Notes to Consolidated Financial Statements
Note 1. Organization
Selective Insurance Group, Inc., through its subsidiaries, (collectively referred to as “we,” “us,” or “our”) offers standard commercial, standard personal, and excess and surplus ("E&S") lines property and casualty insurance products. Selective Insurance Group, Inc. (referred to as the “Parent”) was incorporated in New Jersey in 1977 and its corporate headquarters is located in Branchville, New Jersey. The Parent’s common stock is publicly traded on the NASDAQ Global Select Market under the symbol “SIGI.” We have provided a glossary of terms as Exhibit 99.1 to this Form 10-K, which defines certain industry-specific and other terms that are used in this Form 10-K.
We classify our business into four reportable segments, which are as follows:
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Standard Commercial Lines - comprised of insurance products and services provided in the standard marketplace to commercial enterprises, which are typically businesses, non-profit organizations, and local government agencies.
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Standard Personal Lines - comprised of insurance products and services, including flood insurance coverage, provided primarily to individuals acquiring coverage in the standard marketplace.
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E&S Lines - comprised of insurance products and services provided to customers who have not obtained coverage in the standard marketplace.
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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.
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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) 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) Reclassifications
In
2017
, we reclassified certain line items within our Consolidated Statements of Income to enhance the ability to analyze our expenses. Specifically, we reclassified our insurance underwriting expenses into amortization of deferred policy acquisition costs and other insurance expenses. These expenses were previously included in policy acquisition costs and other expenses. In addition, all expenses of the Parent, which were previously included in other expenses, are now separately identifiable as corporate expenses on the Consolidated Statements of Income. All prior periods presented in this Form 10-K have been reclassified to reflect this change.
(d) Investments
Fixed income securities may include investment grade and below investment grade rated bonds, redeemable preferred stocks, non-redeemable preferred stocks with certain debt-like characteristics, mortgage-backed securities (“MBS”), collateralized loan obligations ("CLO"), and other asset-backed securities (“ABS”). MBS, CLO, and other ABS are jointly referred to as structured securities. Fixed income securities classified as available-for-sale (“AFS”) are reported at fair value. Those fixed income securities that we have the ability and positive intent to hold to maturity are classified as held-to-maturity (“HTM”) and are carried at either: (i) amortized cost; or (ii) market value at the date of transfer into the HTM category, adjusted for subsequent amortization. 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. Premiums and discounts arising from the purchase of structured securities 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. Interest income, as well as amortization and accretion, is included in "Net investment income earned" on our Consolidated Statements of Income. The amortized cost of a fixed income security is written down to fair value when a decline in value is considered to
be other than temporary. See the discussion below on realized investment gains and losses for a description of the accounting for impairments. After-tax unrealized gains and losses on: (i) fixed income securities classified as AFS; and (ii) fixed income securities that were transferred into an HTM designation from an AFS designation, are included in accumulated other comprehensive income (loss) ("AOCI").
Equity securities, which are classified as AFS, may include common and non-redeemable preferred stocks. These securities are carried at fair value and the related dividend income is included in "Net investment income earned" on our Consolidated Statements of Income. The cost of equity securities is written down to fair value when a decline in value is considered to be other than temporary. See the discussion below on realized investment gains and losses for a description of the accounting for impairments. After-tax unrealized gains and losses are included in AOCI.
Short-term investments may include certain money market instruments, savings accounts, commercial paper, and debt issues purchased with a maturity of less than one year. We also enter into reverse repurchase agreements that are included in short-term investments. These loans are fully collateralized with high quality, readily marketable instruments at a minimum of
102%
of the loan principal. At maturity, we receive principal and interest income on these agreements. All short-term investments are carried at cost, which approximates fair value. The associated income is included in "Net investment income earned" on our Consolidated Statements of Income.
Other investments may include alternative investments and other securities. Alternative investments are accounted for using the equity method. Our share of distributed and undistributed net income from alternative investments is included in "Net investment income earned" on our Consolidated Statements of Income. Other securities are primarily comprised of tax credit investments. Low income housing tax credits are accounted for under the proportional amortization method and all other tax credits are accounted for using the equity method. Under the proportional amortization method, our share of the investment’s performance is recorded in our Consolidated Statements of Income as a component of “Federal income tax expense.” Under the equity method, our share of distributed and undistributed net income is included in "Net investment income earned" on our Consolidated Statements of Income. For federal income 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 Statements of Income as a component of "Federal income tax expense" proportionately over the life of the investment.
We evaluate the alternative investments and tax credit investments included in our other investments portfolio to determine whether those investments are variable interest entities ("VIEs") and if so, whether consolidation is required. A VIE is an entity that either has equity investors that lack certain essential characteristics of a controlling financial interest or lack sufficient funds to finance its own activities without financial support provided by other entities. We consider several significant factors in determining if our investments are VIEs and if we are the primary beneficiary, including whether we have: (i) the power to direct activities of the VIE; (ii) the ability to remove the decision maker of the VIE; (iii) the ability to participate in making decisions that are significant to the VIE; and (iv) the obligation to absorb losses and the right to receive benefits that could potentially be significant to the VIE. We have reviewed our alternative and tax credit investments and have concluded that they are VIEs, but that we are not the primary beneficiary and therefore, consolidation is not required.
Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold and are credited or charged to income. Included in realized gains and losses are the other-than-temporary impairment ("OTTI") charges recognized in earnings, which are discussed below.
On a quarterly basis, we review our investment portfolio for impairments that are other than temporary. Interest-related unrealized losses typically do not result in other-than-temporary impairments. The following provides information on this analysis for our fixed income securities and short-term investments, equity securities, and other investments.
Fixed Income Securities and Short-Term Investments
We review securities that are in an unrealized loss position to determine: (i) if we have the intent to sell the security; (ii) if it is more likely than not that we will be required to sell the debt security before its anticipated recovery; and (iii) if the decline is other than temporary. Broad changes in the overall market or interest rate environment generally will not lead to a write down. If we determine that we have either the intent or requirement to sell the security, we write down its amortized cost to its fair value through a charge to earnings as a component of realized losses. If we do not have either the intent or requirement to sell the security, our evaluation for OTTI may include, but is not limited to, evaluation of the following factors:
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Whether the decline appears to be issuer or industry specific;
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The degree to which the issuer is current or in arrears in making principal and interest payments on the fixed income security;
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The issuer’s current financial condition and ability to make future scheduled principal and interest payments on a timely basis;
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Evaluation of projected cash flows;
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Buy/hold/sell recommendations published by outside investment advisors and analysts; and
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Relevant rating history, analysis, and guidance provided by rating agencies and analysts.
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Non-redeemable preferred stocks that are classified as fixed income securities are evaluated under this OTTI method unless the security is below investment grade, at which time it is evaluated under the equity securities OTTI model discussed below.
To determine if an impairment is other than temporary, we perform assessments that may include, but are not limited to, a discounted cash flow analysis ("DCF") to determine the security's present value of future cash flows. This analysis is also performed on all previously-impaired debt securities that continue to be held by us and all structured securities that were not of high credit quality at the date of purchase. Any shortfall in the expected present value of the future cash flows, based on the DCF, from the amortized cost basis of a security is considered a “credit impairment,” with the remaining decline in fair value of a security considered a “non-credit impairment.” Credit impairments are charged to earnings as a component of realized losses, while non-credit impairments are recorded to Other Comprehensive Income ("OCI") as a component of unrealized losses.
The discount rate we use in a DCF is the effective interest rate implicit in the security at the date of acquisition for those structured securities that were not of high credit quality at acquisition. For all other securities, we use a discount rate that equals the current yield, excluding the impact of previous OTTI charges, used to accrete the beneficial interest. 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.
Equity Securities
We review securities that are in an unrealized loss position to determine: (i) if we do not intend to hold the security to its forecasted recovery; or (ii) if the decline is other than temporary, which includes declines driven by market volatility for which we cannot assert the security will recover in the near term. If we determine either that we do not intend to hold a security, or the decline is other than temporary, we write down the security's cost to its fair value through a charge to earnings as a component of realized losses. If we intend to hold the security, our evaluation for OTTI may include, but is not limited to, an evaluation of the following factors:
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Whether the decline appears to be issuer or industry specific;
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The relationship of market prices per share to book value per share at the date of acquisition and date of evaluation;
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The price-earnings ratio at the time of acquisition and date of evaluation;
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The financial condition and near-term prospects of the issuer, including any specific events that may influence the issuer's operations, coupled with our intention to hold the securities in the near-term;
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The recent income or loss of the issuer;
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The independent auditors' report on the issuer's recent financial statements;
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The dividend policy of the issuer at the date of acquisition and the date of evaluation;
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Buy/hold/sell recommendations or price projections published by outside investment advisors;
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Rating agency announcements;
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The length of time and the extent to which the fair value has been, or is expected to be, less than its cost in the near term; and
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Our expectation of when the cost of the security will be recovered.
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Other Investments
Our evaluation for OTTI of an other investment (i.e., an alternative investment) may include, but is not limited to, conversations with the management of the alternative investment concerning the following:
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The current investment strategy;
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Changes made or future changes to be made to the investment strategy;
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Emerging issues that may affect the success of the strategy; and
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The appropriateness of the valuation methodology used regarding the underlying investments.
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If there is a decline in the fair value of an other investment that we do not intend to hold, or if we determine the decline is other than temporary, we write down the carry value of the investment and record the charge through earnings as a component of realized losses.
(e) 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. Transfers between levels in the fair value hierarchy are recognized at the end of the reporting period.
The techniques used to value our financial assets are as follows:
Level 1 Pricing
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Security Type
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Methodology
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Equity Securities; U.S. Treasury Notes
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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.
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Short-Term Investments
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Short-term investments are carried at cost, which approximates fair value. Given the liquid nature of our short-term investments, we generally validate their fair value by way of active trades within approximately one week of the financial statement close.
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Level 2 Pricing
We utilize a market approach for our Level 2 securities, using primarily matrix pricing models prepared by external pricing services. Matrix pricing models use mathematical techniques to value debt securities by relying on the securities' relationship to other benchmark quoted securities, and not relying exclusively on quoted prices for specific securities, as the specific securities are not always frequently traded. As a matter of policy, we consistently use one pricing service as our primary source and secondary pricing services if prices are not available from the primary pricing service. Fixed income securities portfolio pricing is reviewed for reasonableness in the following ways: (i) comparing our pricing to other third-party pricing services as well as benchmark indexed pricing; (ii) comparing fair value fluctuations between months for reasonableness; and (iii) reviewing stale prices. If further analysis is needed, a challenge is sent to the pricing service for review and confirmation of the price.
Further information on our Level 2 asset pricing is included in the following table:
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Security Type
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Methodology
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Corporate Securities including preferred stocks classified as Fixed Income Securities, and U.S. Government and Government Agencies
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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.
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Obligations of States and Political Subdivisions
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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.
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Structured Securities (including CLO and other ABS, Commercial Mortgage-Backed Securities ("CMBS"), Residential Mortgage-Backed Securities ("RMBS"))
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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.
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Foreign Government
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Evaluations are performed using a DCF model and by incorporating observed market yields of benchmarks as inputs, adjusting for varied maturities.
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Level 3 Pricing
Less than 1% of our portfolio cannot be priced using our primary or secondary pricing service. At times, we may use non-binding broker quotes to value some of these securities. These prices are from various broker/dealers that use bid or ask prices, or benchmarks to indices, in measuring the fair value of a security. We review these fair value measurements for reasonableness. This review typically includes an analysis of price fluctuations between months with variances over established thresholds being analyzed further.
Further information on our current Level 3 asset pricing is included in the following table:
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Security Type
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Methodology
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Corporate Securities
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These tax credit investments are priced internally using spread-based evaluations.
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Equity Securities
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These non-publicly traded stocks are valued by the issuer and reviewed internally.
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Liabilities
The techniques used to value our notes payable are as follows:
Level 1 Pricing
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Security Type
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Methodology
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5.875% Senior Notes
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Based on the quoted market prices.
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Level 2 Pricing
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Security Type
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Methodology
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7.25% Senior Notes; 6.70% Senior Notes
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Based on matrix pricing models prepared by external pricing services.
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Borrowings from Federal Home Loan Banks
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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.
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See Note 7. “Fair Value Measurements” for a summary table of the fair value and related carrying amounts of financial instruments.
(f) Allowance for Doubtful Accounts
We estimate an allowance for doubtful accounts on our premiums receivable. This allowance is based on historical write-off percentages adjusted for the effects of current and anticipated trends. An account is charged off when we believe it is probable that we will not collect a receivable. In making this determination, we consider information obtained from our efforts to collect amounts due directly or through collection agencies.
(g) Share-Based Compensation
Share-based compensation consists of all share-based payment transactions in which an entity acquires goods or services by issuing (or offering to issue) its shares, share units, share options, or other equity instruments. The cost resulting from all share-based payment transactions are recognized in the Financial Statements based on the fair value of both equity and liability awards. The fair value is measured at grant date for equity awards, whereas the fair value for liability awards are remeasured at each reporting period. The fair value of both equity and liability awards is recognized over the requisite service period. The requisite service period is typically the lesser of the vesting period or the period of time from the grant date to the date of retirement eligibility. The expense recognized for share-based awards, which, in some cases, contain performance criteria, is based on the number of shares or units expected to be issued at the end of the performance period. We repurchase the Parent’s stock from our employees in connection with tax withholding obligations, as permitted under our stock-based compensation plans. This activity is disclosed in our Consolidated Statements of Stockholders' Equity.
(h) Reinsurance
Reinsurance recoverables represent estimates of amounts that will be recovered from reinsurers under our various treaties. Generally, amounts recoverable from reinsurers are recognized as assets at the same time and in a manner consistent with the paid and unpaid losses associated with the reinsured policies. We require collateral to secure reinsurance recoverables primarily from our reinsurance carriers that are not authorized, otherwise approved, or certified to do business in one or more of our ten insurance subsidiaries' domiciliary states. Our ten insurance subsidiaries are collectively referred to as the
"Insurance Subsidiaries." This collateral is typically in the form of a letter of credit or cash. An allowance for estimated uncollectible reinsurance is recorded based on an evaluation of balances due from reinsurers and other available information, such as each reinsurers' credit rating from A.M. Best Company ("A.M. Best") or Standard & Poor's Rating Services ("S&P"). We charge off reinsurance recoverables on paid losses when it becomes probable that we will not collect the balance.
(i) 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 carried 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:
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Asset Category
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Years
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Computer hardware
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3
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Computer software
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3 to 5
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Internally developed software
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5 to 10
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Software licenses
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3 to 5
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Furniture and fixtures
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10
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Buildings and improvements
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5 to 40
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We recorded depreciation expense of
$17.8 million
,
$17.4 million
, and
$16.4 million
for
2017
,
2016
, and
2015
, respectively.
(j) Deferred Policy Acquisition Costs
Deferred policy acquisition costs are limited to costs directly related to the successful acquisition of insurance contracts. Costs meeting this definition typically include, among other things, sales commissions paid to our distribution partners, premium taxes, and the portion of employee salaries and benefits directly related to time spent on acquired contracts. These costs are deferred and amortized over the life of the contracts.
Accounting guidance requires a premium deficiency analysis to be performed at the level an entity acquires, services, and measures the profitability of its insurance contracts. We currently perform three premium deficiency analyses for our insurance operations, consistent with our reportable segments of Standard Commercial Lines, Standard Personal Lines, and E&S Lines. A combined ratio of over 100% does not necessarily indicate a premium deficiency, as any year's combined ratio includes a portion of underwriting expenses that are expensed at policy inception and therefore are not covered by the remaining unearned premium. In addition, investment income is not contemplated in the combined ratio calculation.
There were no premium deficiencies for any of the reported years, as the sum of the anticipated loss and loss expense, unamortized acquisition costs, policyholder dividends, and other expenses for each segment did not exceed that segment’s related unearned premium and anticipated investment income. The investment yields assumed in the premium deficiency assessment for each reporting period, which were based on our actual average investment yield before tax as of the September 30 calculation date, were
2.9%
for
2017
,
2.4%
for
2016
, and
2.5%
for
2015
.
(k) 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, 2017, goodwill was not impaired.
(l) Reserves for Loss and Loss Expense
Reserves for loss and loss expense are comprised of both case reserves on individual claims and reserves for claims incurred but not reported ("IBNR"). Case reserves result from claims that have been reported to one or more of our Insurance Subsidiaries, and are estimated at the amount of the expected ultimate payment. IBNR reserves are established at more aggregated levels than case basis reserves, and in addition to reserves on claims that have been incurred but not reported, they include provisions for future emergence on known claims, as well as reopened claims. IBNR reserves are established based on the results of the Insurance Subsidiaries’ internal reserve analysis, supplemented with other internal and external information.
The internal reserve analysis is performed quarterly, and relies upon generally accepted actuarial techniques. Such techniques assume that past experience, adjusted for the effects of current developments and anticipated trends, are an appropriate basis for predicting future events. Our analyses rely upon historical paid and case loss and loss expense experience organized by line of business, accident year, and maturity (i.e., “triangles”). Standard actuarial projection methods are applied to this history,
producing a set of estimated ultimate loss and loss expenses. Ultimate loss and loss expenses are selected from the various methods, considering the strengths and weaknesses of the methods as they apply to the specific line and accident year.
Certain types of exposures do not lend themselves to standard actuarial methods. Examples of these are:
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Certain property catastrophe events may be low in frequency and high in severity. These events may affect many insureds simultaneously. Due to the unique nature of these events, ultimate liabilities are estimated for each event, based on surveys of our portfolio of exposures, in conjunction with individual claims estimates. While generally short-tailed, the liabilities associated with these events are subject to a higher degree of uncertainty. We maintain significant reinsurance protection that greatly limits the impact that these extreme events have on net loss and loss expenses.
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Some insured events may span multiple years and trigger multiple policies, as in the case of asbestos and environmental claims, where the injury is deemed to occur over an extended period of time. These types of losses often do not lend themselves to traditional actuarial methods. Where we deem appropriate, our experience may be analyzed without differentiating by accident year, using alternative methods and metrics. In these cases, the associated selected ultimate loss and loss expenses are then allocated to the applicable accident years for reporting.
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Another example of non-standard methods relate to loss expenses that cannot be attributed to a specific claim (referred to as “unallocated loss expenses”). These expenses are first allocated to line of business, and alternative projection methods are then applied to estimate expenses by calendar year, which are then allocated back to the applicable accident years for reporting.
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The selected ultimate losses and loss adjustment expenses are translated into indicated IBNR reserves, which are then compared to the recorded IBNR reserves. Management's judgment is applied in determining any required adjustments and the resulting adjustments are then recorded and assigned or allocated to accident year using the results of the actuarial analysis.
While the reserve analysis is the primary basis for determining the recorded IBNR reserves, other internal and external factors are considered. Internal factors include: (i) supplemental data regarding claims reporting and settlement trends; (ii) exposure estimates for reported claims, along with recent development on those estimates with respect to individual large claims and the aggregate of all claims; (iii) the rate at which new large or complex claims are being reported; and (iv) additional trends observed by claims personnel or reported to them by defense counsel. External factors considered include: (i) legislative enactments; (ii) judicial decisions; (iii) legal developments in the determination of liability and the imposition of damages; and (iv) trends in general economic conditions, including the effects of inflation.
Loss reserves are estimates, and as such, we also consider a range of possible loss and loss expense reserve estimates. This range is determined at the beginning of each year, using prior year-end data, and reflects the fact that there is no single precise method for estimating the required reserves, due to the many factors that may influence the amounts ultimately paid. Considering the reserve range along with all of the items described above, as well as current market conditions, IBNR estimates are then established and recorded.
The combination of the IBNR estimates along with the case reserve estimates on individual claims results in our total reserves for loss and loss expense. These reserves are expected to be sufficient for settling losses and loss reserve obligations under our policies on unpaid claims, including changes in the volume of business written, claims frequency and severity, the mix of business, claims processing, and other items that management expects to affect our ultimate settlement of loss and loss expense. However, the ultimate claim settlements may be higher or lower than reserves established. As our experience emerges and other information develops, we revise our reserve estimates accordingly. The changes in these estimates, resulting from the continuous review process and the differences between estimates and ultimate payments, are reflected in the Consolidated Statements of Income for the period in which such estimates are changed. The associated impacts may be material to the results of operations in future periods.
We do not discount to present value that portion of our losses 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 auto accident) leads to a claim under an auto and an associated umbrella policy, they are each counted separately. Conversely, multiple claimants under the same occurrence/line/policy would contribute only a single count. The claim counts provided are
on a reported basis. A claim is considered reported when a reserve is established or payment is made. Therefore, claims closed without payment are included in the count as long as there was an associated case reserve at some point in its life cycle.
We also write a small amount of assumed reinsurance. Currently, this business is limited to our share of certain involuntary pools. Since the associated claims are not processed by us, they are not captured within our claims system. Therefore, the claim counts reported exclude this business.
(m) Revenue Recognition
The Insurance Subsidiaries' net premiums written (“NPW”) include direct insurance policy writings, plus reinsurance assumed and estimates of premiums earned but unbilled on the workers compensation and general liability lines of insurance, less reinsurance ceded. The estimated premium on the workers compensation and general liability lines is referred to as audit premium. We estimate this premium, as it is anticipated to be either billed or returned on policies subsequent to expiration based on exposure levels (i.e. payroll or sales). Audit premium is based on historical trends adjusted for the uncertainty of future economic conditions. Economic instability could ultimately impact our estimates and assumptions, and changes in our estimate may be material to the results of operations in future periods. Premiums written are recognized as revenue over the period that coverage is provided using the semi-monthly pro-rata method. Unearned premiums and prepaid reinsurance premiums represent that portion of premiums written that are applicable to the unexpired terms of policies in force.
(n) 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 do not issue policies that entitle the policyholder to participate in the earnings or surplus of our Insurance Subsidiaries.
(o) Federal Income Tax
We use the asset and liability method of accounting for income taxes. Current federal income taxes are recognized for the estimated taxes payable or refundable on tax returns for the current year. Deferred federal income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. We consider all evidence, both positive and negative, with respect to our federal tax loss carryback availability, expected levels of pre-tax financial statement income, and federal taxable income, when evaluating whether the temporary differences will be realized. In projecting future taxable income, we begin with budgeted pre-tax income adjusted for estimated non-taxable items. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we use to manage our businesses. A valuation allowance is established when it is more likely than not that some portion of the deferred tax asset will not be realized. A liability for uncertain tax positions is recorded when it is more likely than not that a tax position will not be sustained upon examination by taxing authorities. The effect of a change in tax rates is recognized in the period of enactment. If we were to be levied interest and penalties by the Internal Revenue Service (“IRS”), the interest would be recognized as “Interest expense” and the penalties would be recognized as either “Other insurance expenses” or "Corporate expenses" on the Consolidated Statements of Income depending on the nature of what caused the occurrence of such an item.
For information regarding the impact of the the recent tax reform, refer to Note 13. "Federal Income Taxes" of this Form 10-K.
(p) Leases
We have various operating leases for office space, equipment, and fleet vehicles. Rental expense for such leases is recorded on a straight-line basis over the lease term. If a lease has a fixed and determinable escalation clause, or periods of rent holidays, the difference between rental expense and rent paid is included in "Other liabilities" in the Consolidated Balance Sheets.
In addition, we have various capital leases for computer hardware and software. These leases are accounted for as an acquisition of an asset with a corresponding obligation. Depreciation is calculated using the straight-line method over the shorter of the estimated useful life of the asset or the lease term.
(q) Pension
Our pension and post-retirement life benefit obligations and related costs are calculated using actuarial methods, within the framework of GAAP. Our pension benefit obligation is determined as the actuarial present value of the vested benefits to which the employee is currently entitled, based on the average life expectancy of the employee. Our funding policy provides that payments to our pension trust shall be equal to the minimum funding requirements of the Employee Retirement Income Security Act, plus additional amounts that the Board of Directors of Selective Insurance Company of America (“SICA”) may approve from time to time.
Two key assumptions, the discount rate and the expected return on plan assets, are important elements of expense and/or liability measurement. We evaluate these key assumptions annually unless facts indicate that a more frequent review is required. The discount rate enables us to state expected future cash flows at their present value on the measurement date. The purpose of the discount rate is to determine the interest rates inherent in the price at which pension benefits could be effectively settled. Our discount rate selection is based on high-quality, long-term corporate bonds. To determine the expected long-term rate of return on the plan assets, we consider the current and expected asset allocation, as well as historical and expected returns on each plan asset class. Other assumptions involve demographic factors such as retirement age and mortality.
Note 3. Adoption of Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2016-09,
Compensation - Stock Compensation: Improvements to Employee Share-based Payment Accounting
(“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions. We adopted this guidance in the first quarter of 2017, which resulted in the following impacts on our consolidated financial statements:
Consolidated Statements of Income
The new standard requires that the tax effects of share-based compensation be recognized in the income tax provision as discrete items outside of the annual estimated expected tax rate. In addition, all excess tax benefits and tax deficiencies should be recognized as income tax benefit or expense in the income statement. Previously, these amounts were recorded in additional paid-in capital. In addition, in calculating potential common shares used to determine diluted earnings per share, GAAP requires us to use the treasury stock method. The new standard requires that assumed proceeds under the treasury stock method be modified to exclude the amount of excess tax benefits that would have been recognized in additional paid-in capital. These changes were adopted on a prospective basis. As a result of adoption, we recognized an income tax benefit in the Consolidated Statements of Income of
$4.3 million
in 2017 related to stock grants that have vested this year.
In recording share-based compensation expense, the standard allows companies to make a policy election as to whether they will include an estimate of awards expected to be forfeited or whether they will account for forfeitures as they occur. We have elected to include an estimate of forfeitures in the computation of our share-based compensation expense. As this treatment is consistent with previous guidance, this election had no impact on our consolidated financial statements.
Consolidated Statements of Cash Flows
ASU 2016-09 requires that excess tax benefits from share-based awards be reported as operating activities in the consolidated statement of cash flows. Previously, these cash flows were included in financing activities. We elected to apply this change on a prospective basis; therefore, no changes have been made to the prior periods disclosed in this report.
ASU 2016-09 also requires that employee taxes paid when an employer withholds shares for tax-withholding purposes be reported as financing activities in the consolidated statement of cash flows. This requirement has no impact to us as we have historically reported these cash flows as part of financing activities.
In October 2016, the FASB issued ASU 2016-17,
Consolidation: Interests Held through Related Parties That Are under Common Control
("ASU 2016-17"). ASU 2016-17 changes how a decision maker considers indirect interests in a VIE held under common control in making the primary beneficiary determination. We adopted ASU 2016-17 in the first quarter of 2017. This adoption did not impact us, as we are not the decision maker in any of the VIEs in which we invest.
In March 2017, the FASB issued ASU 2017-08,
Receivables-Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities
("ASU 2017-08"). ASU 2017-08 revises the amortization period for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. ASU 2017-08 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 with early adoption permitted. We adopted this guidance in the fourth quarter of 2017 and the adoption did not impact us as we amortize premium on these callable debt securities to the earliest call date.
In May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation: Scope of Modification Accounting
("ASU 2017-09"). ASU 2017-09 provides clarification about which changes to the terms or conditions of a share-based payment award would require the application of modification accounting. ASU 2017-09 is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. We adopted this guidance in the fourth quarter of 2017 and the adoption did not impact us, as we currently record modifications in accordance with this ASU.
Pronouncements to be effective in the future
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
(“ASU 2016-01”). ASU 2016-01 provides guidance to improve certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Specifically the guidance: (i) requires equity investments to be measured at fair value with changes in fair value recognized in earnings; (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost; (iv) requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and (v) clarifies that the need for a valuation allowance on a deferred tax asset related to an available-for-sale ("AFS") security should be evaluated with other deferred tax assets.
ASU 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Our adoption of this guidance will require a cumulative-effect adjustment between AOCI and retained earnings on the balance sheet for approximately
$25 million
, which represents the after-tax unrealized gain on our equity securities portfolio as of December 31, 2017. On a pre-tax basis, the unrealized gain on our equity securities portfolio increased
$13 million
during 2017 and, had this literature been in effect, we would have recognized additional after-tax net income of approximately
$10 million
, or
$0.17
per diluted share, assuming a
21%
corporate tax rate.
In February 2016, the FASB issued ASU 2016-02,
Leases
(“ASU 2016-02”).
ASU 2016-02 requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that fiscal year, with early adoption permitted. ASU 2016-02 requires the application of a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. While we are currently evaluating ASU 2016-02, we do not expect a material impact on our financial condition or results of operations from the adoption of this guidance.
In June 2016, the FASB issued ASU 2016-13
, Financial Instruments - Credit Losses
(“ASU 2016-13”). ASU 2016-13 will change the way entities recognize impairment of financial assets by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, including, among others, held-to-maturity debt securities, trade receivables, and reinsurance recoverables. ASU 2016-13 requires a valuation allowance to be calculated on these financial assets and that they be presented on the financial statements net of the valuation allowance. The valuation allowance is a measurement of expected losses that is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This methodology is referred to as the current expected credit loss model. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2018. We are currently evaluating the impact of this guidance on our financial condition and results of operations.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”). ASU 2016-15 adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows, including, but not limited to: (i) debt prepayment or debt extinguishment costs; (ii) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (iii) distributions received from equity method investees; and (iv) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective, with retrospective adoption, for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. We anticipate that the adoption of this guidance in 2018 will result in an increase to our 2017 and 2016 operating cash flows of approximately
$2 million
and
$3 million
, respectively, reflecting adjustments for distributions received from equity method investees.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows: Restricted Cash
("ASU 2016-18"). ASU 2016-18, requires that restricted cash and restricted cash equivalents be included with cash and cash equivalents in the reconciliation of beginning and ending cash on the statements of cash flows. This update also requires a reconciliation of the statement of the cash flows to the balance sheet if the balance sheet includes more than one line item containing cash, cash equivalents, and restricted cash. We currently have restricted cash associated with our participation in the National Flood Insurance Program ("NFIP") within "Other assets" on our consolidating balance sheets. This restricted cash amounted to
$44.2 million
,
$36.9 million
, and
$11.9 million
on December 31, 2017, 2016, and 2015, respectively. ASU 2016-18 is effective, with retrospective adoption, for annual periods beginning after December 15, 2017, and interim periods within those annual periods. We anticipate that the adoption of this guidance in 2018 will result in increases to operating cash flows of
$7 million
and
$25 million
for 2017 and 2016, respectively. The restricted cash balance will also be included in the reconciliation of beginning and ending cash balances.
In January 2017, the FASB issued ASU 2017-04,
Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”). ASU 2017-04 eliminates the second step of the two part goodwill impairment test, which required entities to determine the fair value of individual assets and liabilities of a reporting unit to measure the goodwill impairment. Under the new guidance, a goodwill impairment is calculated as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments in this update should be applied on a prospective basis for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We intend to adopt this guidance in 2018, but do not expect it to impact our financial condition or results of operations.
In March 2017, the FASB issued ASU 2017-07,
Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
("ASU 2017-07"). ASU 2017-07 requires that an employer report a pension plan's service cost in the same line item or line items as other compensation costs arising from services rendered by pertinent employees during the period. ASU 2017-07 also requires that other components of net benefit cost be presented in the income statement separately from the service cost component. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted at the beginning of an annual period. As our pension plan was frozen as of March 2016, we have ceased accruing additional service fee costs since that time. Therefore, the application of this guidance is not anticipated to impact our financial condition, results of operations, or disclosures.
Note 4. Statements of Cash Flows
Supplemental cash flow information for the years ended
December 31, 2017, 2016, and 2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2017
|
|
2016
|
|
2015
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
23,905
|
|
|
22,098
|
|
|
21,892
|
|
|
Federal income tax
|
|
62,000
|
|
|
46,405
|
|
|
39,500
|
|
|
|
|
|
|
|
|
|
|
Non-cash items:
|
|
|
|
|
|
|
|
Exchange of fixed income securities, AFS
|
|
22,511
|
|
|
23,579
|
|
|
36,792
|
|
|
Exchange of fixed income securities, HTM
|
|
—
|
|
|
—
|
|
|
15,257
|
|
|
Corporate actions related to equity securities, AFS
1
|
|
4,725
|
|
|
3,263
|
|
|
4,239
|
|
|
Assets acquired under capital lease arrangements
|
|
278
|
|
|
3,151
|
|
|
6,760
|
|
|
Non-cash purchase of property and equipment
|
|
—
|
|
|
78
|
|
|
—
|
|
1
Examples of such corporate actions include non-cash acquisitions and stock-splits.
Included in "Other assets" on the Consolidated Balance Sheet was
$44.2 million
at
December 31, 2017
and
$36.9 million
at
December 31, 2016
of cash received from the NFIP, which is restricted to pay flood claims under the Write Your Own Program.
Note 5. Investments
(a) Net unrealized gains on investments included in OCI by asset class were as follows for the years ended
December 31, 2017, 2016, and 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2017
|
|
2016
|
|
2015
|
|
AFS securities:
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
85,806
|
|
|
38,781
|
|
|
55,689
|
|
|
Equity securities
|
|
38,894
|
|
|
25,864
|
|
|
13,235
|
|
|
Total AFS securities
|
|
124,700
|
|
|
64,645
|
|
|
68,924
|
|
|
|
|
|
|
|
|
|
|
HTM securities:
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
(21
|
)
|
|
159
|
|
|
300
|
|
|
Total HTM securities
|
|
(21
|
)
|
|
159
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
Total net unrealized gains
|
|
124,679
|
|
|
64,804
|
|
|
69,224
|
|
|
Deferred income tax
|
|
(44,103
|
)
|
|
(22,681
|
)
|
|
(24,228
|
)
|
|
Net unrealized gains, net of deferred income tax
|
|
80,576
|
|
|
42,123
|
|
|
44,996
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net unrealized gains in OCI, net of deferred income tax
|
|
$
|
38,453
|
|
|
(2,873
|
)
|
|
(35,398
|
)
|
(b) The amortized cost, net unrealized gains and losses, carrying value, unrecognized holding gains and losses, and fair value of HTM fixed income securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
Unrecognized
|
|
Unrecognized
|
|
|
|
|
|
Amortized
|
|
Gains
|
|
Carrying
|
|
Holding
|
|
Holding
|
|
Fair
|
|
($ in thousands)
|
|
Cost
|
|
(Losses)
|
|
Value
|
|
Gains
|
|
Losses
|
|
Value
|
|
Obligations of state and political subdivisions
|
|
$
|
25,154
|
|
|
84
|
|
|
25,238
|
|
|
1,023
|
|
|
—
|
|
|
26,261
|
|
|
Corporate securities
|
|
16,996
|
|
|
(105
|
)
|
|
16,891
|
|
|
1,003
|
|
|
(55
|
)
|
|
17,839
|
|
|
Total HTM fixed income securities
|
|
$
|
42,150
|
|
|
(21
|
)
|
|
42,129
|
|
|
2,026
|
|
|
(55
|
)
|
|
44,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
Unrecognized
|
|
Unrecognized
|
|
|
|
|
|
Amortized
|
|
Gains
|
|
Carrying
|
|
Holding
|
|
Holding
|
|
Fair
|
|
($ in thousands)
|
|
Cost
|
|
(Losses)
|
|
Value
|
|
Gains
|
|
Losses
|
|
Value
|
|
Obligations of state and political subdivisions
|
|
77,466
|
|
|
317
|
|
|
77,783
|
|
|
2,133
|
|
|
—
|
|
|
79,916
|
|
|
Corporate securities
|
|
22,711
|
|
|
(143
|
)
|
|
22,568
|
|
|
1,665
|
|
|
(158
|
)
|
|
24,075
|
|
|
CMBS
|
|
1,220
|
|
|
(15
|
)
|
|
1,205
|
|
|
15
|
|
|
—
|
|
|
1,220
|
|
|
Total HTM fixed income securities
|
|
$
|
101,397
|
|
|
159
|
|
|
101,556
|
|
|
3,813
|
|
|
(158
|
)
|
|
105,211
|
|
Unrecognized holding gains and losses of HTM securities are not reflected in the Financial Statements, as they represent fair value fluctuations from the later of: (i) the date a security is designated as HTM either through purchase or transfer from AFS; or (ii) the date that an OTTI charge is recognized on an HTM security, through the date of the balance sheet.
(c) The cost/amortized cost, unrealized gains and losses, and fair value of AFS securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Cost/
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
($ in thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
AFS fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies
|
|
$
|
49,326
|
|
|
647
|
|
|
(233
|
)
|
|
49,740
|
|
|
Foreign government
|
|
18,040
|
|
|
526
|
|
|
(11
|
)
|
|
18,555
|
|
|
Obligations of states and political subdivisions
|
|
1,539,307
|
|
|
44,245
|
|
|
(582
|
)
|
|
1,582,970
|
|
|
Corporate securities
|
|
1,588,339
|
|
|
30,891
|
|
|
(1,762
|
)
|
|
1,617,468
|
|
|
CLO and other ABS
|
|
789,152
|
|
|
6,508
|
|
|
(202
|
)
|
|
795,458
|
|
|
CMBS
|
|
382,727
|
|
|
1,563
|
|
|
(841
|
)
|
|
383,449
|
|
|
RMBS
|
|
709,825
|
|
|
6,487
|
|
|
(1,430
|
)
|
|
714,882
|
|
|
Total AFS fixed income securities
|
|
5,076,716
|
|
|
90,867
|
|
|
(5,061
|
)
|
|
5,162,522
|
|
|
AFS equity securities:
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
129,696
|
|
|
38,287
|
|
|
(226
|
)
|
|
167,757
|
|
|
Preferred stock
|
|
14,115
|
|
|
904
|
|
|
(71
|
)
|
|
14,948
|
|
|
Total AFS equity securities
|
|
143,811
|
|
|
39,191
|
|
|
(297
|
)
|
|
182,705
|
|
|
Total AFS securities
|
|
$
|
5,220,527
|
|
|
130,058
|
|
|
(5,358
|
)
|
|
5,345,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Cost/
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
($ in thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
AFS fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies
|
|
$
|
75,139
|
|
|
2,230
|
|
|
(36
|
)
|
|
77,333
|
|
|
Foreign government
|
|
26,559
|
|
|
322
|
|
|
(16
|
)
|
|
26,865
|
|
|
Obligations of states and political subdivisions
|
|
1,366,287
|
|
|
18,610
|
|
|
(5,304
|
)
|
|
1,379,593
|
|
|
Corporate securities
|
|
1,976,556
|
|
|
27,057
|
|
|
(5,860
|
)
|
|
1,997,753
|
|
|
CLO and other ABS
|
|
527,876
|
|
|
1,439
|
|
|
(355
|
)
|
|
528,960
|
|
|
CMBS
|
|
256,356
|
|
|
1,514
|
|
|
(1,028
|
)
|
|
256,842
|
|
|
RMBS
|
|
524,986
|
|
|
3,006
|
|
|
(2,798
|
)
|
|
525,194
|
|
|
Total AFS fixed income securities
|
|
4,753,759
|
|
|
54,178
|
|
|
(15,397
|
)
|
|
4,792,540
|
|
|
AFS equity securities:
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
104,663
|
|
|
26,250
|
|
|
(305
|
)
|
|
130,608
|
|
|
Preferred stock
|
|
16,226
|
|
|
274
|
|
|
(355
|
)
|
|
16,145
|
|
|
Total AFS equity securities
|
|
120,889
|
|
|
26,524
|
|
|
(660
|
)
|
|
146,753
|
|
|
Total AFS securities
|
|
$
|
4,874,648
|
|
|
80,702
|
|
|
(16,057
|
)
|
|
4,939,293
|
|
Unrealized gains and losses of AFS securities represent fair value fluctuations from the later of: (i) the date a security is designated as AFS; or (ii) the date that an OTTI charge is recognized on an AFS security, through the date of the balance sheet. These unrealized gains and losses are recorded in AOCI on the Consolidated Balance Sheets.
(d) The severity of impairment on the securities in an unrealized/unrecognized loss position averaged
1%
of amortized cost at
December 31, 2017
and
December 31, 2016
. Quantitative information regarding unrealized losses on our AFS portfolio is provided below. Our HTM portfolio had
$0.1 million
in unrealized/unrecognized losses at
December 31, 2017
and no unrealized/unrecognized losses at
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
|
($ in thousands)
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
AFS fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies
|
|
$
|
23,516
|
|
|
(233
|
)
|
|
250
|
|
|
—
|
|
|
23,766
|
|
|
(233
|
)
|
|
Foreign government
|
|
1,481
|
|
|
(11
|
)
|
|
—
|
|
|
—
|
|
|
1,481
|
|
|
(11
|
)
|
|
Obligations of states and political subdivisions
|
|
107,514
|
|
|
(422
|
)
|
|
14,139
|
|
|
(160
|
)
|
|
121,653
|
|
|
(582
|
)
|
|
Corporate securities
|
|
238,326
|
|
|
(1,744
|
)
|
|
3,228
|
|
|
(18
|
)
|
|
241,554
|
|
|
(1,762
|
)
|
|
CLO and other ABS
|
|
74,977
|
|
|
(196
|
)
|
|
1,655
|
|
|
(6
|
)
|
|
76,632
|
|
|
(202
|
)
|
|
CMBS
|
|
154,267
|
|
|
(773
|
)
|
|
5,214
|
|
|
(68
|
)
|
|
159,481
|
|
|
(841
|
)
|
|
RMBS
|
|
269,485
|
|
|
(1,285
|
)
|
|
11,200
|
|
|
(145
|
)
|
|
280,685
|
|
|
(1,430
|
)
|
|
Total AFS fixed income securities
|
|
869,566
|
|
|
(4,664
|
)
|
|
35,686
|
|
|
(397
|
)
|
|
905,252
|
|
|
(5,061
|
)
|
|
AFS equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
4,727
|
|
|
(226
|
)
|
|
—
|
|
|
—
|
|
|
4,727
|
|
|
(226
|
)
|
|
Preferred stock
|
|
3,833
|
|
|
(71
|
)
|
|
—
|
|
|
—
|
|
|
3,833
|
|
|
(71
|
)
|
|
Total AFS equity securities
|
|
8,560
|
|
|
(297
|
)
|
|
—
|
|
|
—
|
|
|
8,560
|
|
|
(297
|
)
|
|
Total AFS securities
|
|
$
|
878,126
|
|
|
(4,961
|
)
|
|
35,686
|
|
|
(397
|
)
|
|
913,812
|
|
|
(5,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
|
($ in thousands)
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
AFS fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies
|
|
$
|
6,419
|
|
|
(36
|
)
|
|
—
|
|
|
—
|
|
|
$
|
6,419
|
|
|
$
|
(36
|
)
|
|
Foreign government
|
|
13,075
|
|
|
(16
|
)
|
|
—
|
|
|
—
|
|
|
13,075
|
|
|
(16
|
)
|
|
Obligations of states and political subdivisions
|
|
306,509
|
|
|
(5,304
|
)
|
|
—
|
|
|
—
|
|
|
306,509
|
|
|
(5,304
|
)
|
|
Corporate securities
|
|
462,902
|
|
|
(5,771
|
)
|
|
4,913
|
|
|
(89
|
)
|
|
467,815
|
|
|
(5,860
|
)
|
|
CLO and other ABS
|
|
189,795
|
|
|
(354
|
)
|
|
319
|
|
|
(1
|
)
|
|
190,114
|
|
|
(355
|
)
|
|
CMBS
|
|
82,492
|
|
|
(1,021
|
)
|
|
1,645
|
|
|
(7
|
)
|
|
84,137
|
|
|
(1,028
|
)
|
|
RMBS
|
|
279,480
|
|
|
(2,489
|
)
|
|
8,749
|
|
|
(309
|
)
|
|
288,229
|
|
|
(2,798
|
)
|
|
Total AFS fixed income securities
|
|
1,340,672
|
|
|
(14,991
|
)
|
|
15,626
|
|
|
(406
|
)
|
|
1,356,298
|
|
|
(15,397
|
)
|
|
AFS equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
11,271
|
|
|
(305
|
)
|
|
—
|
|
|
—
|
|
|
11,271
|
|
|
(305
|
)
|
|
Preferred stock
|
|
6,168
|
|
|
(355
|
)
|
|
—
|
|
|
—
|
|
|
6,168
|
|
|
(355
|
)
|
|
Total AFS equity securities
|
|
17,439
|
|
|
(660
|
)
|
|
—
|
|
|
—
|
|
|
17,439
|
|
|
(660
|
)
|
|
Total AFS securities
|
|
$
|
1,358,111
|
|
|
(15,651
|
)
|
|
15,626
|
|
|
(406
|
)
|
|
$
|
1,373,737
|
|
|
$
|
(16,057
|
)
|
We do not intend to sell any of the securities in the tables above, nor do we believe we will be required to sell any of these securities. Additionally, we have reviewed these securities in accordance with our OTTI policy, as described in Note 2. “Summary of Significant Accounting Policies” of this Form 10-K and have concluded that they are temporarily impaired. This conclusion reflects our current judgment as to the financial position and future prospects of the entity that issued the security and underlying collateral. If our judgment about an individual security changes in the future, we may ultimately record a credit loss after having originally concluded that one did not exist, which could have a material impact on our net income and financial position in future periods.
(e) Fixed income securities at
December 31, 2017
, by contractual maturity are shown below. MBS are included in the maturity tables using the estimated average life of each security. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Listed below are the contractual maturities of fixed income securities at
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS
|
|
HTM
|
|
($ in thousands)
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Due in one year or less
|
|
$
|
315,857
|
|
|
10,997
|
|
|
11,168
|
|
|
Due after one year through five years
|
|
2,099,529
|
|
|
23,035
|
|
|
24,235
|
|
|
Due after five years through 10 years
|
|
2,510,294
|
|
|
8,097
|
|
|
8,697
|
|
|
Due after 10 years
|
|
236,842
|
|
|
—
|
|
|
—
|
|
|
Total fixed income securities
|
|
$
|
5,162,522
|
|
|
42,129
|
|
|
44,100
|
|
(f) The following table summarizes our other investment portfolio by strategy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Investments
|
|
December 31, 2017
|
|
December 31, 2016
|
|
($ in thousands)
|
|
Carrying
Value
|
|
Remaining
Commitment
|
|
Maximum
Exposure to Loss
1
|
|
Carrying
Value
|
|
Remaining
Commitment
|
|
Maximum
Exposure to Loss
1
|
|
Alternative Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity
|
|
$
|
52,251
|
|
|
99,026
|
|
|
151,277
|
|
|
41,135
|
|
|
76,774
|
|
|
117,909
|
|
|
Private credit
|
|
37,743
|
|
|
94,959
|
|
|
132,702
|
|
|
28,193
|
|
|
40,613
|
|
|
68,806
|
|
|
Real assets
|
|
25,379
|
|
|
27,014
|
|
|
52,393
|
|
|
14,486
|
|
|
22,899
|
|
|
37,385
|
|
|
Total alternative investments
|
|
115,373
|
|
|
220,999
|
|
|
336,372
|
|
|
83,814
|
|
|
140,286
|
|
|
224,100
|
|
|
Other securities
2
|
|
16,895
|
|
|
—
|
|
|
16,895
|
|
|
18,583
|
|
|
3,400
|
|
|
21,983
|
|
|
Total other investments
|
|
$
|
132,268
|
|
|
220,999
|
|
|
353,267
|
|
|
102,397
|
|
|
143,686
|
|
|
246,083
|
|
1
The maximum exposure to loss includes both the carrying value of these investments and the related unfunded commitments. In addition, tax credits that have been previously recognized in Other securities are subject to the risk of recapture, which we do not consider significant.
2
Other securities primarily consists of tax credit investments.
We have reviewed various investments included in the table above and have concluded that they are VIEs, but that we are not the primary beneficiary and therefore, consolidation is not required. We do not have a future obligation to fund losses or debts on behalf of these investments; however, we are contractually committed to make additional investments up to the remaining commitment outlined above. We have not provided any non-contractual financial support at any time during 2017 or 2016.
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.
|
|
|
|
|
•
|
Secondary Private Equity
: This strategy purchases seasoned private equity funds from investors desiring liquidity prior to normal fund termination. Investments are made across all sectors of the private equity market, including leveraged buyouts ("LBO"), venture capital, distressed securities, mezzanine financing, real estate, and infrastructure.
|
|
|
|
|
•
|
Venture Capital
: In general, these investments are made principally by investing in equity securities of privately-held corporations, for long-term capital appreciation. This strategy makes private equity investments in growth equity and buyout partnerships.
|
Our private credit strategy includes the following:
|
|
|
|
•
|
Middle Market 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 can be made to private equity sponsor-backed companies or non-sponsored companies 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.
|
|
|
|
|
•
|
Distressed Debt
: This strategy makes direct and indirect investments in debt and equity securities of companies that are experiencing financial and/or operational distress. 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:
|
|
|
|
•
|
Energy & Power Generation
: This strategy makes energy and power generation investments in cash flow generating infrastructure assets. Energy investments are made in a variety of industries including oil, natural gas, and coal. These investments are diversified across the energy supply chain and include assets in the exploration and production, pipeline, and refining sectors. Power generation includes investments in: (i) conventional power, such as natural gas and oil; (ii) renewable power, such as wind and solar; and (iii) electric transmission and distribution.
|
|
|
|
|
•
|
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 generally employ low or moderate levels of leverage and use hedging only to reduce foreign exchange or interest rate volatility. At this time, our alternative investment strategies do not include hedge funds. We cannot redeem our investments with the general partners of these investments; however, occasionally these partnerships can be traded on the secondary market. Once liquidation is triggered by clauses within the limited partnership agreements or at the funds’ stated end date, we will receive our final allocation of capital and any earned appreciation of the underlying investments, assuming we have not divested ourselves of our partnership interests prior to that time. We currently receive distributions from these alternative investments through the realization of the underlying investments in the limited partnerships. We anticipate that the general partners of these alternative investments will liquidate their underlying investment portfolios through 2032.
The following tables set forth summarized financial information for our other investments portfolio, including the portion not owned by us. The investments are carried under the equity method of accounting. The last line in the income statement information table below reflects our share of the aggregate income, which is the portion included in our Financial Statements. As the majority of these investments report results to us on a one quarter lag, the summarized financial statement information is as of, and for the 12-month period ended, September 30:
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Information
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
($ in millions)
|
|
2017
|
|
2016
|
|
Investments
|
|
$
|
21,046
|
|
|
11,244
|
|
|
Total assets
|
|
22,357
|
|
|
12,075
|
|
|
Total liabilities
|
|
4,767
|
|
|
1,802
|
|
|
Total partners’ capital
|
|
17,590
|
|
|
10,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement Information
|
|
|
|
|
|
|
|
12 months ended September 30,
|
|
|
|
|
|
|
|
($ in millions)
|
|
2017
|
|
2016
|
|
2015
|
|
Net investment (loss) income
|
|
$
|
(143
|
)
|
|
(44
|
)
|
|
129
|
|
|
Realized gains
|
|
325
|
|
|
1,374
|
|
|
1,187
|
|
|
Net change in unrealized appreciation (depreciation)
|
|
2,894
|
|
|
(719
|
)
|
|
(1,364
|
)
|
|
Net income
|
|
$
|
3,076
|
|
|
611
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
Insurance Subsidiaries' alternative investments income (loss)
|
|
12.7
|
|
|
3.1
|
|
|
(1.9
|
)
|
(g) We did not have exposure to any credit concentration risk of a single issuer greater than
10%
of our stockholders' equity, other than certain U.S. government agencies, as of
December 31, 2017
or
December 31, 2016
.
(h) We have pledged certain AFS fixed income securities as collateral related to our relationships with the Federal Home Loan Bank of Indianapolis ("FHLBI") and the Federal Home Loan Bank of New York ("FHLBNY"). In addition, certain securities were on deposit with various state and regulatory agencies at December 31, 2017 to comply with insurance laws. We retain all rights regarding securities pledged as collateral.
The following table summarizes the market value of these securities at
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
FHLBI Collateral
|
|
FHLBNY Collateral
|
|
State and Regulatory Deposits
|
|
Total
|
|
U.S. government and government agencies
|
|
$
|
3.0
|
|
|
—
|
|
|
22.6
|
|
|
25.6
|
|
|
Obligations of states and political subdivisions
|
|
—
|
|
|
—
|
|
|
3.1
|
|
|
3.1
|
|
|
CMBS
|
|
6.2
|
|
|
14.1
|
|
|
—
|
|
|
20.3
|
|
|
RMBS
|
|
56.3
|
|
|
59.6
|
|
|
—
|
|
|
115.9
|
|
|
Total pledged as collateral
|
|
$
|
65.5
|
|
|
73.7
|
|
|
25.7
|
|
|
164.9
|
|
(i) The components of pre-tax net investment income earned were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2017
|
|
2016
|
|
2015
|
|
Fixed income securities
|
|
$
|
153,230
|
|
|
129,306
|
|
|
123,230
|
|
|
Equity securities
|
|
6,442
|
|
|
7,368
|
|
|
9,161
|
|
|
Short-term investments
|
|
1,526
|
|
|
686
|
|
|
112
|
|
|
Other investments
|
|
12,871
|
|
|
2,940
|
|
|
(1,890
|
)
|
|
Investment expenses
|
|
(12,187
|
)
|
|
(9,546
|
)
|
|
(9,297
|
)
|
|
Net investment income earned
|
|
$
|
161,882
|
|
|
130,754
|
|
|
121,316
|
|
(j) The following tables summarize OTTI by asset type for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
Recognized in
Earnings
|
|
($ in thousands)
|
|
Gross
|
|
Included in OCI
|
|
|
AFS fixed income securities:
|
|
|
|
|
|
|
|
U.S. government and government agencies
|
|
$
|
36
|
|
|
—
|
|
|
36
|
|
|
Obligations of states and political subdivisions
|
|
612
|
|
|
—
|
|
|
612
|
|
|
Corporate securities
|
|
587
|
|
|
—
|
|
|
587
|
|
|
CLO and other ABS
|
|
96
|
|
|
—
|
|
|
96
|
|
|
CMBS
|
|
670
|
|
|
—
|
|
|
670
|
|
|
RMBS
|
|
1,183
|
|
|
(36
|
)
|
|
1,219
|
|
|
Total AFS fixed income securities
|
|
3,184
|
|
|
(36
|
)
|
|
3,220
|
|
|
AFS equity securities:
|
|
|
|
|
|
|
|
Common stock
|
|
1,435
|
|
|
—
|
|
|
1,435
|
|
|
Total AFS equity securities
|
|
1,435
|
|
|
—
|
|
|
1,435
|
|
|
Other investments
|
|
$
|
190
|
|
|
—
|
|
|
190
|
|
|
Total OTTI losses
|
|
$
|
4,809
|
|
|
(36
|
)
|
|
4,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
Recognized in
Earnings
|
|
($ in thousands)
|
|
Gross
|
|
Included in OCI
|
|
|
AFS fixed income securities:
|
|
|
|
|
|
|
|
Obligations of states and political subdivisons
|
|
$
|
2,797
|
|
|
—
|
|
|
2,797
|
|
|
Corporate securities
|
|
1,880
|
|
|
—
|
|
|
1,880
|
|
|
CLO and other ABS
|
|
19
|
|
|
—
|
|
|
19
|
|
|
CMBS
|
|
220
|
|
|
—
|
|
|
220
|
|
|
RMBS
|
|
275
|
|
|
10
|
|
|
265
|
|
|
Total AFS fixed income securities
|
|
5,191
|
|
|
10
|
|
|
5,181
|
|
|
AFS equity securities:
|
|
|
|
|
|
|
|
Common stock
|
|
3,316
|
|
|
—
|
|
|
3,316
|
|
|
Preferred stock
|
|
2
|
|
|
—
|
|
|
2
|
|
|
Total AFS equity securities
|
|
3,318
|
|
|
—
|
|
|
3,318
|
|
|
Total OTTI losses
|
|
$
|
8,509
|
|
|
10
|
|
|
8,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
Recognized in
Earnings
|
|
($ in thousands)
|
|
Gross
|
|
Included in OCI
|
|
|
AFS fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
Corporate securities
|
|
$
|
2,188
|
|
|
—
|
|
|
2,188
|
|
|
RMBS
|
|
1
|
|
|
—
|
|
|
1
|
|
|
Total AFS fixed income securities
|
|
2,189
|
|
|
—
|
|
|
2,189
|
|
|
AFS equity securities:
|
|
|
|
|
|
|
|
Common stock
|
|
15,996
|
|
|
—
|
|
|
15,996
|
|
|
Preferred stock
|
|
181
|
|
|
—
|
|
|
181
|
|
|
Total AFS equity securities
|
|
16,177
|
|
|
—
|
|
|
16,177
|
|
|
Total OTTI losses
|
|
$
|
18,366
|
|
|
—
|
|
|
18,366
|
|
The majority of the OTTI charges in both
2017
and
2016
were on securities for which we had the intent to sell to facilitate our fixed income strategy change to more actively manage the portfolio to maximize after-tax income and total return, while maintaining a similar level of credit quality and duration risk. Charges in 2015 related to equity securities for which we had the intent to sell in relation to our high-dividend yield strategy, with the remaining charges relating to securities that we did not believe would recover in the near term.
(k) The components of net realized gains, excluding OTTI charges, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2017
|
|
2016
|
|
2015
|
|
HTM fixed income securities
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
$
|
44
|
|
|
3
|
|
|
5
|
|
|
Losses
|
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
AFS fixed income securities
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
10,193
|
|
|
7,741
|
|
|
4,515
|
|
|
Losses
|
|
(3,292
|
)
|
|
(11,411
|
)
|
|
(312
|
)
|
|
AFS equity securities
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
5,829
|
|
|
8,108
|
|
|
29,168
|
|
|
Losses
|
|
(1,200
|
)
|
|
(864
|
)
|
|
(1,347
|
)
|
|
Short-term investments
|
|
|
|
|
|
|
|
Gains
|
|
2
|
|
|
—
|
|
|
—
|
|
|
Losses
|
|
(6
|
)
|
|
(13
|
)
|
|
—
|
|
|
Other investments
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
494
|
|
|
3
|
|
|
162
|
|
|
Losses
|
|
(859
|
)
|
|
(4
|
)
|
|
(653
|
)
|
|
Total net realized investment gains
|
|
$
|
11,204
|
|
|
3,562
|
|
|
31,537
|
|
Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold. Proceeds from the sale of AFS securities were
$1,235.9 million
in
2017
,
$1,046.1 million
in
2016
, and
$234.1 million
in
2015
.
Net realized gains in the table above were driven by the following:
|
|
|
|
•
|
2017
: A higher trading volume in our fixed income securities portfolio related to a more active external investment management approach and opportunistic sales in our equity portfolio.
|
|
|
|
|
•
|
2016
: A repositioning of our equity portfolio partially offset by net losses in our AFS fixed income portfolio related to the change in our strategy to more actively manage this portfolio.
|
|
|
|
|
•
|
2015
: A change in our dividend strategy from a quantitative, model-driven stock selection strategy to a fundamentally-based stock selection approach that incorporates an assessment of the sustainability and growth rate of a company's dividends and future cash flow.
|
Note 6. Comprehensive Income
(a) The components of comprehensive income, both gross and net of tax, for
2017
,
2016
, and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Gross
|
|
Tax
|
|
Net
|
|
Net income
|
|
$
|
261,968
|
|
|
93,142
|
|
|
168,826
|
|
|
Components of OCI:
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on investment securities
:
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains during the year
|
|
66,894
|
|
|
23,879
|
|
|
43,015
|
|
|
Non-credit portion of OTTI recognized in OCI
|
|
36
|
|
|
13
|
|
|
23
|
|
|
Amounts reclassified into net income:
|
|
|
|
|
|
|
|
|
HTM securities
|
|
(179
|
)
|
|
(63
|
)
|
|
(116
|
)
|
|
Non-credit OTTI
|
|
104
|
|
|
36
|
|
|
68
|
|
|
Realized gains on AFS securities
|
|
(6,979
|
)
|
|
(2,442
|
)
|
|
(4,537
|
)
|
|
Net unrealized gains
|
|
59,876
|
|
|
21,423
|
|
|
38,453
|
|
|
Defined benefit pension and post-retirement plans:
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
(4,684
|
)
|
|
(984
|
)
|
|
(3,700
|
)
|
|
Amounts reclassified into net income:
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
2,102
|
|
|
735
|
|
|
1,367
|
|
|
Defined benefit pension and post-retirement plans
|
|
(2,582
|
)
|
|
(249
|
)
|
|
(2,333
|
)
|
|
Other comprehensive income
|
|
57,294
|
|
|
21,174
|
|
|
36,120
|
|
|
Comprehensive income
|
|
$
|
319,262
|
|
|
114,316
|
|
|
204,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Gross
|
|
Tax
|
|
Net
|
|
Net income
|
|
$
|
219,955
|
|
|
61,460
|
|
|
158,495
|
|
|
Components of OCI:
|
|
|
|
|
|
|
|
|
|
|
Unrealized (losses) gains on investment securities
:
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses during the year
|
|
(9,195
|
)
|
|
(3,218
|
)
|
|
(5,977
|
)
|
|
Non-credit portion of OTTI recognized in OCI
|
|
(10
|
)
|
|
(4
|
)
|
|
(6
|
)
|
|
Amounts reclassified into net income:
|
|
|
|
|
|
|
|
|
HTM securities
|
|
(141
|
)
|
|
(49
|
)
|
|
(92
|
)
|
|
Non-credit OTTI
|
|
213
|
|
|
75
|
|
|
138
|
|
|
Realized losses on AFS securities
|
|
4,713
|
|
|
1,649
|
|
|
3,064
|
|
|
Net unrealized losses
|
|
(4,420
|
)
|
|
(1,547
|
)
|
|
(2,873
|
)
|
|
Defined benefit pension and post-retirement plans:
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
(12,079
|
)
|
|
(4,227
|
)
|
|
(7,852
|
)
|
|
Amounts reclassified into net income:
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
6,462
|
|
|
2,262
|
|
|
4,200
|
|
|
Defined benefit pension and post-retirement plans
|
|
(5,617
|
)
|
|
(1,965
|
)
|
|
(3,652
|
)
|
|
Other comprehensive loss
|
|
(10,037
|
)
|
|
(3,512
|
)
|
|
(6,525
|
)
|
|
Comprehensive income
|
|
$
|
209,918
|
|
|
57,948
|
|
|
151,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Gross
|
|
Tax
|
|
Net
|
|
Net income
|
|
$
|
232,692
|
|
|
66,831
|
|
|
165,861
|
|
|
Components of OCI:
|
|
|
|
|
|
|
|
|
|
|
Unrealized (losses) gains on investment securities
:
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses during the year
|
|
(40,221
|
)
|
|
(14,078
|
)
|
|
(26,143
|
)
|
|
Amounts reclassified into net income:
|
|
|
|
|
|
|
|
|
HTM securities
|
|
(580
|
)
|
|
(203
|
)
|
|
(377
|
)
|
|
Non-credit OTTI
|
|
357
|
|
|
125
|
|
|
232
|
|
|
Realized gains on AFS securities
|
|
(14,016
|
)
|
|
(4,906
|
)
|
|
(9,110
|
)
|
|
Net unrealized losses
|
|
(54,460
|
)
|
|
(19,062
|
)
|
|
(35,398
|
)
|
|
Defined benefit pension and post-retirement plans:
|
|
|
|
|
|
|
|
|
|
|
Net actuarial gain
|
|
2,438
|
|
|
853
|
|
|
1,585
|
|
|
Amounts reclassified into net income:
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
7,077
|
|
|
2,477
|
|
|
4,600
|
|
|
Defined benefit pension and post-retirement plans
|
|
9,515
|
|
|
3,330
|
|
|
6,185
|
|
|
Other comprehensive loss
|
|
(44,945
|
)
|
|
(15,732
|
)
|
|
(29,213
|
)
|
|
Comprehensive income
|
|
$
|
187,747
|
|
|
51,099
|
|
|
136,648
|
|
(b) The balances of, and changes in, each component of AOCI (net of taxes) as of
December 31, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized (Loss) Gain on Investment Securities
|
|
|
|
|
|
|
|
($ in thousands)
|
|
OTTI Related
|
|
HTM Related
|
|
All Other
|
|
Investments Subtotal
|
|
Defined Benefit Pension and Post- retirement Plans
|
|
Total AOCI
|
|
Balance, December 31, 2015
|
|
$
|
(282
|
)
|
|
194
|
|
|
45,083
|
|
|
44,995
|
|
|
(54,420
|
)
|
|
(9,425
|
)
|
|
OCI before reclassifications
|
|
(6
|
)
|
|
—
|
|
|
(5,977
|
)
|
|
(5,983
|
)
|
|
(7,852
|
)
|
|
(13,835
|
)
|
|
Amounts reclassified from AOCI
|
|
138
|
|
|
(92
|
)
|
|
3,064
|
|
|
3,110
|
|
|
4,200
|
|
|
7,310
|
|
|
Net current period OCI
|
|
132
|
|
|
(92
|
)
|
|
(2,913
|
)
|
|
(2,873
|
)
|
|
(3,652
|
)
|
|
(6,525
|
)
|
|
Balance, December 31, 2016
|
|
(150
|
)
|
|
102
|
|
|
42,170
|
|
|
42,122
|
|
|
(58,072
|
)
|
|
(15,950
|
)
|
|
OCI before reclassifications
|
|
23
|
|
|
—
|
|
|
43,015
|
|
|
43,038
|
|
|
(3,700
|
)
|
|
39,338
|
|
|
Amounts reclassified from AOCI
|
|
68
|
|
|
(116
|
)
|
|
(4,537
|
)
|
|
(4,585
|
)
|
|
1,367
|
|
|
(3,218
|
)
|
|
Net current period OCI
|
|
91
|
|
|
(116
|
)
|
|
38,478
|
|
|
38,453
|
|
|
(2,333
|
)
|
|
36,120
|
|
|
Balance, December 31, 2017
|
|
$
|
(59
|
)
|
|
(14
|
)
|
|
80,648
|
|
|
80,575
|
|
|
(60,405
|
)
|
|
20,170
|
|
The reclassifications out of AOCI are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Year ended December 31, 2017
|
|
Year ended December 31, 2016
|
|
Affected Line Item in the Consolidated Statements of Income
|
|
OTTI related
|
|
|
|
|
|
|
|
Non-credit OTTI on disposed securities
|
|
$
|
104
|
|
|
213
|
|
|
Net realized gains (losses)
|
|
|
|
104
|
|
|
213
|
|
|
Income before federal income tax
|
|
|
|
(36
|
)
|
|
(75
|
)
|
|
Total federal income tax expense
|
|
|
|
68
|
|
|
138
|
|
|
Net income
|
|
HTM related
|
|
|
|
|
|
|
|
Unrealized losses on HTM disposals
|
|
32
|
|
|
169
|
|
|
Net realized gains (losses)
|
|
Amortization of net unrealized gains on HTM securities
|
|
(211
|
)
|
|
(310
|
)
|
|
Net investment income earned
|
|
|
|
(179
|
)
|
|
(141
|
)
|
|
Income before federal income tax
|
|
|
|
63
|
|
|
49
|
|
|
Total federal income tax expense
|
|
|
|
(116
|
)
|
|
(92
|
)
|
|
Net income
|
|
Realized (losses) gains on AFS
|
|
|
|
|
|
|
|
Realized (losses) gains on AFS disposals
|
|
(6,979
|
)
|
|
4,713
|
|
|
Net realized gains (losses)
|
|
|
|
(6,979
|
)
|
|
4,713
|
|
|
Income before federal income tax
|
|
|
|
2,442
|
|
|
(1,649
|
)
|
|
Total federal income tax expense
|
|
|
|
(4,537
|
)
|
|
3,064
|
|
|
Net income
|
|
Defined benefit pension and post-retirement life plans
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
450
|
|
|
1,486
|
|
|
Loss and loss expense incurred
|
|
|
|
1,652
|
|
|
4,976
|
|
|
Other insurance expenses
|
|
Total defined benefit pension and post-retirement life
|
|
2,102
|
|
|
6,462
|
|
|
Income before federal income tax
|
|
|
|
(735
|
)
|
|
(2,262
|
)
|
|
Total federal income tax expense
|
|
|
|
1,367
|
|
|
4,200
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
(3,218
|
)
|
|
7,310
|
|
|
Net income
|
Note 7. Fair Value Measurements
The following table presents the carrying amounts and estimated fair values of our financial instruments as of
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
($ in thousands)
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HTM
|
|
$
|
42,129
|
|
|
44,100
|
|
|
101,556
|
|
|
105,211
|
|
|
AFS
|
|
5,162,522
|
|
|
5,162,522
|
|
|
4,792,540
|
|
|
4,792,540
|
|
|
Equity securities, AFS
|
|
182,705
|
|
|
182,705
|
|
|
146,753
|
|
|
146,753
|
|
|
Short-term investments
|
|
165,555
|
|
|
165,555
|
|
|
221,701
|
|
|
221,701
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
7.25% Senior Notes
|
|
49,904
|
|
|
61,391
|
|
|
49,901
|
|
|
56,148
|
|
|
6.70% Senior Notes
|
|
99,446
|
|
|
116,597
|
|
|
99,430
|
|
|
108,333
|
|
|
5.875% Senior Notes
|
|
185,000
|
|
|
186,332
|
|
|
185,000
|
|
|
176,860
|
|
|
1.61% Borrowings from FHLBNY
|
|
25,000
|
|
|
24,270
|
|
|
25,000
|
|
|
24,286
|
|
|
1.56% Borrowings from FHLBNY
|
|
25,000
|
|
|
24,210
|
|
|
25,000
|
|
|
24,219
|
|
|
3.03% Borrowings from FHLBI
|
|
60,000
|
|
|
60,334
|
|
|
60,000
|
|
|
59,313
|
|
|
Subtotal long-term debt
|
|
444,350
|
|
|
473,134
|
|
|
444,331
|
|
|
449,159
|
|
|
Unamortized debt issuance costs
|
|
(5,234
|
)
|
|
|
|
(5,664
|
)
|
|
|
|
Total long-term debt
|
|
$
|
439,116
|
|
|
|
|
|
438,667
|
|
|
|
|
For discussion regarding the fair value techniques of our financial instruments, refer to Note 2. "Summary of Significant Accounting Policies" in this Form 10-K.
The following tables provide quantitative disclosures of our financial assets that were measured and recorded at fair value at
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Fair Value Measurements Using
|
|
($ in thousands)
|
|
Assets Measured at Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets/ Liabilities
(Level 1)
1
|
|
Significant Other Observable Inputs (Level 2)
1
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies
|
|
$
|
49,740
|
|
|
24,652
|
|
|
25,088
|
|
|
—
|
|
|
Foreign government
|
|
18,555
|
|
|
—
|
|
|
18,555
|
|
|
—
|
|
|
Obligations of states and political subdivisions
|
|
1,582,970
|
|
|
—
|
|
|
1,582,970
|
|
|
—
|
|
|
Corporate securities
|
|
1,617,468
|
|
|
—
|
|
|
1,617,468
|
|
|
—
|
|
|
CLO and other ABS
|
|
795,458
|
|
|
—
|
|
|
795,458
|
|
|
—
|
|
|
CMBS
|
|
383,449
|
|
|
—
|
|
|
376,895
|
|
|
6,554
|
|
|
RMBS
|
|
714,882
|
|
|
—
|
|
|
714,882
|
|
|
—
|
|
|
Total AFS fixed income securities
|
|
5,162,522
|
|
|
24,652
|
|
|
5,131,316
|
|
|
6,554
|
|
|
AFS equity securities:
|
|
|
|
|
|
|
|
|
|
Common stock
2
|
|
167,757
|
|
|
138,640
|
|
|
—
|
|
|
5,398
|
|
|
Preferred stock
|
|
14,948
|
|
|
14,948
|
|
|
—
|
|
|
—
|
|
|
Total AFS equity securities
|
|
182,705
|
|
|
153,588
|
|
|
—
|
|
|
5,398
|
|
|
Total AFS securities
|
|
5,345,227
|
|
|
178,240
|
|
|
5,131,316
|
|
|
11,952
|
|
|
Short-term investments
|
|
165,555
|
|
|
165,555
|
|
|
—
|
|
|
—
|
|
|
Total assets measured at fair value
|
|
$
|
5,510,782
|
|
|
343,795
|
|
|
5,131,316
|
|
|
11,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Fair Value Measurements Using
|
|
($ in thousands)
|
|
Assets Measured at Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets/ Liabilities
(Level 1)
1
|
|
Significant Other Observable Inputs (Level 2)
1
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S. government and government agencies
|
|
$
|
77,333
|
|
|
27,520
|
|
|
49,813
|
|
|
—
|
|
|
Foreign government
|
|
26,865
|
|
|
—
|
|
|
26,865
|
|
|
—
|
|
|
Obligations of states and political subdivisions
|
|
1,379,593
|
|
|
—
|
|
|
1,379,593
|
|
|
—
|
|
|
Corporate securities
|
|
1,997,753
|
|
|
—
|
|
|
1,997,753
|
|
|
—
|
|
|
CLO and other ABS
|
|
528,960
|
|
|
—
|
|
|
528,960
|
|
|
—
|
|
|
CMBS
|
|
256,842
|
|
|
—
|
|
|
256,842
|
|
|
—
|
|
|
RMBS
|
|
525,194
|
|
|
—
|
|
|
525,194
|
|
|
—
|
|
|
Total AFS fixed income securities
|
|
4,792,540
|
|
|
27,520
|
|
|
4,765,020
|
|
|
—
|
|
|
AFS equity securities:
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
130,608
|
|
|
122,932
|
|
|
—
|
|
|
7,676
|
|
|
Preferred stock
|
|
16,145
|
|
|
16,145
|
|
|
—
|
|
|
—
|
|
|
Total AFS equity securities
|
|
146,753
|
|
|
139,077
|
|
|
—
|
|
|
7,676
|
|
|
Total AFS securities
|
|
4,939,293
|
|
|
166,597
|
|
|
4,765,020
|
|
|
7,676
|
|
|
Short-term investments
|
|
221,701
|
|
|
221,701
|
|
|
—
|
|
|
—
|
|
|
Total assets measured at fair value
|
|
$
|
5,160,994
|
|
|
388,298
|
|
|
4,765,020
|
|
|
7,676
|
|
1
There were no transfers of securities between Level 1 and Level 2.
2
In accordance with ASU 2015-07, investments amounting to
$23.7 million
at December 31, 2017, respectively, were measured at fair value using the net asset value per share (or its practical expedient) and have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to total assets measured at fair value.
The following table provides a summary of the changes in the fair value of securities measured using Level 3 inputs and related quantitative information during
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
($ in thousands)
|
|
CMBS
|
|
Common Stock
|
|
Fair value, December 31, 2016
|
|
$
|
—
|
|
|
7,676
|
|
|
Total net (losses) gains for the period included in:
|
|
|
|
|
|
|
OCI
|
|
4
|
|
|
—
|
|
|
Net income
|
|
—
|
|
|
—
|
|
|
Purchases
|
|
6,550
|
|
|
3,780
|
|
|
Sales
|
|
—
|
|
|
(3,958
|
)
|
|
Issuances
|
|
—
|
|
|
—
|
|
|
Settlements
|
|
—
|
|
|
—
|
|
|
Transfers into Level 3
|
|
—
|
|
|
—
|
|
|
Transfers out of Level 3
|
|
—
|
|
|
(2,100
|
)
|
|
Fair value, December 31, 2017
|
|
$
|
6,554
|
|
|
$
|
5,398
|
|
The following tables provide quantitative information regarding our financial assets and liabilities that were not measured, but were disclosed at fair value at
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Fair Value Measurements Using
|
|
($ in thousands)
|
|
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)
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
HTM:
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
26,261
|
|
|
—
|
|
|
26,261
|
|
|
—
|
|
|
Corporate securities
|
|
17,839
|
|
|
—
|
|
|
12,306
|
|
|
5,533
|
|
|
Total HTM fixed income securities
|
|
$
|
44,100
|
|
|
—
|
|
|
38,567
|
|
|
5,533
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
7.25% Senior Notes
|
|
$
|
61,391
|
|
|
—
|
|
|
61,391
|
|
|
—
|
|
|
6.70% Senior Notes
|
|
116,597
|
|
|
—
|
|
|
116,597
|
|
|
—
|
|
|
5.875% Senior Notes
|
|
186,332
|
|
|
186,332
|
|
|
—
|
|
|
—
|
|
|
1.61% Borrowings from FHLBNY
|
|
24,270
|
|
|
—
|
|
|
24,270
|
|
|
—
|
|
|
1.56% Borrowings from FHLBNY
|
|
24,210
|
|
|
—
|
|
|
24,210
|
|
|
—
|
|
|
3.03% Borrowings from FHLBI
|
|
60,334
|
|
|
—
|
|
|
60,334
|
|
|
—
|
|
|
Total long-term debt
|
|
$
|
473,134
|
|
|
186,332
|
|
|
286,802
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Fair Value Measurements Using
|
|
($ in thousands)
|
|
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)
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
HTM:
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
79,916
|
|
|
—
|
|
|
79,916
|
|
|
—
|
|
|
Corporate securities
|
|
24,075
|
|
|
—
|
|
|
16,565
|
|
|
7,510
|
|
|
CMBS
|
|
1,220
|
|
|
—
|
|
|
1,220
|
|
|
—
|
|
|
Total HTM fixed income securities
|
|
$
|
105,211
|
|
|
—
|
|
|
97,701
|
|
|
7,510
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
7.25% Senior Notes
|
|
$
|
56,148
|
|
|
—
|
|
|
56,148
|
|
|
—
|
|
|
6.70% Senior Notes
|
|
108,333
|
|
|
—
|
|
|
108,333
|
|
|
—
|
|
|
5.875% Senior Notes
|
|
176,860
|
|
|
176,860
|
|
|
—
|
|
|
—
|
|
|
1.61% Borrowings from FHLBNY
|
|
24,286
|
|
|
—
|
|
|
24,286
|
|
|
—
|
|
|
1.56% Borrowings from FHLBNY
|
|
24,219
|
|
|
—
|
|
|
24,219
|
|
|
—
|
|
|
3.03% Borrowings from FHLBI
|
|
59,313
|
|
|
—
|
|
|
59,313
|
|
|
—
|
|
|
Total long-term debt
|
|
$
|
449,159
|
|
|
176,860
|
|
|
272,299
|
|
|
—
|
|
Note 8. Reinsurance
Our Financial Statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to the acceptance of certain insurance risks that other insurance entities have underwritten. Ceded reinsurance involves transferring certain insurance risks (along with the related written and earned premiums) that we have underwritten to other insurance companies that agree to share these risks. The primary purpose of ceded reinsurance is to protect the Insurance Subsidiaries from potential losses in excess of the amount that we are prepared to accept. Our major treaties covering property, property catastrophe, and casualty business are excess of loss contracts. In addition, we have an intercompany quota share pooling arrangement and other minor quota share 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, 2020. TRIPRA requires private insurers and the United States 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
2018
, our deductible is approximately
$323 million
. For losses above the deductible, the federal government will pay
82%
of losses to an industry limit of
$100 billion
, and the insurer retains
18%
. The federal share of losses will be reduced by
1%
each year to
80%
by 2020.
The Insurance Subsidiaries remain liable to policyholders to the extent that any reinsurer becomes unable to meet their contractual obligations. In addition to this direct counterparty credit risk, we have indirect counterparty credit risk as our reinsurers often enter into their own reinsurance programs, or retrocessions, as part of managing their exposure to large losses. We evaluate and monitor the financial condition of our reinsurers under voluntary reinsurance arrangements to minimize our exposure to significant losses from reinsurer insolvencies. On an ongoing basis, we review amounts outstanding, length of collection period, changes in reinsurer credit ratings, and other relevant factors to determine collectability of reinsurance recoverables. The allowance for uncollectible reinsurance recoverables was
$4.6 million
at
December 31, 2017
and
$5.5 million
at
December 31, 2016
.
The following table represents our total reinsurance balances segregated by reinsurer to depict our concentration of risk throughout our reinsurance portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
As of December 31, 2016
|
|
($ in thousands)
|
|
Reinsurance Balances
|
|
% of Reinsurance Balance
|
|
Reinsurance Balances
|
|
% of Reinsurance Balance
|
|
Total reinsurance recoverables
|
|
$
|
594,832
|
|
|
|
|
|
$
|
621,537
|
|
|
|
|
|
Total prepaid reinsurance premiums
|
|
153,493
|
|
|
|
|
|
146,282
|
|
|
|
|
|
Total reinsurance balance
|
|
748,325
|
|
|
|
|
|
767,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal and state pools
1
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NFIP
|
|
204,161
|
|
|
27
|
%
|
|
211,181
|
|
|
27
|
%
|
|
New Jersey Unsatisfied Claim Judgment Fund
|
|
62,947
|
|
|
9
|
|
|
65,574
|
|
|
9
|
|
|
Other
|
|
3,634
|
|
|
—
|
|
|
3,227
|
|
|
—
|
|
|
Total federal and state pools
|
|
270,742
|
|
|
36
|
|
|
279,982
|
|
|
36
|
|
|
Remaining reinsurance balance
|
|
$
|
477,583
|
|
|
64
|
|
|
$
|
487,837
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
Munich Re Group (A.M. Best rated "A+")
|
|
$
|
117,460
|
|
|
16
|
|
|
$
|
119,520
|
|
|
16
|
|
|
Hannover Ruckversicherungs AG (A.M. Best rated "A+")
|
|
101,652
|
|
|
14
|
|
|
106,298
|
|
|
13
|
|
|
AXIS Reinsurance Company (A.M. Best rated "A+")
|
|
62,396
|
|
|
8
|
|
|
59,737
|
|
|
8
|
|
|
Swiss Re Group (A.M. Best rated "A+")
|
|
40,772
|
|
|
5
|
|
|
50,494
|
|
|
7
|
|
|
Partner Reinsurance Company of the U.S. (A.M. Best rated “A”)
|
|
16,925
|
|
|
2
|
|
|
21,125
|
|
|
3
|
|
|
All other reinsurers
|
|
138,378
|
|
|
19
|
|
|
130,663
|
|
|
17
|
|
|
Total reinsurers
|
|
477,583
|
|
|
64
|
%
|
|
487,837
|
|
|
64
|
%
|
|
Less: collateral
2
|
|
(122,413
|
)
|
|
|
|
(113,763
|
)
|
|
|
|
Reinsurers, net of collateral
|
|
$
|
355,170
|
|
|
|
|
$
|
374,074
|
|
|
|
1
Considered to have minimal risk of default.
2
Includes letters of credit, trust funds, and funds held against reinsurance recoverables.
Under our reinsurance arrangements, which are prospective in nature, reinsurance premiums ceded are recorded as prepaid reinsurance and amortized over the remaining contract period in proportion to the reinsurance protection provided, or recorded periodically, as per the terms of the contract, in a direct relationship to the gross premium recording. Reinsurance recoveries are recognized as gross losses are incurred.
The following table contains a listing of direct, assumed, and ceded reinsurance amounts for premiums written, premiums earned, and loss and loss expense incurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2017
|
|
2016
|
|
2015
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
2,733,459
|
|
|
2,577,259
|
|
|
2,403,519
|
|
|
Assumed
|
|
26,685
|
|
|
28,779
|
|
|
23,848
|
|
|
Ceded
|
|
(389,503
|
)
|
|
(368,750
|
)
|
|
(357,463
|
)
|
|
Net
|
|
$
|
2,370,641
|
|
|
2,237,288
|
|
|
2,069,904
|
|
|
|
|
|
|
|
|
|
|
Premiums earned:
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
2,647,488
|
|
|
2,484,715
|
|
|
2,330,267
|
|
|
Assumed
|
|
25,831
|
|
|
28,214
|
|
|
23,209
|
|
|
Ceded
|
|
(382,292
|
)
|
|
(363,357
|
)
|
|
(363,567
|
)
|
|
Net
|
|
$
|
2,291,027
|
|
|
2,149,572
|
|
|
1,989,909
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expense incurred:
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
1,570,678
|
|
|
1,560,356
|
|
|
1,274,872
|
|
|
Assumed
|
|
17,588
|
|
|
22,708
|
|
|
16,996
|
|
|
Ceded
|
|
(243,192
|
)
|
|
(348,267
|
)
|
|
(143,327
|
)
|
|
Net
|
|
$
|
1,345,074
|
|
|
1,234,797
|
|
|
1,148,541
|
|
The ceded premiums and losses related to our participation in the NFIP, under which
100%
of our flood premiums, and loss and loss expense are ceded to the NFIP, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded to NFIP ($ in thousands)
|
|
2017
|
|
2016
|
|
2015
|
|
Ceded premiums written
|
|
$
|
(241,345
|
)
|
|
(232,245
|
)
|
|
(228,907
|
)
|
|
Ceded premiums earned
|
|
(235,088
|
)
|
|
(227,882
|
)
|
|
(233,940
|
)
|
|
Ceded loss and loss expense incurred
|
|
(160,922
|
)
|
|
(239,891
|
)
|
|
(62,078
|
)
|
Note 9. Reserve for Loss and Loss Expense
(a) The table below provides a roll forward of reserves for loss and loss expense for beginning and ending reserve balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2017
|
|
2016
|
|
2015
|
|
Gross reserves for loss and loss expense, at beginning of year
|
|
$
|
3,691,719
|
|
|
3,517,728
|
|
|
3,477,870
|
|
|
Less: reinsurance recoverable on unpaid loss and loss expense, at beginning of year
|
|
611,200
|
|
|
551,019
|
|
|
571,978
|
|
|
Net reserves for loss and loss expense, at beginning of year
|
|
3,080,519
|
|
|
2,966,709
|
|
|
2,905,892
|
|
|
Incurred loss and loss expense for claims occurring in the:
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
1,384,266
|
|
|
1,300,565
|
|
|
1,217,550
|
|
|
Prior years
|
|
(39,192
|
)
|
|
(65,768
|
)
|
|
(69,009
|
)
|
|
Total incurred loss and loss expense
|
|
1,345,074
|
|
|
1,234,797
|
|
|
1,148,541
|
|
|
Paid loss and loss expense for claims occurring in the:
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
497,486
|
|
|
450,811
|
|
|
446,550
|
|
|
Prior years
|
|
742,722
|
|
|
670,176
|
|
|
641,174
|
|
|
Total paid loss and loss expense
|
|
1,240,208
|
|
|
1,120,987
|
|
|
1,087,724
|
|
|
Net reserves for loss and loss expense, at end of year
|
|
3,185,385
|
|
|
3,080,519
|
|
|
2,966,709
|
|
|
Add: Reinsurance recoverable on unpaid loss and loss expense, at end of year
|
|
585,855
|
|
|
611,200
|
|
|
551,019
|
|
|
Gross reserves for loss and loss expense at end of year
|
|
$
|
3,771,240
|
|
|
3,691,719
|
|
|
3,517,728
|
|
Our net loss and loss expense reserves increased by
$104.9 million
in
2017
,
$113.8 million
in
2016
, and
$60.8 million
in
2015
. The loss and loss expense reserves are net of anticipated recoveries for salvage and subrogation claims, which amounted to
$64.8 million
for
2017
,
$64.9 million
for
2016
, and
$62.1 million
for
2015
. The changes in the net loss and loss expense reserves were the result of growth in exposures, anticipated loss trends, payments of claims, and normal reserve changes inherent in the uncertainty in establishing reserves for loss and loss expense. As additional information is collected in the loss settlement process, reserves are adjusted accordingly. These adjustments are reflected in the Consolidated Statements of Income in the period in which such adjustments are identified. These changes could have a material impact on the results of operations of future periods when the adjustments are made.
In
2017
, we experienced overall net favorable prior year loss development of
$39.2 million
, compared to $
65.8 million
in
2016
and
$69.0 million
in
2015
. The following table summarizes the prior year development by line of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Favorable)/Unfavorable Prior Year Development
|
|
|
|
|
|
|
|
($ in millions)
|
|
2017
|
|
2016
|
|
2015
|
|
General Liability
|
|
$
|
(48.3
|
)
|
|
(45.0
|
)
|
|
(51.0
|
)
|
|
Commercial Automobile
|
|
35.6
|
|
|
25.3
|
|
|
2.4
|
|
|
Workers Compensation
|
|
(52.3
|
)
|
|
(56.0
|
)
|
|
(37.0
|
)
|
|
Businessowners' Policies
|
|
1.9
|
|
|
1.8
|
|
|
2.2
|
|
|
Commercial Property
|
|
8.7
|
|
|
0.3
|
|
|
(3.0
|
)
|
|
Homeowners
|
|
0.4
|
|
|
1.7
|
|
|
1.5
|
|
|
Personal Automobile
|
|
6.7
|
|
|
1.0
|
|
|
0.4
|
|
|
E&S Casualty Lines
|
|
10.0
|
|
|
6.0
|
|
|
16.0
|
|
|
Other
|
|
(1.9
|
)
|
|
(0.9
|
)
|
|
(0.5
|
)
|
|
Total
|
|
$
|
(39.2
|
)
|
|
(65.8
|
)
|
|
(69.0
|
)
|
The Insurance Subsidiaries had
$39.2 million
of favorable prior accident year development during
2017
, which included
$48.6 million
of net favorable casualty development and
$9.4 million
of unfavorable property development. The net favorable casualty reserve development was largely driven by the workers compensation and general liability lines of business, including products liability and excess liability. Partially offsetting this net favorable development was
$36.0 million
of unfavorable casualty development in the commercial auto line of business. In addition, our E&S casualty lines experienced unfavorable development of
$10.0 million
in 2017.
The majority of the 2017 net favorable development was attributable to accident years 2016 and prior, driven by the general liability and workers compensation lines of business. This net favorable development was partially offset by unfavorable development in accident years 2015 and 2016 attributable to our commercial auto and E&S casualty lines of business. The unfavorable development in our commercial auto line of business was driven primarily by bodily injury liability for accident years 2012 through 2016, driven by higher than expected frequency and severity.
The Insurance Subsidiaries had
$65.8 million
of favorable prior accident year development during
2016
, which included $
69.0 million
of net favorable casualty development and $
3.2 million
of unfavorable property development. The net favorable casualty reserve development was largely driven by the workers compensation and general liability lines of business, including products liability and excess liability. Partially offsetting this net favorable development was
$25.0 million
of unfavorable casualty development in the commercial automobile line of business. In addition, our E&S casualty lines experienced unfavorable development of
$6.0 million
in 2016.
The majority of the 2016 net favorable development was attributable to accident years 2013 and prior, driven by the workers compensation and general liability lines of business. This net favorable development was partially offset by unfavorable development in accident years 2014 and 2015 attributable to our commercial auto and E&S casualty lines of business. The unfavorable development in our commercial auto line of business was driven primarily by bodily injury liability for accident years 2014 and 2015. The unfavorable development in accident year 2014 was driven by higher than expected severity, whereas accident year 2015 was driven by higher than expected frequency and severity.
The Insurance Subsidiaries had
$69.0 million
of favorable prior accident year development during
2015
, which included $
67.0 million
of net favorable casualty development and $
2.0 million
of favorable property development. The net favorable casualty reserve development was largely driven by the workers compensation and general liability lines of business. Our E&S casualty lines experienced unfavorable development of
$16.0 million
in 2015.
The majority of the 2015 net favorable development was attributable to accident years 2009 through 2013, driven by the workers compensation and general liability lines of business. This net favorable development was partially offset by unfavorable development in accident years 2012 through 2014 attributable to our E&S casualty lines of business.
(b) Reserves established for liability insurance include exposure to asbestos and environmental claims. These claims have arisen primarily from insured exposures in municipal government, small non-manufacturing commercial risk, and homeowners policies. The emergence of these claims is slow and highly unpredictable. There are significant uncertainties in estimating our exposure to asbestos and environmental claims (for both case and IBNR reserves) resulting from lack of relevant historical data, the delayed and inconsistent reporting patterns associated with these claims, and uncertainty as to the number and identity of claimants and complex legal and coverage issues. Legal issues that arise in asbestos and environmental cases include federal or state venue, choice of law, causation, admissibility of evidence, allocation of damages and contribution among joint defendants, successor and predecessor liability, and whether direct action against insurers can be maintained. Coverage issues that arise in asbestos and environmental cases include the interpretation and application of policy exclusions, the determination and calculation of policy limits, the determination of the ultimate amount of a loss, the extent to which a loss is covered by a policy, if at all, the obligation of an insurer to defend a claim, and the extent to which a party can prove the existence of coverage. Courts have reached different and sometimes inconsistent conclusions on these legal and coverage issues. We do not discount to present value that portion of our losses and loss expense reserves expected to be paid in future periods.
The following table details our loss and loss expense reserves for various asbestos and environmental claims:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
($ in millions)
|
|
Gross
|
|
Net
|
|
Asbestos
|
|
$
|
7.6
|
|
|
6.3
|
|
|
Landfill sites
|
|
12.4
|
|
|
7.7
|
|
|
Underground storage tanks
|
|
8.4
|
|
|
7.2
|
|
|
Total
|
|
$
|
28.4
|
|
|
21.2
|
|
Reserves for asbestos and environmental claims are highly uncertain. There are significant uncertainties associated with estimating critical assumptions, such as average clean-up costs, third-party costs, potentially responsible party shares, allocation of damages, litigation and coverage costs, and potential state and federal legislative changes. Estimating IBNR is challenging because of the delayed and inconsistent reporting patterns associated with these claims. Traditional actuarial approaches cannot be applied because past loss history is not necessarily indicative of future behavior. While certain alternative projection models
can be applied, such models can produce significantly different results with small changes in assumptions. As a result, reserves for asbestos and environmental require a high degree of judgment. Because of the significant uncertainty in the estimate, we do not calculate an asbestos and environmental loss range.
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 were primarily a Standard Personal Lines carrier and therefore do not have broad exposure to asbestos and environmental claims. Additionally, we are the primary insurance carrier on the majority of these exposures, which provides more certainty in our reserve position compared to other insurance carriers.
The following table provides a roll forward of gross and net asbestos and environmental incurred loss and loss expense and related reserves thereon:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
($ in thousands)
|
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
|
Asbestos
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for loss and loss expense at beginning of year
|
|
$
|
7,847
|
|
|
6,615
|
|
|
8,024
|
|
|
6,793
|
|
|
8,751
|
|
|
7,314
|
|
|
Incurred loss and loss expense
|
|
—
|
|
|
—
|
|
|
77
|
|
|
77
|
|
|
(428
|
)
|
|
(77
|
)
|
|
Less: loss and loss expense paid
|
|
(270
|
)
|
|
(269
|
)
|
|
(254
|
)
|
|
(255
|
)
|
|
(299
|
)
|
|
(444
|
)
|
|
Reserves for loss and loss expense at the end of year
|
|
$
|
7,577
|
|
|
6,346
|
|
|
7,847
|
|
|
6,615
|
|
|
8,024
|
|
|
6,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for loss and loss expense at beginning of year
|
|
$
|
22,115
|
|
|
16,101
|
|
|
22,387
|
|
|
16,368
|
|
|
21,902
|
|
|
15,680
|
|
|
Incurred loss and loss expense
|
|
126
|
|
|
—
|
|
|
1,406
|
|
|
1,303
|
|
|
3,396
|
|
|
3,397
|
|
|
Less: loss and loss expense paid
|
|
(1,403
|
)
|
|
(1,235
|
)
|
|
(1,678
|
)
|
|
(1,570
|
)
|
|
(2,911
|
)
|
|
(2,709
|
)
|
|
Reserves for loss and loss expense at the end of year
|
|
$
|
20,838
|
|
|
14,866
|
|
|
22,115
|
|
|
16,101
|
|
|
22,387
|
|
|
16,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Asbestos and Environmental Claims
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for loss and loss expense at beginning of year
|
|
$
|
29,962
|
|
|
22,716
|
|
|
30,411
|
|
|
23,161
|
|
|
30,653
|
|
|
22,994
|
|
|
Incurred loss and loss expense
|
|
126
|
|
|
—
|
|
|
1,483
|
|
|
1,380
|
|
|
2,968
|
|
|
3,320
|
|
|
Less: loss and loss expense paid
|
|
(1,673
|
)
|
|
(1,504
|
)
|
|
(1,932
|
)
|
|
(1,825
|
)
|
|
(3,210
|
)
|
|
(3,153
|
)
|
|
Reserves for loss and loss expense at the end of year
|
|
$
|
28,415
|
|
|
21,212
|
|
|
29,962
|
|
|
22,716
|
|
|
30,411
|
|
|
23,161
|
|
(c) The following is information about incurred and paid claims development as of
December 31, 2017
, net of reinsurance, as well as cumulative claim frequency and the total of IBNR liabilities. During the experience period, we implemented a series of claims-related initiatives and claims management changes. These initiatives focused on claims handling and reserving, medical claims costs, and loss adjustment expenses. As a result of these initiatives, several historical patterns have changed and may no longer be appropriate to use as the sole basis for projections.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Lines
(in thousands, except for claim counts)
|
|
|
|
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
As of
December 31, 2017
|
|
Accident Year
|
Unaudited
|
|
|
IBNR
|
Cumulative Number of Reported Claims
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
|
|
2008
|
$
|
957,247
|
|
988,584
|
|
990,931
|
|
964,862
|
|
947,306
|
|
936,975
|
|
927,958
|
|
931,785
|
|
926,017
|
|
923,978
|
|
|
41,791
|
|
85,338
|
|
|
2009
|
|
920,143
|
|
941,972
|
|
916,691
|
|
883,590
|
|
870,057
|
|
869,927
|
|
857,960
|
|
853,401
|
|
848,413
|
|
|
41,937
|
|
85,575
|
|
|
2010
|
|
|
950,114
|
|
973,742
|
|
977,959
|
|
956,600
|
|
943,118
|
|
922,404
|
|
915,131
|
|
907,074
|
|
|
50,293
|
|
94,258
|
|
|
2011
|
|
|
|
1,042,576
|
|
1,061,667
|
|
1,062,233
|
|
1,056,107
|
|
1,033,518
|
|
1,023,726
|
|
1,019,351
|
|
|
63,891
|
|
104,500
|
|
|
2012
|
|
|
|
|
1,065,437
|
|
1,071,290
|
|
1,020,655
|
|
998,028
|
|
973,089
|
|
973,644
|
|
|
77,542
|
|
103,745
|
|
|
2013
|
|
|
|
|
|
1,044,142
|
|
1,062,045
|
|
1,047,230
|
|
1,021,007
|
|
1,002,316
|
|
|
116,449
|
|
90,755
|
|
|
2014
|
|
|
|
|
|
|
1,107,513
|
|
1,133,798
|
|
1,146,990
|
|
1,124,014
|
|
|
171,913
|
|
94,375
|
|
|
2015
|
|
|
|
|
|
|
|
1,114,081
|
|
1,130,513
|
|
1,144,830
|
|
|
256,758
|
|
92,891
|
|
|
2016
|
|
|
|
|
|
|
|
|
1,188,608
|
|
1,203,634
|
|
|
416,010
|
|
92,191
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
1,270,110
|
|
|
634,863
|
|
88,941
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
10,417,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Lines
(in thousands)
|
|
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
Accident Year
|
Unaudited
|
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
|
2008
|
$
|
286,314
|
|
489,633
|
|
609,851
|
|
690,016
|
|
764,196
|
|
798,996
|
|
819,280
|
|
839,392
|
|
853,769
|
|
860,745
|
|
|
2009
|
|
277,275
|
|
442,417
|
|
540,982
|
|
634,902
|
|
695,249
|
|
736,100
|
|
760,589
|
|
775,885
|
|
784,713
|
|
|
2010
|
|
|
328,826
|
|
509,910
|
|
625,229
|
|
704,895
|
|
773,536
|
|
803,773
|
|
823,770
|
|
835,532
|
|
|
2011
|
|
|
|
391,944
|
|
585,867
|
|
692,730
|
|
782,655
|
|
852,202
|
|
901,801
|
|
924,111
|
|
|
2012
|
|
|
|
|
378,067
|
|
555,819
|
|
651,544
|
|
743,742
|
|
810,135
|
|
856,195
|
|
|
2013
|
|
|
|
|
|
335,956
|
|
518,872
|
|
644,475
|
|
748,758
|
|
833,823
|
|
|
2014
|
|
|
|
|
|
|
405,898
|
|
614,075
|
|
736,154
|
|
855,959
|
|
|
2015
|
|
|
|
|
|
|
|
376,641
|
|
581,203
|
|
725,385
|
|
|
2016
|
|
|
|
|
|
|
|
|
387,272
|
|
617,958
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
433,440
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
7,727,861
|
|
|
|
|
|
|
|
All outstanding liabilities before 2008, net of reinsurance
|
|
352,192
|
|
|
|
|
|
|
Liabilities for loss and loss adjustment expenses, net of reinsurance
|
|
3,041,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Liability
(in thousands, except for claim counts)
|
|
|
|
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
As of
December 31, 2017
|
|
Accident Year
|
Unaudited
|
|
|
IBNR
|
Cumulative Number of Reported Claims
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
|
|
2008
|
$
|
250,239
|
|
243,755
|
|
243,536
|
|
234,770
|
|
233,712
|
|
224,236
|
|
219,551
|
|
221,640
|
|
221,203
|
|
219,617
|
|
|
14,326
|
|
13,769
|
|
|
2009
|
|
237,913
|
|
241,625
|
|
233,530
|
|
223,146
|
|
212,947
|
|
211,243
|
|
206,387
|
|
205,741
|
|
201,568
|
|
|
17,629
|
|
13,841
|
|
|
2010
|
|
|
215,208
|
|
228,680
|
|
242,499
|
|
237,154
|
|
222,328
|
|
211,619
|
|
208,968
|
|
202,394
|
|
|
18,403
|
|
12,672
|
|
|
2011
|
|
|
|
227,769
|
|
228,720
|
|
239,480
|
|
230,785
|
|
217,256
|
|
211,196
|
|
212,011
|
|
|
25,729
|
|
11,579
|
|
|
2012
|
|
|
|
|
238,979
|
|
245,561
|
|
215,083
|
|
194,144
|
|
175,305
|
|
175,268
|
|
|
27,702
|
|
9,922
|
|
|
2013
|
|
|
|
|
|
250,609
|
|
251,421
|
|
239,776
|
|
225,709
|
|
210,785
|
|
|
53,014
|
|
10,226
|
|
|
2014
|
|
|
|
|
|
|
244,312
|
|
249,946
|
|
257,132
|
|
239,333
|
|
|
80,168
|
|
10,391
|
|
|
2015
|
|
|
|
|
|
|
|
254,720
|
|
245,710
|
|
246,990
|
|
|
124,639
|
|
9,987
|
|
|
2016
|
|
|
|
|
|
|
|
|
277,214
|
|
272,048
|
|
|
178,904
|
|
9,617
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
293,747
|
|
|
249,085
|
|
8,194
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2,273,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Liability
(in thousands)
|
|
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
Accident Year
|
Unaudited
|
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
|
2008
|
$
|
16,397
|
|
45,595
|
|
82,421
|
|
113,088
|
|
151,055
|
|
166,394
|
|
176,873
|
|
186,896
|
|
194,257
|
|
198,360
|
|
|
2009
|
|
14,346
|
|
37,143
|
|
64,970
|
|
103,213
|
|
130,554
|
|
151,920
|
|
166,767
|
|
176,316
|
|
180,621
|
|
|
2010
|
|
|
15,726
|
|
46,201
|
|
80,018
|
|
113,050
|
|
143,360
|
|
161,487
|
|
172,394
|
|
178,179
|
|
|
2011
|
|
|
|
13,924
|
|
42,692
|
|
73,643
|
|
102,978
|
|
135,377
|
|
159,768
|
|
170,525
|
|
|
2012
|
|
|
|
|
13,030
|
|
35,241
|
|
56,580
|
|
89,008
|
|
109,448
|
|
130,866
|
|
|
2013
|
|
|
|
|
|
12,789
|
|
35,113
|
|
72,127
|
|
104,587
|
|
139,114
|
|
|
2014
|
|
|
|
|
|
|
14,901
|
|
46,825
|
|
79,972
|
|
121,969
|
|
|
2015
|
|
|
|
|
|
|
|
14,665
|
|
39,978
|
|
78,668
|
|
|
2016
|
|
|
|
|
|
|
|
|
15,684
|
|
46,549
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
17,366
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
1,262,217
|
|
|
|
|
|
|
|
All outstanding liabilities before 2008, net of reinsurance
|
|
80,514
|
|
|
|
|
|
|
Liabilities for loss and loss adjustment expenses, net of reinsurance
|
|
1,092,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers Compensation
(in thousands, except for claim counts)
|
|
|
|
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
As of
December 31, 2017
|
|
Accident Year
|
Unaudited
|
|
|
IBNR
|
Cumulative Number of Reported Claims
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
|
|
2008
|
$
|
219,616
|
|
243,186
|
|
255,810
|
|
250,423
|
|
241,921
|
|
245,993
|
|
244,100
|
|
243,512
|
|
238,836
|
|
238,218
|
|
|
25,993
|
|
14,401
|
|
|
2009
|
|
197,504
|
|
215,946
|
|
213,036
|
|
210,109
|
|
210,756
|
|
216,992
|
|
212,536
|
|
208,611
|
|
208,142
|
|
|
22,575
|
|
12,217
|
|
|
2010
|
|
|
198,371
|
|
214,469
|
|
212,815
|
|
211,030
|
|
214,916
|
|
212,448
|
|
208,155
|
|
204,423
|
|
|
28,964
|
|
12,184
|
|
|
2011
|
|
|
|
205,238
|
|
218,973
|
|
214,743
|
|
215,114
|
|
210,591
|
|
205,708
|
|
200,674
|
|
|
32,881
|
|
11,845
|
|
|
2012
|
|
|
|
|
203,864
|
|
208,036
|
|
199,360
|
|
195,197
|
|
188,596
|
|
187,359
|
|
|
36,233
|
|
11,605
|
|
|
2013
|
|
|
|
|
|
199,794
|
|
194,318
|
|
187,658
|
|
173,160
|
|
166,662
|
|
|
34,776
|
|
11,366
|
|
|
2014
|
|
|
|
|
|
|
199,346
|
|
187,065
|
|
182,579
|
|
172,515
|
|
|
42,869
|
|
10,482
|
|
|
2015
|
|
|
|
|
|
|
|
193,729
|
|
194,639
|
|
183,604
|
|
|
42,287
|
|
10,530
|
|
|
2016
|
|
|
|
|
|
|
|
|
196,774
|
|
184,946
|
|
|
70,424
|
|
10,509
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
195,202
|
|
|
112,086
|
|
10,182
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
1,941,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers Compensation
(in thousands)
|
|
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
Accident Year
|
Unaudited
|
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
|
2008
|
$
|
39,628
|
|
100,678
|
|
139,144
|
|
158,083
|
|
171,403
|
|
180,556
|
|
188,206
|
|
191,265
|
|
195,962
|
|
198,512
|
|
|
2009
|
|
37,885
|
|
87,299
|
|
117,019
|
|
133,116
|
|
145,417
|
|
154,726
|
|
160,529
|
|
164,336
|
|
167,894
|
|
|
2010
|
|
|
46,795
|
|
93,281
|
|
122,442
|
|
137,184
|
|
149,086
|
|
153,795
|
|
158,078
|
|
162,796
|
|
|
2011
|
|
|
|
42,941
|
|
90,836
|
|
118,847
|
|
134,646
|
|
139,232
|
|
149,269
|
|
154,320
|
|
|
2012
|
|
|
|
|
40,911
|
|
86,909
|
|
108,211
|
|
122,755
|
|
132,052
|
|
139,477
|
|
|
2013
|
|
|
|
|
|
36,829
|
|
74,568
|
|
96,376
|
|
109,739
|
|
118,669
|
|
|
2014
|
|
|
|
|
|
|
35,924
|
|
78,944
|
|
100,876
|
|
113,626
|
|
|
2015
|
|
|
|
|
|
|
|
33,857
|
|
77,320
|
|
98,195
|
|
|
2016
|
|
|
|
|
|
|
|
|
34,525
|
|
78,531
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
40,375
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
1,272,395
|
|
|
|
|
|
|
|
All outstanding liabilities before 2008, net of reinsurance
|
|
247,121
|
|
|
|
|
|
|
Liabilities for loss and loss adjustment expenses, net of reinsurance
|
|
916,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Automobile
(in thousands, except for claim counts)
|
|
|
|
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
As of
December 31, 2017
|
|
Accident Year
|
Unaudited
|
|
|
IBNR
|
Cumulative Number of Reported Claims
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
|
|
2008
|
$
|
196,370
|
|
195,823
|
|
190,349
|
|
187,100
|
|
187,417
|
|
182,785
|
|
180,902
|
|
183,736
|
|
183,618
|
|
183,151
|
|
|
736
|
|
24,129
|
|
|
2009
|
|
199,541
|
|
191,079
|
|
182,724
|
|
169,858
|
|
166,682
|
|
162,911
|
|
161,251
|
|
161,923
|
|
161,300
|
|
|
897
|
|
24,652
|
|
|
2010
|
|
|
187,562
|
|
189,305
|
|
187,778
|
|
181,923
|
|
179,854
|
|
172,969
|
|
173,157
|
|
173,471
|
|
|
1,491
|
|
25,301
|
|
|
2011
|
|
|
|
174,006
|
|
183,044
|
|
182,325
|
|
178,421
|
|
172,617
|
|
174,882
|
|
174,514
|
|
|
2,937
|
|
25,272
|
|
|
2012
|
|
|
|
|
179,551
|
|
191,947
|
|
183,527
|
|
184,289
|
|
184,367
|
|
186,128
|
|
|
3,880
|
|
23,889
|
|
|
2013
|
|
|
|
|
|
188,289
|
|
205,282
|
|
209,197
|
|
207,994
|
|
210,410
|
|
|
8,258
|
|
25,392
|
|
|
2014
|
|
|
|
|
|
|
200,534
|
|
212,725
|
|
216,824
|
|
219,925
|
|
|
19,053
|
|
27,338
|
|
|
2015
|
|
|
|
|
|
|
|
220,994
|
|
240,958
|
|
253,074
|
|
|
36,137
|
|
28,818
|
|
|
2016
|
|
|
|
|
|
|
|
|
255,187
|
|
274,367
|
|
|
71,303
|
|
30,480
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
301,274
|
|
|
132,814
|
|
30,187
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2,137,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Automobile
(in thousands)
|
|
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
Accident Year
|
Unaudited
|
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
|
2008
|
$
|
69,053
|
|
104,711
|
|
130,857
|
|
151,741
|
|
166,487
|
|
173,795
|
|
175,244
|
|
180,779
|
|
181,779
|
|
181,979
|
|
|
2009
|
|
63,126
|
|
94,406
|
|
113,697
|
|
137,564
|
|
149,949
|
|
155,560
|
|
158,303
|
|
159,723
|
|
160,013
|
|
|
2010
|
|
|
68,098
|
|
99,254
|
|
128,015
|
|
146,913
|
|
163,513
|
|
167,227
|
|
169,100
|
|
169,793
|
|
|
2011
|
|
|
|
69,849
|
|
99,196
|
|
121,576
|
|
142,507
|
|
157,291
|
|
166,082
|
|
170,000
|
|
|
2012
|
|
|
|
|
73,316
|
|
105,371
|
|
127,235
|
|
148,669
|
|
168,114
|
|
176,656
|
|
|
2013
|
|
|
|
|
|
76,469
|
|
109,893
|
|
140,015
|
|
169,850
|
|
189,626
|
|
|
2014
|
|
|
|
|
|
|
80,810
|
|
117,169
|
|
148,884
|
|
180,701
|
|
|
2015
|
|
|
|
|
|
|
|
91,347
|
|
132,260
|
|
175,866
|
|
|
2016
|
|
|
|
|
|
|
|
|
106,022
|
|
155,720
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
117,287
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
1,677,641
|
|
|
|
|
|
|
|
All outstanding liabilities before 2008, net of reinsurance
|
|
4,158
|
|
|
|
|
|
|
Liabilities for loss and loss adjustment expenses, net of reinsurance
|
|
464,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Businessowners' Policies
(in thousands, except for claim counts)
|
|
|
|
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
As of
December 31, 2017
|
|
Accident Year
|
Unaudited
|
|
|
IBNR
|
Cumulative Number of Reported Claims
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
|
|
2008
|
$
|
39,660
|
|
38,986
|
|
39,334
|
|
32,974
|
|
30,250
|
|
29,793
|
|
31,066
|
|
31,340
|
|
30,967
|
|
31,065
|
|
|
192
|
|
3,258
|
|
|
2009
|
|
48,535
|
|
51,762
|
|
46,645
|
|
43,828
|
|
43,553
|
|
44,938
|
|
44,299
|
|
44,273
|
|
43,933
|
|
|
272
|
|
3,474
|
|
|
2010
|
|
|
53,669
|
|
49,285
|
|
42,408
|
|
39,915
|
|
40,899
|
|
40,581
|
|
41,239
|
|
41,197
|
|
|
697
|
|
3,917
|
|
|
2011
|
|
|
|
54,469
|
|
57,083
|
|
51,047
|
|
58,242
|
|
59,256
|
|
58,966
|
|
58,456
|
|
|
1,080
|
|
4,959
|
|
|
2012
|
|
|
|
|
54,342
|
|
48,029
|
|
46,303
|
|
44,172
|
|
44,077
|
|
43,747
|
|
|
756
|
|
5,540
|
|
|
2013
|
|
|
|
|
|
49,617
|
|
42,618
|
|
41,005
|
|
40,624
|
|
41,369
|
|
|
3,192
|
|
3,479
|
|
|
2014
|
|
|
|
|
|
|
55,962
|
|
60,949
|
|
62,548
|
|
59,806
|
|
|
5,952
|
|
4,054
|
|
|
2015
|
|
|
|
|
|
|
|
52,871
|
|
53,768
|
|
57,245
|
|
|
10,256
|
|
3,913
|
|
|
2016
|
|
|
|
|
|
|
|
|
52,335
|
|
53,792
|
|
|
11,938
|
|
3,757
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
46,624
|
|
|
15,252
|
|
3,462
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
477,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Businessowners' Policies
(in thousands)
|
|
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
Accident Year
|
Unaudited
|
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
|
2008
|
$
|
15,019
|
|
21,765
|
|
24,449
|
|
25,738
|
|
28,026
|
|
28,660
|
|
28,589
|
|
29,778
|
|
30,873
|
|
30,873
|
|
|
2009
|
|
18,915
|
|
29,612
|
|
32,689
|
|
36,073
|
|
40,052
|
|
42,895
|
|
43,358
|
|
43,448
|
|
43,547
|
|
|
2010
|
|
|
20,821
|
|
28,131
|
|
31,027
|
|
34,705
|
|
37,819
|
|
38,900
|
|
40,279
|
|
40,395
|
|
|
2011
|
|
|
|
27,884
|
|
37,362
|
|
41,011
|
|
46,444
|
|
52,114
|
|
55,856
|
|
57,045
|
|
|
2012
|
|
|
|
|
22,199
|
|
31,833
|
|
35,089
|
|
37,215
|
|
38,766
|
|
40,627
|
|
|
2013
|
|
|
|
|
|
17,412
|
|
26,592
|
|
30,845
|
|
34,760
|
|
37,993
|
|
|
2014
|
|
|
|
|
|
|
28,914
|
|
40,584
|
|
44,911
|
|
49,460
|
|
|
2015
|
|
|
|
|
|
|
|
24,189
|
|
36,014
|
|
42,710
|
|
|
2016
|
|
|
|
|
|
|
|
|
24,655
|
|
36,848
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
21,865
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
401,363
|
|
|
|
|
|
|
|
All outstanding liabilities before 2008, net of reinsurance
|
|
7,292
|
|
|
|
|
|
|
Liabilities for loss and loss adjustment expenses, net of reinsurance
|
|
83,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property
(in thousands, except for claim counts)
|
|
|
|
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
As of
December 31, 2017
|
|
Accident Year
|
Unaudited
|
|
|
IBNR
|
Cumulative Number of Reported Claims
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
|
|
2008
|
$
|
97,578
|
|
102,860
|
|
101,436
|
|
101,470
|
|
101,265
|
|
101,702
|
|
101,043
|
|
100,881
|
|
101,043
|
|
101,054
|
|
|
2
|
|
7,604
|
|
|
2009
|
|
82,619
|
|
82,124
|
|
82,025
|
|
82,014
|
|
80,774
|
|
80,455
|
|
80,558
|
|
80,545
|
|
80,416
|
|
|
4
|
|
7,009
|
|
|
2010
|
|
|
105,647
|
|
96,851
|
|
97,386
|
|
96,127
|
|
95,530
|
|
95,363
|
|
95,178
|
|
95,155
|
|
|
5
|
|
7,667
|
|
|
2011
|
|
|
|
136,954
|
|
131,667
|
|
130,942
|
|
131,282
|
|
131,353
|
|
131,113
|
|
131,049
|
|
|
4
|
|
9,036
|
|
|
2012
|
|
|
|
|
118,464
|
|
114,224
|
|
115,375
|
|
116,658
|
|
117,102
|
|
117,170
|
|
|
24
|
|
8,514
|
|
|
2013
|
|
|
|
|
|
88,101
|
|
90,639
|
|
90,103
|
|
90,005
|
|
90,436
|
|
|
42
|
|
5,709
|
|
|
2014
|
|
|
|
|
|
|
141,192
|
|
136,249
|
|
136,820
|
|
138,751
|
|
|
126
|
|
6,512
|
|
|
2015
|
|
|
|
|
|
|
|
110,270
|
|
109,513
|
|
111,750
|
|
|
261
|
|
6,398
|
|
|
2016
|
|
|
|
|
|
|
|
|
121,927
|
|
126,185
|
|
|
804
|
|
6,686
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
138,773
|
|
|
8,794
|
|
6,358
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
1,130,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Property
(in thousands)
|
|
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
Accident Year
|
Unaudited
|
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
|
2008
|
$
|
68,211
|
|
98,921
|
|
100,465
|
|
99,288
|
|
100,213
|
|
100,752
|
|
100,908
|
|
100,868
|
|
101,034
|
|
101,032
|
|
|
2009
|
|
59,933
|
|
78,695
|
|
80,433
|
|
80,894
|
|
80,251
|
|
80,352
|
|
80,529
|
|
80,509
|
|
80,405
|
|
|
2010
|
|
|
69,543
|
|
91,918
|
|
94,602
|
|
95,111
|
|
95,270
|
|
95,147
|
|
95,156
|
|
95,150
|
|
|
2011
|
|
|
|
94,538
|
|
127,580
|
|
129,579
|
|
130,681
|
|
131,060
|
|
131,115
|
|
131,089
|
|
|
2012
|
|
|
|
|
81,528
|
|
108,834
|
|
111,503
|
|
114,699
|
|
116,291
|
|
116,625
|
|
|
2013
|
|
|
|
|
|
60,244
|
|
87,874
|
|
90,446
|
|
90,350
|
|
90,840
|
|
|
2014
|
|
|
|
|
|
|
101,131
|
|
132,909
|
|
136,634
|
|
137,883
|
|
|
2015
|
|
|
|
|
|
|
|
79,048
|
|
106,182
|
|
109,829
|
|
|
2016
|
|
|
|
|
|
|
|
|
83,966
|
|
118,789
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
99,047
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
1,080,689
|
|
|
|
|
|
|
|
All outstanding liabilities before 2008, net of reinsurance
|
|
250
|
|
|
|
|
|
|
Liabilities for loss and loss adjustment expenses, net of reinsurance
|
|
50,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Automobile
(in thousands, except for claim counts)
|
|
|
|
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
As of
December 31, 2017
|
|
Accident Year
|
Unaudited
|
|
|
IBNR
|
Cumulative Number of Reported Claims
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
|
|
2008
|
$
|
100,311
|
|
106,999
|
|
106,842
|
|
103,934
|
|
100,213
|
|
99,912
|
|
99,686
|
|
99,255
|
|
99,116
|
|
99,270
|
|
|
191
|
|
16,042
|
|
|
2009
|
|
93,808
|
|
103,319
|
|
105,033
|
|
103,908
|
|
104,734
|
|
103,866
|
|
103,393
|
|
103,412
|
|
103,348
|
|
|
191
|
|
17,346
|
|
|
2010
|
|
|
103,340
|
|
110,075
|
|
112,346
|
|
109,515
|
|
107,490
|
|
107,405
|
|
107,224
|
|
107,054
|
|
|
222
|
|
20,822
|
|
|
2011
|
|
|
|
113,232
|
|
116,164
|
|
113,686
|
|
112,993
|
|
114,241
|
|
113,830
|
|
113,988
|
|
|
284
|
|
22,700
|
|
|
2012
|
|
|
|
|
113,771
|
|
114,921
|
|
109,832
|
|
109,324
|
|
110,294
|
|
110,300
|
|
|
728
|
|
22,332
|
|
|
2013
|
|
|
|
|
|
108,417
|
|
109,620
|
|
106,225
|
|
106,703
|
|
107,759
|
|
|
851
|
|
22,371
|
|
|
2014
|
|
|
|
|
|
|
102,250
|
|
109,325
|
|
106,757
|
|
107,452
|
|
|
2,554
|
|
22,499
|
|
|
2015
|
|
|
|
|
|
|
|
96,387
|
|
99,698
|
|
100,214
|
|
|
6,541
|
|
20,840
|
|
|
2016
|
|
|
|
|
|
|
|
|
92,727
|
|
98,032
|
|
|
11,651
|
|
19,747
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
101,880
|
|
|
22,284
|
|
19,818
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
1,049,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Automobile
(in thousands)
|
|
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
Accident Year
|
Unaudited
|
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
|
2008
|
$
|
50,396
|
|
73,194
|
|
84,715
|
|
91,834
|
|
95,932
|
|
97,723
|
|
98,174
|
|
98,604
|
|
98,668
|
|
98,810
|
|
|
2009
|
|
51,039
|
|
71,911
|
|
86,431
|
|
96,229
|
|
100,566
|
|
102,187
|
|
102,322
|
|
102,437
|
|
103,009
|
|
|
2010
|
|
|
58,786
|
|
82,490
|
|
95,300
|
|
101,540
|
|
104,061
|
|
105,849
|
|
106,453
|
|
106,733
|
|
|
2011
|
|
|
|
61,323
|
|
82,102
|
|
93,878
|
|
105,068
|
|
111,085
|
|
112,732
|
|
113,551
|
|
|
2012
|
|
|
|
|
63,704
|
|
82,729
|
|
94,842
|
|
102,977
|
|
107,890
|
|
109,355
|
|
|
2013
|
|
|
|
|
|
61,384
|
|
80,861
|
|
92,637
|
|
100,528
|
|
105,131
|
|
|
2014
|
|
|
|
|
|
|
62,519
|
|
83,739
|
|
92,589
|
|
99,173
|
|
|
2015
|
|
|
|
|
|
|
|
58,725
|
|
76,470
|
|
87,163
|
|
|
2016
|
|
|
|
|
|
|
|
|
57,961
|
|
76,823
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
62,854
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
962,602
|
|
|
|
|
|
|
|
All outstanding liabilities before 2008, net of reinsurance
|
|
5,862
|
|
|
|
|
|
|
Liabilities for loss and loss adjustment expenses, net of reinsurance
|
|
92,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowners
(in thousands, except for claim counts)
|
|
|
|
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
As of
December 31, 2017
|
|
Accident Year
|
Unaudited
|
|
|
IBNR
|
Cumulative Number of Reported Claims
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
|
|
2008
|
$
|
41,224
|
|
41,747
|
|
39,342
|
|
39,203
|
|
38,062
|
|
38,410
|
|
38,111
|
|
38,042
|
|
38,045
|
|
38,038
|
|
|
56
|
|
5,139
|
|
|
2009
|
|
47,636
|
|
44,511
|
|
42,609
|
|
40,313
|
|
61,927
|
|
40,400
|
|
40,465
|
|
40,457
|
|
40,451
|
|
|
73
|
|
5,633
|
|
|
2010
|
|
|
68,373
|
|
67,525
|
|
63,285
|
|
97,761
|
|
62,462
|
|
62,402
|
|
62,339
|
|
62,392
|
|
|
84
|
|
9,131
|
|
|
2011
|
|
|
|
103,804
|
|
98,211
|
|
82,744
|
|
94,167
|
|
94,543
|
|
94,183
|
|
94,378
|
|
|
159
|
|
15,106
|
|
|
2012
|
|
|
|
|
87,260
|
|
82,745
|
|
86,560
|
|
86,667
|
|
86,271
|
|
86,330
|
|
|
180
|
|
16,936
|
|
|
2013
|
|
|
|
|
|
73,670
|
|
72,528
|
|
71,494
|
|
72,145
|
|
71,714
|
|
|
284
|
|
7,747
|
|
|
2014
|
|
|
|
|
|
|
80,111
|
|
82,461
|
|
83,637
|
|
83,844
|
|
|
1,146
|
|
8,762
|
|
|
2015
|
|
|
|
|
|
|
|
76,637
|
|
76,400
|
|
76,559
|
|
|
2,744
|
|
7,724
|
|
|
2016
|
|
|
|
|
|
|
|
|
60,105
|
|
60,931
|
|
|
2,067
|
|
6,820
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
59,167
|
|
|
5,315
|
|
6,651
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
673,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowners
(in thousands)
|
|
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
Accident Year
|
Unaudited
|
|
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
|
2008
|
$
|
21,277
|
|
33,535
|
|
36,271
|
|
37,086
|
|
37,763
|
|
37,837
|
|
37,933
|
|
37,939
|
|
37,930
|
|
37,928
|
|
|
2009
|
|
28,299
|
|
36,965
|
|
38,078
|
|
39,342
|
|
39,731
|
|
39,819
|
|
39,907
|
|
40,189
|
|
40,269
|
|
|
2010
|
|
|
43,699
|
|
58,638
|
|
60,295
|
|
61,106
|
|
62,155
|
|
62,227
|
|
62,241
|
|
62,272
|
|
|
2011
|
|
|
|
71,668
|
|
89,963
|
|
91,718
|
|
92,185
|
|
93,312
|
|
93,720
|
|
94,007
|
|
|
2012
|
|
|
|
|
69,056
|
|
79,584
|
|
82,720
|
|
84,250
|
|
85,196
|
|
85,562
|
|
|
2013
|
|
|
|
|
|
50,664
|
|
65,528
|
|
67,838
|
|
69,775
|
|
71,776
|
|
|
2014
|
|
|
|
|
|
|
61,561
|
|
76,007
|
|
79,751
|
|
81,664
|
|
|
2015
|
|
|
|
|
|
|
|
52,589
|
|
70,078
|
|
72,202
|
|
|
2016
|
|
|
|
|
|
|
|
|
42,252
|
|
57,333
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
45,466
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
648,479
|
|
|
|
|
|
|
|
All outstanding liabilities before 2008, net of reinsurance
|
|
5,403
|
|
|
|
|
|
|
Liabilities for loss and loss adjustment expenses, net of reinsurance
|
|
30,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E&S Casualty Lines
(in thousands, except for claim counts)
|
|
|
|
|
Incurred Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
As of
December 31, 2017
|
|
Accident Year
|
Unaudited
|
|
|
IBNR
|
Cumulative Number of Reported Claims
|
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
|
|
2008
|
$
|
92
|
|
169
|
|
146
|
|
119
|
|
52
|
|
(162
|
)
|
119
|
|
|
—
|
|
35
|
|
|
2009
|
885
|
|
1,053
|
|
938
|
|
728
|
|
710
|
|
96
|
|
737
|
|
|
—
|
|
274
|
|
|
2010
|
3,294
|
|
4,106
|
|
3,369
|
|
4,299
|
|
3,831
|
|
3,055
|
|
4,932
|
|
|
—
|
|
804
|
|
|
2011
|
8,127
|
|
7,102
|
|
9,853
|
|
12,207
|
|
10,273
|
|
9,652
|
|
10,228
|
|
|
361
|
|
1,316
|
|
|
2012
|
|
|
42,367
|
|
42,621
|
|
43,175
|
|
46,149
|
|
46,165
|
|
45,988
|
|
|
7,313
|
|
2,006
|
|
|
2013
|
|
|
|
|
55,468
|
|
60,309
|
|
67,099
|
|
69,112
|
|
67,647
|
|
|
15,326
|
|
2,219
|
|
|
2014
|
|
|
|
|
55,316
|
|
63,505
|
|
69,929
|
|
71,719
|
|
|
18,224
|
|
1,987
|
|
|
2015
|
|
|
|
|
|
75,498
|
|
76,432
|
|
82,404
|
|
|
32,909
|
|
2,606
|
|
|
2016
|
|
|
|
|
|
|
94,451
|
|
96,416
|
|
|
65,489
|
|
2,454
|
|
|
2017
|
|
|
|
|
|
|
|
91,438
|
|
|
79,354
|
|
1,760
|
|
|
|
|
|
|
|
|
Total
|
|
471,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E&S Casualty Lines
(in thousands)
|
|
|
Cumulative Paid Loss and Allocated Loss Adjustment Expenses, Net of Reinsurance
|
|
Accident
Year
|
Unaudited
|
|
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
|
2008
|
$
|
—
|
|
24
|
|
70
|
|
80
|
|
79
|
|
92
|
|
97
|
|
|
2009
|
—
|
|
198
|
|
431
|
|
605
|
|
626
|
|
709
|
|
737
|
|
|
2010
|
—
|
|
1,218
|
|
2,570
|
|
3,574
|
|
4,078
|
|
4,513
|
|
4,610
|
|
|
2011
|
—
|
|
806
|
|
3,200
|
|
6,445
|
|
9,954
|
|
9,912
|
|
10,256
|
|
|
2012
|
|
|
3,722
|
|
7,914
|
|
16,430
|
|
25,064
|
|
32,343
|
|
36,278
|
|
|
2013
|
|
|
|
|
2,715
|
|
9,470
|
|
21,980
|
|
35,200
|
|
46,108
|
|
|
2014
|
|
|
|
|
2,353
|
|
12,234
|
|
25,571
|
|
43,877
|
|
|
2015
|
|
|
|
|
|
|
3,036
|
|
13,057
|
|
29,389
|
|
|
2016
|
|
|
|
|
|
|
|
|
3,720
|
|
16,195
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
5,057
|
|
|
|
|
|
|
|
|
Total
|
|
192,604
|
|
|
|
|
All outstanding liabilities before 2008, net of reinsurance
|
|
—
|
|
|
|
|
Liabilities for loss and loss adjustment expenses, net of reinsurance
|
|
279,023
|
|
In 2011, the Parent purchased Mesa Underwriters Specialty Insurance Company ("MUSIC"), a wholly-owned E&S Lines subsidiary of Montpelier Re Holdings, Ltd. Under the terms of the purchase agreement, the Parent acquired net loss and loss adjustment reserves amounting to approximately
$15 million
. All development on this acquired business was fully reinsured as of the acquisition date.
(d) The reconciliation of the net incurred and paid claims development tables to the liability for loss and loss adjustment expenses in the consolidated statement of financial position is as follows:
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2017
|
|
Net outstanding liabilities:
|
|
|
Standard Commercial Lines
|
|
|
General liability
|
1,092,058
|
|
|
Workers compensation
|
916,471
|
|
|
Commercial automobile
|
464,131
|
|
|
Businessowners' policies
|
83,163
|
|
|
Commercial property
|
50,300
|
|
|
Other Standard Commercial Lines
|
10,560
|
|
|
Total Standard Commercial Lines net outstanding liabilities
|
2,616,683
|
|
|
|
|
|
Standard Personal Lines
|
|
|
Personal automobile
|
92,557
|
|
|
Homeowners
|
30,728
|
|
|
Other Standard Personal Lines
|
9,184
|
|
|
Total Standard Personal Lines net outstanding liabilities
|
132,469
|
|
|
|
|
|
E&S Lines
|
|
|
Casualty lines
|
279,023
|
|
|
Property lines
|
13,519
|
|
|
Total E&S Lines net outstanding liabilities
|
292,542
|
|
|
|
|
|
Total liabilities for unpaid loss and loss adjustment expenses, net of reinsurance
|
3,041,694
|
|
|
|
|
|
Reinsurance recoverable on unpaid claims:
|
|
|
Standard Commercial Lines
|
|
|
General liability
|
175,276
|
|
|
Workers compensation
|
218,024
|
|
|
Commercial automobile
|
16,745
|
|
|
Businessowners' policies
|
3,926
|
|
|
Commercial property
|
24,387
|
|
|
Other Standard Commercial Lines
|
2,287
|
|
|
Total Standard Commercial Lines reinsurance recoverable on unpaid loss
|
440,645
|
|
|
|
|
|
Standard Personal Lines
|
|
|
Personal automobile
|
53,129
|
|
|
Homeowners
|
999
|
|
|
Other Standard Personal Lines
|
69,333
|
|
|
Total Standard Personal Lines reinsurance recoverable on unpaid loss
|
123,461
|
|
|
|
|
|
E&S Lines
|
|
|
Casualty lines
|
21,360
|
|
|
Property lines
|
389
|
|
|
Total E&S Lines reinsurance recoverable on unpaid loss
|
21,749
|
|
|
|
|
|
Total reinsurance recoverable on unpaid loss
|
585,855
|
|
|
|
|
|
Unallocated loss adjustment expenses
|
143,691
|
|
|
|
|
|
Total gross liability for unpaid loss and loss adjustment expenses
|
3,771,240
|
|
(e) 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
6.6%
of its ultimate losses in the first year,
12.5%
in the second year, and so forth. The following is supplementary information about average historical claims duration as of
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
|
|
Years
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
|
10
|
|
General liability
|
6.6%
|
12.5
|
15.4
|
16.7
|
14.9
|
10.1
|
6.0
|
4.6
|
2.2
|
1.3
|
|
Workers compensation
|
20.2
|
23.9
|
13.6
|
8.3
|
5.0
|
3.9
|
2.8
|
2.0
|
1.8
|
1.9
|
|
Commercial automobile
|
38.2
|
17.4
|
14.0
|
12.8
|
9.0
|
4.1
|
1.6
|
1.4
|
0.7
|
0.1
|
|
Businessowners’ policies
|
46.6
|
20.8
|
8.1
|
7.5
|
7.5
|
4.1
|
2.0
|
1.6
|
0.1
|
1.1
|
|
Commercial property
|
70.5
|
25.6
|
2.7
|
0.7
|
0.4
|
0.1
|
—
|
—
|
—
|
—
|
|
Personal automobile
|
56.1
|
18.9
|
10.7
|
7.4
|
4.2
|
1.5
|
0.4
|
0.1
|
0.2
|
—
|
|
Homeowners
|
71.1
|
21.0
|
3.3
|
2.1
|
1.6
|
0.1
|
—
|
0.2
|
0.2
|
0.1
|
|
E&S Lines - casualty
|
4.5
|
12.5
|
18.2
|
20.4
|
15.5
|
8.3
|
4.0
|
|
|
|
Note 10. Indebtedness
The table below provides a summary of our outstanding debt at December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Debt
|
|
|
|
|
|
|
|
|
|
2017
|
|
Carry Value
|
|
($ in thousands)
|
|
Issuance Date
|
|
Maturity Date
|
|
Interest Rate
|
|
Original Amount
|
|
Debt Discount and Unamortized Issuance Costs
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Description
|
|
|
|
|
|
|
|
|
Long-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) FHLBI
|
|
12/16/2016
|
|
12/16/2026
|
|
3.03
|
%
|
|
$
|
60,000
|
|
|
—
|
|
|
60,000
|
|
|
60,000
|
|
|
(2) FHLBNY
|
|
8/15/2016
|
|
8/16/2021
|
|
1.56
|
%
|
|
25,000
|
|
|
—
|
|
|
25,000
|
|
|
25,000
|
|
|
(2) FHLBNY
|
|
7/21/2016
|
|
7/21/2021
|
|
1.61
|
%
|
|
25,000
|
|
|
—
|
|
|
25,000
|
|
|
25,000
|
|
|
(3) Senior Notes
|
|
2/8/2013
|
|
2/9/2043
|
|
5.875
|
%
|
|
185,000
|
|
|
(4,570
|
)
|
|
180,430
|
|
|
180,068
|
|
|
(4) Senior Notes
|
|
11/3/2005
|
|
11/1/2035
|
|
6.70
|
%
|
|
100,000
|
|
|
(989
|
)
|
|
99,011
|
|
|
98,952
|
|
|
(5) Senior Notes
|
|
11/16/2004
|
|
11/15/2034
|
|
7.25
|
%
|
|
50,000
|
|
|
(325
|
)
|
|
49,675
|
|
|
49,647
|
|
|
Total long-term debt
|
|
|
|
|
|
|
|
|
$
|
445,000
|
|
|
(5,884
|
)
|
|
439,116
|
|
|
438,667
|
|
Short-term Debt
Selective Insurance Company of America ("SICA") borrowed: (i)
$64 million
in short-term funds from the FHLBNY on February 28, 2017 at an interest rate of
0.75%
, which it repaid on March 21, 2017; and (ii)
$20 million
in short-term funds from the FHLBNY on November 8, 2017 at an interest rate of
1.29%
, which it repaid on November 15, 2017.
The Parent's line of credit with Wells Fargo Bank, National Association, as administrative agent, and Branch Banking and Trust Company (BB&T) (referred to as our "Line of Credit"), was renewed effective
December 1, 2015
, with a borrowing capacity of
$30 million
, which can be increased to
$50 million
with the approval of both lending partners. Our Line of Credit expires on December 1, 2020, and has an interest rate, which varies and is based on, among other factors, the Parent’s debt ratings. There were no balances outstanding under our Line of Credit at
December 31, 2017
or at any time during
2017
.
Our Line of Credit agreement 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, minimum combined statutory surplus, 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 of the covenants in the Line of Credit:
|
|
|
|
|
|
|
|
|
|
|
Required as of
|
|
Actual as of
|
|
|
|
December 31, 2017
|
|
December 31, 2017
|
|
Consolidated net worth
|
|
Not less than $1.2 billion
|
|
$1.7 billion
|
|
Statutory surplus
|
|
Not less than $750 million
|
|
$1.7 billion
|
|
Debt-to-capitalization ratio
1
|
|
Not to exceed 35%
|
|
20.5%
|
|
A.M. Best financial strength rating
|
|
Minimum of A-
|
|
A
|
1
Calculated in accordance with the Line of Credit agreement.
In addition to the above requirements, the Line of Credit agreement contains a cross-default provision that provides that the Line of Credit will be in default if we fail to comply with any condition, covenant, or agreement (including payment of principal and interest when due on any debt with an aggregate principal amount of at least
$20 million
), which causes or permits the acceleration of principal. Additionally, the Line of Credit limits borrowings from the FHLBI and the FHLBNY to 10% of the respective member company's admitted assets for the previous year.
Long-term Debt
(1) In the first quarter of 2009, Selective Insurance Company of South Carolina ("SICSC") and Selective Insurance Company of the Southeast ("SICSE"), which are collectively referred to as the "Indiana Subsidiaries" as they are domiciled in Indiana, joined, and invested in, the FHLBI, which provides them with access to additional liquidity. The Indiana Subsidiaries’ aggregate investment in the FHLBI was
$2.8 million
at
December 31, 2017
and
December 31, 2016
. 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. For information on investments that are pledged as collateral for these borrowings, see Note 5. "Investments" above.
(2) In the fourth quarter of 2015, SICA and Selective Insurance Company of New York ("SICNY") joined, and invested in, the FHLBNY, which provides them with access to additional liquidity. The aggregate investment for both subsidiaries was
$2.6 million
at
December 31, 2017
and
$2.8 million
at
December 31, 2016
. Our investment provides us the ability to borrow approximately 20 times the total amount of the FHLBNY common stock purchased with additional collateral, at comparatively low borrowing rates. In 2016, SICA borrowed the following amounts from the FHLBNY: (i)
$25 million
in August 2016 at an interest rate of
1.56%
, which is due on August 16, 2021; and (ii)
$25 million
from the FHLBNY at an interest rate of
1.61%
, which is due on July 21, 2021.
All borrowings from the FHLBNY require security. For information on investments that are pledged as collateral for these borrowings, see Note 5. "Investments" above.
(3) In February 2013, we issued
$185 million
of
5.875%
Senior Notes due 2043. The notes became callable by us on February 8, 2018, at a price equal to 100% of their principal outstanding amount, plus accrued and unpaid interest to, but excluding, the date of redemption. A portion of the proceeds from this debt issuance was used to fully redeem the
$100 million
aggregate principal amount of our
7.5%
Junior Subordinated Notes due 2066. Of the remaining net proceeds,
$57.1 million
was used to make capital contributions to the Insurance Subsidiaries, while the balance was used for general corporate purposes. There are no financial debt covenants to which we are required to comply in regards to these Senior Notes.
(4) In November 2005, we issued
$100 million
of
6.70%
Senior Notes due
2035
. These notes were issued at a discount of
$0.7 million
resulting in an effective yield of
6.754%
. Net proceeds of approximately
$50 million
were used to fund an irrevocable trust that subsequently funded certain payment obligations in respect of our outstanding debt. The remainder of the proceeds was used for general corporate purposes. The agreements covering these notes contain a standard default cross-acceleration provision that provides the
6.70%
Senior Notes will enter a state of default upon the failure to pay principal when due or upon any event or condition that results in an acceleration of principal of any other debt instrument in excess of
$10 million
that we have outstanding concurrently with the
6.70%
Senior Notes. There are no financial debt covenants to which we are required to comply in regards to these notes.
(5) In November 2004, we issued
$50 million
of
7.25%
Senior Notes due
2034
. These notes were issued at a discount of
$0.1 million
, resulting in an effective yield of
7.27%
. We contributed
$25 million
of the bond proceeds to the Insurance Subsidiaries as capital. The remainder of the proceeds was used for general corporate purposes. The agreements covering these notes contain a standard default cross-acceleration provision that provides the
7.25%
Senior Notes will enter a state of default upon the failure to pay principal when due or upon any event or condition that results in an acceleration of principal of any other debt instrument in excess of
$10 million
that we have outstanding concurrently with the
7.25%
Senior Notes. There are no financial debt covenants to which we are required to comply in regards to these notes.
Note 11. Segment Information
The disaggregated results of our
four
reportable segments are used by senior management to manage our operations. These reportable segments are evaluated as follows:
|
|
|
|
•
|
Our Standard Commercial Lines, Standard Personal Lines, and E&S Lines are evaluated based on before and after-tax underwriting results (net premiums earned, incurred loss and loss expense, policyholders dividends, policy acquisition costs, and other underwriting expenses), and combined ratios.
|
|
|
|
|
•
|
Our Investments segment is evaluated based on after-tax net investment income and net realized gains and losses.
|
In computing the results of each segment, we do not make adjustments for interest expense or corporate expenses. We do not maintain separate investment portfolios for the segments and therefore, do not allocate assets to the segments.
Our combined insurance operations are subject to certain geographic concentrations, particularly in the Northeast and Mid-Atlantic regions of the country. In
2017
, approximately
20%
of NPW were related to insurance policies written in New Jersey.
The goodwill balance of
$7.8 million
at both
December 31, 2017
and
2016
relates to our Standard Commercial Lines reporting unit.
The following summaries present revenues (net investment income and net realized gains on investments in the case of the Investments segment) and pre-tax income for the individual segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by Segment
|
|
Years ended December 31,
|
|
($ in thousands)
|
|
2017
|
|
2016
|
|
2015
|
|
Standard Commercial Lines:
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned:
|
|
|
|
|
|
|
|
|
|
|
Commercial automobile
|
|
$
|
442,818
|
|
|
398,942
|
|
|
358,909
|
|
|
Workers compensation
|
|
317,982
|
|
|
308,233
|
|
|
290,075
|
|
|
General liability
|
|
569,217
|
|
|
527,859
|
|
|
483,291
|
|
|
Commercial property
|
|
311,932
|
|
|
293,438
|
|
|
269,022
|
|
|
Businessowners’ policies
|
|
100,266
|
|
|
97,754
|
|
|
93,428
|
|
|
Bonds
|
|
29,086
|
|
|
23,227
|
|
|
20,350
|
|
|
Other
|
|
17,198
|
|
|
16,030
|
|
|
14,367
|
|
|
Miscellaneous income
|
|
9,488
|
|
|
7,782
|
|
|
6,343
|
|
|
Total Standard Commercial Lines revenue
|
|
1,797,987
|
|
|
1,673,265
|
|
|
1,535,785
|
|
|
Standard Personal Lines:
|
|
|
|
|
|
|
|
Net premiums earned:
|
|
|
|
|
|
|
|
Personal automobile
|
|
153,147
|
|
|
142,876
|
|
|
146,784
|
|
|
Homeowners
|
|
129,699
|
|
|
130,973
|
|
|
134,382
|
|
|
Other
|
|
6,855
|
|
|
6,758
|
|
|
6,968
|
|
|
Miscellaneous income
|
|
1,228
|
|
|
1,098
|
|
|
1,113
|
|
|
Total Standard Personal Lines revenue
|
|
290,929
|
|
|
281,705
|
|
|
289,247
|
|
|
E&S Lines:
|
|
|
|
|
|
|
|
Net premiums earned:
|
|
|
|
|
|
|
|
Casualty lines
|
|
157,366
|
|
|
151,638
|
|
|
126,064
|
|
|
Property lines
|
|
55,461
|
|
|
51,844
|
|
|
46,269
|
|
|
Miscellaneous income
|
|
—
|
|
|
1
|
|
|
—
|
|
|
Total E&S Lines revenue
|
|
212,827
|
|
|
203,483
|
|
|
172,333
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
161,882
|
|
|
130,754
|
|
|
121,316
|
|
|
Net realized investment gains (losses)
|
|
6,359
|
|
|
(4,937
|
)
|
|
13,171
|
|
|
Total Investments revenues
|
|
168,241
|
|
|
125,817
|
|
|
134,487
|
|
|
Total revenues
|
|
$
|
2,469,984
|
|
|
2,284,270
|
|
|
2,131,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Federal Income Tax
|
|
Years ended December 31,
|
|
($ in thousands)
|
|
2017
|
|
2016
|
|
2015
|
|
Standard Commercial Lines:
|
|
|
|
|
|
|
|
|
|
|
Underwriting gain, before federal income tax
|
|
$
|
149,514
|
|
|
146,435
|
|
|
164,496
|
|
|
Underwriting gain, after federal income tax
|
|
97,184
|
|
|
95,183
|
|
|
106,923
|
|
|
Combined ratio
|
|
91.6
|
%
|
|
91.2
|
%
|
|
89.2
|
%
|
|
|
|
|
|
|
|
|
|
Standard Personal Lines:
|
|
|
|
|
|
|
|
Underwriting gain, before federal income tax
|
|
11,104
|
|
|
12,419
|
|
|
1,336
|
|
|
Underwriting gain, after federal income tax
|
|
7,217
|
|
|
8,072
|
|
|
868
|
|
|
Combined ratio
|
|
96.2
|
%
|
|
95.6
|
%
|
|
99.5
|
%
|
|
|
|
|
|
|
|
|
|
E&S Lines:
|
|
|
|
|
|
|
|
Underwriting loss, before federal income tax
|
|
(6,282
|
)
|
|
(6,921
|
)
|
|
(16,803
|
)
|
|
Underwriting loss, after federal income tax
|
|
(4,083
|
)
|
|
(4,499
|
)
|
|
(10,922
|
)
|
|
Combined ratio
|
|
103.0
|
%
|
|
103.4
|
%
|
|
109.8
|
%
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
161,882
|
|
|
130,754
|
|
|
121,316
|
|
|
Net realized investment gains (losses)
|
|
6,359
|
|
|
(4,937
|
)
|
|
13,171
|
|
|
Total investment income, before federal income tax
|
|
168,241
|
|
|
125,817
|
|
|
134,487
|
|
|
Tax on investment income
|
|
45,588
|
|
|
30,621
|
|
|
32,090
|
|
|
Total investment income, after federal income tax
|
|
$
|
122,653
|
|
|
95,196
|
|
|
102,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Segment Results to Income Before Federal Income Tax
|
|
Years ended December 31,
|
|
($ in thousands)
|
|
2017
|
|
2016
|
|
2015
|
|
Underwriting gain (loss)
|
|
|
|
|
|
|
|
Standard Commercial Lines
|
|
$
|
149,514
|
|
|
146,435
|
|
|
164,496
|
|
|
Standard Personal Lines
|
|
11,104
|
|
|
12,419
|
|
|
1,336
|
|
|
E&S Lines
|
|
(6,282
|
)
|
|
(6,921
|
)
|
|
(16,803
|
)
|
|
Investment income
|
|
168,241
|
|
|
125,817
|
|
|
134,487
|
|
|
Total all segments
|
|
322,577
|
|
|
277,750
|
|
|
283,516
|
|
|
Interest expense
|
|
(24,354
|
)
|
|
(22,771
|
)
|
|
(22,428
|
)
|
|
Corporate expenses
|
|
(36,255
|
)
|
|
(35,024
|
)
|
|
(28,396
|
)
|
|
Income, before federal income tax
|
|
$
|
261,968
|
|
|
219,955
|
|
|
232,692
|
|
Note 12. Earnings per Share
The following table provides a reconciliation of the numerators and denominators of basic and diluted earnings per share ("EPS"):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Income
|
|
Shares
|
|
Per Share
|
|
($ in thousands, except per share amounts)
|
|
(Numerator)
|
|
(Denominator)
|
|
Amount
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
168,826
|
|
|
58,458
|
|
|
$
|
2.89
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Stock compensation plans
|
|
—
|
|
|
899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
168,826
|
|
|
59,357
|
|
|
$
|
2.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
Income
|
|
Shares
|
|
Per Share
|
|
($ in thousands, except per share amounts)
|
|
(Numerator)
|
|
(Denominator)
|
|
Amount
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
158,495
|
|
|
57,889
|
|
|
$
|
2.74
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Stock compensation plans
|
|
—
|
|
|
858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
158,495
|
|
|
58,747
|
|
|
$
|
2.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
Income
|
|
Shares
|
|
Per Share
|
|
($ in thousands, except per share amounts)
|
|
(Numerator)
|
|
(Denominator)
|
|
Amount
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
165,861
|
|
|
57,212
|
|
|
$
|
2.90
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Stock compensation plans
|
|
—
|
|
|
944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
165,861
|
|
|
58,156
|
|
|
$
|
2.85
|
|
Note 13. Federal Income Taxes
(a) On December 22, 2017, the Tax Cuts and Jobs Act of 2017 ("Tax Reform") was signed into law, which among other implications, will reduce our statutory corporate tax rate from 35% to 21% beginning with our 2018 tax year. We revalued our deferred tax inventory as of
December 31, 2017
in anticipation of this reduction, which resulted in a
$20.2 million
charge to income as illustrated in the rate reconciliation table below. This charge included a
$5.7 million
benefit related to net unrealized gains on our investment portfolio and pension plan, which were originally recorded through AOCI.
Our accounting for the impact of Tax Reform on our deferred tax assets and liabilities is complete with the exception of amounts related to loss reserve discounting. Prior to Tax Reform, we had elected to use our own loss reserve payment patterns in determining the factors that we use in our discounting calculation. Under Tax Reform, this election has been eliminated and we are required to use an industry experience approach that includes a discount rate based on a corporate bond yield curve for which the IRS has not yet issued any guidance. Considering this, we have recorded a
$7.5 million
provisional increase to our deferred tax asset that is based on the industry experience approach under the tax law that existed prior to Tax Reform. We believe this is a reasonable estimate for the elimination of the company experience method election. We have not estimated a provisional amount based on the revised Tax Reform industry experience approach. Based on a Tax Reform transition rule that allows for this type of change in accounting method to be amortized into expense over an eight-year period beginning in 2018, we have established an offsetting deferred tax liability of
$7.5 million
as of December 31, 2017. During 2018, we will obtain, prepare, and analyze the necessary information to complete the accounting for loss reserve discounting.
(b) A reconciliation of federal income tax on income at the corporate rate to the effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2017
|
|
2016
|
|
2015
|
|
Tax at statutory rate of 35%
|
|
$
|
91,689
|
|
|
76,984
|
|
|
81,442
|
|
|
Tax-advantaged interest
|
|
(11,510
|
)
|
|
(12,126
|
)
|
|
(13,164
|
)
|
|
Dividends received deduction
|
|
(1,961
|
)
|
|
(1,114
|
)
|
|
(1,817
|
)
|
|
Stock based compensation
|
|
(4,281
|
)
|
|
—
|
|
|
—
|
|
|
Tax reform rate change
|
|
20,205
|
|
|
—
|
|
|
—
|
|
|
Other
|
|
(1,000
|
)
|
|
(2,284
|
)
|
|
370
|
|
|
Federal income tax expense from continuing operations
|
|
$
|
93,142
|
|
|
61,460
|
|
|
66,831
|
|
In addition to the impact of Tax Reform discussed above, our rate reconciliation for 2017 was also impacted by the
$4.3 million
impact of new accounting literature requiring that the tax effects of share-based compensation be recognized in the income tax provision. Previously, these amounts were recorded in additional paid-in capital. See Note 3. "Adoption of Accounting Pronouncements" for additional information regarding this literature change.
(c) The tax effects of the significant temporary differences that gave rise to deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
2017
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Net loss reserve discounting
|
|
$
|
38,771
|
|
|
70,065
|
|
|
Net unearned premiums
|
|
50,267
|
|
|
78,201
|
|
|
Employee benefits
|
|
8,606
|
|
|
17,881
|
|
|
Long-term incentive compensation plans
|
|
12,221
|
|
|
17,750
|
|
|
Temporary investment write-downs
|
|
1,044
|
|
|
2,475
|
|
|
Other investment related items, net
|
|
—
|
|
|
1,484
|
|
|
Net operating loss
|
|
54
|
|
|
771
|
|
|
Other
|
|
5,784
|
|
|
8,344
|
|
|
Total deferred tax assets
|
|
116,747
|
|
|
196,971
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
47,484
|
|
|
75,310
|
|
|
Unrealized gains on investment securities
|
|
26,183
|
|
|
22,681
|
|
|
Other investment-related items, net
|
|
2,500
|
|
|
—
|
|
|
Accelerated depreciation and amortization
|
|
8,590
|
|
|
14,140
|
|
|
Total deferred tax liabilities
|
|
84,757
|
|
|
112,131
|
|
|
Net deferred federal income tax asset
|
|
$
|
31,990
|
|
|
84,840
|
|
Net deferred federal income tax assets decreased by
$52.9 million
during 2017. As mentioned above, net deferred federal income tax assets were reduced by
$20.2 million
in relation to Tax Reform. In addition to this charge, net deferred assets decreased by
$21.4 million
resulting from additional unrealized gains generated during the year on our investment portfolio.
After considering all evidence, both positive and negative, with respect to our federal tax loss carryback availability, expected levels of pre-tax financial statement income, and federal taxable income, we believe it is more likely than not that the existing deductible temporary differences will reverse during periods in which we generate net federal taxable income or have adequate federal carryback availability. As a result, we had no valuation allowance recognized for federal deferred tax assets at
December 31, 2017
or
2016
.
As of
December 31, 2017
, we had federal tax net operating loss ("NOL") carryforwards of
$0.3 million
. These NOLs, which are subject to an annual limitation of
$1.9 million
, will expire between 2030 and 2031.
Stockholders' equity reflects tax benefits related to compensation expense deductions for share-based compensation awards of
$23.8 million
at December 31, 2017 and
December 31, 2016
, and
$22.0 million
at
December 31, 2015
. As mentioned above, beginning in 2017, all excess tax benefits and tax deficiencies on share-based payment awards are recognized as income tax expense or benefit on the Consolidated Statements of Income.
We have analyzed our tax positions in all open tax years, which as of
December 31, 2017
were
2014
through
2016
, and 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. We are not currently under a federal income tax audit for any tax year.
Note 14. Retirement Plans
(a) Selective Insurance Retirement Savings Plan (“Retirement Savings Plan”)
SICA offers a voluntary defined contribution 401(k) plan, which is available to most of our employees and is a tax-qualified retirement plan subject to the Employee Retirement Income Security Act of 1974 ("ERISA"). Expense recorded for this plan was
$15.8 million
in
2017
,
$15.0 million
in
2016
, and
$14.1 million
in
2015
.
(b) Deferred Compensation Plan
SICA offers a nonqualified deferred compensation plan ("Deferred Compensation Plan") to a group of management or highly compensated employees as a method of recognizing and retaining such employees. The Deferred Compensation Plan provides these employees the opportunity to elect to defer receipt of specified portions of compensation and to have such deferred amounts deemed to be invested in specified investment options. In addition to the employee deferrals, SICA may choose to make matching contributions to some or all of the participants in this plan to the extent the participant did not receive the maximum matching or non-elective contributions permissible under the Retirement Savings Plan due to limitations under the Internal Revenue Code or the Retirement Savings Plan. Expense recorded for these contributions was
$0.2 million
in
2017
,
$0.3 million
in
2016
, and
$0.2 million
in
2015
.
(c) Retirement Income Plan and Retirement Life Plan
SICA's primary pension plan is the Retirement Income Plan for Selective Insurance Company of America (the "Pension Plan"). This qualified, noncontributory defined benefit plan is closed to new entrants and existing participants ceased accruing benefits after
March 31, 2016
.
In addition to the Pension Plan, SICA also sponsors the Supplemental Excess Retirement Plan (the "Excess Plan") and a life insurance benefit plan (the "Retirement Life Plan"). Both of these plans are closed to new entrants and participants in the Excess Plan ceased accruing benefits after
March 31, 2016
. The Retirement Life Plan does not accrue benefits and this plan applies only to retirees who terminated employment with SICA on or before March 31, 2009. These are both unfunded plans with benefit obligations as of
December 31, 2017
and
December 31, 2016
of
$10.1 million
and
$9.1 million
, respectively, for the Excess Plan and
$6.4 million
and
$6.3 million
, respectively, for the Retirement Life Plan. Expense recorded for the Excess Plan was
$0.4 million
in
2017
,
$0.5 million
in
2016
, and
$0.8 million
in
2015
. Expense recorded for the Retirement Life Plan was
$0.3 million
in
2017
,
2016
, and
2015
.
The following tables provide details on the Pension Plan for
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Pension Plan
|
|
($ in thousands)
|
|
2017
|
|
2016
|
|
Change in Benefit Obligation:
|
|
|
|
|
|
|
|
Benefit obligation, beginning of year
|
|
$
|
330,588
|
|
|
310,308
|
|
|
Service cost
|
|
—
|
|
|
1,647
|
|
|
Interest cost
|
|
12,490
|
|
|
12,336
|
|
|
Actuarial losses
|
|
31,158
|
|
|
15,086
|
|
|
Benefits paid
|
|
(9,825
|
)
|
|
(8,789
|
)
|
|
Benefit obligation, end of year
|
|
$
|
364,411
|
|
|
330,588
|
|
|
|
|
|
|
|
|
Change in Fair Value of Assets:
|
|
|
|
|
|
|
|
Fair value of assets, beginning of year
|
|
$
|
316,515
|
|
|
249,700
|
|
|
Actual return on plan assets, net of expenses
|
|
46,983
|
|
|
21,079
|
|
|
Contributions by the employer to funded plans
|
|
10,000
|
|
|
54,525
|
|
|
Benefits paid
|
|
(9,825
|
)
|
|
(8,789
|
)
|
|
Fair value of assets, end of year
|
|
$
|
363,673
|
|
|
316,515
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(738
|
)
|
|
(14,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in the Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
Liabilities
|
|
$
|
(738
|
)
|
|
(14,073
|
)
|
|
Net pension liability, end of year
|
|
$
|
(738
|
)
|
|
(14,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in AOCI:
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
87,438
|
|
|
85,845
|
|
|
Total
|
|
$
|
87,438
|
|
|
85,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Information as of December 31:
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
364,411
|
|
|
330,588
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Liability Assumptions as of December 31:
|
|
|
|
|
|
|
Discount rate
|
|
3.78
|
%
|
|
4.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
($ in thousands)
|
|
2017
|
|
2016
|
|
2015
|
|
Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost:
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
—
|
|
|
1,647
|
|
|
7,215
|
|
|
Interest cost
|
|
12,490
|
|
|
12,336
|
|
|
13,668
|
|
|
Expected return on plan assets
|
|
(19,419
|
)
|
|
(17,309
|
)
|
|
(15,969
|
)
|
|
Amortization of unrecognized actuarial loss
|
|
2,001
|
|
|
6,299
|
|
|
6,831
|
|
|
Total net periodic cost
|
|
$
|
(4,928
|
)
|
|
2,973
|
|
|
11,745
|
|
|
|
|
|
|
|
|
|
|
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss (gain)
|
|
$
|
3,594
|
|
|
11,316
|
|
|
(1,425
|
)
|
|
Reversal of amortization of net actuarial loss
|
|
(2,001
|
)
|
|
(6,299
|
)
|
|
(6,831
|
)
|
|
Total recognized in other comprehensive income
|
|
$
|
1,593
|
|
|
5,017
|
|
|
(8,256
|
)
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and other comprehensive income
|
|
$
|
(3,335
|
)
|
|
7,990
|
|
|
3,489
|
|
The estimated net actuarial loss for the Pension Plan that will be amortized from AOCI into net periodic benefit cost during the
2018
fiscal year is
$2.0 million
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Weighted-Average Expense Assumptions for the years ended December 31:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
4.41
|
%
|
|
4.69
|
|
4.29
|
|
Expected return on plan assets
|
|
6.24
|
|
|
6.37
|
|
6.27
|
|
Rate of compensation increase
1
|
|
—
|
|
|
—
|
|
4.00
|
1
This assumption was 4.00% through March 31, 2016, the date after which benefits ceased accruing for all participants of the Pension Plan.
Our latest measurement date was
December 31, 2017
, at which time we increased our expected return on plan assets to
6.36%
, reflecting a higher allocation to equity securities in the portfolio.
When determining the most appropriate discount rate to be used in the valuation, we consider, among other factors, our expected payout patterns of the Pension Plan's obligations as well as our investment strategy and we ultimately select the rate that we believe best represents our estimate of the inherent interest rate at which our pension and post-retirement life benefits can be effectively settled. Effective January 1, 2016, the approach used to calculate the service and interest components of net periodic benefit cost for benefit plans was changed to provide a more precise measurement of service and interest costs. Prior to 2016, we calculated these service and interest components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Beginning in 2016, we elected to utilize an approach that discounts the individual expected cash flows using the applicable spot rates derived from the yield curve over the projected cash flow period. We have accounted for this change prospectively as a change in accounting estimate. The weighted average discount rate used to determine
2018
interest cost is
3.46%
.
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 2018, 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 equity investments may not contain investments in any one security greater than
8%
of the portfolio value without notification to our management investment committee, nor have more than
5%
of the outstanding shares of any one corporation or other entity. The use of derivative instruments is permitted under certain circumstances, but shall not be used for unrelated speculative hedging or to apply leverage to portfolio positions. Within the alternative investments portfolio, some leverage is permitted as defined and limited by the partnership agreements.
The plan’s target ranges, as well as the actual weighted average asset allocation by strategy, at
December 31
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
Target Percentage
2
|
|
Actual Percentage
|
|
Actual Percentage
|
|
Return seeking assets
1
|
|
20% - 60%
|
|
|
58
|
%
|
|
50
|
%
|
|
Liability hedging assets
|
|
40% - 80%
|
|
|
42
|
%
|
|
50
|
%
|
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
1
Includes limited partnerships.
2
Target percent allocations may change over time based on the funded status of the plan and market return expectations.
The Pension Plan had no investments in the Parent’s common stock as of
December 31, 2017
or
2016
.
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 long-duration fixed income mutual funds utilize a market approach wherein the quoted prices in the active market for identical assets are used. All of the mutual funds are traded in active markets at their net asset value per share. These investments are classified as Level 1 in the fair value hierarchy.
|
|
|
|
|
•
|
The investments in global equity collective investment funds 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. There are no restrictions as to the redemption of these investments nor do we have any contractual obligations for further investment. These investments are classified as Level 1 in the fair value hierarchy.
|
|
|
|
|
•
|
The investments in private equity 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.
|
|
|
|
|
•
|
The investments in other private equity securities are non-publicly traded stocks and are valued by the issuer and reviewed internally. These investments are classified as Level 3 in the fair value hierarchy.
|
|
|
|
|
•
|
Short-term investments are carried at cost, which approximates fair value. Given that these investments are listed on active exchanges, coupled with their liquid nature, these investments are classified as Level 1 in the fair value hierarchy.
|
|
|
|
|
•
|
The deposit administration contract is carried at cost, which approximates fair value. Given the liquid nature of the underlying investments in overnight cash deposits and other short-term duration products, we have determined that a correlation exists between the deposit administration contract and other short-term investments, such as money market funds. As such, this investment is classified as Level 2 in the fair value hierarchy.
|
For discussion regarding the levels within the fair value hierarchy, see Note 2. "Summary of Significant Accounting Policies."
In addition, refer to Note 5. "Investments" for discussion regarding the limited partnership investment strategies, excluding the middle market lending strategy, as these investments are not part of the Pension Plan. The hedge fund strategy is part of the overall private asset strategy and is only included in the Pension Plan assets. The Pension Plan invests in hedge funds with diversified exposure to a number of underlying systematic strategies that include arbitrage, macro-oriented and equity related strategies. These positions are expected to improve the risk-adjusted return of the portfolio given their lower volatility profile than public equities with returns that are generally uncorrelated to traditional asset classes over a complete market cycle.
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, 2017
|
|
|
|
Fair Value Measurements at 12/31/17 Using
|
|
($ in thousands)
|
|
Assets Measured at Fair Value At 12/31/17
|
|
Quoted Prices in Active Markets for Identical Assets/ Liabilities
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return seeking assets:
|
|
|
|
|
|
|
|
|
|
Long-duration fixed income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global asset allocation fund
|
|
$
|
41,309
|
|
|
41,309
|
|
|
—
|
|
|
—
|
|
|
Global equity:
|
|
|
|
|
|
|
|
|
|
Non-U.S. equity
|
|
67,989
|
|
|
67,989
|
|
|
—
|
|
|
—
|
|
|
U.S. equity
|
|
66,353
|
|
|
66,353
|
|
|
—
|
|
|
—
|
|
|
Total global equity
|
|
134,342
|
|
|
134,342
|
|
|
—
|
|
|
—
|
|
|
Private assets:
|
|
|
|
|
|
|
|
|
|
|
Limited partnerships (at net asset value)
1
:
|
|
|
|
|
|
|
|
|
|
Real assets
|
|
16,305
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Private equity
|
|
1,096
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Private credit
|
|
460
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Hedge fund
|
|
15,192
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total limited partnerships
|
|
33,053
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other private assets
|
|
980
|
|
|
—
|
|
|
—
|
|
|
980
|
|
|
Total private assets
|
|
34,033
|
|
|
—
|
|
|
—
|
|
|
980
|
|
|
Total return seeking assets
|
|
209,684
|
|
|
175,651
|
|
|
—
|
|
|
980
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability hedging assets:
|
|
|
|
|
|
|
|
|
|
Long-duration fixed income:
|
|
|
|
|
|
|
|
|
|
Extended duration fixed income
|
|
146,837
|
|
|
146,837
|
|
|
—
|
|
|
—
|
|
|
Cash and short-term investments:
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
4,939
|
|
|
4,939
|
|
|
—
|
|
|
—
|
|
|
Deposit administration contracts
|
|
1,615
|
|
|
—
|
|
|
1,615
|
|
|
—
|
|
|
Total cash and short-term investments
|
|
6,554
|
|
|
4,939
|
|
|
1,615
|
|
|
—
|
|
|
Total liability hedging assets
|
|
153,391
|
|
|
151,776
|
|
|
1,615
|
|
|
—
|
|
|
Total invested assets
|
|
$
|
363,075
|
|
|
$
|
327,427
|
|
|
$
|
1,615
|
|
|
$
|
980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Fair Value Measurements at 12/31/16 Using
|
|
($ in thousands)
|
|
Assets Measured at Fair Value At 12/31/16
|
|
Quoted Prices in Active Markets for Identical Assets/ Liabilities
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return seeking assets:
|
|
|
|
|
|
|
|
|
|
Long-duration fixed income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global asset allocation fund
|
|
$
|
37,878
|
|
|
37,878
|
|
|
—
|
|
|
—
|
|
|
Global equity:
|
|
|
|
|
|
|
|
|
|
Non-U.S. equity
|
|
48,836
|
|
|
48,836
|
|
|
—
|
|
|
—
|
|
|
U.S. equity
|
|
55,073
|
|
|
55,073
|
|
|
—
|
|
|
—
|
|
|
Total global equity
|
|
103,909
|
|
|
103,909
|
|
|
—
|
|
|
—
|
|
|
Private assets (limited partnerships, at net asset value)
1
:
|
|
|
|
|
|
|
|
|
|
|
Real assets
|
|
15,466
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Private equity
|
|
1,615
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Private credit
|
|
1,108
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total private assets
|
|
18,189
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total return seeking assets
|
|
159,976
|
|
|
141,787
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability hedging assets:
|
|
|
|
|
|
|
|
|
|
Long-duration fixed income:
|
|
|
|
|
|
|
|
|
|
Extended duration fixed income
|
|
131,457
|
|
|
131,457
|
|
|
—
|
|
|
—
|
|
|
Cash and short-term investments:
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
23,722
|
|
|
23,722
|
|
|
—
|
|
|
—
|
|
|
Deposit administration contracts
|
|
1,832
|
|
|
—
|
|
|
1,832
|
|
|
—
|
|
|
Total cash and short-term investments
|
|
25,554
|
|
|
23,722
|
|
|
1,832
|
|
|
—
|
|
|
Total liability hedging assets
|
|
157,011
|
|
|
155,179
|
|
|
1,832
|
|
|
—
|
|
|
Total invested assets
|
|
$
|
316,987
|
|
|
$
|
296,966
|
|
|
$
|
1,832
|
|
|
$
|
—
|
|
1
In accordance with ASU 2015-07, certain investments that are measured at fair value using the net asset value per share (or its practical expedient) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to total Pension Plan invested assets.
Contributions
We presently do not anticipate contributing to the Pension Plan in
2018
, as we have no minimum required contribution amounts.
Benefit Payments
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Pension Plan
|
|
Benefits Expected to be Paid in Future
|
|
|
|
|
Fiscal Years:
|
|
|
|
|
2018
|
|
$
|
12,913
|
|
|
2019
|
|
12,936
|
|
|
2020
|
|
13,987
|
|
|
2021
|
|
15,093
|
|
|
2022
|
|
16,128
|
|
|
2023-2027
|
|
94,542
|
|
Note 15. Share-Based Payments
Active Plans
As of
December 31, 2017
, the following four plans were available for the issuance of share-based payment awards:
|
|
|
|
•
|
The 2014 Omnibus Stock Plan (the "Stock Plan");
|
|
|
|
|
•
|
The Cash Incentive Plan, amended and restated effective as of May 1, 2014 (the "Cash Plan");
|
|
|
|
|
•
|
The Employee Stock Purchase Plan (2009) ("ESPP"); and
|
|
|
|
|
•
|
The Amended and Restated Stock Purchase Plan for Independent Insurance Agencies (the "Agent Plan").
|
The following table provides information regarding the approval of these plans:
|
|
|
|
|
|
Plan
|
Approvals
|
|
Stock Plan
|
Approved effective as of May 1, 2014 by stockholders on April 23, 2014.
|
|
Cash Plan
|
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.
|
|
ESPP
|
Approved by stockholders on April 29, 2009 effective July 1, 2009.
|
|
Agent Plan
|
Approved by stockholders on April 26, 2006.
Most recently amended and restated plan was approved on December 13, 2016 by the Parent's Board of Directors' Salary and Employee Benefits Committee. The amendment was effective February 1, 2017.
|
The types of awards that can be issued under each of these plans are as follows:
|
|
|
|
|
|
Plan
|
Types of Share-Based Payments Issued
|
|
Stock Plan
|
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 Plan
|
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 as 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.
|
|
ESPP
|
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.
|
|
Agent Plan
|
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, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
Authorized
|
Available for Issuance
|
Awards Outstanding
|
|
Stock Plan
|
3,500,000
|
|
2,516,871
|
|
882,490
|
|
|
ESPP
|
1,500,000
|
|
499,629
|
|
—
|
|
|
Agent Plan
|
3,000,000
|
|
1,817,493
|
|
—
|
|
Retired Plans
The following plans are closed for the issuance of new awards, although awards outstanding continue in effect according to the terms of the applicable award agreements:
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
Types of Share-Based Payments Issued
|
Reserve Shares
|
Awards Outstanding
1
|
|
Plan
|
|
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.
|
2,202,532
|
|
277,132
|
|
|
Parent's Stock Compensation Plan for Non-employee Directors ("Directors Stock Compensation Plan")
|
Directors could elect to receive a portion of their annual compensation in shares of the Parent's common stock.
|
66,506
|
|
66,506
|
|
1
Awards outstanding under the 2005 Stock Plan consisted of
47,268
RSUs and
229,864
stock options.
RSU Transactions
A summary of the RSU transactions under our share-based payment plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Unvested RSU awards at December 31, 2016
|
|
916,640
|
|
|
$
|
26.20
|
|
|
Granted in 2017
|
|
321,928
|
|
|
42.66
|
|
|
Vested in 2017
|
|
(360,702
|
)
|
|
22.78
|
|
|
Forfeited in 2017
|
|
(12,279
|
)
|
|
32.09
|
|
|
Unvested RSU awards at December 31, 2017
|
|
865,587
|
|
|
$
|
33.66
|
|
As of
December 31, 2017
, total unrecognized compensation expense related to unvested RSU awards granted under our stock plans was
$8.0 million
. That expense is expected to be recognized over a weighted-average period of
1.8 years
. The total intrinsic value of RSUs vested was
$16.0 million
for
2017
,
$12.6 million
for
2016
, and
$10.3 million
for
2015
. In connection with vested RSUs, the total value of the DEU shares that vested was
$0.9 million
during
2017
and
$0.7 million
in
2016
and
2015
.
Option Transactions
A summary of the stock option transactions under our share-based payment plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life in Years
|
|
Aggregate
Intrinsic Value
($ in thousands)
|
|
Outstanding at December 31, 2016
|
|
355,391
|
|
|
$
|
16.87
|
|
|
|
|
|
|
|
Granted in 2017
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Exercised in 2017
|
|
(120,496
|
)
|
|
19.39
|
|
|
|
|
|
|
|
Forfeited or expired in 2017
|
|
(5,031
|
)
|
|
24.54
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
229,864
|
|
|
$
|
15.38
|
|
|
1.50
|
|
$
|
9,958
|
|
|
Exercisable at December 31, 2017
|
|
229,864
|
|
|
$
|
15.38
|
|
|
1.50
|
|
$
|
9,958
|
|
The total intrinsic value of options exercised was
$4.0 million
in
2017
,
$2.3 million
in
2016
, and
$2.2 million
in
2015
.
CIU Transactions
The liability recorded in connection with our Cash Plan was
$37.0 million
at
December 31, 2017
and
$32.0 million
at
December 31, 2016
. The remaining cost associated with the CIUs is expected to be recognized over a weighted average period of
0.9 years
. The CIU payments made were
$14.2 million
in
2017
,
$14.3 million
in
2016
, and
$10.2 million
in
2015
.
ESPP and Agent Plan Transactions
A summary of ESPP and Agent Plan share issuances is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
|
ESPP Issuances
|
75,093
|
|
88,432
|
|
100,944
|
|
|
Agent Plan Issuances
|
49,794
|
|
69,867
|
|
82,142
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESPP
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Risk-free interest rate
|
|
1.07
|
%
|
|
0.47
|
|
0.10
|
|
Expected term
|
|
6 months
|
|
|
6 months
|
|
6 months
|
|
Dividend yield
|
|
1.3
|
%
|
|
1.7
|
|
2.0
|
|
Expected volatility
|
|
24
|
%
|
|
31
|
|
20
|
The weighted-average fair value of options and stock per share, including RSUs granted for the Parent's stock plans, during
2017
,
2016
, and
2015
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
RSUs
|
|
$
|
42.66
|
|
|
32.53
|
|
|
25.22
|
|
|
ESPP:
|
|
|
|
|
|
|
|
|
|
Six month option
|
|
2.73
|
|
|
2.63
|
|
|
1.26
|
|
|
Discount of grant date market value
|
|
7.06
|
|
|
5.23
|
|
|
4.16
|
|
|
Total ESPP
|
|
9.79
|
|
|
7.86
|
|
|
5.42
|
|
|
Agent Plan:
|
|
|
|
|
|
|
|
|
|
|
Discount of grant date market value
|
|
5.04
|
|
|
3.79
|
|
|
2.94
|
|
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 Cash Plan, is adjusted to reflect our performance on specified indicators as compared to targeted peer companies.
Expense Recognition
The following table provides share-based compensation expense in
2017
,
2016
, and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
2017
|
|
2016
|
|
2015
|
|
Share-based compensation expense, pre-tax
|
$
|
31.2
|
|
|
30.3
|
|
|
23.8
|
|
|
Income tax benefit, including the benefit related to stock grants that have vested during the year
|
(15.0
|
)
|
|
(10.3
|
)
|
|
(8.0
|
)
|
|
Share-based compensation expense, after-tax
|
$
|
16.2
|
|
|
20.0
|
|
|
15.8
|
|
Note 16. Related Party Transactions
William M. Rue, a Director of the Parent, is Chairman of, and owns more than
10%
of the equity of, Chas. E. Rue & Son, Inc., t/a Rue Insurance, a general independent retail insurance agency ("Rue Insurance"). Rue Insurance is an appointed distribution partner of the Insurance Subsidiaries on terms and conditions similar to those of our other distribution partners, which includes the right to participate in the Agent Plan. Mr. Rue’s son is President, and an employee, of Rue Insurance and Mr. Rue’s daughter is an employee of Rue Insurance. Our relationship with Rue Insurance has existed since 1928.
Rue Insurance placed insurance policies with the Insurance Subsidiaries for its customers and itself. Direct premiums written associated with these policies were
$11.1 million
in
2017
,
$10.4 million
in
2016
, and
$9.6 million
in
2015
. In return, the Insurance Subsidiaries paid standard market commissions, including supplemental commissions, to Rue Insurance of
$2.3 million
in
2017
,
$2.1 million
in
2016
, and
$1.7 million
in
2015
. Amounts due to Rue Insurance at
December 31, 2017
and
December 31, 2016
were
$0.6 million
and
$0.7 million
, respectively.
In 2005, we established a private foundation, now named The Selective Insurance Group Foundation (the "Foundation"), under Section 501(c)(3) of the Internal Revenue Code. The Board of Directors of the Foundation is comprised of some of the Parent's officers. We made less than
$0.1 million
of contributions and no contributions to the Foundation in
2017
and
2016
, respectively. We made contributions to the Foundation in the amount of
$1.0 million
in
2015
.
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 19, 2018, BlackRock filed a Schedule 13G/A reporting beneficial ownership as of December 31, 2017, of
12.8%
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. In 2017 and 2016, we incurred expenses related to BlackRock of
$2.0 million
and
$0.4 million
, respectively, for services rendered. Amounts payable for such services at December 31, 2017 and December 31, 2016, were
$0.5 million
and
$0.4 million
, respectively. All contracts with BlackRock were consummated in the ordinary course of business on an arm's-length basis.
Note 17. 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, 2017
, we had purchased such annuities with a present value of
$18.5 million
for settlement of claims on a structured basis for which we are contingently liable. To our knowledge, there are no material defaults from any of the issuers of such annuities.
(b) We have various operating leases for office space, equipment, and fleet vehicles. Such lease agreements, which expire at various times, are generally renewed or replaced by similar leases. Rental expense under these leases amounted to
$10.8 million
in
2017
,
$12.3 million
in
2016
, and
$11.7 million
in
2015
. We also lease computer hardware and software under capital lease agreements expiring at various dates through
2019
. See item (p) of Note 2. "Summary of Significant Accounting Policies" in this Form 10-K for information on our accounting policy regarding leases.
In addition, certain of these leases are non-cancelable, and liability for payment will continue even though the leased asset may no longer be in use. At
December 31, 2017
, the total future minimum rental commitments under non-cancelable leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Capital Leases
|
Operating Leases
|
Total
|
|
2018
|
|
$
|
2.3
|
|
10.0
|
|
12.3
|
|
|
2019
|
|
0.1
|
|
7.5
|
|
7.6
|
|
|
2020
|
|
—
|
|
6.0
|
|
6.0
|
|
|
2021
|
|
—
|
|
3.7
|
|
3.7
|
|
|
2022
|
|
—
|
|
2.1
|
|
2.1
|
|
|
After 2022
|
|
—
|
|
2.6
|
|
2.6
|
|
|
Total minimum payment required
|
|
$
|
2.4
|
|
31.9
|
|
34.3
|
|
(c) As of
December 31, 2017
, we had contractual obligations that expire at various dates through
2032
to invest up to an additional
$221 million
in alternative and other investments. There is no certainty that any such additional investment will be required. For additional information regarding these investments, see item (f) of Note 5. "Investments" in this Form 10-K. In addition, as of
December 31, 2017
, we had contractual obligations that expire in
2023
to invest
$16.3 million
in a non-publicly traded common stock within our available-for-sale portfolio. We expect to have the capacity to repay and/or refinance these obligations as they become due.
Note 18. Litigation
In the ordinary course of conducting business, we are named as defendants in various legal proceedings. Most of these proceedings are claims litigation involving our Insurance Subsidiaries as either: (i) liability insurers defending or providing indemnity for third-party claims brought against our customers; or (ii) insurers defending first-party coverage claims brought against them. We account for such activity through the establishment of unpaid losses and loss expense reserves. We expect that any potential ultimate liability in such ordinary course claims litigation will not be material to our consolidated financial condition, results of operations, or cash flows after consideration of provisions made for potential losses and costs of defense.
From time to time, our Insurance Subsidiaries also are named as defendants in other legal actions, some of which assert claims for substantial amounts. These actions include, among others, putative class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, improper reimbursement of medical providers paid under workers compensation and personal and commercial automobile insurance policies. Similarly, our Insurance Subsidiaries are also named from time-to-time in individual actions seeking extra-contractual damages, punitive damages, or penalties, some of which allege bad faith in the handling of insurance claims. We believe that we have valid defenses to these cases. We expect that any potential ultimate liability in any such lawsuit will not be material to our consolidated financial condition, after consideration of provisions made for estimated losses. Nonetheless, given the inherent unpredictability of litigation and the large or indeterminate amounts sought in certain of these actions, an adverse outcome in certain matters could possibly have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods.
As of
December 31, 2017
, we do not believe the Company was involved in any legal action that could have a material adverse effect on our consolidated financial condition, results of operations, or cash flows.
Note 19. 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 materially affect the determination of statutory surplus, statutory net income, or risk-based capital (“RBC”). As of
December 31, 2017
, the various state insurance departments of domicile have adopted the March
2017
version of the NAIC Accounting Practices and Procedures manual in its entirety, as a component of prescribed or permitted practices.
The following table provides statutory data for each of our Insurance Subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State of Domicile
|
|
Unassigned Surplus
|
|
Statutory Surplus
|
|
Statutory Net Income
|
|
($ in millions)
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2015
|
|
SICA
|
|
New Jersey
|
|
$
|
455.5
|
|
|
414.4
|
|
|
609.7
|
|
|
568.6
|
|
|
84.6
|
|
|
72.2
|
|
|
69.6
|
|
|
Selective Way Insurance Company ("SWIC")
|
|
New Jersey
|
|
276.1
|
|
|
260.5
|
|
|
325.1
|
|
|
309.5
|
|
|
43.6
|
|
|
41.2
|
|
|
42.3
|
|
|
SICSC
|
|
Indiana
|
|
112.9
|
|
|
110.6
|
|
|
144.1
|
|
|
141.9
|
|
|
17.9
|
|
|
17.4
|
|
|
15.9
|
|
|
SICSE
|
|
Indiana
|
|
86.2
|
|
|
83.5
|
|
|
111.8
|
|
|
109.1
|
|
|
14.7
|
|
|
13.4
|
|
|
12.1
|
|
|
SICNY
|
|
New York
|
|
78.8
|
|
|
74.1
|
|
|
106.5
|
|
|
101.8
|
|
|
13.4
|
|
|
12.9
|
|
|
12.7
|
|
|
Selective Insurance Company of New England ("SICNE")
|
|
New Jersey
|
|
16.1
|
|
|
13.6
|
|
|
46.3
|
|
|
43.7
|
|
|
6.3
|
|
|
5.9
|
|
|
5.5
|
|
|
Selective Auto Insurance Company of New Jersey ("SAICNJ")
|
|
New Jersey
|
|
42.1
|
|
|
36.9
|
|
|
84.9
|
|
|
79.8
|
|
|
11.4
|
|
|
11.5
|
|
|
10.8
|
|
|
MUSIC
|
|
New Jersey
|
|
21.4
|
|
|
16.7
|
|
|
89.9
|
|
|
85.2
|
|
|
10.3
|
|
|
9.7
|
|
|
9.5
|
|
|
Selective Casualty Insurance Company ("SCIC")
|
|
New Jersey
|
|
34.5
|
|
|
26.6
|
|
|
109.0
|
|
|
101.0
|
|
|
13.4
|
|
|
12.6
|
|
|
12.1
|
|
|
Selective Fire and Casualty Insurance Company ("SFCIC")
|
|
New Jersey
|
|
13.7
|
|
|
11.3
|
|
|
45.6
|
|
|
43.2
|
|
|
5.6
|
|
|
5.5
|
|
|
5.3
|
|
|
Total
|
|
|
|
$
|
1,137.3
|
|
|
1,048.2
|
|
|
1,672.9
|
|
|
1,583.8
|
|
|
221.2
|
|
|
202.3
|
|
|
195.8
|
|
(b) Capital Requirements
The Insurance Subsidiaries are required to maintain certain minimum amounts of statutory surplus to satisfy the requirements of their various state insurance departments of domicile. RBC requirements for property and casualty insurance companies are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. The Insurance Subsidiaries' combined total adjusted capital exceeded the authorized control level RBC, as defined by the NAIC based on their
2017
statutory financial statements. In addition to statutory capital requirements, we are impacted by various rating agency requirements related to certain rating levels. These required capital levels may be more than statutory requirements.
(c) Restrictions on Dividends and Transfers of Funds
Our ability to declare and pay dividends on the Parent's common stock is dependent on liquidity at the Parent coupled with the ability of the Insurance Subsidiaries to declare and pay dividends, if necessary, and/or the availability of other sources of liquidity to the Parent. As of
December 31, 2017
, the Parent had an aggregate of
$114.5 million
in investments and cash available to fund future dividends and interest payments. These amounts are not subject to any regulatory restrictions other than standard state insolvency restrictions, whereas our consolidated retained earnings of
$1.7 billion
is predominately restricted due to the regulation associated with our Insurance Subsidiaries. In
2018
, the Insurance Subsidiaries have the ability to provide for
$211.0 million
in annual dividends to the Parent; however, as regulated entities, these dividends are subject to certain restrictions, which are further discussed below. The Parent also has available to it other potential sources of liquidity, such as: (i) borrowings from our Indiana Subsidiaries; (ii) debt issuances; (iii) common 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
$70.5 million
as of
December 31, 2017
, based on restrictions in these agreements that limit borrowings to
10%
of the admitted assets of the Indiana Subsidiaries. For additional restrictions on the Parent's debt, see Note 10. "Indebtedness" in this Form 10-K.
Insurance Subsidiaries Dividend Restrictions
As noted above, the restriction on our net assets and retained earnings is predominantly driven by our Insurance Subsidiaries' ability to pay dividends to the Parent under applicable law and regulations. Under the insurance laws of the domiciliary states of the Insurance Subsidiaries, New Jersey, Indiana, and New York, an insurer can potentially make an ordinary dividend payment if its statutory surplus following such dividend is reasonable in relation to its outstanding liabilities, is adequate to its financial needs, and the dividend does not exceed the insurer's unassigned surplus. In general, New Jersey defines an ordinary dividend as a dividend whose fair market value, together with other dividends made within the preceding 12 months, is less than the greater of
10%
of the insurer's statutory surplus as of the preceding
December 31,
or the insurer's net income (excluding capital gains) for the 12-month period ending on the preceding
December 31
. Indiana's ordinary dividend calculation is consistent with New Jersey's, except that it does not exclude capital gains from net income. In general, New York defines an ordinary dividend as a dividend whose fair market value, together with other dividends made within the preceding 12 months, is less than the lesser of
10%
of the insurer's statutory surplus, or
100%
of adjusted net investment income.
New Jersey and Indiana require notice of the declaration of any ordinary dividend distribution. During the notice period, the relevant state regulatory authority may disallow all or part of the proposed dividend if it determines that the dividend is not appropriate given the above considerations. New York does not require notice of ordinary dividends. Dividend payments
exceeding ordinary dividends are referred to as extraordinary dividends and require review and approval by the applicable domiciliary insurance regulatory authority prior to payment.
The following table provides quantitative data regarding all Insurance Subsidiaries' dividends paid to the Parent in
2017
for debt service, shareholder dividends, and general operating purposes:
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
Twelve Months ended December 31, 2017
|
|
($ in millions)
|
|
State of Domicile
|
|
Ordinary Dividends Paid
|
|
SICA
|
|
New Jersey
|
|
$
|
28.0
|
|
|
SWIC
|
|
New Jersey
|
|
19.0
|
|
|
SICSC
|
|
Indiana
|
|
10.0
|
|
|
SICSE
|
|
Indiana
|
|
7.5
|
|
|
SICNY
|
|
New York
|
|
4.5
|
|
|
SICNE
|
|
New Jersey
|
|
2.0
|
|
|
SAICNJ
|
|
New Jersey
|
|
2.5
|
|
|
MUSIC
|
|
New Jersey
|
|
2.1
|
|
|
SCIC
|
|
New Jersey
|
|
3.0
|
|
|
SFCIC
|
|
New Jersey
|
|
1.5
|
|
|
Total
|
|
|
|
$
|
80.1
|
|
Based on the
2017
statutory financial statements, the maximum ordinary dividends that can be paid to the Parent by the Insurance Subsidiaries in
2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
($ in millions)
|
|
State of Domicile
|
|
Maximum Ordinary Dividends
|
|
SICA
|
|
New Jersey
|
|
$
|
77.6
|
|
|
SWIC
|
|
New Jersey
|
|
43.3
|
|
|
SICSC
|
|
Indiana
|
|
17.9
|
|
|
SICSE
|
|
Indiana
|
|
14.7
|
|
|
SICNY
|
|
New York
|
|
10.7
|
|
|
SICNE
|
|
New Jersey
|
|
6.2
|
|
|
SAICNJ
|
|
New Jersey
|
|
11.3
|
|
|
MUSIC
|
|
New Jersey
|
|
10.3
|
|
|
SCIC
|
|
New Jersey
|
|
13.4
|
|
|
SFCIC
|
|
New Jersey
|
|
5.6
|
|
|
Total
|
|
|
|
$
|
211.0
|
|
Note 20. Quarterly Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited, $ in thousands,
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
except per share data)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
1
|
|
2016
|
|
Net premiums earned
|
|
$
|
560,854
|
|
|
522,458
|
|
|
568,030
|
|
|
531,932
|
|
|
572,055
|
|
|
542,429
|
|
|
590,088
|
|
|
552,753
|
|
|
Net investment income earned
|
|
37,419
|
|
|
30,769
|
|
|
41,430
|
|
|
31,182
|
|
|
40,446
|
|
|
33,375
|
|
|
42,587
|
|
|
35,428
|
|
|
Net realized (losses) gains
|
|
(1,045
|
)
|
|
(2,704
|
)
|
|
1,734
|
|
|
1,765
|
|
|
6,798
|
|
|
3,688
|
|
|
(1,128
|
)
|
|
(7,686
|
)
|
|
Other income
|
|
3,241
|
|
|
951
|
|
|
3,291
|
|
|
3,868
|
|
|
1,994
|
|
|
2,199
|
|
|
2,190
|
|
|
1,863
|
|
|
Total revenues
|
|
600,469
|
|
|
551,474
|
|
|
614,485
|
|
|
568,747
|
|
|
621,293
|
|
|
581,691
|
|
|
633,737
|
|
|
582,358
|
|
|
Income before federal income taxes
|
|
67,574
|
|
|
51,875
|
|
|
58,929
|
|
|
62,311
|
|
|
67,315
|
|
|
55,443
|
|
|
68,150
|
|
|
50,326
|
|
|
Net income
|
|
50,440
|
|
|
37,032
|
|
|
41,426
|
|
|
43,601
|
|
|
46,718
|
|
|
38,502
|
|
|
30,242
|
|
|
39,360
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
0.87
|
|
|
0.64
|
|
|
0.71
|
|
|
0.75
|
|
|
0.80
|
|
|
0.66
|
|
|
0.52
|
|
|
0.68
|
|
|
Diluted
|
|
0.85
|
|
|
0.63
|
|
|
0.70
|
|
|
0.74
|
|
|
0.79
|
|
|
0.66
|
|
|
0.51
|
|
|
0.67
|
|
1
Results for the fourth quarter of 2017 include the impact of the $20.2 million write off of deferred tax assets required with the implementation of Tax Reform. See Note 13. "Federal Income Taxes" above for additional information.
The addition of all quarters may not agree to annual amounts on the Financial Statements due to rounding.
Note 21. Subsequent Events
Subsequent to year-end and through the end of January 2018, our insurance operations experienced significant insured property losses, principally due to the deep freeze that impacted our footprint states during the month, the Property Claims Services ("PCS") named winter storm that occurred between January 3 and January 6, and a relatively large number of severe fire losses. For January 2018, non-catastrophe property losses amounted to
$47 million
and catastrophe losses, which we define as only those losses specifically attributable to a named PCS catastrophe, totaled
$16 million
. In total, the
$63 million
of insured property losses were approximately
$30 million
in excess of our property loss expectations for the month of January.