complications in the supply chain, including labor shortages, increase
the risk of longer-term elevated economic inflation.
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 continue to leverage our predictive
modeling and analytical capabilities that provide guidance and automatic retrieval of relevant public information on
existing and potential policyholders to provide more granular insights about where we should focus our actions.
Reducing premium leakage by improving the quality of our rating information, including validating application
information with third-party data and obtaining more detailed vehicle usage information.
Aggressively managing new business pricing and hazard mix while deploying co-underwriting by our regional
underwriters and corporate underwriting teams' subject matter experts for selected higher hazard classes to improve
risk-driver recognition and exposure-based pricing.
Standard Market Personal Automobile Line of Business
At December 31, 2022, our personal automobile line of business had recorded reserves, net of reinsurance, of $104 million,
which represented 2% of our total net reserves. In 2022, this line experienced unfavorable prior year reserve development of
$0.5 million. In 2021, this line experienced favorable prior year reserve development of $0.2 million.
Some of the same issues affecting the commercial automobile line are affecting this line. The COVID-19-related reduction in
frequencies was even more pronounced than in the commercial automobile line. As with the commercial automobile line, these
frequencies significantly rebounded in 2021 and 2022, yet remain less than pre-pandemic levels. This line has a similar
potential for increasing average severities like the commercial automobile line. In addition to the COVID-19-related temporary
impacts, the underlying trends of increased vehicle repair costs and poor road quality are likely causes of rising severities,
exacerbated by riskier driving behaviors, including distracted driving trends. We continue to recalibrate our predictive models
and refine our underwriting and pricing approaches. While we believe these underwriting and pricing 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, 2022, our E&S casualty lines of business had recorded reserves, net of reinsurance, of $494 million,
representing 11% of our total net reserves. Our E&S casualty lines results have improved over recent years. In 2022, this line
experienced favorable prior year reserve development of $5.0 million, primarily attributable to favorable inception-to-date
claim frequencies and lower loss severities in accident years 2020 and 2021. In 2021, this line experienced favorable prior year
reserve development of $7.0 million, primarily attributable to lower loss severities in accident years 2016 and prior.
Some of the risk factors for the general liability line also affect the E&S casualty lines. These include (i) economic inflation,
such as materials and labor costs; and (ii) social trends, such as increased attorney involvement.
The E&S casualty lines also are impacted by operational changes we have made to improve the portfolio's performance. Prior
to 2022, our underwriting operations have substantially exited several targeted business classes that have historically produced
volatile results, including commercial automobile liability, liquor liability, and snow removal. In addition, we have shifted
more of our sales towards middle market business without materially increasing the overall risk profile of the portfolio.
41
Recent E&S casualty claims actions have created further casualty improvements:
• We created a dedicated E&S claims team in our corporate claims function, bringing greater expertise and consistency
to E&S claims handling.
• We segregated “litigated,” “non-litigated,” and "high exposure" claims, with separate specialized teams for each.
• We implemented the following operational and expense improvement initiatives for legal counsel:
◦
◦
◦
Increased the use of staff counsel, increasing legal staff in their assigned territories to support claims volume;
Heightened focus on legal budgeting and expense management; and
Implemented a panel counsel review process.
While we believe these underwriting and claims operational changes improved our underwriting experience, there is risk
associated with these changes. Most notably, changes in portfolio composition or our claims processes 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.
Other impacts creating additional loss and loss expense reserve uncertainty
Claims Initiative Impacts
Consistent with our strategic imperative to optimize operational effectiveness and efficiency, our Claims Department
continually identifies areas for improvement and efficiency to increase our value proposition to policyholders. These
improvements may lead to claims practice changes 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.
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 case adequacy or
settlement rate level, providing a more consistent basis for projecting future development patterns. These methods, like all
projection methods, have their own associated assumptions and judgments. Therefore, no single method can be interpreted as
definitive.
Unanticipated Changes in Inflation
United States ("U.S.") monetary policy and global economic conditions bring additional uncertainty related to inflationary
trends. Changes in inflation affect the ultimate settlement costs for many of our lines of business, with the greatest reserve
impact on 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 estimates due to changes in key assumptions
Our process to establish reserves includes a variety of key assumptions, such as:
•
•
•
•
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 line of business and accident year. If the
actual experience emerges differently than the assumptions underlying the reserve process, changes in our reserve estimates are
possible that may be material to the results of operations in future periods. Below are sensitivity tests highlighting 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 a key
assumption. These ratios are developed through a rigorous process of projecting recent accident years' experience to an
ultimate settlement basis. Then they are adjusted to the current accident year's pricing and loss cost levels. The impact from
underwriting portfolio and claims handling practice changes are also quantified and reflected where appropriate. As with all
estimates, the ultimate loss and loss expense ratios may differ from those currently estimated.
42
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 line of business reserve impacts if the actual calendar year incurred amounts are
greater or less than current expectations by the selected percentages. While judgmental, the selected percentages by line 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 % $
18
15
15
10
(180) $
(105)
(115)
(10)
(50)
180
105
115
10
50
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
(90) $
(35)
(60)
(10)
(25)
90
35
60
10
25
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 range of possible outcomes. Our reserves could
increase or decrease significantly from what the tables above reflect.
Asbestos and Environmental Reserves
Our general liability, excess liability, businessowners' policies, and homeowners reserves include exposure to asbestos and
environmental claims. The emergence of these claims occurs over an extended period and can be unpredictable. The total
recorded net loss and loss expense reserves for these claims were $20.3 million as of December 31, 2022 and $21.1 million as
of December 31, 2021, with asbestos claims constituting approximately 23% of these reserves in both years.
Environmental claims have arisen primarily from insured landfill exposures in municipal government and small non-
manufacturing commercial risk, as well as leaking underground storage tanks within our homeowners policies. Asbestos claims
have arisen primarily from policies issued to various distributors of asbestos-containing products, such as electrical and
plumbing materials. We handle our asbestos and environmental claims in a centralized and specialized asbestos and
environmental claim unit. That unit establishes case reserves on individual claims based on the facts and circumstances known
at a given point in time, which are supplemented by 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. Limiting our exposure to asbestos and environmental claims are (i) the
fuel oil system exclusion on our New Jersey homeowners policies that we introduced in 2007, and (ii) the Insurance Services
Office, Inc.'s Total Pollution Exclusion that was introduced in the mid-1980s. Prior to the mid-1980s, we primarily wrote
Standard Personal Lines, which has also limited our exposure to asbestos and environmental claims.
43
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 a dedicated claims unit, similar to our handling
of asbestos and environmental claims. The impact of social, political, and legal trends on these claims remains highly
uncertain, so our related loss and loss expense reserves 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.
Investment Valuation and the Allowance for Credit Losses on AFS Fixed Income Securities
Investment Valuation
Accounting guidance defines the fair value of our investment portfolio 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 rely on observable market data, if available. Most 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 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.
The fair value of approximately 93% of our investments measured at fair value are classified as either Level 1 or Level 2 in the
fair value hierarchy and are priced using observable inputs for identical or similar assets. About 7% are classified as either (i)
Level 3 and are based on unobservable market inputs because the related securities are not traded on a public market, or (ii) not
leveled because the related securities are measured at fair value using net asset value per share (or its practical expedient). For
additional information, refer to the following within Item 8. "Financial Statements and Supplementary Data." of this Form 10-
K: (i) item (d) of Note 2. "Summary of Significant Accounting Policies" regarding descriptions of the levels within the fair
value hierarchy and the valuation techniques used for our Level 3 securities, and (ii) Note 7. "Fair Value Measurements" for
additional information on the unobservable inputs in our securities measured using Level 3 inputs.
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 them, we record an allowance for
credit losses for the portion of the unrealized loss related to an expected credit loss. We estimate expected credit losses on these
securities by performing a risk-adjusted 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 security's fair
value. We also consider the need to record losses on securities in an unrealized loss position for which we have the intent to
sell.
We analyze unrealized losses for credit loss in accordance with our existing accounting policy, which includes performing DCF
analyses on securities 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 models contain forecasted economic data from 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 $45.7 million in 2022, and $9.7 million in 2021, on our
AFS fixed income securities portfolio. After considering the allowance for credit losses, the remaining unrealized losses on this
portfolio were $537.2 million in 2022 and $17.4 million in 2021. The increase in 2022 compared to 2021 was driven by an
increase in benchmark U.S. Treasury rates and a widening of credit spreads, with the increase in interest rates having the most
significant impact. If the security-specific and macroeconomic assumptions 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 or benefit will negatively or positively impact our results of operations. Factors considered in determining the
allowance for credit losses require significant judgment, including our evaluation of the security's projected cash flow stream.
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.
44
Reinsurance
Reinsurance recoverables on paid and unpaid loss and loss expense represent our estimates of the amounts we will recover from
reinsurers. Each reinsurance contract is analyzed to ensure that sufficient risk is transferred to record the transactions
appropriately 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, including collateral we hold under the terms and conditions of the underlying
agreements. Reinsurers often purchase and rely on their own retrocessional reinsurance programs to manage their capital
position and improve their financial strength ratings. Details about retrocessional reinsurance programs are not always
transparent, making it difficult to assess our reinsurers' exposure to counterparty credit risk. Our reinsurer's credit quality 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
was $1.6 million at both December 31, 2022, and December 31, 2021. We continually monitor developments that may impact
recoverability from our reinsurers, for which we have contractual remedies if necessary. For further information regarding
reinsurance, see the “Reinsurance” section below in "Results of Operations and Related Information by Segment" and Note 9.
“Reinsurance” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
Financial Highlights of Results for Years Ended December 31, 2022, 2021, and 20201
($ in thousands, except per share amounts)
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
2022
2021
2022
vs. 2021
2020
2021
vs. 2020
$ 3,558,062
232,199
131,774
280,186
224,886
215,686
3,379,164
263,000
172,688
505,310
403,837
394,484
5 % $ 2,922,274
184,612
107,716
302,988
246,355
246,355
(12)
(24)
(45)
(44)
(45)
Key Metrics:
Combined ratio
Invested assets per dollar of common stockholders' equity
Total return on investments
Return on average common equity ("ROE")
Net premiums written to statutory surplus ratio
Per Common Share Amounts:
Diluted net income per share
Book value per share
Dividends declared per share to common stockholders
Non-GAAP Information:
Non-GAAP operating income2
Non-GAAP operating income per diluted common share2
Non-GAAP operating ROE2
Adjusted book value per common share2
$
$
$
$
95.1 %
3.37
2.9 %
8.8
1.44 x
3.54
38.57
1.14
92.8
2.88
3.4
14.8
1.33
6.50
46.24
1.03
2.3 pts
17 % $
(0.5) pts
(6.0)
0.11
94.9 %
2.96
2.6 %
10.4
1.30
(46) % $
(17)
11
4.09
42.38
0.94
306,384
5.03
12.4 %
45.49
380,580
6.27
14.3
43.23
(19) % $
(20)
(1.9) pts
249,686
4.15
10.5 %
5 % $
37.29
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, non-GAAP operating income per diluted common share, and non-GAAP operating ROE are measures comparable to net
income available to common stockholders, net income available to common stockholders per diluted common share, and ROE, respectively, but exclude after-
tax net realized and unrealized gains and losses on investments included in net income. Adjusted book value per common share is a measure comparable to
book value per common share, but excludes total after-tax unrealized gains and losses on investments included in accumulated other comprehensive (loss)
income. These non-GAAP measures are important financial measures used by us, analysts, and investors because the timing of realized and unrealized
investment gains and losses on securities in any given period is largely discretionary. In addition, net realized and unrealized investment gains and losses on
investments could distort the analysis of trends.
45
16 %
42
60
67
64
60
(2.1) pts
(3) %
0.8 pts
4.4
0.03
59 %
9
10
52 %
51
3.8 pts
16 %
4.09
0.07
(0.01)
4.15
10.4
0.2
(0.1)
10.5
42.38
(6.45)
1.36
37.29
Reconciliations of our GAAP to non-GAAP measures 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 investment losses (gains) included in net income, 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 investment losses (gains) included in net income, before tax
Tax on reconciling items
Non-GAAP operating income per diluted common share
$
$
$
$
2022
2021
2020
215,686
114,808
(24,110)
306,384
394,484
(17,599)
3,695
380,580
246,355
4,217
(886)
249,686
2022
2021
2020
3.54
1.89
(0.40)
5.03
6.50
(0.29)
0.06
6.27
Reconciliation of ROE to non-GAAP operating ROE
ROE
Net realized and unrealized investment losses (gains) included in net income, before tax
Tax on reconciling items
Non-GAAP operating ROE
2022
2021
2020
8.8 %
4.7
(1.1)
12.4 %
14.8
(0.7)
0.2
14.3
Reconciliation of book value per common share to adjusted book value per common
share
Book value per common share
Total unrealized investment losses (gains) included in accumulated other comprehensive (loss)
income, before tax
Tax on reconciling items
Adjusted book value per common share
$
2022
2021
2020
38.57
8.75
(1.83)
45.49
46.24
(3.80)
0.79
43.23
The components of our ROE and non-GAAP operating ROE are as follows:
ROE Components
Standard Commercial Lines segment
Standard Personal Lines segment
E&S Lines segment
Total insurance operations
Net investment income
Net realized and unrealized investment (losses) gains
Total investments segment
Other
ROE
Net realized and unrealized investment losses (gains), after tax
Non-GAAP operating ROE
2022
2021
2022
vs. 2021
2020
2021
vs. 2020
4.6 %
(0.2)
1.0
5.4
9.4
(3.6)
5.8
(2.4)
8.8
3.6
12.4 %
5.9
0.1
0.5
6.5
9.9
0.5
10.4
(1.3) pts
(0.3)
0.5
(1.1)
(0.5)
(4.1)
(4.6)
5.1
(0.5)
—
4.6
7.8
(0.1)
7.7
0.8 pts
0.6
0.5
1.9
2.1
0.6
2.7
(2.1)
(0.3)
(1.9)
(0.2)
14.8
(0.5)
14.3
(6.0)
4.1
(1.9)
10.4
0.1
10.5
4.4
(0.6)
3.8
In 2022, we generated our ninth consecutive year of double-digit non-GAAP operating ROEs, with a 12.4% non-GAAP
operating ROE, which was above our full-year 2022 target of 11%, but below our 2021 non-GAAP operating ROE of 14.3%.
This was a significant achievement in a year with elevated net catastrophe losses, capital market volatility, and higher loss cost
trends driven by elevated inflation, among other factors. Our results reflect the success of our underwriting discipline and
profitable growth strategies.
The 1.9-point decrease in non-GAAP operating ROE in 2022 compared to 2021 was primarily driven by a reduction in after-tax
underwriting and investment income. After-tax underwriting income decreased $40.9 million, or 1.1 ROE points, in 2022
compared to 2021, primarily from increased non-catastrophe property loss and loss expenses. The higher non-catastrophe
property loss and loss expenses were mainly due to the higher inflationary environment that resulted in an increase in the cost
46
of materials and labor associated with repairs.
While net catastrophe losses were down slightly in 2022 compared to 2021, these losses included a significant impact from
Winter Storm Elliott. This storm, which occurred in late-December 2022, impacted 37 states, 26 of which are in our Standard
Commercial Lines footprint. We recorded $135.0 million of gross losses, or $46.1 million net of reinsurance. In addition, we
incurred $11.7 million in reinstatement premium, resulting in a total impact of $57.8 million, pre-tax, or 1.9 ROE points and
$0.75 per diluted common share.
After-tax net investment income decreased $30.8 million, or 0.5 ROE points, in 2022 compared to 2021, from lower after-tax
alternative investment income in 2022. Partially offsetting this decrease was an increase in income earned on fixed income
securities, which benefited from higher new purchase yields in 2022 as a result of the rapid rise in benchmark U.S. Treasury
rates and slightly wider credit spreads.
In addition, our ROE was reduced by the impact of net realized and unrealized investment gains and losses, which was 3.6 ROE
points in 2022. Net realized and unrealized investment losses in 2022 compared to net realized and unrealized investment gains
in 2021 drove the reduction in our ROE. The increase in net realized and unrealized losses resulted from (i) a decrease in
valuations reflecting the current public equities market, (ii) active trading of our fixed income securities to increase the book
yield of our fixed income portfolio due to increasing new purchase yields, resulting in realized losses, and (iii) higher credit loss
expense on our AFS fixed income securities portfolio.
Outlook
For 2023, we established a non-GAAP operating ROE target of 12%. Our 2023 target is based on (i) our current estimated
weighted average cost of capital ("WACC"), (ii) an approximate 400 basis point spread over our estimated WACC, (iii) the
current interest rate environment, and (iv) property and casualty insurance market conditions. Our 2023 12% non-GAAP
operating 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.
In 2022, the elevated level of economic inflation, the significant increase in interest rates, and predictions of a recession in the
near term, which led to a widening of credit spreads, have all contributed to lower investment valuations and significant
financial market volatility. The higher interest rates, and to a lesser extent the widening of credit spreads, have reduced the fair
value of our fixed income securities, which in turn has negatively impacted our stockholders' equity, which was down 15% in
2022. The higher economic inflation has also negatively impacted our property loss and loss expenses through increased
severities in our short-tail property lines, which has reduced our underwriting income. Should these trends continue, and in the
absence of taking enough rate and other underwriting actions, our underwriting profitability could be negatively impacted in the
near term. We will continue to focus on underwriting improvements, proper insurance-to-value on our property exposures, and
achieving written renewal pure price increases that meet or exceed expected loss trend. In 2022, we achieved Standard
Commercial Lines renewal pure price increases of 5.4% and exposure growth of 4.0%. These rates were up from 2021, which
experienced renewal pure price increases of 5.3% and exposure growth of 2.6%.
While higher interest rates, wider credit spreads, and financial market volatility have negatively impacted our investment
valuations and certain key financial metrics, such as stockholders' equity and book value per common share, they have also
provided us with the opportunity to invest our cash flows at significantly higher new purchase yields. Our pre-tax new
purchase yields for fixed income securities averaged 4.5% in 2022, compared to 2.3% in 2021. The portfolio's net investment
income also benefited from our 11% allocation to floating rate fixed income securities, which are primarily tied to 90-day U.S.
dollar-denominated London Interbank Offered Rate ("LIBOR"). The 90-day LIBOR increased to 4.77% at December 31, 2022
from 0.21% at December 31, 2021. These floating securities have reset quarterly at higher rates, which combined with our
higher new purchase yields for fixed income securities, contributed to higher net investment income from our fixed income
securities. Partially offsetting the increase in net investment income from fixed income securities were lower returns from our
allocation to alternative investments. We expect these dynamics to continue in 2023, and as such, are factored into our full-year
2023 after-tax net investment income expectations, as discussed below.
Our focus in 2023 will continue to be on several other foundational areas to position us for ongoing success:
•
Delivering on our strategy for continued disciplined and profitable growth by:
◦
◦
Continuing to expand our Standard Commercial Lines market share by (i) increasing our share towards our
12% target of our agents' premiums, (ii) strategically appointing new agents, and (iii) maximizing new
business growth in the small business market through the utilization of our enhanced small business platform;
Expanding our geographic footprint. In June 2022, we began writing Standard Commercial Lines business in
Vermont. In October 2022, we began writing Standard Commercial Lines business in Alabama and Idaho.
47
◦
◦
◦
We plan to expand our Standard Commercial Lines footprint into other states over time;
Increasing customer retention by delivering a superior omnichannel experience and offering value-added
technologies and services;
Shifting our Standard Personal Lines products and services towards customers in the mass affluent market,
where we believe we can be more competitive with the strong coverage and servicing capabilities that we
offer; and
Deploying our new underwriting platform in our E&S segment and improving agents' ease of interactions
with us.
•
Continuing to build on a culture centered on the values of diversity, equity, and inclusion that fosters innovation, idea
generation, and developing a group of specially trained leaders who can guide us successfully into the future.
As we look ahead to 2023, we believe the elevated level of economic inflation will persist and continue to negatively impact
our short-tail property lines of business and may impact our general and administrative expenses. In addition, we expect
reduced reinsurance capacity and higher demand for new and expanded reinsurance purchases by U.S. primary insurance
companies will result in higher reinsurance prices in 2023 and less favorable terms and conditions for the industry, including us.
We experienced reinsurance price increases at our January 1, 2023 renewals, as discussed in the "Reinsurance" section below.
While these factors could negatively impact our 2023 combined ratio and underwriting profits, we believe we are well-
positioned to navigate these challenges and expect to continue generating strong overall returns.
For 2023, our full-year guidance is as follows:
•
•
•
A GAAP combined ratio of 96.5%, including net catastrophe losses of 4.5 points. Our combined ratio estimate
assumes no prior year casualty reserve development;
After-tax net investment income of $300 million that includes after-tax net investment income from our alternative
investments of $30 million;
An overall effective tax rate of approximately 21.0%, which assumes an effective tax rate of 20.0% for net investment
income and 21.0% for all other items; and
• Weighted average shares of 61 million on a fully diluted basis, which assumes no share repurchases we may make
under our authorization.
Results of Operations and Related Information by Segment
Insurance Operations
The following table provides quantitative information for analyzing the combined ratio:
All Lines
($ in thousands)
Insurance Operations Results:
Net premiums written ("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
2022
2021
2022 vs.
2021
2020
2021 vs.
2020
$ 3,573,590
3,373,380
2,111,778
1,089,942
4,858
166,802
$
3,189,713
3,017,253
1,813,984
979,537
5,140
218,592
12 % $ 2,773,092
2,681,814
12
16
11
(5)
(24) % $
1,635,823
905,830
3,812
136,349
62.7 %
32.3
0.1
95.1
60.1
32.5
0.2
92.8
2.6 pts
(0.2)
(0.1)
2.3
61.0 %
33.8
0.1
94.9
15 %
13
11
8
35
60 %
(0.9) pts
(1.3)
0.1
(2.1)
The 12% NPW growth in 2022 compared to 2021 reflected (i) overall renewal pure price increases, and (ii) higher direct new
business, as shown in the following table:
($ in millions)
Direct new business premiums
Renewal pure price increases on NPW
2022
$
731.7
5.1 %
2021
2020
648.5
4.9
579.7
4.3
48
Our NPW growth in 2022 also benefited from strong retention. In addition, increased economic activity and inflation in the
U.S. resulted in our customers increasing their sales, payrolls, and exposure units, all of which favorably impacted our NPW.
The increase in NPE in 2022 compared to 2021 resulted from the same impacts to NPW described above.
Loss and Loss Expenses
The loss and loss expense ratio increased 2.6 points in 2022 compared to 2021, primarily due to the following:
($ in millions)
Non-Catastrophe Property
Loss and Loss Expenses
Net Catastrophe Losses
For the year ended
December 31,
2022
2021
2020
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
$
617.9
471.7
410.0
$
18.3 pts
15.6
15.3
145.9
164.2
215.4
4.3 pts
5.4
8.0
22.6
21.0
23.3
(Favorable)/
Unfavorable
Year-Over-Year
Change
1.6
(2.3)
4.4
Net catastrophe losses in 2022 were lower than losses in 2021 and 2020; however, 2022 did include gross losses from Winter
Storm Elliott of $135.0 million, or net losses of approximately $46.1 million, or 1.6 points. This storm impacted 37 states, 26
of which are in our Standard Commercial Lines footprint, and primarily included property losses from damage to commercial
businesses and personal homes. Including the impact of reinstatement premium of $11.7 million for this event, the total impact
to the overall combined ratio was 1.7 points.
Net catastrophe losses of 5.4 points in 2021 were higher than our longer-term net catastrophe loss averages. Catastrophe losses
in 2021 included gross losses of $53 million from Hurricane Ida, or net losses of approximately $41 million, or 1.4 points. The
majority of the Hurricane Ida losses, which included meaningful property losses from damage to personal and commercial
automobiles, occurred in New Jersey and the surrounding states.
Details of the prior year casualty reserve development were as follows:
($ in millions)
(Favorable) Prior Year Casualty Reserve Development
Loss and Loss
Expense Incurred
Impact on Loss and Loss
Expense Ratio
(Favorable)/Unfavorable
Year-Over-Year Change
For the year ended December 31,
2022
2021
2020
(86.0)
(81.0)
(85.0)
(2.5) pts
(2.7)
(3.2)
(Favorable)/Unfavorable Prior Year Casualty Reserve Development
($ in millions)
General liability
Commercial automobile
Workers compensation
Businessowners' policies
Bonds
Total Standard Commercial Lines
Homeowners
Personal automobile
Total Standard Personal Lines
E&S
2022
$
(5.0)
15.0
(70.0)
(11.0)
(10.0)
(81.0)
—
—
—
(5.0)
Total (favorable) prior year casualty reserve development
$
(86.0)
(Favorable) impact on loss ratio
(2.5) pts
0.2
0.5
(0.9)
(35.0)
10.0
(60.0)
—
—
(85.0)
—
—
—
—
(85.0)
(3.2)
2021
2020
(29.0)
15.0
(58.0)
(2.0)
—
(74.0)
—
—
—
(7.0)
(81.0)
(2.7)
In addition to the prior year casualty reserve development, current year casualty loss costs increased 0.7 points in 2022
compared to 2021, primarily driven by a higher estimated loss trend.
49
For additional qualitative discussion on prior year reserve development, current year casualty loss costs, and non-catastrophe
property loss and loss expenses, refer to the insurance segment sections below.
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
2022
2021
2022 vs.
2021
2020
2021 vs.
2020
$ 2,901,984
2,739,819
1,683,988
907,277
4,858
143,696
$
2,593,018
2,443,885
1,426,768
813,381
5,140
198,596
12 % $ 2,230,636
2,143,184
12
18
12
(5)
(28) % $
1,245,627
742,014
3,812
151,731
61.5 %
33.1
0.2
94.8
58.4
33.3
0.2
91.9
3.1 pts
(0.2)
—
2.9
58.1 %
34.6
0.2
92.9
16 %
14
15
10
35
31 %
0.3 pts
(1.3)
—
(1.0)
NPW growth of 12% in 2022 compared to 2021 reflected (i) renewal pure price increases, (ii) higher direct new business, and
(iii) strong retention as shown in the table below. In addition, NPW growth in 2022 benefited from exposure growth.
($ in millions)
Direct new business premiums
Retention
Renewal pure price increases on NPW
For the Year Ended December 31,
2022
2021
$
512.5
$
85 %
5.4
469.9
85
5.3
The increase in NPE in 2022 compared to 2021 resulted from the same impacts to NPW described above.
The 3.1-point increase in the loss and loss expense ratio in 2022 compared to 2021 was primarily driven by the following:
($ in millions)
Non-Catastrophe Property Loss
and Loss Expenses
Net Catastrophe Losses
For the year ended
December 31,
2022
2021
Loss and Loss
Expense
Incurred
Impact on Loss
and Loss
Expense Ratio
Loss and Loss
Expense
Incurred
Impact on Loss
and Loss
Expense Ratio
Total Impact on
Loss and Loss
Expense Ratio
(Favorable)/
Unfavorable
Year-Over-Year
Change
$
461.1
340.7
16.8 pts
13.9
$
95.6
104.1
3.5 pts
4.3
20.3
18.2
2.1
(1.1)
Our loss and loss expenses in 2022 compared to 2021 included (i) elevated non-catastrophe property loss and loss expenses,
primarily due to increased severities resulting from inflationary pressures on labor and material costs, and (ii) lower net
catastrophe losses, as discussed below and in the "Insurance Operations" section above.
Our 2022 catastrophe losses were impacted by 48 events designated as catastrophes by Property Claims Services ("PCS"), an
internationally recognized authority on insured catastrophe property losses, including (i) several wind and thunderstorm events
that occurred throughout the second quarter of 2022, and (ii) Winter Storm Elliott, a cross-country storm that impacted 26 of
our footprint states in December 2022. Catastrophe losses in 2021 were impacted by 46 events that PCS designed as
catastrophes, including two severe thunderstorms accompanied by wind and hail, Hurricane Ida, and a series of severe
tornadoes.
($ in millions)
(Favorable) Prior Year Casualty Reserve Development
For the year ended December 31,
2022
2021
$
Loss and Loss Expense
Incurred
Impact on Loss and Loss
Expense Ratio
(Favorable)/Unfavorable
Year-Over-Year Change
(81.0)
(74.0)
(3.0) pts
(3.0)
—
1.0
50
For quantitative information on favorable prior year casualty reserve development by line of business, see the "Insurance
Operations" section above. For qualitative information about the significant drivers of this development, see the line of
business discussions below.
The loss and loss expense ratio increase in 2022 also included an increase in current year casualty loss costs of 0.9 points in
2022 compared to 2021, primarily driven by a higher estimated loss trend.
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 Lines NPW
1n/a: not applicable.
$
$
2022
958,121
151,005
85 %
4.5
902,428
104,517
88.4 %
33
2022 vs.
20211
12 % $
n/a
n/a
n/a
12 % $
(15)
3.7 pts
2021
859,284
139,255
85
4.4
807,158
123,450
84.7
33
2020
716,119
122,159
85 %
3.9
694,019
103,262
85.1 %
32
2021 vs.
20201
20 %
n/a
n/a
n/a
16 %
20
(0.4) pts
NPW growth of 12% in 2022 compared to 2021 benefited from exposure growth, strong retention, renewal pure price increases,
and direct new business.
The combined ratio increased 3.7 points in 2022 compared to 2021, primarily driven by less favorable prior year casualty
reserve development, as follows:
($ in millions)
For the year ended December 31,
2022
2021
$
(Favorable) Prior Year Casualty Reserve Development
Impact on Loss and Loss
Loss and Loss Expense
Expense Ratio
Incurred
(Favorable)/Unfavorable
Year-Over-Year Change
(5.0)
(29.0)
(0.6) pts
(3.6)
3.0
1.4
The favorable prior year casualty reserve development in 2022 was primarily attributable to favorable inception-to-date claim
frequencies in accident years 2021 and 2020. The 2021 favorable prior year casualty reserve development was primarily
attributable to improved loss severities in accident years 2018 and prior.
The combined ratio increase in 2022 also included an increase in current year casualty loss costs of 1.1 points in 2022 compared
to 2021, primarily driven by (i) higher estimated loss trend for this line, and (ii) an increase in ceded casualty reinstatement
premium principally due to development on one large loss from the 2018 treaty year and two large losses from the 2020 treaty
year. This line is exposed to changes in economic and social trends, including litigation propensity and outcomes, and changes
in state laws, such as those that extend the statute of limitations or open windows for previously time-barred actions.
Commercial Automobile
($ in thousands)
NPW
Direct new business
Retention
Renewal pure price increases
NPE
Underwriting loss
Combined ratio
% of total Standard Commercial Lines NPW
1n/a: not applicable.
$
$
2022
860,116
125,129
86 %
8.1
812,306
(63,112)
107.8 %
30
2022 vs.
20211
12 % $
n/a
n/a
n/a
12 % $
(170)
4.6 pts
2021
767,723
115,088
86
8.3
724,398
(23,335)
103.2
30
2020
658,930
112,893
86 %
8.1
615,181
(3,126)
100.5 %
30
2021 vs.
20201
17 %
n/a
n/a
n/a
18 %
(646)
2.7 pts
NPW growth of 12% in 2022 compared to 2021 benefited from renewal pure price increases, higher direct new business, and
strong retention. NPW also benefited from 5% growth of in-force vehicle counts as of December 31, 2022, compared to
December 31, 2021.
51
The combined ratio increased 4.6 points in 2022 compared to 2021, primarily driven by the following:
($ in millions)
Non-Catastrophe Property Loss
and Loss Expenses
Net Catastrophe Losses
For the year ended
December 31,
Loss and Loss
Expense
Incurred
Impact on Loss
and Loss
Expense Ratio
Loss and Loss
Expense
Incurred
Impact on Loss
and Loss
Expense Ratio
Total Impact on
Loss and Loss
Expense Ratio
(Favorable)/
Unfavorable
Year-Over-Year
Change
2022
2021
$
172.2
125.2
21.2 pts
$
17.3
3.1
9.8
0.4 pts
1.4
21.6
18.7
2.9
3.1
Loss and loss expenses in 2022 compared to 2021 experienced (i) lower net catastrophe losses, as discussed in the "Insurance
Operations" section above, and (ii) elevated non-catastrophe property loss and loss expenses, primarily due to higher severities
from inflationary and supply chain impacts that have increased labor, material, and replacement vehicle costs, as well as the
duration of claims, which impacts vehicle rental days.
($ 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
2022
2021
$
15.0
15.0
1.8 pts
2.1
(0.3)
0.5
The unfavorable prior year casualty reserve development in 2022 was primarily due to increased severities in the 2021 accident
year. The 2021 unfavorable prior year casualty reserve development was primarily attributable to unfavorable reserve
development on loss severities in accident years 2016 through 2019.
In addition, the combined ratio was impacted by a 1.9-point increase in current year casualty loss costs in 2022 compared to
2021, due to (i) an expected increase in claim frequencies from a more normalized amount of miles driven as COVID-19-
related impacts continue to lessen, and (ii) increased loss severity expectations following the unfavorable development for the
2021 accident year.
This line of business remains an area of focus for us and most of the industry, as profitability challenges continue to generate
combined ratios higher than targets. We will continue to actively seek price increases on this line and execute on targeted
underwriting and claims actions to improve the mix of business and claim outcomes.
Commercial Property
($ in thousands)
NPW
Direct new business
Retention
Renewal pure price increases
NPE
Underwriting income (loss)
Combined ratio
% of total Standard Commercial Lines NPW
1n/a: not applicable.
$
$
2022
535,666
118,470
84 %
6.2
495,647
(7,015)
101.4 pts
18
2022 vs.
20211
14 % $
n/a
n/a
n/a
14 % $
(167)
3.8
2021
470,043
108,418
84
6.0
436,412
10,515
97.6
18
2020
413,194
94,697
84 %
4.6
388,120
(21,296)
105.5 pts
19
2021 vs.
20201
14 %
n/a
n/a
n/a
12 %
(149)
(7.9)
NPW growth of 14% in 2022 compared to 2021 benefited from renewal pure price increases, exposure growth, strong retention,
and higher direct new business.
The combined ratio increased 3.8 points in 2022 compared to 2021, primarily driven by the following:
($ in millions)
Non-Catastrophe Property Loss
and Loss Expenses
Net Catastrophe Losses
For the year ended
December 31,
2022
2021
Loss and Loss
Expense
Incurred
Impact on Loss
and Loss
Expense Ratio
Loss and Loss
Expense
Incurred
Impact on Loss
and Loss
Expense Ratio
Total Impact on
Loss and Loss
Expense Ratio
(Favorable)/
Unfavorable
Year-Over-Year
Change
$
240.5
182.5
48.5 pts
41.8
$
75.3
79.3
15.2 pts
18.2
63.7
60.0
3.7
(6.7)
52
Loss and loss expenses in 2022 compared to 2021 experienced (i) lower net catastrophe losses, as discussed in the "Insurance
Operations" section above, and (ii) elevated non-catastrophe property loss and loss expenses. The elevated non-catastrophe
property loss and loss expenses was primarily due to increased severity compared to 2021 reflecting inflationary pressures on
building material and labor costs.
As profitability challenges continue to generate combined ratios higher than targets, we will continue to actively seek price
increases on this line and execute on targeted underwriting and claims actions to improve the mix of business and claim
outcomes.
Workers Compensation
($ in thousands)
NPW
Direct new business
Retention
Renewal pure price increases (decreases)
NPE
Underwriting income
Combined ratio
% of total Standard Commercial Lines NPW
1n/a: not applicable.
$
$
2022
340,802
61,726
86 %
(0.5)
335,955
91,087
72.9 %
12
2022 vs.
20211
7 % $
n/a
n/a
n/a
10 % $
16
(1.5) pts
2021
317,035
59,938
86
0.1
306,428
78,537
74.4
12
2020
270,168
51,078
84 %
(2.0)
278,062
70,897
74.5 %
12
2021 vs.
20201
17 %
n/a
n/a
n/a
10 %
11
(0.1) pts
NPW increased 7% in 2022 compared to 2021 due to exposure growth, strong retention, and higher direct new business.
The combined ratio decreased 1.5 points in 2022 compared to 2021, primarily driven by favorable prior year casualty reserve
development:
($ in millions)
(Favorable) Prior Year Casualty Reserve Development
For the year ended December 31,
2022
2021
$
Loss and Loss Expense
Incurred
Impact on Loss and Loss
Expense Ratio
Unfavorable/(Favorable)
Year-Over-Year Change
(70.0)
(58.0)
(20.8) pts
(18.9)
(1.9)
2.7
The favorable prior year casualty reserve development in 2022 was primarily due to continued favorable medical trends in
accident years 2020 and prior, and favorable inception-to-date claim frequencies in accident year 2020. The favorable prior
year casualty reserve development in 2021 was primarily due to continued favorable medical trends in accident years 2019 and
prior. Due to the length of time injured workers can receive related medical treatment, decreases in medical inflation can cause
favorable loss development across an extended number of accident years.
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
2022
2021
2022 vs.
2021
2020
2021 vs.
2020
$
$
319,059
299,405
231,113
75,485
(7,193)
77.2 %
25.2
102.4
292,265
293,559
212,116
77,477
3,966
72.2
26.4
98.6
9 % $
2
295,166
299,140
9
(3)
(281) % $
233,260
81,388
(15,508)
5.0 pts
(1.2)
3.8
78.0 %
27.2
105.2
(1) %
(2)
(9)
(5)
(126) %
(5.8) pts
(0.8)
(6.6)
NPW increased 9% in 2022 compared to 2021, primarily due to (i) higher direct new business, (ii) stronger retention, (iii)
higher homeowner coverage amounts due to inflation adjustments, and (iv) higher average policy sizes from our mass affluent
market strategy. In the third quarter of 2021, we transitioned our personal lines strategy to targeting customers in the mass
affluent market where we believe our strong coverage and servicing capabilities will be more competitive.
53
($ in millions)
Direct new business premiums1
Retention
Renewal pure price increases on NPW
1Excludes our flood direct premiums written, which is 100% ceded to the NFIP and therefore, has no impact on our NPW.
$
2022
2021
62.9
$
85 %
0.7
40.9
82
1.0
The increase in NPE in 2022 compared to 2021 resulted from the same impacts to NPW discussed above.
The loss and loss expense ratio increased 5.0 points in 2022 compared to 2021, driven by the following:
($ in millions)
Non-Catastrophe Property Loss
and Loss Expenses
Net Catastrophe Losses
For the year ended
December 31,
2022
2021
Loss and Loss
Expense
Incurred
Impact on Loss
and Loss
Expense Ratio
Loss and Loss
Expense
Incurred
Impact on Loss
and Loss
Expense Ratio
Total Impact on
Loss and Loss
Expense Ratio
(Favorable)/
Unfavorable
Year-Over-Year
Change
$
117.1
102.8
39.1 pts
35.0
$
40.8
37.4
13.6 pts
12.7
52.7
47.7
5.0
(6.9)
Our 2022 catastrophe losses were impacted by 43 events designated as catastrophes by PCS, including (i) several wind and
thunderstorm events that occurred throughout the second quarter of 2022, and (ii) Winter Storm Elliott in December 2022. Our
2021 catastrophe losses were impacted by 44 events designated as catastrophes by PCS, including two severe thunderstorms
accompanied by wind and hail, Hurricane Ida, and a series of severe tornadoes.
In addition, we experienced elevated non-catastrophe property loss and loss expenses in 2022 compared to 2021, driven by
higher personal automobile physical damage losses. These higher losses resulted from (i) higher frequencies from increased
miles driven, and (ii) greater severities from inflationary and supply chain impacts that have increased labor, material, and
replacement vehicle costs, and the duration of claims, which impacts vehicle rental days. The likely continuation of elevated
non-catastrophe property loss and loss expenses, coupled with renewal pure price increases below loss trend, will put pressure
on this segment's profitability in the near-term. To alleviate pressure on profitability in our homeowners line of business, we
have and continue to apply valuation inflationary adjustments at renewal, and file rate increases to mitigate these inflationary
impacts. Additionally, the personal automobile line of business remains an area of focus for us and most of the industry, as
profitability challenges continue to generate combined ratios higher than targets. We will continue to actively seek price
increases on this line and execute on targeted underwriting and claims actions to improve the mix of business and claim
outcomes.
The underwriting expense ratio decreased 1.2 points in 2022 compared to 2021, primarily due to a decrease in labor expenses.
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
2022
2021
2022 vs.
2021
2020
2021
vs. 2020
$
$
352,547
334,156
196,677
107,180
30,299
58.8 %
32.1
90.9
304,430
279,809
175,100
88,679
16,030
62.6
31.7
94.3
16 % $
19
247,290
239,490
12
21
89 % $
156,936
82,428
126
(3.8) pts
0.4
(3.4)
65.5 %
34.4
99.9
23 %
17
12
8
12,622 %
(2.9) pts
(2.7)
(5.6)
54
NPW growth of 16% in 2022 compared to 2021 reflected renewal pure price increases and higher direct new business as shown
in the table below. In addition, NPW growth in 2022 benefited from exposure growth driven by favorable E&S Lines
marketplace conditions.
($ in millions)
Direct new business premiums
Renewal pure price increases on NPW
2022
$
156.3
7.3 %
2021
137.7
6.5
The increase in NPE in 2022 compared to 2021 resulted from the same impacts to NPW discussed above.
The loss and loss expense ratio decreased 3.8 points in 2022 compared to 2021, primarily driven by the following:
($ in millions)
Non-Catastrophe Property Loss
and Loss Expenses
Net Catastrophe Losses
For the year ended
December 31,
2022
2021
Loss and Loss
Expense
Incurred
Impact on Loss
and Loss
Expense Ratio
Loss and Loss
Expense
Incurred
Impact on Loss
and Loss
Expense Ratio
Total Impact on
Loss and Loss
Expense Ratio
(Favorable)/
Unfavorable
Year-Over-Year
Change
$
39.6
28.2
11.9 pts
10.1
$
9.6
22.7
2.9 pts
8.1
14.8
18.2
(3.4)
(1.8)
We experienced lower net catastrophe losses in 2022 compared 2021. Our 2022 catastrophe losses were impacted by 44 events
that PCS designated as catastrophes, including severe weather affecting Midwestern states. Winter Storm Elliott did not have a
meaningful impact on our E&S Lines segment. Our 2021 losses were impacted by 50 events that PCS designated as
catastrophes, including Winter Storm Uri affecting Texas, a series of large storms affecting Southern and Midwestern states,
and Hurricane Ida.
We experienced elevated non-catastrophe property loss and loss expenses in 2022 compared to 2021, primarily due to increased
severity reflecting inflationary pressures on labor and material costs, and the normal period-to-period volatility of our property
lines of business in this segment.
($ in millions)
For the year ended December 31,
2022
2021
$
(Favorable) Prior Year Casualty Reserve Development
Loss and Loss Expense
Incurred
Impact on Loss and Loss
Expense Ratio
(Favorable)/Unfavorable
Year-Over-Year Change
(5.0)
(7.0)
(1.5) pts
(2.5)
1.0
(2.5)
The favorable prior year casualty reserve development in 2022 was primarily attributable to favorable inception-to-date claim
frequencies and lower loss severities in accident years 2021 and 2020. The favorable prior year casualty reserve development in
2021 was primarily attributable to lower loss severities in accident years 2016 and prior.
In addition, the loss and loss expense ratio was favorably impacted by a 1.3-point decrease in current year casualty loss costs in
2022 compared to 2021. Our E&S casualty lines results have improved over recent years after benefiting from several
underwriting and claims initiatives and strong rate increases. The decrease in current year casualty loss costs reflects the
impacts of these actions.
Reinsurance
We use reinsurance to protect our capital resources and insure against losses on property and casualty risks that we underwrite
in excess of the amount that we are prepared to accept. We use two main reinsurance vehicles: (i) a reinsurance pooling
agreement among our Insurance Subsidiaries through which each company agrees to share in premiums and losses based on
certain specified percentages; and (ii) reinsurance contracts and arrangements with third parties that cover various policies that
we issue to our customers.
Reinsurance Pooling Agreement
The primary purposes of the Insurance Subsidiaries' reinsurance pooling agreement 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
55
•
Permit all 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, 2022:
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 statutory surplus. Under our reinsurance treaties, we
cede to our reinsurers a portion of our incurred losses from an individual policy or group of policies in exchange for a portion of
the premium on those policies. 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 reinsurers 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, indirect, and contingent 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 also purchase a limited amount of facultative reinsurance,
primarily 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, primarily for large
individual casualty risks in excess of our treaty capacity. We may also purchase quota share capacity for certain
new or higher severity casualty lines of business.
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 our main property catastrophe treaty, which covers both our standard market and E&S business, effective January
1, 2023. For this treaty, we increased our treaty limit by $100 million and increased our treaty retention by $20 million to
56
respond to our growing property portfolio. As a result, the coverage was extended to $915 million in excess of the $60 million
retention with higher co-participations in certain layers as our overall net purchased limits increased to $810 million from $776
million. A hardening reinsurance pricing environment was also characterized by significant efforts on the part of reinsurers to
impose restrictions on cedents' terms and conditions, particularly with respect to coverage for non-modeled/under-modeled
perils, such as terrorism, strike, riot, civil unrest, severe convective storms, and the systemic perils of communicable disease
and cyber. Consequently, the property catastrophe program excludes coverage for communicable disease, but retains limited
reinsurance coverage for terrorism, strike, riot, civil unrest, severe convective storms, and cybersecurity risks. Despite these
limitations, coverage for other traditionally covered property perils was largely maintained. Additionally, we made the decision
to not purchase our expiring E&S Lines $30 million in excess of $10 million treaty, which covered all 50 states and the District
of Columbia, due to challenging market conditions and our assessment of the projected reinsurance spend relative to expected
covered losses.
We seek to minimize reinsurance credit risk by transacting with highly-rated reinsurance partners and purchasing collateralized
reinsurance products, particularly for high-severity, low-probability events, if feasible. Our current reinsurance program
includes $216 million in collateralized limit in the top layer of the catastrophe program, compared to $259 million in
collateralized limit under the prior year's reinsurance program.
Overall, ceded premium for our property catastrophe reinsurance treaty will increase considerably in 2023 due to three factors:
(i) increases in underlying property exposures in line with our growing property insurance portfolio; (ii) the addition of $100
million of coverage purchased to maintain stability in our net risk profile; and (iii) significant risk-adjusted price increases due
to a severely hardening reinsurance market driven by such dynamics as elevated inflation-driven demand for reinsurance
capacity, reinsurer investment losses, exchange rate impacts, poor reinsurance profitability over the past six years, limited
supply of retrocessional capacity, and reinsurer and investor concerns over climate change and un-modeled/under-modeled
perils.
We model various catastrophic perils, and hurricane risk continues to be our portfolio's most significant natural catastrophe
peril because of the geographic location of the risks we insure. The table below illustrates the impact of the five largest
hurricane losses we have experienced in the last 35 years:
($ in millions)
Net Loss2
45.6
41.5
40.2
3.0
15.7
1This amount represents reported and unreported gross losses estimated as of December 31, 2022.
2Net loss does not include reinstatement premiums, taxes, or flood claims handling fees.
Hurricane Name
Superstorm Sandy
Hurricane Ida
Hurricane Irene
Hurricane Hugo
Hurricane Isabel
Gross Loss1
$125.5
50.8
44.8
26.4
25.1
Accident
Year
2012
2021
2011
1989
2003
Gross Loss
Ratio
7.9%
1.7
3.1
5.9
2.2
Net Loss
Ratio
2.9
1.4
2.8
0.7
1.4
We review our exposure to hurricane risk by examining third-party vendor models and conducting our own proprietary
analysis. The third-party vendor models provide a long-term view that closely relates modeled event frequency to historical
hurricane activity, adjusting to reflect certain non-modeled cost assumptions, such as the impact of loss expenses, residual
market assessments, and automobile-related losses. We believe that modeled estimates provide a range of potential outcomes,
and we review multiple estimates to understand our catastrophic risk.
Our established catastrophic risk tolerance requires that no more than 10% of stockholders’ equity is exposed to a loss from a
hurricane event at a 99.6% confidence level (1-in-250 year event or 0.4% probability) on a net of reinsurance and after-tax
basis. In addition to the 1-in-250 year modeled event, we evaluate the impact of a number of other scenarios on stockholders’
equity.
57
The table below shows the gross and net losses modeled results for (i) hurricane peril in our underwriting property portfolio,
and (ii) the gross and net of reinsurance hurricane losses from the following scenarios:
•
•
Recasts of two large hurricanes that impacted our geographic footprint:
◦
◦
1938 New England Hurricane, one of the largest hurricanes to impact the Northeast United States; and
Hurricane Hazel, a Category 4 storm that made landfall near the border between North Carolina and South
Carolina in 1954; and
Realistic disaster scenarios (“RDS”) for significant potential storms in the Northeast and the Carolinas based on
Lloyds of London methodology.
Occurrence Exceedance Probability
Hurricane
($ 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)
Historical recast - 1938 New England Hurricane
Lloyd's RDS North-East (Category 4 hurricane)
Historical recast - 1954 Hurricane Hazel
Lloyd's RDS Carolinas (Category 5 hurricane)
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 based on the treaty structure effective January 1, 2023.
3GAAP stockholders' equity as of December 31, 2022.
Net Losses %
of Equity3
3
3
3
5
5
7
21
3
5
3
3
Gross
Losses1
$212,267
354,977
575,734
818,907
906,745
1,041,355
1,504,757
452,577
825,960
282,257
483,327
Net
Losses2
66,724
73,001
83,045
118,032
130,419
171,671
526,564
78,011
122,269
66,903
78,915
%
As reflected in the table above, we are well within our established tolerance for catastrophic risk. Our current catastrophe
reinsurance program exhausts at an approximately 1-in-220 year return period, or events with 0.5% probability, based on a
multi-model view of hurricane risk. Our actual gross and net losses incurred from hurricanes making U.S.-landfall will vary,
perhaps materially, from our estimated modeled losses.
In addition to hurricane peril, the table below shows gross and net losses modeled by other wind and earthquake perils in our
underwriting property portfolio.
Occurrence Exceedance Probability
Other Wind
Earthquake
($ 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 based on the treaty structure effective January 1, 2023.
3GAAP stockholders' equity as of December 31, 2022.
Net Losses %
of Equity3
2
2
2
2
2
2
2
Net Losses %
of Equity3
—
1
2
2
3
3
3
Gross
Losses1
$7,681
$24,349
$72,657
$116,502
$147,880
$187,630
$273,747
Gross
Losses1
$114,149
153,494
206,864
236,293
265,758
295,893
351,876
Net
Losses2
$5,502
$16,566
$43,376
$54,125
$63,394
$63,238
$65,493
Net
Losses2
47,782
50,526
52,843
57,050
57,548
58,486
61,968
%
%
As we currently do not write crop insurance, have minimal exposure to private flood, and have a small geographic footprint in
the Western U.S., our exposures to perils, such as droughts, wildfires, and flooding, tend to be relatively modest. However, as
our geographic expansion progresses, we continually evaluate how physical risks from these perils and others are considered in
our strategic decision making.
In addition, we regularly experience property losses from winter storms, and while we utilize third-party vendor models to help
us model and manage our exposure to this peril, we also evaluate our winter storm exposure based on our own historical
experience, as winter storm third-party vendor models are currently less mature. As an example of the impact from a large and
recent winter storm, we incurred $135.0 million in gross losses from Winter Storm Elliott which took place in late-December
2022, or $46.1 million net of reinsurance. In addition, we incurred $11.7 million in reinstatement premium from Winter Storm
58
Elliott, resulting in a total impact of $57.8 million, pre-tax or $45.7 million after-tax. Despite the size of this event, our
reinsurance strategy limited the impact on our full-year 2022 results to 1.8% of equity or a 1.7-point impact on our combined
ratio. Based on our 2023 property catastrophe reinsurance program discussed above, if Winter Storm Elliott were to recur, the
net impact to us would be more significant.
We renewed the property excess of loss treaty, which covers both our standard market and E&S business, on July 1, 2022, with
a $10 million increase in coverage in the highest layer. The treaty is comprised of three layers, with the $20 million in excess
of $40 million layer effective January 1, 2022, being cancelled effective July 1, 2022.
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)
Reinsurance Coverage
$915 million above $60 million retention treaty that responds
on per occurrence basis in four layers:
- 47% of losses in excess of $60 million up to
$100 million;
- 100% of losses in excess of $100 million up to
$225 million;
- 100% of losses in excess of $225 million up to
$525 million; and
- 81% of losses in excess of $525 million up
to $975 million.
The treaty provides one reinstatement in each of the first three
layers and no reinstatement in the fourth layer. The per
occurrence limit is $810.1 million and the annual aggregate
limit is $1.3 billion, net of the Insurance Subsidiaries' co-
participation.
Terrorism Coverage
All nuclear, biological, chemical, and radioactive ("NBCR")
losses are excluded regardless of whether or not they are
certified under TRIPRA. Coverage for non-NBCR losses is
limited due to current market conditions. Please see Item 1A.
“Risk Factors.” of this Form 10-K for discussion regarding
TRIPRA.
Property Excess of Loss
(covers all insurance
operations)
$67 million above $3 million retention covering 100% in three
layers. Losses other than TRIPRA certified losses are subject
to the following reinstatements and annual aggregate limits:
- $7 million in excess of $3 million layer
provides unlimited reinstatements;
- $20 million in excess of $10 million layer
provides three reinstatements, $80 million in
aggregate limits; and
- $40 million in excess of $30 million layer
provides two reinstatements, $120 million in aggregate
limits.
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 $21 million
for the first layer; $60 million for the second layer; and $40
million for the third layer. 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
Casualty Reinsurance
We renewed the casualty excess of loss treaty, which covers both our standard market and E&S Lines business, on July 1, 2022,
substantially on the same terms as the treaty expiring June 30, 2022.
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 41
reinstatements, $126 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 provides six
reinstatements, $49 million annual 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 provides three
reinstatements, $36 million annual 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 provides one
reinstatement, $18 million annual 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 provides one
reinstatement, $40 million annual aggregate limit; and
- $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 provides one
reinstatement, $80 million annual aggregate limit.
- $40 million in excess of $50 million layer with
$80 million net annual terrorism aggregate limit.
59
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 protects against losses on policies written
before 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, such
as personal cyber and home systems protection, (vi) Cyber Liability Quota Share, and (vii) Excess Liability Quota Share, which
covers MUSIC's excess liability business.
We regularly evaluate our overall reinsurance program and 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, 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
Our investment portfolio's objectives are to maximize after-tax net investment income and generate long-term growth in book
value per share by maximizing the overall total return of the portfolio by investing the premiums we receive from our insurance
operations and the amounts generated through our capital management strategies, which may include debt and equity security
issuances. We balance those objectives against prevailing market conditions, capital preservation considerations, and our
enterprise risk-taking appetite. We maintain (i) a well-diversified portfolio across issuers, sectors, and asset classes; and (ii) a
high credit quality fixed income securities portfolio with a duration and maturity profile at an acceptable risk level that provides
ample liquidity.
The effective duration of the fixed income securities portfolio, including short-term investments, was 4.1 years as of December
31, 2022, compared to the Insurance Subsidiaries' net loss and loss expense reserves duration of 3.1 years. The effective
duration is monitored and managed to maximize yield while managing interest rate risk at an acceptable level. Purchases and
sales are made with the intent of maximizing investment returns in the current market environment while balancing capital
preservation.
Our fixed income and short-term investments represented 92% of our invested assets at December 31, 2022, and 91% at
December 31, 2021. These investments had a weighted average credit rating of “AA-” as of December 31, 2022 and "A+" as of
December 31, 2021, with a 96% allocation to investment grade holdings at both December 31, 2022 and December 31, 2021.
The improvement in our weighted average credit rating reflects active management of our investment portfolio in 2022 to
optimize our risk-adjusted investment yields in the rising interest rate environment, which resulted in higher credit quality fixed
income security purchases.
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
Components of unrealized (losses) gains – before tax:
Fixed income securities
Equity securities
Net unrealized (losses) gains - before tax
Components of unrealized (losses) gains – after tax:
Fixed income securities
Equity securities
Net unrealized (losses) gains - after tax
2022
2021
Change
$
7,837,469
3.37
8,026,988
2.88
(2) %
17
(527,892)
(5,431)
(533,323)
(417,035)
(4,290)
(421,325)
228,962
26,696
255,658
180,880
21,090
201,970
(331)
(120)
(309)
(331)
(120)
(309)
Invested assets decreased $189.5 million at December 31, 2022, compared to December 31, 2021, reflecting a $789.0 million
increase in pre-tax unrealized losses during 2022. The increase in pre-tax unrealized losses was primarily due to an increase in
benchmark U.S. Treasury rates, and to a lesser extent the widening of credit spreads. This decrease in invested assets was
partially offset by operating cash flows during 2022 that were 22% of NPW.
60
Net Investment Income
The components of net investment income earned were as follows:
($ in thousands)
Fixed income securities
Commercial mortgage loans ("CMLs")
Equity securities
Short-term investments
Alternative investments
Other investments
Investment expenses
Net investment income earned – before tax
Net investment income tax expense
Net investment income earned – after tax
Effective tax rate
Annual after-tax yield on fixed income investments
Annual after-tax yield on investment portfolio
2022
$ 259,918
5,555
13,554
3,997
23,003
258
(18,130)
288,155
55,956
$ 232,199
19.4 %
3.1
2.9
2021
209,709
2,743
15,920
260
117,701
359
(20,103)
326,589
63,589
263,000
19.5
2.6
3.4
2022 vs.
2021
24 %
103
(15)
1,437
(80)
(28)
10
(12)
(12)
(12)
(0.1) pts
0.5
(0.5)
2020
203,926
844
9,286
1,821
26,504
418
(15,692)
227,107
42,495
184,612
18.7
2.6
2.6
2021 vs.
2020
3 %
225
71
(86)
344
(14)
(28)
44
50
42
0.8 pts
—
0.8
Net investment income earned decreased 12% in 2022 compared to 2021, driven by lower returns on our alternative
investments, reflecting lower valuations. Partially offsetting this decrease was an increase in income earned on fixed income
securities.
During 2022, we managed our fixed income securities portfolio to opportunistically increase the book yield in a rapidly rising
interest rate environment. The pre-tax earned yield for fixed income investments was 3.90% in 2022, compared to 3.18% in
2021. The increase in investment income associated with fixed income securities was driven by (i) investing approximately
$2.7 billion of new money, taking advantage of higher investment yields, and simultaneously improving credit quality and
liquidity, and (ii) higher resets on our floating rate securities. The average pre-tax new purchase yield on fixed income
securities in 2022 was 4.5%, up from 2.3% in 2021. In addition, as of December 31, 2022, 11% of our fixed income securities
portfolio was invested in floating rate securities that reset principally to 90-day LIBOR. LIBOR increased 456 basis points in
2022 to 4.77% at December 31, 2022 from 0.21% at December 31, 2021, which increased the book yield on our floating rate
securities and increased net investment income.
Realized and Unrealized Investment Gains and Losses
When evaluating securities for sale, our general philosophy is to reduce our exposure to securities and sectors based on
economic evaluations of whether the fundamentals for that security or sector have deteriorated or the timing is appropriate to
opportunistically trade for other securities with better economic-return characteristics. Net realized and unrealized gains and
losses for the indicated periods were as follows:
($ in thousands)
Net realized (losses) gains on disposals
Net unrealized (losses) gains on equity securities
Net credit loss (expense) on fixed income securities, AFS
Net credit loss benefit (expense) on fixed income securities, HTM
Net credit loss (expense) on CMLs
Losses on securities for which we have the intent to sell
Total net realized and unrealized investment (losses) gains
2022
2021
2020
$
$
(31,636)
(32,127)
(39,169)
63
(116)
(11,823)
(114,808)
7,144
17,881
(6,858)
(49)
—
(519)
17,599
9,148
7,939
(5,042)
4
—
(16,266)
(4,217)
Net realized and unrealized investment losses in 2022 were primarily driven by (i) a decrease in valuations reflecting the current
public equities market, (ii) active trading of our fixed income securities to opportunistically increase yield in the rising interest
rate environment, and (iii) higher credit loss expense on our AFS fixed income 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.
61
Federal Income Taxes
The following table provides information regarding federal income taxes.
($ in millions)
Federal income tax expense
Effective tax rate1
1The effective tax rate is calculated by taking "Total federal income tax expense" divided by "Income before federal income tax" less "Preferred stock
dividends" on our Consolidated Statements of Income.
55.3
20.4 %
101.5
20.5
2020
2021
2022
$
56.6
18.7
Federal income tax expense decreased $46.2 million in 2022 compared to 2021, primarily due to a decrease in pre-tax income
that is taxed at the statutory rate. The decrease in pre-tax income was primarily driven by (i) a decrease in underwriting
income, (ii) lower net investment income earned, primarily due to lower returns on our alternative investments, and (iii) net
realized and unrealized investment losses in 2022 compared to net realized and unrealized investment gains in 2021.
See Note 14. “Federal Income Taxes” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K for: (i) a
reconciliation of our effective tax rate to the statutory rate of 21%; and (ii) details regarding our net deferred tax asset and
liability.
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 our operating and growth needs.
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 adjust our liquidity requirements based on economic conditions, market conditions, and future
cash flow commitments, as discussed further below.
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 (common or preferred) and debt securities. We continue to monitor these sources, considering our short-term
and long-term liquidity and capital preservation strategies.
The Parent’s investment portfolio includes (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, (iv) alternative investments, and (v) a cash balance. In the aggregate,
Parent cash and total investments amounted to $484 million at December 31, 2022, and $527 million at December 31, 2021.
The amount and composition of the Parent's investment portfolio may change over time 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 stockholders, asset allocation investment decisions, inorganic growth opportunities, debt
retirement, and share repurchases. Our target is for the Parent to maintain highly liquid investments of at least twice its
expected annual net cash outflow needs, or $180 million.
Insurance Subsidiary Dividends
The Insurance Subsidiaries generate liquidity through insurance float, which is created by collecting premiums and earning
investment income before paying claims. The period of float can extend over many years. Our investment portfolio consists of
securities with maturity dates that continually provide a source of cash flow for claims payments in the ordinary course of
business. To protect our Insurance Subsidiaries' capital, we purchase reinsurance coverage for significantly large claims or
catastrophes that may occur.
The Insurance Subsidiaries paid $120 million in total dividends to the Parent in 2022. As of December 31, 2022, our allowable
ordinary maximum dividend is $283 million for 2023. All Insurance Subsidiary dividends to the Parent are (i) subject to the
approval and/or review of its domiciliary state insurance regulator and (ii) generally payable only from earned statutory surplus
reported in its annual statements as of the preceding December 31. Although domiciliary state insurance regulators historically
have approved dividends, there is no assurance they will approve future Insurance Subsidiary dividends.
New Jersey corporate law also limits the maximum amount of dividends the Parent can pay our stockholders if either (i) the
Parent would be unable to pay its debts as they become due in the usual course of business, or (ii) the Parent’s total assets
62
would be less than its total liabilities. The Parent’s ability to pay dividends to stockholders is also impacted by (i) covenants in
its credit agreement that obligate it, among other things, to maintain a minimum consolidated net worth and a maximum ratio of
consolidated debt to total capitalization, 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. “Equity,” 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.
Line of Credit
On November 7, 2022, the Parent entered into a Credit Agreement with the lenders named therein (the “Lenders”) and Wells
Fargo Bank, National Association, 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 $125 million with the Lenders'
consent. The Line of Credit will mature on November 7, 2025, and has a variable interest rate based on the Parent’s debt
ratings. This agreement replaced a prior credit agreement that the Parent terminated in conjunction with entering into the Line
of Credit. No borrowings were made under either credit facility in 2022. For additional information regarding the Line of
Credit and corresponding representations, warranties, and covenants, refer to Note 11. “Indebtedness” in Item 8. “Financial
Statements and Supplementary Data.” of this Form 10-K.
Four of the Insurance Subsidiaries are members of Federal Home Loan Bank ("FHLB") branches, as shown in the following
table. Membership requires the ownership of branch stock and includes the right to access liquidity. All Federal Home Loan
Bank of Indianapolis ("FHLBI") and Federal Home Loan Bank of New York ("FHLBNY") borrowings are required to be
secured by investments pledged as collateral. For additional information regarding collateral outstanding, refer to Note 5.
"Investments" in Item 8. "Financial Statements and Supplementary Data.” of this Form 10-K.
Branch
FHLBI
FHLBNY
Insurance Subsidiary Member
SICSC1
SICSE1
SICA
SICNY
1These subsidiaries are jointly referred to as the "Indiana Subsidiaries" because they are domiciled in Indiana.
The Line of Credit permits aggregate borrowings from the FHLBI and the FHLBNY up to 10% of the respective member
company’s admitted assets for the previous year. As SICNY is domiciled in New York, its FHLBNY borrowings are limited by
New York insurance regulations to the lower of 5% of admitted assets for the most recently completed fiscal quarter, or 10% of
admitted assets for the previous year-end.
The following table provides information on the remaining capacity for FHLB borrowings based on these restrictions, as well
as the additional FHLB stock purchase requirement to allow these member companies to borrow their remaining capacity
amounts:
($ in millions)
As of December 31, 2022
SICSC
SICSE
SICA
SICNY
Total
Admitted
Assets
Borrowing
Limitation
Amount
Borrowed
Remaining
Capacity
Additional
FHLB Stock
Requirements
$
899.0 $
715.8
3,356.4
625.6
$
89.9
71.6
335.6
31.3
528.4
32.0
28.0
—
—
60.0
57.9
43.6
335.6
31.3
468.4
1.2
0.9
15.1
1.4
18.6
Short-term Borrowings
During 2022, SICA borrowed the following funds from the FHLBNY for general corporate purposes:
•
•
$35 million on April 1, 2022 at an interest rate of 0.70% with repayment due on May 2, 2022. This borrowing was
refinanced upon its maturity on May 2, 2022, at an interest rate of 1.10% and was subsequently repaid on June 27,
2022.
$25 million on October 3, 2022 at an interest rate of 3.21%, which was repaid on November 3, 2022.
63
Intercompany Loan Agreements
The Parent has lending agreements with the Indiana Subsidiaries approved by the Indiana Department of Insurance that provide
additional liquidity. Similar to the Line of Credit, these lending agreements limit the Parent's borrowings from the Indiana
Subsidiaries to 10% of the admitted assets of the respective Indiana Subsidiary. The following table provides information on
the Parent’s borrowings and remaining borrowing capacity from the two Indiana Subsidiaries:
($ in millions)
As of December 31, 2022
SICSC
SICSE
Total
Admitted Assets as of
December 31, 2022
Borrowing
Limitation
Amount
Borrowed
Remaining
Capacity
$
899.0 $
715.8
$
89.9
71.6
161.5
24.0
16.0
40.0
65.9
55.6
121.5
Capital Market Activities
The Parent had no private or public stock issuances during 2022. During 2022, we repurchased 165,159 shares of our common
stock under our existing share repurchase program for $12.4 million, or a $75.20 average price per share, excluding commission
costs paid. We had $84.2 million of remaining capacity under our share repurchase program as of December 31, 2022. For
additional information on the preferred stock transaction, refer to Note 17. “Equity” in Item 8. “Financial Statements and
Supplementary Data.” of this Form 10-K.
Uses of Liquidity
The Parent's liquidity generated from the sources discussed above is used, among other things, to pay dividends to our
stockholders. 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 November 2022, our Board approved a 7% increase in the quarterly cash dividend, to $0.30 from $0.28 per share.
On February 2, 2023, our Board declared:
•
A quarterly cash dividend on common stock of $0.30 per common share, that is payable March 1, 2023, to holders of
record on February 15, 2023; and
• A cash dividend of $287.50 per share on our 4.60% Non-Cumulative Preferred Stock, Series B (equivalent to
$0.28750 per depository share) payable on March 15, 2023, to holders of record as of February 28, 2023.
Our ability to meet our interest and principal repayment obligations on our debt and 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. Our next FHLB borrowing principal
repayment is $60 million to FHLBI due 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, 2022, we had GAAP stockholders’ equity of $2.5
billion and statutory surplus of $2.5 billion. With total debt of $505 million at December 31, 2022, our debt-to-capital ratio was
16.6%. For additional information on our statutory surplus, see Note 22. "Statutory Financial Information, Capital
Requirements, and Restrictions on Dividends and Transfers of Funds" in Item 8. "Financial Statements and Supplementary
Data." of this Form 10-K.
64
The following table summarizes current and long-term material cash requirements as of December 31, 2022, which we expect
to fund primarily with operating cash flows.
Less than
1 year
Payment Due by Period
1-3
years
3-5
years
More than
5 years
($ in millions)
Notes payable
Interest on debt obligation
Subtotal
Gross loss and loss expense payments
Ceded loss and loss expense payments
Net loss and loss expense payments
$
Total
510.0
565.3
1,075.3
5,144.8
757.5
4,387.3
—
28.3
28.3
1,571.9
305.8
1,266.1
—
56.6
56.6
1,633.8
170.7
1,463.1
Total
$
5,462.6
1,294.4
1,519.7
60.0
54.8
114.8
778.9
79.3
699.6
814.4
450.0
425.6
875.6
1,160.2
201.7
958.5
1,834.1
Our loss and loss expense payments in the table above represent estimated paid amounts by year on our loss and loss expense
reserves. These estimates are 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. Therefore, the projected settlement of the reserves for net loss and loss expense may differ, perhaps significantly, from
actual future payments. For more information on our case reserves and estimates of reserves for loss and loss expense IBNR,
refer to the “Reserves for Loss and Loss Expense” section in the "Critical Accounting Policies and Estimates" section of this
MD&A and Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data."
of this Form 10-K.
For additional information regarding cross-default provisions associated with our notes payable in the table above or 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, the following table summarizes certain contractual obligations we had at December 31, 2022 that may
require us to invest additional amounts into our investment portfolio, which we would fund primarily with operating cash flows.
($ in millions)
Alternative investments
Non-publicly traded collateralized loan obligations in our fixed income securities portfolio
Non-publicly traded common stock within our equity portfolio
CMLs
Privately-placed corporate securities
Total
Amount of Obligation
$
$
246.1
106.6
35.0
4.9
20.1
412.7
There is no certainty (i) that any such additional investments will be required, and (ii) of the actual timing of funding. We
expect to have the capacity to fund these commitments through our normal operating and investing activities as they come due.
Our other cash requirements include, without limitation, dividends to stockholders, capital expenditures, and other operating
expenses, including commissions to our distribution partners, labor costs, premium taxes, general and administrative expenses,
and income taxes.
As of December 31, 2022 and 2021, we had no (i) material guarantees on behalf of others and trading activities involving non-
exchange traded contracts accounted for at fair value, (ii) 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,
and (iii) 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.
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
65
and/or equity securities, repurchasing existing debt, repurchasing shares of the Parent’s common stock, and increasing common
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 a profitable book of business and
solid capital base, positioning us well to take advantage of potential market opportunities.
Book value per common share decreased 17% to $38.57 as of December 31, 2022, from $46.24 as of December 31, 2021,
driven by a $9.91 change in net unrealized losses on our fixed income securities portfolio and $1.14 in dividends to our
common stockholders, partially offset by $3.54 in net income available to common stockholders per diluted common share.
The increase in net unrealized losses on our fixed income securities was primarily driven by an increase in benchmark U.S.
Treasury rates, and to a lesser extent the widening of credit spreads. Our adjusted book value per share, which is book value
per share excluding total after-tax unrealized gains or losses on investments included in accumulated other comprehensive
(loss) income, increased to $45.49 as of December 31, 2022, from $43.23 as of December 31, 2021.
Cash Flows
Net cash provided by operating activities of $802 million in 2022 reflected a modest 4% increase compared to $771 million in
2021, primarily driven by a 5% increase in total revenues. Operating cash flows during 2022 were 22% of NPW.
Net cash used in investing activities increased to $734 million in 2022, compared to $619 million in 2021, primarily due to
investing cash received from operating activities. A greater percentage of operating cash flows was used in our investing
activities because of the reduced cash required in our financing activities.
Net cash used in financing activities decreased to $88 million in 2022, compared to $123 million in 2021, primarily due to a
decrease in borrowing repayments made in 2022, partially offset by increased dividends to common stockholders and increased
activity in our share repurchase program in 2022.
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.
Our portfolio allocation was 85% fixed income securities, 2% commercial mortgage loans, 2% equity securities, 5% short-term
investments, 5% alternative investments, and 1% other investments as of December 31, 2022. Alternative investments are
limited partnership investments in private equity, private credit, and real estate strategies. We do not directly hold derivatives,
commodities, or other investments denominated in foreign currency. We have minimal foreign currency fluctuation risk within
our alternative investment portfolio. For a discussion of our investment objective and philosophy, see the "Investments
Segment" section of Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." of this
Form 10-K.
We manage our investment portfolio to mitigate risks associated with various financial market scenarios. We 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 Standard & Poor's Global Ratings ("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,
2022, approximately 11% (15% at December 31, 2021) of our fixed income securities portfolio was floating rate securities,
primarily tied to the 90-day 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. For more information on the upcoming transition away from LIBOR, refer to "Risks Related to our Investments
Segment" in Item 1A. "Risk Factors." of this Form 10-K.
Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in
interest rates. Our fixed income securities portfolio contains interest rate-sensitive instruments, and its performance could be
66
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 increase 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, 2022, was 4.1 years, which
is within our historical range. The Insurance Subsidiaries’ net loss and loss expense reserves duration was approximately 3.1
years at December 31, 2022.
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, or range, of the effect of changes in
market interest rates and equity prices on our income or stockholders’ equity, but rather provides insight into the portfolio's
sensitivity. These calculations 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, 2022:
($ in thousands)
Fixed income securities
Fair value of fixed income securities portfolio
Fair value change
Fair value change from base (%)
-200
2022 Interest Rate Shift in Basis Points
100
—
-100
200
$ 7,187,341
545,397
6,914,779
272,835
8.2 %
4.1 %
6,641,944
6,369,000
(272,944)
6,096,178
(545,766)
(4.1) %
(8.2) %
Credit Risk
Our most significant credit risk is within our fixed income securities portfolio, which had an overall credit quality of “AA-” as
of December 31, 2022, and “A+” as of December 31, 2021. Non-investment grade exposure represented approximately 4% of
the total fixed income securities portfolio at both December 31, 2022 and December 31, 2021. The improvement in our
weighted average credit rating reflects active management of our investment portfolio in 2022 to optimize our risk-adjusted
investment yields in the rising interest rate environment, resulting in higher credit quality fixed income security purchases.
67
Details on the credit quality of our invested assets at December 31, 2022 are provided below:
Amortized
Cost
Fair
Value
440 $ 440
$
% of
Yield to
Invested
Assets
Worst
5.6 % 4.2 %
Effective
Duration
in Years
0.01
Average
Life in
Years
0.01
AAA
$ 420
AA
$ 20
A
$ —
BBB
$ —
Non-
Investment
Grade
—
$
Not
Rated
$ —
Credit Rating
210
11
969
2,586
189
10
921
2,361
2.4
0.1
11.8
30.2
809
360
1,170
737
323
1,060
9.4
4.1
13.5
664
614
7.9
1,833
1,674
21.4
30
58
867
8
644
1,608
3,441
29
48
809
8
592
1,486
3,160
0.4
0.6
10.3
0.1
7.6
19.0
40.4
4.6
5.2
3.8
5.8
4.7
5.8
5.1
6.5
5.6
8.5
11.4
7.6
6.2
6.8
7.4
6.4
7,807
7,222
92.3
5.7
5.1
6.7
5.0
4.6
5.9
4.5
5.5
3.3
4.7
1.8
2.9
2.1
3.1
4.1
2.9
3.8
4.1
187
7.5
8.2 —
181
6.1
41
6.3
8.6
7.1
8.2
737
213
949
4.3
523
6.8
1,472
29
1.9
3.5 —
386
5.2
7
3.5
155
5.2
578
5.1
6.0
2,050
2
2
419
270
—
35
35
44
79
—
1
261
—
91
354
433
—
5
286
974
—
76
76
42
117
—
20
47
1
277
345
462
—
2
37
916
—
—
—
5
5
—
22
38
—
55
114
120
—
—
—
160
—
—
—
—
—
—
6
59
—
6
71
71
5.8
2,879
1,157
1,785
1,141
234
—
—
—
—
—
—
—
—
—
—
—
17
—
7
25
25
25
39.9 % 16.0 % 24.7 % 15.8 %
3.2 % 0.3 %
149
139
1.8
4.9
4.4
6.2 —
165
2
167
160
2
162
2
—
2.1
—
—
—
—
—
—
— —
— —
— —
11
—
—
—
58
—
—
—
67
—
2
2
December 31, 2022
($ in millions)
Short-term investments
Fixed income securities:
U.S. government obligations
Foreign government obligations
State and municipal obligations
Corporate securities
MBS:
Residential mortgage-backed
securities ("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
Alternative investments:
Private equity
Private credit
Real assets
Total alternative investments
281
55
35
371
71
281
55
35
371
71
8,417 $ 7,826
3.6
0.7
0.5
4.7
0.9
100 % — %
—
—
—
—
—
—
—
—
—
—
—
— —
— —
— —
— —
— —
— $ 2,879 $ 1,157 $ 1,785 $ 1,143 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Other investments
Total invested assets
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 10% or more of
our invested assets at December 31, 2022 were (i) special revenue bonds within our state and municipal obligations portfolio
(10%), (ii) the financial sector within corporate securities (15%), and (iii) collateralized loan obligations within our CLOs and
other ABS portfolio (10%). We discuss each of these sector holdings in more detail below.
68
3
—
—
—
—
—
—
—
—
—
234
160
—
160
281
55
35
371
71
$ 628
State and Municipal Obligations
Our state and municipal obligations represented 10% of our invested assets at December 31, 2022. The tables below provide
details on this portfolio at December 31, 2022 and 2021:
December 31, 2022
($ in millions)
General obligation state & local
Special revenue
Total state and municipal obligations
December 31, 2021
($ in millions)
General obligation state & local
Special revenue
Total state and municipal obligations
Fair
Value
Carry
Value
148.6
772.8
921.4
148.6
772.8
921.4
Fair
Value
Carry
Value
235.9
957.0
1,192.9
235.9
956.8
1,192.7
$
$
$
$
Net
Unrealized/
Unrecognized
Gain (Loss)
(5.8)
(40.4)
(46.2)
Net
Unrealized/
Unrecognized
Gain (Loss)
11.6
56.6
68.2
Weighted
Average
Credit
Quality
AA+
AA-
AA-
Weighted
Average
Credit
Quality
AA+
AA-
AA-
The following table details the top 10 state exposures of this portfolio at December 31, 2022:
State Exposures of Municipal Bonds
($ in thousands)
California
New York
Texas1
New Jersey
Colorado
Pennsylvania
Ohio
Massachusetts
Florida
Louisiana
Other
Pre-refunded/escrowed to maturity bonds
Total
$
General Obligation
State & Local
35,541
5,730
36,115
—
1,142
—
2,090
5,315
—
—
42,615
128,548
20,047
148,595
Special
Revenue
68,934
84,090
36,312
60,662
38,127
37,699
31,155
26,131
29,718
28,669
274,131
715,628
57,200
772,828
Fair
Value
104,475
89,820
72,427
60,662
39,269
37,699
33,245
31,446
29,718
28,669
316,746
844,176
77,247
921,423
% of Total
11%
10%
8%
7%
4%
4%
4%
3%
3%
3%
34%
92%
8%
100%
Weighted Average
Credit Quality
A+
AA-
AA
A+
AA-
AA-
AA-
AA
AA-
AA
AA-
AA-
AAA
AA-
% of Total Municipal Portfolio
% of Total Investment Portfolio
1Of the $36.1 million in state and local Texas general obligation bonds, $15.7 million represents investments in Texas Permanent School Fund bonds, which are
considered to have lower risk as a result of the bond guarantee programs that support these bonds.
100 %
12 %
84 %
10 %
16 %
2 %
Special revenue fixed income securities of municipalities (referred to as “special revenue bonds”) represented 10% of our total
invested assets at December 31, 2022. These securities generally do not have the “full faith and credit” backing of the
municipal or state governments, like general obligation bonds, but special revenue bonds have a dedicated revenue stream for
repayment. For our special revenue bonds, 65% of the dedicated revenue stream is comprised of the following: (i) essential
services (53%), which is comprised of transportation, water and sewer, and electric; and (ii) education (12%), which includes
school districts and higher education, including state-wide university systems. Because of the quality of these dedicated
revenue streams, we believe our special revenue bond portfolio is appropriate for the current environment.
Corporate Securities
Our corporate securities represented 30% of our invested assets at December 31, 2022. For investment-grade corporate bonds,
we address the risk of an individual issuer's default by maintaining a diverse portfolio of holdings. The primary risk related to
non-investment grade corporate bonds is credit risk. A weak financial profile can lead to credit rating downgrades, which can
put further downward pressure on bond prices. Valuations on these bonds are related more directly to underlying operating
performance than to general interest rates. Our holdings of non-investment grade corporate bonds, which typically exhibit
weaker credit profiles and are subject to more risk of credit loss, represent 2% of our overall investment portfolio.
69
The tables below provide details on our corporate bond holdings at December 31, 2022 and 2021:
December 31, 2022
($ in millions)
Investment grade
Non-investment grade
Total corporate securities
December 31, 2021
($ in millions)
Investment grade
Non-investment grade
Total corporate securities
Fair
Value
Carry
Value
2,201.1
160.4
2,361.5
2,202.4
160.4
2,362.8
Fair
Value
Carry
Value
2,424.8
174.6
2,599.4
2,424.3
174.6
2,598.9
$
$
$
$
Net
Unrealized/
Unrecognized
Gain (Loss)
(189.8)
(4.8)
(194.6)
Net
Unrealized/
Unrecognized
Gain (Loss)
100.0
2.5
102.5
Weighted
Average
Credit
Quality
A-
B+
A-
Weighted
Average
Credit
Quality
A-
B+
BBB+
The following tables provide the sector composition of this portfolio at December 31, 2022 and 2021:
($ in millions)
Financials
Consumer non-cyclicals
Communications
Utilities
Consumer cyclicals
Technology
Energy
Bank loans
Basic materials
Other
Other industrials
Total corporate securities
December 31, 2022
Weighted
Average Credit
Rating
A-
BBB+
A-
A-
BBB
BBB+
BBB
B
BBB-
A-
BBB
A-
Fair Value
1,194.3
178.5
136.2
97.7
81.4
77.1
77.0
37.6
23.7
251.7
206.3
2,361.5
% of Fixed
Income
Securities
Fair Value
18 %
3 %
2 %
1 %
1 %
1 %
1 %
1 %
0.3 %
4 %
3 %
35
1,286.9
242.8
133.3
123.7
101.6
95.6
94.2
57.3
33.0
188.6
242.4
2,599.4
December 31, 2021
Weighted
Average Credit
Rating
A-
BBB+
A-
A-
BBB
BBB+
BBB
B
BBB-
BBB+
BBB
BBB+
% of Fixed
Income
Securities
19 %
4 %
2 %
2 %
1 %
1 %
1 %
1 %
1 %
3 %
4 %
39
As illustrated in the table above, within our allocation to corporate securities, financials is our most significant industry
concentration at 18% of our fixed income securities portfolio at December 31, 2022. These holdings represented 15% of our
total investment portfolio. 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, 2022.
MBS (RMBS and CMBS Portfolios)
MBS represent our most significant exposure to real estate. Further breakdown of this exposure is provided in the table above
that shows details on the credit quality of our invested assets. Agency RMBS represented approximately 70% of our RMBS
allocation, and 9% of our total invested assets, as of December 31, 2022. These securities are rated “AAA" and had an
unrealized loss of approximately $72.7 million, primarily due to an increase in benchmark U.S. Treasury rates, as of December
31, 2022.
To manage and mitigate exposure on our RMBS and CMBS portfolios, we perform analyses both at the time of purchase and as
part of the ongoing portfolio evaluation. These analyses includes review of loan-to-value ratios, geographic spread of the assets
securing the bond, delinquencies in payments on the underlying mortgages, gains/losses on sales, evaluations of projected cash
flows, as well as other information that aids in determination of the health of the underlying assets. We consider the overall
credit environment, economic conditions, the investment's total projected return, and overall portfolio asset allocation in
deciding to purchase or sell these securities.
CLO and Other ABS Portfolio
For CLO and other ABS, the primary risk is credit risk. We manage this risk by evaluating a number of factors, including the
deal's structure, the credit quality of underlying loans or assets, the composition of the underlying portfolio, and the portfolio
manager's track record and capabilities. We monitor key performance metrics, including over-collateralization, interest
coverage, and cash flows, on an on-going basis. We consider the overall credit environment, economic conditions, the
70
investment's total projected return, and overall portfolio asset allocation when deciding to purchase or sell CLO and other ABS.
Other ABS includes structured note obligations and securities collateralized by loans and other financial assets, including,
without limitation, auto loans, credit card receivables, equipment leases, and student loans.
The tables below provide details on our CLO and other ABS holdings at December 31, 2022, and December 31, 2021:
December 31, 2022
($ 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, 2021
($ 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
Net
Unrealized/
Unrecognized
Gain (Loss)
Weighted
Average
Credit
Quality
732.6
658.0
1,390.6
76.1
19.3
95.4
1,486.0
732.6
658.0
1,390.6
76.1
19.3
95.4
1,486.0
(49.6)
(60.9)
(110.5)
(6.9)
(1.9)
(8.8)
(119.3)
AA+
A+
AA
B
CCC+
B
AA-
Fair
Value
Carry
Value
Net
Unrealized/
Unrecognized
Gain (Loss)
Weighted
Average
Credit
Quality
788.6
475.9
1,264.5
69.8
16.5
86.3
1,350.8
788.6
475.9
1,264.5
69.8
16.5
86.3
1,350.8
2.6
5.9
8.5
(0.3)
(0.2)
(0.5)
8.0
AA+
A+
AA
B
CCC+
B
AA-
$
$
$
$
CLOs represented 10% of our total invested assets as of December 31, 2022. Investment grade CLOs accounted for the
majority of this portfolio at 9% of invested assets, while non-investment grade CLOs represented only 1% of invested assets.
The CLO portfolio is well diversified by issuer, manager, vintage year, and underlying corporate borrowers and sectors. No
individual CLO comprised more than 1% of our fixed income securities portfolio at December 31, 2022, and this portfolio had
an average credit quality of 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 the market value of the equity
portfolio as of December 31, 2022:
($ in thousands)
Fair value of equity securities portfolio
Fair value change
(30)%
(20)%
$
113,400
(48,600)
129,600
(32,400)
Change in Equity Values in Percent
10%
0%
(10)%
178,200
162,000
16,200
145,800
(16,200)
20%
194,400
32,400
30%
210,600
48,600
In addition to our equity securities, we invest in alternative investments that are also subject to price risk. These are
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, 2022, alternative investments represented 5% of
our total invested assets and 15% of our stockholders’ equity. These investments are subject to the risks arising from the fact
that their valuation is inherently subjective. The general partner of each of these partnerships usually reports the change in the
value of the interests in the partnership on a one quarter lag because of the nature of the underlying assets or liabilities. Since
these partnerships' underlying investments consist primarily of assets or liabilities for which there are no quoted prices in active
markets for the same or similar assets, the valuation of interests in these partnerships are subject to a higher level of subjectivity
71
and unobservable inputs than substantially all of our other invested assets. 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, we meet our liquidity needs generally 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 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 "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 and CLO and other ABS.
2These exposures include our alternative investments and other non-publicly traded securities.
Percentage of
Invested Assets
58 %
33
9
100 %
Indebtedness
(a) Long-Term Debt
As of December 31, 2022, we had outstanding long-term debt of $504.7 million that matures as shown in the following table:
($ in thousands)
Financial liabilities
Long-term debt
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
2022
2026
2034
2035
2049
60,000
49,921
99,542
294,424
503,887
(2,929)
3,718
504,676
$
57,175
51,705
99,264
258,459
466,603
The weighted average effective interest rate for our outstanding long-term debt was 5.5% at December 31, 2022. Our debt is
not exposed to material changes in interest rates because the interest rates are fixed.
(b) Short-Term Debt
On November 7, 2022, the Parent entered into a Credit Agreement (the “Line of Credit”) among the Parent, the lenders named
therein (the “Lenders”), and Wells Fargo Bank, National Association, 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 November 7, 2025, and has a variable interest rate based on
the Parent’s debt ratings. This agreement replaced a prior credit agreement that the Parent terminated in conjunction with
entering into the Line of Credit. For additional information regarding the Line of Credit 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.
72
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, 2022 and December 31, 2021, 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, 2022, 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, 2022 and December 31, 2021, and the results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2022, 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, 2022, 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 10, 2023 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 judgments. 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, 2022, the Company recorded a liability of $5.14 billion for reserves.
We identified the evaluation of the estimate of reserves for loss and loss expense as a critical audit matter. The process to
evaluate the Company’s estimate of reserves involved a high degree of subjective auditor judgment due to the inherent
uncertainties in adjusting past experience for current development and anticipating trends for predicting future events.
73
These uncertainties may be affected by a number of considerations, including internal factors, such as changes to
underwriting and claim practices, and claim experience; as well as external factors, such as economic conditions,
legislative enactments, judicial decisions, and social trends. 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 10, 2023
/s/ KPMG LLP
74
Consolidated Balance Sheets
December 31,
($ in thousands, except share amounts)
ASSETS
Investments:
Fixed income securities, held-to-maturity – at carrying value (fair value: $29,837 – 2022; $29,460 – 2021)
$
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: $45,721 – 2022; $9,724 – 2021; amortized cost: $7,185,754 – 2022;
$6,490,753 – 2021)
Commercial mortgage loans – at carrying value (fair value: $139,243 – 2022; $97,598 – 2021)
Less: allowance for credit losses
Commercial mortgage loans, net of allowance for credit losses
Equity securities – at fair value (cost: $167,431 – 2022; $308,840 – 2021)
Short-term investments
Alternative investments
Other investments
Total investments (Notes 5 and 7)
Cash
Restricted cash
Accrued investment income
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)
Current federal income tax (Note 14)
Deferred federal income tax (Note 14)
Property and equipment – at cost, net of accumulated
depreciation and amortization of: $251,209 – 2022; $253,427 – 2021
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)
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):
$
$
$
2022
2021
31,157
—
31,157
6,612,107
149,305
(116)
149,189
162,000
440,456
371,316
71,244
7,837,469
26
25,183
59,167
1,101,787
(16,100)
1,085,687
784,410
(1,600)
782,810
172,371
3,545
172,733
84,306
368,624
7,849
202,491
10,802,261
5,144,821
1,992,781
504,676
—
115,185
517,234
8,274,697
28,850
(65)
28,785
6,709,976
95,795
—
95,795
335,537
447,863
359,732
49,300
8,026,988
455
44,608
48,247
958,787
(13,600)
945,187
601,668
(1,600)
600,068
183,007
772
—
82,053
326,915
7,849
195,240
10,461,389
4,580,903
1,803,207
506,050
13,413
121,057
453,874
7,478,504
Authorized shares: 5,000,000; Issued shares: 8,000 with $25,000 liquidation preference per share – 2022
and 2021
$
200,000
200,000
Common stock of $2 par value per share:
Authorized shares 360,000,000
Issued: 104,847,111 – 2022; 104,450,916 – 2021
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income (Note 6)
Treasury stock – at cost (shares: 44,508,211 – 2022; 44,266,534 – 2021)
Total stockholders’ equity
Commitments and contingencies (Notes 19 and 20)
Total liabilities and stockholders’ equity
See accompanying Notes to Consolidated Financial Statements.
75
209,694
493,488
2,749,703
(498,042)
(627,279)
2,527,564
208,902
464,347
2,603,472
115,099
(608,935)
2,982,885
$
10,802,261
10,461,389
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
2022
2021
2020
$
3,373,380
288,155
(114,808)
11,335
3,558,062
3,017,253
326,589
17,599
17,723
2,681,814
227,107
(4,217)
17,570
3,379,164
2,922,274
2,111,778
1,813,984
1,635,823
705,822
400,313
28,847
31,116
626,469
375,931
29,165
28,305
560,271
366,941
30,839
25,412
3,277,876
2,873,854
2,619,286
Income before federal income tax
280,186
505,310
302,988
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.
78,308
(23,008)
55,300
87,335
14,138
101,473
60,059
(3,426)
56,633
224,886
403,837
246,355
9,200
9,353
—
215,686
394,484
246,355
3.57
3.54
6.55
6.50
4.12
4.09
$
$
$
$
76
Consolidated Statements of Comprehensive Income
December 31,
($ in thousands)
Net income
2022
2021
2020
$
224,886
403,837
246,355
Other comprehensive (loss) income, net of tax:
Unrealized (losses) gains on investment securities:
Unrealized holding (losses) gains 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 (gains) on disposals and losses on intent-to-sell available-for-sale
securities
Credit loss expense
(527,805)
(148,495)
(119,598)
(7,159)
3
47,438
30,944
(9)
(3,022)
5,418
Total unrealized (losses) gains on investment securities
(597,915)
(124,370)
133,104
(6,459)
(19)
4,247
3,984
134,857
Defined benefit pension and post-retirement plans:
Net actuarial (loss) gain
Amounts reclassified into net income:
Net actuarial loss
Total defined benefit pension and post-retirement plans
Other comprehensive (loss) income
Comprehensive (loss) income
See accompanying Notes to Consolidated Financial Statements.
(16,543)
17,093
1,197
1,317
(15,226)
(613,141)
(388,255)
$
2,190
19,283
(105,087)
298,750
2,382
3,579
138,436
384,791
77
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 guidance on allowance for credit losses, net of tax
Balance at beginning of year, as adjusted
Net income
Dividends to preferred stockholders
Dividends to common stockholders
End of year
Accumulated other comprehensive income:
Beginning of year
Other comprehensive (loss) income
End of year
Treasury stock:
Beginning of year
Acquisition of treasury stock - share repurchase authorization
Acquisition of treasury stock - shares acquired related to employee share-based compensation plans
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
2022
2021
2020
$
200,000
—
200,000
208,902
44
748
209,694
464,347
1,784
—
27,357
493,488
200,000
—
200,000
208,066
46
790
208,902
438,985
1,707
—
23,655
464,347
—
200,000
200,000
206,968
58
1,040
208,066
418,521
1,645
(5,416)
24,235
438,985
2,603,472
—
2,603,472
224,886
(9,200)
(69,455)
2,749,703
2,271,537
—
2,271,537
403,837
(9,353)
(62,549)
2,603,472
2,080,529
1,435
2,081,964
246,355
—
(56,782)
2,271,537
115,099
(613,141)
(498,042)
220,186
(105,087)
115,099
81,750
138,436
220,186
$
$
$
(608,935)
(12,424)
(5,920)
(627,279)
(599,885)
(3,404)
(5,646)
(608,935)
(592,832)
—
(7,053)
(599,885)
2,527,564
2,982,885
2,738,889
1,150.00
1.14
1,169.17
1.03
8,000
—
8,000
8,000
—
8,000
—
0.94
—
8,000
8,000
Common stock, shares outstanding:
Beginning of year
Dividend reinvestment plan
Stock purchase and compensation plan
Acquisition of treasury stock - share repurchase authorization
Acquisition of treasury stock - shares acquired related to employee share-based compensation plans
End of year
60,184,382
22,093
374,102
(165,159)
(76,518)
60,338,900
59,905,803
22,986
395,018
(52,781)
(86,644)
60,184,382
59,461,153
28,890
519,863
—
(104,103)
59,905,803
See accompanying Notes to Consolidated Financial Statements.
78
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 reserve for loss and loss expense, net of reinsurance recoverable
Increase in unearned premiums, net of prepaid reinsurance
(Increase) decrease in net federal income taxes
Increase in premiums receivable
Increase in deferred policy acquisition costs
Increase in accrued investment income
(Decrease) increase in accrued salaries and benefits
Increase in other assets
Increase in other liabilities
Net cash provided by operating activities
Investing Activities
Purchases of fixed income securities, held-to-maturity
Purchases of fixed income securities, available-for-sale
Purchases of commercial mortgage loans
Purchases of equity securities
Purchases of alternative investments and other investments
Purchases of short-term investments
Sales of fixed income securities, available-for-sale
Proceeds from commercial mortgage loans
Sales of short-term investments
Redemption and maturities of fixed income securities, held-to-maturity
Redemption and maturities of fixed income securities, available-for-sale
Sales of equity securities
Sales of other investments
Distributions from alternative investments and other investments
Purchases 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 (used in) provided by financing activities
Net (decrease) increase in cash and restricted cash
Cash and restricted cash, beginning of year
Cash and restricted cash, end of year
See accompanying Notes to Consolidated Financial Statements.
$
79
2022
2021
2020
$
224,886
403,837
246,355
42,336
18,428
(12,946)
43,184
114,808
172
381,176
200,210
(25,932)
(140,500)
(41,709)
(10,920)
(3,092)
(37,561)
49,869
802,409
(6,691)
(2,648,974)
(64,008)
(26,675)
(73,408)
(4,506,500)
1,211,739
10,498
4,513,940
4,351
669,211
186,144
3,281
18,664
(26,019)
(734,447)
(9,200)
(66,920)
(18,344)
9,086
—
60,000
(60,000)
(2,438)
(87,816)
(19,854)
45,063
25,209
55,109
15,893
(69,873)
2,910
(17,599)
50
307,972
172,460
(542)
(109,173)
(38,337)
(3,243)
7,216
(33,379)
78,121
771,422
(16,250)
(2,165,555)
(50,204)
(88,640)
(85,044)
(4,345,140)
502,911
714
4,306,684
4,192
1,217,555
99,235
5,428
17,497
(22,163)
(618,780)
(9,353)
(60,136)
(9,050)
7,976
(479)
—
(50,000)
(1,768)
(122,810)
29,832
15,231
45,063
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
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 are
unable to obtain 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 investments. We also hold commercial mortgage loans
("CMLs"), equity securities, short-term investments, alternative investments, and other investments. A description of our
portfolio holdings, and the related presentation in our Consolidated Balance Sheet, is provided below.
Fixed Income Investments
Our fixed income investments include our fixed income securities portfolio and our CML portfolio.
Fixed Income Securities
We hold the following types of securities in our fixed income securities portfolio:
•
•
•
•
•
•
•
U.S. government and government agency obligations;
Foreign government obligations;
Obligations of states and political subdivisions, 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").
80
We have designated substantially all of the holdings in our fixed income securities 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
amortized cost is reflected in stockholders’ equity as a component of accumulated other comprehensive (loss) income
("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 “Accrued investment income” 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.
CMLs
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 reported at amortized cost, net of any 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 “Accrued
investment income” on our Consolidated Balance Sheet.
Other Portfolio Holdings
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 may 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.
Alternative investments 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, with the underlying holdings carried
at fair value, the valuation and income recognized on these investments may be impacted by volatility in the financial markets.
We categorize distributions from our 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 our alternative investments to determine whether those investments are variable interest entities ("VIEs") and if so,
whether consolidation is required. A VIE is an entity that either has equity investors that lack certain essential characteristics of
a controlling financial interest or lack sufficient funds to finance its own activities without financial support provided by other
entities. We consider several significant factors in determining if our investments are VIEs and if we are the primary
beneficiary, including whether we have (i) the power to direct activities of the VIE, (ii) the ability to remove the decision maker
of the VIE, (iii) the ability to participate in making decisions that are significant to the VIE, and (iv) the obligation to absorb
losses and the right to receive benefits that could potentially be significant to the VIE. We have reviewed our alternative
investments and have concluded that they are VIEs, but that we are not the primary beneficiary and therefore, consolidation is
not required.
81
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.
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) gains on our Consolidated Statement of Income include the following:
•
•
•
•
Realized gains and losses on the disposal of holdings in our investment portfolio, 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 investments 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 is also
discussed further below.
Losses on Investments for which we have the Intent to Sell
For our 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.
For our alternative and other investments, if we determine that we intend to sell a holding 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.
After reviewing our portfolio, if (i) we do not have the intent to sell, or (ii) it is more likely than not we will not be required to
sell the security before its anticipated recovery, then our intent is to hold the investment securities to maturity and recover the
decline in valuation as prices accrete to par. However, our intent may change prior to maturity due to certain types of events,
which include, but are not limited to, changes in the financial markets, our analysis of an issuer’s credit metrics and prospects,
changes in tax laws or the regulatory environment, or as a result of significant unforeseen changes in liquidity needs. As such,
we may, from time to time, sell invested assets subsequent to the balance sheet date that we did not intend to sell at the balance
sheet date. Conversely, we may not sell invested assets that we asserted we intended to sell at the balance sheet date. Such
changes in intent are due to events occurring subsequent to the balance sheet date.
ACL on AFS Fixed Income Securities and Short-Term Investments
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
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credit losses on fixed income securities by performing a discounted cash flow (“DCF”). The ACL is 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 reasonable and 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;
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 apply reasonable and forecasted macroeconomic data such as unemployment, inflation, and rent assumptions 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.
Credit Losses on Alternative Investments
We review our alternative investment portfolio for potential credit losses through quarterly fund reports and conversations with
the general partners of the alternative investments 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.
Credit Losses on Other Investments
Our evaluation for potential credit loss on 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.
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If we do not intend to sell a security, and we expect a credit loss on a holding in our alternative or 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.
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.
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Further information on our Level 2 asset pricing is included in the following table:
Security Type
Methodology
Corporate Securities, including
preferred stocks classified as
Fixed Income Securities, and
U.S. Government and
Government Agencies
Obligations of States and
Political Subdivisions
RMBS, CMBS, CLO and other
ABS
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.
Foreign Government
Evaluations are performed using a DCF model and by incorporating observed market yields
of benchmarks as inputs, adjusting for varied maturities.
Level 3 Pricing
Security Type
CMLs
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
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
Based on matrix pricing models prepared by external pricing services.
Methodology
Borrowings from Federal Home
Loan Banks
Evaluations are performed using a DCF model based on current borrowing rates provided by
the Federal Home Loan Banks that are consistent with the remaining term of the borrowing.
(e) Allowance for 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.
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
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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 Company ("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 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 $24.6 million, $24.3 million, and $21.5 million for 2022, 2021, and 2020, 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
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taxes, and the portion of employee salaries and benefits directly related to time spent on acquired contracts. These costs are
deferred and amortized over the life of the contracts.
Accounting guidance requires a premium deficiency analysis to be performed at the level an entity acquires, services, and
measures the profitability of its insurance contracts. We currently perform three premium deficiency analyses for our insurance
operations, consistent with our reportable segments of Standard Commercial Lines, Standard Personal Lines, and E&S Lines.
A combined ratio of over 100% does not necessarily indicate a premium deficiency, as any year's combined ratio includes a
portion of underwriting expenses that are expensed at policy inception and therefore are not covered by the remaining unearned
premium. In addition, investment income is not contemplated in the combined ratio calculation.
There were no premium deficiencies for any of the reported years, as the sum of the anticipated loss and loss expense,
unamortized acquisition costs, policyholder dividends, and other expenses for each segment did not exceed that segment’s
related unearned premium and anticipated investment income. The investment yields assumed in the premium deficiency
assessment for each reporting period, which were based on our actual average investment yield before tax as of the September
30 calculation date, were 3.5% for 2022, 4.3% for 2021, and 3.0% for 2020.
(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, 2022, 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 could be reopened in the future, and (iv) anticipated salvage
and subrogation recoveries.
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 on 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 include 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 estimation
techniques are used for these liabilities, some of which are primarily exposure-based methods. These methods 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
judgment.
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. 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
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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 practices, (ii) supplemental data on 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 on medical costs, raw materials, and labor.
The combination of IBNR estimates and 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 (i) volume of business written, (ii) claims frequency and severity, (iii) mix of business,
(iv) claims processing, and (v) 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. Actual
outcomes are further 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 on 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. 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.
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 statutory 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 net operating and capital loss carryback
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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 taxable and 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. The evaluation of a valuation allowance
considers the character of the taxable income, ordinary income versus capital income. 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.
(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 (the "Board") of Selective Insurance Company of America (“SICA”) may
approve from time to time.
Two key assumptions, the benefit obligation 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
There was no adoption of accounting pronouncements in 2022.
Pronouncements to be effective in the future
In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 GAAP guidance 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, 2024, as permitted by the newly issued ASU 2022-06, Reference Rate Reform (Topic 848) - Deferral of the
Sunset Date of Topic 848. We are currently evaluating the impact of this guidance, but we do not anticipate its adoption to have
a material impact on our financial condition and results of operations.
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In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale
Restrictions (“ASU 2022-03”). ASU 2022-03 clarifies that a contractual sales restriction on an equity security is not considered
when determining the security's fair value. This ASU was issued to eliminate diversity in practice by clarifying that contractual
arrangements restricting an entity's ability to sell the security for a certain period of time is a characteristic of the reporting
entity and should not be contemplated when determining the security's fair value. ASU 2022-03 requires new disclosures that
provide investors with information about the restriction, including the nature and remaining duration of the restriction. The
ASU is effective for annual periods beginning after December 15, 2023, including interim periods within those annual periods.
Early adoption is permitted. We are currently evaluating the impact of this guidance.
Note 4. Statements of Cash Flows
Supplemental cash flow information for the years ended December 31, 2022, 2021, and 2020 was 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, held-to-maturity ("HTM")1
Corporate actions related to equity securities1
Conversion of AFS fixed income securities to equity securities
Assets acquired under finance lease arrangements
Assets acquired under operating lease arrangements
Non-cash purchase of property and equipment
1Examples of corporate actions include like-kind exchanges, non-cash acquisitions, and stock-splits.
2022
2021
2020
$
26,639
75,000
28,930
100,000
8,148
46
2,438
38,106
—
—
1,463
707
16,649
70
7,935
35
1,768
56,365
—
30,666
15,139
6,709
3,272
472
30,464
47,000
9,498
15
550
55,446
2,589
10,890
—
324
22,390
590
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, 2022
December 31, 2021
$
$
26
25,183
25,209
455
44,608
45,063
Amounts in restricted cash represent cash received from the National Flood Insurance Program ("NFIP") that can only be used
to pay flood claims under the Write Your Own program. Restricted cash was elevated at December 31, 2021, primarily to pay
Hurricane Ida flood claims.
90
Note 5. Investments
(a) Net unrealized losses and gains on investments included in "Other comprehensive (loss) income" ("OCI") by asset class
were as follows for the years ended December 31, 2022, 2021, and 2020:
($ in thousands)
AFS securities:
Fixed income securities
Total AFS securities
HTM securities:
Fixed income securities
Total HTM securities
Short-term securities
Total net unrealized (losses) gains
Deferred income tax
Net unrealized (losses) gains, net of deferred income tax
2022
2021
2020
$
(527,926)
(527,926)
228,947
228,947
386,380
386,380
—
—
35
(4)
(4)
20
7
7
6
(527,891)
110,857
(417,034)
228,963
(48,082)
180,881
386,393
(81,142)
305,251
(Decrease) increase in net unrealized (losses) gains in OCI, net of deferred income tax
$
(597,915)
(124,370)
134,857
(b) Information regarding our AFS securities as of December 31, 2022 and December 31, 2021 were as follows:
December 31, 2022
($ 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
Total AFS fixed income securities
December 31, 2021
($ 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
Total AFS fixed income securities
Cost/
Amortized
Cost
209,528
11,199
965,231
2,558,655
1,607,660
1,169,546
663,935
7,185,754
Cost/
Amortized
Cost
Allowance for
Credit Losses
Unrealized
Gains
Unrealized
Losses
Fair
Value
—
(284)
(1,024)
(30,330)
(2,375)
(11,597)
(111)
(45,721)
37
—
1,812
3,509
2,408
1,148
348
9,262
(20,326)
(1,307)
(48,001)
(196,809)
(121,720)
(99,265)
(49,760)
(537,188)
189,239
9,608
918,018
2,335,025
1,485,973
1,059,832
614,412
6,612,107
Allowance for
Credit Losses
Unrealized
Gains
Unrealized
Losses
Fair
Value
127,974
15,420
1,121,422
2,478,348
1,343,687
756,280
647,622
6,490,753 $
—
(46)
(137)
(6,682)
(939)
(1,909)
(11)
(9,724)
3,629
609
68,258
106,890
14,350
24,813
27,752
246,301
(1,145)
(123)
(235)
(4,953)
(6,284)
(2,932)
(1,682)
(17,354)
130,458
15,860
1,189,308
2,573,603
1,350,814
776,252
673,681
6,709,976
$
$
$
$
91
The following tables provide a roll forward of the allowance for credit losses on our AFS fixed income securities for the years
indicated:
Total AFS fixed income securities
$
2022
($ in thousands)
Foreign government
Obligations of states and political
subdivisons
Corporate securities
CLO and other ABS
RMBS
CMBS
2021
($ in thousands)
Foreign government
Obligations of states and political
subdivisons
Corporate securities
CLO and other ABS
RMBS
CMBS
Beginning
Balance
$
46
137
6,682
939
1,909
11
9,724
$
1
4
2,782
592
561
29
Current
Provision for
Securities
without
Prior
Allowance
291
1,087
30,670
2,158
245
110
34,561
Initial
Allowance for
Purchased
Credit
Deteriorated
Assets with
Credit
Deterioration
—
—
—
—
8,318
—
8,318
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
4
(57)
(6)
3,714
(652)
1,558
(10)
4,608
(194)
(6,902)
(50)
(433)
—
(7,636)
—
—
(3,834)
(20)
—
—
(3,854)
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
46
122
5,785
579
1,593
10
8,135
(1)
11
(992)
(211)
(63)
(28)
(1,284)
—
—
(723)
(21)
(182)
—
(926)
Ending
Balance
284
1,024
30,330
2,375
11,597
111
45,721
Ending
Balance
46
137
6,682
939
1,909
11
—
—
(170)
—
—
—
Total AFS fixed income securities
$
3,969
(170)
9,724
During 2022 or 2021, we had no write-offs or recoveries of our AFS fixed income securities.
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. Accrued interest on AFS securities was
$56.4 million as of December 31, 2022, and $46.3 million as of December 31, 2021. We did not record any material write-offs
of accrued interest during 2022 or 2021.
(c) Quantitative information about unrealized losses on our AFS portfolio follows:
December 31, 2022
Less than 12 months
12 months or longer
Total
($ in thousands)
AFS fixed income securities:
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
U.S. government and government agencies
Foreign government
Obligations of states and political subdivisions
Corporate securities
CLO and other ABS
RMBS
CMBS
Total AFS fixed income securities
$
$
166,975
5,573
681,795
1,889,492
916,423
887,229
512,953
5,060,440
(13,658)
(608)
(43,767)
(164,197)
(69,155)
(76,432)
(37,815)
(405,632)
16,011
2,456
16,618
133,223
411,283
108,041
77,181
764,813
(6,668)
(699)
(4,234)
(32,612)
(52,565)
(22,833)
(11,945)
(131,556)
182,986
8,029
698,413
2,022,715
1,327,706
995,270
590,134
5,825,253
(20,326)
(1,307)
(48,001)
(196,809)
(121,720)
(99,265)
(49,760)
(537,188)
92
December 31, 2021
Less than 12 months
12 months or longer
Total
($ in thousands)
AFS fixed income securities:
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
U.S. government and government agencies
Foreign government
Obligations of states and political subdivisions
Corporate securities
CLO and other ABS
RMBS
CMBS
Total AFS fixed income securities
$
34,857
2,000
25,837
300,549
663,976
236,010
112,899
1,376,128
(746)
(84)
(235)
(4,903)
(4,934)
(2,931)
(1,016)
(14,849)
7,827
1,061
—
2,520
53,368
20
20,326
85,122
(399)
(39)
—
(50)
(1,350)
(1)
(666)
(2,505)
42,684
3,061
25,837
303,069
717,344
236,030
133,225
1,461,250
(1,145)
(123)
(235)
(4,953)
(6,284)
(2,932)
(1,682)
(17,354)
We currently do not intend to sell any of the securities summarized in the tables above, nor will we be required to sell any of
them. The increase in gross unrealized losses as December 31, 2022, compared to December 31, 2021, was driven by an
increase in benchmark U.S. Treasury rates and a widening of credit spreads, with the increase in interest rates having the most
significant impact. The severity of impairment on these securities is less than 10% at both periods. 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 allowance for credit loss is required on these balances beyond the
allowance for credit loss recorded as of December 31, 2022. This conclusion reflects our current judgment about the financial
position and future prospects of the entities that issued the investment security and underlying collateral.
(d) AFS and HTM fixed income securities at December 31, 2022, by contractual maturity are shown below. The maturities of
mortgage-backed securities were calculated using each security's estimated average life. Expected maturities may differ from
contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment
penalties.
($ 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
Fair Value
$
$
324,394
2,928,594
2,600,001
759,118
6,612,107
HTM
Carrying Value
6,093
3,779
21,285
—
31,157
Fair Value
6,090
3,798
19,949
—
29,837
(e) The following table summarizes our alternative investment portfolio by strategy:
($ in thousands)
Alternative investments
Private equity
Private credit
Real assets
Total alternative investments
December 31, 2022
December 31, 2021
Carrying
Value
Remaining
Commitment
Maximum
Exposure to Loss
Carrying
Value
Remaining
Commitment
Maximum
Exposure to Loss
$
280,980
54,866
35,470
371,316
134,676
89,481
21,945
246,102
415,656
144,347
57,415
617,418
273,070
63,138
23,524
359,732
99,734
92,674
22,579
214,987
372,804
155,812
46,103
574,719
We are contractually committed to make additional investments up to the remaining commitments stated above. We did not
provide any non-contractual financial support during 2022 or 2021.
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.
93
•
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
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 partnership positions can be sold on the
secondary market. Once liquidation is triggered by clauses within the limited partnership agreements or at the funds’ stated end
date, we 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 of, or income generated by, the limited partnerships.
The following tables show gross summarized financial information for our alternative investments portfolio, including the
portion we do not own. 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
2022
2021
$
114,038
128,158
15,464
112,694
107,347
112,232
12,371
99,861
94
Income Statement Information
12 months ended September 30,
($ in millions)
Net investment income (loss)
Realized gains
Net change in unrealized appreciation
Net income
Alternative investment income included in "Net investment income earned" on our
Consolidated Statements of Income
2022
2021
2020
$
$
765
12,590
(5,215)
8,140
23.0
653
6,121
26,877
33,651
117.7
(26)
1,452
4,898
6,324
26.5
(f) We did not have exposure to any credit concentration risk of a single issuer greater than 10% of our stockholders' equity,
other than to certain U.S. government agencies, as of December 31, 2022 or December 31, 2021.
(g) We have pledged certain AFS fixed income securities as collateral related to our borrowing relationships with the Federal
Home Loan Bank of Indianapolis ("FHLBI") and the Federal Home Loan Bank of New York ("FHLBNY"). In addition, we
had certain securities on deposit with various state and regulatory agencies at December 31, 2022 to comply with insurance
laws. We retain all rights regarding all securities pledged as collateral.
The following table summarizes the market value of these securities at December 31, 2022:
($ in millions)
U.S. government and government agencies
Obligations of states and political subdivisions
RMBS
CMBS
Total pledged as collateral
FHLBI
Collateral
FHLBNY
Collateral
Regulatory
Deposits
Total
$
$
—
—
61.4
4.6
66.0
—
—
28.8
9.6
38.4
19.3
3.6
—
—
22.9
19.3
3.6
90.2
14.2
127.3
(h) The components of pre-tax net investment income earned were as follows:
($ in thousands)
Fixed income securities
CMLs
Equity securities
Short-term investments
Alternative investments
Other investments
Investment expenses
2022
2021
2020
$
259,918
5,555
13,554
3,997
23,003
258
(18,130)
288,155
209,709
2,743
15,920
260
117,701
359
(20,103)
326,589
203,926
844
9,286
1,821
26,504
418
(15,692)
227,107
Net investment income earned
$
(i) The following table summarizes net realized and unrealized investment gains and losses for the periods indicated:
($ in thousands)
Gross gains on sales
Gross losses on sales
Net realized (losses) gains on disposals
Net unrealized (losses) gains on equity securities
Net credit loss (expense) on fixed income securities, AFS
Net credit loss (expense) benefit on fixed income securities, HTM
Net credit loss (expense) on CMLs
Losses on securities for which we have the intent to sell
Net realized and unrealized investment (losses) gains
2022
2021
2020
$
$
28,419
(60,055)
(31,636)
(32,127)
(39,169)
63
(116)
(11,823)
(114,808)
15,284
(8,140)
7,144
17,881
(6,858)
(49)
—
(519)
17,599
18,893
(9,745)
9,148
7,939
(5,042)
4
—
(16,266)
(4,217)
Net realized and unrealized investment losses in 2022 were primarily driven by (i) a decrease in valuations reflecting the current
public equities market, (ii) active trading of our fixed income securities in an effort to opportunistically increase yield given the
rising interest rate environment, and (iii) higher credit loss expense on our AFS fixed income securities portfolio.
95
Net unrealized losses and gains recognized in income on equity securities, as reflected in the table above, included the
following:
($ in thousands)
2022
2021
2020
Unrealized (losses) gains recognized in income on equity securities:
On securities remaining in our portfolio at end of period
On securities sold in period
Total unrealized (losses) gains recognized in income on equity securities
$
$
(10,454)
(21,673)
(32,127)
16,473
1,408
17,881
7,936
3
7,939
Proceeds from the sales of AFS fixed income securities were $1,211.7 million, $502.9 million, and $487.1 million in 2022,
2021, and 2020, respectively. Proceeds from the sales of equity securities were $186.1 million, $99.2 million, and $1.3 million
in 2022, 2021, and 2020, respectively.
Note 6. Comprehensive Income
(a) The components of comprehensive income, both gross and net of tax, for 2022, 2021, and 2020 are as follows:
2022
($ in thousands)
Net income
Components of OCI:
Unrealized (losses) gains on investment securities:
Unrealized holding losses 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 intent-to-sell AFS securities
Credit loss expense
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 loss
2021
($ in thousands)
Net income
Components of OCI:
Unrealized (losses) gains on investment securities:
Unrealized holding losses during the year
Unrealized losses on securities with credit loss recognized in earnings
Amounts reclassified into net income:
HTM securities
Net realized gains on disposals and losses on intent-to-sell AFS securities
Credit loss expense
Total unrealized losses 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 loss
Comprehensive income
96
Gross
Tax
Net
$
280,186
55,300
224,886
(668,107)
(187,968)
4
60,048
39,169
(756,854)
(140,302)
(39,473)
1
12,610
8,225
(158,939)
(527,805)
(148,495)
3
47,438
30,944
(597,915)
(20,941)
(4,398)
(16,543)
1,668
(19,273)
(776,127)
(495,941)
$
351
(4,047)
(162,986)
(107,686)
1,317
(15,226)
(613,141)
(388,255)
Gross
Tax
Net
$
505,310
101,473
403,837
(151,391)
(9,061)
(11)
(3,825)
6,858
(157,430)
(31,793)
(1,902)
(2)
(803)
1,440
(33,060)
(119,598)
(7,159)
(9)
(3,022)
5,418
(124,370)
21,636
4,543
17,093
2,772
24,408
(133,022)
372,288
$
582
5,125
(27,935)
73,538
2,190
19,283
(105,087)
298,750
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 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
Gross
Tax
Net
$
302,988
56,633
246,355
168,487
(8,176)
(24)
5,376
5,042
170,705
35,383
(1,717)
(5)
1,129
1,058
35,848
133,104
(6,459)
(19)
4,247
3,984
134,857
1,515
318
1,197
3,015
4,530
175,235
478,223
$
633
951
36,799
93,432
2,382
3,579
138,436
384,791
(b) The balances of, and changes in, each component of AOCI (net of taxes) as of December 31, 2022 and 2021 were as
follows:
Net Unrealized (Losses) Gains on Investment Securities
Credit Loss
Related1
All Other
$
HTM Related
($ in thousands)
Balance, December 31, 2020
OCI before reclassifications
Amounts reclassified from AOCI
Net current period OCI
Balance, December 31, 2021
OCI before reclassifications
Amounts reclassified from AOCI
Net current period OCI
Balance, December 31, 2022
$
1Represents change in unrealized loss on securities with credit loss recognized in earnings.
(2,546)
(7,159)
5,418
(1,741)
(4,287)
(148,495)
30,944
(117,551)
(121,838)
6
—
(9)
(9)
(3)
—
3
3
—
307,790
(119,598)
(3,022)
(122,620)
185,170
(527,805)
47,438
(480,367)
(295,197)
Investments
Subtotal
305,250
(126,757)
2,387
(124,370)
180,880
(676,300)
78,385
(597,915)
(417,035)
Defined Benefit
Pension and
Post-retirement
Plans
Total AOCI
(85,064)
17,093
2,190
19,283
(65,781)
(16,543)
1,317
(15,226)
(81,007)
220,186
(109,664)
4,577
(105,087)
115,099
(692,843)
79,702
(613,141)
(498,042)
97
The reclassifications out of AOCI are as follows:
($ in thousands)
HTM related
Year ended
December 31, 2022
Year ended
December 31, 2021
Affected Line Item in the Consolidated
Statements of Income
Unrealized gains on HTM disposals
Amortization of net unrealized losses on HTM
securities
$
Net realized losses (gains) on disposals and losses on
intent-to-sell AFS securities
Net realized losses (gains) 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
(7)
11
4
(1)
3
60,048
60,048
(12,610)
47,438
39,169
39,169
(8,225)
30,944
359
1,309
1,668
(351)
1,317
(14) Net realized and unrealized investment (losses) gains
3 Net investment income earned
(11)
Income before federal income tax
2 Total federal income tax expense
(9) Net income
(3,825) Net realized and unrealized investment (losses) gains
(3,825) Income before federal income tax
803 Total federal income tax expense
(3,022) Net income
6,858 Net realized and unrealized investment (losses) gains
6,858
Income before federal income tax
(1,440) Total federal income tax expense
5,418 Net income
638 Loss and loss expense incurred
2,134 Other insurance expenses
2,772
Income before federal income tax
(582) Total federal income tax expense
2,190 Net income
Total reclassifications for the period
$
79,702
4,577 Net income
Note 7. Fair Value Measurements
The financial assets in our investment portfolio are primarily measured at fair value as disclosed on the Consolidated Balance
Sheets. The following table presents the carrying amounts and estimated fair values of our financial liabilities as of
December 31, 2022 and 2021:
($ in thousands)
Financial Liabilities
Long-term debt:
7.25% Senior Notes
6.70% Senior Notes
5.375% Senior Notes
3.03% Borrowings from FHLBI
Subtotal long-term debt
Unamortized debt issuance costs
Finance lease obligations
Total long-term debt
December 31, 2022
December 31, 2021
Carrying Amount
Fair Value
Carrying Amount
Fair Value
$
$
49,921
99,542
294,424
60,000
503,887
(2,929)
3,718
504,676
51,705
99,264
258,459
57,175
466,603
$
49,917
99,520
294,330
60,000
503,767
(3,167)
5,450
506,050
63,719
127,574
395,652
64,126
651,071
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.
98
The following tables provide quantitative disclosures of our financial assets that were measured and recorded at fair value at
December 31, 2022 and 2021:
December 31, 2022
($ 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
189,239
9,608
918,018
2,335,025
1,485,973
1,059,832
614,412
6,612,107
160,355
1,645
162,000
440,456
Total assets measured at fair value
$
7,214,563
109,240
—
—
—
—
—
—
109,240
55,846
1,645
57,491
418,199
584,930
79,999
9,608
911,357
2,147,045
1,332,631
1,059,832
614,037
6,154,509
—
—
—
22,257
6,176,766
—
—
6,661
187,980
153,342
—
375
348,358
897
—
897
—
349,255
December 31, 2021
($ 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
130,458
15,860
1,189,308
2,573,603
1,350,814
776,252
673,681
6,709,976
333,449
2,088
335,537
447,863
60,615
—
—
—
—
—
—
60,615
249,846
2,088
251,934
442,723
69,843
15,860
1,181,563
2,459,476
1,225,905
776,007
669,425
6,398,079
—
—
—
5,140
—
—
7,745
114,127
124,909
245
4,256
251,282
—
—
—
—
Total assets measured at fair value
251,282
1Investments amounting to $103.6 million and $83.6 million at December 31, 2022 and December 31, 2021, 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.
7,493,376
6,403,219
755,272
$
99
The following tables provide a summary of Level 3 changes for the years indicated:
2022
($ in thousands)
Fair value, December 31, 2021
Total net (losses) gains for the period included in:
OCI
Net realized and unrealized investment (losses) gains
Net investment income earned
Purchases
Sales
Issuances
Settlements
Transfers into Level 3
Transfers out of Level 3
Fair value, December 31, 2022
Obligations of
states and political
subdivisions
$
$
7,745
(985)
(99)
—
—
—
—
—
—
—
6,661
Corporate
Securities
114,127
CLO and
Other ABS
124,909
RMBS
CMBS
245
4,256
(23,624)
(2,414)
68
99,868
—
—
(10,148)
19,214
(9,111)
187,980
(11,287)
(876)
229
100,406
—
—
(12,361)
502
(48,180)
153,342
(17)
—
—
—
—
—
(11)
—
(217)
—
(481)
—
45
—
—
—
(15)
—
(3,430)
375
Common
Stock
—
—
—
—
—
—
—
—
897
—
897
Total
251,282
(36,394)
(3,389)
342
200,274
—
—
(22,535)
20,613
(60,938)
349,255
Change in unrealized losses for the period included in
earnings for assets held at period end
Change in unrealized losses for the period included in
OCI for assets held at period end
(99)
(2,399)
(876)
—
—
—
(3,374)
(985)
(23,630)
(11,246)
(17)
(481)
—
(36,359)
2021
($ in thousands)
Fair value, December 31, 2020
Total net (losses) gains for the period included in:
OCI
Net realized and unrealized investment (losses) gains
Net investment income earned
Purchases
Sales
Issuances
Settlements
Transfers into Level 3
Transfers out of Level 3
Fair value, December 31, 2021
Change in unrealized (losses) gains for the period
included in earnings for assets held at period end
Change in unrealized (losses) gains for the period
included in OCI for assets held at period end
Obligations of
states and political
subdivisions
Corporate
Securities
CLO and
Other ABS
RMBS
CMBS
$
2,894
70,700
56,375
(239)
(11)
—
—
—
—
—
5,101
—
7,745
1,636
(50)
27
64,813
—
—
(544)
981
(23,436)
114,127
(520)
(214)
16
76,731
—
—
(5,161)
11,344
(13,662)
124,909
(11)
(50)
(239)
1,636
(214)
(520)
$
—
—
—
—
249
—
—
(4)
—
—
245
—
—
—
(196)
5
19
98
—
—
(52)
4,382
—
4,256
Total
129,969
681
(270)
62
141,891
—
—
(5,761)
21,808
(37,098)
251,282
5
(270)
(196)
681
The following tables present quantitative information about the significant unobservable inputs used in the fair value
measurements of Level 3 assets at December 31, 2022 and 2021:
December 31, 2022
($ in thousands)
Internal valuations:
Corporate securities
CLO and other ABS
Total internal valuations
Other1
Total Level 3 securities
Assets Measured
at Fair Value
Valuation Techniques
Unobservable
Inputs
Range
Weighted
Average
$
$
81,867 Discounted Cash Flow Illiquidity Spread
59,452 Discounted Cash Flow Illiquidity Spread
(4.4)% - 5.3%
0.01% - 19.6%
1.3%
2.5%
141,319
207,936
349,255
100
December 31, 2021
($ in thousands)
Internal valuations:
Corporate securities
CLO and other ABS
Total internal valuations
Other1
Total Level 3 securities
Assets Measured
at Fair Value
Valuation Techniques
Unobservable
Inputs
Range
Discounted Cash Flow
Discounted Cash Flow
Illiquidity Spread
Illiquidity Spread
0.3% - 3.0%
0.7% - 8.0%
$
$
54,135
34,903
89,038
162,244
251,282
Weighted
Average
(1.2)%
(2.1)%
1Other is comprised of broker quotes or other third-party pricing for which there is a lack of transparency into the inputs used to develop the valuations. The
quantitative details of these unobservable inputs is neither provided to us, nor reasonably available to us, and therefore are not included in the tables above.
For the securities in the tables above valued using a discounted cash flow analysis, we apply an illiquidity spread in our
determination of fair value. An increase in this assumption would result in a lower fair value measurement.
The following tables provide quantitative information regarding our financial assets and liabilities that were not measured at fair
value, but were disclosed as such at December 31, 2022 and 2021:
December 31, 2022
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
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)
$
$
$
$
$
3,405
26,432
29,837
139,243
51,705
99,264
258,459
57,175
466,603
—
—
—
—
—
—
—
—
—
3,405
26,432
29,837
—
—
—
—
139,243
51,705
99,264
258,459
57,175
466,603
—
—
—
—
—
December 31, 2021
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
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)
—
—
—
—
—
—
—
—
—
3,576
25,884
29,460
—
—
—
—
97,598
63,719
127,574
395,652
64,126
651,071
—
—
—
—
—
$
$
$
$
$
3,576
25,884
29,460
97,598
63,719
127,574
395,652
64,126
651,071
101
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 2022 and 2021:
($ in thousands)
Balance at beginning of year
Current period change for expected credit losses
Write-offs charged against the allowance for credit losses
Recoveries
ACL, end of year
December 31, 2022
December 31, 2021
$
$
13,600
6,065
(4,978)
1,413
16,100
21,000
1,291
(9,343)
652
13,600
In 2022, we recognized an additional allowance for credit losses on premiums receivable of $7.5 million, excluding the impact
of write-offs. The additional allowance consisted of a reserve of $9.3 million on 2022 premiums based on our historical write-
off percentages and assumptions, partially offset by a $1.8 million allowance reduction on 2021 and older policies, primarily
impacted by the COVID-19 pandemic, for which the credit loss did not fully materialize.
In 2021, we recognized an additional allowance for credit losses on premiums receivable of $1.9 million, excluding the impact
of write-offs. The additional allowance consisted of a reserve of $8.3 million on 2021 premiums based on our historical write-
off percentages and assumptions, partially offset by a $6.4 million allowance reduction on older policies, primarily impacted by
the COVID-19 pandemic, for which the credit loss did not fully materialize, as mentioned above.
For a discussion of the methodology used to evaluate our estimate of expected credit losses on premiums receivable, refer to
Note 2. "Summary of Significant Accounting Policies."
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 2023, our deductible, before tax, is approximately $480 million. For losses above the deductible, the federal
government will pay 80% of losses to an industry limit of $100 billion, and the insurer retains 20%.
The Insurance Subsidiaries remain liable to policyholders to the extent that any reinsurer becomes unable to meet their
contractual obligations. In addition to this direct counterparty credit risk, we have indirect counterparty credit risk as our
reinsurers often enter into their own reinsurance programs, or retrocessions, as part of managing their exposure to large losses
and improving their financial strength ratings. The credit quality of our reinsurers is also impacted by other factors, such as
their reserve adequacy, investment portfolio, regulatory capital position, catastrophe aggregations, and risk management
expertise. We evaluate and monitor the financial condition of our reinsurers under voluntary reinsurance arrangements to
minimize our exposure to significant losses from reinsurer insolvencies.
102
The following tables provide (i) a disaggregation of our reinsurance recoverable balance by financial strength rating, and (ii) an
aging analysis of our past due reinsurance recoverable balances as of December 31, 2022 and 2021:
($ in thousands)
Financial strength rating of rated reinsurers
A++
A+
A
A-
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
($ in thousands)
Financial strength rating of rated reinsurers
A++
A+
A
A-
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
December 31, 2022
Current
Past Due
Total Reinsurance
Recoverables
46,282 $
425,395
106,102
7,148
584,927 $
180,794 $
13,678
194,472 $
1 $
3,191
1,315
89
4,596 $
— $
415
415 $
779,399 $
5,011 $
$
46,283
428,586
107,417
7,237
589,523
180,794
14,093
194,887
784,410
(1,600)
782,810
Current
December 31, 2021
Past Due
Total Reinsurance Recoverables
38,601 $
339,857
95,675
3,209
477,342 $
116,378 $
4,597
120,975 $
9 $
1,520
1,227
145
2,901 $
— $
450
450 $
598,317 $
3,351 $
$
38,610
341,377
96,902
3,354
480,243
116,378
5,047
121,425
601,668
(1,600)
600,068
$
$
$
$
$
$
$
$
$
$
The $109.3 million increase in "Total rated reinsurers" as of December 31, 2022, compared to December 31, 2021, was
primarily due to reserves recorded for Winter Storm Elliott, which impacted 37 states, 26 of which are in our Standard
Commercial Lines footprint. Additionally, the $64.4 million increase in "Federal and state pools" as of December 31, 2022,
compared to December 31, 2021, was primarily due to NFIP reserves recorded for flood losses in Florida and surrounding
states as a result of Hurricane Ian, which are 100% ceded to the NFIP.
The following table provides a roll forward of the allowance for credit losses on our reinsurance recoverable balance for 2022
and 2021:
($ in thousands)
Balance at beginning of year
Current period change for expected credit losses
Write-offs charged against the allowance for credit losses
Recoveries
ACL, end of year
December 31, 2022
December 31, 2021
$
$
1,600 $
—
—
—
1,600 $
1,777
(177)
—
—
1,600
For a discussion of the methodology used to evaluate our estimate of expected credit losses on our reinsurance recoverable
balance, refer to Note 2. "Summary of Significant Accounting Policies."
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, net of allowance for credit losses
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: ACL
Reinsurers, net of ACL
Less: collateral2
Reinsurers, net of collateral
As of December 31, 2022
% of
Reinsurance
Balance
Reinsurance
Balances
As of December 31, 2021
% of
Reinsurance
Balance
Reinsurance
Balances
$
$
$
$
782,810
172,371
955,181
276,541
45,496
3,488
325,525
629,656
127,106
124,706
70,957
36,525
32,730
239,232
631,256
(1,600)
629,656
(126,167)
503,489
$
$
$
$
29 %
5
—
34
66
13
13
8
4
3
25
66 %
600,068
183,007
783,075
223,845
49,738
2,385
275,968
507,107
108,381
107,110
70,814
29,186
26,490
166,726
508,707
(1,600)
507,107
(128,699)
378,408
29 %
6
—
35
65
14
14
9
4
3
21
65 %
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 lists direct, assumed, and ceded reinsurance amounts for premiums written, premiums earned, and loss and
loss expense incurred for the indicated periods:
($ in thousands)
Premiums written:
Direct
Assumed
Ceded
Net
Premiums earned:
Direct
Assumed
Ceded
Net
Loss and loss expense incurred:
Direct
Assumed
Ceded
Net
2022
2021
2020
4,068,518
32,320
(527,248)
3,573,590
3,880,522
30,742
(537,884)
3,373,380
2,537,638
23,160
(449,020)
2,111,778
3,656,537
22,664
(489,488)
3,189,713
3,472,715
21,550
(477,012)
3,017,253
2,096,512
13,813
(296,341)
1,813,984
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
$
$
$
$
$
$
104
Ceded premiums written, ceded premiums earned, and ceded loss and loss expense incurred related to our participation in the
NFIP, to which we cede 100% of our NFIP flood premiums, losses, and loss expenses, were as follows:
Ceded to NFIP ($ in thousands)
Ceded premiums written
Ceded premiums earned
Ceded loss and loss expense incurred
2022
2021
2020
$
(259,246)
(274,100)
(200,467)
(284,311)
(274,384)
(215,224)
(274,042)
(271,598)
(78,993)
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
$
2022
4,580,903
578,641
4,002,262
2,190,668
(78,890)
2,111,778
768,583
958,149
1,726,732
4,387,308
757,513
5,144,821
2021
4,260,355
554,269
3,706,086
1,896,837
(82,853)
1,813,984
676,331
841,477
1,517,808
4,002,262
578,641
4,580,903
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
4,260,355
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
Gross reserves for loss and loss expense at end of year
12020 includes an adjustment of $2.9 million related to our adoption of ASU 2016-13, Financial Instruments - Credit Losses.
$
Our net loss and loss expense reserves increased by $385.0 million in 2022, $296.2 million in 2021, and $183.1 million in 2020.
The loss and loss expense reserves are net of anticipated recoveries for salvage and subrogation claims, which amounted to
$91.3 million for 2022, $87.0 million for 2021, and $80.9 million for 2020. The increase in net loss and loss expense reserves
in 2022 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 reserve development. In
2022, we experienced overall net favorable prior year loss reserve development of $78.9 million, compared to $82.9 million in
2021 and $72.9 million in 2020.
The following table summarizes the prior year reserve development by line of business:
(Favorable)/Unfavorable Prior Year Development
($ in millions)
General Liability
Commercial Automobile
Workers Compensation
Businessowners' Policies
Commercial Property
Bonds
Homeowners
Personal Automobile
E&S Casualty Lines
E&S Property Lines
Other
Total
2022
2021
2020
$
$
(5.0)
22.5
(70.0)
(7.3)
(1.6)
(10.0)
(0.6)
0.5
(5.0)
(2.5)
0.1
(78.9)
(29.0)
13.3
(58.0)
(0.4)
(2.6)
—
1.8
(0.2)
(7.0)
(0.8)
—
(82.9)
(35.0)
7.1
(60.0)
3.9
9.2
—
7.7
(1.8)
—
(4.0)
—
(72.9)
The Insurance Subsidiaries had $78.9 million of favorable prior year reserve development during 2022, which included $86.0
million of net favorable casualty reserve development and $7.1 million of unfavorable property reserve development. The net
favorable casualty reserve development was largely driven by the workers compensation line of business, which was impacted
by continued favorable medical trends in accident years 2020 and prior, and favorable inception-to-date claim frequencies in
accident year 2020. Partially offsetting this net favorable reserve development was $15.0 million of unfavorable casualty
105
reserve development in the commercial auto line of business ($22.5 million net of property reserve development), primarily
driven by increased loss severities in accident year 2021.
The Insurance Subsidiaries had $82.9 million of favorable prior year reserve development during 2021, which included $81.0
million of net favorable casualty reserve development and $1.9 million of favorable 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 2019 and prior, and general
liability development was attributable to lower loss severities in accident years 2018 and prior. In addition, our E&S casualty
lines experienced favorable reserve development of $7.0 million in 2021. Partially offsetting this net favorable reserve
development was $15.0 million of unfavorable casualty reserve development in the commercial auto line of business
($13.3 million net of property reserve development), driven by unfavorable reserve development on loss severities in accident
years 2016 through 2019.
The Insurance Subsidiaries had $72.9 million of favorable prior 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 $10.0 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.
(b) We have exposure to abuse or molestation claims within our general liability line of business, primarily through insurance
policies that we issue to schools, religious institutions, day-care facilities, 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 highly unpredictable and may be reported over an extended period of time. In addition to legislative changes
that increase our exposure, 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 or our predecessor companies, that will
require complex claims coverage determinations, potential litigation, and the need to collect from reinsurers under older
reinsurance agreements.
(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 highly unpredictable and may be reported over an extended period of time. 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. 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.
106
The following table details our loss and loss expense reserves for various asbestos and environmental claims showing gross and
net of reinsurance:
($ in millions)
Asbestos
Landfill sites
Underground storage tanks
Total
2022
Gross
Net
$
$
5.9
11.8
10.1
27.8
4.7
7.5
8.1
20.3
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 asbestos and environmental incurred loss and loss expense and related reserves
thereon showing gross and net of reinsurance:
($ 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
2022
2021
2020
Gross
Net
Gross
Net
Gross
Net
$
$
$
$
$
$
6,115
8
(232)
5,891
21,658
696
(477)
21,877
27,773
704
(709)
27,768
4,884
8
(232)
4,660
16,191
(213)
(309)
15,669
21,075
(205)
(541)
20,329
6,254
51
(190)
6,115
22,276
(613)
(5)
21,658
28,530
(562)
(195)
27,773
5,023
51
(190)
4,884
16,398
(14)
(193)
16,191
21,421
37
(383)
21,075
6,288
320
(354)
6,254
22,413
(447)
310
22,276
28,701
(127)
(44)
28,530
5,057
320
(354)
5,023
16,532
(474)
340
16,398
21,589
(154)
(14)
21,421
107
(d) The following is information about incurred and paid claims development as of December 31, 2022, net of reinsurance, as
well as the associated IBNR liabilities. During the experience period we implemented a series of underwriting and claims-
related initiatives, including claims management changes. These initiatives focused on general underwriting and claims
improvements occurring naturally through our portfolio and may impact some relationships in the tables below. As a result,
several historical patterns have changed and may no longer be appropriate to use as the sole basis for projections.
The tables below also include information regarding reported claims. 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. 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. The cumulative number of reported claims for each accident year in the tables below are updated with
information available as of December 31, 2022. Therefore, the claim counts presented for the more recent accident years may
not be representative of the ultimate claim counts, as they are for the more mature accident years presented.
All Lines
(in thousands, except for claim counts)
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
Accident
Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
IBNR
$ 1,044,142 1,062,045
1,047,230
1,021,007
1,002,316
987,763
984,858
973,739
957,958
951,813
1,107,513
1,133,798
1,146,990
1,124,014
1,104,218
1,100,208
1,089,529
1,094,367
1,090,345
1,114,081
1,130,513
1,144,830
1,138,313
1,119,441
1,108,860
1,103,592
1,103,543
1,188,608
1,203,634
1,227,142
1,199,734
1,180,829
1,171,273
1,167,539
1,270,110
1,313,372
1,313,585
1,288,526
1,268,941
1,273,039
33,631
42,087
45,698
67,934
84,415
1,413,800
1,461,603
1,457,415
1,441,303
1,425,540
153,214
1,483,945
1,523,041
1,526,566
1,529,859
272,639
1,591,972
1,587,607
1,550,195
395,519
1,784,661
1,781,054
636,984
2,073,343
1,089,571
Total
13,946,270
As of
December 31, 2022
Cumulative
Number of
Reported
Claims
91,959
95,835
95,173
95,944
99,877
107,095
104,096
94,752
97,914
94,382
All Lines
(in thousands)
Accident
Year
2013
2014
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
2017
2016
2018
2015
2019
2020
2021
2022
$
335,956
518,872
405,898
644,475
614,075
376,641
748,758
736,154
581,203
387,272
833,823
855,959
725,385
617,958
433,440
872,331
936,425
845,868
764,331
678,453
511,271
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
891,841
904,825
911,657
916,769
981,868
1,002,157
1,020,961
1,032,400
929,222
892,390
829,134
779,466
510,091
967,857
1,000,509
1,018,023
983,852
954,792
1,025,264
1,050,258
1,061,952
1,116,336
942,893
1,083,556
1,187,744
781,462
572,302
949,996
1,109,628
831,976
609,889
988,463
934,965
699,789
Total
10,066,069
All outstanding liabilities before 2013, net of reinsurance
379,073
Liabilities for loss and loss expenses, net of reinsurance
4,259,274
108
General Liability
(in thousands, except for claim counts)
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
Accident
Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
IBNR
$ 250,609
251,421
239,776
225,709
210,785
203,831
202,697
195,697
192,782
189,594
244,312
249,946
257,132
239,333
234,082
237,125
229,679
230,247
228,933
254,720
245,710
246,990
233,249
219,204
214,176
211,768
210,137
277,214
272,048
277,986
263,245
252,733
246,643
243,669
293,747
293,128
301,384
289,883
278,607
283,379
317,934
336,326
345,224
332,013
324,567
12,561
18,901
19,932
30,556
46,761
92,627
347,150
356,363
358,301
366,184
154,311
361,554
360,302
352,834
201,089
422,748
414,279
287,278
482,590
409,505
Total
3,096,166
As of
December 31, 2022
Cumulative
Number of
Reported
Claims
10,462
10,704
10,565
10,825
11,324
11,802
11,575
9,645
10,136
8,988
General Liability
(in thousands)
Accident
Year
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
$
12,789
35,113
14,901
72,127
46,825
14,665
104,587
79,972
39,978
15,684
139,114
121,969
78,668
46,549
17,366
153,628
154,957
116,804
89,431
49,470
19,531
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
163,764
179,192
144,216
133,757
92,355
60,784
18,097
169,847
187,352
157,071
164,136
131,980
108,421
58,284
21,858
172,983
198,772
173,697
181,770
167,002
155,538
100,206
58,699
28,069
174,987
204,212
179,117
199,032
201,948
197,286
160,680
100,356
71,664
31,502
All outstanding liabilities before 2013, net of reinsurance
113,263
Liabilities for loss and loss expenses, net of reinsurance
1,688,645
Total
1,520,784
Workers Compensation
(in thousands, except for claim counts)
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
Accident
Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
IBNR
$ 199,794
194,318
187,658
173,160
166,662
162,787
159,767
157,645
153,436
149,975
199,346
187,065
182,579
172,515
164,420
160,646
159,604
161,021
158,479
193,729
194,639
183,604
179,642
176,242
172,572
170,577
169,008
196,774
184,946
176,248
166,009
156,540
155,210
151,961
195,202
184,306
175,853
162,672
154,159
151,221
193,894
193,818
181,151
173,428
167,974
188,625
188,596
174,912
164,940
168,643
168,594
159,229
185,198
185,151
16,818
17,598
18,790
21,205
19,961
25,963
32,088
44,323
74,474
207,206
116,968
Total
1,665,144
109
As of
December 31, 2022
Cumulative
Number of
Reported
Claims
11,385
10,498
10,554
10,586
10,813
11,133
10,324
7,534
8,547
8,517
Workers Compensation
(in thousands)
Accident
Year
2013
2014
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
2017
2016
2015
2019
2018
2020
2021
2022
$
36,829
74,568
35,924
96,376
78,944
33,857
109,739
100,876
77,320
34,525
118,669
113,626
98,195
78,531
40,375
124,130
119,392
112,601
98,037
82,216
41,122
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
126,822
124,077
120,097
109,166
100,645
84,780
37,826
129,224
127,858
124,046
115,159
110,645
105,903
77,878
29,559
130,467
130,726
129,019
119,800
116,426
119,904
100,812
68,277
32,918
131,390
132,809
132,235
122,186
120,468
126,206
112,649
87,211
76,015
45,814
All outstanding liabilities before 2013, net of reinsurance
Liabilities for loss and loss expenses, net of reinsurance
230,858
809,019
Total
1,086,983
Commercial Automobile
(in thousands, except for claim counts)
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
Accident
Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
IBNR
$ 188,289
205,282
209,197
207,994
210,410
207,975
209,602
208,040
207,554
207,564
200,534
212,725
216,824
219,925
218,172
217,334
216,461
214,992
214,816
220,994
240,958
253,074
259,495
260,565
261,386
262,054
262,766
255,187
274,367
285,302
285,304
290,359
291,674
294,297
301,274
329,389
324,291
322,197
326,461
325,654
347,908
352,487
345,547
350,310
348,202
385,212
398,346
404,854
407,051
381,654
381,163
375,636
535
516
1,627
2,635
4,664
11,375
32,019
70,872
483,831
512,673
155,984
572,421
278,004
Total
3,521,080
Commercial Automobile
(in thousands)
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
As of
December 31, 2022
Cumulative
Number of
Reported
Claims
26,221
28,263
30,085
32,041
33,345
36,002
36,375
30,343
36,843
36,909
Accident
Year
2013
2014
2015
2016
$
76,469
109,893
80,810
140,015
117,169
91,347
169,850
148,884
132,260
106,022
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2018
2019
2020
2021
2022
200,750
202,821
211,515
200,701
178,823
134,867
202,622
209,655
238,142
233,939
220,422
193,788
149,538
205,064
212,481
249,905
264,858
262,349
243,713
221,590
139,016
206,162
213,689
255,600
277,242
296,600
291,725
283,410
198,034
187,200
206,641
213,847
257,668
284,870
309,810
319,819
331,152
254,365
283,411
216,180
All outstanding liabilities before 2013, net of reinsurance
4,650
Liabilities for loss and loss expenses, net of reinsurance
847,967
Total
2,677,763
Unaudited
2017
189,626
180,701
175,866
155,720
117,287
110
Businessowners' Policies
(in thousands, except for claim counts)
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
Accident
Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
IBNR
$ 49,617
42,618
55,962
41,005
60,949
52,871
40,624
62,548
53,768
52,335
41,369
59,806
57,245
53,792
46,624
39,709
58,517
55,925
54,993
48,698
55,024
39,699
58,093
54,454
53,835
51,524
57,202
53,531
39,358
57,302
52,325
53,367
48,067
62,427
59,466
71,836
38,930
57,483
52,200
53,147
43,606
60,393
64,667
73,680
66,312
38,984
57,355
52,514
53,201
42,374
56,625
65,762
73,077
63,648
86,194
169
96
608
828
879
3,125
8,181
7,630
10,539
33,995
Total
589,734
Businessowners' Policies
(in thousands)
As of
December 31, 2022
Cumulative
Number of
Reported
Claims
3,484
4,067
3,968
3,854
3,895
4,262
3,639
5,421
3,454
3,074
Accident
Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
$
17,412
26,592
28,914
30,845
40,584
24,189
34,760
44,911
36,014
24,655
37,993
49,460
42,710
36,848
21,865
38,464
52,940
46,571
39,973
31,337
29,995
39,085
55,458
49,073
45,308
36,950
39,791
27,718
39,212
55,708
49,839
48,786
40,359
44,316
41,587
43,376
39,440
55,729
50,005
50,536
39,940
48,144
46,113
57,210
34,412
39,445
56,861
51,120
52,070
40,845
51,239
52,887
60,596
47,436
36,421
All outstanding liabilities before 2013, net of reinsurance
9,657
Liabilities for loss and loss expenses, net of reinsurance
110,471
Total
488,920
Commercial Property
(in thousands, except for claim counts)
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
Accident
Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
IBNR
$ 88,101
90,639
90,103
90,005
90,436
90,278
90,218
90,486
90,461
90,799
141,192
136,249
136,820
138,751
138,155
136,212
136,237
136,151
136,112
110,270
109,513
111,750
111,566
112,496
112,582
112,937
112,915
121,927
126,185
125,937
124,487
123,567
123,005
123,126
138,773
149,106
149,044
153,664
154,119
154,942
183,177
190,834
192,558
194,016
196,413
173,826
177,075
179,574
180,605
232,060
225,278
226,107
246,319
239,822
4
5
9
14
20
47
230
2,023
4,672
297,318
56,716
Total
1,758,159
111
As of
December 31, 2022
Cumulative
Number of
Reported
Claims
5,716
6,517
6,407
6,743
6,906
8,293
7,315
10,147
7,942
7,224
Commercial Property
(in thousands)
Accident
Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
$
60,244
87,874
101,131
90,446
132,909
79,048
90,350
136,634
106,182
83,966
90,840
137,883
109,829
118,789
99,047
90,696
137,418
110,994
122,930
142,338
135,416
90,646
136,008
110,969
123,828
148,589
184,813
130,891
90,917
135,928
112,117
123,601
152,018
192,698
172,768
164,613
90,891
136,141
112,410
122,909
153,750
193,487
177,825
215,107
161,757
91,206
136,107
112,391
123,265
154,689
196,376
179,538
220,953
227,259
186,677
All outstanding liabilities before 2013, net of reinsurance
579
Liabilities for loss and loss expenses, net of reinsurance
130,277
Total
1,628,461
Personal Automobile
(in thousands, except for claim counts)
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
Accident
Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
IBNR
$ 108,417
109,620
106,225
106,703
107,759
107,680
107,916
107,803
107,754
107,758
102,250
109,325
106,757
107,452
106,821
107,104
107,106
107,566
107,543
96,387
99,698
100,214
99,570
98,718
92,727
98,032
100,202
101,140
98,588
99,544
98,596
98,669
99,858
100,395
101,880
105,139
103,653
103,260
103,557
105,079
111,594
113,569
112,030
112,418
113,647
114,043
115,688
115,993
118,669
95,625
94,532
90,179
108,244
102,777
121,030
Total
1,065,746
57
47
117
409
710
2,098
4,163
6,584
10,411
26,632
As of
December 31, 2022
Cumulative
Number of
Reported
Claims
22,376
22,509
20,865
19,827
20,748
22,684
22,860
17,533
19,672
20,345
Personal Automobile
(in thousands)
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
$
61,384
80,861
62,519
92,637
83,739
58,725
100,528
105,131
92,589
76,470
57,961
99,173
87,163
76,823
62,854
106,679
104,055
92,102
86,752
82,730
69,721
106,876
105,709
95,997
94,372
91,479
89,628
69,699
107,419
106,478
97,275
98,080
97,628
99,982
92,162
53,407
107,423
107,108
97,761
98,977
100,521
107,026
102,930
68,691
65,325
107,417
107,325
97,920
99,656
103,556
109,644
109,844
76,710
84,743
75,994
Accident
Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
All outstanding liabilities before 2013, net of reinsurance
Liabilities for loss and loss expenses, net of reinsurance
7,045
99,982
Total
972,809
112
Homeowners
(in thousands, except for claim counts)
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
Accident
Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
IBNR
$ 73,670
72,528
80,111
71,494
82,461
76,637
72,145
83,637
76,400
60,105
71,714
83,844
76,559
60,931
59,167
72,148
83,539
74,723
62,391
67,978
62,961
72,318
83,824
74,978
61,723
70,365
68,526
64,306
71,948
83,525
74,673
61,735
70,064
69,832
72,772
71,955
83,830
74,682
60,855
68,938
68,931
73,816
71,960
83,819
74,237
60,841
68,902
68,416
73,070
109,033
112,523
113,804
82,425
83,295
93,826
Total
792,170
67
60
20
438
504
608
1,412
3,611
3,657
17,362
As of
December 31, 2022
Cumulative
Number of
Reported
Claims
7,753
8,776
7,753
6,896
7,389
7,608
7,010
9,824
6,884
5,819
Homeowners
(in thousands)
Accident
Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
$
50,664
65,528
61,561
67,838
76,007
52,589
69,775
79,751
70,078
42,252
71,776
81,664
72,202
57,333
45,466
72,197
82,583
72,927
59,546
63,290
49,430
72,433
82,836
74,079
60,082
67,193
64,137
49,680
72,446
82,831
74,052
61,187
67,767
65,348
67,631
83,838
72,447
83,321
74,096
60,449
68,078
66,634
69,911
105,690
59,054
72,415
83,782
74,108
60,474
68,282
67,739
70,880
109,145
77,018
68,832
All outstanding liabilities before 2013, net of reinsurance
Liabilities for loss and loss expenses, net of reinsurance
6,102
45,597
Total
752,675
E&S Casualty Lines
(in thousands, except for claim counts)
Incurred Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
Accident
Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
IBNR
$ 55,468 $ 60,309
55,316
67,099
63,505
75,498
69,112
69,929
76,432
94,451
67,647
71,719
82,404
68,972
71,206
90,488
68,451
71,153
90,355
68,029
70,846
90,126
60,349
74,270
87,662
60,511
74,538
90,263
96,416
104,655
105,120
104,730
102,476
101,873
91,438
95,783
99,866
99,395
99,960
102,045
98,324
103,004
103,184
104,983
105,756
117,087
118,298
117,736
117,113
103,872
103,137
95,832
128,099
125,436
3,504
4,918
4,646
12,138
11,390
17,093
39,429
49,633
89,909
146,999
132,276
Total 1,020,366
113
As of
December 31, 2022
Cumulative
Number of
Reported
Claims
2,311
2,141
2,887
2,998
2,848
2,816
2,683
1,788
1,751
1,285
E&S Casualty Lines
(in thousands)
Accident
Year
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Cumulative Paid Loss and Allocated Loss Expenses, Net of Reinsurance
Unaudited
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
$
2,715 $
9,470
2,353
21,980
12,234
3,036
35,200
25,571
13,057
3,720
46,108
43,877
29,389
16,195
5,057
51,142
53,780
50,712
33,950
14,672
5,509
54,974
60,092
64,529
56,581
34,179
21,337
4,422
55,988
64,698
71,421
69,448
53,238
39,174
17,812
3,695
57,152
66,661
75,844
75,004
68,266
57,962
35,844
13,064
4,326
58,584
68,648
81,396
81,932
77,090
73,605
57,701
27,861
15,835
4,198
All outstanding liabilities before 2013, net of reinsurance
5,991
Liabilities for loss and loss expenses, net of reinsurance
479,507
Total
546,850
114
(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, 2022
$
1,688,645
809,019
847,967
110,471
130,277
17,995
3,604,374
99,982
45,597
11,739
157,318
479,507
18,075
497,582
4,259,274
246,736
199,057
14,271
19,277
81,970
4,443
565,754
36,529
7,124
132,525
176,178
11,397
4,184
15,581
757,513
128,034
Total gross liability for unpaid loss and loss expenses
$
5,144,821
115
(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, 11.8% in the second year, and so forth.
The following is supplementary information about average historical claims duration as of December 31, 2022:
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%
22.3
36.8
49.0
68.7
59.8
70.8
3.9
2
11.8
25.9
16.9
21.8
26.4
18.1
21.8
11.5
3
15.5
13.9
14.6
8.3
3.2
8.8
3.5
4
17.4
8.9
13.3
8.1
1.0
6.5
1.6
5
15.1
4.7
9.9
6.1
0.4
3.7
1.7
18.0
21.7
15.8
6
9.9
3.0
4.2
3.1
—
1.7
0.2
7.9
7
7.2
1.9
1.9
1.3
—
0.5
0.2
6.8
8
4.1
1.8
1.1
0.6
—
0.4
0.1
5.2
9
3.0
3.1
0.7
0.3
—
0.2
0.1
2.6
10
2.1
2.2
0.1
0.2
—
0.1
—
3.5
Note 11. Indebtedness
The table below provides a summary of our outstanding debt at December 31, 2022 and 2021:
Outstanding Debt
($ in thousands)
Description
Long term
(1) Senior Notes
(2) FHLBI
(3) Senior Notes
(4) Senior Notes
Finance lease obligations
Total long-term debt
Issuance
Date
Maturity
Date
Interest
Rate
Original
Amount
Unamortized
Issuance Costs
Debt
Discount
December 31,
2022
December 31,
2021
2022
Carry Value
3/1/2019
3/1/2049
5.375 %
300,000 $
2,543
5,576
291,881
291,597
12/16/2016
12/16/2026
11/3/2005
11/1/2035
11/16/2004
11/15/2034
3.03 %
6.70 %
7.25 %
60,000
100,000
50,000
—
256
130
—
458
79
$
2,929
6,113
60,000
99,286
49,791
3,718
504,676
60,000
99,233
49,770
5,450
506,050
On November 7, 2022, the Parent entered into a Credit Agreement (the “Line of Credit”) among the Parent, the lenders named
therein (the “Lenders”), and Wells Fargo Bank, National Association, 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 November 7, 2025, and has a variable interest rate based on
the Parent’s debt ratings. The Parent, as borrower, was a party to a Credit Agreement dated December 20, 2019, for a $50
million revolving credit facility, which could be increased to $125 million with the consent of the lenders, with the lenders
named therein, and Bank of Montreal, Chicago Branch, as Administrative Agent (“Bank of Montreal”), which was scheduled to
mature on December 20, 2022 (the “Prior Credit Agreement”). In anticipation of entering into the Line of Credit, the Parent
exercised termination rights under the Prior Credit Agreement by sending a termination letter to Bank of Montreal on
November 3, 2022. The effective date of the termination of the Prior Credit Agreement was November 7, 2022.
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, 2022
Not less than $1.9 billion
Not to exceed 35%
Actual as of
December 31, 2022
$3 billion
14.3%
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 $30 million), which causes or permits the acceleration of
116
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.
Short-term Debt Activity
(1) On April 1, 2022, SICA borrowed short-term funds of $35 million from the FHLBNY at an interest rate of 0.7%. This
borrowing was refinanced and extended through June 27, 2022, at an interest rate of 1.10%. This borrowing was repaid on
June 27, 2022.
(2) On October 3, 2022, SICA borrowed short-term funds of $25 million from the FHLBNY at an interest rate of 3.21%. This
borrowing was repaid on November 3, 2022.
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, Selective Insurance Company of South Carolina ("SICSC") and Selective Insurance Company of
the Southeast ("SICSE"), which are collectively referred to as the "Indiana Subsidiaries" as they are domiciled in Indiana,
joined, and invested in, the FHLBI, which provides them with access to additional liquidity. The Indiana Subsidiaries’
aggregate investment in the FHLBI was $5.2 million at December 31, 2022 and $5.7 million at December 31, 2021. 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 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.
(4) 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 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 on after-tax net investment income and its ROE contribution.
After-tax net realized and unrealized gains and losses are also included in our Investment segment results.
117
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 2022, approximately 17% of NPW were related to insurance policies written in New Jersey. We also had a
goodwill balance of $7.8 million at both December 31, 2022 and 2021 on our Consolidated Balance Sheet that relates to our
Standard Commercial Lines reporting unit.
The following summaries present revenues (net investment income and net realized and unrealized gains and losses on
investments in the case of the Investments segment) and pre-tax income for the individual segments:
Revenue by Segment
($ in thousands)
Standard Commercial Lines:
Net premiums earned:
General liability
Commercial automobile
Commercial property
Workers compensation
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
Total E&S Lines revenue
Investments:
Years ended December 31,
2021
2020
2022
$
902,428
812,306
495,647
335,955
124,474
43,354
25,655
9,519
2,749,338
162,899
128,222
8,284
1,816
301,221
233,086
101,070
334,156
807,158
724,398
436,412
306,428
110,622
35,762
23,105
16,056
2,459,941
163,007
122,526
8,026
1,667
295,226
197,779
82,030
279,809
326,589
17,599
344,188
3,379,164
694,019
615,181
388,120
278,062
110,210
36,742
20,850
15,512
2,158,696
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
Net investment income
Net realized and unrealized investment (losses) gains
Total Investments revenues
Total revenues
288,155
(114,808)
173,347
3,558,062
$
118
Income Before and After Federal Income Tax
($ in thousands)
Standard Commercial Lines:
Underwriting income, before federal income tax
Underwriting income, after federal income tax
Combined ratio
ROE contribution
Standard Personal Lines:
Underwriting income (loss), before federal income tax
Underwriting income (loss), after federal income tax
Combined ratio
ROE contribution
E&S Lines:
Underwriting income, before federal income tax
Underwriting income, after federal income tax
Combined ratio
ROE contribution
Investments:
Net investment income earned
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 earned
Reconciliation of Segment Results to Income Before Federal Income Tax
($ in thousands)
Underwriting income (loss)
Standard Commercial Lines
Standard Personal Lines
E&S Lines
Investment income
Total all segments
Interest expense
Corporate expenses
Income, before federal income tax
Preferred stock dividends
Income available to common stockholders, before federal income tax
Years ended December 31,
2021
2020
2022
$
143,696
113,520
94.8 %
4.6 %
(7,193)
(5,682)
102.4 %
(0.2) %
30,299
23,936
90.9 %
1.0 %
288,155
(114,808)
173,347
31,846
141,501
9.4 %
198,596
156,891
91.9 %
5.9
3,966
3,133
98.6 %
0.1
16,030
12,664
94.3 %
0.5
326,589
17,599
344,188
67,284
276,904
9.9
151,731
119,867
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,
2021
2020
2022
143,696
(7,193)
30,299
173,347
340,149
(28,847)
(31,116)
280,186
(9,200)
270,986 $
198,596
3,966
16,030
344,188
562,780
(29,165)
(28,305)
505,310
(9,353)
495,957 $
151,731
(15,508)
126
222,890
359,239
(30,839)
(25,412)
302,988
—
302,988
$
$
$
$
$
Note 13. Earnings per Share
The following table presents the calculations of earnings per common share ("EPS") on a basic and diluted basis:
($ in thousands, except per share amounts)
Net income available to common stockholders:
2022
2021
2020
$
215,686
394,484
246,355
Weighted average common shares outstanding:
Weighted average common shares outstanding - basic
Effect of dilutive securities - stock compensation plans
Weighted average common shares outstanding - diluted
EPS:
Basic
Diluted
60,407
468
60,875
3.57
3.54
$
60,183
484
60,667
6.55
6.50
59,862
431
60,293
4.12
4.09
119
Note 14. Federal Income Taxes
(a) A reconciliation of federal income tax on income at the corporate rate (21.0%) 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
Income before federal income tax, less preferred stock dividends
Effective tax rate
$
2022
58,839
(4,087)
(469)
1,848
(893)
62
55,300
270,986
2021
106,115
(4,514)
(558)
2,469
(693)
(1,346)
101,473
495,957
2020
63,627
(4,730)
(514)
2,246
(1,846)
(2,150)
56,633
302,988
20.4 %
20.5 %
18.7 %
(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
Unrealized losses on fixed income securities
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 assets (liabilities)
2022
2021
$
$
65,907
76,513
7,064
6,384
110,857
12,480
9,824
289,029
77,411
—
26,713
12,172
116,296
172,733
60,227
68,086
2,787
5,904
—
4,314
2,245
143,563
68,652
48,082
27,044
13,198
156,976
(13,413)
The increase in net deferred federal income tax assets was primarily due to an increase in unrealized losses on our investment
portfolio resulting from an increase in benchmark U.S. Treasury rates, and to a lesser extent the widening of credit spreads.
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, 2022 or 2021. We did not have unrecognized tax expense or benefit as of December 31, 2022.
We have analyzed our tax positions in all open tax years, which as of December 31, 2022 were 2019 through 2022. 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
$19.8 million in 2022, $19.2 million in 2021, and $18.6 million in 2020.
(b) Retirement Income Plan
SICA maintains a defined benefit pension plan, the Retirement Income Plan for Selective Insurance Company of America (the
"Pension Plan"). This qualified, noncontributory plan is closed to new entrants, and existing participants ceased accruing
benefits after March 31, 2016.
120
The following tables provide details on the Pension Plan for 2022 and 2021:
December 31,
($ in thousands)
Change in Benefit Obligation:
Benefit obligation, beginning of year
Interest cost
Actuarial gains
Benefits paid
Benefit obligation, end of year
Change in Fair Value of Assets:
Fair value of assets, beginning of year
Actual return on plan assets, net of expenses
Benefits paid
Fair value of assets, end of year
Funded status
Amounts Recognized in the Consolidated Balance Sheet:
Net pension assets, 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
Pension Plan
2022
2021
$
$
$
$
$
$
$
$
407,758
9,944
(91,653)
(14,104)
311,945
450,305
(93,227)
(14,104)
342,974
31,029
31,029
100,561
311,945
5.21 %
425,161
8,593
(12,844)
(13,152)
407,758
432,716
30,741
(13,152)
450,305
42,547
42,547
78,304
407,758
2.98
When determining the most appropriate discount rate to be used in the valuation at December 31, 2022, we consider, among
other factors, our expected payout patterns of the Pension Plan's obligations as well as our investment strategy. 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 increased 223 basis points, to 5.21% as of
December 31, 2022, from 2.98% as of December 31, 2021, which drove the decrease in the benefit obligation for the period.
($ in thousands)
Components of Net Periodic Benefit Cost and Other Amounts Recognized in
Other Comprehensive Income:
2022
Pension Plan
2021
2020
Net Periodic Benefit Cost (Benefit):
Interest cost
Expected return on plan assets
Amortization of unrecognized actuarial loss
Total net periodic pension cost (benefit)1
Other Changes in Plan Assets and Benefit Obligations Recognized in Other
Comprehensive Income:
Net actuarial loss (gain)
Reversal of amortization of net actuarial loss
Total recognized in other comprehensive income
$
$
$
$
9,944
(22,147)
1,465
(10,738)
23,722
(1,465)
22,257
8,593
(22,976)
2,501
(11,882)
(20,609)
(2,501)
(23,110)
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.
(34,992)
11,519
$
11,312
(21,907)
2,817
(7,778)
(2,894)
(2,817)
(5,711)
(13,489)
121
Weighted-Average Expense Assumptions for the years ended December 31:
Discount rate
Interest rate
Expected return on plan assets
2022
Pension Plan
2021
2020
2.98 %
2.48 %
5.00
2.68 %
2.06 %
5.40
3.33 %
2.95 %
5.80
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
2023, 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.
2022
Target Percentage
Actual Percentage
Minimum
Maximum
2021
Actual Percentage
50 %
20 %
-
80 %
50 %
-
71 %
27 %
2 %
100 %
66 %
33 %
1 %
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 77% hedge
against the projected benefit obligation.
The Pension Plan had no investments in the Parent’s common stock as of December 31, 2022 or 2021. 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."
In addition, refer to Note 5. "Investments" for discussion regarding the primary private equity, venture capital, and real asset
limited partnership investment strategies as these investments are part of the Pension Plan's investment portfolio.
122
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, 2022
Fair Value Measurements at 12/31/22 Using
Assets Measured at
Fair Value
At 12/31/22
Quoted Prices in Active
Markets for Identical
Assets/ Liabilities
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
—
—
—
—
—
—
—
—
—
—
—
—
—
2,740
2,740
2,740
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
($ in thousands)
Description
Return seeking assets:
Equities:
Global equity
Diversified credit
Real assets
Liquid diversifiers1
Total equities
Limited partnerships (at net asset value)2:
Real assets
Private equity
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
$
63,852
58,761
95,396
23,978
241,987
27
331
358
242,345
35,378
56,255
91,633
5,108
2,740
7,848
63,852
58,761
95,396
23,978
241,987
—
—
—
241,987
35,378
56,255
91,633
5,108
—
5,108
Total invested assets
$
341,826
338,728
123
December 31, 2021
Fair Value Measurements at 12/31/21 Using
Assets Measured at
Fair Value
At 12/31/21
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)2:
Real assets
Private equity
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
$
144,634
66,165
89,590
300,389
47
413
460
300,849
86,183
65,304
151,487
1,744
2,422
4,166
144,634
66,165
89,590
300,389
—
—
—
300,389
86,183
65,304
151,487
1,744
—
1,744
—
—
—
—
—
—
—
—
—
—
—
—
2,422
2,422
2,422
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total invested assets
$
456,502
453,620
1 Liquid diversifiers are investments that unbundle return drivers from hedge funds, providing investors access to liquid, diversifying returns.
2In accordance with the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its
Equivalent), 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 2023, as we have no minimum required contribution
amounts.
Benefit Payments
($ in thousands)
Benefits Expected to be Paid in Future
Fiscal Years:
2023
2024
2025
2026
2027
2028-2032
Note 16. Share-Based Payments
Pension Plan
$
16,925
17,265
18,317
19,391
20,328
111,842
Active Plans
As of December 31, 2022, 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, As Amended and Restated as of July 1, 2021 ("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").
•
•
•
•
124
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 effective July 1, 2009 by stockholders on April 29, 2009.
Most recently amended and restated plan was approved effective July 1, 2021 by stockholders on April 28, 2021.
Approved by stockholders on April 26, 2006.
Most recently amended and restated plan was approved 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
Stock Plan
Cash Plan
ESPP
Agent Plan
Types of Share-Based Payments Issued
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, 2022 were as follows:
Stock Plan
ESPP
Agent Plan
Authorized
4,750,000
5,500,000
3,000,000
Available for Issuance
2,474,585
1,116,863
1,551,498
Awards Outstanding
657,311
—
—
Retired Plans
The following plans are closed for the issuance of new awards as of December 31, 2022, although awards outstanding continue
in effect according to the terms of the applicable award agreements:
Plan
Types of Share-Based Payments Issued
Reserve Shares
Awards Outstanding1
2005 Omnibus Stock Plan ("2005
Stock Plan")
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.
1,954,922
29,522
Parent's Stock Compensation
Plan for Non-employee Directors
Directors could elect to receive a portion of their annual compensation in
shares of the Parent's common stock.
40,940
40,940
1Awards outstanding under the 2005 Stock Plan represent shares deferred by our non-employee directors.
125
RSU Transactions
A summary of the RSU transactions under our share-based payment plans is as follows:
Number
of Shares
Unvested RSU awards at December 31, 2021
Granted 2022
Vested 2022
Forfeited 2022
Unvested RSU awards at December 31, 2022
Weighted Average
Grant Date Fair Value
63.73
76.09
63.79
66.77
68.84
641,636 $
248,619
(232,742)
(20,451)
637,062 $
As of December 31, 2022, total unrecognized compensation expense related to unvested RSU awards granted under our Stock
Plan was $11.3 million. That expense is expected to be recognized over a weighted-average period of 1.7 years. The total
intrinsic value of RSUs vested was $18.1 million for 2022, $17.2 million for 2021, and $20.6 million for 2020. In connection
with vested RSUs, the total value of the DEUs that vested was $0.7 million in 2022, $0.6 million in 2021, and $0.7 million in
2020.
CIU Transactions
The liability recorded in connection with our Cash Plan was $11.1 million as of December 31, 2022, and $11.0 million as of
December 31, 2021. The remaining cost associated with the CIUs is expected to be recognized over a weighted average period
of 1.1 years. The CIU payments made in connection with the CIU vestings were $2.9 million in 2022, $2.2 million in 2021,
and $2.3 million in 2020.
ESPP and Agent Plan Transactions
A summary of ESPP and Agent Plan share issuances is as follows:
ESPP Issuances
Agent Plan Issuances
2022
2021
2020
67,986
56,736
72,239
50,999
99,141
69,238
Fair Value Measurements
The grant date fair value of RSUs is based on the market price of our common stock on the grant date, adjusted for the present
value of our expected dividend payments. The expense recognized for share-based awards is based on the number of shares or
units expected to be issued at the end of the performance period and the grant date fair value.
The grant date fair value of each option award is estimated using the Black Scholes option valuation model ("Black Scholes").
The following are the significant assumptions used in applying Black Scholes: (i) the risk-free interest rate, which is the
implied yield currently available on U.S. Treasury zero-coupon issues with an equal remaining term; (ii) the expected term,
which is based on historical experience of similar awards; (iii) the dividend yield, which is determined by dividing the expected
per share dividend during the coming year by the grant date stock price; and (iv) the expected volatility, which is based on the
volatility of the Parent's stock price over a historical period comparable to the expected term. In applying Black Scholes, we
use the weighted average assumptions illustrated in the following table:
Risk-free interest rate
Expected term
Dividend yield
Expected volatility
2022
1.42 %
6 months
1.3 %
21 %
ESPP
2021
0.07
6 months
1.4
28
2020
0.76
6 months
1.6
37
126
The weighted-average fair value per share of options and stock, including RSUs granted under the Parent's stock plans, during
2022, 2021, and 2020 was as follows:
RSUs
ESPP:
Six month option
Discount of grant date market value
Total ESPP
Agent Plan:
Discount of grant date market value
2022
2021
2020
$
76.09
4.43
12.61
17.04
8.28
64.03
4.69
10.98
15.67
7.57
62.91
4.82
8.61
13.43
5.73
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 2022, 2021, and 2020:
($ 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
2022
2021
2020
$
$
23.6
(5.6)
18.0
22.3
(5.1)
17.2
19.8
(5.7)
14.1
Note 17. Equity
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 were 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
(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.
Share Repurchase Program
On December 2, 2020, we announced that our Board authorized a $100 million share repurchase program, with no set
expiration or termination date. Our repurchase program does not obligate us to acquire any particular amount of our common
stock. Management will determine the timing and amount of any share repurchases under the authorization at its discretion
based on market conditions and other considerations. For the year ended December 31, 2022, 165,159 shares were repurchased
under the share repurchase program at a total cost of $12.4 million, including commissions. We had $84.2 million of remaining
capacity under our share repurchase program as of December 31, 2022.
127
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 $14.3 million in 2022, $12.8 million in 2021, and $11.0 million in 2020. In return, the
Insurance Subsidiaries paid standard market commissions, including supplemental commissions, to Rue Insurance of $2.7
million in 2022, $2.0 million in 2021, and $1.8 million in 2020. Amounts due to Rue Insurance at December 31, 2022 and
December 31, 2021 were $0.7 million and $0.7 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 $0.3 million of contributions to the Foundation in 2022, $1.3 million in 2021 and $0.5 million in 2020.
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 23, 2023,
BlackRock filed a Schedule 13G/A reporting beneficial ownership as of December 31, 2022, of 11.8% 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 $1.8 million in 2022, $1.8 million in 2021, and $2.0 million in 2020. Amounts payable for
such services were $0.8 million at December 31, 2022, $0.5 million at December 31, 2021, and $1.3 million at December 31,
2020.
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, 2022 and December 31, 2021, and are predominately
reflected in "Fixed income securities" on our Consolidated Balance Sheet. During 2022, with regard to BlackRock funds, we
(i) purchased $18.5 million in securities, (ii) sold $32.3 million, (iii) recognized net realized and unrealized losses of $6.9
million, and (iv) recorded $1.8 million in income. During 2021, we (i) purchased $16.5 million in securities, (ii) sold $32.5
million, (iii) recognized net realized and unrealized losses of $0.6 million, and (iv) recorded $0.9 million in income. During
2020, we (i) purchased $62.2 million in securities, (ii) recognized net unrealized losses of $0.2 million, and (iii) recorded $0.4
million in income. We did not make any sales of BlackRock funds in 2020. There were no amounts payable on the settlement
of these investment transactions at December 31, 2022 and December 31, 2021.
Our Pension Plan's investment portfolio contained investments in BlackRock funds of $120.1 million at December 31, 2022 and
$209.9 million at December 31, 2021. During 2022, with regard to BlackRock funds, the Pension Plan (i) purchased $56.4
million in securities, (ii) sold $65.7 million, and (iii) recorded net investment losses of $80.5 million. During 2021, with regard
to BlackRock funds, the Pension Plan (i) purchased $18.0 million in securities, (ii) sold $18.1 million, and (iii) recorded net
investment income of $18.2 million. During 2020, with regard to BlackRock funds, the Pension Plan (i) purchased $56.7
million in securities, (ii) sold $44.9 million, and (iii) recorded net investment income of $35.8 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.
Vanguard, one of the world’s largest investment management companies, has purchased our common shares in the ordinary
course of its investment business and has previously filed Schedules 13G/A with the SEC. Vanguard offers low-cost mutual
funds and exchange-traded funds, as well as other investment related services. On February 10, 2023, Vanguard filed a
Schedule 13G/A reporting beneficial ownership of 10.03% of our common stock as of January 31, 2023. In connection with
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purchasing our common shares, Vanguard filed the necessary filings with insurance regulatory authorities. On the basis of
those filings, we do not expect Vanguard to be deemed a controlling person for the purposes of applicable insurance law.
As part of our overall investment diversification, we may invest in various Vanguard funds from time to time. These funds
accounted for less than 1% of our invested assets at December 31, 2022, and less than 3% of our invested assets at December
31, 2021, and are predominately reflected in "Equity securities" on our Consolidated Balance Sheet. During 2022, with regard
to Vanguard funds, we (i) purchased $3.5 million in securities, (ii) sold $125.2 million, (iii) recognized net realized and
unrealized losses of $10.4 million, and (iv) recorded $4.7 million in income. During 2021, we (i) purchased $19.3 million in
securities, (ii) sold $23.6 million, (iii) recognized net realized and unrealized gains of $17.7 million, and (iv) recorded $7.5
million in income. During 2020, we (i) purchased $150.9 million in securities, (ii) recognized net realized and unrealized gains
of $10.2 million, and (iii) recorded $2.4 million in income. We did not make any sales of Vanguard funds in 2020. There were
no amounts payable on the settlement of these investment transactions at December 31, 2022 and December 31, 2021.
Our deferred compensation plan offers our employees investment options based on the notional value of various Vanguard
funds. Our defined contribution plan offers our employees the option to invest in a Vanguard fund. All transactions with
Vanguard are consummated in the ordinary course of business on an arm’s-length basis.
NOTE 19. Leases
We have various operating leases for office space, equipment, and fleet vehicles. In addition, we have various finance leases
for computer hardware. Such lease agreements, which expire at various dates through 2032, are generally renewed or replaced
by similar leases.
The components of lease expense for the year ended December 31, 2022 and 2021 were as follows:
($ in thousands)
Operating lease cost, included in Other insurance expenses on the Consolidated Statements of Income
Finance lease cost:
$
Amortization of assets, included in Other insurance expenses on the Consolidated Statements of Income
Interest on lease liabilities, included in Interest expense on the Consolidated Statements of Income
Total finance lease cost
Variable lease cost, included in Other insurance expenses on the Consolidated Statements of Income
Short-term lease cost, included in Other insurance expenses on the Consolidated Statements of Income
$
2022
2021
8,148
2,440
46
2,486
1,384
166
7,935
1,765
35
1,800
291
832
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, 2022
December 31, 2021
8
2
2.6
1.2
years
7
2
2.1 %
0.8
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
December 31, 2022
December 31, 2021
$
$
42,403
44,505
3,713
3,718
35,644
37,296
5,446
5,450
129
The maturities of our lease liabilities at December 31, 2022 were as follows:
($ in thousands)
Year ended December 31,
2023
2024
2025
2026
2027
Thereafter
Total lease payments
Less: imputed interest
Less: leases that have not yet commenced
Total lease liabilities
Finance Leases
Operating Leases
Total
$
$
2,490
1,029
190
54
2
—
3,765
47
—
3,718
7,290
6,943
6,649
6,156
6,053
18,832
51,923
4,496
2,922
44,505
9,780
7,972
6,839
6,210
6,055
18,832
55,688
4,543
2,922
48,223
Refer to Note 4. "Statements of Cash Flows" in Item 8. "Financial Statements and Supplementary Data." of 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, 2022, we had purchased such annuities with a present value of $31.0 million
for settlement of claims on a structured basis for which we are contingently liable. To our knowledge, there are no material
defaults from any of the issuers of such annuities.
(b) As of December 31, 2022, we have made commitments that may require us to invest additional amounts into our investment
portfolio, which are as follows:
($ in millions)
Alternative investments
Non-publicly traded collateralized loan obligations in our fixed income securities portfolio
Non-publicly traded common stock within our equity portfolio
CMLs
Privately-placed corporate securities
Total
Amount of Obligation
246.1
106.6
35.0
4.9
20.1
412.7
$
$
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, 2022, 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 by establishing unpaid loss and loss expense
reserves. Considering potential losses and defense costs reserves, we expect that any potential ultimate liability for ordinary
course claims litigation will not be material to our consolidated financial condition, results of operations, or cash flows.
All our commercial property and businessowners' policies require direct physical loss of or damage to property by a covered
cause of loss. All our standard lines commercial property and businessowners' policies also include or attach an exclusion that
states 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 the 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. To date, insurers (including us) have prevailed in the majority of these suits, with most decisions
holding that COVID-19 does not cause physical loss of or damage to property and the Virus Exclusion is valid. Nonetheless,
130
these two matters continue to be litigated in trial courts, are subject to review by state and federal appellate courts, and their
ultimate outcome cannot be assured.
From time to time, our Insurance Subsidiaries also are named as defendants in other legal actions, some asserting claims for
substantial amounts. Plaintiffs may style these actions as class actions and seek judicial certification of a state or national class
for allegations involving our business practices, such as improper medical provider reimbursement under workers compensation
and personal and commercial automobile insurance policies or improper reimbursement for automobile parts. Similarly, our
Insurance Subsidiaries can be named defendants 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 by establishing unpaid loss and loss expense reserves. Considering estimated
losses and defense costs reserves, we expect that any potential ultimate liability for these other legal actions will not be material
to our consolidated financial condition. As litigation outcomes are inherently unpredictable and the amounts sought in certain
actions are large or indeterminate, adverse outcomes could potentially 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, 2022, the various state insurance
departments of domicile have adopted the March 2022 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
($ 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")
Mesa Underwriters Specialty Insurance Company ("MUSIC")
Selective Casualty Insurance Company ("SCIC")
Selective Fire and Casualty Insurance Company ("SFCIC")
Total
New Jersey
New Jersey
Indiana
Indiana
New York
New Jersey
New Jersey
New Jersey
New Jersey
New Jersey
2022
$ 686.6
461.9
164.1
135.9
137.4
38.2
102.2
52.8
91.4
37.6
$ 1,908.1
2021
673.1
436.4
166.3
132.7
127.0
34.5
90.4
47.4
83.4
34.2
1,825.4
Statutory Surplus
2022
851.8
517.8
198.4
163.5
165.1
69.3
147.1
122.3
167.9
70.5
2,473.7
2021
838.3
492.4
200.6
160.3
154.7
65.6
135.2
116.9
159.9
67.1
2,391.0
2020
Statutory Net Income
2021
134.7
74.5
24.2
19.4
18.6
7.5
16.7
13.9
20.6
8.2
338.3
2022
103.1
69.6
17.0
14.2
13.2
5.1
12.7
9.7
14.0
5.8
264.4
81.8
54.0
20.8
16.8
15.3
6.8
12.9
11.4
16.2
6.4
242.4
(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 required level of capital as defined by the NAIC based on
their 2022 statutory financial statements. In the fourth quarter of 2020, the NAIC adopted the basic structure of Group Capital
Calculation ("GCC"), along with a model law to enable the GCC after state legislative enactment. The GCC expands the
existing RBC calculation to include (i) capital requirements for other regulated entities in the group, and (ii) defined capital
calculation for other group entities that are unregulated. Our New Jersey state insurance regulators adopted the GCC model law
in 2022. Based on our 2022 statutory financial statements, our GCC ratio exceeds the regulatory action minimum threshold. 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 higher 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
131
ability of the Insurance Subsidiaries to declare and pay dividends, if necessary, and/or the availability of other sources of
liquidity to the Parent.
In addition to regulatory restrictions on the availability of dividends that our Insurance Subsidiaries can pay to the Parent, the
maximum amount of dividends the Parent can pay our shareholders is limited by certain New Jersey corporate law provisions
that limit dividends if either: (i) the Parent would be unable to pay its debts as they became due in the usual course of business;
or (ii) the Parent’s total assets would be less than its total liabilities. The Parent’s ability to pay dividends to shareholders also
are impacted by (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, 2022, the Parent had an aggregate of $484.3 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 $2.7 billion are predominately restricted due
to regulations applicable to our Insurance Subsidiaries. In 2023, the Insurance Subsidiaries have the ability to provide for
$283.1 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 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 $121.5 million as of December 31, 2022, 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.
132
The table below provides the following information: (i) quantitative data regarding all Insurance Subsidiaries' dividends paid to
the Parent in 2022, 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 2023, based on the 2022 statutory
financial statements.
Dividends
($ in millions)
SICA
SWIC
SICSC
SICSE
SICNY
SICNE
SAICNJ
MUSIC
SCIC
SFCIC
Total
State of Domicile
Twelve Months ended December 31, 2022
Ordinary Dividends Paid
2023
Maximum Ordinary Dividends
New Jersey
New Jersey
Indiana
Indiana
New York
New Jersey
New Jersey
New Jersey
New Jersey
New Jersey
$
$
62.3 $
24.3
5.6
6.6
3.0
1.5
1.3
5.3
7.8
2.3
120.0 $
103.1
69.6
19.8
16.4
16.5
6.9
14.7
12.2
16.8
7.1
283.1
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, 2022. 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, 2022, 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 2022 that materially affected, or are reasonably likely to materially affect, our internal
133
control over financial reporting.
Attestation Report of the Independent Registered Public Accounting Firm
Our independent registered public accounting firm, KPMG, LLP, has issued their attestation report on our internal control over
financial reporting which is set forth below.
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, 2022, 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, 2022, 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, 2022 and December 31, 2021, 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, 2022, and the related notes and financial statement schedules I to V (collectively, the
consolidated financial statements), and our report dated February 10, 2023 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 10, 2023
/s/ KPMG LLP
134
Item 9B. Other Information.
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
PART III
Because we will file a Proxy Statement within 120 days after the end of the fiscal year ending December 31, 2022, 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," "Information About Proposal 1 -
Election of Directors," and "Board Meetings and Committees" 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 the "Executive Compensation," including,
without limitation, the Compensation Discussion and Analysis and related tabular disclosures, the "CEO Pay Ratio," "Pay
versus Performance," and the "Compensation Committee Report" sections of the Proxy Statement and is hereby incorporated by
reference. Information about compensation of the Board appears under the "Director Compensation" 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 the "Security Ownership of
Management and Certain Beneficial Owners" section of the Proxy Statement and is hereby incorporated by reference.
Information about securities authorized for issuance under the Company’s equity compensation plans is set forth under Item 5.
"Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities." in this
Form 10-K 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” 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, KPMG LLC (Public Company Accounting Oversight
Board ID No. 185), appears under the "Fees of Independent Registered Public Accounting Firm" section of the Proxy Statement
and is hereby incorporated by reference.
135
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, 2022 and 2021
Consolidated Statements of Income for the Years Ended December 31, 2022, 2021, and 2020
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021, and 2020
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2022, 2021, and 2020
Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021, and 2020
Notes to Consolidated Financial Statements, December 31, 2022, 2021, and 2020
(2) Financial Statement Schedules:
Form 10-K
Page
75
76
77
78
79
80
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, 2022
Schedule II
Condensed Financial Information of Registrant at December 31, 2022, 2021, and 2020 and for the Years Ended December
31, 2022, 2021, and 2020
Schedule III
Supplementary Insurance Information for the Years Ended December 31, 2022, 2021, and 2020
Schedule IV
Reinsurance for the Years Ended December 31, 2022, 2021, and 2020
Schedule V
Allowance for Credit Losses on Premiums and Other Receivables for the Years Ended December 31, 2022, 2021, and 2020
Form 10-K
Page
137
138
141
142
142
(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.
136
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2022
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
Alternative investments
Other investments
Total investments
3,405
—
26,432
29,837
189,239
9,608
918,018
97,717
2,237,308
1,485,973
1,059,832
614,412
6,612,107
20,201
140,154
1,645
162,000
3,405
—
27,752
31,157
209,528
11,199
965,231
110,544
2,448,111
1,607,660
1,169,546
663,935
7,185,754
22,579
142,892
1,960
167,431
149,305
440,439
371,316
71,244
$
8,045,330
3,405
—
27,752
31,157
189,239
9,608
918,018
97,717
2,237,308
1,485,973
1,059,832
614,412
6,612,107
20,201
140,154
1,645
162,000
149,189
440,456
371,316
71,244
7,837,469
See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K
137
SELECTIVE INSURANCE GROUP, INC.
(Parent Corporation)
Balance Sheets
($ in thousands, except share amounts)
Assets:
Fixed income securities, available-for-sale – at fair value
(allowance for credit losses: $1,194 – 2022; $542 – 2021; amortized cost: $418,588 – 2022; $317,703 –
2021
$
Equity securities
Short-term investments
Alternative 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 –
2022 and 2021
Common stock of $2 par value per share:
Authorized shares: 360,000,000
Issued: 104,847,111 – 2022; 104,450,916 – 2021
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income
Treasury stock – at cost (shares: 44,508,211 – 2022; 44,266,534 – 2021)
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
$
$
SCHEDULE II
December 31,
2022
2021
387,535
48,095
33,008
15,631
26
325,014
136,362
56,042
9,241
455
2,524,448
2,954,725
8,894
14,733
11,104
7,208
4,487
9,178
3,043,474
3,502,712
440,958
56,266
11,101
7,585
515,910
440,600
57,980
10,965
10,282
519,827
200,000
200,000
209,694
493,488
2,749,703
(498,042)
(627,279)
2,527,564
3,043,474
208,902
464,347
2,603,472
115,099
(608,935)
2,982,885
3,502,712
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.
138
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 (losses) gains
$
Total revenues
Expenses:
Interest expense
Other expenses
Total expenses
Income before federal income tax
Federal income tax (benefit) expense:
Current
Deferred
Total federal income tax benefit
Year ended December 31,
2022
2021
2020
120,007
18,622
(17,855)
120,774
28,897
31,116
60,013
60,761
(9,381)
(2,189)
(11,570)
140,018
15,454
1,898
157,370
28,988
28,305
57,293
100,077
(6,552)
12
(6,540)
104,992
7,579
1,756
114,327
29,220
25,412
54,632
59,695
(10,987)
473
(10,514)
Net income before equity in undistributed income of subsidiaries
72,331
106,617
70,209
Equity in undistributed income of subsidiaries, net of tax
152,555
297,220
176,146
Net income
Preferred stock dividends
Net income available to common stockholders
$
$
224,886
403,837
246,355
9,200
9,353
—
215,686
394,484
246,355
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 Cash Flows
SCHEDULE II (continued)
($ in thousands)
Operating Activities:
Net income
Year ended December 31,
2022
2021
2020
$
224,886
403,837
246,355
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Equity in undistributed income of subsidiaries, net of tax
(152,555)
(297,220)
(176,146)
Stock-based compensation expense
Net realized and unrealized investment losses (gains)
Undistributed (income) losses of equity method investments
Amortization – other
Changes in assets and liabilities:
Increase (decrease) in accrued long-term stock compensation
(Increase) decrease in net federal income taxes
Increase in other assets
Decrease in other liabilities
Net cash provided by operating activities
Investing Activities:
Purchases of fixed income securities, available-for-sale
Purchases of equity securities
Purchases of short-term investments
Purchases of alternative investments
Redemption and maturities of fixed income securities, available-for-sale
Sales of fixed income securities, available-for-sale
Sales of equity securities
Sales of short-term investments
Proceeds from alternative 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 (used in) provided by financing activities
Net (decrease) increase in cash
Cash, beginning of year
Cash, end of year
$
18,428
17,855
(2,240)
(154)
136
(3,875)
(1,961)
(2,813)
97,707
(208,512)
(1,647)
(362,213)
(4,149)
35,527
66,725
77,971
385,254
—
—
(11,044)
(9,200)
(66,920)
(18,344)
—
—
9,086
—
(1,714)
(87,092)
(429)
455
26
15,893
(1,898)
(1,859)
1,076
2,727
3,843
(7,251)
(1,742)
117,406
(113,829)
(5,676)
(330,843)
(4,949)
51,524
15,713
31,204
311,225
959
—
(44,672)
(9,353)
(60,136)
(9,050)
—
—
7,976
(479)
(1,631)
(72,673)
61
394
455
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
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. AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
Year ended December 31, 2022
SCHEDULE III
Deferred
policy
acquisition
costs
Reserve
for loss
and loss
expense
Unearned
premiums
Net
premiums
earned
Net
investment
income1
Loss
and loss
expense
incurred
Amortization
of deferred
policy
acquisition
costs
Other
operating
expenses2
Net
premiums
written
2,901,984
319,059
352,547
—
3,573,590
400,313
(11,335)
388,978
($ in thousands)
Standard Commercial Lines
Segment
Standard Personal Lines Segment
E&S Lines Segment
Investments Segment
$ 311,535
17,817
39,272
—
4,275,002
340,302
529,517
—
1,511,447
322,668
158,666
—
2,739,819
299,405
334,156
—
—
—
—
173,347
1,683,988
231,113
196,677
—
605,845
27,129
72,848
—
306,290
48,356
34,332
—
Total
388,978
1Includes “Net investment income earned” and “Net realized and unrealized investment (losses) gains” on the Consolidated Statements of Income.
2“Other operating expenses” of $388,978 reconciles to the Consolidated Statements of Income as follows:
$ 368,624
3,373,380
1,992,781
5,144,821
2,111,778
173,347
705,822
Other insurance expenses
Other income
Total
$
$
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, 2021
Other
Unearned
operating
expenses2
($ in thousands)
premiums
Standard Commercial Lines Segment
1,346,809
278,915
Standard Personal Lines Segment
317,276
51,559
E&S Lines Segment
139,122
27,734
Investments Segment
—
—
Total
1,803,207
358,208
1Includes “Net investment income earned” and “Net realized and unrealized investment (losses) gains” on the Consolidated Statements of Income.
2“Other operating expenses” of $358,208 reconciles to the Consolidated Statements of Income as follows:
Net
premiums
earned
2,443,885
293,559
279,809
—
3,017,253
—
—
—
344,188
344,188
Net
investment
income1
Deferred
policy
acquisition
costs
$ 279,850
12,911
34,154
—
$ 326,915
Loss
and loss
expense
incurred
1,426,768
212,116
175,100
—
1,813,984
Reserve
for loss
and loss
expense
3,832,151
270,066
478,686
—
4,580,903
Amortization
of deferred
policy
acquisition
costs
539,606
25,918
60,945
—
626,469
Other insurance expenses
Other income
Total
$
$
Net
premiums
written
2,593,018
292,265
304,430
—
3,189,713
375,931
(17,723)
358,208
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, 2020
Deferred
policy
acquisition
costs
$ 246,494
13,803
28,281
—
Reserve
for loss
and loss
expense
3,596,340
228,348
435,667
—
Unearned
premiums
1,196,243
308,183
113,845
—
Net
premiums
earned
2,143,184
299,140
239,490
—
Net
investment
income1
—
—
—
222,890
Loss
and loss
expense
incurred
1,245,627
233,260
156,936
—
Amortization
of deferred
policy
acquisition
costs
474,322
30,694
55,255
—
Other
operating
expenses2
271,504
50,694
27,173
—
($ in thousands)
Standard Commercial Lines Segment
Standard Personal Lines Segment
E&S Lines Segment
Investments Segment
Total
1,618,271
349,371
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
4,260,355
2,681,814
1,635,823
560,271
222,890
Other insurance expenses
Other income
Total
$
$
Net
premiums
written
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.
141
SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
REINSURANCE
Years ended December 31, 2022, 2021, and 2020
SCHEDULE IV
($ thousands)
2022
Premiums earned:
Accident and health insurance
Property and liability insurance
Total premiums earned
2021
Premiums earned:
Accident and health insurance
Property and liability insurance
Total premiums earned
2020
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
$
$
$
—
3,880,522
3,880,522
2
3,472,713
3,472,715
13
3,108,674
3,108,687
—
30,742
30,742
—
21,550
21,550
—
25,010
25,010
—
537,884
537,884
—
3,373,380
3,373,380
2
477,010
477,012
—
3,017,253
3,017,253
13
451,870
451,883
—
2,681,814
2,681,814
—
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, 2022, 2021, and 2020
($ in thousands)
Balance, January
Cumulative effect adjustment
Balance at the beginning of the period, as adjusted
Additions
Deductions
Balance, December 31
2022
2021
2020
$
$
15,200
—
15,200
7,478
(4,978)
17,700
22,777
—
22,777
1,766
(9,343)
15,200
10,800
(1,845)
8,955
17,576
(3,754)
22,777
See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
142
EXHIBIT INDEX
Exhibit
Number
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
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 for the quarter ended
September 30, 2020, 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, filed July 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).
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).
Description of the Company's Securities Registered Under Section 12 of the Securities Exchange Act of 1934, as
amended (incorporated by reference herein to Exhibit 4.9 of the Company’s Annual Report on Form 10-K for the
year ended December 31, 2020, filed February 12, 2021, File No. 001-33067).
10.1+
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, filed October 31, 2008, File No. 001-33067).
143
Exhibit
Number
10.1a+
10.1b+
10.2+
10.2a+
10.2b+
10.3+
10.4+
10.5+
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
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 for the quarter ended March 31, 2020, 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, filed October 27, 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, filed October 27, 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, filed April 24, 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,
filed April 24, 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, filed April 24, 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, filed April 24, 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, filed April 24, 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, filed April 24, 2014, File No. 001-33067).
Selective Insurance Group, Inc. 2014 Omnibus Stock Plan Director Restricted Stock Unit Agreement
(incorporated by reference herein to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2014, filed April 24, 2014, File No. 001-33067).
Selective Insurance Group, Inc. 2005 Omnibus Stock Plan As Amended and Restated Effective as of May 1,
2010 (incorporated by reference herein to Appendix C of the Company’s Definitive Proxy Statement for its 2010
Annual Meeting of Stockholders, filed March 25, 2010, File No. 001-33067).
144
Exhibit
Number
10.12+
10.13+
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 for its 2018
Annual Meeting of Stockholders, filed March 26, 2018, File No. 001-33067).
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, filed February 22, 2017, File No.
001-33067).
10.14+ (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).
10.15+
10.16+
10.17+
10.18+
10.19+
10.20+
10.21+
10.22+
10.23+
10.24+
10.25+
Selective Insurance Group, Inc. Employee Stock Purchase Plan (2021), Amended and Restated Effective July 1,
2021 (incorporated by reference herein to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2021, filed April 29, 2021, 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, filed April 24, 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, filed April 24, 2014, 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 for the quarter ended September 30, 2020, filed October 29, 2020,
File No. 001-33067).
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, filed February 27, 2009, 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 for the year ended December 31, 2019, 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).
145
Exhibit
Number
10.26+
10.27+
10.28+
10.29
10.30
10.31+
10.32+
Employment Agreement between Selective Insurance Company of America and Brenda M. Hall, dated as of
September 30, 2019 (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-
Q for the quarter ended September 30, 2021, filed October 28, 2021, File No. 001-33067).
Employment Agreement between Selective Insurance Company of America and Paul Kush, dated as of
December 5, 2019 (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2021, filed October 28, 2021, File No. 001-33067).
Employment Agreement between Selective Insurance Company of America and Vincent M. Senia, dated as of
June 6, 2017 (incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2021, filed October 28, 2021, 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 for the year ended December 31, 2019, 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, filed February 24, 2010, 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, filed February 25, 2011, File No. 001-33067).
146
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
*31.1
*31.2
**32.1
**32.2
*99.1
** 101
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 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, 2022, 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.
** 104
The cover page from the Company's Annual Report on Form 10-K for the year ended December 31, 2022,
formatted in iXBRL.
* Filed herewith.
** Furnished and not filed herewith.
+ Management compensation plan or arrangement.
(P) Paper filed.
Item 16. Form 10-K Summary.
None.
147
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
Chairperson of the Board, 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 10, 2023
February 10, 2023
February 10, 2023
148
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
Chairperson of the Board, 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
*
Cynthia S. Nicholson
Director
*
William M. Rue
Director
*
John S. Scheid
Director
*
J. Brian Thebault
Director
*
Philip H. Urban
Director
* By: /s/ Michael H. Lanza
Michael H. Lanza
Attorney-in-fact
149
February 10, 2023
February 10, 2023
February 10, 2023
February 10, 2023
February 10, 2023
February 10, 2023
February 10, 2023
February 10, 2023
February 10, 2023
February 10, 2023
February 10, 2023
February 10, 2023
February 10, 2023
February 10, 2023
February 10, 2023
February 10, 2023
February 10, 2023
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.
Customers: another term for policyholders; individuals or entities that
purchase our insurance products or services.
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.
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.
Loss Trend: represents increases or decreases to losses incurred relative to
underlying exposures over time and is typically expressed as a percentage
relative to the loss ratio. Various factors influence loss trend and can affect
claims frequency and severity. These factors include, but are not limited to,
legislative enactments, judicial decisions, changes in societal behavior as
well as economic and social inflation. Loss trend may be historical, which
we estimate based on our historical loss experience, or future, which we
estimate using our loss experience supplemented with forward-looking
indicators.
Net Premiums Written to Statutory Surplus Ratio: statutory measure of
solvency risk calculated by dividing net statutory premiums written for the
year by the ending statutory surplus.
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.
Earned Premiums: portion of a premium that is recognized as income based
on the expired portion of the policy period.
Premiums Written: premiums for all policies sold during a specific
accounting period.
Effective Duration: expressed in years, provides an approximate measure of
the portfolio's price sensitivity to a change in interest rates, taking into
consideration how the change in interest rates may impact the timing of
expected cash flows.
Frequency: 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.
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).
Generally Accepted Accounting Principles (GAAP): accounting practices
used in the United States of America determined by the Financial Accounting
Standards Board. Public companies use GAAP when preparing financial
statements to be filed with the United States Securities and Exchange
Commission.
Incurred But Not Reported (IBNR) Reserves: reserves for estimated losses
that have been incurred by insureds but not yet reported plus provisions for
future emergence on known claims and reopened claims.
Interest Rate Risk: exposure to interest rate risk relates primarily to market
price and cash flow variability associated with changes in interest rates. A
rise in interest rates may decrease the fair value of our existing fixed income
security investments and declines in interest rates may result in an increase in
the fair value of our existing fixed income security investments.
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.
Exhibit 99.1
Glossary of Terms
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. 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.
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.
Underwriting: insurer’s process of reviewing applications submitted for
insurance coverage, deciding whether to provide all or part of the coverage
requested, and determining applicable premiums and terms and conditions of
coverage.
Underwriting Result: underwriting income or loss; represents premiums
earned less insurance losses and loss expenses, underwriting expenses, and
dividends to policyholders. This measure of performance is used by
management and analysts to evaluate profitability of underwriting operations
and is not intended to replace GAAP net income.
Unearned Premiums: portion of a premium that a company has written but
has yet to earn because a portion of the policy is unexpired.
Wholesale General Agent: distribution partner authorized to underwrite on
behalf of a surplus lines insurer through binding authority agreements.
Insurance companies pay wholesale general agents for business production.
Yield on Investments: Yield is the income earned on an investment,
expressed as an annual percentage rate that is calculated by dividing income
earned by the average invested asset balance. Yield can be calculated based
on either pre-tax or after-tax income and can be calculated on the entire
investment portfolio, or on a portion thereof, such as the fixed income
securities portfolio.
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2022 BOARD OF DIRECTORS
H. Elizabeth Mitchell 2018
Former President and Chief Executive Officer,
Renaissance Reinsurance U.S., Inc.
Michael J. Morrissey, CFA 2008*
Special Advisor and former President
and Chief Executive Officer,
International Insurance Society, Inc.
Cynthia (Cie) S. Nicholson 2009
Managing Member, Band of Sisters, LLC
William M. Rue 1977*
Chairman, Chas. E. Rue & Son, Inc.,
t/a Rue Insurance
John S. Scheid, CPA 2014
Owner, Scheid Investment Group, LLC, and former
Senior Partner, PricewaterhouseCoopers LLP
J. Brian Thebault 1996
Partner, Thebault Associates
Philip H. Urban 2014
Former President and
Chief Executive Officer,
Grange Insurance
John J. Marchioni 2019
Chairman of the Board,
President and Chief Executive Officer,
Selective Insurance Group, Inc.
Ainar D. Aijala, Jr. 2020
Former Senior Advisor,
Deloitte & Touche LLP
Lisa Rojas Bacus 2020
Former Executive Vice President and
Global Chief Marketing Officer,
Cigna Corporation
John C. Burville, Ph.D, FIA, MAAA 2006*
Former Insurance Consultant
to the Bermuda Government
Terrence W. Cavanaugh 2018
Founding Partner, Accretive Consulting LLC, and
former President and Chief Executive Officer,
Erie Indemnity Company
Wole C. Coaxum 2020
Chief Executive Officer,
Mobility Capital Finance (MoCaFi)
Robert Kelly Doherty 2015
Lead Independent Director,
Selective Insurance Group, Inc.
Managing Partner, Caymen Partners
Thomas A. McCarthy 2018
Former Executive Vice President
and Chief Financial Officer, Cigna Corporation
Stephen C. Mills 2020
Former President and General Manager,
New York Knicks
*Retiring 2023
SELECTIVE 2022 ANNUAL REPORT
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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
West Region
Robyn P. Turner 1
Assistant General Counsel and
Corporate Secretary
OFFICERS
Chairman of the Board
President and
Chief Executive Officer
John J. Marchioni 1,2
Executive Vice Presidents
Lucinda (Cyndi) Bennett 2
Chief Human Resources Officer
John P. Bresney 2
Chief Information Officer
Joseph O. Eppers 1,2
Chief Investment Officer
Brenda M. Hall 2
Chief Operating Officer
Standard Lines
Jeffrey F. Kamrowski 2
MUSIC
Paul Kush 2
Chief Claims Officer
Michael H. Lanza 1,2
General Counsel and
Chief Compliance Officer
Rohit Mull 2
Chief Marketing and
Innovation 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
Christopher G. Cunniff 1,2
Chief Risk 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
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INVESTOR INFORMATION
Annual Meeting
Wednesday, May 3, 2023 - 9:00 AM (ET)
Virtual format via live audiocast at
www.virtualshareholdermeeting.com/SIGI2023
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, 2022 (not including exhibits and documents incorporated
by reference), the Proxy Statement for the 2023 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
Senior 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 2022 Annual Report.
Website
Visit us at www.Selective.com
for information about Selective,
including our latest financial news.
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SELECTIVE 2022 ANNUAL REPORT
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