UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 20172018
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____________________________to_____________________________
Commission File Number: 001-33067
SELECTIVE INSURANCE GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
|
| | |
New Jersey | | 22-2168890 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
| | |
40 Wantage Avenue | | |
Branchville, New Jersey | | 07890 |
(Address of Principal Executive Offices) | | (Zip Code) |
|
|
(973) 948-3000 |
(Registrant’s Telephone Number, Including Area Code) |
|
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesx No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yesx No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | |
Large accelerated filer x | | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | |
Emerging growthSmaller reporting company o
|
| | Smaller reportingEmerging growth company o
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Nox
As of July 14, 2017,20, 2018, there were 58,364,18758,835,249 shares of common stock, par value $2.00 per share, outstanding.
|
| | |
| SELECTIVE INSURANCE GROUP, INC. | |
| Table of Contents | |
| | Page No. |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
|
| |
PART I. FINANCIAL INFORMATION | |
|
| |
ITEM 1. FINANCIAL STATEMENTS. | |
| | SELECTIVE INSURANCE GROUP, INC. CONSOLIDATED BALANCE SHEETS | | Unaudited | | | | Unaudited | | |
($ in thousands, except share amounts) | | June 30, 2017 | | December 31, 2016 | | June 30, 2018 | | December 31, 2017 |
ASSETS | | |
| | |
| | |
| | |
|
Investments: | | |
| | |
| | |
| | |
|
Fixed income securities, held-to-maturity – at carrying value (fair value: $75,540 – 2017; $105,211 – 2016) | | $ | 72,514 |
| | 101,556 |
| |
Fixed income securities, available-for-sale – at fair value (amortized cost: $4,923,005 – 2017; $4,753,759 – 2016) | | 5,018,722 |
| | 4,792,540 |
| |
Equity securities, available-for-sale – at fair value (cost: $131,463 – 2017; $120,889 – 2016) | | 161,694 |
| | 146,753 |
| |
Fixed income securities, held-to-maturity – at carrying value (fair value: $43,373 – 2018; $44,100 – 2017) | | | $ | 42,016 |
| | 42,129 |
|
Fixed income securities, available-for-sale – at fair value (amortized cost: $5,153,737 – 2018; $5,076,716 – 2017) | | | 5,137,653 |
| | 5,162,522 |
|
Equity securities – at fair value (cost: $150,638 – 2018; $143,811 – 2017) | | | 176,578 |
| | 182,705 |
|
Short-term investments (at cost which approximates fair value) | | 133,706 |
| | 221,701 |
| | 164,118 |
| | 165,555 |
|
Other investments | | 116,411 |
| | 102,397 |
| | 145,203 |
| | 132,268 |
|
Total investments (Note 4 and 6) | | 5,503,047 |
|
| 5,364,947 |
| | 5,665,568 |
|
| 5,685,179 |
|
Cash | | 8,628 |
| | 458 |
| | 4,876 |
| | 534 |
|
Restricted cash | | | 11,604 |
| | 44,176 |
|
Interest and dividends due or accrued | | 40,231 |
| | 40,164 |
| | 40,978 |
| | 40,897 |
|
Premiums receivable, net of allowance for uncollectible accounts of: $6,627 – 2017; $5,980 – 2016 | | 764,340 |
| | 681,611 |
| |
Reinsurance recoverable, net of allowance for uncollectible accounts of: $5,200 – 2017; $5,500 – 2016 | | 601,887 |
| | 621,537 |
| |
Premiums receivable, net of allowance for uncollectible accounts of: $10,100 – 2018; $10,000 – 2017 | | | 821,173 |
| | 747,029 |
|
Reinsurance recoverable, net of allowance for uncollectible accounts of: $4,700 – 2018; $4,600 – 2017 | | | 544,979 |
| | 594,832 |
|
Prepaid reinsurance premiums | | 151,898 |
| | 146,282 |
| | 157,561 |
| | 153,493 |
|
Current federal income tax | | — |
| | 2,486 |
| | — |
| | 3,243 |
|
Deferred federal income tax | | 60,388 |
| | 84,840 |
| | 51,615 |
| | 31,990 |
|
Property and equipment – at cost, net of accumulated depreciation and amortization of: $206,847 – 2017; $198,729 – 2016 | | 66,255 |
| | 69,576 |
| |
Property and equipment – at cost, net of accumulated depreciation and amortization of: $220,874 – 2018; $213,227 – 2017 | | | 62,731 |
| | 63,959 |
|
Deferred policy acquisition costs | | 234,903 |
| | 222,564 |
| | 248,467 |
| | 235,055 |
|
Goodwill | | 7,849 |
| | 7,849 |
| | 7,849 |
| | 7,849 |
|
Other assets | | 88,778 |
| | 113,534 |
| | 88,272 |
| | 78,195 |
|
Total assets | | $ | 7,528,204 |
| | 7,355,848 |
| | $ | 7,705,673 |
| | 7,686,431 |
|
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
| | |
| | |
| | |
|
Liabilities: | | |
| | |
| | |
| | |
|
Reserve for losses and loss expenses (Note 8) | | $ | 3,731,221 |
| | 3,691,719 |
| |
Reserve for loss and loss expense (Note 8) | | | $ | 3,804,365 |
| | 3,771,240 |
|
Unearned premiums | | 1,352,068 |
| | 1,262,819 |
| | 1,436,855 |
| | 1,349,644 |
|
Long-term debt | | 438,894 |
| | 438,667 |
| | 439,331 |
| | 439,116 |
|
Current federal income tax | | 2,104 |
| | — |
| | 5,090 |
| | — |
|
Accrued salaries and benefits | | 103,177 |
| | 132,880 |
| | 85,372 |
| | 131,850 |
|
Other liabilities | | 248,184 |
| | 298,393 |
| | 236,505 |
| | 281,624 |
|
Total liabilities | | $ | 5,875,648 |
| | 5,824,478 |
| | $ | 6,007,518 |
| | 5,973,474 |
|
| | | | | | | | |
Stockholders’ Equity: | | |
| | |
| | |
| | |
|
Preferred stock of $0 par value per share: | | $ | — |
| | — |
| | $ | — |
| | — |
|
Authorized shares 5,000,000; no shares issued or outstanding | | | | | | | | |
Common stock of $2 par value per share: | | | | | | | | |
Authorized shares 360,000,000 | | | | | | | | |
Issued: 102,150,866 – 2017; 101,620,436 – 2016 | | 204,302 |
| | 203,241 |
| |
Issued: 102,729,946 – 2018; 102,284,564 – 2017 | | | 205,460 |
| | 204,569 |
|
Additional paid-in capital | | 359,982 |
| | 347,295 |
| | 381,641 |
| | 367,717 |
|
Retained earnings | | 1,641,820 |
| | 1,568,881 |
| | 1,779,928 |
| | 1,698,613 |
|
Accumulated other comprehensive income (loss) (Note 11) | | 24,497 |
| | (15,950 | ) | |
Treasury stock – at cost (shares: 43,788,147 – 2017; 43,653,237 – 2016) | | (578,045 | ) | | (572,097 | ) | |
Accumulated other comprehensive (loss) income (Note 11) | | | (84,517 | ) | | 20,170 |
|
Treasury stock – at cost (shares: 43,894,894 – 2018; 43,789,442 – 2017) | | | (584,357 | ) | | (578,112 | ) |
Total stockholders’ equity | | $ | 1,652,556 |
| | 1,531,370 |
| | $ | 1,698,155 |
| | 1,712,957 |
|
Commitments and contingencies | |
|
| |
|
| |
|
| |
|
|
Total liabilities and stockholders’ equity | | $ | 7,528,204 |
| | 7,355,848 |
| | $ | 7,705,673 |
| | 7,686,431 |
|
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
| | SELECTIVE INSURANCE GROUP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF INCOME | | Quarter ended June 30, | | Six Months ended June 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands, except per share amounts) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Revenues: | | |
| | |
| | | | | | |
| | |
| | | | |
Net premiums earned | | $ | 568,030 |
| | 531,932 |
| | 1,128,884 |
| | 1,054,390 |
| | $ | 604,836 |
| | 568,030 |
| | 1,196,664 |
| | 1,128,884 |
|
Net investment income earned | | 41,430 |
| | 31,182 |
| | 78,849 |
| | 61,951 |
| | 45,553 |
| | 41,430 |
| | 88,784 |
| | 78,849 |
|
Net realized gains (losses): | | |
| | |
| | | | | |
Net realized investment gains | | 2,951 |
| | 2,314 |
| | 5,381 |
| | 3,203 |
| |
Net realized and unrealized (losses) gains: | | | |
| | |
| | | | |
Net realized investment gains on disposals | | | 54 |
| | 2,951 |
| | 4,785 |
| | 5,381 |
|
Other-than-temporary impairments | | (1,211 | ) | | (559 | ) | | (4,686 | ) | | (4,152 | ) | | (2,821 | ) | | (1,211 | ) | | (4,033 | ) | | (4,686 | ) |
Other-than-temporary impairments on fixed income securities recognized in other comprehensive income | | (6 | ) | | 10 |
| | (6 | ) | | 10 |
| | — |
| | (6 | ) | | — |
| | (6 | ) |
Total net realized gains (losses) | | 1,734 |
| | 1,765 |
| | 689 |
| | (939 | ) | |
Unrealized gains (losses) on equity securities | | | 1,115 |
| | — |
| | (12,953 | ) | | — |
|
Total net realized and unrealized (losses) gains | | | (1,652 | ) | | 1,734 |
| | (12,201 | ) | | 689 |
|
Other income | | 3,291 |
| | 3,868 |
| | 6,532 |
| | 4,819 |
| | 3,179 |
| | 3,291 |
| | 5,358 |
| | 6,532 |
|
Total revenues | | 614,485 |
| | 568,747 |
| | 1,214,954 |
| | 1,120,221 |
| | 651,916 |
| | 614,485 |
| | 1,278,605 |
| | 1,214,954 |
|
| | | | | | | | | | | | | | | | |
Expenses: | | |
| | |
| | | | | | |
| | |
| | | | |
Losses and loss expenses incurred | | 341,559 |
| | 298,479 |
| | 659,031 |
| | 595,623 |
| |
Policy acquisition costs | | 196,824 |
| | 190,731 |
| | 393,052 |
| | 373,958 |
| |
Loss and loss expense incurred | | | 366,328 |
| | 341,559 |
| | 751,269 |
| | 659,031 |
|
Amortization of deferred policy acquisition costs | | | 122,661 |
| | 116,578 |
| | 243,754 |
| | 231,928 |
|
Other insurance expenses | | | 80,994 |
| | 82,874 |
| | 164,234 |
| | 164,925 |
|
Interest expense | | 6,081 |
| | 5,620 |
| | 12,187 |
| | 11,226 |
| | 6,125 |
| | 6,081 |
| | 12,277 |
| | 12,187 |
|
Other expenses | | 11,092 |
| | 11,606 |
| | 24,181 |
| | 25,228 |
| |
Corporate expenses | | | 3,283 |
| | 8,464 |
| | 14,615 |
| | 20,380 |
|
Total expenses | | 555,556 |
| | 506,436 |
| | 1,088,451 |
| | 1,006,035 |
| | 579,391 |
| | 555,556 |
| | 1,186,149 |
| | 1,088,451 |
|
| | | | | | | | | | | | | | | | |
Income before federal income tax | | 58,929 |
| | 62,311 |
| | 126,503 |
| | 114,186 |
| | 72,525 |
| | 58,929 |
| | 92,456 |
| | 126,503 |
|
| | | | | | | | | | | | | | | | |
Federal income tax expense: | | |
| | |
| | | | | | |
| | |
| | | | |
Current | | 17,785 |
| | 18,318 |
| | 32,058 |
| | 32,402 |
| | 12,782 |
| | 17,785 |
| | 13,215 |
| | 32,058 |
|
Deferred | | (282 | ) | | 392 |
| | 2,579 |
| | 1,151 |
| | 924 |
| | (282 | ) | | 1,497 |
| | 2,579 |
|
Total federal income tax expense | | 17,503 |
| | 18,710 |
| | 34,637 |
| | 33,553 |
| | 13,706 |
| | 17,503 |
| | 14,712 |
| | 34,637 |
|
| | | | | | | | | | | | | | | | |
Net income | | $ | 41,426 |
| | 43,601 |
| | 91,866 |
| | 80,633 |
| | $ | 58,819 |
| | 41,426 |
| | 77,744 |
| | 91,866 |
|
| | | | | | | | | | | | | | | | |
Earnings per share: | | |
| | |
| | | | | | |
| | |
| | | | |
Basic net income | | $ | 0.71 |
| | 0.75 |
| | 1.57 |
| | 1.40 |
| | $ | 1.00 |
| | 0.71 |
| | 1.32 |
| | 1.57 |
|
| | | | | | | | | | | | | | | | |
Diluted net income | | $ | 0.70 |
| | 0.74 |
| | 1.55 |
| | 1.38 |
| | $ | 0.99 |
| | 0.70 |
| | 1.30 |
| | 1.55 |
|
| | | | | | | | | | | | | | | | |
Dividends to stockholders | | $ | 0.16 |
| | 0.15 |
| | 0.32 |
| | 0.30 |
| | $ | 0.18 |
| | 0.16 |
| | 0.36 |
| | 0.32 |
|
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
| | SELECTIVE INSURANCE GROUP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | Quarter ended June 30, | | Six Months ended June 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Net income | | $ | 41,426 |
| | 43,601 |
| | 91,866 |
| | 80,633 |
| | $ | 58,819 |
| | 41,426 |
| | 77,744 |
| | 91,866 |
|
| | | | | | | | | | | | | | | | |
Other comprehensive income, net of tax: | | |
| | |
| | | | | |
Unrealized gains on investment securities: | | |
| | |
| | | | | |
Unrealized holding gains arising during period | | 23,326 |
| | 36,188 |
| | 40,087 |
| | 78,917 |
| |
Other comprehensive income (loss), net of tax: | | | |
| | |
| | | | |
Unrealized (losses) gains on investment securities: | | | |
| | |
| | | | |
Unrealized holding (losses) gains arising during period | | | (18,955 | ) | | 23,326 |
| | (86,353 | ) | | 40,087 |
|
Non-credit portion of other-than-temporary impairments recognized in other comprehensive income | | 4 |
| | (6 | ) | | 4 |
| | (6 | ) | | — |
| | 4 |
| | — |
| | 4 |
|
Amounts reclassified into net income: | | | | | | | | | | | | | | | | |
Held-to-maturity securities | | (28 | ) | | (12 | ) | | (60 | ) | | (59 | ) | | (6 | ) | | (28 | ) | | (16 | ) | | (60 | ) |
Realized (gains) losses on available-for-sale securities | | (1,225 | ) | | (1,145 | ) | | (244 | ) | | 609 |
| |
Total unrealized gains on investment securities | | 22,077 |
| | 35,025 |
| | 39,787 |
| | 79,461 |
| |
Realized losses (gains) on disposals of available-for-sale securities | | | 2,267 |
| | (1,225 | ) | | 5,861 |
| | (244 | ) |
Total unrealized (losses) gains on investment securities | | | (16,694 | ) | | 22,077 |
| | (80,508 | ) | | 39,787 |
|
| | | | | | | | | | | | | | | | |
Defined benefit pension and post-retirement plans: | | |
| | |
| | | | | | |
| | |
| | | | |
Amounts reclassified into net income: | | | | | | | | | | | | | | | | |
Net actuarial loss | | 330 |
| | 985 |
| | 660 |
| | 1,971 |
| | 420 |
| | 330 |
| | 840 |
| | 660 |
|
Total defined benefit pension and post-retirement plans | | 330 |
| | 985 |
| | 660 |
| | 1,971 |
| | 420 |
| | 330 |
| | 840 |
| | 660 |
|
Other comprehensive income | | 22,407 |
| | 36,010 |
| | 40,447 |
| | 81,432 |
| |
Comprehensive income | | $ | 63,833 |
| | 79,611 |
| | 132,313 |
| | 162,065 |
| |
Other comprehensive (loss) income | | | (16,274 | ) | | 22,407 |
| | (79,668 | ) | | 40,447 |
|
Comprehensive income (loss) | | | $ | 42,545 |
| | 63,833 |
| | (1,924 | ) | | 132,313 |
|
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
| | SELECTIVE INSURANCE GROUP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | | Six Months ended June 30, | | Six Months ended June 30, |
($ in thousands, except per share amounts) | | 2017 | | 2016 | | 2018 | | 2017 |
Common stock: | | |
| | |
| | |
| | |
|
Beginning of year | | $ | 203,241 |
| | 201,723 |
| | $ | 204,569 |
| | 203,241 |
|
Dividend reinvestment plan (shares: 15,419 – 2017; 20,808 – 2016) | | 31 |
| | 42 |
| |
Stock purchase and compensation plans (shares: 515,011 – 2017; 569,034 – 2016) | | 1,030 |
| | 1,138 |
| |
Dividend reinvestment plan (shares: 12,373 – 2018; 15,419 – 2017) | | | 25 |
| | 31 |
|
Stock purchase and compensation plans (shares: 433,009 – 2018; 515,011 – 2017) | | | 866 |
| | 1,030 |
|
End of period | | 204,302 |
| | 202,903 |
| | 205,460 |
| | 204,302 |
|
| | | | | | | | |
Additional paid-in capital: | | |
| | |
| | |
| | |
|
Beginning of year | | 347,295 |
| | 326,656 |
| | 367,717 |
| | 347,295 |
|
Dividend reinvestment plan | | 693 |
| | 696 |
| | 686 |
| | 693 |
|
Stock purchase and compensation plans | | 11,994 |
| | 12,757 |
| | 13,238 |
| | 11,994 |
|
End of period | | 359,982 |
| | 340,109 |
| | 381,641 |
| | 359,982 |
|
| | | | | | | | |
Retained earnings: | | |
| | |
| | |
| | |
|
Beginning of year | | 1,568,881 |
| | 1,446,192 |
| |
Beginning of year, as previously reported | | | 1,698,613 |
| | 1,568,881 |
|
Cumulative effect adjustment due to adoption of equity security guidance, net of tax (Note 2) | | | 30,726 |
| | — |
|
Cumulative effect adjustment due to adoption of stranded deferred tax guidance (Note 2) | | | (5,707 | ) | | — |
|
Balance at beginning of year, as adjusted | | | 1,723,632 |
| | 1,568,881 |
|
Net income | | 91,866 |
| | 80,633 |
| | 77,744 |
| | 91,866 |
|
Dividends to stockholders ($0.32 per share – 2017; $0.30 per share – 2016) | | (18,927 | ) | | (17,583 | ) | |
Dividends to stockholders ($0.36 per share – 2018; $0.32 per share – 2017) | | | (21,448 | ) | | (18,927 | ) |
End of period | | 1,641,820 |
| | 1,509,242 |
| | 1,779,928 |
| | 1,641,820 |
|
| | | | | | | | |
Accumulated other comprehensive income: | | |
| | |
| |
Beginning of year | | (15,950 | ) | | (9,425 | ) | |
Other comprehensive income | | 40,447 |
| | 81,432 |
| |
Accumulated other comprehensive (loss) income: | | | |
| | |
|
Beginning of year, as previously reported | | | 20,170 |
| | (15,950 | ) |
Cumulative effect adjustment due to adoption of equity security guidance, net of tax (Note 2) | | | (30,726 | ) | | — |
|
Cumulative effect adjustment due to adoption of stranded deferred tax guidance (Note 2) | | | 5,707 |
| | — |
|
Balance at beginning of year, as adjusted | | | (4,849 | ) | | (15,950 | ) |
Other comprehensive (loss) income | | | (79,668 | ) | | 40,447 |
|
End of period | | 24,497 |
| | 72,007 |
| | (84,517 | ) | | 24,497 |
|
| | | | | | | | |
Treasury stock: | | |
| | |
| | |
| | |
|
Beginning of year | | (572,097 | ) | | (567,105 | ) | | (578,112 | ) | | (572,097 | ) |
Acquisition of treasury stock (shares: 134,910 – 2017; 138,007 – 2016) | | (5,948 | ) | | (4,419 | ) | |
Acquisition of treasury stock (shares: 105,452 – 2018; 134,910 – 2017) | | | (6,245 | ) | | (5,948 | ) |
End of period | | (578,045 | ) | | (571,524 | ) | | (584,357 | ) | | (578,045 | ) |
Total stockholders’ equity | | $ | 1,652,556 |
| | 1,552,737 |
| | $ | 1,698,155 |
| | 1,652,556 |
|
Selective Insurance Group, Inc. also has authorized, but not issued, 5,000,000 shares of preferred stock, without par value, of which 300,000 shares have been
designated Series A junior preferred stock, without par value.
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
| | SELECTIVE INSURANCE GROUP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS | | Six Months ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2017 | | 2016 | | 2018 | | 2017 |
Operating Activities | | |
| | |
| | |
| | |
|
Net income | | $ | 91,866 |
| | 80,633 |
| | $ | 77,744 |
| | 91,866 |
|
| | | | | | | | |
Adjustments to reconcile net income to net cash provided by operating activities: | | |
| | |
| | |
| | |
|
Depreciation and amortization | | 25,409 |
| | 30,155 |
| | 21,771 |
| | 25,409 |
|
Stock-based compensation expense | | 8,372 |
| | 7,203 |
| | 9,636 |
| | 8,372 |
|
Undistributed (gains) losses of equity method investments | | (3,575 | ) | | 1,677 |
| |
Undistributed gains of equity method investments | | | (1,628 | ) | | (3,584 | ) |
Distributions in excess of current year income of equity method investments | | | 1,450 |
| | 552 |
|
Loss on disposal of fixed assets | | 998 |
| | — |
| | 29 |
| | 998 |
|
Net realized (gains) losses | | (689 | ) | | 939 |
| |
Net realized and unrealized losses (gains) | | | 12,201 |
| | (689 | ) |
| | | | | | | | |
Changes in assets and liabilities: | | |
| | |
| | |
| | |
|
Increase in reserve for losses and loss expenses, net of reinsurance recoverable | | 59,152 |
| | 41,986 |
| |
Increase in reserve for loss and loss expense, net of reinsurance recoverable | | | 82,978 |
| | 59,152 |
|
Increase in unearned premiums, net of prepaid reinsurance | | 83,633 |
| | 89,109 |
| | 83,143 |
| | 83,633 |
|
Decrease in net federal income taxes | | 7,263 |
| | 2,380 |
| | 9,887 |
| | 7,263 |
|
Increase in premiums receivable | | (82,729 | ) | | (91,391 | ) | | (74,144 | ) | | (82,729 | ) |
Increase in deferred policy acquisition costs | | (12,339 | ) | | (15,395 | ) | | (13,412 | ) | | (12,339 | ) |
Increase in interest and dividends due or accrued | | (204 | ) | | (1,030 | ) | |
Decrease (increase) in interest and dividends due or accrued | | | 2 |
| | (204 | ) |
Decrease in accrued salaries and benefits | | (29,703 | ) | | (48,603 | ) | | (46,478 | ) | | (29,703 | ) |
Decrease (increase) in other assets | | 24,953 |
| | (3,877 | ) | |
Increase in other assets | | | (6,550 | ) | | (3,862 | ) |
Decrease in other liabilities | | (48,684 | ) | | (34,659 | ) | | (64,372 | ) | | (48,684 | ) |
Net cash provided by operating activities | | 123,723 |
| | 59,127 |
| | 92,257 |
| | 95,451 |
|
| | | | | | | | |
Investing Activities | | |
| | |
| | |
| | |
|
Purchase of fixed income securities, held-to-maturity | | — |
| | (4,235 | ) | | (3,650 | ) | | — |
|
Purchase of fixed income securities, available-for-sale | | (1,194,142 | ) | | (411,538 | ) | | (1,331,607 | ) | | (1,194,142 | ) |
Purchase of equity securities, available-for-sale | | (22,115 | ) | | (16,796 | ) | |
Purchase of equity securities | | | (46,402 | ) | | (22,115 | ) |
Purchase of other investments | | (22,121 | ) | | (17,734 | ) | | (26,032 | ) | | (22,121 | ) |
Purchase of short-term investments | | (2,259,305 | ) | | (691,496 | ) | | (1,462,238 | ) | | (2,259,305 | ) |
Sale of fixed income securities, available-for-sale | | 717,072 |
| | 22,114 |
| | 938,276 |
| | 717,072 |
|
Sale of short-term investments | | 2,348,892 |
| | 680,865 |
| | 1,463,726 |
| | 2,348,892 |
|
Redemption and maturities of fixed income securities, held-to-maturity | | 28,730 |
| | 44,615 |
| | 3,654 |
| | 28,730 |
|
Redemption and maturities of fixed income securities, available-for-sale | | 300,430 |
| | 264,244 |
| | 311,590 |
| | 300,430 |
|
Sale of equity securities, available-for-sale | | 6,289 |
| | 83,793 |
| |
Sale of equity securities | | | 43,590 |
| | 6,289 |
|
Sale of other investments | | | 3,497 |
| | — |
|
Distributions from other investments | | 9,843 |
| | 13,380 |
| | 15,927 |
| | 9,300 |
|
Purchase of property and equipment | | (7,047 | ) | | (8,187 | ) | | (6,733 | ) | | (7,047 | ) |
Net cash used in investing activities | | (93,474 | ) | | (40,975 | ) | | (96,402 | ) | | (94,017 | ) |
| | | | | | | | |
Financing Activities | | |
| | |
| | |
| | |
|
Dividends to stockholders | | (17,922 | ) | | (16,569 | ) | | (20,437 | ) | | (17,922 | ) |
Acquisition of treasury stock | | (5,948 | ) | | (4,419 | ) | | (6,245 | ) | | (5,948 | ) |
Net proceeds from stock purchase and compensation plans | | 4,045 |
| | 4,368 |
| | 3,930 |
| | 4,045 |
|
Proceeds from borrowings | | 64,000 |
| | 55,000 |
| | 130,000 |
| | 64,000 |
|
Repayments of borrowings | | (64,000 | ) | | (55,000 | ) | | (130,000 | ) | | (64,000 | ) |
Excess tax benefits from share-based payment arrangements | | — |
| | 1,761 |
| |
Repayments of capital lease obligations | | (2,254 | ) | | (2,661 | ) | | (1,333 | ) | | (2,254 | ) |
Net cash used in financing activities | | (22,079 | ) | | (17,520 | ) | | (24,085 | ) | | (22,079 | ) |
Net increase in cash | | 8,170 |
| | 632 |
| |
Cash, beginning of year | | 458 |
| | 898 |
| |
Cash, end of period | | $ | 8,628 |
| | 1,530 |
| |
Net decrease in cash and restricted cash | | | (28,230 | ) | | (20,645 | ) |
Cash and restricted cash, beginning of year | | | 44,710 |
| | 37,405 |
|
Cash and restricted cash, end of period | | | $ | 16,480 |
| | 16,760 |
|
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Basis of Presentation
As used herein, the "Company,” “we,” “us,” or “our” refers to Selective Insurance Group, Inc. (the "Parent"), and its subsidiaries, except as expressly indicated or unless the context otherwise requires. Our interim unaudited consolidated financial statements (“Financial Statements”) have been prepared by us in conformity with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The preparation of the Financial Statements in conformity with GAAP requires us 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. All significant intercompany accounts and transactions between the Parent and its subsidiaries are eliminated in consolidation.
Certain amounts in our prior years' Financial Statements and related notes have been reclassified to conform to the 2018 presentation. Specifically, we reclassified restricted cash balances related to our participation in the National Flood Insurance Program ("NFIP") from other assets in our consolidated balance sheet into a separate line item on the face of that statement. Additionally, refer to Note 2. "Adoption of Accounting Pronouncements" below for a discussion of the retroactive restatements that are included in these financial statements in relation to the adoption of new accounting pronouncements for the treatment of restricted cash and distributions from equity method investments on the consolidated statements of cash flows.
Our Financial Statements reflect all adjustments that, in our opinion, are normal, recurring, and necessary for a fair presentation of our results of operations and financial condition. Our Financial Statements cover the second quarters ended June 30, 2018 (“Second Quarter 2018”) and June 30, 2017 (“Second Quarter 2017”) and June 30, 2016 (“Second Quarter 2016”) and the six-month periods ended June 30, 2018 ("Six Months 2018") and June 30, 2017 ("Six Months 2017") and June 30, 2016 ("Six Months 2016"). The Financial Statements do not include all of the information and disclosures required by GAAP and the SEC for audited annual financial statements. Results of operations for any interim period are not necessarily indicative of results for a full year. Consequently, our Financial Statements should be read in conjunction with the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 20162017 (“20162017 Annual Report”Report”) filed with the SEC.
NOTE 2. Adoption of Accounting Pronouncements
In MarchJanuary 2016, the Financial Accounting Standards Board ("FASB") issued Accounting StandardStandards 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 on January 1, 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 $0.4 million in Second Quarter 2017 and $3.3 million in Six Months 2017 related to stock grants that have vested this year.
In recording share-based compensation expense, ASU 2016-09 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.
The standard 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 variable interest entity ("VIE") held under common control in making the primary beneficiary determination. ASU 2016-17 was effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. The adoption of ASU 2016-17 did not impact us, as we are not the decision maker in any of the VIEs in which we are invested.
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 investmentssecurities held in our investment portfolio 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.
We adopted ASU 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Our adoptionin the first quarter of this guidance will require2018 and recognized a $30.7 million cumulative-effect adjustment to the balance sheet asopening balances of January 1, 2018 in an amount equal toaccumulated other comprehensive income ("AOCI") and retained earnings, which represents the after-tax net unrealized gain or loss on our equity portfolio as of year-endDecember 31, 2017. IfAdditionally, beginning in the first quarter of 2018, changes in unrealized gains or losses on this guidance had been adopted asportfolio are no longer recorded to AOCI, but are instead recognized in income through "Unrealized gains (losses) on equity securities" on our Consolidated Statements of the beginning of 2017, the cumulative-effect adjustment would have been approximately $17 millionIncome. See Note 4 (j) below for information regarding unrealized equity gains (losses) recognized in income in Second Quarter and we would have recognized additional after-tax net income of approximately $3 million or $0.05 per diluted share, reflecting the change in fair value during Six Months 2017.2018.
In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 requires all lessees to recognizeThere were two accounting updates that we adopted with 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 presentedtransition in the financial statements. While wefirst quarter of 2018 that related to our statements of cash flows. These accounting updates impacted our categorization of distributions from equity method investees (ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15")) and the presentation of restricted cash (ASU 2016-18, Statement of Cash Flows: Restricted Cash ("ASU 2016-18")). These ASUs are currently evaluating ASU 2016-02, we do not expectdiscussed below and the discussions are followed with 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 receivables. 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 evaluatingtable presenting the impact of this guidance on our financial condition and results of operations.the prior period restatements.
In August 2016, the FASB issued ASU 2016-15, Statement2016-15. As mentioned above, this ASU adds guidance on the categorization of Cash Flows (“ASU 2016-15”).distributions from equity method investees within the statement of cash flows. In accordance with this guidance, we made an accounting policy election to classify these distributions using the cumulative earnings approach. This election resulted in a restatement to operating and investing cash flows as outlined in the table below. ASU 2016-15 addsalso added or clarifiesclarified guidance on the cash flow 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)(iii) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effectiveThe updated guidance for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating thethese topics did not impact of this guidance on our statement of cash flows.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash ("ASU 2016-18").2016-18. ASU 2016-18 requires that restricted cash and restricted cash equivalents to 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 ofcontaining cash, cash equivalents, and restricted cash. ASU 2016-18 is effective, with retrospective adoption, for annual periods beginning after December 15, 2017, and interim periods within those annual periods. We currently have restricted cash associated withrelated to our participation in the National Flood Insurance Program ("NFIP")NFIP, which we had previously reported as part of "Other assets" on the Consolidated Balance Sheet. Beginning in "Other assets." This literature will impact the presentationfirst quarter of this2018, we are reporting restricted cash in its own line item in bothon the Consolidated Balance Sheets to aid in the reconciliation of the amounts presented on the Consolidated Statements of Cash Flows. We have also restated prior year balances on the Consolidated Balance Sheets to conform to the current year presentation.
The adoption of this guidance resulted in a restatement of operating cash flows in Six Months 2017 to remove the impact of the change in restricted cash from operating activities and include the restricted cash balance in the reconciliation of beginning and ending cash balances on the Statements of Cash Flows. In addition, we have included the required reconciliation in Note 3. "Statements of Cash Flows" below.
ASU 2016-15 and ASU 2016-18 resulted in the following line item restatements within operating and investing cash flows on the Statements of Cash Flows:
|
| | | | | | |
| | June 30, 2017 |
(in thousands) | | Prior to Adoption | | After Adoption |
Undistributed gains of equity method investments | | (3,575 | ) | | (3,584 | ) |
Distributions in excess of current year income of equity method investments | | — |
| | 552 |
|
Decrease (increase) in other assets | | 24,953 |
| | (3,862 | ) |
Net cash provided by operating activities | | 123,723 |
| | 95,451 |
|
| | | | |
Distributions from other investments | | 9,843 |
| | 9,300 |
|
Net cash used in investing activities | | (93,474 | ) | | (94,017 | ) |
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 do not expect a materialadopted ASU 2017-04 in the first quarter of 2018 and it had no impact on our financial condition or results of operations from the adoption of this guidance.us.
In March 2017,February 2018, the FASB issued ASU 2017-07,2018-02, Compensation-Retirement Benefits:Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit CostIncome Statement - Reporting Comprehensive Income ("ASU 2017-07"2018-02"). ASU 2017-07 requires2018-02 allows a one-time reclassification from AOCI to retained earnings for the stranded tax assets that an employer report a pension plan's service costwere created in AOCI from the enactment of the Tax Cuts and Jobs Act of 2017 ("Tax Reform"). We adopted ASU 2018-02 in the same line item or line items as other compensation costs arising from services rendered by pertinent employees duringfirst quarter of 2018 and recognized a $5.7 million cumulative-effect adjustment for the period. ASU 2017-07 also requires that other components of net benefit cost be presenteddeferred tax charge to income in the income statement separatelyfourth quarter of 2017 that was associated with net unrealized gains on our investment portfolio and pension plan resulting from the service cost component. If a separate line item or items are not used, the line item or items usedenactment of Tax Reform.
Pronouncements to be effective in the income statementfuture
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to presentNonemployee Share-Based Payment Accounting ("ASU 2018-07"). The amendments in ASU 2018-07 expand the other componentsscope of net benefit cost must be disclosed.Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2017-072018-07 is effective for annual periodsfiscal years 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 ceased accruing additional service fee costs at that time. Therefore, the application of this guidance is not anticipated to impact our financial condition, results of operations, or disclosures.
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 periods2018, and interim periods within those annual periods beginning after December 15, 2018, with earlyfiscal years. Early adoption is permitted. This ASU does notWe are currently evaluating the 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. The adoption of this guidance is not anticipated to impact us, as we currently record modifications in accordance with this ASU.on our financial condition and results of operations.
NOTE 3. Statements of Cash Flows
Supplemental cash flow information was as follows:
|
| | | | | | | |
| | Six Months ended June 30, |
($ in thousands) | | 2017 | | 2016 |
Cash paid during the period for: | | |
| | |
|
Interest | | $ | 11,963 |
| | 10,986 |
|
Federal income tax | | 27,000 |
| | 29,000 |
|
| | | | |
Non-cash items: | | | | |
Exchange of fixed income securities, AFS | | 1,029 |
| | 17,702 |
|
Corporate actions related to equity securities, AFS1 | | — |
| | 3,032 |
|
Assets acquired under capital lease arrangements | | 278 |
| | 2,999 |
|
Non-cash purchase of property and equipment | | — |
| | 577 |
|
1Examples of such corporate actions include non-cash acquisitions and stock splits. |
| | | | | | | |
| | Six Months ended June 30, |
($ in thousands) | | 2018 | | 2017 |
Cash paid (refunded) during the period for: | | |
| | |
|
Interest | | $ | 12,064 |
| | 11,963 |
|
Federal income tax | | 4,193 |
| | 27,000 |
|
| | | | |
Non-cash items: | | | | |
Exchange of fixed income securities, AFS | | 32,101 |
| | 1,029 |
|
Non-cash acquisition of fixed income securities, AFS | | 32 |
| | — |
|
Assets acquired under capital lease arrangements | | — |
| | 278 |
|
Non-cash purchase of property and equipment | | 18 |
| | — |
|
Included in "Other assets" onThe following table provides a reconciliation of cash and restricted cash reported within the Consolidated Balance Sheets was $8.1 million at June 30, 2017 and $8.9 million at June 30, 2016that equate to the amount reported in the Consolidated Statements of Cash Flows:
|
| | | | | | | |
($ in thousands) | | June 30, 2018 | | December 31, 2017 |
Cash | | $ | 4,876 |
| | 534 |
|
Restricted cash | | 11,604 |
| | 44,176 |
|
Total cash and restricted cash shown in the Statements of Cash Flows | | $ | 16,480 |
| | 44,710 |
|
Amounts included in restricted cash represent cash received from the NFIP, which is restricted to pay flood claims under the Write Your Own ("WYO") program.Program.
NOTE 4. Investments
(a) Information regarding our held-to-maturity ("HTM") fixed income securities as of June 30, 20172018 and December 31, 20162017 was as follows:
| | June 30, 2017 | | | | | | | | | | | | | |
June 30, 2018 | | | | | | | | | | | | | |
($ in thousands) | | Amortized Cost | | Net Unrealized Gains (Losses) | | Carrying Value | | Unrecognized Holding Gains | | Unrecognized Holding Losses | | Fair Value | | Amortized Cost | | Net Unrealized Gains (Losses) | | Carrying Value | | Unrecognized Holding Gains | | Unrecognized Holding Losses | | Fair Value |
Obligations of states and political subdivisions | | $ | 53,734 |
| | 185 |
| | 53,919 |
| | 1,703 |
| | — |
| | 55,622 |
| | $ | 22,490 |
| | 49 |
| | 22,539 |
| | 721 |
| | — |
| | 23,260 |
|
Corporate securities | | 18,714 |
| | (119 | ) | | 18,595 |
| | 1,323 |
| | — |
| | 19,918 |
| | 19,567 |
| | (90 | ) | | 19,477 |
| | 761 |
| | (125 | ) | | 20,113 |
|
Total HTM fixed income securities | | $ | 72,448 |
| | 66 |
| | 72,514 |
| | 3,026 |
| | — |
| | 75,540 |
| | $ | 42,057 |
| | (41 | ) | | 42,016 |
| | 1,482 |
| | (125 | ) | | 43,373 |
|
| | December 31, 2016 | | | | | | | | | | | | | |
December 31, 2017 | | | | | | | | | | | | | |
($ in thousands) | | Amortized Cost | | Net Unrealized Gains (Losses) | | Carrying Value | | Unrecognized Holding Gains | | Unrecognized Holding Losses | | Fair Value | | Amortized Cost | | Net Unrealized Gains (Losses) | | Carrying Value | | Unrecognized Holding Gains | | Unrecognized Holding Losses | | Fair Value |
Obligations of states and political subdivisions | | $ | 77,466 |
| | 317 |
| | 77,783 |
| | 2,133 |
| | — |
| | 79,916 |
| | $ | 25,154 |
| | 84 |
| | 25,238 |
| | 1,023 |
| | — |
| | 26,261 |
|
Corporate securities | | 22,711 |
| | (143 | ) | | 22,568 |
| | 1,665 |
| | (158 | ) | | 24,075 |
| | 16,996 |
| | (105 | ) | | 16,891 |
| | 1,003 |
| | (55 | ) | | 17,839 |
|
Commercial mortgage-backed securities ("CMBS") | | 1,220 |
| | (15 | ) | | 1,205 |
| | 15 |
| | — |
| | 1,220 |
| |
Total HTM fixed income securities | | $ | 101,397 |
| | 159 |
| | 101,556 |
| | 3,813 |
| | (158 | ) | | 105,211 |
| | $ | 42,150 |
| | (21 | ) | | 42,129 |
| | 2,026 |
| | (55 | ) | | 44,100 |
|
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; or (ii) the date that an other-than-temporary impairment (“OTTI”) charge is recognized on an HTM security, through the date of the balance sheet.
(b) Information regarding our AFS securities as of June 30, 20172018 and December 31, 20162017 was as follows:
|
| | | | | | | | | | | | | |
June 30, 2018 | | | | | | | | |
($ in thousands) | | Cost/ Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
AFS fixed income securities: | | | | | | | | |
U.S. government and government agencies | | $ | 39,368 |
| | 291 |
| | (763 | ) | | 38,896 |
|
Foreign government | | 18,024 |
| | 87 |
| | (129 | ) | | 17,982 |
|
Obligations of states and political subdivisions | | 1,240,487 |
| | 17,622 |
| | (4,442 | ) | | 1,253,667 |
|
Corporate securities | | 1,630,998 |
| | 6,617 |
| | (23,131 | ) | | 1,614,484 |
|
Collateralized loan obligations and other asset-backed securities ("CLO and other ABS") | | 768,466 |
| | 4,948 |
| | (1,817 | ) | | 771,597 |
|
Commercial mortgage-backed securities ("CMBS") | | 457,344 |
| | 258 |
| | (6,009 | ) | | 451,593 |
|
Residential mortgage-backed securities (“RMBS”) | | 999,050 |
| | 2,726 |
| | (12,342 | ) | | 989,434 |
|
Total AFS securities | | $ | 5,153,737 |
| | 32,549 |
| | (48,633 | ) | | 5,137,653 |
|
| | June 30, 2017 | | | | | | | | | |
December 31, 2017 | | | | | | | | | |
($ in thousands) | | Cost/ Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cost/ Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
AFS fixed income securities: | | | | | | | | | | | | | | | | |
U.S. government and government agencies | | $ | 66,932 |
| | 1,103 |
| | (32 | ) | | 68,003 |
| | $ | 49,326 |
| | 647 |
| | (233 | ) | | 49,740 |
|
Foreign government | | 18,157 |
| | 557 |
| | — |
| | 18,714 |
| | 18,040 |
| | 526 |
| | (11 | ) | | 18,555 |
|
Obligations of states and political subdivisions | | 1,360,211 |
| | 45,641 |
| | (1,086 | ) | | 1,404,766 |
| | 1,539,307 |
| | 44,245 |
| | (582 | ) | | 1,582,970 |
|
Corporate securities | | 1,782,993 |
| | 39,041 |
| | (524 | ) | | 1,821,510 |
| | 1,588,339 |
| | 30,891 |
| | (1,762 | ) | | 1,617,468 |
|
Collateralized loan obligations and other asset-backed securities ("CLO and other ABS") | | 698,594 |
| | 4,108 |
| | (178 | ) | | 702,524 |
| |
CLO and other ABS | | | 789,152 |
| | 6,508 |
| | (202 | ) | | 795,458 |
|
CMBS | | 277,320 |
| | 2,128 |
| | (243 | ) | | 279,205 |
| | 382,727 |
| | 1,563 |
| | (841 | ) | | 383,449 |
|
Residential mortgage-backed securities (“RMBS”) | | 718,798 |
| | 6,068 |
| | (866 | ) | | 724,000 |
| |
RMBS | | | 709,825 |
| | 6,487 |
| | (1,430 | ) | | 714,882 |
|
Total AFS fixed income securities | | 4,923,005 |
| | 98,646 |
| | (2,929 | ) | | 5,018,722 |
| | 5,076,716 |
| | 90,867 |
| | (5,061 | ) | | 5,162,522 |
|
AFS equity securities: | | | | | | | | | | | | | | | | |
Common stock | | 115,315 |
| | 30,108 |
| | (987 | ) | | 144,436 |
| | 129,696 |
| | 38,287 |
| | (226 | ) | | 167,757 |
|
Preferred stock | | 16,148 |
| | 1,110 |
| | — |
| | 17,258 |
| | 14,115 |
| | 904 |
| | (71 | ) | | 14,948 |
|
Total AFS equity securities | | 131,463 |
| | 31,218 |
| | (987 | ) | | 161,694 |
| | 143,811 |
| | 39,191 |
| | (297 | ) | | 182,705 |
|
Total AFS securities | | $ | 5,054,468 |
| | 129,864 |
| | (3,916 | ) | | 5,180,416 |
| | $ | 5,220,527 |
| | 130,058 |
| | (5,358 | ) | | 5,345,227 |
|
|
| | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | |
($ in thousands) | | Cost/ Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair 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 OTTIother-than-temporary impairment ("OTTI") charge is recognized on an AFS security, through the date of the balance sheet. These unrealized gains and losses are recorded in "Accumulated other comprehensive income (loss)" ("AOCI")AOCI on the Consolidated Balance Sheets. As of the first quarter of 2018, equity securities are no longer required to be included in the table above with the adoption of new accounting guidance through which unrealized gains and losses on equity securities are no longer recognized in AOCI, but are instead recognized through income. Refer to Note 2. "Adoption of Accounting Pronouncements" for additional information regarding the adoption of ASU 2016-01.
(c) The severity of impairment on securities in an unrealized/unrecognized loss position averaged approximately 1% of amortized cost at both June 30, 20172018 and December 31, 2016.2017. Quantitative information regarding unrealized losses on our AFS portfolio is provided below. Our HTM portfolio had $0.3 million of unrealized/unrecognized losses at June 30, 2018, and $0.1 million of unrealized/unrecognized losses at December 31, 2017.
| | June 30, 2017 | | Less than 12 months | | 12 months or longer | | Total | |
June 30, 2018 | | | Less than 12 months | | 12 months or longer | | Total |
($ in thousands) | | Fair Value | | Unrealized Losses1 | | Fair Value | | Unrealized Losses1 | | Fair Value | | Unrealized Losses1 | | Fair Value | | Unrealized Losses1 | | Fair Value | | Unrealized Losses1 | | Fair Value | | Unrealized Losses1 |
AFS fixed income securities: | | |
| | |
| | |
| | |
| | | | | | |
| | |
| | |
| | |
| | | | |
U.S. government and government agencies | | $ | 12,670 |
| | (32 | ) | | — |
| | — |
| | 12,670 |
| | (32 | ) | | $ | 28,005 |
| | (763 | ) | | — |
| | — |
| | 28,005 |
| | (763 | ) |
Foreign government | | | 7,740 |
| | (129 | ) | | — |
| | — |
| | 7,740 |
| | (129 | ) |
Obligations of states and political subdivisions | | 107,387 |
| | (1,086 | ) | | — |
| | — |
| | 107,387 |
| | (1,086 | ) | | 342,653 |
| | (4,316 | ) | | 3,422 |
| | (126 | ) | | 346,075 |
| | (4,442 | ) |
Corporate securities | | 72,991 |
| | (517 | ) | | 2,531 |
| | (7 | ) | | 75,522 |
| | (524 | ) | | 1,147,312 |
| | (22,989 | ) | | 2,762 |
| | (142 | ) | | 1,150,074 |
| | (23,131 | ) |
CLO and other ABS | | 156,406 |
| | (178 | ) | | — |
| | — |
| | 156,406 |
| | (178 | ) | | 427,307 |
| | (1,813 | ) | | 774 |
| | (4 | ) | | 428,081 |
| | (1,817 | ) |
CMBS | | 42,671 |
| | (243 | ) | | — |
| | — |
| | 42,671 |
| | (243 | ) | | 378,523 |
| | (6,009 | ) | | — |
| | — |
| | 378,523 |
| | (6,009 | ) |
RMBS | | 179,293 |
| | (860 | ) | | 449 |
| | (6 | ) | | 179,742 |
| | (866 | ) | | 739,217 |
| | (11,962 | ) | | 10,895 |
| | (380 | ) | | 750,112 |
| | (12,342 | ) |
Total AFS fixed income securities | | 571,418 |
| | (2,916 | ) | | 2,980 |
| | (13 | ) | | 574,398 |
| | (2,929 | ) | |
AFS equity securities: | | | | | | | | | | | | | |
Common stock | | 18,423 |
| | (987 | ) | | — |
| | — |
| | 18,423 |
| | (987 | ) | |
Total AFS equity securities | | 18,423 |
| | (987 | ) | | — |
| | — |
| | 18,423 |
| | (987 | ) | |
Total AFS | | $ | 589,841 |
| | (3,903 | ) | | 2,980 |
| | (13 | ) | | 592,821 |
| | (3,916 | ) | |
Total AFS securities | | | $ | 3,070,757 |
| | (47,981 | ) | | 17,853 |
| | (652 | ) | | 3,088,610 |
| | (48,633 | ) |
| | December 31, 2016 | | Less than 12 months | | 12 months or longer | | Total | |
December 31, 2017 | | | Less than 12 months | | 12 months or longer | | Total |
($ in thousands) | | Fair Value | | Unrealized Losses1 | | Fair Value | | Unrealized Losses1 | | Fair Value | | Unrealized Losses1 | | Fair Value | | Unrealized Losses1 | | Fair Value | | Unrealized Losses1 | | Fair Value | | Unrealized Losses1 |
AFS fixed income securities: | | |
| | |
| | |
| | |
| | | | | | |
| | |
| | |
| | |
| | | | |
U.S. government and government agencies | | $ | 6,419 |
| | (36 | ) | | — |
| | — |
| | 6,419 |
| | (36 | ) | | $ | 23,516 |
| | (233 | ) | | 250 |
| | — |
| | 23,766 |
| | (233 | ) |
Foreign government | | 13,075 |
| | (16 | ) | | — |
| | — |
| | 13,075 |
| | (16 | ) | | 1,481 |
| | (11 | ) | | — |
| | — |
| | 1,481 |
| | (11 | ) |
Obligations of states and political subdivisions | | 306,509 |
| | (5,304 | ) | | — |
| | — |
| | 306,509 |
| | (5,304 | ) | | 107,514 |
| | (422 | ) | | 14,139 |
| | (160 | ) | | 121,653 |
| | (582 | ) |
Corporate securities | | 462,902 |
| | (5,771 | ) | | 4,913 |
| | (89 | ) | | 467,815 |
| | (5,860 | ) | | 238,326 |
| | (1,744 | ) | | 3,228 |
| | (18 | ) | | 241,554 |
| | (1,762 | ) |
CLO and other ABS | | 189,795 |
| | (354 | ) | | 319 |
| | (1 | ) | | 190,114 |
| | (355 | ) | | 74,977 |
| | (196 | ) | | 1,655 |
| | (6 | ) | | 76,632 |
| | (202 | ) |
CMBS | | 82,492 |
| | (1,021 | ) | | 1,645 |
| | (7 | ) | | 84,137 |
| | (1,028 | ) | | 154,267 |
| | (773 | ) | | 5,214 |
| | (68 | ) | | 159,481 |
| | (841 | ) |
RMBS | | 279,480 |
| | (2,489 | ) | | 8,749 |
| | (309 | ) | | 288,229 |
| | (2,798 | ) | | 269,485 |
| | (1,285 | ) | | 11,200 |
| | (145 | ) | | 280,685 |
| | (1,430 | ) |
Total AFS fixed income securities | | 1,340,672 |
| | (14,991 | ) | | 15,626 |
| | (406 | ) | | 1,356,298 |
| | (15,397 | ) | | 869,566 |
| | (4,664 | ) | | 35,686 |
| | (397 | ) | | 905,252 |
| | (5,061 | ) |
AFS equity securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock | | 11,271 |
| | (305 | ) | | — |
| | — |
| | 11,271 |
| | (305 | ) | | 4,727 |
| | (226 | ) | | — |
| | — |
| | 4,727 |
| | (226 | ) |
Preferred stock | | 6,168 |
| | (355 | ) | | — |
| | — |
| | 6,168 |
| | (355 | ) | | 3,833 |
| | (71 | ) | | — |
| | — |
| | 3,833 |
| | (71 | ) |
Total AFS equity securities | | 17,439 |
| | (660 | ) | | — |
| | — |
| | 17,439 |
| | (660 | ) | | 8,560 |
| | (297 | ) | | — |
| | — |
| | 8,560 |
| | (297 | ) |
Total AFS | | $ | 1,358,111 |
| | (15,651 | ) | | 15,626 |
| | (406 | ) | | 1,373,737 |
| | (16,057 | ) | | $ | 878,126 |
| | (4,961 | ) | | 35,686 |
| | (397 | ) | | 913,812 |
| | (5,358 | ) |
1 Gross unrealized losses include non-OTTI unrealized amounts and OTTI losses recognized in AOCI.
The increase in the less than 12 months unrealized loss position was driven by higher interest rates, with a 65-basis point increase in 2-year U.S. Treasury Note yields and a 45-basis point increase in the 10-year U.S. Treasury Note yields during Six Months 2018. We do not intend to sell any of the securities in the tables above, nor dowill we believe we will be required to sell any of these securities. We have also reviewedConsidering these factors, and in accordance with our review of these securities under our OTTI policy, as described in Note 2. “Summary of Significant Accounting Policies” within Item 8. “Financial Statements and Supplementary Data.” of our 20162017 Annual Report,, and we 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 investment security and underlying collateral.
(d) Fixed income securities at June 30, 20172018, by contractual maturity, are shown below. Mortgage-backed securities ("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 June 30, 20172018:
| | | | AFS | | HTM | | AFS | | HTM |
($ in thousands) | | Fair Value | | Carrying Value | | Fair Value | | Fair Value | | Carrying Value | | Fair Value |
Due in one year or less | | $ | 306,493 |
| | 34,521 |
| | 34,898 |
| | $ | 186,138 |
| | 8,309 |
| | 8,383 |
|
Due after one year through five years | | 2,095,055 |
| | 29,648 |
| | 31,498 |
| | 2,034,623 |
| | 27,160 |
| | 28,544 |
|
Due after five years through 10 years | | 2,379,624 |
| | 8,345 |
| | 9,144 |
| | 2,733,420 |
| | 6,547 |
| | 6,446 |
|
Due after 10 years | | 237,550 |
| | — |
| | — |
| | 183,472 |
| | — |
| | — |
|
Total fixed income securities | | $ | 5,018,722 |
| | 72,514 |
| | 75,540 |
| | $ | 5,137,653 |
| | 42,016 |
| | 43,373 |
|
(e) We evaluate the alternative investments and tax credit investments included in our other investments portfolio to determine whether those investments are 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 lacks 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 determined that the investments in our other investment portfolio are VIEs, but that we are not the primary beneficiary and therefore, consolidation is not required.
The following table summarizes our other investment portfolio by strategy:
| | Other Investments | | June 30, 2017 | | December 31, 2016 | | June 30, 2018 | | December 31, 2017 |
($ in thousands) | | Carrying Value | | Remaining Commitment | | Maximum Exposure to Loss1 | | Carrying Value | | Remaining Commitment | | Maximum Exposure to Loss1 | | Carrying Value | | Remaining Commitment | | Maximum Exposure to Loss1 | | Carrying Value | | Remaining Commitment | | Maximum Exposure to Loss1 |
Alternative Investments | | |
| | |
| | | | | | | | | | |
| | |
| | | | | | | | |
Private equity | | $ | 46,945 |
| | 76,027 |
| | 122,972 |
| | 41,135 |
| | 76,774 |
| | 117,909 |
| | $ | 59,681 |
| | 110,833 |
| | 170,514 |
| | 52,251 |
| | 99,026 |
| | 151,277 |
|
Private credit | | 29,942 |
| | 57,391 |
| | 87,333 |
| | 28,193 |
| | 40,613 |
| | 68,806 |
| | 40,916 |
| | 89,757 |
| | 130,673 |
| | 37,743 |
| | 94,959 |
| | 132,702 |
|
Real assets | | 20,783 |
| | 31,237 |
| | 52,020 |
| | 14,486 |
| | 22,899 |
| | 37,385 |
| | 23,430 |
| | 36,588 |
| | 60,018 |
| | 25,379 |
| | 27,014 |
| | 52,393 |
|
Total alternative investments | | 97,670 |
| | 164,655 |
| | 262,325 |
| | 83,814 |
| | 140,286 |
| | 224,100 |
| | 124,027 |
| | 237,178 |
| | 361,205 |
| | 115,373 |
| | 220,999 |
| | 336,372 |
|
Other securities | | 18,741 |
| | — |
| | 18,741 |
| | 18,583 |
| | 3,400 |
| | 21,983 |
| | 21,176 |
| | — |
| | 21,176 |
| | 16,895 |
| | — |
| | 16,895 |
|
Total other investments | | $ | 116,411 |
| | 164,655 |
| | 281,066 |
| | 102,397 |
| | 143,686 |
| | 246,083 |
| | $ | 145,203 |
| | 237,178 |
| | 382,381 |
| | 132,268 |
| | 220,999 |
| | 353,267 |
|
1The maximum exposure to loss includes both the carry 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.
We do not have a future obligation to fund losses or debts on behalf of the investments above; 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 20172018 or 2016.2017.
For a description of our alternative investment strategies, as well as information regarding redemption, restrictions, and fund liquidations, refer to Note 5. “Investments” in Item 8. “Financial Statements and Supplementary Data.” of our 2016 Annual Report.
The following table sets forth gross summarized financial information for our other investments portfolio, including the portion not owned by us. The majority of these investments are carried under the equity method of accounting. The last line of the table below reflects our share of the aggregate income or loss, 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 for the threethree- and six-month periods ended March 31 is included in our Second Quarter and Six Months results. This information is as follows:
|
| | | | | | | | | | | | | |
Income Statement Information | | Quarter ended June 30, | | Six Months ended June 30, |
($ in millions) | | 2017 |
| 2016 | | 2017 | | 2016 |
Net investment (loss) income | | $ | (9.9 | ) |
| (4.6 | ) | | (62.4 | ) | | 37.0 |
|
Realized gains | | (70.2 | ) |
| 193.2 |
| | (304.3 | ) | | 981.1 |
|
Net change in unrealized depreciation | | 1,418.5 |
|
| (253.9 | ) | | 1,890.0 |
| | (1,236.5 | ) |
Net gain | | $ | 1,338.4 |
|
| (65.3 | ) | | 1,523.3 |
| | (218.4 | ) |
Selective’s insurance subsidiaries’ other investments gain (loss) | | $ | 5.2 |
|
| (0.6 | ) | | 6.8 |
| | (1.7 | ) |
|
| | | | | | | | | | | | | |
Income Statement Information | | Quarter ended June 30, | | Six Months ended June 30, |
($ in millions) | | 2018 | | 2017 | | 2018 | | 2017 |
Net investment loss | | $ | (6.4 | ) |
| (88.0 | ) | | (41.8 | ) | | (62.4 | ) |
Realized gains (losses) | | 629.5 |
|
| (69.2 | ) | | 1,223.5 |
| | (304.3 | ) |
Net change in unrealized (depreciation) appreciation | | (1,200.2 | ) |
| 1,328.5 |
| | (738.6 | ) | | 1,890.0 |
|
Net (loss) gain | | $ | (577.1 | ) |
| 1,171.3 |
| | 443.1 |
| | 1,523.3 |
|
Selective’s insurance subsidiaries’ alternative investments gain | | $ | 1.9 |
| | 5.2 |
| | 3.5 |
| | 6.8 |
|
(f) 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 June 30, 20172018 to comply with insurance laws. We retain all rights regarding all securities pledged as collateral.
The following table summarizes the market value of these securities at June 30, 2017:2018:
| | ($ in millions) | | FHLBI Collateral | | FHLBNY Collateral | | State and Regulatory Deposits | | Total | | FHLBI Collateral | | FHLBNY Collateral | | State and Regulatory Deposits | | Total |
U.S. government and government agencies | | $ | 3.1 |
| | — |
| | 23.9 |
| | 27.0 |
| | $ | — |
| | — |
| | 22.3 |
| | 22.3 |
|
Obligations of states and political subdivisions | | — |
| | — |
| | 2.0 |
| | 2.0 |
| | — |
| | — |
| | 3.1 |
| | 3.1 |
|
CMBS | | 3.6 |
| | 4.8 |
| | — |
| | 8.4 |
| | 7.2 |
| | 9.6 |
| | — |
| | 16.8 |
|
RMBS | | 60.6 |
| | 51.9 |
| | — |
| | 112.5 |
| | 58.2 |
| | 79.8 |
| | — |
| | 138.0 |
|
Total pledged as collateral | | $ | 67.3 |
| | 56.7 |
| | 25.9 |
|
| 149.9 |
| | $ | 65.4 |
| | 89.4 |
| | 25.4 |
|
| 180.2 |
|
(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-backed investments, as of June 30, 20172018 or December 31, 2016.
2017.
(h) The components of pre-tax net investment income earned were as follows:
| | | | Quarter ended June 30, | | Six Months ended June 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Fixed income securities | | $ | 37,668 |
|
| 31,753 |
| | $ | 74,559 |
| | 63,397 |
| | $ | 43,774 |
|
| 37,668 |
| | $ | 85,815 |
| | 74,559 |
|
Equity securities | | 1,419 |
|
| 2,204 |
| | 2,887 |
| | 4,434 |
| | 1,820 |
|
| 1,419 |
| | 3,797 |
| | 2,887 |
|
Short-term investments | | 377 |
|
| 142 |
| | 627 |
| | 301 |
| | 611 |
|
| 377 |
| | 1,134 |
| | 627 |
|
Other investments | | 5,231 |
|
| (611 | ) | | 6,834 |
| | (1,677 | ) | | 2,094 |
|
| 5,231 |
| | 3,657 |
| | 6,834 |
|
Investment expenses | | (3,265 | ) |
| (2,306 | ) | | (6,058 | ) | | (4,504 | ) | | (2,746 | ) |
| (3,265 | ) | | (5,619 | ) | | (6,058 | ) |
Net investment income earned | | $ | 41,430 |
| | 31,182 |
| | $ | 78,849 |
| | 61,951 |
| | $ | 45,553 |
| | 41,430 |
| | $ | 88,784 |
| | 78,849 |
|
(i) The following tables summarize OTTI by asset typecharges were $2.8 million and $1.2 million in Second Quarter 2018 and Second Quarter 2017, respectively, and $4.0 million and $4.7 million in Six Months 2018 and Six Months 2017, respectively. All of the OTTI charges in 2018 and a majority of the charges in 2017 were related to securities for which we had the periods indicated:
|
| | | | | | | | | | | | |
Second Quarter 2017 | | Gross | | Included in Other Comprehensive Income ("OCI") | | Recognized in Earnings |
($ in thousands) | | | |
AFS fixed income securities: | | | | | | |
U.S. government and government agencies | | $ | 2 |
| | — |
| | 2 |
|
Obligations of states and political subdivisions | | 239 |
| | — |
| | 239 |
|
Corporate securities | | 381 |
| | — |
| | 381 |
|
CLO and other ABS | | 62 |
| | — |
| | 62 |
|
CMBS | | 220 |
| | — |
| | 220 |
|
RMBS | | 71 |
| | (6 | ) | | 77 |
|
Total AFS fixed income securities | | 975 |
| | (6 | ) | | 981 |
|
AFS equity securities: | | | | | | |
Common stock | | 46 |
| | — |
| | 46 |
|
Total AFS equity securities | | 46 |
| | — |
| | 46 |
|
Other Investments | | 190 |
| | — |
| | 190 |
|
Total OTTI losses | | $ | 1,211 |
| | $ | (6 | ) | | $ | 1,217 |
|
|
| | | | | | | | | | |
Second Quarter 2016 | | Gross | | Included in OCI | | Recognized in Earnings |
($ in thousands) | | | |
AFS fixed income securities: | | | | | | |
Corporate securities | | $ | 104 |
| | — |
| | 104 |
|
RMBS | | 98 |
| | 10 |
| | 88 |
|
Total AFS fixed income securities | | 202 |
| | 10 |
| | 192 |
|
AFS equity securities: | | | | | | |
Common stock | | 357 |
| | — |
| | 357 |
|
Total AFS equity securities | | 357 |
| | — |
| | 357 |
|
Total OTTI losses | | $ | 559 |
| | 10 |
| | 549 |
|
|
| | | | | | | | | | | | |
Six Months 2017 | | Gross | | Included in Other Comprehensive Income ("OCI") | | Recognized in Earnings |
($ in thousands) | | | |
AFS fixed income securities: | | | | | | |
U.S. government and government agencies | | $ | 31 |
| | — |
| | 31 |
|
Obligations of states and political subdivisions | | 612 |
| | — |
| | 612 |
|
Corporate securities | | 575 |
| | — |
| | 575 |
|
CLO and other ABS | | 85 |
| | — |
| | 85 |
|
CMBS | | 670 |
| | — |
| | 670 |
|
RMBS | | 1,163 |
| | (6 | ) | | 1,169 |
|
Total AFS fixed income securities | | 3,136 |
| | (6 | ) | | 3,142 |
|
AFS equity securities: | | | | | | |
Common stock | | 1,360 |
| | — |
| | 1,360 |
|
Total AFS equity securities | | 1,360 |
| | — |
| | 1,360 |
|
Other Investments | | 190 |
| | — |
| | 190 |
|
Total OTTI losses | | $ | 4,686 |
| | $ | (6 | ) | | $ | 4,692 |
|
|
| | | | | | | | | | |
Six Months 2016 | | Gross | | Included in OCI | | Recognized in Earnings |
($ in thousands) | | | |
AFS fixed income securities: | | | | | | |
Corporate securities | | $ | 1,077 |
| | — |
| | 1,077 |
|
RMBS | | 98 |
| | 10 |
| | 88 |
|
Total AFS fixed income securities | | 1,175 |
| | 10 |
| | 1,165 |
|
AFS equity securities: | | | | | | |
Common stock | | 2,974 |
| | — |
| | 2,974 |
|
Preferred stock | | 3 |
| | — |
| | 3 |
|
Total AFS equity securities | | 2,977 |
| | — |
| | 2,977 |
|
Total OTTI losses | | $ | 4,152 |
| | 10 |
| | 4,142 |
|
intent to sell, with each security type's charge not exceeding 1% of its fair value. For a discussion of our evaluation for OTTI, refer to Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of our 20162017 Annual Report.
(j) Net realized and unrealized gains and losses (excluding OTTI charges) for Second Quarter and Six Months 2018 and 2017 included the following:
|
| | | | | | | | | | | | | | |
| | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Net realized (losses) gains on the disposals of securities: | | | | | | | | |
Fixed income securities | | $ | (1,174 | ) | | 2,606 |
| | (4,509 | ) | | 4,570 |
|
Equity securities | | 1,226 |
| | 350 |
| | 9,295 |
| | 350 |
|
Short-term investments | | 2 |
| | — |
| | (1 | ) | | — |
|
Other investments | | — |
| | (5 | ) | | — |
| | 461 |
|
Net realized gains on the disposal of securities | | 54 |
| | 2,951 |
| | 4,785 |
| | 5,381 |
|
OTTI charges | | (2,821 | ) | | (1,217 | ) | | (4,033 | ) | | (4,692 | ) |
Net realized (losses) gains | | (2,767 | ) | | 1,734 |
| | 752 |
| | 689 |
|
Unrealized gains (losses) recognized in income on equity securities1 | | 1,115 |
| | — |
| | (12,953 | ) | | — |
|
Total net realized and unrealized investment (losses) gains | | $ | (1,652 | ) | | 1,734 |
| | $ | (12,201 | ) | | 689 |
|
1Includes unrealized holding gains (losses) of: (i) $2.3 million in Second Quarter 2018 and $(2.7) million in Six Months 2018 on equity securities remaining in our portfolio as of June 30, 2018; and (ii) $(1.2) million in Second Quarter 2018 and $(10.3) million in Six Months 2018 on equity securities sold during the period.
(j) The components of net realized gains excluding OTTI charges,on disposals of securities for the periods indicated were as follows: | | | | Quarter ended June 30, | | Six Months ended June 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
HTM fixed income securities | | | | | | | | | | | | | | | | |
Gains | | $ | 44 |
| | 3 |
| | 44 |
| | 3 |
| | $ | — |
| | 44 |
| | 2 |
| | 44 |
|
Losses | | — |
| | — |
| | (1 | ) | | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) |
AFS fixed income securities | | |
| | |
| |
|
| |
|
| | |
| | |
| | | | |
Gains | | 2,715 |
| | 365 |
| | 6,267 |
| | 985 |
| | 1,971 |
| | 2,715 |
| | 4,594 |
| | 6,267 |
|
Losses | | (153 | ) | | (5 | ) | | (1,740 | ) | | (41 | ) | | (3,145 | ) | | (153 | ) | | (9,105 | ) | | (1,740 | ) |
AFS equity securities | | |
| | |
| |
|
| |
|
| |
Equity securities | | | |
| | |
| | | | |
Gains | | | 1,226 |
| | 350 |
| | 9,625 |
| | 350 |
|
Losses | | | — |
| | — |
| | (330 | ) | | — |
|
Short-term investments | | | | | | | | | |
Gains | | 350 |
| | 2,171 |
| | 350 |
| | 2,501 |
| | 2 |
| | — |
| | 3 |
| | 2 |
|
Losses | | — |
| | (220 | ) | | — |
| | (240 | ) | | — |
| | — |
| | (4 | ) | | (2 | ) |
Other investments | | | | | | | | | | | | | | | | |
Gains | | — |
| | — |
| | 480 |
| | — |
| | — |
| | — |
| | — |
| | 480 |
|
Losses | | (5 | ) |
| — |
| | (19 | ) | | (4 | ) | | — |
|
| (5 | ) | | — |
| | (19 | ) |
Total net realized gains (excluding OTTI charges) | | $ | 2,951 |
|
| 2,314 |
| | 5,381 |
| | 3,203 |
| |
Total net realized gains on disposals of securities | | | $ | 54 |
|
| 2,951 |
| | 4,785 |
| | 5,381 |
|
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 $123.1 million and $88.7 millionNet realized gains in Second Quarter 2017 and Second Quarter 2016, respectively, and $723.4 million and $105.9 million in Six Months 2017 and Six Months 2016, respectively. This increase was2018 were primarily driven by opportunistic sales in our equity portfolio and higher trading volume in our fixed income securities portfolio related toportfolio. Proceeds from the recent hiringsales of new external investment managers.AFS fixed income securities were $262.9 million and $122.3 million in Second Quarter 2018 and Second Quarter 2017, respectively, and $938.3 million and $717.1 million in Six Months 2018 and Six Months 2017, respectively. Proceeds from the sales of equity securities were $2.9 million and $0.8 million in Second Quarter 2018 and Second Quarter 2017, respectively, and $43.6 million and $6.3 million in Six Months 2018 and Six Months 2017, respectively.
NOTE 5. Indebtedness
Our long-term debt balance has not changed materially since December 31, 2016.2017. However, on February 28, 2017, Selective Insurance Company of America ("SICA") borrowed $64 million inthe following short-term funds in the first quarter of 2018 from the FHLBNYFHLBNY:
On February 27, 2018, SICA borrowed $75 million at an interest rate of 0.75%1.75%. This borrowing was repaid on March 21, 2017.20, 2018; and
On March 28, 2018, SICA borrowed $55 million at an interest rate of 1.98%. This borrowing was repaid on April 18, 2018.
For detailed information on our indebtedness, see Note 10. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." of our 20162017 Annual Report.
NOTE 6. Fair Value Measurements
Our financial assets are measured at fair value as disclosed on the Consolidated Balance Sheets. The fair values of our long-term debt are provided in this footnote and the related carry values have improved since December 31, 2016, but notchanged by moreless than 5% in the aggregate.1% during Six Months 2018. For a discussion of the fair value and hierarchy of the techniques used to value our financial assets and liabilities, refer to Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of our 20162017 Annual Report.
The following tables provide quantitative disclosures of our financial assets that were measured and recorded at fair value at June 30, 20172018 and December 31, 2016:2017:
| | June 30, 2017 | | | | Fair Value Measurements Using | |
June 30, 2018 | | | | | Fair Value Measurements Using |
($ in thousands) | | Assets Measured at Fair Value at 6/30/2017 | | Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1)1 | | Significant Other Observable Inputs (Level 2)1 | | Significant Unobservable Inputs (Level 3) | | 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 | | $ | 68,003 |
| | 24,828 |
| | 43,175 |
| | — |
| | $ | 38,896 |
| | 22,479 |
| | 16,417 |
| | — |
|
Foreign government | | 18,714 |
| | — |
| | 18,714 |
| | — |
| | 17,982 |
| | — |
| | 17,982 |
| | — |
|
Obligations of states and political subdivisions | | 1,404,766 |
| | — |
| | 1,404,766 |
| | — |
| | 1,253,667 |
| | — |
| | 1,253,667 |
| | — |
|
Corporate securities | | 1,821,510 |
| | — |
| | 1,821,510 |
| | — |
| | 1,614,484 |
| | — |
| | 1,614,484 |
| | — |
|
CLO and other ABS | | 702,524 |
| | — |
| | 702,524 |
| | — |
| | 771,597 |
| | — |
| | 768,408 |
| | 3,189 |
|
CMBS | | 279,205 |
| | — |
| | 279,205 |
| | — |
| | 451,593 |
| | — |
| | 451,593 |
| | — |
|
RMBS | | 724,000 |
| | — |
| | 724,000 |
| | — |
| | 989,434 |
| | — |
| | 989,434 |
| | — |
|
Total AFS fixed income securities | | 5,018,722 |
| | 24,828 |
| | 4,993,894 |
| | — |
| | 5,137,653 |
| | 22,479 |
| | 5,111,985 |
| | 3,189 |
|
AFS equity securities: | | | | | | | | | |
Common stock | | 144,436 |
| | 135,966 |
| | — |
| | 8,470 |
| |
Equity securities: | | | | | | | | | |
Common stock2 | | | 172,157 |
| | 145,038 |
| | — |
| | — |
|
Preferred stock | | 17,258 |
| | 17,258 |
| | — |
| | — |
| | 4,421 |
| | 4,421 |
| | — |
| | — |
|
Total AFS equity securities | | 161,694 |
| | 153,224 |
| | — |
| | 8,470 |
| |
Total AFS securities | | 5,180,416 |
| | 178,052 |
| | 4,993,894 |
| | 8,470 |
| |
Total equity securities | | | 176,578 |
| | 149,459 |
| | — |
| | — |
|
Short-term investments | | 133,706 |
| | 133,706 |
| | — |
| | — |
| | 164,118 |
| | 163,120 |
| | 998 |
| | — |
|
Total assets measured at fair value | | $ | 5,314,122 |
| | 311,758 |
| | 4,993,894 |
|
| 8,470 |
| | $ | 5,478,349 |
| | 335,058 |
| | 5,112,983 |
|
| 3,189 |
|
| | December 31, 2016 | | | | Fair Value Measurements Using | |
December 31, 2017 | | | | | Fair Value Measurements Using |
($ in thousands) | | Assets Measured at Fair Value at 12/31/2016 | | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1)1 | | Significant Other Observable Inputs (Level 2)1 | | Significant Unobservable Inputs (Level 3) | | 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 |
| | — |
| | $ | 49,740 |
| | 24,652 |
| | 25,088 |
| | — |
|
Foreign government | | 26,865 |
| | — |
| | 26,865 |
| | — |
| | 18,555 |
| | — |
| | 18,555 |
| | — |
|
Obligations of states and political subdivisions | | 1,379,593 |
| | — |
| | 1,379,593 |
| | — |
| | 1,582,970 |
| | — |
| | 1,582,970 |
| | — |
|
Corporate securities | | 1,997,753 |
| | — |
| | 1,997,753 |
| | — |
| | 1,617,468 |
| | — |
| | 1,617,468 |
| | — |
|
CLO and other ABS | | 528,960 |
| | — |
| | 528,960 |
| | — |
| | 795,458 |
| | — |
| | 795,458 |
| | — |
|
CMBS | | 256,842 |
| | — |
| | 256,842 |
| | — |
| | 383,449 |
| | — |
| | 376,895 |
| | 6,554 |
|
RMBS | | 525,194 |
| | — |
| | 525,194 |
| | — |
| | 714,882 |
| | — |
| | 714,882 |
| | — |
|
Total AFS fixed income securities | | 4,792,540 |
| | 27,520 |
| | 4,765,020 |
| | — |
| | 5,162,522 |
| | 24,652 |
| | 5,131,316 |
| | 6,554 |
|
AFS equity securities: | | | | | | | | | | | | | | | | |
Common stock | | 130,608 |
| | 122,932 |
| | — |
| | 7,676 |
| |
Common stock2 | | | 167,757 |
| | 138,640 |
| | — |
| | 5,398 |
|
Preferred stock | | 16,145 |
| | 16,145 |
| | — |
| | — |
| | 14,948 |
| | 14,948 |
| | — |
| | — |
|
Total AFS equity securities | | 146,753 |
| | 139,077 |
| | — |
| | 7,676 |
| | 182,705 |
| | 153,588 |
| | — |
| | 5,398 |
|
Total AFS securities | | 4,939,293 |
| | 166,597 |
| | 4,765,020 |
| | 7,676 |
| | 5,345,227 |
| | 178,240 |
| | 5,131,316 |
| | 11,952 |
|
Short-term investments | | 221,701 |
| | 221,701 |
| | — |
| | — |
| | 165,555 |
| | 165,555 |
| | — |
| | — |
|
Total assets measured at fair value | | $ | 5,160,994 |
| | 388,298 |
| | 4,765,020 |
| | 7,676 |
| | $ | 5,510,782 |
| | 343,795 |
| | 5,131,316 |
| | 11,952 |
|
| |
1 | There were no transfers of securities between Level 1 and Level 2. |
| |
2 | Investments amounting to $27.1 million at June 30, 2018, and $23.7 million at December 31, 2017, were measured at fair value using net asset value per share (or its practical expedient) and have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to total assets measured at fair value. |
There were no material changes in the fair value of securities measured using Level 3 inputs since December 31, 2016.prices in Six Months 2017. The following table provides a summary of Level 3 changes in Six Months 2018:
|
| | | | | | | | | |
June 30, 2018 | | | | | |
($ in thousands) | CMBS | | Common Stock | | CLO and Other ABS |
Fair value, December 31, 2017 | $ | 6,554 |
| | 5,398 |
| | — |
|
Total net (losses) gains for the period included in: | | | | | |
Other comprehensive income ("OCI") | — |
| | — |
| | — |
|
Net income | — |
| | — |
| | — |
|
Purchases | — |
| | — |
| | 3,189 |
|
Sales | — |
| | — |
| | — |
|
Issuances | — |
| | — |
| | — |
|
Settlements | — |
| | — |
| | — |
|
Transfers into Level 3 | — |
| | — |
| | — |
|
Transfers out of Level 3 | (6,554 | ) | | (5,398 | ) | | — |
|
Fair value, June 30, 2018 | $ | — |
| | — |
| | 3,189 |
|
The following tables provide quantitative information regarding our financial assets and liabilities that were disclosed at fair value at June 30, 20172018 and December 31, 20162017: | | June 30, 2017 | | | | Fair Value Measurements Using | |
June 30, 2018 | | | | | Fair Value Measurements Using |
($ in thousands) | | Assets/ Liabilities Disclosed at Fair Value at 6/30/2017 | | Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | 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 | | $ | 55,622 |
| | — |
| | 55,622 |
| | — |
| | $ | 23,260 |
| | — |
| | 23,260 |
| | — |
|
Corporate securities | | 19,918 |
| | — |
| | 13,960 |
| | 5,958 |
| | 20,113 |
| | — |
| | 11,628 |
| | 8,485 |
|
Total HTM fixed income securities | | $ | 75,540 |
| | — |
| | 69,582 |
| | 5,958 |
| | $ | 43,373 |
| | — |
| | 34,888 |
| | 8,485 |
|
| | | | | | | | | | | | | | | | |
Financial Liabilities | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Long-term debt: | | | | | | | | | | | | | | | | |
7.25% Senior Notes | | $ | 58,690 |
| | — |
| | 58,690 |
| | — |
| | $ | 57,231 |
| | — |
| | 57,231 |
| | — |
|
6.70% Senior Notes | | 112,573 |
| | — |
| | 112,573 |
| | — |
| | 108,453 |
| | — |
| | 108,453 |
| | — |
|
5.875% Senior Notes | | 188,767 |
| | 188,767 |
| | — |
| | — |
| | 186,924 |
| | 186,924 |
| | — |
| | — |
|
1.61% borrowings from FHLBNY | | 24,521 |
| | — |
| | 24,521 |
| | — |
| | 23,979 |
| | — |
| | 23,979 |
| | — |
|
1.56% borrowings from FHLBNY | | 24,462 |
| | — |
| | 24,462 |
| | — |
| | 23,915 |
| | — |
| | 23,915 |
| | — |
|
3.03% borrowings from FHLBI | | 60,837 |
| | — |
| | 60,837 |
| | — |
| | 58,483 |
| | — |
| | 58,483 |
| | — |
|
Total long-term debt | | $ | 469,850 |
| | 188,767 |
| | 281,083 |
| | — |
| | $ | 458,985 |
| | 186,924 |
| | 272,061 |
| | — |
|
| | December 31, 2016 | | | | Fair Value Measurements Using | |
December 31, 2017 | | | | | Fair Value Measurements Using |
($ in thousands) | | Assets/ Liabilities Disclosed at Fair Value at 12/31/2016 | | Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | 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 |
| | — |
| | $ | 26,261 |
| | — |
| | 26,261 |
| | — |
|
Corporate securities | | 24,075 |
| | — |
| | 16,565 |
| | 7,510 |
| | 17,839 |
| | — |
| | 12,306 |
| | 5,533 |
|
CMBS | | 1,220 |
| | — |
| | 1,220 |
| | — |
| |
Total HTM fixed income securities | | $ | 105,211 |
| | — |
| | 97,701 |
| | 7,510 |
| | $ | 44,100 |
| | — |
| | 38,567 |
| | 5,533 |
|
| | | | | | | | | | | | | | | | |
Financial Liabilities | | |
| | | | | | | | |
| | | | | | |
Long-term debt: | | | | | | | | | | | | | | | | |
7.25% Senior Notes | | $ | 56,148 |
| | — |
| | 56,148 |
| | — |
| | $ | 61,391 |
| | — |
| | 61,391 |
| | — |
|
6.70% Senior Notes | | 108,333 |
| | — |
| | 108,333 |
| | — |
| | 116,597 |
| | — |
| | 116,597 |
| | — |
|
5.875% Senior Notes | | 176,860 |
| | 176,860 |
| | — |
| | — |
| | 186,332 |
| | 186,332 |
| | — |
| | — |
|
1.61% borrowings from FHLBNY | | 24,286 |
| | — |
| | 24,286 |
| | — |
| | 24,270 |
| | — |
| | 24,270 |
| | — |
|
1.56% borrowings from FHLBNY | | 24,219 |
| | — |
| | 24,219 |
| | — |
| | 24,210 |
| | — |
| | 24,210 |
| | — |
|
3.03% borrowings from FHLBI | | 59,313 |
| | — |
| | 59,313 |
| | — |
| | 60,334 |
| | — |
| | 60,334 |
| | — |
|
Total long-term debt | | $ | 449,159 |
| | 176,860 |
| | 272,299 |
| | — |
| | $ | 473,134 |
| | 186,332 |
| | 286,802 |
| | — |
|
NOTE 7. Reinsurance
The following table contains a listing of direct, assumed, and ceded reinsurance amounts for premiums written, premiums earned, and loss and loss expenses incurred for the periods indicated. For more information concerning reinsurance, refer to
Note 8. “Reinsurance” in Item 8. “Financial Statements and Supplementary Data.” of our 20162017 Annual Report.Report. | | | | Quarter ended June 30, | | Six Months ended June 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Premiums written: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Direct | | $ | 706,408 |
| | 665,862 |
| | 1,390,228 |
| | 1,312,140 |
| | $ | 753,363 |
| | 706,408 |
| | $ | 1,467,597 |
| | 1,390,228 |
|
Assumed | | 6,488 |
| | 7,788 |
| | 12,179 |
| | 14,108 |
| | 6,536 |
| | 6,488 |
| | 12,807 |
| | 12,179 |
|
Ceded | | (99,082 | ) | | (95,510 | ) | | (189,889 | ) | | (182,749 | ) | | (104,651 | ) | | (99,082 | ) | | (200,596 | ) | | (189,889 | ) |
Net | | $ | 613,814 |
| | 578,140 |
| | 1,212,518 |
| | 1,143,499 |
| | $ | 655,248 |
| | 613,814 |
| | $ | 1,279,808 |
| | 1,212,518 |
|
Premiums earned: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Direct | | $ | 654,588 |
| | 612,406 |
| | 1,301,316 |
| | 1,219,067 |
| | $ | 696,723 |
| | 654,588 |
| | $ | 1,380,456 |
| | 1,301,316 |
|
Assumed | | 6,063 |
| | 7,171 |
| | 11,842 |
| | 13,441 |
| | 6,612 |
| | 6,063 |
| | 12,736 |
| | 11,842 |
|
Ceded | | (92,621 | ) | | (87,645 | ) | | (184,274 | ) | | (178,118 | ) | | (98,499 | ) | | (92,621 | ) | | (196,528 | ) | | (184,274 | ) |
Net | | $ | 568,030 |
| | 531,932 |
| | 1,128,884 |
| | 1,054,390 |
| | $ | 604,836 |
| | 568,030 |
| | $ | 1,196,664 |
| | 1,128,884 |
|
Loss and loss expense incurred: | | |
| | |
| | |
| | |
| |
Loss and loss expenses incurred: | | | |
| | |
| | |
| | |
|
Direct | | $ | 389,550 |
| | 362,064 |
| | 731,672 |
| | 723,703 |
| | $ | 391,014 |
| | 389,550 |
| | $ | 811,930 |
| | 731,672 |
|
Assumed | | 7,766 |
| | 6,140 |
| | 12,203 |
| | 12,495 |
| | 2,364 |
| | 7,766 |
| | 10,368 |
| | 12,203 |
|
Ceded | | (55,757 | ) | | (69,725 | ) | | (84,844 | ) | | (140,575 | ) | | (27,050 | ) | | (55,757 | ) | | (71,029 | ) | | (84,844 | ) |
Net | | $ | 341,559 |
| | 298,479 |
| | 659,031 |
| | 595,623 |
| | $ | 366,328 |
| | 341,559 |
| | $ | 751,269 |
| | 659,031 |
|
Ceded premiums and losses related to our participation in the NFIP, under which 100% of our flood premiums, losses, and loss expenses are ceded to the NFIP, are as follows: | | Ceded to NFIP | | Quarter ended June 30, | | Six Months ended June 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Ceded premiums written | | $ | (63,808 | ) | | (63,906 | ) | | (120,142 | ) | | (117,154 | ) | | $ | (66,341 | ) | | (63,808 | ) | | $ | (123,010 | ) | | (120,142 | ) |
Ceded premiums earned | | (57,655 | ) | | (56,667 | ) | | (114,932 | ) | | (113,481 | ) | | (60,143 | ) | | (57,655 | ) | | (119,134 | ) | | (114,932 | ) |
Ceded loss and loss expense incurred | | (15,140 | ) | | (24,261 | ) | | (21,681 | ) | | (64,979 | ) | |
Ceded loss and loss expenses incurred | | | (10,261 | ) | | (15,140 | ) | | (25,980 | ) | | (21,681 | ) |
NOTE 8. ReservesReserve for LossesLoss and Loss ExpensesExpense
The table below provides a roll forward of reservesreserve for lossesloss and loss expenses for beginning and ending reserveexpense balances:
|
| | | | | | | |
| | Six Months ended June 30, |
($ in thousands) | | 2017 | | 2016 |
Gross reserves for losses and loss expenses, at beginning of year | | $ | 3,691,719 |
| | 3,517,728 |
|
Less: reinsurance recoverable on unpaid losses and loss expenses, at beginning of year | | 611,200 |
| | 551,019 |
|
Net reserves for losses and loss expenses, at beginning of year | | 3,080,519 |
| | 2,966,709 |
|
Incurred losses and loss expenses for claims occurring in the: | | |
| | |
|
Current year | | 684,877 |
| | 624,159 |
|
Prior years | | (25,846 | ) | | (28,536 | ) |
Total incurred losses and loss expenses | | 659,031 |
| | 595,623 |
|
Paid losses and loss expenses for claims occurring in the: | | |
| | |
|
Current year | | 171,724 |
| | 146,849 |
|
Prior years | | 425,521 |
| | 402,255 |
|
Total paid losses and loss expenses | | 597,245 |
| | 549,104 |
|
Net reserves for losses and loss expenses, at end of period | | 3,142,305 |
| | 3,013,228 |
|
Add: Reinsurance recoverable on unpaid losses and loss expenses, at end of period | | 588,916 |
| | 576,941 |
|
Gross reserves for losses and loss expenses at end of period | | $ | 3,731,221 |
| | 3,590,169 |
|
|
| | | | | | | |
| | Six Months ended June 30, |
($ in thousands) | | 2018 | | 2017 |
Gross reserve for loss and loss expense, at beginning of year | | $ | 3,771,240 |
| | 3,691,719 |
|
Less: reinsurance recoverable on unpaid loss and loss expense, at beginning of year | | 585,855 |
| | 611,200 |
|
Net reserve for loss and loss expense, at beginning of year | | 3,185,385 |
| | 3,080,519 |
|
Incurred loss and loss expense for claims occurring in the: | | |
| | |
|
Current year | | 756,855 |
| | 684,877 |
|
Prior years | | (5,586 | ) | | (25,846 | ) |
Total incurred loss and loss expense | | 751,269 |
| | 659,031 |
|
Paid loss and loss expense for claims occurring in the: | | |
| | |
|
Current year | | 214,169 |
| | 171,724 |
|
Prior years | | 457,441 |
| | 425,521 |
|
Total paid loss and loss expense | | 671,610 |
| | 597,245 |
|
Net reserve for loss and loss expense, at end of period | | 3,265,044 |
| | 3,142,305 |
|
Add: Reinsurance recoverable on unpaid loss and loss expense, at end of period | | 539,321 |
| | 588,916 |
|
Gross reserve for loss and loss expense at end of period | | $ | 3,804,365 |
| | 3,731,221 |
|
The $72.0 million increase in current year loss and loss expense incurred illustrated in the table above was primarily driven by non-catastrophe property losses, as well as an increase in exposure due to premium growth. Non-catastrophe property losses, which increased $44.0 million, to $188.7 million, in Six Months 2018, were principally related to the early January deep freeze in our footprint states and a relatively large number of severe fire losses.
Prior year development in Six Months 2018 of $5.6 million included $12.0 million of favorable casualty development partially offset by $6.4 million of unfavorable property development. The favorable casualty development included $33.0 million of development in our workers compensation line of business, partially offset by unfavorable development of $15.0 million in our commercial automobile line of business and $6.0 million in our excess and surplus ("E&S") casualty lines.
Prior year development in Six Months 2017 of $25.8 million was primarily driven by favorable prior year casualty reserve development of $37.4 million in our general liability line of business and $15.3 million in our workers compensation line of business. This was partially offset by unfavorable casualty reserve development of $21.0 million in our commercial automobile line of business and $4.0 million in our personal automobile line of business.
Prior year development in Six Months 2016For a discussion of $28.5 million was primarily duethe trends and recent developments impacting these lines, refer to favorable casualty reserve developmentthe "Critical Accounting Policies and Estimates" section of $22.0 millionItem 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." in our general liability line of business and $21.0 million in our workers compensation line of business. This was partially offset by unfavorable casualty reserve development of $13.0 million in our commercial automobile line of business and $3.0 million in our E&S segment.2017 Annual Report.
NOTE 9. Segment Information
The disaggregated results of our four reportable segments are used by senior management to manage our operations. These reportable segments are evaluated as follows:
Our Standard Commercial Lines, Standard Personal Lines, and Excess and Surplus ("E&S")&S Lines are evaluated based on statutorybefore and after-tax underwriting results (net premiums earned, incurred lossesloss and loss expenses,expense, policyholder dividends, policy acquisition costs, and other underwriting expenses), and statutory combined ratios.
Our Investments segment is evaluated based on after-tax net investment income and net realized gains and losses.
In computing the results of each segment, we do not make adjustments for interest expense or net general corporate expenses; however, we do partially allocate taxes to various segments. Furthermore, weexpenses. We do not maintain separate investment portfolios for the segments and therefore, do not allocate assets to the segments.
The following summaries present revenues (net investment income and net realized and unrealized gains on investments in the case of the Investments segment) and pre-tax income for the individual segments:
| | Revenue by Segment | | Quarter ended June 30, | | Six Months ended June 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Standard Commercial Lines: | | |
| | |
| | | | | | |
| | |
| | | | |
Net premiums earned: | | |
| | |
| | | | | | |
| | |
| | | | |
Commercial automobile | | $ | 108,316 |
| | 98,896 |
| | 215,445 |
| | 194,315 |
| | $ | 122,104 |
| | 108,316 |
| | 240,335 |
| | 215,445 |
|
Workers compensation | | 79,460 |
| | 75,251 |
| | 158,786 |
| | 151,251 |
| | 80,021 |
| | 79,460 |
| | 158,844 |
| | 158,786 |
|
General liability | | 141,503 |
| | 129,283 |
| | 281,487 |
| | 257,368 |
| | 153,002 |
| | 141,503 |
| | 302,831 |
| | 281,487 |
|
Commercial property | | 78,052 |
| | 73,591 |
| | 154,443 |
| | 143,769 |
| | 82,162 |
| | 78,052 |
| | 162,488 |
| | 154,443 |
|
Businessowners’ policies | | 24,989 |
| | 24,651 |
| | 49,834 |
| | 48,555 |
| | 25,829 |
| | 24,989 |
| | 51,420 |
| | 49,834 |
|
Bonds | | 6,986 |
| | 5,665 |
| | 13,484 |
| | 11,129 |
| | 8,335 |
| | 6,986 |
| | 16,469 |
| | 13,484 |
|
Other | | 4,288 |
| | 3,940 |
| | 8,529 |
| | 7,779 |
| | 4,559 |
| | 4,288 |
| | 8,989 |
| | 8,529 |
|
Miscellaneous income | | 3,016 |
| | 3,567 |
| | 5,876 |
| | 4,257 |
| | 2,882 |
| | 3,016 |
| | 4,708 |
| | 5,876 |
|
Total Standard Commercial Lines revenue | | 446,610 |
| | 414,844 |
| | 887,884 |
| | 818,423 |
| | 478,894 |
| | 446,610 |
| | 946,084 |
| | 887,884 |
|
Standard Personal Lines: | | | | | | | | | | | | | | | | |
Net premiums earned: | | | | | | | | | | | | | | | | |
Personal automobile | | 37,663 |
| | 35,881 |
| | 74,613 |
| | 71,661 |
| | 41,810 |
| | 37,663 |
| | 82,252 |
| | 74,613 |
|
Homeowners | | 32,467 |
| | 33,411 |
| | 65,167 |
| | 66,311 |
| | 32,223 |
| | 32,467 |
| | 64,424 |
| | 65,167 |
|
Other | | 1,542 |
| | 1,532 |
| | 3,093 |
| | 3,057 |
| | 1,644 |
| | 1,542 |
| | 3,257 |
| | 3,093 |
|
Miscellaneous income | | 275 |
| | 301 |
| | 656 |
| | 561 |
| | 297 |
| | 275 |
| | 649 |
| | 656 |
|
Total Standard Personal Lines revenue | | 71,947 |
| | 71,125 |
| | 143,529 |
| | 141,590 |
| | 75,974 |
| | 71,947 |
| | 150,582 |
| | 143,529 |
|
E&S Lines: | | | | | | | | | | | | | | | | |
Net premiums earned: | | | | | | | | | | | | | | | | |
Commercial liability | | 39,054 |
| | 36,940 |
| | 76,966 |
| | 73,796 |
| |
Commercial property | | 13,710 |
| | 12,891 |
| | 27,037 |
| | 25,399 |
| |
Casualty lines | | | 39,379 |
| | 39,054 |
| | 77,919 |
| | 76,966 |
|
Property lines | | | 13,768 |
| | 13,710 |
| | 27,436 |
| | 27,037 |
|
Miscellaneous income | | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | — |
|
Total E&S Lines revenue | | 52,764 |
| | 49,831 |
| | 104,003 |
| | 99,196 |
| | 53,147 |
| | 52,764 |
| | 105,356 |
| | 104,003 |
|
Investments: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Net investment income | | 41,430 |
| | 31,182 |
| | 78,849 |
| | 61,951 |
| | 45,553 |
| | 41,430 |
| | 88,784 |
| | 78,849 |
|
Net realized investment gains (losses) | | 1,734 |
| | 1,765 |
| | 689 |
| | (939 | ) | |
Net realized and unrealized investment (losses) gains | | | (1,652 | ) | | 1,734 |
| | (12,201 | ) | | 689 |
|
Total Investments revenue | | 43,164 |
| | 32,947 |
| | 79,538 |
| | 61,012 |
| | 43,901 |
| | 43,164 |
| | 76,583 |
| | 79,538 |
|
Total revenues | | $ | 614,485 |
| | 568,747 |
| | 1,214,954 |
| | 1,120,221 |
| | $ | 651,916 |
| | 614,485 |
| | 1,278,605 |
| | 1,214,954 |
|
|
| | | | | | | | | | | | | |
Income Before and After Federal Income Tax | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Standard Commercial Lines: | | |
| | |
| | | | |
Underwriting gain, before federal income tax | | $ | 41,016 |
| | 34,759 |
| | 47,820 |
| | 77,305 |
|
Underwriting gain, after federal income tax | | 32,403 |
| | 22,593 |
| | 37,778 |
| | 50,248 |
|
Combined ratio | | 91.4 | % | | 92.2 |
| | 94.9 |
| | 91.2 |
|
| | | |
|
| |
|
| |
|
|
Standard Personal Lines: | | | | | | | | |
Underwriting gain (loss), before federal income tax | | $ | 4,805 |
| | (5,768 | ) | | 3,299 |
| | (662 | ) |
Underwriting gain (loss), after federal income tax | | 3,796 |
| | (3,749 | ) | | 2,606 |
| | (430 | ) |
Combined ratio | | 93.7 | % | | 108.0 |
| | 97.8 |
| | 100.5 |
|
| | | | | | | | |
E&S Lines: | | | | | | | | |
Underwriting (loss) gain, before federal income tax | | $ | (7,789 | ) | | 1,319 |
| | (8,354 | ) | | 2,889 |
|
Underwriting (loss) gain, after federal income tax | | (6,154 | ) | | 857 |
| | (6,600 | ) | | 1,878 |
|
Combined ratio | | 114.7 | % | | 97.5 |
| | 107.9 |
| | 97.2 |
|
| | | | | | | | |
Investments: | | |
| | |
| | | | |
Net investment income | | $ | 45,553 |
| | 41,430 |
| | 88,784 |
| | 78,849 |
|
Net realized and unrealized investment (losses) gains | | (1,652 | ) | | 1,734 |
| | (12,201 | ) | | 689 |
|
Total investment income, before federal income tax | | 43,901 |
| | 43,164 |
| | 76,583 |
| | 79,538 |
|
Tax on investment income | | 7,617 |
| | 11,734 |
| | 12,843 |
| | 21,336 |
|
Total investment income, after federal income tax |
| $ | 36,284 |
|
| 31,430 |
| | 63,740 |
| | 58,202 |
|
|
| | | | | | | | | | | | | |
Income Before Federal Income Tax | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Standard Commercial Lines: | | |
| | |
| | | | |
Underwriting gain | | $ | 34,759 |
| | 40,173 |
| | 77,305 |
| | 71,105 |
|
GAAP combined ratio | | 92.2 | % | | 90.2 |
| | 91.2 |
| | 91.3 |
|
Statutory combined ratio | | 90.6 |
| | 88.6 |
| | 89.5 |
| | 89.1 |
|
| | | |
|
| |
|
| |
|
|
Standard Personal Lines: | | | | | | | | |
Underwriting (loss) gain | | $ | (5,768 | ) | | 6,125 |
| | (662 | ) | | 14,730 |
|
GAAP combined ratio | | 108.0 | % | | 91.4 |
| | 100.5 |
| | 89.6 |
|
Statutory combined ratio | | 105.9 |
| | 89.9 |
| | 99.8 |
| | 90.1 |
|
| | | | | | | | |
E&S Lines: | | | | | | | | |
Underwriting gain (loss) | | $ | 1,319 |
| | (2,521 | ) | | 2,889 |
| | (1,103 | ) |
GAAP combined ratio | | 97.5 | % | | 105.1 |
| | 97.2 |
| | 101.1 |
|
Statutory combined ratio | | 97.0 |
| | 102.7 |
| | 96.5 |
| | 100.6 |
|
| | | | | | | | |
Investments: | | |
| | |
| | | | |
Net investment income | | $ | 41,430 |
| | 31,182 |
| | 78,849 |
| | 61,951 |
|
Net realized investment losses | | 1,734 |
| | 1,765 |
| | 689 |
| | (939 | ) |
Total investment income, before federal income tax | | 43,164 |
| | 32,947 |
| | 79,538 |
| | 61,012 |
|
Tax on investment income | | 11,734 |
| | 8,275 |
| | 21,336 |
| | 14,538 |
|
Total investment income, after federal income tax |
| $ | 31,430 |
|
| 24,672 |
| | 58,202 |
| | 46,474 |
|
| | Reconciliation of Segment Results to Income Before Federal Income Tax | | Quarter ended June 30, | | Six Months ended June 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Underwriting gain (loss), before federal income tax | | | | | | | | | |
Underwriting gain (loss) | | | | | | | | | |
Standard Commercial Lines | | $ | 34,759 |
| | 40,173 |
| | 77,305 |
| | 71,105 |
| | $ | 41,016 |
| | 34,759 |
| | 47,820 |
| | 77,305 |
|
Standard Personal Lines | | (5,768 | ) | | 6,125 |
| | (662 | ) | | 14,730 |
| | 4,805 |
| | (5,768 | ) | | 3,299 |
| | (662 | ) |
E&S Lines | | 1,319 |
| | (2,521 | ) | | 2,889 |
| | (1,103 | ) | | (7,789 | ) | | 1,319 |
| | (8,354 | ) | | 2,889 |
|
Investment income, before federal income tax | | 43,164 |
| | 32,947 |
| | 79,538 |
| | 61,012 |
| |
Investment income | | | 43,901 |
| | 43,164 |
| | 76,583 |
| | 79,538 |
|
Total all segments | | 73,474 |
| | 76,724 |
| | 159,070 |
| | 145,744 |
| | 81,933 |
| | 73,474 |
| | 119,348 |
| | 159,070 |
|
Interest expense | | (6,081 | ) | | (5,620 | ) | | (12,187 | ) | | (11,226 | ) | | (6,125 | ) | | (6,081 | ) | | (12,277 | ) | | (12,187 | ) |
General corporate and other expenses | | (8,464 | ) | | (8,793 | ) | | (20,380 | ) | | (20,332 | ) | |
Corporate expenses | | | (3,283 | ) | | (8,464 | ) | | (14,615 | ) | | (20,380 | ) |
Income, before federal income tax | | $ | 58,929 |
| | 62,311 |
|
| 126,503 |
| | 114,186 |
| | $ | 72,525 |
| | 58,929 |
|
| 92,456 |
| | 126,503 |
|
NOTE 10. Retirement Plans
SICA's primary pension plan is the Retirement Income Plan for Selective Insurance Company of America (the “Pension Plan”). SICA also sponsors the Supplemental Excess Retirement Plan (the “Excess Plan”) and a life insurance benefit plan. All plans are closed to new entrants and benefits ceased accruing under the Pension Plan and the Excess Plan after March 31, 2016. For more information concerning SICA's retirement plans, refer to Note 14. “Retirement Plans” in Item 8. “Financial Statements and Supplementary Data.” of our 20162017 Annual Report.
The following tables provide information regarding the Pension Plan: | | | | | | | | | | | | Pension Plan | | Pension Plan |
| | Pension Plan Quarter ended June 30, | | Pension Plan Six Months ended June 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Net Periodic Benefit Cost: | | | | | | | | | | | | | | | | |
Service cost | | $ | — |
| | — |
| | — |
| | 1,606 |
| |
Interest cost | | 3,110 |
| | 3,101 |
| | 6,221 |
| | 6,203 |
| | $ | 3,095 |
| | 3,110 |
| | 6,190 |
| | 6,221 |
|
Expected return on plan assets | | (4,855 | ) | | (3,988 | ) | | (9,709 | ) | | (7,976 | ) | | (5,681 | ) | | (4,855 | ) | | (11,363 | ) | | (9,709 | ) |
Amortization of unrecognized net actuarial loss | | 482 |
| | 1,481 |
| | 963 |
| | 2,961 |
| | 493 |
| | 482 |
| | 987 |
| | 963 |
|
Total net periodic cost | | $ | (1,263 | ) | | 594 |
| | (2,525 | ) | | 2,794 |
| |
Total net periodic benefit cost1 | | | $ | (2,093 | ) | | (1,263 | ) | | (4,186 | ) | | (2,525 | ) |
1 The components of net periodic benefit cost are included within "Loss and loss expense incurred" and "Other insurance expenses" on the Consolidated Statements of Income.
| | | | | | | | Pension Plan |
| | Pension Plan Six Months ended June 30, | | Six Months ended June 30, |
| | 2017 | | 2016 | | 2018 | | 2017 |
Weighted-Average Expense Assumptions: | | | | | | | | |
Discount rate | | 4.41 | % | | 4.69 | % | | 3.78 | % | | 4.41 | % |
Effective interest rate for calculation of service cost | | n/a |
| | 4.52 |
| |
Effective interest rate for calculation of interest cost | | 3.83 |
| | 4.02 |
| | 3.46 |
| | 3.84 |
|
Expected return on plan assets | | 6.24 |
| | 6.37 |
| | 6.36 |
| | 6.24 |
|
Rate of compensation increase | | n/a |
| | 4.00 |
| |
NOTE 11. Comprehensive Income
The components of comprehensive income, both gross and net of tax, for Second Quarter and Six Months 20172018 and 20162017 are as follows: |
| | | | | | | | | | |
Second Quarter 2017 | | | | | | |
($ in thousands) | | Gross | | Tax | | Net |
Net income | | $ | 58,929 |
| | 17,503 |
| | 41,426 |
|
Components of OCI: | | |
| | |
| | |
|
Unrealized gains on investment securities: | | |
| | |
| | |
|
Unrealized holding gains during period | | 35,887 |
| | 12,561 |
| | 23,326 |
|
Non-credit portion of OTTI recognized in OCI | | 6 |
| | 2 |
| | 4 |
|
Amounts reclassified into net income: | | | | | | |
HTM securities | | (43 | ) | | (15 | ) | | (28 | ) |
Realized gains on AFS securities | | (1,885 | ) | | (660 | ) | | (1,225 | ) |
Total unrealized gains on investment securities | | 33,965 |
| | 11,888 |
| | 22,077 |
|
Defined benefit pension and post-retirement plans: | | |
| | |
| | |
|
Amounts reclassified into net income: | | |
| | |
| | |
|
Net actuarial loss | | 508 |
| | 178 |
| | 330 |
|
Total defined benefit pension and post-retirement plans | | 508 |
| | 178 |
| | 330 |
|
Other comprehensive income | | 34,473 |
| | 12,066 |
| | 22,407 |
|
Comprehensive income | | $ | 93,402 |
| | 29,569 |
| | 63,833 |
|
| | Second Quarter 2016 | | | | | | | |
Second Quarter 2018 | | | | | | | |
($ in thousands) | | | Gross | | Tax | | Net |
Net income | | | $ | 72,525 |
| | 13,706 |
| | 58,819 |
|
Components of other comprehensive loss: | | | |
| | |
| | |
|
Unrealized losses on investment securities: | | | |
| | |
| | |
|
Unrealized holding losses during period | | | (23,993 | ) | | (5,038 | ) | | (18,955 | ) |
Amounts reclassified into net income: | | | | | | | |
HTM securities | | | (8 | ) | | (2 | ) | | (6 | ) |
Realized losses on disposals of AFS securities | | | 2,870 |
| | 603 |
| | 2,267 |
|
Total unrealized losses on investment securities | | | (21,131 | ) | | (4,437 | ) | | (16,694 | ) |
Defined benefit pension and post-retirement plans: | | | |
| | |
| | |
|
Amounts reclassified into net income: | | | |
| | |
| | |
|
Net actuarial loss | | | 531 |
| | 111 |
| | 420 |
|
Total defined benefit pension and post-retirement plans | | | 531 |
| | 111 |
| | 420 |
|
Other comprehensive loss | | | (20,600 | ) | | (4,326 | ) | | (16,274 | ) |
Comprehensive income | | | $ | 51,925 |
| | 9,380 |
| | 42,545 |
|
| | | | | | | |
| | | | | | | |
Second Quarter 2017 | | | | | | | |
($ in thousands) | | Gross | | Tax | | Net | | Gross | | Tax | | Net |
Net income | | $ | 62,311 |
| | 18,710 |
| | 43,601 |
| | $ | 58,929 |
| | 17,503 |
| | 41,426 |
|
Components of OCI: | | |
| | |
| | |
| | |
| | |
| | |
|
Unrealized gains on investment securities: | | |
| | |
| | |
| | |
| | |
| | |
|
Unrealized holding gains during period | | 55,675 |
| | 19,487 |
| | 36,188 |
| | 35,887 |
| | 12,561 |
| | 23,326 |
|
Non-credit portion of OTTI recognized in OCI | | (10 | ) | | (4 | ) | | (6 | ) | | 6 |
| | 2 |
| | 4 |
|
Amounts reclassified into net income: | | | | | | | | | | | | |
HTM securities | | (19 | ) | | (7 | ) | | (12 | ) | | (43 | ) | | (15 | ) | | (28 | ) |
Realized gains on AFS securities | | (1,762 | ) | | (617 | ) | | (1,145 | ) | |
Realized gains on disposals of AFS securities | | | (1,885 | ) | | (660 | ) | | (1,225 | ) |
Total unrealized gains on investment securities | | 53,884 |
| | 18,859 |
| | 35,025 |
| | 33,965 |
| | 11,888 |
| | 22,077 |
|
Defined benefit pension and post-retirement plans: | | |
| | |
| | |
| | |
| | |
| | |
|
Amounts reclassified into net income: | | |
| | |
| | |
| | |
| | |
| | |
|
Net actuarial loss | | 1,517 |
| | 532 |
| | 985 |
| | 508 |
| | 178 |
| | 330 |
|
Total defined benefit pension and post-retirement plans | | 1,517 |
| | 532 |
| | 985 |
| | 508 |
| | 178 |
| | 330 |
|
Other comprehensive income | | 55,401 |
| | 19,391 |
| | 36,010 |
| | 34,473 |
| | 12,066 |
| | 22,407 |
|
Comprehensive income | | $ | 117,712 |
| | 38,101 |
| | 79,611 |
| | $ | 93,402 |
| | 29,569 |
| | 63,833 |
|
|
| | | | | | | | | | |
Six Months 2017 | | | | | | |
($ in thousands) | | Gross | | Tax | | Net |
Net income | | $ | 126,503 |
| | 34,637 |
| | 91,866 |
|
Components of OCI: | | |
| | |
| | |
|
Unrealized gains on investment securities: | | |
| | |
| | |
|
Unrealized holding gains during period | | 61,672 |
| | 21,585 |
| | 40,087 |
|
Non-credit portion of OTTI recognized in OCI | | 6 |
| | 2 |
| | 4 |
|
Amounts reclassified into net income: | | | | | | |
HTM securities | | (92 | ) | | (32 | ) | | (60 | ) |
Realized gains on AFS securities | | (375 | ) | | (131 | ) | | (244 | ) |
Total unrealized gains on investment securities | | 61,211 |
| | 21,424 |
| | 39,787 |
|
Defined benefit pension and post-retirement plans: | | |
| | |
| | |
|
Amounts reclassified into net income: | | |
| | |
| | |
|
Net actuarial loss | | 1,015 |
| | 355 |
| | 660 |
|
Total defined benefit pension and post-retirement plans | | 1,015 |
| | 355 |
| | 660 |
|
Other comprehensive income | | 62,226 |
| | 21,779 |
| | 40,447 |
|
Comprehensive income | | $ | 188,729 |
| | 56,416 |
| | 132,313 |
|
| | Six Months 2016 | | | | | | | |
Six Months 2018 | | | | | | | |
($ in thousands) | | | Gross | | Tax | | Net |
Net income | | | $ | 92,456 |
| | 14,712 |
| | 77,744 |
|
Components of other comprehensive loss: | | | |
| | |
| | |
|
Unrealized losses on investment securities: | | | |
| | |
| | |
|
Unrealized holding losses during period | | | (109,308 | ) | | (22,955 | ) | | (86,353 | ) |
Amounts reclassified into net income: | | | | | | | |
HTM securities | | | (20 | ) | | (4 | ) | | (16 | ) |
Realized losses on disposals of AFS securities | | | 7,419 |
| | 1,558 |
| | 5,861 |
|
Total unrealized losses on investment securities | | | (101,909 | ) | | (21,401 | ) | | (80,508 | ) |
Defined benefit pension and post-retirement plans: | | | |
| | |
| | |
|
Amounts reclassified into net income: | | | |
| | | | |
Net actuarial loss | | | 1,063 |
| | 223 |
| | 840 |
|
Total defined benefit pension and post-retirement plans | | | 1,063 |
| | 223 |
| | 840 |
|
Other comprehensive loss | | | (100,846 | ) | | (21,178 | ) | | (79,668 | ) |
Comprehensive loss | | | $ | (8,390 | ) | | (6,466 | ) | | (1,924 | ) |
| | | | | | | |
| | | | | | | |
Six Months 2017 | | | | | | | |
($ in thousands) | | Gross | | Tax | | Net | | Gross | | Tax | | Net |
Net income | | $ | 114,186 |
| | 33,553 |
| | 80,633 |
| | $ | 126,503 |
| | 34,637 |
| | 91,866 |
|
Components of OCI: | | |
| | |
| | |
| | |
| | | | |
Unrealized gains on investment securities: | | |
| | |
| | |
| | |
| | | | |
Unrealized holding gains during period | | 121,412 |
| | 42,495 |
| | 78,917 |
| | 61,672 |
| | 21,585 |
| | 40,087 |
|
Non-credit portion of OTTI recognized in OCI | | (10 | ) | | (4 | ) | | (6 | ) | | 6 |
| | 2 |
| | 4 |
|
Amounts reclassified into net income: | | | | | | | | | | | | |
HTM securities | | (91 | ) | | (32 | ) | | (59 | ) | | (92 | ) | | (32 | ) | | (60 | ) |
Realized losses on AFS securities | | 937 |
| | 328 |
| | 609 |
| |
Realized gains on disposals of AFS securities | | | (375 | ) | | (131 | ) | | (244 | ) |
Total unrealized gains on investment securities | | 122,248 |
| | 42,787 |
| | 79,461 |
| | 61,211 |
| | 21,424 |
| | 39,787 |
|
Defined benefit pension and post-retirement plans: | | |
| | |
| | |
| | |
| | |
| | |
|
Amounts reclassified into net income: | | |
| | |
| | |
| | |
| | | | |
Net actuarial loss | | 3,033 |
| | 1,062 |
| | 1,971 |
| | 1,015 |
| | 355 |
| | 660 |
|
Total defined benefit pension and post-retirement plans | | 3,033 |
| | 1,062 |
| | 1,971 |
| | 1,015 |
| | 355 |
| | 660 |
|
Other comprehensive income | | 125,281 |
| | 43,849 |
| | 81,432 |
| | 62,226 |
| | 21,779 |
| | 40,447 |
|
Comprehensive income | | $ | 239,467 |
| | 77,402 |
| | 162,065 |
| | $ | 188,729 |
| | 56,416 |
| | 132,313 |
|
The balances of, and changes in, each component of AOCI (net of taxes) as of June 30, 20172018 were as follows:
| | June 30, 2017 | | | | Defined Benefit Pension and Post-Retirement Plans | | | |
June 30, 2018 | | | | | Defined Benefit Pension and Post-Retirement Plans | | |
| | Net Unrealized Gain on Investment Securities | | Total AOCI | | Net Unrealized Gains (Losses) on Investment Securities | | Total AOCI |
($ in thousands) | | OTTI Related | | HTM Related | | All Other | | Investments Subtotal | | Defined Benefit Pension and Post-Retirement Plans | | | OTTI Related | | HTM Related | | All Other | | Investments Subtotal | |
Balance, December 31, 2016 | | $ | (150 | ) | | 102 |
| | 42,170 |
| | 42,122 |
| | (15,950 | ) | |
Balance, December 31, 2017 | | | $ | (59 | ) | | (14 | ) | | 80,648 |
| | 80,575 |
| | (60,405 | ) | | 20,170 |
|
Cumulative effect adjustments | | | (12 | ) | | (2 | ) | | (12,792 | ) | | (12,806 | ) | | (12,213 | ) | | (25,019 | ) |
Balance, December 31, 2017 as adjusted | | | (71 | ) | | (16 | ) | | 67,856 |
| | 67,769 |
| | (72,618 | ) | | (4,849 | ) |
OCI before reclassifications | | 4 |
| | — |
| | 40,087 |
| | 40,091 |
| | — |
| | 40,091 |
| | — |
| | — |
| | (86,353 | ) | | (86,353 | ) | | — |
| | (86,353 | ) |
Amounts reclassified from AOCI | | — |
| | (60 | ) | | (244 | ) | | (304 | ) | | 660 |
| | 356 |
| | — |
| | (16 | ) | | 5,861 |
| �� | 5,845 |
| | 840 |
| | 6,685 |
|
Net current period OCI | | 4 |
| | (60 | ) | | 39,843 |
| | 39,787 |
| | 660 |
| | 40,447 |
| | — |
| | (16 | ) | | (80,492 | ) | | (80,508 | ) | | 840 |
| | (79,668 | ) |
Balance, June 30, 2017 | | $ | (146 | ) | | 42 |
| | 82,013 |
| | 81,909 |
| | (57,412 | ) | | 24,497 |
| |
Balance, June 30, 2018 | | | $ | (71 | ) | | (32 | ) | | (12,636 | ) | | (12,739 | ) | | (71,778 | ) | | (84,517 | ) |
The reclassifications out of AOCI were as follows: | | | Quarter ended June 30, | | Six Months ended June 30, | Affected Line Item in the Unaudited Consolidated Statement of Income | Quarter ended June 30, | | Six Months ended June 30, | Affected Line Item in the Unaudited Consolidated Statements of Income |
($ in thousands) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
HTM related | | | | | | | | | | | | | | | | |
Unrealized losses on HTM disposals | 17 |
| | 60 |
| | 30 |
| | 88 |
| Net realized gains (losses) | $ | (7 | ) | | 17 |
| | (6 | ) | | 30 |
| Net realized and unrealized (losses) gains |
Amortization of net unrealized gains on HTM securities | (60 | ) | | (79 | ) | | (122 | ) | | (179 | ) | Net investment income earned | (1 | ) | | (60 | ) | | (14 | ) | | (122 | ) | Net investment income earned |
| (43 | ) | | (19 | ) | | (92 | ) | | (91 | ) | Income before federal income tax | (8 | ) | | (43 | ) | | (20 | ) | | (92 | ) | Income before federal income tax |
| 15 |
| | 7 |
| | 32 |
| | 32 |
| Total federal income tax expense | 2 |
| | 15 |
| | 4 |
| | 32 |
| Total federal income tax expense |
| (28 | ) | | (12 | ) | | (60 | ) | | (59 | ) | Net income | (6 | ) | | (28 | ) | | (16 | ) | | (60 | ) | Net income |
Realized (gains) losses on AFS and OTTI | | | | | | | | | |
Realized (gains) losses on AFS disposals and OTTI | (1,885 | ) | | (1,762 | ) | | (375 | ) | | 937 |
| Net realized gains (losses) | |
Realized losses (gains) on AFS and OTTI | | | | | | | | | |
Realized losses (gains) on AFS disposals and OTTI | | 2,870 |
| | (1,885 | ) | | 7,419 |
| | (375 | ) | Net realized and unrealized (losses) gains |
| (1,885 | ) | | (1,762 | ) | | (375 | ) | | 937 |
| Income before federal income tax | 2,870 |
| | (1,885 | ) | | 7,419 |
| | (375 | ) | Income before federal income tax |
| 660 |
| | 617 |
| | 131 |
| | (328 | ) | Total federal income tax expense | (603 | ) | | 660 |
| | (1,558 | ) | | 131 |
| Total federal income tax expense |
| (1,225 | ) | | (1,145 | ) | | (244 | ) | | 609 |
| Net income | 2,267 |
| | (1,225 | ) | | 5,861 |
| | (244 | ) | Net income |
Defined benefit pension and post-retirement life plans | | | | | | | | | | | | | | | | |
Net actuarial loss | 111 |
| | 329 |
| | 221 |
| | 658 |
| Losses and loss expenses incurred | 113 |
| | 111 |
| | 225 |
| | 221 |
| Loss and loss expense incurred |
| 397 |
| | 1,188 |
| | 794 |
| | 2,375 |
| Policy acquisition costs | 418 |
| | 397 |
| | 838 |
| | 794 |
| Other insurance expenses |
Total defined benefit pension and post-retirement life | 508 |
| | 1,517 |
| | 1,015 |
| | 3,033 |
| Income before federal income tax | 531 |
| | 508 |
| | 1,063 |
| | 1,015 |
| Income before federal income tax |
| (178 | ) | | (532 | ) | | (355 | ) | | (1,062 | ) | Total federal income tax expense | (111 | ) | | (178 | ) | | (223 | ) | | (355 | ) | Total federal income tax expense |
| 330 |
| | 985 |
| | 660 |
| | 1,971 |
| Net income | 420 |
| | 330 |
| | 840 |
| | 660 |
| Net income |
| | | | | | | | | | | | | | | | |
Total reclassifications for the period | $ | (923 | ) | | (172 | ) | | 356 |
| | 2,521 |
| Net income | $ | 2,681 |
| | (923 | ) | | 6,685 |
| | 356 |
| Net income |
NOTE 12. Related Party TransactionsFederal Income Taxes
BlackRock, Inc., a leading publicly traded investment management firm (“BlackRock”), has purchased(a) On December 22, 2017, Tax Reform was signed into law, which among other implications, reduced our common shares in the ordinary course of its investment business and has previously filed Schedules 13G/Astatutory corporate tax rate from 35% to 21% beginning with the SEC. On April 10, 2017, BlackRock filed a Schedule 13G/A reporting beneficial ownership as of March 31, 2017, of 12.7% 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 Second Quarter 2017 and Six Months 2017, we incurred BlackRock-related expenses of $0.5 million and $1.0 million for services rendered, respectively. No material expenses were incurred with BlackRock in Second Quarter 2016 and Six Months 2016. Amounts payable for such services at June 30, 2017 and December 31, 2016, were $0.9 million and $0.4 million, respectively. All contracts with BlackRock were consummated in the ordinary course of business on an arm's-length basis.2018 tax year.
We have nocontinue to provide provisional amounts for loss reserve discounting because the Internal Revenue Service ("IRS") has not yet issued guidance with regard to the discount rates to be used under Tax Reform. For additional material transactions with related parties other than those disclosed ininformation, refer to Note 16. "Related Party Transactions" included13. "Federal Income Taxes" in Item 8. "Financial Statements and Supplementary Data." of our 20162017 Annual Report.
During 2018, we will continue to monitor IRS guidance to complete the analysis of loss reserve discounting.
(b) A reconciliation of federal income tax on income at the corporate rate to the effective tax rate is as follows: |
| | | | | | | | | | | | | |
| | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Statutory tax rate | | 21 | % | | 35 |
| | 21 |
| | 35 |
|
Tax at statutory rate | | $ | 15,231 |
| | 20,625 |
| | 19,416 |
| | 44,276 |
|
Tax-advantaged interest | | (1,393 | ) | | (2,757 | ) | | (2,904 | ) | | (5,564 | ) |
Dividends received deduction | | (210 | ) | | (625 | ) | | (336 | ) | | (956 | ) |
Stock-based compensation | | (82 | ) | | (374 | ) | | (2,548 | ) | | (3,323 | ) |
Other | | 160 |
| | 634 |
| | 1,084 |
| | 204 |
|
Federal income tax expense | | $ | 13,706 |
| | 17,503 |
| | 14,712 |
| | 34,637 |
|
NOTE 13. 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 ten insurance subsidiaries ("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 lossesloss 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 June 30, 2017,2018, 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
As used herein, the "Company," "we," "us," or "our" refers to Selective Insurance Group, Inc. (the "Parent"), and its subsidiaries, except as expressly indicated or unless the context otherwise requires. In this Quarterly Report on Form 10-Q, we discuss and make statements regarding our intentions, beliefs, current expectations, and projections regarding our company’s future operations and performance. Such statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are often identified by words such as “anticipates,” “believes,” “expects,” “will,” “should,” and “intends” and their negatives. We caution prospective investors that such forward-looking statements are not guarantees of future performance. Risks and uncertainties are inherent in our future performance. Factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to, those discussed under Item 1A. “Risk Factors” below in Part II. “Other Information.” These risk factors may not be exhaustive. We operate in a continually changing business environment and new risk factors emerge from time to time. We can neither predict such new risk factors nor can we assess the impact, if any, of such new risk factors on our businesses or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied in any forward-looking statements in this report. In light of these risks, uncertainties, and assumptions, the forward-looking events discussed in this report might not occur. We make forward-looking statements based on currently available information and assume no obligation to update these statements due to changes in underlying factors, new information, future developments, or otherwise.
Introduction
The Parent, through its ten insurance subsidiaries, collectively referred to as the "Insurance Subsidiaries," offers property and casualty insurance products in the standard and excess and surplus ("E&S") marketplaces. We classify our business into four reportable segments, which are as follows:
Standard Commercial Lines;
Standard Personal Lines;
E&S Lines; and
Investments.
For further details regarding these segments, refer to Note 9. "Segment Information" in Item 1. "Financial Statements." of this Form 10-Q and Note 11. "Segment Information" in Item 8. "Financial Statements and Supplementary Data." of our Annual Report on Form 10-K for the year ended December 31, 20162017 ("20162017 Annual Report"Report").
Our Standard Commercial and Standard Personal Lines products and services are written through nine of our Insurance Subsidiaries, some of which write flood business through the Write Your Own ("WYO") program of the National Flood Insurance Program ("NFIP"). Our E&S products and services are written through one subsidiary, Mesa Underwriters Specialty Insurance Company ("MUSIC"). This subsidiary provides us with a nationally-authorized non-admitted platform to offer insurance products and services to customers who have not obtained coverage in the standard marketplace.
The following is Management’s Discussion and Analysis (“MD&A”) of the consolidated results of operations and financial condition, as well as known trends and uncertainties, that may have a material impact in future periods. Consequently, investors should read the MD&A in conjunction with Item 1. "Financial Statements." of this Form 10-Q and the consolidated financial statements in our 20162017 Annual Report filed with the U.S. Securities and Exchange Commission ("SEC").Commission.
In the MD&A, we will discuss and analyze the following:
Critical Accounting Policies and Estimates;
Financial Highlights of Results for the second quarters ended June 30, 2018 (“Second Quarter 2018”) and June 30, 2017 (“Second Quarter 2017”) and June 30, 2016 (“Second Quarter 2016”) and the six-month periods ended June 30, 2018 ("Six Months 2018") and June 30, 2017 ("Six Months 2017") and June 30, 2016 ("Six Months 2016");
Results of Operations and Related Information by Segment;
Federal Income Taxes;
Financial Condition, Liquidity, and Capital Resources;
Ratings;
Off-Balance Sheet Arrangements; and
Contractual Obligations, Contingent Liabilities, and Commitments.
Critical Accounting Policies and Estimates
Our unaudited interim consolidated financial statements include amounts based on our informed estimates and judgments for those transactions that are not yet complete. Such estimates and judgments affect the reported amounts in the consolidated financial statements. Those estimates and judgments that were most critical to the preparation of the consolidated financial statements involved the following: (i) reserves for loss and loss expenses;expense; (ii) pension and post-retirement benefit plan actuarial assumptions; (iii) investment valuation and other-than-temporary-impairments ("OTTI"); and (iv) reinsurance. These estimates and judgments require the use of assumptions about matters that are highly uncertain and, therefore, are subject to change as facts and circumstances develop. If different estimates and judgments had been applied, materially different amounts might have been reported in the financial statements. For additional information regarding our critical accounting policies, refer to pages 3736 through 4544 of our 20162017 Annual Report.Report.
Financial Highlights of Results for Second Quarter and Six Months 20172018 and Second Quarter and Six Months 201620171
| | ($ and shares in thousands, except per share amounts) | | Quarter ended June 30, | | Change % or Points | | Six Months ended June 30, | | Change % or Points | | | Quarter ended June 30, | | Change % or Points | | Six Months ended June 30, | | Change % or Points | |
| 2017 | | 2016 | | | | 2017 | | 2016 | | | 2018 | | 2017 | | | | 2018 | | 2017 | |
Generally Accepted Accounting Principles ("GAAP") measures: | | | | | | | | | | | | | | | | |
Revenues | | $ | 614,485 |
| | 568,747 |
| | 8 |
| | % | | $ | 1,214,954 |
| | 1,120,221 |
| | 8 |
| | % | | $ | 651,916 |
| | 614,485 |
| | 6 |
| % | | $ | 1,278,605 |
| | 1,214,954 |
| | 5 |
| % |
After-tax net investment income | | 30,303 |
| | 23,525 |
| | 29 |
| | | | 57,754 |
| | 47,085 |
| | 23 |
| | | | 37,589 |
| | 30,303 |
| | 24 |
| | | 73,379 |
| | 57,754 |
| | 27 |
| |
Pre-tax net income | | 58,929 |
| | 62,311 |
| | (5 | ) | | 126,503 |
| | 114,186 |
| | 11 |
| | |
After-tax underwriting income | | | 30,045 |
| | 19,702 |
| | 52 |
| | 33,784 |
| | 51,696 |
| | (35 | ) | |
Net income before federal income tax | | | 72,525 |
| | 58,929 |
| | 23 |
| | 92,456 |
| | 126,503 |
| | (27 | ) | |
Net income | | 41,426 |
| | 43,601 |
| | (5 | ) | | 91,866 |
| | 80,633 |
| | 14 |
| | | 58,819 |
| | 41,426 |
| | 42 |
| | 77,744 |
| | 91,866 |
| | (15 | ) | |
Diluted net income per share | | 0.70 |
| | 0.74 |
| | (5 | ) | | 1.55 |
| | 1.38 |
| | 12 |
| | | 0.99 |
| | 0.70 |
| | 41 |
| | 1.30 |
| | 1.55 |
| | (16 | ) | |
Diluted weighted-average outstanding shares | | 59,222 |
| | 58,598 |
| | 1 |
| | | | 59,185 |
| | 58,552 |
| | 1 |
| | | | 59,597 |
| | 59,222 |
| | 1 |
| | | 59,579 |
| | 59,185 |
| | 1 |
| |
GAAP combined ratio | | 94.7 | % | | 91.8 |
| | 2.9 |
| | pts | | 93.0 | % | | 92.0 |
| | 1.0 |
| | pts | |
Statutory combined ratio | | 93.1 |
| | 90.1 |
| | 3.0 |
| | | | 91.4 |
| | 90.4 |
| | 1.0 |
| | | |
Combined ratio | | | 93.7 | % | | 94.7 |
| | (1.0 | ) | pts | | 96.4 | % | | 93.0 |
| | 3.4 |
| pts |
Invested assets per dollar of stockholders' equity | | $ | 3.33 |
| | 3.39 |
| | (2 | ) | | % | | $ | 3.33 |
| | 3.39 |
| | (2 | ) | | % | | $ | 3.34 |
| | 3.33 |
| | — |
| % | | $ | 3.34 |
| | 3.33 |
| | — |
| % |
After-tax yield on investments | | 2.2 | % | | 1.8 |
| | 0.4 |
| | pts | | 2.1 | % | | 1.8 |
| | 0.3 |
| | pts | | 2.7 | % | | 2.2 |
| | 0.5 |
| pts | | 2.6 | % | | 2.1 |
| | 0.5 |
| pts |
Annualized return on average equity ("ROE") | | 10.2 |
| | 11.5 |
| | (1.3 | ) | | 11.5 |
| | 10.9 |
| | 0.6 |
| | | 14.0 |
| | 10.2 |
| | 3.8 |
| | 9.1 |
| | 11.5 |
| | (2.4 | ) | |
Non-GAAP measures: | | | | | | | | | | | | | | | | | |
Operating income2 | | $ | 40,299 |
| | 42,454 |
| | (5 | ) | | % | | $ | 91,418 |
| | 81,244 |
| | 13 |
| | % | |
Diluted operating income per share2 | | 0.68 |
| | 0.72 |
| | (6 | ) | | 1.54 |
| | 1.39 |
| | 11 |
| | |
Annualized operating ROE2 | | 9.9 | % | | 11.2 |
| | (1.3 | ) | | pts | | 11.5 | % | | 11.0 |
| | 0.5 |
| | pts | |
| | | | | | | | | | | | | | | |
Non-Generally Accepted Accounting Principles ("GAAP") operating income2 | | | $ | 60,124 |
| | 40,299 |
| | 49 |
| % | | $ | 87,383 |
| | 91,418 |
| | (4 | ) | % |
Diluted non-GAAP operating income per share2 | | | 1.01 |
| | 0.68 |
| | 49 |
| | 1.46 |
| | 1.54 |
| | (5 | ) | |
Annualized non-GAAP operating ROE2 | | | 14.3 | % | | 9.9 |
| | 4.4 |
| pts | | 10.2 | % | | 11.5 |
| | (1.3 | ) | pts |
| |
1 | Refer to the Glossary of Terms attached to our 20162017 Annual Report as Exhibit 99.1 for definitions of terms used in this Form 10-Q. |
| |
2 | OperatingNon-GAAP operating income is used as an important financial measure by us, analysts, and investors, because the realization of investment gains and losses on sales of securities in any given period is largely discretionary as to timing. In addition, these net realized investment gains and losses, as well as OTTI that are charged to earnings, and the results of discontinued operations,unrealized gains and losses on equity securities, could distort the analysis of trends. |
Reconciliations of net income, net income per share, and annualized ROE to non-GAAP operating income, non-GAAP operating income per share, and annualized non-GAAP operating ROE, respectively, are provided in the tables below:
|
| | | | | | | | | | | | | |
Reconciliation of net income to operating income | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Net income | | $ | 41,426 |
| | 43,601 |
| | 91,866 |
| | 80,633 |
|
Exclude: Net realized (gains) losses | | (1,734 | ) | | (1,765 | ) | | (689 | ) | | 939 |
|
Exclude: Tax on net realized (gains) losses | | 607 |
| | 618 |
| | 241 |
| | (328 | ) |
Operating income | | $ | 40,299 |
| | 42,454 |
| | 91,418 |
| | 81,244 |
|
|
| | | | | | | | | | | | | |
Reconciliation of net income to non-GAAP operating income | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Net income | | $ | 58,819 |
| | 41,426 |
| | 77,744 |
| | 91,866 |
|
Net realized losses (gains) and OTTI | | 2,767 |
| | (1,734 | ) | | (752 | ) | | (689 | ) |
Net unrealized (gains) losses recognized in income on equity securities | | (1,115 | ) | | — |
| | 12,953 |
| | — |
|
Net realized (gains) losses, OTTI, and unrealized (gains) losses | | 1,652 |
| | (1,734 | ) | | 12,201 |
| | (689 | ) |
Tax expense (benefit) | | (347 | ) | | 607 |
| | (2,562 | ) | | 241 |
|
Non-GAAP operating income | | $ | 60,124 |
| | 40,299 |
| | 87,383 |
| | 91,418 |
|
|
| | | | | | | | | | | | | |
Reconciliation of net income per share to operating income per share | | Quarter ended June 30, | | Six Months ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Diluted net income per share | | $ | 0.70 |
| | 0.74 |
| | 1.55 |
| | 1.38 |
|
Exclude: Net realized (gains) losses per share | | (0.03 | ) | | (0.03 | ) | | (0.01 | ) | | 0.02 |
|
Exclude: Tax on net realized (gains) losses per share | | 0.01 |
| | 0.01 |
| | — |
| | (0.01 | ) |
Diluted operating income per share | | $ | 0.68 |
| | 0.72 |
| | 1.54 |
| | 1.39 |
|
|
| | | | | | | | | | | | | |
Reconciliation of net income per share to non-GAAP operating income per share | | Quarter ended June 30, | | Six Months ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Diluted net income per share | | $ | 0.99 |
| | 0.70 |
| | 1.30 |
| | 1.55 |
|
Net realized losses (gains) and OTTI | | 0.05 |
| | (0.03 | ) | | (0.01 | ) | | (0.01 | ) |
Net unrealized (gains) losses recognized in income on equity securities | | (0.02 | ) | | — |
| | 0.21 |
| | — |
|
Net realized (gains) losses, OTTI, and unrealized (gains) losses | | 0.03 |
| | (0.03 | ) | | 0.20 |
| | (0.01 | ) |
Tax expense (benefit) | | (0.01 | ) | | 0.01 |
| | (0.04 | ) | | — |
|
Diluted non-GAAP operating income per share | | $ | 1.01 |
| | 0.68 |
| | 1.46 |
| | 1.54 |
|
|
| | | | | | | | | | | |
Reconciliation of annualized ROE to annualized operating ROE | | Quarter ended June 30, | | Six Months ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Annualized ROE | | 10.2 | % | | 11.5 |
| | 11.5 |
| | 10.9 |
Exclude: Net realized (gains) losses | | (0.4 | ) | | (0.5 | ) | | (0.1 | ) | | 0.1 |
Exclude: Tax on net realized (gains) losses | | 0.1 |
| | 0.2 |
| | 0.1 |
| | — |
Annualized operating ROE | | 9.9 | % | | 11.2 |
| | 11.5 |
| | 11.0 |
|
| | | | | | | | | | | | |
Reconciliation of annualized ROE to annualized non-GAAP operating ROE | | Quarter ended June 30, | | Six Months ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Insurance operations | | 7.2 | % | | 4.9 |
| | 4.0 |
| | 6.5 |
|
Investment income1 | | 9.0 |
| | 7.5 |
| | 8.6 |
| | 7.3 |
|
Other | | (1.9 | ) | | (2.5 | ) | | (2.4 | ) | | (2.3 | ) |
Net realized (losses) gains and OTTI | | (0.7 | ) | | 0.4 |
| | 0.1 |
| | 0.1 |
|
Net unrealized gains (losses) recognized in income on equity securities | | 0.3 |
| | — |
| | (1.5 | ) | | — |
|
Total net realized (losses) gains, OTTI, and unrealized gains (losses)1 | | (0.4 | ) | | 0.4 |
| | (1.4 | ) | | 0.1 |
|
Tax on net realized losses (gains), OTTI, and unrealized (gains) losses1 | | 0.1 |
| | (0.1 | ) | | 0.3 |
| | (0.1 | ) |
Annualized ROE | | 14.0 | ��% | | 10.2 |
| | 9.1 |
| | 11.5 |
|
| | | | | | | | |
Annualized ROE | | 14.0 |
| | 10.2 |
| | 9.1 |
| | 11.5 |
|
Net realized losses (gains) and OTTI | | 0.7 |
| | (0.4 | ) | | (0.1 | ) | | (0.1 | ) |
Net unrealized (gains) losses recognized in income on equity securities | | (0.3 | ) | | — |
| | 1.5 |
| | — |
|
Net realized (gains) losses, OTTI, and unrealized (gains) losses | | 0.4 |
| | (0.4 | ) | | 1.4 |
| | (0.1 | ) |
Tax expense (benefit) | | (0.1 | ) | | 0.1 |
| | (0.3 | ) | | 0.1 |
|
Annualized non-GAAP operating ROE | | 14.3 | % | | 9.9 |
| | 10.2 |
| | 11.5 |
|
1 Investment segment results are the combination of "Net investment income earned," "Net realized and unrealized losses," and "Tax on net realized and unrealized losses."
After the severe winter weather losses incurred in the first quarter of 2018, our strong results in Second Quarter 2018 resulted in a 14.0% annualized ROE for Second Quarter 2018 and a 9.1% annualized ROE for Six Months 2018. The 3.8-point increase in annualized ROE in Second Quarter 2018 compared to Second Quarter 2017 was driven by: (i) an improvement in underwriting results, as the combined ratio was lower by 1.0 points in Second Quarter 2018 compared to Second Quarter 2017; (ii) an increase in investment income due to higher yields on our fixed income securities portfolio; (iii) a decrease in other expenses, as Second Quarter 2018 included a benefit related to stock compensation expense as a result of stock price fluctuations that have impacted the fair value of our liability awards; and (iv) a 1.9-point benefit from the lower corporate tax rate provided for in the Tax Cuts and Jobs Act of 2017 ("Tax Reform"). The 2.4-point decrease in annualized ROE in Six Months 2018 compared to Six Months 2017 reflects: (i) a 3.4-point increase in our combined ratio from 93.0% in Six Months 2017 to 96.4% in Six Months 2018; and (ii) the impact of net unrealized losses on equity securities in our income statement; partially offset by a 0.9-point benefit from the lower corporate tax rate provided for in Tax Reform. The combined ratio increase was primarily driven by non-catastrophe property losses that were 3.0 points higher than Six Months 2017, mostly due to the severe winter weather and a relatively large number of severe fire losses in the first quarter of 2018.
Our Second Quarter and Six Months 20172018 results continue to reflect our hard work to driveefforts to: (i) achieve renewal pure price increases at the account level within our Standard Commercial Lines segment and overall rate level increases in our Standard Personal Lines segments as well as ourand E&S segment,segments; (ii) generate new business,business; and (iii) improve the underlying profitability of our book of business through various underwriting and claims initiatives. Our net premiums written ("NPW") growth of 7% for Second Quarter 2018 and 6% infor Six Months 2017 was driven by our strong franchise value with our "ivy league" distribution partners. Over the past eight years, our Standard Commercial Lines renewal pure price increases have cumulatively outperformed the Willis Towers Watson Commercial Lines Pricing (or CLIPs) survey by approximately 1,800 basis points, while maintaining high retention rates. In addition, NPW growth2018 was aided by the net appointment of 46109 retail agents in 20162017 and 1066 retail agents in Six Months 2017, which is exclusive of 252018, excluding agency consolidations. Included in these net appointments were 26 agents that have beenwere appointed in our expansion states. These expansion statenew states of
Arizona and New Hampshire in 2017 and 12 agents will begin generating premium for usthat were appointed in the second half of 2017.Arizona, New Hampshire, and Colorado in Six Months 2018.
In addition to the cumulative renewal pure renewal price increases we have achieved over the past several years, we have benefited fromdriven underwriting and claims process enhancements, as well as a shift inand have improved our mix of business mix towards higher quality accounts.based on expected future profitability. For example, our workers compensation book of business, which represents approximately 20%17% of our Standard Commercial Lines business, continues to benefit from the steps we have taken in recent years to increase premium rates and improve the business mix by shifting towards lower hazard and smaller accounts from higher hazard and larger accounts. Additionally,from: (i) claims initiatives, such as having an increased focus on reducing workers compensation medical costs through more favorable Preferred Provider Organization ("PPO") contracts and greater PPO penetration, have helped improve profitability of this line. Thepenetration; and (ii) better outcomes driven by our workers compensation statutory combined ratio was a profitable 86.9%strategic case unit. In addition, we continue to work towards an improved mix of business in Six Months 2017. Our E&S segment has also seen some improvement in underwriting results as we have continued to deploy our corporate claims practices into this line, that shifts towards lower hazard and smaller operation; although we have not yet met our financial targets for this segment.accounts from higher hazard and larger accounts. For a full discussion of the claims initiatives that we have deployed, refer to the “Reserves for Loss and Loss Expenses”Expense” section within Critical Accounting Policies and Estimates in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations.” of our 20162017 Annual Report.
After-taxOur commercial automobile line of business has been unprofitable in recent years and remains a significant area of focus for both the industry and us, as we continue to drive various initiatives to improve profitability in this line of business. For Second Quarter and Six Months 2018, we recorded unfavorable prior year casualty reserve development of $7.0 million and $15.0 million, respectively, mainly for accident years 2015 through 2017. The industry-wide statutory combined ratio for 2018 is expected to average approximately 112% as the industry has been experiencing higher than expected claim frequencies largely due to increased miles driven as a result of lower unemployment, lower gasoline prices, and an increase in distracted driving. Our combined ratio was 108.8% for Second Quarter 2018 and 110.0% for Six Months 2018. We achieved renewal pure price increases on this line of 7.5% in Second Quarter 2018 and 7.4% in Six Months 2018. We expect on-going industry-wide profitability issues to drive new and renewal pricing higher for this line of business. We have also been managing our commercial automobile in-force book of business in targeted industry segments and reducing our relative exposure in higher hazard classes to improve the underlying profitability of this business.
Our E&S Lines segment also remains a focus area, with a combined ratio of 114.7% for Second Quarter 2018 and 107.9% for Six Months 2018. We face a competitive environment in this segment, and our pricing and underwriting initiatives aimed at improving profitability have resulted in a decline in new business volume. To improve our profitability, we have increased new and renewal pricing, implemented business mix changes, and enhanced claims management practices. We expect continued pressure on NPW growth in this segment until we achieve our risk-adjusted return expectations.
Pre-tax net investment income grew 23%10% in Second Quarter 2018 and 13% in Six Months 20172018 compared to Six Months 2016,the same prior year periods, driven by higher yields on our fixed income portfolio and improved returns on our alternative investments. In 2016, we determined that a more active management approach to our investment portfolio was necessary to maximize the risk-adjusted after-tax income and total return of the portfolio in an investment environment of low interest rates, while maintaining a similar level of credit quality and duration risk.securities portfolio. We have increased our long-term target risk asset allocation and modestly increasedcontinued to diversify our exposure to non-investment graderisk assets and move towards a long-term allocation of approximately 10% of total invested assets. Risk assets, which principally include public equities, high-yield fixed income securities, private equity investments, and private credit strategies to further diversify our allocation within risk assets. Our risk assets, which include public equities, non-investment grade fixed income securities, private equity investments, and other limited partnership private investments, represented 7%7.6% of our total invested assets at June 30, 2017 and may increase to approximately 10% over time.2018.
The improvements to our underwriting profitability and the more active management of our investment portfolio contributed to our long-term goal of generatingWe generated an annualized non-GAAP operating ROE that is approximately 300 basis pointsof 14.3% in excess of our weighted average cost of capital over time. Our annualized operating ROE increasedSecond Quarter 2018 and 10.2% in Six Months 2017 to 11.5%,2018, compared to 11.0%9.9% in Second Quarter 2017 and 11.5% in Six Months 2016,2017. The 4.4-point increase in Second Quarter 2018 compared to Second Quarter 2017 was mainly due to the increase in underwriting income and investment income, mentionedas discussed above. Our annualized ROE and operating ROE contributionsThe 1.3-point decrease in Six Months 2018 compared to Six Months 2017 was mainly due to lower levels of underwriting income as discussed above, partially offset by component are as follows:an increase in investment income.
|
| | | | | | | | | | | | |
ROE | | Quarter ended June 30, | | Six Months ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Insurance segments | | 4.9 | % | | 7.5 |
| | 6.5 | % | | 7.5 |
|
Investment income1 | | 7.5 |
| | 6.2 |
| | 7.3 |
| | 6.4 |
|
Other | | (2.5 | ) | | (2.5 | ) | | (2.3 | ) | | (2.9 | ) |
Net realized gains (losses)1, net of tax at 35% | | 0.3 |
| | 0.3 |
| | — |
| | (0.1 | ) |
Annualized ROE | | 10.2 |
| | 11.5 |
| | 11.5 |
| | 10.9 |
|
Exclude: Net realized gains (losses)1, net of tax at 35% | | (0.3 | ) | | (0.3 | ) | | — |
| | 0.1 |
|
Annualized operating ROE | | 9.9 | % | | 11.2 |
| | 11.5 | % | | 11.0 |
|
Weighted average cost of capital, as of the prior year-end | | 8.5 | % | | 8.7 |
| | 8.5 | % | | 8.7 |
|
1 Investment segment results are the combination of "Net investment income earned" and "Net realized losses".
��
Insurance SegmentsOperations
The key metric in understanding our insurance segments’ contribution to annualized non-GAAP operating ROE is the GAAP combined ratio. The following table provides a quantitative foundation for analyzing this ratio:
| | All Lines | | Quarter ended June 30, | | Change % or Points | | Six Months ended June 30, | | Change % or Points | | | Quarter ended June 30, | | Change % or Points | | Six Months ended June 30, | | Change % or Points | |
($ in thousands) | | 2017 | | 2016 | | | | | 2017 | | 2016 | | | 2018 | | 2017 | | | | 2018 | | 2017 | |
GAAP Insurance Operations Results: | | | | | | | | | | | | | | |
Insurance Operations Results: | | Insurance Operations Results: | | | | | | | | | | | | |
NPW | | $ | 613,814 |
| | 578,140 |
| | 6 |
| | % | | $ | 1,212,518 |
| | 1,143,499 |
| | 6 |
| | % | | $ | 655,248 |
| | 613,814 |
| | 7 |
| % | | $ | 1,279,808 |
| | 1,212,518 |
| | 6 |
| % |
Net premiums earned (“NPE”) | | 568,030 |
| | 531,932 |
| | 7 |
| | | | 1,128,884 |
| | 1,054,390 |
| | 7 |
| | | | 604,836 |
| | 568,030 |
| | 6 |
| | | 1,196,664 |
| | 1,128,884 |
| | 6 |
| |
Less: | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | |
Losses and loss expenses incurred | | 341,559 |
| | 298,479 |
| | 14 |
| | | | 659,031 |
| | 595,623 |
| | 11 |
| | | |
Loss and loss expense incurred | | | 366,328 |
| | 341,559 |
| | 7 |
| | | 751,269 |
| | 659,031 |
| | 14 |
| |
Net underwriting expenses incurred | | 194,237 |
| | 188,058 |
| | 3 |
| | 388,494 |
| | 370,764 |
| | 5 |
| | | 198,899 |
| | 194,237 |
| | 2 |
| | 398,646 |
| | 388,494 |
| | 3 |
| |
Dividends to policyholders | | 1,924 |
| | 1,618 |
| | 19 |
| | | | 1,827 |
| | 3,271 |
| | (44 | ) | | | | 1,577 |
| | 1,924 |
| | (18 | ) | | | 3,984 |
| | 1,827 |
| | 118 |
| |
Underwriting gain | | $ | 30,310 |
| | 43,777 |
| | (31 | ) | | % | | $ | 79,532 |
| | 84,732 |
| | (6 | ) | | % | |
GAAP Ratios: | | | | |
| | | | | | | | | | | | | |
Underwriting income | | | $ | 38,032 |
| | 30,310 |
| | 25 |
| % | | $ | 42,765 |
| | 79,532 |
| | (46 | ) | % |
Combined Ratios: | | | | | |
| | | | | | | | | | |
Loss and loss expense ratio | | 60.2 |
| % | 56.1 |
| | 4.1 |
| | pts | | 58.4 |
| % | 56.5 |
| | 1.9 |
| | pts | | 60.5 |
| % | 60.2 |
| | 0.3 |
| pts | | 62.8 |
| % | 58.4 |
| | 4.4 |
| pts |
Underwriting expense ratio | | 34.2 |
| | 35.4 |
| | (1.2 | ) | | 34.4 |
| | 35.2 |
| | (0.8 | ) | | | 32.9 |
| | 34.2 |
| | (1.3 | ) | | 33.3 |
| | 34.4 |
| | (1.1 | ) | |
Dividends to policyholders ratio | | 0.3 |
| | 0.3 |
| | — |
| | | | 0.2 |
| | 0.3 |
| | (0.1 | ) | | | | 0.3 |
| | 0.3 |
| | — |
| | | 0.3 |
| | 0.2 |
| | 0.1 |
| |
Combined ratio | | 94.7 |
| | 91.8 |
| | 2.9 |
| | | | 93.0 |
| | 92.0 |
| | 1.0 |
| | | | 93.7 |
| | 94.7 |
| | (1.0 | ) | | | 96.4 |
| | 93.0 |
| | 3.4 |
| |
Statutory Ratios: | | | | |
| | | | | | | | | | | | | |
Loss and loss expense ratio | | 60.0 |
| | 56.0 |
| | 4.0 |
| | | | 58.2 |
| | 56.4 |
| | 1.8 |
| | | |
Underwriting expense ratio | | 32.8 |
| | 33.8 |
| | (1.0 | ) | | 33.0 |
| | 33.7 |
| | (0.7 | ) | | |
Dividends to policyholders ratio | | 0.3 |
| | 0.3 |
| | — |
| | | | 0.2 |
| | 0.3 |
| | (0.1 | ) | | | |
Combined ratio | | 93.1 |
| % | 90.1 |
| | 3.0 |
| | pts | | 91.4 |
| % | 90.4 |
| | 1.0 |
| | pts | |
The GAAP combinedloss and loss expense ratio increased by 2.90.3 points in Second Quarter 20172018 and 1.0 pointincreased 4.4 points in Six Months 20172018 compared to the same prior year periods, last year, driven by:by the following:
|
| | | | | | | | | | | | | | | | |
| Second Quarter 2017 | | Second Quarter 2016 | | |
($ in millions) | Losses and Loss Expenses Incurred | Impact on Loss and Loss Expense Ratio | | | Losses and Loss Expenses Incurred | Impact on Loss and Loss Expense Ratio | | Change in Ratio | |
Catastrophe losses | $ | 29.3 |
| 5.2 |
| pts | | $ | 8.4 |
| 1.6 |
| pts | 3.6 |
| pts |
Non-catastrophe property losses | 73.3 |
| 12.9 |
| | | 64.3 |
| 12.1 |
| | 0.8 |
| |
Favorable prior year casualty reserve development | (14.3 | ) | (2.5 | ) | | | (10.0 | ) | (1.9 | ) | | (0.6 | ) | |
Total | 88.3 |
| 15.6 |
| | | 62.7 |
| 11.8 |
| | 3.8 |
| |
| | | Six Months 2017 | | Six Months 2016 | | Second Quarter 2018 | | Second Quarter 2017 | | |
($ in millions) | Losses and Loss Expenses Incurred | Impact on Loss and Loss Expense Ratio | | | Losses and Loss Expenses Incurred | Impact on Loss and Loss Expense Ratio | | Change in Ratio | | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio | | | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio | | Change in Ratio | |
Catastrophe losses | $ | 41.5 |
| 3.7 |
| pts | | $ | 22.8 |
| 2.2 |
| pts | 1.5 | pts | $ | 18.7 |
| 3.1 |
| pts | | $ | 29.3 |
| 5.2 |
| pts | (2.1 | ) | pts |
(Favorable) prior year casualty reserve development | | (4.0 | ) | (0.7 | ) | | (14.3 | ) | (2.5 | ) | | 1.8 |
| |
Non-catastrophe property losses | 144.7 |
| 12.8 |
| | 130.8 |
| 12.4 |
| | 0.4 | | 82.9 |
| 13.7 |
| | 73.3 |
| 12.9 |
| | 0.8 |
| |
Favorable prior year casualty reserve development | (28.7 | ) | (2.5 | ) | | (27.0 | ) | (2.6 | ) | | 0.1 | | |
Total | 157.5 |
| 14.0 |
| | 126.6 |
| 12.0 |
| | 2.0 | | 97.6 |
| 16.1 |
| | 88.3 |
| 15.6 |
| | 0.5 |
| |
| | | | | | | | | |
| | | | | | | | | |
| | Six Months 2018 | | Six Months 2017 | | |
($ in millions) | | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio | | | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio | | Change in Ratio | |
Catastrophe losses | | $ | 44.8 |
| 3.7 |
| pts | | $ | 41.5 |
| 3.7 |
| pts | — |
| pts |
(Favorable) prior year casualty reserve development | | (12.0 | ) | (1.0 | ) | | (28.7 | ) | (2.5 | ) | | 1.5 |
| |
Non-catastrophe property losses | | 188.7 |
| 15.8 |
| | 144.7 |
| 12.8 |
| | 3.0 |
| |
Total | | 221.5 |
| 18.5 |
| | 157.5 |
| 14.0 |
| | 4.5 |
| |
The Second Quarter 2017 catastrophe losses included $11.9 million of development, or 2.1 points, from prior period storms. The most significant of these were three hail storms that occurred in March 2017 that added $8.8 million, or 1.5 points, to Second Quarter 2017 losses.
Details of the favorable prior year casualty reserve development were as follows:
| | (Favorable)/Unfavorable Prior Year Casualty Reserve Development | Quarter ended June 30, | | Six Months ended June 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in millions) | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
General liability | $ | (15.0 | ) | | (11.0 | ) | | (37.4 | ) | | (22.0 | ) | | $ | — |
| | (15.0 | ) | | — |
| | (37.4 | ) |
Commercial automobile | 15.0 |
| | 8.0 |
| | 21.0 |
| | 13.0 |
| | 7.0 |
| | 15.0 |
| | 15.0 |
| | 21.0 |
|
Workers compensation | (15.3 | ) | | (9.0 | ) | | (15.3 | ) | | (21.0 | ) | | (17.0 | ) | | (15.3 | ) | | (33.0 | ) | | (15.3 | ) |
Bonds | (2.0 | ) | | — |
| | (2.0 | ) | | — |
| | — |
| | (2.0 | ) | | — |
| | (2.0 | ) |
Total Standard Commercial Lines | (17.3 | ) | | (12.0 | ) | | (33.7 | ) | | (30.0 | ) | | (10.0 | ) | | (17.3 | ) | | (18.0 | ) | | (33.7 | ) |
| | | | | | | | | | | | | | | |
Homeowners | 1.0 |
| | — |
| | 1.0 |
| | — |
| | — |
| | 1.0 |
| | — |
| | 1.0 |
|
Personal automobile | 2.0 |
| | — |
| | 4.0 |
| | — |
| | — |
| | 2.0 |
| | — |
| | 4.0 |
|
Total Standard Personal Lines | 3.0 |
| | — |
| | 5.0 |
| | — |
| | — |
| | 3.0 |
| | — |
| | 5.0 |
|
| | | | | | | | | | | | | | | |
E&S | — |
| | 2.0 |
| | — |
| | 3.0 |
| | 6.0 |
| | — |
| | 6.0 |
| | — |
|
| | | | | | | | | | | | | | | |
Total (favorable) prior year casualty reserve development | $ | (14.3 | ) | | (10.0 | ) | | (28.7 | ) | | (27.0 | ) | | $ | (4.0 | ) | | (14.3 | ) | | (12.0 | ) | | (28.7 | ) |
| | | | | | | | | | | | | | | |
(Favorable) impact on loss ratio | (2.5 | ) | pts | (1.9 | ) | | (2.5 | ) | | (2.6 | ) | | (0.7 | ) | pts | (2.5 | ) | | (1.0 | ) | | (2.5 | ) |
The underwriting expense ratio decreased 1.3 points and 1.1 points in Second Quarter and Six Months 2018 compared to the same prior year periods due to the following:
A 0.8-point and 0.6-point decrease in employee-related expenses in Second Quarter 2018 and Six Months 2018, respectively. These decreases included a reduction in profit-based compensation to our employees of 0.3 points in the quarter and 0.2 points in the year-to-date period.
A 0.3-point decrease in supplemental commissions to our distribution partners in both periods compared to Second Quarter 2017 and Six Months 2017.
For a qualitative discussion of this reserve development, please refer to the respective insurance segment section below in
"Results of Operations and Related Information by Segment."
Improvements in the GAAP underwriting expense ratio in Second Quarter 2017 of 1.2 points and Six Months 2017 of 0.8 points compared to the same periods last year included the following:
A 0.3-point and 0.2-point decrease in supplemental commissions to our distribution partners in Second Quarter 2017 and Six Months 2017, respectively; and
A 0.3-point and 0.4-point decrease in pension expense in Second Quarter 2017 and Six Months 2017, respectively. As our pension plan ceased accruing benefits on March 31, 2016, we extended the amortization period for the net actuarial loss from the average remaining service life of active participants to the average remaining life expectancy of plan participants. This reduced amortization, coupled with interest costs in the quarter, did not fully offset the expected return on our pension assets, thereby creating the benefit that reduced our overall expense ratio. For additional information on our pension plan, refer to Note 10. "Retirement Plans" in Item 1. "Financial Statements." of this Form 10-Q.
Investments Segment
In total, our investment segment contributed 7.8 points to our overall annualized ROE in Second Quarter 2017 and 7.3 points in Six Months 2017, compared to 6.5 points and 6.3 points in Second Quarter and Six Months 2016, respectively. These increases were driven by improved yields on our fixed income securities portfolio. Additionally, our alternative investment portfolio reported pre-tax income of $5.2 million in Second Quarter 2017 and $6.8 million in Six Months 2017 compared to pre-tax losses of $0.6 million and $1.7 million in Second Quarter and Six Months 2016, respectively, which were negatively impacted by the energy sector in the prior year.
Other
Our interest and other corporate expenses, which are primarily comprised of expensesstock compensation expense at the holding company level, reduced our overallcontributed an annualized ROE by 2.5of (1.9) points in bothSecond Quarter 2018, and (2.4) points in Six Months 2018 compared to (2.5) points in Second Quarter 2017 and Second Quarter 2016 and 2.3(2.3) points in Six Months 2017 compared to 2.9 points in Six Months 2016.2017. The year-to-datequarter-to-date variance was driven primarily by a 1.6-point decrease in stock compensation expense as a result of stock price fluctuations that have impacted the tax effectsfair value of share-based compensation, which benefited our overall annualized ROE by 0.4 pointsliability awards.
Outlook
Despite our strong financial performance in Six Months 2017. We do not expect this tax benefit2017 and expectations for 2018, the U.S. property and casualty insurance industry continues to be replicated throughoutcharacterized by an abundance of capital, intense competition, and low overall premium growth. According to A.M. Best Company's ("A.M. Best") "US Property/Casualty: 2018 Review & Preview," for 2018, rate increases are expected to remain in the remainderlow single digits for most lines of 2017. We hadbusiness. A.M. Best is estimating an overall statutory combined ratio for the industry for 2018 of 100.0% and an estimated after-tax return on surplus of 5.8%. A.M. Best also estimates that property and casualty insurance industry loss and loss expense reserve adequacy peaked several years ago and has been declining since that time. In addition, changes in economic conditions, including changes in U.S. trade policies and the imposition of tariffs on imports, may lead to higher inflation and increase loss costs above expected trends, which would negatively impact our profitability and the property and casualty insurance industry profitability as a whole. Unanticipated inflation would impact both the claim payments that are made during the current year, as well as estimates of the loss and loss expense reductions and increased stability relatedreserves for claims to our share-based payment awards beginningbe settled in 2017, as we have restructuredthe future. For a further discussion, please refer to Item 1A. "Risk Factors" in our 2017 awardsAnnual Report, under the subsection entitled, "Risks Related to Our Insurance Operations."
Our long-term growth plans include: (i) building our "ivy league" distribution partnerships to be more aligned with grant date fair value expense treatment and loweredrepresentative of at least 25% of the allocation to awards that require fair value adjustments subsequent to grant date. However, the 16% increase in our stock price during Six Months 2017 has resulted in fair value adjustments to our outstanding awards during Six Months 2017 that have offset the savings associated with the structural changes made to the awards granted in 2017.
For additional information on the tax effects of share-based compensation, refer to Note 2. "Adoption of Accounting Pronouncements" in Item 1. "Financial Statements." of this Form 10-Q.
Outlook
In 2017, we continue to focus on seeking out additional growth opportunities in our insurance operations while achieving rate and working towards our profit targets. We have been able to achieve NPW growth that has exceeded the industry’s growth rate, while at the same time generating solid underwriting margins. In addition, we have about a 1.3% standard commercial linesavailable market share in the 22 states in which we operate andeach of our long-term goal is to increase this market share to approximately 3%. By offeringStandard Commercial Lines states; (ii) increasing our distribution partners superior technology solutions and customer experience, we are targeting a 12% share of the standard commercial lines business within our independent agencies,these distribution partners, which we refer to as our "share of wallet.wallet," As of June 30, 2017, our share of wallet with agencies withto 12%, which we have an established relationship was 8%. We are also seeking to increase our agency appointments over time to representtranslates into a 25%3% market share of the statesin each state in which we are fully operational, from our current 18% share. We believe our relationships with our distribution partners are amongwrite Standard Commercial Lines business; and (iii) geographic expansion. To date, we write Standard
Commercial Lines business in 25 states and the strongest in the industry and underpin our success. During Six MonthsDistrict of Columbia, which, at a 3% market share, would create a corporate Standard Commercial Lines profile of approximately $5 billion of NPW.
In 2017, we appointed 35 of the 85 new agents we are planning for this year, net of agency terminations.
Our expansion plans are well on track foropened Arizona and New Hampshire.Hampshire for Standard Commercial Lines business, and effective January 1, 2018, we started writing Standard Commercial Lines business in Colorado. We have appointed a totalan aggregate of 2538 agents in these states, with appointments in each state controlling about 25%approximately 10%-20% of that state's available commercial linesStandard Commercial Lines premium. We began quotingexpect to open New Mexico and Utah for Standard Commercial Lines business during Second Quarter 2017,and Arizona and Utah for Standard Personal Lines business by the end of 2018.
Investing in the development and implementation of leading technologies to enhance our underwriting is integral to our overall strategy. The ability to segment our business and present specific account-level pricing guidance to our underwriters based on expected future profitability has positioned us to achieve strong renewal pure price without negatively impacting retention. We continue to expand the use of our newest underwriting tool that provides real-time insights into how each prospective new business account compares with policies being effectivesimilar accounts already in our portfolio. We believe this tool positions us better to grow the business regardless of overall market dynamics.
As an organization, we are making significant investments focused on or after July 1, 2017. Our approachenhancing the overall customer experience in an omni-channel environment, including efforts to entering these states has been consistentobtain: (i) stronger customer engagement through multiple communication touch points, such as mobile notifications and billing alerts; (ii) a 360-degree view of our customers to provide a more integrated service experience; (iii) increased capabilities to allow customers to interact with us in a 24x7 environment in a manner of their choosing; and (iv) deeper insight into metrics regarding customer satisfaction. To that end, we have recently deployed a new customer experience desktop to our contact center employees, and are working closely with our agent franchise business model,distribution partners and primary agency management system vendors to ensure we present our customers with a seamless experience. We recognize that our customers' expectations on how they engage with us and our agents are rapidly evolving, and we continue to strive towards providing "best-in-class" customer service in a 24-hour, 365-day environment. Our goals in this area are centered around leveraging technology to improve customer retention rates, which is predicated aroundshould, over time, enhance the quality of our field-based underwriting, claims, and customer service.business.
In our Investments segment, weOur investment portfolio generated after-taxpre-tax net investment income of $57.8$88.8 million in Six Months 20172018, which was a 13% increase over the same period in 2017. We have generated strong investment returns while maintaining a similar level of credit quality and areduration risk on track to meetthe portfolio, as a result of active investment management and security selection, principally in our full-year guidance outlined below. Our challenge in 2017 is navigating the increased market volatility that may accompany uncertainty regarding fiscalcore fixed income portfolio. Risk assets, which principally include high-yield fixed income securities, equities, and monetary policy changes. For instance, the potential impact of limiting or eliminating tax-advantage municipal bond interest may be significant to the returnsour alternative investment portfolio, were 7.6% of our municipal bond portfolio. Likewise, a reduction in the corporate tax rate or a border-adjustment tax mayoverall portfolio as of June 30, 2018, which is consistent with year-end 2017. We have significant repercussions in the marketplace. Weighing these risks when seeking new opportunities,been gradually diversifying our portfolio, and managing the risks for existing positions and sectors in the portfolio, will be a key focus throughout the remainderlikely continue to modestly increase our risk asset allocation over time, up to approximately 10% of the year.
In summary, we are positioning ourselves for a more competitive environment with a focusour invested assets, depending on generating adequate returns for our shareholders. We are preparing ourselves for changes in a period of heightened uncertainty surrounding interest rates, tax law changes, legislative changes, and inflation. We also have a number of internal strategic initiatives in place to enhance our technological offerings to our agents while improving the overall customer experience.market conditions.
After two quarters of better than expectedSecond Quarter 2018 results, we are revisingconfirming our full-year expectations to2018 guidance, which is the following:
A statutoryGAAP combined ratio, excluding catastrophe losses, of 89.5%, an improvement of 100 basis points from our original guidance.92.0%. This assumes no additional prior year casualty reserve development;
Catastrophe losses of 3.5 points;
After-tax net investment income of $113$150 million, upwhich includes $8 million of after-tax net investment income from our original guidancealternative investments;
An overall effective tax rate of $110 million;approximately 18%, which includes an effective tax rate of 17% for net investment income, reflecting a tax rate of 5.25% for tax-advantaged municipal bonds and a tax rate of 21% for all other investments; and
Weighted average shares of 59.259.6 million.
Results of Operations and Related Information by Segment
Standard Commercial Lines Segment
| | | | Quarter ended June 30, | | Change % or Points | | | Six Months ended June 30, | | Change % or Points | | | Quarter ended June 30, | | Change % or Points | | | Six Months ended June 30, | | Change % or Points | |
($ in thousands) | | 2017 | | 2016 | | | | 2017 | | 2016 | | | 2018 | | 2017 | | | | 2018 | | 2017 | |
GAAP Insurance Operations Results: | | |
| | |
| | |
| | | | | | | | | |
Insurance Segments Results: | | | |
| | |
| | |
| | | | | | | | |
NPW | | $ | 478,917 |
| | 449,008 |
| | 7 |
| % | | $ | 962,465 |
| | 904,071 |
| | 6 |
| % | | $ | 514,930 |
| | 478,917 |
| | 8 |
| % | | $ | 1,024,006 |
| | 962,465 |
| | 6 |
| % |
NPE | | 443,594 |
| | 411,277 |
| | 8 |
| | | 882,008 |
| | 814,166 |
| | 8 |
| | | 476,012 |
| | 443,594 |
| | 7 |
| | | 941,376 |
| | 882,008 |
| | 7 |
| |
Less: | | | | |
| | |
| | | | | | | | | | | | |
| | |
| | | | | | | | |
Losses and loss expenses incurred | | 252,876 |
| | 221,618 |
| | 14 |
| | | 494,440 |
| | 444,968 |
| | 11 |
| | |
Loss and loss expense incurred | | | 273,934 |
| | 252,876 |
| | 8 |
| | | 567,440 |
| | 494,440 |
| | 15 |
| |
Net underwriting expenses incurred | | 154,035 |
| | 147,868 |
| | 4 |
| | | 308,436 |
| | 294,822 |
| | 5 |
| | | 159,485 |
| | 154,035 |
| | 4 |
| | | 322,132 |
| | 308,436 |
| | 4 |
| |
Dividends to policyholders | | 1,924 |
| | 1,618 |
| | 19 |
| | | 1,827 |
| | 3,271 |
| | (44 | ) | | | 1,577 |
| | 1,924 |
| | (18 | ) | | | 3,984 |
| | 1,827 |
| | 118 |
| |
Underwriting gain | | $ | 34,759 |
| | 40,173 |
| | (13 | ) | % | | $ | 77,305 |
| | 71,105 |
| | 9 |
| % | |
GAAP Ratios: | | |
| | |
| | |
| | | | | | | | | |
Underwriting income | | | $ | 41,016 |
| | 34,759 |
| | 18 |
| % | | $ | 47,820 |
| | 77,305 |
| | (38 | ) | % |
Combined Ratios: | | | |
| | |
| | |
| | | | | | | | |
Loss and loss expense ratio | | 57.1 |
| % | 53.9 |
| | 3.2 |
| pts | | 56.0 |
| % | 54.7 |
| | 1.3 |
| pts | | 57.6 |
| % | 57.1 |
| | 0.5 |
| pts | | 60.3 |
| % | 56.0 |
| | 4.3 |
| pts |
Underwriting expense ratio | | 34.7 |
| | 35.9 |
| | (1.2 | ) | | | 35.0 |
| | 36.2 |
| | (1.2 | ) | | | 33.5 |
| | 34.7 |
| | (1.2 | ) | | | 34.2 |
| | 35.0 |
| | (0.8 | ) | |
Dividends to policyholders ratio | | 0.4 |
| | 0.4 |
| | — |
| | | 0.2 |
| | 0.4 |
| | (0.2 | ) | | | 0.3 |
| | 0.4 |
| | (0.1 | ) | | | 0.4 |
| | 0.2 |
| | 0.2 |
| |
Combined ratio | | 92.2 |
| | 90.2 |
| | 2.0 |
| | | 91.2 |
| | 91.3 |
| | (0.1 | ) | | | 91.4 |
| | 92.2 |
| | (0.8 | ) | | | 94.9 |
| | 91.2 |
| | 3.7 |
| |
Statutory Ratios: | | |
| | |
| | |
| | | | | | | | | |
Loss and loss expense ratio | | 56.9 |
| | 53.8 |
| | 3.1 |
| | | 56.0 |
| | 54.5 |
| | 1.5 |
| | |
Underwriting expense ratio | | 33.3 |
| | 34.4 |
| | (1.1 | ) | | 33.3 |
| | 34.2 |
| | (0.9 | ) | | |
Dividends to policyholders ratio | | 0.4 |
| | 0.4 |
| | — |
| | | 0.2 |
| | 0.4 |
| | (0.2 | ) | | |
Combined ratio | | 90.6 |
| % | 88.6 |
| | 2.0 |
| pts | | 89.5 |
| % | 89.1 |
| | 0.4 |
| pts | |
The increases in NPW in Second Quarterthe quarter and Six Months 2017 compared to Second Quarter and Six Months 2016year-to-date periods reflected in the table above were driven by: (i) direct new business; (ii) renewal pure price increases; and (iii) solidstrong retention.
| | | | Quarter ended June 30, | | Six Months ended June 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in millions) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Retention | | 83 |
| % | 83 |
| | 83 |
| % | 83 |
| | 84 |
| % | 83 |
| | 84 | % | | 83 |
|
Renewal pure price increases | | 3.1 |
| | 2.6 |
| | 3.1 |
| | 2.7 |
| | 3.5 |
| | 3.1 |
| | 3.4 |
| | 3.1 |
|
Direct new business | | $ | 98.0 |
| | 95.5 |
| | $ | 187.5 |
| | 183.2 |
| | $ | 101.1 |
| | 98.0 |
| | $ | 199.0 |
| | 187.5 |
|
The NPE increases in Second Quarter and Six Months 2017 compared to Second Quarter and Six Months 2016 were consistent with the fluctuation in NPW for the twelve-month period ended June 30, 2017 compared with the twelve-month period ended June 30, 2016.
The GAAP loss and loss expense ratio increased 3.20.5 points in Second Quarter 20172018 compared to Second Quarter 20162017 and 1.34.3 points in Six Months 20172018 compared to Six Months 2016, reflecting2017. These increases were driven by the following items, which were partially offset by underwriting improvements, claims initiatives, and earned rate that outpaced loss costs:following:
|
| | | | | | | | | | | | | | | | |
| Second Quarter 2017 |
| Second Quarter 2016 |
|
|
($ in millions) | Losses and Loss Expenses Incurred | Impact on Loss and Loss Expense Ratio |
|
| Losses and Loss Expenses Incurred | Impact on Loss and Loss Expense Ratio |
| Change in Ratio |
|
Catastrophe losses | $ | 17.0 |
| 3.8 |
| pts | | $ | 3.6 |
| 0.9 |
| pts | 2.9 |
| pts |
Non-catastrophe property losses | 48.2 |
| 10.9 |
|
|
| 41.6 |
| 10.1 |
|
| 0.8 |
|
|
Favorable prior year casualty reserve development | (17.3 | ) | (3.9 | ) |
|
| (12.0 | ) | (2.9 | ) |
| (1.0 | ) |
|
Total | 47.9 |
| 10.8 |
| | | 33.2 |
| 8.1 |
| | 2.7 |
| |
| | | Six Months 2017 | | Six Months 2016 | | | Second Quarter 2018 | | Second Quarter 2017 | | |
($ in millions) | Losses and Loss Expenses Incurred | Impact on Loss and Loss Expense Ratio | | | Losses and Loss Expenses Incurred | Impact on Loss and Loss Expense Ratio | | Change in Ratio | | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio | | | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio | | Change in Ratio | |
Catastrophe losses | $ | 23.9 |
| 2.7 |
| pts | | $ | 15.3 |
| 1.9 |
| pts | 0.8 |
| pts | $ | 10.1 |
| 2.1 |
| pts | | $ | 17.0 |
| 3.8 |
| pts | (1.7 | ) | pts |
Non-catastrophe property losses | 98.0 |
| 11.1 |
| | 85.2 |
| 10.5 |
| | 0.6 |
| | 57.0 |
| 12.0 |
| | 48.2 |
| 10.9 |
| | 1.1 |
| |
Favorable prior year casualty reserve development | (33.7 | ) | (3.8 | ) | | (30.0 | ) | (3.7 | ) | | (0.1 | ) | | |
(Favorable) prior year casualty reserve development | | (10.0 | ) | (2.1 | ) | | (17.3 | ) | (3.9 | ) | | 1.8 |
| |
Total | 88.2 |
| 10.0 |
| | 70.5 |
| 8.7 |
| | 1.3 |
| | 57.1 |
| 12.0 |
| | 47.9 |
| 10.8 |
| | 1.2 |
| |
| | | | | | | | | |
| | | | | | | | | |
| | Six Months 2018 | | Six Months 2017 | | |
($ in millions) | | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio | | | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio | | Change in Ratio | |
Catastrophe losses | | $ | 29.9 |
| 3.2 |
| pts | | $ | 23.9 |
| 2.7 |
| pts | 0.5 |
| pts |
Non-catastrophe property losses | | 127.8 |
| 13.6 |
| | 98.0 |
| 11.1 |
| | 2.5 |
| |
(Favorable) prior year casualty reserve development | | (18.0 | ) | (1.9 | ) | | (33.7 | ) | (3.8 | ) | | 1.9 |
| |
Total | | 139.7 |
| 14.9 |
| | 88.2 |
| 10.0 |
| | 4.9 |
| |
For additional information regarding the favorable prior year casualty reserve development by line of business, see the "Financial Highlights of Results for Second Quarter and Six Months 20172018 and Second Quarter and Six Months 2016"2017" section above and the line of business discussions below.
The decreasesThere was a 1.2-point decrease in the GAAP underwriting expense ratio in bothSecond Quarter 2018 compared to Second Quarter 2017, and a 0.8-point decrease in the underwriting expense ratio in Six Months 2018 compared to Six Months 2017. The significant drivers of these variances were as follows:
A reduction in employee-related expenses of 0.7 points in the quarter and year-to-date periods of 1.20.5 points were primarily attributable to:year to date. These decreases included: (i) lower pension expenseprofit-based compensation to our employees of 0.3 points in the quarter and 0.40.2 points year to date; and (ii) lower medical costs of 0.3 points in the year-to-date period;quarter and (ii) lower supplemental commissions0.2 points year to date.
A reduction in profit-based compensation to our distribution partners of approximately0.3 points in the quarter and 0.2 points in both periods. In addition, labor expenses decreased as a percentage of premium as we recognized productivity gains relativeyear to the growth of our business.date.
The following is a discussion of our most significant Standard Commercial Lines of business and their respective statutory results:business: | | General Liability | General Liability | | | | | | | | General Liability | | | | | | | |
| | Quarter ended June 30, | | Change % or Points | | Six Months ended June 30, | | Change % or Points | | | Quarter ended June 30, | | Change % or Points | | Six Months ended June 30, | | Change % or Points | |
($ in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | | 2018 | | 2017 | | 2018 | | 2017 | |
Statutory NPW | | $ | 158,721 |
| | 145,489 |
| | 9 |
| % | | $ | 313,858 |
| | 290,195 |
| | 8 |
| % | |
NPW | | | $ | 170,370 |
| | 158,721 |
| | 7 |
| % | | $ | 334,879 |
| | 313,858 |
| | 7 |
| % |
Direct new business | | 30,012 |
| | 28,865 |
| | 4 |
| | 56,919 |
| | 54,976 |
| | 4 |
| | | 29,725 |
| | 30,012 |
| | (1 | ) | | 59,442 |
| | 56,919 |
| | 4 |
| |
Retention | | 84 |
| % | 83 |
| | 1 |
| pts | | 84 |
| % | 83 |
| | 1 |
| pts | | 84 |
| % | 84 |
| | — |
| pts | | 84 |
| % | 84 |
| | — |
| pts |
Renewal pure price increases | | 2.9 |
| | 1.6 |
| | 1.3 |
| | 2.6 |
| | 1.8 |
| | 0.8 |
| | | 2.4 |
| | 2.9 |
| | (0.5 | ) | | 2.5 |
| | 2.6 |
| | (0.1 | ) | |
Statutory NPE | | $ | 141,503 |
| | 129,283 |
| | 9 |
| % | | $ | 281,487 |
| | 257,368 |
| | 9 |
| % | |
Statutory combined ratio | | 78.4 |
| % | 83.5 |
| | (5.1 | ) | pts | | 75.8 |
| % | 83.4 |
| | (7.6 | ) | pts | |
% of total statutory Standard Commercial Lines NPW | | 33 |
| | 32 |
| | |
| | 33 |
| | 32 |
| | |
| | |
NPE | | | $ | 153,002 |
| | 141,503 |
| | 8 |
| % | | $ | 302,831 |
| | 281,487 |
| | 8 |
| % |
Underwriting income | | | 15,758 |
| | 26,769 |
| | (41 | ) | | 29,700 |
| | 61,323 |
| | (52 | ) | |
Combined ratio | | | 89.7 |
| % | 81.1 |
| | 8.6 |
| pts | | 90.2 |
| % | 78.2 | % | | 12.0 |
| pts |
% of total Standard Commercial Lines NPW | | | 33 |
| | 33 |
| | |
| | 33 |
| | 33 |
| |
|
| |
The statutory combined ratio decreaseincrease in Second Quarter and Six Months 20172018 compared to Second Quarter and Six Months 20162017 was driven primarily by: (i)by a decline in favorable prior year casualty reserve development, as illustrated in the tables below; (ii) lower supplemental commissions to our distribution partners of 0.3 points in each period; and (iii) lower pension expense of 0.3 points in the quarter and 0.5 points in the year-to-date period.table below.
|
| | | | | | | | | | | | | | | |
| Second Quarter 2017 | Second Quarter 2016 |
|
|
($ in millions) | (Benefit) Expense | Impact on Combined Ratio |
| (Benefit) Expense | Impact on Combined Ratio |
| Change Points |
|
Favorable prior year casualty reserve development | $ | (15.0 | ) | (10.6 | ) | pts | $ | (11.0 | ) | (8.5 | ) | pts | (2.1 | ) | pts |
| | | Six Months 2017 | Six Months 2016 | | | Second Quarter 2018 | Second Quarter 2017 |
|
($ in millions) | (Benefit) Expense | Impact on Combined Ratio | | (Benefit) Expense | Impact on Combined Ratio | | Change Points | | Loss and Loss Expense Incurred | Impact on Combined Ratio |
| Loss and Loss Expense Incurred | Impact on Combined Ratio |
| Change Points |
|
Favorable prior year casualty reserve development | $ | (37.4 | ) | (13.3 | ) | pts | $ | (22.0 | ) | (8.5 | ) | pts | (4.8 | ) | pts | |
(Favorable) prior year casualty reserve development | | $ | — |
| — | pts | $ | (15.0 | ) | (10.6 | ) | pts | 10.6 | pts |
| | | | | | |
| | | | | | |
| | Six Months 2018 | Six Months 2017 | |
($ in millions) | | Loss and Loss Expense Incurred | Impact on Combined Ratio | | Loss and Loss Expense Incurred | Impact on Combined Ratio | | Change Points | |
(Favorable) prior year casualty reserve development | | $ | — |
| — | pts | $ | (37.4 | ) | (13.3 | ) | pts | 13.3 | pts |
The significant drivers of the development were as follows:
Second Quarter and Six Months 2017: Development2017 development was primarily attributable to lower claims frequencies and severities primarily in accident years 2015 and prior, particularly in the products liability and excess liability segments.
Partially offsetting the prior year casualty development is the underwriting expense ratio, which decreased by 1.9 points in Second Quarter 2018 compared to Second Quarter 2017 and by 1.5 points in Six Months 2016: Development was2018 compared to Six Months 2017, primarily attributable to lower claims frequencies and severitiesthe aforementioned items discussed in the 2012 through 2014 accident years, particularly in the products liability and excess liability segments.overall Commercial Lines Segment above.
| | Commercial Automobile | Commercial Automobile | | | | | | Commercial Automobile | | | | | | | |
| | Quarter ended June 30, | | Change % or Points | | Six Months ended June 30, | | Change % or Points | | | Quarter ended June 30, | | Change % or Points | | Six Months ended June 30, | | Change % or Points | |
($ in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | | 2018 | | 2017 | | 2018 | | 2017 | |
Statutory NPW | | $ | 119,063 |
| | 108,888 |
| | 9 | % | | $ | 236,449 |
| | 217,096 |
| | 9 | % | |
NPW | | | $ | 134,082 |
| | 119,063 |
| | 13 |
| % | | $ | 263,927 |
| | 236,449 |
| | 12 |
| % |
Direct new business | | 20,990 |
| | 20,682 |
| | 1 | | 39,550 |
| | 39,272 |
| | 1 | | | 25,016 |
| | 20,990 |
| | 19 |
| | 47,305 |
| | 39,550 |
| | 20 |
| |
Retention | | 84 |
| % | 84 |
| | — | pts | | 84 |
| % | 84 |
| | — | pts | | 84 |
| % | 84 |
| | — |
| pts | | 84 |
| % | 84 |
| | — |
| pts |
Renewal pure price increases | | 6.9 |
| | 4.8 |
| | 2.1 | | 6.7 |
| | 4.9 |
| | 1.8 | | | 7.5 |
| | 6.9 |
| | 0.6 |
| | 7.4 |
| | 6.7 |
| | 0.7 |
| |
Statutory NPE | | $ | 108,316 |
| | 98,896 |
| | 10 | % | | $ | 215,445 |
| | 194,315 |
| | 11 | % | |
Statutory combined ratio | | 114.1 |
| % | 107.0 |
| | 7.1 | pts | | 109.9 |
| % | 106.0 |
| | 3.9 | pts | |
% of total statutory Standard Commercial Lines NPW | | 25 |
| | 24 |
| | | | 25 |
| | 24 |
| | | | |
NPE | | | $ | 122,104 |
| | 108,316 |
| | 13 |
| % | | $ | 240,335 |
| | 215,445 |
| | 12 |
| % |
Underwriting loss | | | (10,773 | ) | | (17,355 | ) | | (38 | ) | | (24,137 | ) | | (25,523 | ) | | (5 | ) | |
Combined ratio | | | 108.8 |
| % | 116.0 |
| | (7.2 | ) | pts | | 110.0 |
| % | 111.8 |
| | (1.8 | ) | pts |
% of total Standard Commercial Lines NPW | | | 26 |
| | 25 |
| | |
| | 26 |
| | 25 |
| | |
| |
The increasesdecreases in the statutory combined ratio of 7.2 points in Second Quarter 2018 compared to Second Quarter 2017 and 1.8 points in Six Months 2018 compared to Six Months 2017 compared to the prior year periods were driven by:
Unfavorableby a decrease in unfavorable prior year casualty reserve development, that waspartially offset by higher by 5.7 points in Second Quarter 2017 and 3.0 points in Six Months 2017. This development was mainly due to higher casualty claim frequency, and some increases in claim severity, in accident years 2015 and 2016; and
Catastrophe losses that were higher by 0.6 points in Second Quarter 2017 and 0.3 points in Six Months 2017.
non-catastrophe property losses. Quantitative information regardingon the prior year development and catastropheproperty losses is as follows: |
| | | | | | | | | | | | | | | | |
| Second Quarter 2017 | | Second Quarter 2016 | | |
($ in millions) | Losses Incurred | Impact on Loss Ratio | | | Losses Incurred | Impact on Loss Ratio | | Change in Ratio | |
Unfavorable prior year casualty reserve development | $ | 15.0 |
| 13.8 |
| pts | | $ | 8.0 |
| 8.1 |
| pts | 5.7 |
| pts |
Catastrophe losses | 0.9 |
| 0.8 |
| | | 0.2 |
| 0.2 |
| | 0.6 |
| |
Total | 15.9 |
| 14.6 |
| | | 8.2 |
| 8.3 |
| | 6.3 |
| |
| | | Six Months 2017 | | Six Months 2016 | | | Second Quarter 2018 | | Second Quarter 2017 | | |
($ in millions) | Losses Incurred | Impact on Loss Ratio | | Losses Incurred | Impact on Loss Ratio | | Change in Ratio | | Loss and Loss Expense Incurred | Impact on Combined Ratio | | Loss and Loss Expense Incurred | Impact on Combined Ratio | | Change in Ratio | |
Non-catastrophe property losses | | $ | 19.7 |
| 16.1 |
| pts | | $ | 14.6 |
| 13.5 |
| pts | 2.6 |
| pts |
Unfavorable prior year casualty reserve development | $ | 21.0 |
| 9.7 |
| pts | | $ | 13.0 |
| 6.7 |
| pts | 3.0 |
| pts | 7.0 |
| 5.7 |
| | 15.0 |
| 13.8 |
| | (8.1 | ) | |
Catastrophe losses | 1.1 |
| 0.5 |
| | 0.3 |
| 0.2 |
| | 0.3 |
| | 0.7 |
| 0.5 |
| | 0.9 |
| 0.8 |
| | (0.3 | ) | |
Total | 22.1 |
| 10.2 |
| | 13.3 |
| 6.9 |
| | 3.3 |
| | 27.4 |
| 22.3 |
| | 30.5 |
| 28.1 |
| | (5.8 | ) | |
|
| | | | | | | | | | | | | | | | | | | | | | |
Workers Compensation | | | | | | | |
| | Quarter ended June 30, | | Change % or Points | | | Six Months ended June 30, | | Change % or Points | |
($ in thousands) | | 2017 | | 2016 | | | | 2017 | | 2016 | | |
Statutory NPW | | $ | 81,354 |
| | 79,074 |
| | 3 |
| % | | $ | 173,194 |
| | 170,386 |
| | 2 |
| % |
Direct new business | | 17,269 |
| | 17,081 |
| | 1 |
| | | 34,306 |
| | 34,811 |
| | (1 | ) | |
Retention | | 83 |
| % | 84 |
| | (1 | ) | pts | | 83 |
| % | 84 |
| | (1 | ) | pts |
Renewal pure price increases | | 0.5 |
| | 1.3 |
| | (0.8 | ) | | | 0.6 |
| | 1.5 |
| | (0.9 | ) | |
Statutory NPE | | $ | 79,460 |
| | 75,251 |
| | 6 |
| % | | $ | 158,786 |
| | 151,251 |
| | 5 |
| % |
Statutory combined ratio | | 78.3 |
| % | 87.7 |
| | (9.4 | ) | pts | | 86.9 |
| % | 84.3 |
| | 2.6 |
| pts |
% of total statutory Standard Commercial Lines NPW | | 17 |
| | 18 |
| | |
| | | 18 |
| | 19 |
| | | |
The variances in the statutory combined ratio in Second Quarter and Six Months 2017 compared to the same prior year periods were due primarily to: (i) prior year casualty reserve development, as shown in the tables below; (ii) lower supplemental commissions to our distribution partners of 0.8 points in the quarter and 0.6 points in the year-to-date period; and (iii) lower pension expense of 0.4 points in the quarter and 0.6 points in the year-to-date period.
|
| | | | | | | | | | | | | | | |
| Second Quarter 2017 | Second Quarter 2016 | | |
($ in millions) | (Benefit) Expense | Impact on Combined Ratio | | (Benefit) Expense | Impact on Combined Ratio | | Change Points | |
Favorable prior year casualty reserve development | $ | (15.3 | ) | (19.3 | ) | pts | $ | (9.0 | ) | (12.0 | ) | pts | (7.3 | ) | pts |
| | | Six Months 2017 | Six Months 2016 | | Six Months 2018 | | Six Months 2017 | | |
($ in millions) | (Benefit) Expense | Impact on Combined Ratio | | (Benefit) Expense | Impact on Combined Ratio | | Change Points | | Loss and Loss Expense Incurred | Impact on Combined Ratio | | Loss and Loss Expense Incurred | Impact on Combined Ratio | | Change in Ratio | |
Favorable prior year casualty reserve development | $ | (15.3 | ) | (9.6 | ) | pts | $ | (21.0 | ) | (13.9 | ) | pts | 4.3 | pts | |
Non-catastrophe property losses | | $ | 40.9 |
| 17.0 |
| pts | | $ | 30.4 |
| 14.1 |
| pts | 2.9 |
| pts |
Unfavorable prior year casualty reserve development | | 15.0 |
| 6.2 |
| | 21.0 |
| 9.7 |
| | (3.5 | ) | |
Catastrophe losses | | 1.5 |
| 0.6 |
| | 1.1 |
| 0.5 |
| | 0.1 |
| |
Total | | 57.4 |
| 23.8 |
| | 52.5 |
| 24.3 |
| | (0.5 | ) | |
The significant drivers of the development were as follows:
Second Quarter and Six Months 2018: Development was primarily due to higher claims frequencies, and to some extent severities, in accident years 2015 through 2017.
Second Quarter and Six Months 2017: Development was mainly due to higher casualty claim frequencies, and some increases in claim severities, in accident years 2015 and 2016.
In addition to the items described above, the combined ratio on this line benefited from the underwriting ratio, which was 1.1 points lower in Second Quarter 2018 compared to Second Quarter 2017 and 0.9 points lower in Six Months 2018 compared to Six Months 2017. These reductions were primarily attributable to the same items discussed in the overall Commercial Lines Segment above.
|
| | | | | | | | | | | | | | | | | | | | | | |
Workers Compensation | | | | | | | |
| | Quarter ended June 30, | | Change % or Points | | | Six Months ended June 30, | | Change % or Points | |
($ in thousands) | | 2018 | | 2017 | | | | 2018 | | 2017 | | |
NPW | | $ | 81,995 |
| | 81,354 |
| | 1 |
| % | | $ | 170,901 |
| | 173,194 |
| | (1 | ) | % |
Direct new business | | 16,070 |
| | 17,269 |
| | (7 | ) | | | 33,418 |
| | 34,306 |
| | (3 | ) | |
Retention | | 84 |
| % | 83 |
| | 1 |
| pts | | 84 |
| % | 83 |
| | 1 |
| pts |
Renewal pure price (decreases) increases | | 0.3 |
| | 0.5 |
| | (0.2 | ) | | | 0.1 |
| | 0.6 |
| | (0.5 | ) | |
NPE | | $ | 80,021 |
| | 79,460 |
| | 1 |
| % | | $ | 158,844 |
| | 158,786 |
| | — |
| % |
Underwriting income | | 21,795 |
| | 16,738 |
| | 30 |
| | | 38,221 |
| | 17,892 |
| | 114 |
| |
Combined ratio | | 72.8 |
| % | 78.9 |
| | (6.1 | ) | pts | | 75.9 |
| % | 88.7 |
| | (12.8 | ) | pts |
% of total Standard Commercial Lines NPW | | 16 |
| | 17 |
| | |
| | | 17 |
| | 18 |
| | | |
The decreases in the combined ratio in Second Quarter and Six Months 2018 compared to the same prior year periods were driven by favorable prior year casualty reserve development, as well as a 1.5-point reduction in the combined ratio due to lower current year loss costs in both the quarter and year-to-date periods. Favorable prior year development, which in all cases was primarily due to lower severities in accident years 2016 and prior.prior, was as follows:
|
| | | | | | | | | | | | | | | |
| Second Quarter 2018 | Second Quarter 2017 | | |
($ in millions) | Loss and Loss Expense Incurred | Impact on Combined Ratio | | Loss and Loss Expense Incurred | Impact on Combined Ratio | | Change Points | |
(Favorable) prior year casualty reserve development | $ | (17.0 | ) | (21.2 | ) | pts | $ | (15.3 | ) | (19.3 | ) | pts | (1.9 | ) | pts |
| | | | | | | | |
| | | | | | | | |
| Six Months 2018 | Six Months 2017 | | |
($ in millions) | Loss and Loss Expense Incurred | Impact on Combined Ratio | | Loss and Loss Expense Incurred | Impact on Combined Ratio | | Change Points | |
(Favorable) prior year casualty reserve development | $ | (33.0 | ) | (20.8 | ) | pts | $ | (15.3 | ) | (9.6 | ) | pts | (11.2 | ) | pts |
Additionally, there was a 1.2-point decrease in the underwriting expense ratio in Second Quarter and Six Months 2016: Developmentof 2018 compared to Second Quarter 2017, which was primarily due to lower severities in accident years 2013 and prior.
For more information regarding the initiatives that we have undertaken regarding this line of business, referattributable to the Standard Market Workers Compensation Line of Business discussion withinsame items discussed in the Reserves for Losses and Loss Expenses section of "Critical Accounting Policies and Estimates" of our 2016 Annual Report.overall Commercial Lines Segment above.
| | Commercial Property | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter ended June 30, | | Change % or Points | | Six Months ended June 30, | | Change % or Points | | | Quarter ended June 30, | | Change % or Points | | Six Months ended June 30, | | Change % or Points | |
($ in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | | 2018 | | 2017 | | 2018 | | 2017 | |
Statutory NPW | | $ | 81,971 |
| | 79,354 |
| | 3 |
| % | | $ | 162,474 |
| | 154,998 |
| | 5 |
| % | |
NPW | | | $ | 88,376 |
| | 81,971 |
| | 8 |
| % | | $ | 173,581 |
| | 162,474 |
| | 7 |
| % |
Direct new business | | 19,850 |
| | 20,339 |
| | (2 | ) | | 37,163 |
| | 38,149 |
| | (3 | ) | | | 19,928 |
| | 19,850 |
| | — |
| | 39,412 |
| | 37,163 |
| | 6 |
| |
Retention | | 82 |
| % | 82 |
| | — |
| pts | | 82 |
| % | 82 |
| | — |
| pts | | 82 |
| % | 82 |
| | — |
| pts | | 82 |
| % | 82 |
| | — |
| pts |
Renewal pure price increases | | 1.6 |
| | 2.7 |
| | (1.1 | ) | | 2.0 |
| | 2.5 |
| | (0.5 | ) | | | 3.2 |
| | 1.6 |
| | 1.6 |
| | 2.8 |
| | 2.0 |
| | 0.8 |
| |
Statutory NPE | | $ | 78,052 |
| | 73,591 |
| | 6 |
| % | | $ | 154,443 |
| | 143,769 |
| | 7 |
| % | |
Statutory combined ratio | | 101.4 |
| % | 78.2 |
| | 23.2 |
| pts | | 93.7 |
| % | 84.8 |
| | 8.9 |
| pts | |
% of total statutory Standard Commercial Lines NPW | | 17 |
| | 18 |
| | |
| | 17 |
| | 17 |
| | | | |
NPE | | | $ | 82,162 |
| | 78,052 |
| | 5 |
| % | | $ | 162,488 |
| | 154,443 |
| | 5 |
| % |
Underwriting income (loss) | | | 9,944 |
| | (1,631 | ) | | (710 | ) | | (2,497 | ) | | 9,093 |
| | (127 | ) | |
Combined ratio | | | 87.9 |
| % | 102.1 |
| | (14.2 | ) | pts | | 101.5 |
| % | 94.1 |
| | 7.4 |
| pts |
% of total Standard Commercial Lines NPW | | | 17 |
| | 17 |
| | |
| | 17 |
| | 17 |
| | | |
The fluctuationdecrease in the statutory combined ratio in Second Quarter 2018 compared Second Quarter 2017, and the increase in the combined ratio in Six Months 2018 compared to Six Months 2017, compared to Second Quarter and Six Months 2016 waswere driven by the following:
|
| | | | | | | | | | | | | |
| Second Quarter 2017 |
| Second Quarter 2016 |
|
|
($ in millions) | (Benefit) Expense | Impact on Combined Ratio |
|
| (Benefit) Expense | Impact on Combined Ratio |
| Change % or Points |
|
Catastrophe losses | $ | 14.4 |
| 18.5 | pts |
| $ | 2.9 |
| 4.0 | pts | 14.5 | pts |
Non-catastrophe property losses | 31.0 |
| 39.7 |
|
| 23.2 |
| 31.5 |
| 8.2 |
|
Total | 45.4 |
| 58.2 | | | 26.1 |
| 35.5 | | 22.7 | |
| | | Six Months 2017 | | Six Months 2016 | | Second Quarter 2018 |
| Second Quarter 2017 |
|
|
($ in millions) | (Benefit) Expense | Impact on Combined Ratio | | (Benefit) Expense | Impact on Combined Ratio | | Change % or Points | | Loss and Loss Expense Incurred | Impact on Combined Ratio |
| Loss and Loss Expense Incurred | Impact on Combined Ratio |
| Change % or Points |
|
Catastrophe losses | | $ | 7.8 |
| 9.4 | pts |
| $ | 14.4 |
| 18.5 | pts | (9.1 | ) | pts |
Non-catastrophe property losses | $ | 58.1 |
| 37.6 | pts | | $ | 46.3 |
| 32.2 | pts | 5.4 | pts | 29.3 |
| 35.6 |
| 31.0 |
| 39.7 |
| (4.1 | ) |
|
Total | | 37.1 |
| 45.0 | | 45.4 |
| 58.2 | | (13.2 | ) | |
| | | | | | | |
| | | | | | | |
| | Six Months 2018 | | Six Months 2017 | | |
($ in millions) | | Loss and Loss Expense Incurred | Impact on Combined Ratio | | Loss and Loss Expense Incurred | Impact on Combined Ratio | | Change % or Points | |
Catastrophe losses | 20.5 |
| 13.3 | | 13.1 |
| 9.1 | | 4.2 | | $ | 22.5 |
| 13.9 | pts | | $ | 20.5 |
| 13.3 | pts | 0.6 |
| pts |
Non-catastrophe property losses | | 72.4 |
| 44.5 | | 58.1 |
| 37.6 | | 6.9 |
| |
Total | 78.6 |
| 50.9 | | 59.4 |
| 41.3 | | 9.6 | | 94.9 |
| 58.4 | | 78.6 |
| 50.9 | | 7.5 |
| |
The increase inLower catastrophe losses in Second Quarter 2017 included $7.4 million, or 9.4 points, related to prior period storms. The most significant of these were three hail storms from March 2017 that added $5.5 million, or 7.0 points, to Second Quarter 2017 losses. The increase inand non-catastrophe property losses in Second Quarter and Six Months 2017 was driven by higher fire and weather-related losses than in2018 compared to Second Quarter 2017 partially offset the severe winter weather losses that we experienced in the first quarter of 2018. On a year -date-basis, the increase in our combined ratio continues to reflect these higher property losses from the first quarter of 2018, which were principally related to the January deep freeze in our footprint states and Six Months 2016, reflecting volatility from period to period that is normally associated with our commercial property linea relatively large number of business.severe fire losses.
Standard Personal Lines Segment
| | | | Quarter ended June 30, | | Change % or Points | | | | Six Months ended June 30, | | Change % or Points | | | Quarter ended June 30, | | Change % or Points | | | | Six Months ended June 30, | | Change % or Points | |
($ in thousands) | | 2017 | | 2016 | | | | 2017 | | 2016 | | | 2018 | | 2017 | | | | 2018 | | 2017 | |
GAAP Insurance Operations Results: | | |
| | |
| | |
| | | | | | | | | | |
Insurance Segments Results: | | | |
| | |
| | |
| | | | | | | | | |
NPW | | $ | 78,107 |
| | 75,576 |
| | 3 |
| | % | | $ | 142,803 |
| | 137,545 |
| | 4 |
| % | | $ | 83,934 |
| | 78,107 |
| | 7 |
| | % | | $ | 151,795 |
| | 142,803 |
| | 6 |
| % |
NPE | | 71,672 |
| | 70,824 |
| | 1 |
| | | | 142,873 |
| | 141,029 |
| | 1 |
| | | 75,677 |
| | 71,672 |
| | 6 |
| | | | 149,933 |
| | 142,873 |
| | 5 |
| |
Less: | | | | |
| | | | | | | | |
| | | | | | | |
| | | | | | | | |
| | | |
Losses and loss expenses incurred | | 54,725 |
| | 42,212 |
| | 30 |
| | | | 99,015 |
| | 81,907 |
| | 21 |
| | |
Loss and loss expense incurred | | | 49,260 |
| | 54,725 |
| | (10 | ) | | | | 104,699 |
| | 99,015 |
| | 6 |
| |
Net underwriting expenses incurred | | 22,715 |
| | 22,487 |
| | 1 |
| | 44,520 |
| | 44,392 |
| | — |
| | | 21,612 |
| | 22,715 |
| | (5 | ) | | 41,935 |
| | 44,520 |
| | (6 | ) | |
Underwriting (loss) gain | | $ | (5,768 | ) | | 6,125 |
| | (194 | ) | | % | | $ | (662 | ) | | 14,730 |
| | 104 |
| % | |
GAAP Ratios: | | | | |
| | | | | | | | |
| | | | |
Underwriting income (loss) | | | $ | 4,805 |
| | (5,768 | ) | | 183 |
| | % | | $ | 3,299 |
| | (662 | ) | | 598 |
| % |
Combined Ratios: | | | | | |
| | | | | | | | |
| | | |
Loss and loss expense ratio | | 76.3 |
| % | 59.6 |
| | 16.7 |
| | pts | | 69.3 |
| % | 58.1 |
| | 11.2 |
| pts | | 65.1 |
| % | 76.3 |
| | (11.2 | ) | | pts | | 69.8 |
| % | 69.3 |
| | 0.5 |
| pts |
Underwriting expense ratio | | 31.7 |
| | 31.8 |
| | (0.1 | ) | | 31.2 |
| | 31.5 |
| | (0.3 | ) | | | 28.6 |
| | 31.7 |
| | (3.1 | ) | | 28.0 |
| | 31.2 |
| | (3.2 | ) | |
Combined ratio | | 108.0 |
| | 91.4 |
| | 16.6 |
| | | | 100.5 |
| | 89.6 |
| | 10.9 |
| | | 93.7 |
| | 108.0 |
| | (14.3 | ) | | | | 97.8 |
| | 100.5 |
| | (2.7 | ) | |
Statutory Ratios: | | | | |
| | | | | | | | |
| | | | |
Loss and loss expense ratio | | 76.4 |
| | 59.6 |
| | 16.8 |
| | | | 69.3 |
| | 58.1 |
| | 11.2 |
| | |
Underwriting expense ratio | | 29.5 |
| | 30.3 |
| | (0.8 | ) | | 30.5 |
| | 32.0 |
| | (1.5 | ) | | |
Combined ratio | | 105.9 |
| % | 89.9 |
| | 16.0 |
| | pts | | 99.8 |
| % | 90.1 |
| | 9.7 |
| pts | |
The increases in NPW in Second Quarter and Six Months 20172018 compared to Second Quarter and Six Months 20162017 were due primarily to: (i) an increase in new business; (ii) renewal pure price increases; and (iii) improving retention.
| | | | Quarter ended June 30, | | Six Months ended June 30, | | | Quarter ended June 30, | | Six Months ended June 30, | |
($ in millions) | | 2017 | | 2016 | | 2017 | | 2016 | | | 2018 | | 2017 | | 2018 | | 2017 | |
New business | | $ | 13.2 |
| | 9.6 | | $ | 24.6 |
| | 17.0 | | | $ | 15.9 |
| | 13.2 |
| | $ | 27.7 |
| | 24.6 |
| |
Retention | | 84 |
| % | 83 | | 84 |
| % | 82 | | | 85 |
| % | 84 |
| | 85 |
| % | 84 |
| |
Renewal pure price increases | | 2.6 |
| | 5.2 | | 2.7 |
| | 5.1 | | | 3.4 |
| | 2.6 |
| | 3.6 |
| | 2.7 |
| |
The NPE increases in Second Quarter and Six Months 2017 compared to Second Quarter and Six Months 2016 were consistent with the fluctuations in NPW for the twelve-month period ended June 30, 2017 compared with the twelve-month period ended June 30, 2016.
The GAAP loss and loss expense ratio increased 16.7decreased 11.2 points in Second Quarter 20172018 compared to Second Quarter 20162017 and 11.2increased 0.5 points in Six Months 20172018 compared to Six Months 2016. The quantitative breakout2017 . Quantitative information on the drivers of these drivers werefluctuations is as follows:
|
| | | | | | | | | | | | | | | |
| Second Quarter 2017 | | Second Quarter 2016 | | |
($ in millions) | Losses and Loss Expenses Incurred | Impact on Loss and Loss Expense Ratio | | | Losses and Loss Expenses Incurred | Impact on Loss and Loss Expense Ratio | | Change in Ratio | |
Catastrophe losses | $ | 9.4 |
| 13.0 |
| pts | | $ | 2.1 |
| 3.0 |
| pts | 10.0 | pts |
Unfavorable prior year casualty reserve development | 3.0 |
| 4.2 |
| | | — |
| — |
| | 4.2 | |
Non-catastrophe property losses | 20.0 |
| 27.9 |
| | | 18.4 |
| 25.9 |
| | 2.0 | |
Flood claims handling fees | (0.8 | ) | (1.1 | ) | | | (0.9 | ) | (1.3 | ) | | 0.2 | |
Total | 31.6 |
| 44.0 |
| | | 19.6 |
| 27.6 |
| | 16.4 | |
| | | | Second Quarter 2018 | | Second Quarter 2017 | | |
($ in millions) | | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio | | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio | | Change in Ratio | |
Non-catastrophe property losses | | $ | 19.8 |
| 26.2 |
| pts | | $ | 20.0 |
| 27.9 |
| pts | (1.7 | ) | pts |
Catastrophe losses | | 5.8 |
| 7.7 |
| | 9.4 |
| 13.0 |
| | (5.3 | ) | |
Unfavorable prior year development | | — |
| — |
| | 3.0 |
| 4.2 |
| | (4.2 | ) | |
Total | | 25.6 |
| 33.9 |
| | 32.4 |
| 45.1 |
| | (11.2 | ) | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| Six Months 2017 | | Six Months 2016 | | Six Months 2018 | | Six Months 2017 | | |
($ in millions) | Losses and Loss Expenses Incurred | Impact on Loss and Loss Expense Ratio | | Losses and Loss Expenses Incurred | Impact on Loss and Loss Expense Ratio | | Change in Ratio | | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio | | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio | | Change in Ratio | |
Catastrophe losses | $ | 13.3 |
| 9.3 |
| pts | | $ | 4.3 |
| 3.1 |
| pts | 6.2 | pts | $ | 12.7 |
| 8.4 |
| pts | | $ | 13.3 |
| 9.3 |
| pts | (0.9 | ) | pts |
Unfavorable prior year casualty reserve development | 5.0 |
| 3.5 |
| | — |
| — |
| | 3.5 | | — |
| — |
| | 5.0 |
| 3.5 |
| | (3.5 | ) | |
Non-catastrophe property losses | 36.4 |
| 25.4 |
| | 34.7 |
| 24.6 |
| | 0.8 | | 45.5 |
| 30.3 |
| | 36.4 |
| 25.4 |
| | 4.9 |
| |
Flood claims handling fees | (1.4 | ) | (1.0 | ) | | (2.0 | ) | (1.4 | ) | | 0.4 | | |
Total | 53.3 |
| 37.2 |
| | 37.0 |
| 26.3 |
| | 10.9 | | 58.2 |
| 38.7 |
| | 54.7 |
| 38.2 |
| | 0.5 |
| |
Lower catastrophe and non-catastrophe property losses in Second Quarter 2018 compared to Second Quarter 2017 provided some offset to the property losses we experienced in the first quarter of 2018. On a year-to-date basis, non-catastrophe property losses remain higher than last year principally related to the January 2018 deep freeze in our footprint states and a relatively large number of severe fire losses.
TheUnfavorable prior year casualty reserve development in Second Quarter and Six Months 2017 was primarily driven by increased frequency and severity in the personal automobile liability line for accident year 2016.
The GAAPunderwriting expense ratio remained relatively flatdecreased 3.1 points in Second Quarter and Six Months 20172018 compared to Second Quarter 2017 and 3.2 points in Six Months 2016.2018 compared to Six Months 2017. The significant drivers of these variances were as follows:
A reduction in costs of 1.3 points in the quarter and 1.0 points year to date associated with the internally-developed software platform used in this segment of our business, which was fully amortized in the fourth quarter of 2017. E&S Insurance Operations
A reduction in employee-related expenses of 1.0 points in the quarter and 0.8 points year to date . These decreases included: (i) lower profit-based compensation to our employees of 0.3 points in the quarter and 0.2 points year to date; and (ii) lower medical costs of 0.2 points in the quarter and 0.1 points year to date. |
| | | | | | | | | | | | | | | | | | | | | | |
| | Quarter ended June 30, | | Change % or Points | | | Six Months ended June 30, | | Change % or Points | |
($ in thousands) | | 2017 | | 2016 | | | | 2017 | | 2016 | | |
GAAP Insurance Operations Results: | | |
| | |
| | |
| | | | | | | | |
NPW | | $ | 56,790 |
| | 53,556 |
| | 6 |
| % | | $ | 107,250 |
| | 101,883 |
| | 5 |
| % |
NPE | | 52,764 |
| | 49,831 |
| | 6 |
| | | 104,003 |
| | 99,195 |
| | 5 |
| |
Less: | | |
| | |
| | |
| | | |
| | |
| | |
| |
Losses and loss expenses incurred | | 33,958 |
| | 34,649 |
| | (2 | ) | | | 65,576 |
| | 68,748 |
| | (5 | ) | |
Net underwriting expenses incurred | | 17,487 |
| | 17,703 |
| | (1 | ) | | | 35,538 |
| | 31,550 |
| | 13 |
| |
Underwriting gain (loss) | | $ | 1,319 |
| | (2,521 | ) | | 152 |
| % | | $ | 2,889 |
| | (1,103 | ) | | 362 |
| % |
GAAP Ratios: | | |
| | |
| | |
| | | |
| | |
| | |
| |
Loss and loss expense ratio | | 64.4 |
| % | 69.5 |
| | (5.1 | ) | pts | | 63.0 |
| % | 69.3 |
| | (6.3 | ) | pts |
Underwriting expense ratio | | 33.1 |
| | 35.6 |
| | (2.5 | ) | | | 34.2 |
| | 31.8 |
| | 2.4 |
| |
Combined ratio | | 97.5 |
| | 105.1 |
| | (7.6 | ) | | | 97.2 |
| | 101.1 |
| | (3.9 | ) | |
Statutory Ratios: | | |
| | |
| | |
| | | |
| | |
| | |
| |
Loss and loss expense ratio | | 64.3 |
| | 69.6 |
| | (5.3 | ) | | | 63.2 |
| | 69.3 |
| | (6.1 | ) | |
Underwriting expense ratio | | 32.7 |
| | 33.1 |
| | (0.4 | ) | | | 33.3 |
| | 31.3 |
| | 2.0 |
| |
Combined ratio | | 97.0 |
| % | 102.7 |
| | (5.7 | ) | pts | | 96.5 |
| % | 100.6 |
| | (4.1 | ) | pts |
A 0.6-point reduction in commissions to our distribution partners in both the quarter and year-to-date periods, including 0.4-points related to profit-based commissions.
The increaseE&S Lines Segment |
| | | | | | | | | | | | | | | | | | | | | | |
| | Quarter ended June 30, | | Change % or Points | | | Six Months ended June 30, | | Change % or Points | |
($ in thousands) | | 2018 | | 2017 | | | | 2018 | | 2017 | | |
Insurance Segments Results: | | |
| | |
| | |
| | | | | | | | |
NPW | | $ | 56,384 |
| | 56,790 |
| | (1 | ) | % | | $ | 104,007 |
| | 107,250 |
| | (3 | ) | % |
NPE | | 53,147 |
| | 52,764 |
| | 1 |
| | | 105,355 |
| | 104,003 |
| | 1 |
| |
Less: | | |
| | |
| | |
| | | |
| | |
| | |
| |
Loss and loss expense incurred | | 43,134 |
| | 33,958 |
| | 27 |
| | | 79,130 |
| | 65,576 |
| | 21 |
| |
Net underwriting expenses incurred | | 17,802 |
| | 17,487 |
| | 2 |
| | | 34,579 |
| | 35,538 |
| | (3 | ) | |
Underwriting (loss) income | | $ | (7,789 | ) | | 1,319 |
| | (691 | ) | % | | $ | (8,354 | ) | | 2,889 |
| | (389 | ) | % |
Combined Ratios: | | |
| | |
| | |
| | | |
| | |
| | |
| |
Loss and loss expense ratio | | 81.2 |
| % | 64.4 |
| | 16.8 |
| pts | | 75.1 |
| % | 63.0 |
| | 12.1 |
| pts |
Underwriting expense ratio | | 33.5 |
| | 33.1 |
| | 0.4 |
| | | 32.8 |
| | 34.2 |
| | (1.4 | ) | |
Combined ratio | | 114.7 |
| | 97.5 |
| | 17.2 |
| | | 107.9 |
| | 97.2 |
| | 10.7 |
| |
We continue to focus on profitability drivers in our E&S operations and have been actively managing price increases. While NPW in Second Quarter and Six Months 2017 comparedhas declined as a consequence of these actions, our primary focus is to Second Quarter and Six Months 2016 was due primarilybring this segment to targeted levels of profitability. Quantitative information regarding new business and price increases is as follows: | | | | Quarter ended June 30, | | Six Months ended June 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in millions) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Direct new business | | $ | 24.9 |
| | 25.4 |
| | 48.7 |
| | 47.9 |
| | $ | 20.3 |
| | 24.9 |
| | $ | 38.5 |
| | 48.7 |
|
Price increases | | 3.7 |
| % | 4.3 |
| | 5.6 |
| % | 4.1 |
| |
Casualty new/renewal price increases | | | 5.9 |
| % | 5.8 |
| | 6.5 |
| % | 8.1 |
|
The NPE increases in Second Quarter and Six Months 2017,2018 compared to Second Quarter and 2017 Six Months 2016,2017 were consistent with the fluctuationsfluctuation in NPW for the twelve-month period ended June 30, 20172018 compared with the twelve-month period ended June 30, 2016.2017.
The GAAP loss and loss expense ratio decreased 5.1increased 16.8 points in Second Quarter 20172018 and 6.312.1 points in Six Months 20172018 compared to the same prior year periods, reflecting underwriting improvements, claims initiatives, and earned rate that outpaced loss costs, whichdriven by the items outlined in total decreasedthe table below as well as higher current year loss costs that increased the combined ratio by approximately 2.54.7 points in both the quarter and 3.5 pointsyear-to-date periods. The unfavorable prior year casualty reserve development outlined in the year-to-date period, along with the following:table below was primarily driven by increased frequencies and severities in accident years 2015 and 2016.
|
| | | | | | | | | | | | | | |
| Second Quarter 2017 | | | Second Quarter 2016 | | | |
($ in millions) | Losses and Loss Expenses Incurred | Impact on Loss and Loss Expense Ratio | | | Losses and Loss Expenses Incurred | Impact on Loss and Loss Expense Ratio | | Change in Ratio | |
Non-catastrophe property losses | $ | 5.1 |
| 9.7 | pts | | $ | 4.4 |
| 8.7 | pts | 1.0 |
| pts |
Catastrophe losses | 3.0 |
| 5.7 | | | 2.7 |
| 5.4 | | 0.3 |
| |
Unfavorable prior year casualty reserve development | — |
| — | | | 2.0 |
| 4.0 | | (4.0 | ) | |
Total | 8.1 |
| 15.4 | | | 9.1 |
| 18.1 | | (2.7 | ) | |
| | | Six Months 2017 | | Six Months 2016 | | | | Second Quarter 2018 | | Second Quarter 2017 | | | |
($ in millions) | Losses and Loss Expenses Incurred | Impact on Loss and Loss Expense Ratio | | Losses and Loss Expenses Incurred | Impact on Loss and Loss Expense Ratio | | Change in Ratio | | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio | | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio | | Change in Ratio | |
Catastrophe losses | $ | 4.4 |
| 4.2 | pts | | $ | 3.2 |
| 3.2 | pts | 1.0 |
| pts | |
Unfavorable prior year casualty reserve development | — |
| — | | 3.0 |
| 3.0 | | (3.0 | ) | | $ | 6.0 |
| 11.3 | pts | | $ | — |
| — | pts | 11.3 |
| pts |
Non-catastrophe property losses | 10.4 |
| 10.0 | | 10.8 |
| 10.9 | | (0.9 | ) | | 6.1 |
| 11.5 | | 5.1 |
| 9.7 | | 1.8 |
| |
Catastrophe losses | | 2.8 |
| 5.3 | | 3.0 |
| 5.7 | | (0.4 | ) | |
Total | 14.8 |
| 14.2 | | 17.0 |
| 17.1 | | (2.9 | ) | | 14.9 |
| 28.1 | | 8.1 |
| 15.4 | | 12.7 |
| |
| | | | | | | |
| | | | | | | |
| | Six Months 2018 | | Six Months 2017 | | | |
($ in millions) | | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio | | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio | | Change in Ratio | |
Unfavorable prior year casualty reserve development | | $ | 6.0 |
| 5.7 | pts | | $ | — |
| — | pts | 5.7 |
| pts |
Non-catastrophe property losses | | 15.4 |
| 14.6 | | 10.4 |
| 10.0 | | 4.6 |
| |
Catastrophe losses | | 2.2 |
| 2.1 | | 4.4 |
| 4.2 | | (2.1 | ) | |
Total | | 23.6 |
| 22.4 | | 14.8 |
| 14.2 | | 8.2 |
| |
There was a 2.5-point1.4-point decrease in the GAAP underwriting expense ratio in Second Quarter 2017 compared to Second Quarter 2016, driven primarily by the growth in premiums earned, which has more than outpaced the increase in fixed expenses, and lower supplemental commissions to our wholesale general agents of 0.8 points. These were partially offset by a higher allocation of corporate support services to this segment.
The 2.4-point increase in the GAAP underwriting expense ratio in Six Months 20172018 compared to Six Months 20162017, which was primarily driven by a lower cash incentive plan payment0.8-point reductions in the first quarter of 2016 for employees in this segment based on 2015 underwriting resultsprofit-based compensation to both our distribution partners and a higher allocation of corporate support services to this segment in 2017.employees.
Reinsurance
We have successfully completed negotiations of our July 1, 20172018 excess of loss treaties, which provide coverage for our Standard Commercial Lines, Standard Personal Lines, and E&S Lines. The renewal of these treaties included some enhancements in terms and conditions, with the same structure as the expiring treaties as follows:
Property Excess of Loss
The property excess of loss treaty ("Property Treaty") provides $58.0 million of coverage in excess of a $2.0 million retention:
The per occurrence cap on the first and second layers is $84.0 million.
The first layer has unlimited reinstatements and a limit of $8.0 million in excess of $2.0 million.
The annual aggregate limit, for the $30.0 million in excess of $10.0 million second layer, is $120.0 million.
A third layer has a limit of $20.0 million in excess of $40.0 million, with an annual aggregate limit of approximately $75.5$75.0 million.
The Property Treaty excludes nuclear, biological, chemical, and radiological ("NBCR") terrorism losses.
Casualty Excess of Loss
The casualty excess of loss treaty (“Casualty Treaty”) provides $88.0 million of coverage in excess of a $2.0 million retention:
The first through sixth layers provide coverage for 100% of up to $88.0 million in excess of a $2.0 million retention.
The Casualty Treaty includes a $25.0 million limit, per life, on our workers compensation business, which remains unchanged from the prior treaty.
The Casualty Treaty excludes NBCR terrorism losses and has annual aggregate non-NBCR terrorism limits of $208.0 million.
Investments
The primary objective of the investment portfolio is to maximize risk-adjusted after-tax net investment income and the overall total return of the portfolio, while maintaining our historica high credit quality core fixed income portfolio and managing our duration risk profile. Our investment philosophy includes certain return and risk objectives for the fixed income, equity, and other investment portfolios. After-tax yield and net investment income generation are key drivers to our investment strategy, which we believe will be obtained through more active management of the portfolio. | | Total Invested Assets | | | | | | | | | | | | | | |
($ in thousands) | | June 30, 2017 | | December 31, 2016 | | Change % or Points | | | June 30, 2018 | | December 31, 2017 | | Change % or Points | |
Total invested assets | | $ | 5,503,047 |
| | 5,364,947 |
| | 3 |
| % | | $ | 5,665,568 |
| | 5,685,179 |
| | — |
| % |
Invested assets per dollar of stockholders' equity | | 3.33 |
| | 3.50 |
| | (5 | ) |
| | 3.34 |
| | 3.32 |
| | 1 |
|
|
Unrealized gain – before tax | | 126,014 |
| | 64,803 |
| | 94 |
| | |
Unrealized gain – after tax | | 81,909 |
| | 42,122 |
| | 94 |
| | |
Unrealized gain – before tax1 | | | 9,816 |
| | 124,679 |
| | (92 | ) | |
Unrealized gain – after tax1 | | | 7,755 |
| | 80,575 |
| | (90 | ) | |
1Includes unrealized gains on fixed income securities and equity securities.
The increase in investedInvested assets remained relatively unchanged at June 30, 20172018 compared to December 31, 2016 was primarily driven by operating cash flow of $123.7 million, and an increase2017. The decrease in unrealized gains of $61.2 million. The $61.2 million change in unrealized gainsduring Six Months 2018 was driven by our fixed income securities portfolio, which was favorablyunfavorably impacted by tightening credit spreads and a decrease in risk-freerising interest rates.
Fixed Income Securities
At June 30, 2017,2018, our fixed income securities portfolio represented 93%92% of our total invested assets, largely unchanged compared to December 31, 2016.2017. The effective duration and spread duration of the fixed income securities portfolio as of June 30, 20172018 was 3.74.0 years, and 4.4 years, respectively, including short-term investments. Thecompared to the Insurance Subsidiaries’ liability duration isas of December 31, 2017 of approximately 4.03.8 years. Effective duration provides an approximate measure of the portfolio's price sensitivity to a change in interest rates, while spread duration provides an approximate measure of the portfolio's price sensitivity to spread changes, which are the differences between the yields on particular debt instruments and the yields of U.S. Treasury debt securities with similar maturities. The effective and spread durationsduration of the fixed income securities portfolio areis monitored and managed to maximize yield while managing interest rate risk and credit risk respectively, at an acceptable level. Approximately 17% of our fixed income security portfolio at June 30, 2018 was invested in floating securities that are primarily indexed to the three-month London Interbank Offered Rate ("LIBOR"). We maintain a well-diversified portfolio across sectors, credit quality, and maturities that affords us ample liquidity. Every purchase or sale isPurchases and sales are made with the intent of maximizing risk-adjusted investment returns in the current market environment while balancing capital preservation. Over time, we may seek to increase or decrease the duration and overall credit quality of the portfolio based on market conditions.
Our fixed income securities portfolio had a weighted average credit rating of "AA-"“ AA- ,” with 97% of the securities in the portfolio being investment grade quality, at both June 30, 20172018 and December 31, 2016.2017. Within our fixed income securities portfolio, we maintained an allocation of non-investment grade high-yield securities, which represented 3% of our fixed income securities portfolio as of both June 30, 20172018 and December 31, 2016.2017. The sector composition and credit quality of our major asset categories within our fixed income securities portfolio did not significantly change from December 31, 2016. However, we have recently increased our exposure to floating rate fixed income securities, which is largely reflective of our increased allocation to collateralized loan obligations ("CLO"). Floating rate securities represented approximately 17% of our fixed income securities portfolio as of June 30, 2017, compared to 13% as of December 31, 2016. The increase in floating rate instruments, which are primarily indexed to the 90-day LIBOR, will increase the sensitivity of changes to our book yield and investment income.2017.
For details regarding the credit quality of our portfolio, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.” of our 20162017 Annual Report.
Net Investment Income
The components of net investment income earned for the indicated periods were as follows:
| | | | Quarter ended June 30, | | Six Months ended June 30, | | Quarter ended June 30, | | Change % or Points | | | Six Months ended June 30, | Change % or Points | |
($ in thousands) | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Fixed income securities | | $ | 37,668 |
| | 31,753 |
| | 74,559 |
| | 63,397 |
| | $ | 43,774 |
| | 37,668 |
| | 16 | % | | 85,815 |
| | 74,559 |
| 15 | % | |
Equity securities | | 1,419 |
| | 2,204 |
| | 2,887 |
| | 4,434 |
| | 1,820 |
| | 1,419 |
| | 28 |
| | 3,797 |
| | 2,887 |
| 32 |
| |
Short-term investments | | 377 |
| | 142 |
| | 627 |
| | 301 |
| | 611 |
| | 377 |
| | 62 |
| | 1,134 |
| | 627 |
| 81 |
| |
Other investments | | 5,231 |
| | (611 | ) | | 6,834 |
| | (1,677 | ) | | 2,094 |
| | 5,231 |
| | (60 | ) | | 3,657 |
| | 6,834 |
| (46 | ) | |
Investment expenses | | (3,265 | ) | | (2,306 | ) | | (6,058 | ) | | (4,504 | ) | | (2,746 | ) | | (3,265 | ) | | (16 | ) | | (5,619 | ) | | (6,058 | ) | (7 | ) | |
Net investment income earned – before tax | | 41,430 |
| | 31,182 |
| | 78,849 |
| | 61,951 |
| | 45,553 |
| | 41,430 |
| | 10 |
| | 88,784 |
| | 78,849 |
| 13 |
| |
Net investment income tax expense | | (11,127 | ) | | (7,657 | ) | | (21,095 | ) | | (14,866 | ) | | (7,964 | ) | | (11,127 | ) | | (28 | ) | | (15,405 | ) | | (21,095 | ) | (27 | ) | |
Net investment income earned – after tax | | $ | 30,303 |
| | 23,525 |
| | 57,754 |
| | 47,085 |
| | $ | 37,589 |
| | 30,303 |
| | 24 |
| | 73,379 |
| | 57,754 |
| 27 |
| |
Effective tax rate | | 26.9 | % | | 24.6 |
| | 26.8 |
| | 24.0 |
| | 17.5 | % | | 26.9 |
| | (9.4 | ) | pts | | 17.4 |
| | 26.8 |
| (9.4 | ) | pts |
Annualized after-tax yield on fixed income securities | | 2.2 |
| | 2.0 |
| | 2.2 |
| | 2.0 |
| | 2.8 |
| | 2.2 |
| | 0.6 |
| | 2.7 |
| | 2.2 |
| 0.5 |
| |
Annualized after-tax yield on investment portfolio | | 2.2 |
| | 1.8 |
| | 2.1 |
| | 1.8 |
| | 2.7 |
| | 2.2 |
| | 0.5 |
| | 2.6 |
| | 2.1 |
| 0.5 |
| |
The increase in pre-tax net investment income in both Second Quarter 2017and Six Months 2018 compared to Second Quarter and Six Months 2017 was driven primarily by our fixed income securities portfolio, which benefited fromimprovedfrom improved new money reinvestment yields our increased allocation to non-investmentand repositioning of the investment grade securities as a result of active investment management and repositioning within the investment gradesecurity selection, principally in our core fixed income portfolio. In addition, with approximately 17% of our fixed income portfolio invested in floating rate securities that primarily reset based on the 90-day LIBOR, we have benefited from the 64-point rise in LIBOR in Six Months 2018. These improvements were partially offset by lower returns on our alternative investments within our other investment portfolio, increased in both periods dueprimarily related to valuation improvementsour energy-sector related investments. On an after-tax basis, we benefited from a decrease in the private equity and energy-related sectors.effective tax rate as a result of Tax Reform. See the "Federal Income Taxes" discussion below for additional information regarding the impact of this legislation.
Realized and Unrealized Gains and Losses
Our general philosophy for sales of securities is to reduce our exposure to securities and sectors based on economic evaluations and when the fundamentals for that security or sector have deteriorated, or to opportunistically trade out of securities to other securities with better economic return characteristics. Net realized and unrealized gains (losses)and losses for the indicated periods were as follows:
|
| | | | | | | | | | | | | |
| | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Net realized gains, excluding OTTI | | $ | 2.9 |
| | 2.3 |
| | 5.4 |
| | 3.2 |
|
OTTI | | (1.2 | ) | | (0.5 | ) | | (4.7 | ) | | (4.1 | ) |
Total net realized gains (losses) | | 1.7 |
| | 1.8 |
| | 0.7 |
| | (0.9 | ) |
|
| | | | | | | | | | | | | |
| | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Net realized gains on disposals, excluding OTTI | | $ | 54 |
| | 2,951 |
| | 4,785 |
| | 5,381 |
|
OTTI charges | | (2,821 | ) | | (1,217 | ) | | (4,033 | ) | | (4,692 | ) |
Unrealized gains (losses) recognized in income on equity securities | | 1,115 |
| | — |
| | (12,953 | ) | | — |
|
Total net realized and unrealized (losses) gains | | $ | (1,652 | ) | | 1,734 |
| | (12,201 | ) | | 689 |
|
The increase in net realized and unrealized losses in Second Quarter 2018 compared to Second Quarter 2017 was driven by OTTI charges recognized in earnings. The increase in net realized and unrealized losses in Six Months 2018 compared to Six Months 2017 was driven by market value fluctuations on our equity portfolio, which are recorded through income due to an accounting change in the first quarter of 2018. For further discussion of our realized gains and losses, as well as our OTTI methodology,information on this accounting change, see Note 2. “Summary"Adoption of Significant Accounting Policies” in Item 8. “Financial Statements and Supplementary Data.” of our 2016 Annual Report. For additional information about our OTTI charges, see Note 4. "Investments"Pronouncements" in Item 1. "Financial Statements." of this Form 10-Q. For further discussion of our OTTI methodology, see Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of our 2017 Annual Report.
Federal Income Taxes
The following table provides information regarding federal income taxes:
| | | Quarter ended June 30, | | Six Months ended June 30, | Quarter ended June 30, | | Six Months ended June 30, |
($ in millions) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
Federal income tax expense | $ | 17.5 |
| | 18.7 |
| | 34.6 |
| | 33.6 |
| $ | 13.7 |
| | 17.5 |
| | 14.7 |
| | 34.6 |
|
Effective tax rate | 29.7 | % | | 30.0 |
| | 27.4 |
| | 29.4 |
| 18.9 | % | | 29.7 |
| | 15.9 |
| | 27.4 |
|
On December 22, 2017, Tax Reform was signed into law, which among other provisions, reduced our statutory corporate tax rate from 35% to 21% beginning on January 1, 2018. The reduction in the effective tax rate in the table above differs from the statutory tax rate of 35% primarily because of tax-advantaged interest
and dividend income. The decrease in our effective tax rate infor Second Quarter and Six Months 20172018 compared to Second Quarter and Six Months 20162017 reflects: (i) the lower statutory rate; (ii) the contribution of tax-advantaged interest and dividend income in relation to overall pre-tax income this year compared to last; and (iii) an increase in the tax benefit of our share-based payment awards that are recognized through income, which was driven primarily by growth in our adoption of ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-based Payment Accounting ("ASU 2016-09") on January 1, 2017, which 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. All excess tax benefits and tax deficiencies are recognized as income tax benefit or expense in the income statement and reducedstock price.
In general, our effective tax rate by 0.6 pointsdiffers from the statutory rate principally due to the benefit of tax-advantaged interest and 2.6 points in Second Quarter and Six Months 2017, respectively. Previously, these amounts were recorded in additional paid-in capital.dividend income, which are taxed at lower rates. For further informationa reconciliation of tax expense at the statutory rate to tax expense on our adoptionConsolidated Statements of ASU 2016-09,Income, refer to Note 2. "Adoption of Accounting Pronouncements"12. "Federal Income Taxes" in Item 1. "Financial Statements." of this Form 10-Q.
We believe that ourOur future effective tax rate will continue to be impacted by similar items, assuming no significant changes to
tax laws. However, for full-year 2018, we expect an overall effective tax rate of approximately 18%, which is higher than our effective tax rate for Six Months 2018, as we expect a greater income contribution from our insurance operations for the U.S. federal income tax structure is currently under significant debate as a resultremainder of the last
Presidential election. We are unableyear compared to provide an estimatethe relative contribution during the first half of the magnitude of potential changes.year.
Financial Condition, Liquidity, and Capital Resources
Capital resources and liquidity reflect our ability to generate cash flows from business operations, borrow funds at competitive rates, and raise new capital to meet operating and growth needs.
Liquidity
We manage liquidity with a focus on generating sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. Our cash, excluding restricted cash, and short-term investment position of $142$169 million at June 30, 20172018 was comprised of $21$36 million at the Parent and $121$133 million at the Insurance Subsidiaries. Short-term investments are generally maintained in "AAA" rated money market funds approved by the National Association of Insurance Commissioners. The Parent maintains a fixed income security investment portfolio containing high-quality, highly-liquid government and corporate fixed income securities. This portfolio amounted to $84$90 million at June 30, 2018 and December 31, 2017, for a total of $126 million of cash and liquid investments at the Parent at June 30, 2018, compared to $74$114 million at December 31, 2016.2017. We expect to continue to increase the level of cash and invested assets at the Parent over time, although there will be fluctuations in these balances based on various factors, including the amount and availability of dividends from our Insurance Subsidiaries, investment income, expenses, and other liquidity needs of the Parent. Our target is to hold cash and other liquid assets at the Parent sufficient to meet two years of its expected annual needs.
Sources of Liquidity
Sources of cash for the Parent have historically consisted of dividends from the Insurance Subsidiaries, the investment portfolio discussed above, borrowings under lines of credit and loan agreements with certain Insurance Subsidiaries, and the issuance of stock and debt securities. We continue to monitor these sources, giving consideration to our long-term liquidity and capital preservation strategies.
Insurance Subsidiary Dividends
We currently anticipate that the Insurance Subsidiaries will pay $80$100 million in total dividends to the Parent in 2018, a $20 million increase compared to $80 million paid in 2017, of which $40$50 million was paid during Six Months 2017.2018. As of June 30,December 31, 2017, our allowable ordinary maximum dividend was $199$211 million for 2017, which is a $6 million increase from December 31, 2016 due to an Indiana regulation change regarding the calculation of ordinary dividends, which impacted two of our insurance subsidiaries.2018.
Any dividends to the Parent are subject to the approval and/or review of the insurance regulators in the respective Insurance Subsidiaries' domiciliary states and are generally payable only from earned surplus as reported in the statutory annual statements of those subsidiaries as of the preceding December 31. Although past dividends have historically been met with regulatory approval, there is no assurance that future dividends that may be declared will be approved. For additional information regarding dividend restrictions, refer to Note 19. “Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds” in Item 8. “Financial Statements and Supplementary Data.” of our 20162017 Annual Report.
The Insurance Subsidiaries generate liquidity through insurance float, which is created by collecting premiums and earning investment income before losses are paid. The period of the float can extend over many years. Our investment portfolio consists of maturity dates that continually provide a source of cash flows for claims payments in the ordinary course of business. The effective duration of the fixed income securities portfolio including short-term investments, was 3.74.0 years as of June 30, 2017,2018, while the liabilities of the Insurance Subsidiaries havehad a duration as of 4.0December 31, 2017 of 3.8 years. As protection for the capital resources of the Insurance Subsidiaries, we purchase reinsurance coverage for significantly large claims or catastrophes that may occur during the year.
Line of Credit
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. This 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 the Line of Credit at June 30, 20172018 or at any time during 2017.2018.
The 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, a minimum combined statutory surplus, and a maximum ratio of consolidated debt to total capitalization, as well as covenants limiting our ability to: (i) merge or liquidate; (ii) incur debt or liens; (iii) dispose of assets; (iv) make certain 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 June 30, 20172018 | Actual as of June 30, 20172018 |
Consolidated net worth | Not less than $1.1$1.2 billion | $1.7 billion |
Statutory surplus | Not less than $750 million | $1.7 billion |
Debt-to-capitalization ratio1 | Not to exceed 35% | 21.2%20.6% |
A.M. Best financial strength rating | Minimum of A- | A |
| |
1 | Calculated in accordance with the Line of Credit agreement. |
Several of our Insurance Subsidiaries are members of certain branches of the Federal Home Loan Bank, which provides those subsidiaries with additional access to liquidity. Membership is as follows:
|
| |
Branch | Insurance Subsidiary Member |
Federal Home Loan Bank of Indianapolis ("FHLBI") | Selective Insurance Company of South Carolina ("SICSC")1 Selective Insurance Company of the Southeast ("SICSE")1 |
Federal Home Loan Bank of New York ("FHLBNY") | Selective Insurance Company of America ("SICA") Selective Insurance Company of New York ("SICNY") |
1These subsidiaries are jointly referred to as the "Indiana Subsidiaries" as they are domiciled in Indiana.
The Line of Credit permits aggregate borrowings from the FHLBI and the FHLBNY up to 10% of the respective member company’s admitted assets for the previous year end. Additionally, as SICNY is domiciled in New York, this company's borrowings from the FHLBNY are limited to the lower of 5% of admitted assets for the most recently completed fiscal quarter or 10% of admitted assets for the previous year end.
All borrowings from both the FHLBI and the FHLBNY are required to be secured by investments pledged as collateral. For additional information regarding collateral outstanding, refer to Note 4. "Investments" in Item 1. "Financial Statements." of this Form 10-Q. The following table provides information on the remaining capacity for Federal Home Loan Bank borrowings as of June 30, 2017 based on these restrictions, as well as the amount of additional stock that would need to be purchased to allow these member companies to borrow their remaining capacity: | | ($ in millions) | Admitted Assets | | Borrowing Limitation | | Amount Borrowed | | Remaining Capacity | | Additional Stock Requirements | Admitted Assets | | Borrowing Limitation | | Amount Borrowed | | Remaining Capacity | | Additional Stock Requirements |
| | |
SICSC | $ | 644.9 |
| | $ | 64.5 |
| | 32.0 |
| | 32.5 |
| | 1.4 |
| $ | 648.0 |
| | $ | 64.8 |
| | 32.0 |
| | 32.8 |
| | 1.4 |
|
SICSE | 490.7 |
| | 49.1 |
| | 28.0 |
| | 21.1 |
| | 0.9 |
| 507.5 |
| | 50.8 |
| | 28.0 |
| | 22.8 |
| | 1.0 |
|
SICA | 2,314.2 |
| | 231.4 |
| | 50.0 |
| | 181.4 |
| | 8.2 |
| 2,434.9 |
| | 243.5 |
| | 50.0 |
| | 193.5 |
| | 8.7 |
|
SICNY | 427.4 |
| | 21.4 |
| | — |
| | 21.4 |
| | 1.0 |
| 445.8 |
| | 22.3 |
| | — |
| | 22.3 |
| | 1.0 |
|
Total | | | $ | 366.4 |
| | 110.0 |
| | 256.4 |
| | 11.5 |
| | | $ | 381.4 |
| | 110.0 |
| | 271.4 |
| | 12.1 |
|
Short-term Borrowings
In the first quarter of 2017,Six Months 2018, SICA borrowed $64borrowed: (i) $75 million from the FHLBNY, which was repaid on March 21, 2017.20, 2018; and (ii) $55 million from the FHLBNY, which was repaid on April 18, 2018. For further
information regarding this borrowing, see Note 5. "Indebtedness" in Item 1. "Financial Statements." of this Form 10-Q.
Intercompany Loan Agreements
The Parent has lending agreements with the Indiana Subsidiaries that have been approved by the Indiana Department of Insurance, which provide additional liquidity to the Parent. Similar to the Line of Credit agreement, these lending agreements limit borrowings by the Parent from the Indiana Subsidiaries to 10% of the admitted assets of the respective Indiana Subsidiary. The following table provides information on the Parent’s borrowings and remaining borrowing capacity from the Indiana Subsidiaries:
| | ($ in millions) | Admitted Assets as of December 31, 2016 | | Borrowing Limitation | | Amount Borrowed | | Remaining Capacity | Admitted Assets as of December 31, 2017 | | Borrowing Limitation | | Amount Borrowed | | Remaining Capacity |
As of June 30, 2017 | | |
As of June 30, 2018 | | Admitted Assets as of December 31, 2017 | | Borrowing Limitation | | Amount Borrowed | | Remaining Capacity |
SICSC | $ | 644.9 |
| | $ | 64.5 |
| | 27.0 |
| | 37.5 |
| |
SICSE | 490.7 |
| | 49.1 |
| | 18.0 |
| | 31.1 |
| 507.5 |
| | 50.8 |
| | 18.0 |
| | 32.8 |
|
Total | | | $ | 113.6 |
| | 45.0 |
| | 68.6 |
| | | $ | 115.6 |
| | 45.0 |
| | 70.6 |
|
Capital Market Activities
The Parent had no private or public issuances of stock or debt instruments during Six Months 2017.2018.
Uses of Liquidity
The liquidity generated from the sources discussed above is used, among other things, to pay dividends to our shareholders. Dividends on shares of the Parent's common stock are declared and paid at the discretion of the Board of Directors based on our operating results, financial condition, capital requirements, contractual restrictions, and other relevant factors.
Our ability to meet our interest and principal repayment obligations on our debt, as well as our ability to continue to pay dividends to our stockholders, is dependent on liquidity at the Parent coupled with the ability of the Insurance Subsidiaries to pay dividends, if necessary, and/or the availability of other sources of liquidity to the Parent. Our next two principal debt repayment is
repayments, each in the amount of $25 million, are due in 2021.2021, with the next following principal payment due in 2026. We
have $185 million of Senior Notes due February 9, 2043 that became callable on February 8, 2018, which we may elect to call, in whole or in part, at any time. If we were to call and redeem these Senior Notes, we would expense the associated unamortized debt issuance costs. The balance of the unamortized debt issuance costs associated with our $185 million of Senior Notes was $4.4 million at June 30, 2018.
Restrictions on the ability of the Insurance Subsidiaries to declare and pay dividends, without alternative liquidity options, could materially affect our ability to service debt and pay dividends on common stock.
Capital Resources
Capital resources provide protection for policyholders, furnish the financial strength to support the business of underwriting insurance risks, and facilitate continued business growth. At June 30, 2017,2018, we had GAAP stockholders' equity and statutory surplus of $1.7 billion. With total debt of $438.9$439.3 million, our debt-to-capital ratio was approximately 21.0%20.6% at June 30, 2017.2018.
Our cash requirements include, but are not limited to, principal and interest payments on various notes payable, dividends to stockholders, payment of claims, payment of commitments under limited partnership agreements and capital expenditures, as well as other operating expenses, which include commissions to our distribution partners, labor costs, premium taxes, general and administrative expenses, and income taxes. For further details regarding our cash requirements, refer to the section below entitled, “Contractual Obligations, Contingent Liabilities, and Commitments.”
We continually monitor our cash requirements and the amount of capital resources that we maintain at the holding company and operating subsidiary levels. As part of our long-term capital strategy, we strive to maintain capital metrics, relative to the macroeconomic environment, that support our targeted financial strength. Based on our analysis and market conditions, we may take a variety of actions, including, but not limited to, contributing capital to the Insurance Subsidiaries in our insurance operations, issuing additional debt and/or equity securities, calling existing debt, repurchasing shares of the Parent’s common stock, and increasing stockholders’ dividends.
Our capital management strategy is intended to protect the interests of the policyholders of the Insurance Subsidiaries and our stockholders, while enhancing our financial strength and underwriting capacity.
Book value per share increased by 7%decreased to $28.32$28.86 as of June 30, 2017,2018, from $26.42$29.28 as of December 31, 2016,2017, due to $1.55 in net income and $0.68$1.37 in unrealized gainslosses on our investment portfolio partially offset by $0.32and $0.36 in dividends to our shareholders.shareholders, partially offset by $1.30 in net income per share.
Ratings
We are rated by major rating agencies that issue opinions on our financial strength, operating performance, strategic position, and ability to meet policyholder obligations. We believe that our ability to write insurance business is most influenced by our rating from A.M. Best. We have been rated “A” or higher by A.M. Best for the past 8788 years. A downgrade from A.M. Best to a rating below “A-“A-” is an event of default under our Line of Credit and could affect our ability to write new business with customers and/or distribution partners, some of whom are required (under various third-party agreements) to maintain insurance with a carrier that maintains a specified A.M. Best minimum rating.
Our ratings have not changed from those reported in our "Ratings" section of Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." in our 20162017 Annual Report and continue to be as follows:
|
| | | | |
NRSRO | | Financial Strength Rating | | Outlook |
A.M. Best | | A | | Stable |
Moody's Investor Services ("Moody's") | | A2 | | Stable |
Fitch Ratings ("Fitch") | | A+ | | Stable |
Standard & Poor's Global Ratings ("S&P") | | A | | Stable |
In the first quarter of 2018, Moody’s reaffirmed our "A2" rating with a "stable" outlook. In taking this action, Moody’s cited our solid risk-adjusted capitalization, strong asset quality, and underwriting profitability, as well as our good regional presence and established independent agency support.
In Second Quarter 2017,2018, Fitch reaffirmed our "A+" rating with a "stable" outlook. In taking this action, Fitch cited our strong underwriting results, solid capitalization with growth in stockholders' equity, stable leverage metrics,strong business profile, and stable interest coverage metrics.
Our S&P, Moody's, and Fitch financial strength and associated credit ratings affect our ability to access capital markets. The interest rate on our Line of Credit varies and is based on, among other factors, the Parent's debt ratings. There can be no assurance that our ratings will continue for any given period of time or that they will not be changed. It is possible that positive or negative ratings actions by one or more of the rating agencies may occur in the future.
Off-Balance Sheet Arrangements
At June 30, 20172018 and December 31, 20162017, we did not have any material relationships with unconsolidated entities or financial partnerships, such entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, we are not exposed to any material financing, liquidity, market, or credit risk that could arise if we had engaged in such relationships.
Contractual Obligations, Contingent Liabilities, and Commitments
Our future cash payments associated with: (i) loss and loss expense reserves; (ii) contractual obligations pursuant to operating leases for office space and equipment; and (iii) debt have not materially changed since December 31, 2016.2017. As of June 30, 2017,2018, we had contractual obligations that expire at various dates through 20302036 that may require us to invest up to $165$237.2 million in alternative and other investments. There is no certainty that any such additional investment will be required. Additionally, as of June 30, 2017,2018, we had the following contractual obligations that expire in 2019 to invest $12.0obligations: (i) $27.9 million in a non-publicly traded common stock within our AFS portfolio.equity portfolio that expire through 2023, and (ii) $16.8 million in a non-publicly traded collateralized loan obligation in our fixed income securities portfolio that expires in 2030. We expect to have the capacity to repay and/or refinance these obligations as they come due.
We have issued no material guarantees on behalf of others and have no trading activities involving non-exchange traded contracts accounted for at fair value. For additional details on transactions with related parties, see Note 12.16. "Related Party Transactions" in Item 1.8. "Financial Statements.Statements and Supplementary Data." of this Form 10-Q.in our 2017 Annual Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in the information about market risk set forth in our 20162017 Annual Report.Report.
ITEM 4. CONTROLS AND PROCEDURES.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. In performing this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework ("COSO Framework") in 2013. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are: (i) effective in recording, processing, summarizing, and reporting information on a timely basis that we are required to disclose in the reports that we file or submit under the Exchange Act; and (ii) effective in ensuring that information that we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. No
Except for internal controls over financial reporting related to the implementation of a new investment accounting platform, no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) of the Exchange Act) occurred during Six Months 20172018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management reviewed and tested the effectiveness of internal controls over financial reporting related to the new investment accounting platform and concluded they were effective.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 June 30, 2017,2018, 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.
ITEM 1A. RISK FACTORS.
Certain risk factors exist that can have a significant impact on our business, liquidity, capital resources, results of operations, financial condition, and debt ratings. These risk factors might affect, alter, or change actions that we might take in executing our long-term capital strategy, including but not limited to, contributing capital to any or all of the Insurance Subsidiaries, issuing additional debt and/or equity securities, repurchasing our equity securities, redeeming our fixed income securities, or increasing or decreasing stockholders' dividends. We operate in a continually changing business environment and new risk factors emerge from time to time. Consequently, we can neither predict such new risk factors nor assess the potential future impact, if any, they might have on our business. There have been no material changes from the risk factors disclosed in Item 1A. “Risk Factors.” in our 20162017 Annual Report.Report other than as discussed below.
We face risks regarding our flood business because of uncertainties regarding the NFIP.
We are the fifth largest insurance group participating in the WYO arrangement of the NFIP, which is managed by the Mitigation Division of the Federal Emergency Management Agency (“FEMA”) in the U.S. Department of Homeland Security. Under the arrangement, we receive an expense allowance for policies written and a servicing fee for claims administered, and all losses are 100% reinsured by the Federal Government. The current expense allowance is 30.9% of direct premium written. The servicing fee is the combination of 0.9% of direct premium written and 1.5% of incurred losses.
As a WYO carrier, we are required to follow certain NFIP procedures in the administration of flood policies and claims. Some of these requirements may differ from our normal business practices and may present a reputational risk to our brand. While insurance companies are regulated by the states and the NFIP requires WYO carriers to be licensed in the states in which they operate, the NFIP is a federal program and WYO carriers are fiscal agents of the U.S. Government and must follow the NFIP's directives. Consequently, we have the risk that directives from the NFIP and a state regulator on the same issue may conflict.
The NFIP was authorized until July 31, 2018. On July 25, 2018, the U.S. House of Representatives passed a four-month extension authorizing the NFIP until November 30, 2018. On July 31, 2018, the U.S. Senate passed the four-month extension and President Trump signed the extension bill. There continues to be significant public policy and political debate in Congress about extension of the NFIP and solutions for flood risk throughout the country. In November 2017, the U.S. House of Representatives passed the 21st Century Flood Reform Act, which would extend the NFIP for five years but reduce the WYO expense allowance over a three-year period by three points, from its current 30.9% to 27.9%. The bill also proposes changes in certain operational processes and provides incentives for the private flood insurance market. The U.S. Senate has yet to consider this bill. FEMA, on its own initiative however, revised the arrangement by: (i) reducing the WYO’s expense allowance by one percentage point, from 30.9% to 29.9% effective October 2018; and (ii) eliminating the provision allowing FEMA to increase a WYO’s expense allowance by one percentage point to cover additional incurred expenses.
Our flood business could be impacted by: (i) a lapse in program authorization; (ii) any mandate for primary insurance carriers to provide flood insurance; or (iii) private writers becoming more prevalent in the marketplace. The uncertainty created by the public policy debate and politics of flood insurance reform make it difficult for us to predict the future of the NFIP and our continued participation in the program.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following table provides information regarding our purchases of our common stock in Second Quarter 20172018:
|
| | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased1 | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Announced Programs |
April 1 – 30, 2017 | | 792 |
| | $ | 50.14 |
| | — |
| | — |
|
May 1 - 31, 2017 | | 4,835 |
| | 51.74 |
| | — |
| | — |
|
June 1 - 30, 2017 | | 1,636 |
| | 49.78 |
| | — |
| | — |
|
Total | | 7,263 |
| | $ | 51.12 |
| | — |
| | — |
|
|
| | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased1 | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Announced Programs |
April 1 – 30, 2018 | | 461 |
| | $ | 60.50 |
| | — |
| | — |
|
May 1 - 31, 2018 | | 1,821 |
| | 55.78 |
| | — |
| | — |
|
June 1 - 30, 2018 | | — |
| | — |
| | — |
| | — |
|
Total | | 2,282 |
| | $ | 56.74 |
| | — |
| | — |
|
1During Second Quarter 20172018, 2,428488 shares were purchased from employees and non-employee directors in connection with the vesting of restricted stock units and 4,8351,794 shares were purchased from employees in connection with option exercises. These repurchases were made to satisfy tax withholding obligations and/or option costs with respect to those employees.individuals. These shares were not purchased as part of any publicly announced program. The shares that were purchased in connection with the vesting of restricted stock units were purchased at fair market value as defined in the Selective Insurance Group, Inc. 2014 Omnibus Stock Plan and the Selective Insurance Group, Inc. 2005 Omnibus Stock Plan As Amended and Restated Effective as of May 1, 2010.Plan. The shares purchased in connection with the option exercises were purchased at the current market prices of our common stock on the dates the options were exercised.
ITEM 6. EXHIBITS.
|
| | |
Exhibit No. | | |
| | Statement Re: Computation of Per Share Earnings. |
| | Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. |
| | Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. |
| | Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. |
| | Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. |
** 101.INS | | XBRL Instance Document. |
** 101.SCH | | XBRL Taxonomy Extension Schema Document. |
** 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
** 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
** 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
** 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
* Filed herewith.
** Furnished and not filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
SELECTIVE INSURANCE GROUP, INC.
Registrant
|
| | | |
Date: | August 2, 2018 | | By: /s/ Gregory E. Murphy | July 27, 2017 |
| | | Gregory E. Murphy |
|
| | Chairman of the Board and Chief Executive Officer | |
| | | |
Date: | August 2, 2018 | | By: /s/ Mark A. Wilcox | July 27, 2017 |
| | | Mark A. Wilcox |
|
| | Executive Vice President and Chief Financial Officer |
|
| | (principal financial officer) | |