UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: SeptemberJune 30, 20192020
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)
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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)
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| |
973 | 948-3000 |
(Registrant’s Telephone Number, Including Area Code) |
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(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) |
Securities registered pursuant to Section 12(b) of the Act:
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| | | | |
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common Stock, par value $2 per share | | SIGI | | NASDAQ Global Select Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| | | |
Large accelerated filer | ☒ | Accelerated filer ☐ | |
Non-accelerated filer ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 18, 2019,July 17, 2020, there were 59,401,56559,812,099 shares of common stock, par value $2.00 per share, outstanding.
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| SELECTIVE INSURANCE GROUP, INC. | |
| Table of Contents | |
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PART I. FINANCIAL INFORMATION | |
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ITEM 1. FINANCIAL STATEMENTS. | |
| | SELECTIVE INSURANCE GROUP, INC. CONSOLIDATED BALANCE SHEETS | | Unaudited | | | | Unaudited | | |
($ in thousands, except share amounts) | | September 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
ASSETS | | |
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Investments: | | |
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Fixed income securities, held-to-maturity – at carrying value (fair value: $28,356 – 2019; $38,317 – 2018) | | $ | 26,925 |
| | 37,110 |
| |
Fixed income securities, available-for-sale – at fair value (amortized cost: $5,706,656 – 2019; $5,270,798 – 2018) | | 5,930,237 |
| | 5,273,100 |
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Equity securities – at fair value (cost: $77,779 – 2019; $138,144 – 2018) | | 79,213 |
| | 147,639 |
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Fixed income securities, held-to-maturity – at carrying value (fair value: $20,727 – 2020; $21,975 – 2019) | | | $ | 19,570 |
| | 20,800 |
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Less: allowance for credit losses | | | (28 | ) | | — |
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Fixed income securities, held-to-maturity, net of allowance for credit losses | | | 19,542 |
| | 20,800 |
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Fixed income securities, available-for-sale – at fair value (allowance for credit losses: $10,395 – 2020; amortized cost: $6,065,554 – 2020 and $5,879,986 – 2019) | | | 6,358,156 |
| | 6,095,620 |
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Commercial mortgage loans - at carrying value (fair value: $17,949 – 2020) | | | 17,880 |
| | — |
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Less: allowance for credit losses | | | (217 | ) | | — |
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Commercial mortgage loans, net of allowance for credit losses | | | 17,663 |
| | — |
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Equity securities – at fair value (cost: $144,617 – 2020; $72,061 – 2019) | | | 134,058 |
| | 72,937 |
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Short-term investments (at cost which approximates fair value) | | 326,121 |
| | 323,864 |
| | 370,390 |
| | 282,490 |
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Other investments | | 189,243 |
| | 178,938 |
| | 230,520 |
| | 216,807 |
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Total investments (Note 4 and 6) | | 6,551,739 |
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| 5,960,651 |
| | 7,130,329 |
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| 6,688,654 |
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Cash | | 516 |
| | 505 |
| | 666 |
| | 300 |
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Restricted cash | | 9,647 |
| | 16,414 |
| | 4,971 |
| | 7,675 |
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Interest and dividends due or accrued | | 42,975 |
| | 41,620 |
| | 45,793 |
| | 44,846 |
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Premiums receivable, net of allowance for uncollectible accounts of: $7,800 – 2019; $9,400 – 2018 | | 860,480 |
| | 770,518 |
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Reinsurance recoverable, net of allowance for uncollectible accounts of: $4,400 – 2019; $4,500 – 2018 | | 575,984 |
| | 549,172 |
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Premiums receivable | | | 887,938 |
| | 830,301 |
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Less: allowance for credit losses (Note 7) | | | (21,000 | ) | | (6,400 | ) |
Premiums receivable, net of allowance for credit losses | | | 866,938 |
| | 823,901 |
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Reinsurance recoverable | | | 587,127 |
| | 577,635 |
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Less: allowance for credit losses (Note 8) | | | (2,396 | ) | | (4,400 | ) |
Reinsurance recoverable, net of allowance for credit losses | | | 584,731 |
| | 573,235 |
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Prepaid reinsurance premiums | | 173,557 |
| | 157,723 |
| | 169,761 |
| | 166,705 |
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Deferred federal income tax | | 5,509 |
| | 53,540 |
| | — |
| | 6,776 |
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Property and equipment – at cost, net of accumulated depreciation and amortization of: $223,518 – 2019; $211,657 – 2018 | | 76,423 |
| | 65,248 |
| |
Property and equipment – at cost, net of accumulated depreciation and amortization of: $237,021 – 2020; $227,566 – 2019 | | | 78,771 |
| | 77,409 |
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Deferred policy acquisition costs | | 279,239 |
| | 252,612 |
| | 285,455 |
| | 271,186 |
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Goodwill | | 7,849 |
| | 7,849 |
| | 7,849 |
| | 7,849 |
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Other assets | | 135,488 |
| | 76,877 |
| | 130,698 |
| | 128,614 |
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Total assets | | $ | 8,719,406 |
| | 7,952,729 |
| | $ | 9,305,962 |
| | 8,797,150 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
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Liabilities: | | |
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Reserve for loss and loss expense (Note 8) | | $ | 4,055,631 |
| | 3,893,868 |
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Reserve for loss and loss expense (Note 9) | | | $ | 4,176,906 |
| | 4,067,163 |
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Unearned premiums | | 1,570,226 |
| | 1,431,932 |
| | 1,615,928 |
| | 1,523,167 |
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Long-term debt | | 550,669 |
| | 439,540 |
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Short-term debt (Note 5) | | | 252,000 |
| | — |
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Long-term debt (Note 5) | | | 550,588 |
| | 550,597 |
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Current federal income tax | | 2,656 |
| | 1,302 |
| | 10,550 |
| | 2,987 |
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Deferred federal income tax | | | 13,065 |
| | — |
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Accrued salaries and benefits | | 100,445 |
| | 116,706 |
| | 82,671 |
| | 126,753 |
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Other liabilities | | 302,403 |
| | 277,579 |
| | 305,579 |
| | 331,547 |
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Total liabilities | | $ | 6,582,030 |
| | 6,160,927 |
| | $ | 7,007,287 |
| | 6,602,214 |
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Stockholders’ Equity: | | |
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Preferred stock of $0 par value per share: | | $ | — |
| | — |
| | $ | — |
| | — |
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Authorized shares 5,000,000; no shares issued or outstanding | | | | | | | | |
Common stock of $2 par value per share: | | | | | | | | |
Authorized shares 360,000,000 | | | | | | | | |
Issued: 103,421,301 – 2019; 102,848,394 – 2018 | | 206,843 |
| | 205,697 |
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Issued: 103,937,634 – 2020; 103,484,159 – 2019 | | | 207,875 |
| | 206,968 |
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Additional paid-in capital | | 412,347 |
| | 390,315 |
| | 435,019 |
| | 418,521 |
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Retained earnings | | 2,012,499 |
| | 1,858,414 |
| | 2,103,629 |
| | 2,080,529 |
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Accumulated other comprehensive income (loss) (Note 11) | | 98,426 |
| | (77,956 | ) | |
Treasury stock – at cost (shares: 44,021,732 – 2019; 43,899,840 – 2018) | | (592,739 | ) | | (584,668 | ) | |
Accumulated other comprehensive income (Note 12) | | | 151,966 |
| | 81,750 |
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Treasury stock – at cost (shares: 44,125,892 – 2020; 44,023,006 – 2019) | | | (599,814 | ) | | (592,832 | ) |
Total stockholders’ equity | | $ | 2,137,376 |
| | 1,791,802 |
| | $ | 2,298,675 |
| | 2,194,936 |
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Commitments and contingencies | |
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Total liabilities and stockholders’ equity | | $ | 8,719,406 |
| | 7,952,729 |
| | $ | 9,305,962 |
| | 8,797,150 |
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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 September 30, | | Nine Months ended September 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands, except per share amounts) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Revenues: | | |
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Net premiums earned | | $ | 653,620 |
| | 614,277 |
| | 1,928,812 |
| | 1,810,941 |
| | $ | 630,671 |
| | 642,619 |
| | 1,282,374 |
| | 1,275,192 |
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Net investment income earned | | 55,826 |
| | 52,443 |
| | 164,949 |
| | 141,227 |
| | 34,444 |
| | 58,505 |
| | 90,411 |
| | 109,123 |
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Net realized and unrealized (losses) gains: | | |
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Net realized investment gains (losses) on disposals | | 20,425 |
| | (751 | ) | | 26,752 |
| | 4,034 |
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Unrealized losses on equity securities | | (20,317 | ) | | (2,610 | ) | | (8,091 | ) | | (15,563 | ) | |
Other-than-temporary impairments | | (2,291 | ) | | (1,426 | ) | | (3,366 | ) | | (5,459 | ) | |
Total net realized and unrealized (losses) gains | | (2,183 | ) | | (4,787 | ) | | 15,295 |
| | (16,988 | ) | |
Net realized and unrealized gains (losses): | | | |
| | |
| | | | |
Net realized investment gains on disposals | | | 2,615 |
| | 2,883 |
| | 6,715 |
| | 6,327 |
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Unrealized gains (losses) on equity securities | | | 5,701 |
| | 2,115 |
| | (11,436 | ) | | 12,226 |
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Other-than-temporary impairment benefit (expense) | | | 4,333 |
| | (971 | ) | | (27,296 | ) | | (1,075 | ) |
Total net realized and unrealized gains (losses) | | | 12,649 |
| | 4,027 |
| | (32,017 | ) | | 17,478 |
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Other income | | 3,162 |
| | 2,538 |
| | 8,535 |
| | 7,896 |
| | 4,683 |
| | 3,053 |
| | 6,508 |
| | 5,373 |
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Total revenues | | 710,425 |
| | 664,471 |
| | 2,117,591 |
| | 1,943,076 |
| | 682,447 |
| | 708,204 |
| | 1,347,276 |
| | 1,407,166 |
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Expenses: | | |
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Loss and loss expense incurred | | 398,675 |
| | 379,199 |
| | 1,166,238 |
| | 1,130,468 |
| | 403,949 |
| | 380,984 |
| | 804,273 |
| | 767,563 |
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Amortization of deferred policy acquisition costs | | 136,572 |
| | 124,511 |
| | 399,647 |
| | 368,265 |
| | 136,931 |
| | 133,401 |
| | 273,432 |
| | 263,075 |
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Other insurance expenses | | 90,234 |
| | 80,108 |
| | 261,975 |
| | 244,342 |
| | 84,601 |
| | 86,662 |
| | 179,947 |
| | 171,741 |
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Interest expense | | 7,397 |
| | 6,073 |
| | 26,289 |
| | 18,350 |
| | 7,928 |
| | 7,366 |
| | 15,529 |
| | 18,892 |
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Corporate expenses | | 6,369 |
| | 7,450 |
| | 28,345 |
| | 22,065 |
| | 6,345 |
| | 9,566 |
| | 15,405 |
| | 21,976 |
|
Total expenses | | 639,247 |
| | 597,341 |
| | 1,882,494 |
| | 1,783,490 |
| | 639,754 |
| | 617,979 |
| | 1,288,586 |
| | 1,243,247 |
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Income before federal income tax | | 71,178 |
| | 67,130 |
| | 235,097 |
| | 159,586 |
| | 42,693 |
| | 90,225 |
| | 58,690 |
| | 163,919 |
|
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Federal income tax expense: | | |
| | |
| | | | | | |
| | |
| | | | |
Current | | 13,805 |
| | 10,314 |
| | 44,344 |
| | 23,529 |
| | (1,350 | ) | | 17,958 |
| | 8,536 |
| | 30,539 |
|
Deferred | | 1,223 |
| | 1,381 |
| | 989 |
| | 2,878 |
| | 9,860 |
| | 1 |
| | 735 |
| | (234 | ) |
Total federal income tax expense | | 15,028 |
| | 11,695 |
| | 45,333 |
| | 26,407 |
| | 8,510 |
| | 17,959 |
| | 9,271 |
| | 30,305 |
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Net income | | $ | 56,150 |
| | 55,435 |
| | 189,764 |
| | 133,179 |
| | $ | 34,183 |
| | 72,266 |
| | 49,419 |
| | 133,614 |
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Earnings per share: | | |
| | |
| | | | | | |
| | |
| | | | |
Basic net income | | $ | 0.94 |
| | 0.94 |
| | 3.20 |
| | 2.26 |
| | $ | 0.57 |
| | 1.22 |
| | 0.83 |
| | 2.25 |
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Diluted net income | | $ | 0.93 |
| | 0.93 |
| | 3.16 |
| | 2.23 |
| | $ | 0.57 |
| | 1.21 |
| | 0.82 |
| | 2.23 |
|
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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 September 30, | | Nine Months ended September 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Net income | | $ | 56,150 |
| | 55,435 |
| | 189,764 |
| | 133,179 |
| | $ | 34,183 |
| | 72,266 |
| | 49,419 |
| | 133,614 |
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Other comprehensive income (loss), net of tax: | | |
| | |
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Unrealized gains (losses) on investment securities: | | |
| | |
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Unrealized holding gains (losses) arising during period | | 27,168 |
| | (17,036 | ) | | 174,483 |
| | (103,389 | ) | |
Other comprehensive income, net of tax: | | | |
| | |
| | | | |
Unrealized gains on investment securities: | | | |
| | |
| | | | |
Unrealized holding gains arising during period | | | 149,127 |
| | 66,002 |
| | 74,882 |
| | 147,315 |
|
Non-credit portion of OTTI recognized in OCI | | | 29,608 |
| | — |
| | (22,050 | ) | | — |
|
Amounts reclassified into net income: | | | | | | | | | | | | | | | | |
Held-to-maturity securities | | (2 | ) | | (6 | ) | | (26 | ) | | (22 | ) | | (25 | ) | | (17 | ) | | (5 | ) | | (24 | ) |
Realized losses on disposals and other-than-temporary impairments of available-for-sale securities | | 2,229 |
| | 8,563 |
| | 351 |
| | 14,424 |
| |
Total unrealized gains (losses) on investment securities | | 29,395 |
| | (8,479 | ) | | 174,808 |
| | (88,987 | ) | |
Net realized (gains) losses on disposals and intent-to-sell OTTI on AFS securities | | | (1,332 | ) | | (1,027 | ) | | 7,616 |
| | (1,878 | ) |
Credit loss (benefit) expense recognized in OTTI | | | (3,890 | ) | | — |
| | 8,582 |
| | — |
|
Total unrealized gains on investment securities | | | 173,488 |
| | 64,958 |
| | 69,025 |
| | 145,413 |
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Defined benefit pension and post-retirement plans: | | |
| | |
| | | | | | |
| | |
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Amounts reclassified into net income: | | | | | | | | | | | | | | | | |
Net actuarial loss | | 525 |
| | 420 |
| | 1,574 |
| | 1,260 |
| | 595 |
| | 524 |
| | 1,191 |
| | 1,049 |
|
Total defined benefit pension and post-retirement plans | | 525 |
| | 420 |
| | 1,574 |
| | 1,260 |
| | 595 |
| | 524 |
| | 1,191 |
| | 1,049 |
|
Other comprehensive income (loss) | | 29,920 |
| | (8,059 | ) | | 176,382 |
| | (87,727 | ) | |
Other comprehensive income | | | 174,083 |
| | 65,482 |
| | 70,216 |
| | 146,462 |
|
Comprehensive income | | $ | 86,070 |
| | 47,376 |
| | 366,146 |
| | 45,452 |
| | $ | 208,266 |
| | 137,748 |
| | 119,635 |
| | 280,076 |
|
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
| | SELECTIVE INSURANCE GROUP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | | Quarter ended September 30, | | Nine Months ended September 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands, except share and per share amounts) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Common stock: | | | | | | |
| | |
| | | | | | |
| | |
|
Beginning of period | | $ | 206,665 |
| | 205,460 |
| | 205,697 |
| | 204,569 |
| | $ | 207,665 |
| | 206,451 |
| | 206,968 |
| | 205,697 |
|
Dividend reinvestment plan | | 9 |
| | 10 |
| | 31 |
| | 35 |
| | 16 |
| | 11 |
| | 30 |
| | 22 |
|
Stock purchase and compensation plans | | 169 |
| | 103 |
| | 1,115 |
| | 969 |
| | 194 |
| | 203 |
| | 877 |
| | 946 |
|
End of period | | 206,843 |
| | 205,573 |
| | 206,843 |
| | 205,573 |
| | 207,875 |
| | 206,665 |
| | 207,875 |
| | 206,665 |
|
| | | | | | | | | | | | | | | | |
Additional paid-in capital: | | | | | | |
| | |
| | | | | | |
| | |
|
Beginning of period | | 407,382 |
| | 381,641 |
| | 390,315 |
| | 367,717 |
| | 427,328 |
| | 398,881 |
| | 418,521 |
| | 390,315 |
|
Dividend reinvestment plan | | 366 |
| | 327 |
| | 1,095 |
| | 1,013 |
| | 407 |
| | 364 |
| | 815 |
| | 729 |
|
Stock purchase and compensation plans | | 4,599 |
| | 3,483 |
| | 20,937 |
| | 16,721 |
| | 7,284 |
| | 8,137 |
| | 15,683 |
| | 16,338 |
|
End of period | | 412,347 |
| | 385,451 |
| | 412,347 |
| | 385,451 |
| | 435,019 |
| | 407,382 |
| | 435,019 |
| | 407,382 |
|
| | | | | | | | | | | | | | | | |
Retained earnings: | | | | | | |
| | |
| | | | | | |
| | |
|
Beginning of period, as previously reported | | 1,968,374 |
| | 1,779,928 |
| | 1,858,414 |
| | 1,698,613 |
| | 2,083,340 |
| | 1,908,119 |
| | 2,080,529 |
| | 1,858,414 |
|
Cumulative effect adjustment due to adoption of equity security guidance, net of tax | | — |
| | — |
| | — |
| | 30,726 |
| |
Cumulative effect adjustment due to adoption of stranded deferred tax guidance | | — |
| | — |
| | — |
| | (5,707 | ) | |
Cumulative effect adjustment due to adoption of lease guidance, net of tax (Note 2) | | — |
| | — |
| | 342 |
| | — |
| | — |
| | — |
| | — |
| | 342 |
|
Cumulative effect adjustment due to adoption of guidance on allowance for credit losses, net of tax (Note 2) | | | — |
| | — |
| | 1,435 |
| | — |
|
Balance at beginning of period, as adjusted | | 1,968,374 |
| | 1,779,928 |
| | 1,858,756 |
| | 1,723,632 |
| | 2,083,340 |
| | 1,908,119 |
| | 2,081,964 |
| | 1,858,756 |
|
Net income | | 56,150 |
| | 55,435 |
| | 189,764 |
| | 133,179 |
| | 34,183 |
| | 72,266 |
| | 49,419 |
| | 133,614 |
|
Dividends to stockholders | | (12,025 | ) | | (10,756 | ) | | (36,021 | ) | | (32,204 | ) | | (13,894 | ) | | (12,011 | ) | | (27,754 | ) | | (23,996 | ) |
End of period | | 2,012,499 |
| | 1,824,607 |
| | 2,012,499 |
| | 1,824,607 |
| | 2,103,629 |
| | 1,968,374 |
| | 2,103,629 |
| | 1,968,374 |
|
| | | | | | | | | | | | | | | | |
Accumulated other comprehensive income (loss): | | | | | | |
| | |
| | | | | | |
| | |
|
Beginning of period, as previously reported | | 68,506 |
| | (84,517 | ) | | (77,956 | ) | | 20,170 |
| |
Cumulative effect adjustment due to adoption of equity security guidance, net of tax | | — |
| | — |
| | — |
| | (30,726 | ) | |
Cumulative effect adjustment due to adoption of stranded deferred tax guidance | | — |
| | — |
| | — |
| | 5,707 |
| |
Balance at beginning of period, as adjusted | | 68,506 |
| | (84,517 | ) | | (77,956 | ) | | (4,849 | ) | |
Beginning of period | | | (22,117 | ) | | 3,024 |
| | 81,750 |
| | (77,956 | ) |
Other comprehensive income (loss) | | 29,920 |
| | (8,059 | ) | | 176,382 |
| | (87,727 | ) | | 174,083 |
| | 65,482 |
| | 70,216 |
| | 146,462 |
|
End of period | | 98,426 |
| | (92,576 | ) | | 98,426 |
| | (92,576 | ) | | 151,966 |
| | 68,506 |
| | 151,966 |
| | 68,506 |
|
| | | | | | | | | | | | | | | | |
Treasury stock: | | | | | | |
| | |
| | | | | | |
| | |
|
Beginning of period | | (591,383 | ) | | (584,357 | ) | | (584,668 | ) | | (578,112 | ) | | (599,760 | ) | | (591,253 | ) | | (592,832 | ) | | (584,668 | ) |
Acquisition of treasury stock | | (1,356 | ) | | (178 | ) | | (8,071 | ) | | (6,423 | ) | | (54 | ) | | (130 | ) | | (6,982 | ) | | (6,715 | ) |
End of period | | (592,739 | ) | | (584,535 | ) | | (592,739 | ) | | (584,535 | ) | | (599,814 | ) | | (591,383 | ) | | (599,814 | ) | | (591,383 | ) |
Total stockholders’ equity | | $ | 2,137,376 |
| | 1,738,520 |
| | 2,137,376 |
| | 1,738,520 |
| | $ | 2,298,675 |
| | 2,059,544 |
| | 2,298,675 |
| | 2,059,544 |
|
| | | | | | | | | | | | | | | | |
Dividends declared per share to stockholders | | $ | 0.20 |
| | 0.18 |
| | 0.60 |
| | 0.54 |
| | $ | 0.23 |
| | 0.20 |
| | 0.46 |
| | 0.40 |
|
| | | | | | | | | | | | | | | | |
Common stock, shares outstanding: | | | | | | | | | | | | | | | | |
Beginning of period | | 59,328,108 |
| | 58,835,052 |
| | 58,948,554 |
| | 58,495,122 |
| | 59,707,545 |
| | 59,222,905 |
| | 59,461,153 |
| | 58,948,554 |
|
Dividend reinvestment plan
| | 4,738 |
| | 5,310 |
| | 15,650 |
| | 17,683 |
| | 7,899 |
| | 5,218 |
| | 14,874 |
| | 10,912 |
|
Stock purchase and compensation plan | | 83,979 |
| | 51,482 |
| | 557,257 |
| | 484,491 |
| | 97,365 |
| | 101,650 |
| | 438,601 |
| | 473,278 |
|
Acquisition of treasury stock | | (17,256 | ) | | (2,859 | ) | | (121,892 | ) | | (108,311 | ) | | (1,067 | ) | | (1,665 | ) | | (102,886 | ) | | (104,636 | ) |
End of period | | 59,399,569 |
| | 58,888,985 |
| | 59,399,569 |
| | 58,888,985 |
| | 59,811,742 |
| | 59,328,108 |
| | 59,811,742 |
| | 59,328,108 |
|
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 | | Nine Months ended September 30, | | Six Months ended June 30, |
($ in thousands) | | 2019 | | 2018 | | 2020 | | 2019 |
Operating Activities | | |
| | |
| | |
| | |
|
Net income | | $ | 189,764 |
| | 133,179 |
| | $ | 49,419 |
| | 133,614 |
|
| | | | | | | | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | |
| | |
| | |
| | |
|
Depreciation and amortization | | 42,346 |
| | 34,961 |
| | 29,634 |
| | 28,327 |
|
Stock-based compensation expense | | 15,857 |
| | 12,150 |
| | 11,198 |
| | 11,654 |
|
Undistributed gains of equity method investments | | (8,832 | ) | | (4,243 | ) | |
Undistributed losses (gains) of equity method investments | | | 7,319 |
| | (4,934 | ) |
Distributions in excess of current year income of equity method investments | | 2,267 |
| | 3,210 |
| | 8,488 |
| | 2,157 |
|
(Gain) loss on disposal of fixed assets | | (21 | ) | | 62 |
| |
Net realized and unrealized (gains) losses | | (15,295 | ) | | 16,988 |
| |
Net realized and unrealized losses (gains) | | | 32,017 |
| | (17,478 | ) |
Loss on disposal of fixed assets | | | 17 |
| | — |
|
| | | | | | | | |
Changes in assets and liabilities: | | |
| | |
| | |
| | |
|
Increase in reserve for loss and loss expense, net of reinsurance recoverable | | 134,951 |
| | 144,920 |
| | 101,151 |
| | 105,082 |
|
Increase in unearned premiums, net of prepaid reinsurance | | 122,460 |
| | 120,535 |
| | 89,705 |
| | 99,152 |
|
Decrease in net federal income taxes | | 2,408 |
| | 18,339 |
| | 8,340 |
| | 1,698 |
|
Increase in premiums receivable | | (89,962 | ) | | (79,894 | ) | | (44,095 | ) | | (107,190 | ) |
Increase in deferred policy acquisition costs | | (26,627 | ) | | (22,978 | ) | | (14,269 | ) | | (20,516 | ) |
(Increase) decrease in interest and dividends due or accrued | | (1,460 | ) | | 72 |
| |
Increase in interest and dividends due or accrued | | | (934 | ) | | (1,399 | ) |
Decrease in accrued salaries and benefits | | (16,261 | ) | | (36,498 | ) | | (44,082 | ) | | (29,124 | ) |
Increase in other assets | | (35,810 | ) | | (13,881 | ) | | (2,753 | ) | | (22,320 | ) |
Increase (decrease) in other liabilities | | 414 |
| | (34,437 | ) | |
Decrease in other liabilities | | | (33,770 | ) | | (13,583 | ) |
Net cash provided by operating activities | | 316,199 |
| | 292,485 |
| | 197,385 |
| | 165,140 |
|
| | | | | | | | |
Investing Activities | | |
| | |
| | |
| | |
|
Purchase of fixed income securities, held-to-maturity | | — |
| | (7,150 | ) | |
Purchase of fixed income securities, available-for-sale | | (1,330,827 | ) | | (1,974,253 | ) | | (961,803 | ) | | (891,241 | ) |
Purchase of commercial mortgage loans | | | (17,934 | ) | | — |
|
Purchase of equity securities | | (40,233 | ) | | (57,834 | ) | | (73,879 | ) | | (24,699 | ) |
Purchase of other investments | | (41,248 | ) | | (47,238 | ) | | (39,400 | ) | | (25,822 | ) |
Purchase of short-term investments | | (4,108,414 | ) | | (2,711,360 | ) | | (3,368,828 | ) | | (3,258,852 | ) |
Sale of fixed income securities, available-for-sale | | 461,825 |
| | 1,382,677 |
| | 302,342 |
| | 372,159 |
|
Proceeds from commercial mortgage loans | | | 54 |
| | — |
|
Sale of short-term investments | | 4,106,643 |
| | 2,572,399 |
| | 3,278,106 |
| | 3,291,878 |
|
Redemption and maturities of fixed income securities, held-to-maturity | | 10,062 |
| | 3,923 |
| | 1,200 |
| | 4,643 |
|
Redemption and maturities of fixed income securities, available-for-sale | | 413,220 |
| | 456,037 |
| | 461,527 |
| | 236,705 |
|
Sale of equity securities | | 125,302 |
| | 79,676 |
| | 1,320 |
| | 30,094 |
|
Sale of other investments | | 18,016 |
| | 3,497 |
| | 53 |
| | 12,609 |
|
Distributions from other investments | | 19,054 |
| | 23,420 |
| | 7,349 |
| | 14,489 |
|
Purchase of property and equipment | | (24,424 | ) | | (11,150 | ) | | (12,634 | ) | | (16,985 | ) |
Fixed asset disposals | | 35 |
| | — |
| |
Net cash used in investing activities | | (390,989 | ) | | (287,356 | ) | | (422,527 | ) | | (255,022 | ) |
| | | | | | | | |
Financing Activities | | |
| | |
| | |
| | |
|
Dividends to stockholders | | (34,440 | ) | | (30,694 | ) | | (26,631 | ) | | (22,940 | ) |
Acquisition of treasury stock | | (8,071 | ) | | (6,423 | ) | | (6,982 | ) | | (6,715 | ) |
Net proceeds from stock purchase and compensation plans | | 5,599 |
| | 5,001 |
| | 4,731 |
| | 5,100 |
|
Proceeds from borrowings | | 355,757 |
| | 130,000 |
| | 387,000 |
| | 340,757 |
|
Repayments of borrowings | | (250,000 | ) | | (130,000 | ) | | (135,000 | ) | | (235,000 | ) |
Repayments of finance lease obligations | | (811 | ) | | (4,891 | ) | | (314 | ) | | (596 | ) |
Net cash provided by (used in) financing activities | | 68,034 |
| | (37,007 | ) | |
Net cash provided by financing activities | | | 222,804 |
| | 80,606 |
|
Net decrease in cash and restricted cash | | (6,756 | ) | | (31,878 | ) | | (2,338 | ) | | (9,276 | ) |
Cash and restricted cash, beginning of year | | 16,919 |
| | 44,710 |
| | 7,975 |
| | 16,919 |
|
Cash and restricted cash, end of period | | $ | 10,163 |
| | 12,832 |
| | $ | 5,637 |
| | 7,643 |
|
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 and Accounting Policies
As used herein, the(a) Basis of Presentation
The words "Company,” “we,” “us,” or “our” refersrefer to Selective Insurance Group, Inc. (the "Parent"), and its subsidiaries except as expressly indicated or unless the context otherwise requires. Ourrequires otherwise. We have prepared 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 ofIn preparing the Financial Statements in conformity with GAAP, requires uswe are required to make estimates and assumptions that affect the reported financial statement balances as well asand 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.
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 thirdsecond quarters ended SeptemberJune 30, 2020 (“Second Quarter 2020”) and June 30, 2019 (“ThirdSecond Quarter 2019”) and Septemberthe six-month periods ended June 30, 2018 (“Third Quarter 2018”2020 ("Six Months 2020") and the nine-month periods ended SeptemberJune 30, 2019 (“Nine("Six Months 2019”) and September 30, 2018 (“Nine Months 2018”2019"). These Financial Statements do not include all of the information and disclosures required by GAAP and the SEC for audited annual financial statements. Additionally, resultsResults 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, 20182019 (“20182019 Annual Report”) filed with the SEC.
(b) Accounting Policies
There have been no material changes from the accounting policies disclosed in Note 2. "Summary of Significant Accounting Policies" in Item 8. “Financial Statements and Supplementary Data.” of our 2019 Annual Report other than those associated with our adoption of ASU 2016-13, Financial Instruments - Credit Losses ("CECL") in the first quarter of 2020 and our recent investment allocation to commercial mortgage loans ("CMLs"). The pertinent additions and changes to our accounting policies are centered around the following items: (i) Investments; (ii) Allowance for Uncollectible Premiums Receivable; and (iii) Allowance for Uncollectible Reinsurance Recoverable.
Investments
Fixed Income Securities
We have updated our policy associated with our review of fixed income securities for other-than-temporary impairments ("OTTI"), and we follow a two-step process:
(i) We review our fixed income securities in an unrealized loss position to determine: (i) if we have the intent to sell the security; or (ii) if it is more likely than not we will be required to sell the security before its anticipated recovery. If we determine that we have the intent or likely requirement to sell the security, we write down its amortized cost to its fair value. In writing down amortized cost, any amount previously recorded as an allowance for credit losses is reversed and any incremental impairment is recorded directly to earnings as OTTI.
(ii) If we do not have either the intent or likely requirement to sell the security, our evaluation for expected credit losses primarily focuses on performing a discounted cash flow (“DCF”) analysis on each of our fixed income securities to determine if an allowance for credit loss is required. We incorporate the results of the DCF analysis on individual security holdings into our calculation of the allowance for credit losses as follows:
For our held-to-maturity ("HTM") portfolio, the allowance for credit losses is calculated as the shortfall between amortized cost at the reporting date and the present value of future cash flows calculated in the DCF analysis.
For our available-for-sale ("AFS") portfolio and fixed income securities included in our short-term investment portfolio, the allowance for credit losses is calculated in the same manner as for the HTM portfolio; but the allowance amount is limited to the difference between the security’s amortized cost and fair value, or the fair value floor. This treatment is appropriate as we have the ability to recover the amortized cost of an AFS security either through: (i) collection of the contractual cash flows; or (ii) sale of the security.
Fair value declines on our AFS securities not recorded through OTTI are recognized in accumulated other comprehensive income, after tax.
Our DCF analyses calculate the present value of future cash flows using various models that are specific to the major security types within our portfolio. These models use security-specific information as well as forecasted macroeconomic data to determine possible expected credit loss scenarios based on projected changes in the economy. The forecasted economic data incorporated into the models is based on the Federal Reserve Board’s annual supervisory stress test review on certain large banks and financial institutions. Additionally, we have the ability to incorporate internally-developed forecast information into the models as we deem appropriate. Model scenarios include a baseline assumption with projections for moderate economic expansion, an adverse assumption with projections for a weakening economy, and a severely adverse assumption with projections for a global recession. In developing our best estimate of the allowance for credit losses, we consider our outlook as to the probability of each of these scenarios occurring over the estimated contractual cash flows of our investment portfolio.
For additional information about the various assumptions we make, including the discount rates used in our DCF analyses, see Note 2. "Summary of Significant Accounting Policies" in Item 8. “Financial Statements and Supplementary Data.” of our 2019 Annual Report.
The allowance for credit losses are recorded as a contra-asset reflected in the carrying value of the investment on the Consolidated Balance Sheet, and are charged to earnings as credit loss expense, which is a component of "Other-than-temporary impairment benefit (expense)" within "Net realized and unrealized gains (losses)" on our Consolidated Statements of Income. The income statement treatment is consistent with how we accounted for credit losses prior to the adoption of CECL. However, subsequent changes in the expected cash flows associated with a future period's updated DCF analysis are recorded as an increase to (or reversal of) credit loss expense with the offset recorded to the allowance. We charge write-offs against the allowance when either: (i) we determine the recovery of amortized cost to be uncollectible based on our evaluation of the financial condition of the issuer; (ii) we have the intent, or requirement, to sell a security for which an allowance for credit losses was previously established; and (iii) we sold a security for which an allowance for credit losses was previously established.
Accrued interest on fixed income securities and CMLs is recorded as a component of “Interest and dividends due or accrued” on our Consolidated Balance Sheet. If accrued interest is due but not paid within 90 days, we reverse the delinquent amount against investment income, which is a component of “Net investment income earned” on our Consolidated Statements of Income. We do not record a valuation allowance on our accrued interest balance as we reverse delinquent amounts on a timely basis. We consider a debt security to be past due at the time any principal or interest payments become 90 days delinquent.
Commercial Mortgage Loans
Beginning in 2020, our investment portfolio contains an allocation to CMLs. As of June 30, 2020, CMLs accounted for less than 1% of our invested assets. CMLs are loans secured by commercial property, such as an office building, multi-family apartment complex, industrial warehouse, or shopping center. We may acquire investments in CMLs through direct originations under a loan syndication arrangement or purchase CMLs in the marketplace. We record our investment in CMLs on the settlement date of the loan. Our CMLs are classified as held-for-investment and reported at amortized cost, net of the applicable allowance for credit losses, on our Consolidated Balance Sheet.
We evaluate our CMLs for expected credit loss under the same methodology described above for fixed income securities using a DCF model. The discount rate used in this DCF model is either the effective interest rate implicit in the CML at the date of acquisition for fixed rate investments, or the effective interest rate in effect as of the reporting date for non-fixed-rate CMLs.
The allowance for credit losses on our CML investments is calculated as the shortfall between amortized cost at the reporting date and the present value of future cash flows calculated in the DCF analysis. The treatment of earnings and the related classification of the expected credit losses on the Consolidated Statements of Income and the Consolidated Balance Sheet are consistent with our fixed income securities as described above.
Allowance for Uncollectible Premiums Receivable
We estimate an allowance for expected credit losses on our outstanding premiums receivable balance at each reporting date. In determining this allowance, we use a method that considers the aging of the receivable, based on the effective year of the related policy, along with our historical receivable loss experience. We also contemplate expected macroeconomic conditions over the expected collection period of these receivables that, because the majority of the balances are collected within a year or two of policy issuance, are short-term in nature.
Expected credit losses on premiums receivable are charged to earnings as credit loss expense, which is a component of "Other insurance expenses" on our Consolidated Statements of Income with an offsetting allowance being recorded as a contra-asset reflected in the carrying value of the receivable. Subsequent changes in the allowance are recorded as an increase to (or
reversal of) credit loss expense. We charge write-offs against the allowance when we determine the account to be uncollectible after considering information obtained from our collection efforts.
Allowance for Uncollectible Reinsurance Recoverable
The "Reinsurance recoverable" balance on our Consolidated Balance Sheets represents our estimate of amounts that will be recovered from reinsurers under our various treaties. Generally, amounts recoverable from reinsurers are recognized as assets at the same time and in a manner consistent with the paid and unpaid losses associated with the reinsured policies. We would consider a recoverable balance from a reinsurer to be past due if payment is not received by the first day following the invoice due date. We require collateral to secure reinsurance recoverable balances primarily from our reinsurance carriers that are not authorized, otherwise approved, or certified to do business in one or more of our ten insurance subsidiaries' domiciliary states. Our ten insurance subsidiaries are collectively referred to as the "Insurance Subsidiaries." This collateral is typically in the form of a letter of credit or cash.
We estimate an allowance for expected credit losses on our outstanding reinsurance recoverable balance at each reporting date. Credit risk is mitigated to the extent we have obtained collateral as described above. We, therefore, reduce the recoverable balance by the amount of the collateral as part of our allowance calculation. We then pool the uncollateralized balances by similar risk characteristics, including the financial strength rating of the reinsurer, and use a probability-of-default methodology in calculating the allowance. Historical default rates are sourced from AM Best and are coupled with severity assumptions in developing a baseline scenario. We then stress this scenario by incorporating forecasts of industry catastrophe losses and economic factors sourced through third-party data providers. In developing our best estimate of the allowance for credit losses, we consider our outlook as to the probability of each of these scenarios occurring.
Expected credit losses on reinsurance recoverable balances are charged to earnings as credit loss expense, which is a component of “Loss and loss expense incurred” on our Consolidated Statements of Income with an offsetting allowance for the credit loss being recorded as a contra-asset reflected in the carrying value of the recoverable balance. Subsequent changes in the allowance are recorded as an increase to (or reversal of) credit loss expense. We charge write-offs against the allowance when we determine the recoverable balance to be uncollectible after considering information obtained from our efforts to collect amounts due or through a review of the financial condition of the reinsurer.
NOTE 2. Adoption of Accounting Pronouncements
TheIn June 2016, the Financial Accounting Standards Board ("FASB"(“FASB”) issued new leasing guidance through ASU 2016-02, Leases, which was issued in February 2016, as well as additional implementation guidance that was issued in 2018 and 2019 (collectively referred to as "ASU 2016-02"). ASU 2016-02 requires all lessees to recognize assets and liabilities on their balance sheets for the rights and obligations created by leases with terms longer than 12 months. For leases with a term of 12 months or less, an accounting policy election is allowed to recognize lease expense on a straight-line basis over the lease term.
ASU 2016-02 allows for certain practical expedients, accounting policy elections, and a transition method election. We adopted practical expedients related to reassessing: (i) whether our existing contracts are, or contain, leases; (ii) lease classification for existing leases; and (iii) initial direct costs for existing leases. Additionally, we adopted accounting policy elections to: (i) aggregate lease and non-lease components of a contract into a single lease component; and (ii) expense short-term leases on a straight-line basis over the lease term. We adopted ASU 2016-02 effective January 1, 2019. See Note 12. "Leases" in this Form 10-Q for additional information regarding our leases and the impact of this guidance on our financial condition and results of operations.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07"). The amendments in ASU 2018-07 expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. We adopted ASU 2018-07 in the first quarter of 2019 and it did not have a material impact on our financial condition or results of operations.
Pronouncements to be effective in the future
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses as well as, and subsequent additional implementation guidance issued in 2018 and 2019 (collectively referred to as “ASU 2016-13”). ASU 2016-13 will change that changes the way entities recognize impairment of financial assets by requiringassets. The new guidance requires immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets including, among others, held-to-maturity ("HTM") debt securities, trade receivables, and reinsurance recoverables. ASU 2016-13 requiresthrough the establishment of a valuation allowance to be calculated on 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 asAdditionally, ASU 2016-03 requires the current expected credit loss model. This ASU also made targeted changes topresentation of the impairment accounting model for available-for-sale ("AFS") debt securities. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those annual periods. impacted financial assets on the consolidated balance sheet net of the valuation allowance.
We are currently evaluating the impact ofadopted this guidance on January 1, 2020, applied a modified retrospective approach for the adoption, and recorded a net cumulative-effect adjustment to increase the opening balance of 2020 retained earnings by $1.4 million, after tax. As prescribed in ASU 2016-13, we did not adjust the amortized cost basis of any securities for which we had previously recorded OTTI. The cumulative-effect increase to retained earnings represents the net adjustment required to (i) establish valuation allowances on our held-to-maturity ("HTM") debt securities, and (ii) re-estimate valuation allowances on our premiums receivables and reinsurance recoverables under ASU 2016-13. See Note 1. "Basis of Presentation and Accounting Policies" of this Form 10-Q for accounting policy updates related to ASU 2016-13. Additionally, see Note 4. "Investments," Note 7. "Allowance for Uncollectible Premiums Receivable," and Note 8. "Reinsurance" of this Form 10-Q for additional information regarding credit losses related to the respective financial condition and results of operations.assets.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement(“ (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements for fair value measurements.measurements by removing certain disclosures, and modifying and adding disclosure requirements. The modifications removed the followingadditional disclosure requirements:requirements include (i) the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) the policy for timing of transfers between levels; and (iii) the
valuation processes for Level 3 fair value measurements. This ASU added the following disclosure requirements: (i) the changeschange in unrealized gains and losses for the period included in other comprehensive income ("OCI"(“OCI”) for recurring Level 3 fair value measurements held at the end of the reporting period;period, and (ii) the range and weighted average of significant observable inputs used to develop Level 3 fair value measurements. This update is effective for annualWe adopted the provisions related to removed disclosures in the fourth quarter of 2019 and interim periods beginning after December 15, 2019, with early adoption permitted.adopted the remaining disclosure requirements in the first quarter of 2020 as permitted under ASU 2018-13. As the requirements of this literature arerequires disclosure only, ASU 2018-13 will nothas no impact our financial condition or results of operations.
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General: Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”). ASU 2018-14 modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. These modifications include: (i) removing the requirement to disclose the amount in accumulated other comprehensive income ("AOCI") expected to be recognized as components of net periodic benefit cost over the next fiscal year; and (ii) adding the requirement to disclose an explanation of the reasons for significant gains or losses related to changes in the benefit obligation for the period. This update is effective for fiscal years ending after December 15, 2020, with early adoption permitted. As the requirements of this literature are disclosure only, ASU 2018-14 will not impacton our financial condition or results of operations.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract(“ (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a cloud computing hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted this guidance prospectively on January 1, 2020, and it did not have a material impact on our financial condition or results of operations.
Pronouncements to be effective in the future
In December 2019, the FASB issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (“ASU 2019-12”). Among other items, the amendments in ASU 2019-12 simplify the accounting treatment of tax law changes and year-to-date losses in interim periods. An entity generally recognizes the effects of a change in tax law in the period of enactment; however, there is an exception for tax laws with delayed effective dates. Under current guidance, an entity may not adjust its annual effective tax rate for a tax law change until the period in which the law is effective. This updateexception was removed by ASU 2019-12. This guidance provides that all effects of a tax law change are recognized in the period of enactment, including adjustment of the estimated annual effective tax rate.
For year-to-date losses in interim periods, an entity is required to estimate its annual effective tax rate for the full fiscal year at the end of each interim period and use that rate to calculate its income taxes on a year-to-date basis. Current guidance provides an exception that, when an interim period loss exceeds the anticipated loss for the year, the income tax benefit is limited to the amount that would be recognized if the year-to-date loss were the anticipated loss for the full year. ASU 2019-12 removes this exception and provides that, in this situation, an entity would compute its income tax benefit at each interim period based on its estimated annual effective tax rate.
ASU 2019-12 is effective for annual and interim periodsfiscal years beginning after December 15, 2019, with early2020, including interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact of this guidance on our financial condition and results of operations.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) -Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions to the guidance in GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition away from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. Companies can elect to adopt ASU 2020-04 as of the beginning of the interim period that includes March 2020, or any date thereafter through December 31, 2022. We are currently evaluating the impact of this guidance on our financial condition and results of operations.
NOTE 3. Statements of Cash Flows
Supplemental cash flow information was as follows:
| | | | Nine Months ended September 30, | | Six Months ended June 30, |
($ in thousands) | | 2019 | | 2018 | | 2020 | | 2019 |
Cash paid during the period for: | | |
| | |
| | |
| | |
|
Interest | | $ | 19,261 |
| | 15,449 |
| | $ | 14,920 |
| | 10,512 |
|
Federal income tax | | 42,000 |
| | 7,193 |
| | — |
| | 28,000 |
|
| | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities:
| | | | | | | | |
Operating cash flows from operating leases1 | | 6,062 |
| | — |
| |
Operating cash flows from operating leases | | | 4,443 |
| | 3,994 |
|
Operating cash flows from financing leases
| | 12 |
| | — |
| | 10 |
| | 7 |
|
Financing cash flows from finance leases
| | 811 |
| | 4,891 |
| | 314 |
| | 596 |
|
| | | | | | | | |
Non-cash items: | | | | | | | | |
Corporate actions related to fixed income securities, AFS2 | | 29,771 |
| | 32,757 |
| |
Corporate actions related to equity securities2 | | 14,250 |
| | 944 |
| |
Corporate actions related to fixed income securities, AFS1 | | | 18,224 |
| | 25,104 |
|
Corporate actions related to fixed income securities, HTM1 | | | 2,596 |
| | — |
|
Corporate actions related to equity securities1 | | | 890 |
| | — |
|
Assets acquired under finance lease arrangements
| | 824 |
| | 4,114 |
| | 119 |
| | 814 |
|
Assets acquired under operating lease arrangements1
| | 13,648 |
| | — |
| |
Assets acquired under operating lease arrangements | | | 4,358 |
| | 12,881 |
|
Non-cash purchase of property and equipment | | 108 |
| | — |
| | 60 |
| | — |
|
1Upon adoption of ASU 2016-02, effective January 1, 2019, we are required to disclose cash paid for amounts included in the measurement of operating lease liabilities, as well as supplemental non-cash information on operating lease liabilities arising from obtaining operating lease assets.
2Examples of such corporate actions include exchanges, non-cash acquisitions, and stock splits.
The following table provides a reconciliation of cash and restricted cash reported within the Consolidated Balance Sheets that equate to the amount reported in the Consolidated Statements of Cash Flows:
| | ($ in thousands) | | September 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
Cash | | $ | 516 |
| | 505 |
| | $ | 666 |
| | 300 |
|
Restricted cash | | 9,647 |
| | 16,414 |
| | 4,971 |
| | 7,675 |
|
Total cash and restricted cash shown in the Statements of Cash Flows | | $ | 10,163 |
| | 16,919 |
| | $ | 5,637 |
| | 7,975 |
|
Amounts included in restricted cash represent cash received from the National Flood Insurance Program ("NFIP"), which is restricted to pay flood claims under the Write Your Own program.
NOTE 4. Investments
(a) Our HTM fixed income securities as of September 30, 2019 represented less than 1% of our total invested assets, down slightly compared to December 31, 2018. The carry value and net unrealized/unrecognized gains were $26.9 million and $1.5 million, respectively, at September 30, 2019, and $37.1 million and $1.3 million, respectively, at December 31, 2018. Included in the net unrealized/unrecognized gains were gross unrealized/unrecognized losses of less than $0.1 million at September 30, 2019 and $0.2 million at December 31, 2018.
Unrecognized holding gains and losses of HTM securities are not reflected in the Financial Statements, as they represent fair value fluctuations from the date a security is designated as HTM through the date of the balance sheet.
(b) Information regarding our AFS securities as of SeptemberJune 30, 20192020 and December 31, 20182019 was as follows:
|
| | | | | | | | | | | | | |
September 30, 2019 | | | | | | | | |
($ in thousands) | | Cost/ Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
AFS fixed income securities: | | | | | | | | |
U.S. government and government agencies | | $ | 116,555 |
| | 4,357 |
| | (12 | ) | | 120,900 |
|
Foreign government | | 20,947 |
| | 573 |
| | — |
| | 21,520 |
|
Obligations of states and political subdivisions | | 1,127,709 |
| | 62,910 |
| | (4 | ) | | 1,190,615 |
|
Corporate securities | | 1,762,981 |
| | 78,345 |
| | (2,399 | ) | | 1,838,927 |
|
Collateralized loan obligations and other asset-backed securities ("CLO and other ABS") | | 764,038 |
| | 8,998 |
| | (4,653 | ) | | 768,383 |
|
Commercial mortgage-backed securities ("CMBS") | | 524,441 |
| | 31,435 |
| | (145 | ) | | 555,731 |
|
Residential mortgage-backed securities (“RMBS”) | | 1,389,985 |
| | 44,710 |
| | (534 | ) | | 1,434,161 |
|
Total AFS fixed income securities | | $ | 5,706,656 |
| | 231,328 |
| | (7,747 | ) | | 5,930,237 |
|
| | December 31, 2018 | | | | | | | | | |
June 30, 2020 | | | | | | | | | | | |
($ in thousands) | | Cost/ Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | Cost/ Amortized Cost | | Allowance for Credit Losses | | Unrealized Gains | | Unrealized Losses | | Fair Value |
AFS fixed income securities: | | | | | | | | | | | | | | | | | | |
U.S. government and government agencies | | $ | 120,092 |
| | 1,810 |
| | (592 | ) | | 121,310 |
| | $ | 112,341 |
| | — |
| | 7,382 |
| | — |
| | 119,723 |
|
Foreign government | | 23,202 |
| | 36 |
| | (107 | ) | | 23,131 |
| | 16,936 |
| | (28 | ) | | 1,118 |
| | (104 | ) | | 17,922 |
|
Obligations of states and political subdivisions | | 1,121,615 |
| | 19,485 |
| | (2,631 | ) | | 1,138,469 |
| | 1,131,597 |
| | (17 | ) | | 72,034 |
| | (200 | ) | | 1,203,414 |
|
Corporate securities | | 1,639,852 |
| | 5,521 |
| | (27,965 | ) | | 1,617,408 |
| | 2,131,707 |
| | (8,077 | ) | | 142,677 |
| | (10,302 | ) | | 2,256,005 |
|
CLO and other ABS | | 720,193 |
| | 4,112 |
| | (6,943 | ) | | 717,362 |
| |
CMBS | | 527,409 |
| | 3,417 |
| | (3,748 | ) | | 527,078 |
| |
RMBS | | 1,118,435 |
| | 12,988 |
| | (3,081 | ) | | 1,128,342 |
| |
Collateralized loan obligations ("CLO") and other asset-backed securities ("ABS") | | | 853,470 |
| | (1,389 | ) | | 11,946 |
| | (24,506 | ) | | 839,521 |
|
Residential mortgage-backed securities ("RMBS") | | | 1,254,472 |
| | (831 | ) | | 65,745 |
| | (1,008 | ) | | 1,318,378 |
|
Commercial mortgage-backed securities ("CMBS") | | | 565,031 |
| | (53 | ) | | 41,999 |
| | (3,784 | ) | | 603,193 |
|
Total AFS fixed income securities | | $ | 5,270,798 |
| | 47,369 |
| | (45,067 | ) | | 5,273,100 |
| | $ | 6,065,554 |
| | (10,395 | ) | | 342,901 |
| | (39,904 | ) | | 6,358,156 |
|
|
| | | | | | | | | | | | | |
December 31, 2019 | | | | | | | | |
($ in thousands) | | Cost/ Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
AFS fixed income securities: | | | | | | | | |
U.S. government and government agencies | | $ | 112,680 |
| | 3,506 |
| | — |
| | 116,186 |
|
Foreign government | | 18,011 |
| | 533 |
| | (2 | ) | | 18,542 |
|
Obligations of states and political subdivisions | | 1,168,185 |
| | 62,175 |
| | (270 | ) | | 1,230,090 |
|
Corporate securities | | 1,866,881 |
| | 81,906 |
| | (1,310 | ) | | 1,947,477 |
|
CLO and other ABS | | 790,517 |
| | 7,929 |
| | (5,434 | ) | | 793,012 |
|
RMBS | | 1,409,003 |
| | 43,421 |
| | (455 | ) | | 1,451,969 |
|
CMBS | | 514,709 |
| | 23,902 |
| | (267 | ) | | 538,344 |
|
Total AFS fixed income securities | | $ | 5,879,986 |
| | 223,372 |
| | (7,738 | ) | | 6,095,620 |
|
Unrealized gainsThe following tables provide a rollforward of the allowance for credit losses on our AFS fixed income securities for the periods indicated: |
| | | | | | | | | | | | | | | | | | | |
Quarter ended June 30, 2020 | | | | | | | | | | | | |
($ in thousands) | | Beginning Balance | | Current Provision for Securities without Prior Allowance | | Increase (Decrease) on Securities with Prior Allowance, excluding intent (or Requirement) to Sell Securities | | Reductions for Securities Sold | | Reductions for Securities Identified as Intent (or Requirement) to Sell during the Period | | Ending Balance |
Foreign government | | $ | 21 |
| | — |
| | 7 |
| | — |
| | — |
| | 28 |
|
Obligations of states and political subdivisions | | 29 |
| | 15 |
| | (27 | ) | | — |
| | — |
| | 17 |
|
Corporate securities | | 13,412 |
| | 813 |
| | (5,686 | ) | | (395 | ) | | (67 | ) | | 8,077 |
|
CLO and other ABS | | 1,565 |
| | 27 |
| | (145 | ) | | (58 | ) | | — |
| | 1,389 |
|
RMBS | | 722 |
| | — |
| | 124 |
| | (15 | ) | | — |
| | 831 |
|
CMBS | | 38 |
| | 8 |
| | 7 |
| | — |
| | — |
| | 53 |
|
Total AFS fixed income securities | | $ | 15,787 |
| | 863 |
| | (5,720 | ) | | (468 | ) | | (67 | ) | | 10,395 |
|
|
| | | | | | | | | | | | | | | | | | | |
Six Months ended June 30, 2020 | | | | | | | | | | | | |
($ in thousands) | | Beginning Balance | | Current Provision for Securities without Prior Allowance | | Increase (Decrease) on Securities with Prior Allowance, excluding intent (or Requirement) to Sell Securities | | Reductions for Securities Sold | | Reductions for Securities Identified as Intent (or Requirement) to Sell during the Period | | Ending Balance |
Foreign government | | $ | — |
| | 28 |
| | — |
| | — |
| | — |
| | 28 |
|
Obligations of states and political subdivisions | | — |
| | 17 |
| | — |
| | — |
| | — |
| | 17 |
|
Corporate securities | | — |
| | 8,539 |
| | — |
| | (395 | ) | | (67 | ) | | 8,077 |
|
CLO and other ABS | | — |
| | 1,447 |
| | — |
| | (58 | ) | | — |
| | 1,389 |
|
RMBS | | — |
| | 846 |
| | — |
| | (15 | ) | | — |
| | 831 |
|
CMBS | | — |
| | 53 |
| | — |
| | — |
| | — |
| | 53 |
|
Total AFS fixed income securities | | $ | — |
| | 10,930 |
| | — |
| | (468 | ) | | (67 | ) | | 10,395 |
|
During 2020, we did not experience any write-offs or recoveries of our AFS fixed income securities, nor did we purchase any assets with credit deterioration, therefore these items are not included in the table above.
As disclosed in Note 1. "Basis of Presentation and losses ofAccounting Policies," we do not evaluate accrued interest on our AFS securities represent fair value fluctuations from the later of: (i) the datefor credit impairment as we write-off these balances in a security is designated as AFS; or (ii) the date that an other-than-temporary impairment ("OTTI") charge is recognized on an AFS security, through the datetimely manner. As of the balance sheet. These unrealized gains and losses are recorded in AOCI on the Consolidated Balance Sheets.
(c) The severity of impairmentJune 30, 2020, accrued interest on AFS securities in an unrealized/unrecognized loss position averaged approximately 1%amounted to $44.7 million and we did not record any write-offs of amortized cost at September 30, 2019 and approximately 2% at December 31, 2018.accrued interest during 2020.
(b) Quantitative information regarding theseabout unrealized losses on our AFS portfolio is provided below.
|
| | | | | | | | | | | | | | | | | | | |
June 30, 2020 | | Less than 12 months | | 12 months or longer | | Total |
($ in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
AFS fixed income securities: | | |
| | |
| | |
| | |
| | | | |
Foreign government | | $ | 1,673 |
| | (104 | ) | | — |
| | — |
| | 1,673 |
| | (104 | ) |
Obligations of states and political subdivisions | | 9,141 |
| | (200 | ) | | — |
| | — |
| | 9,141 |
| | (200 | ) |
Corporate securities | | 175,595 |
| | (9,852 | ) | | 3,216 |
| | (450 | ) | | 178,811 |
| | (10,302 | ) |
CLO and other ABS | | 373,896 |
| | (16,109 | ) | | 142,759 |
| | (8,397 | ) | | 516,655 |
| | (24,506 | ) |
RMBS | | 39,176 |
| | (975 | ) | | 1,352 |
| | (33 | ) | | 40,528 |
| | (1,008 | ) |
CMBS | | 86,573 |
| | (3,128 | ) | | 11,739 |
| | (656 | ) | | 98,312 |
| | (3,784 | ) |
Total AFS fixed income securities | | $ | 686,054 |
| | (30,368 | ) | | 159,066 |
| | (9,536 | ) | | 845,120 |
| | (39,904 | ) |
|
| | | | | | | | | | | | | | | | | | | |
September 30, 2019 | | Less than 12 months | | 12 months or longer | | Total |
($ in thousands) | | Fair Value | | Unrealized Losses1 | | Fair Value | | Unrealized Losses1 | | Fair Value | | Unrealized Losses1 |
AFS fixed income securities: | | |
| | |
| | |
| | |
| | | | |
U.S. government and government agencies | | $ | 5,014 |
| | (11 | ) | | 498 |
| | (1 | ) | | 5,512 |
| | (12 | ) |
Obligations of states and political subdivisions | | 437 |
| | (4 | ) | | — |
| | — |
| | 437 |
| | (4 | ) |
Corporate securities | | 89,919 |
| | (1,862 | ) | | 15,867 |
| | (537 | ) | | 105,786 |
| | (2,399 | ) |
CLO and other ABS | | 176,999 |
| | (2,458 | ) | | 180,898 |
| | (2,195 | ) | | 357,897 |
| | (4,653 | ) |
CMBS | | 59,857 |
| | (126 | ) | | 7,665 |
| | (19 | ) | | 67,522 |
| | (145 | ) |
RMBS | | 84,408 |
| | (503 | ) | | 9,513 |
| | (31 | ) | | 93,921 |
| | (534 | ) |
Total AFS fixed income securities | | $ | 416,634 |
| | (4,964 | ) | | 214,441 |
| | (2,783 | ) | | 631,075 |
| | (7,747 | ) |
|
| | | | | | | | | | | | | | | | | | | |
December 31, 2018 | | Less than 12 months | | 12 months or longer | | Total |
($ in thousands) | | Fair Value | | Unrealized Losses1 | | Fair Value | | Unrealized Losses1 | | Fair Value | | Unrealized Losses1 |
AFS fixed income securities: | | |
| | |
| | |
| | |
| | | | |
U.S. government and government agencies | | $ | 6,693 |
| | (174 | ) | | 23,163 |
| | (418 | ) | | 29,856 |
| | (592 | ) |
Foreign government | | 12,208 |
| | (93 | ) | | 1,482 |
| | (14 | ) | | 13,690 |
| | (107 | ) |
Obligations of states and political subdivisions | | 196,798 |
| | (2,074 | ) | | 42,821 |
| | (557 | ) | | 239,619 |
| | (2,631 | ) |
Corporate securities | | 1,041,952 |
| | (23,649 | ) | | 78,953 |
| | (4,316 | ) | | 1,120,905 |
| | (27,965 | ) |
CLO and other ABS | | 516,106 |
| | (6,750 | ) | | 16,800 |
| | (193 | ) | | 532,906 |
| | (6,943 | ) |
CMBS | | 229,338 |
| | (2,548 | ) | | 66,294 |
| | (1,200 | ) | | 295,632 |
| | (3,748 | ) |
RMBS | | 139,338 |
| | (1,660 | ) | | 45,661 |
| | (1,421 | ) | | 184,999 |
| | (3,081 | ) |
Total AFS fixed income securities | | $ | 2,142,433 |
| | (36,948 | ) | | 275,174 |
| | (8,119 | ) | | 2,417,607 |
| | (45,067 | ) |
1 Gross unrealized losses include non-OTTI unrealized amounts and OTTI losses recognized in AOCI.
|
| | | | | | | | | | | | | | | | | | | |
December 31, 2019 | | Less than 12 months | | 12 months or longer | | Total |
($ in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
AFS fixed income securities: | | |
| | |
| | |
| | |
| | | | |
Foreign government | | $ | 1,416 |
| | (2 | ) | | — |
| | — |
| | 1,416 |
| | (2 | ) |
Obligations of states and political subdivisions | | 35,838 |
| | (270 | ) | | — |
| | — |
| | 35,838 |
| | (270 | ) |
Corporate securities | | 84,832 |
| | (480 | ) | | 20,182 |
| | (830 | ) | | 105,014 |
| | (1,310 | ) |
CLO and other ABS | | 205,191 |
| | (1,938 | ) | | 204,385 |
| | (3,496 | ) | | 409,576 |
| | (5,434 | ) |
RMBS | | 126,089 |
| | (425 | ) | | 5,375 |
| | (30 | ) | | 131,464 |
| | (455 | ) |
CMBS | | 62,893 |
| | (264 | ) | | 828 |
| | (3 | ) | | 63,721 |
| | (267 | ) |
Total AFS fixed income securities | | $ | 516,259 |
| | (3,379 | ) | | 230,770 |
| | (4,359 | ) | | 747,029 |
| | (7,738 | ) |
The $37.3 million decrease in the unrealized loss position reflected: (i) lower interest rates, with an 87-basis point decrease in 2-year U.S. Treasury Note yields and a 102-basis point decrease in 10-year U.S. Treasury Note yields during Nine Months 2019; and (ii) tightening option adjusted corporate credit spreads, with a 38-basis point decrease in the Bloomberg Barclays U.S. Aggregate Corporate Bond Index during Nine Months 2019.
We do not currently intend to sell any of the securities in the tables above, nor is it likely we will we be required to sell any of these securities.the securities in the table above. Considering these factors and in accordance with our review of these securities under our methodology for analyzing OTTI, policy, as described in Note 2. “Summary of Significant Accounting Policies” within Item 8. “Financial Statements and Supplementary Data.” of our 2018 Annual Report, we have concluded that they are temporarily impaired as we believe: (i) they will mature at par value; (ii) they have not incurred a credit impairment; and (iii) future values of these securities will fluctuate with changes in interest rates. 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.
The COVID-19-related governmental orders have caused uncertainty and volatility in the financial markets. While market conditions improved during Second Quarter 2020, gross unrealized losses on our AFS fixed income securities portfolio increased to $39.9 million at June 30, 2020, from $7.7 million at December 31, 2019. This increase was driven by widening credit spreads as a result of the uncertainty in the marketplace, and was partially offset by a significant decline in benchmark risk-free rates.
(d)(c) Fixed income securities at SeptemberJune 30, 20192020, are shown below by contractual maturity, are shown below.maturity. Mortgage-backed securities are included in the maturity tables using the estimated average life of each security. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations, with or without call or prepayment penalties. |
| | | | | | | | | | |
| | AFS | | HTM |
($ in thousands) | | Fair Value | | Carrying Value | | Fair Value |
Due in one year or less | | $ | 315,316 |
| | 440 |
| | 448 |
|
Due after one year through five years | | 3,639,491 |
| | 16,591 |
| | 17,843 |
|
Due after five years through 10 years | | 2,053,058 |
| | 2,511 |
| | 2,436 |
|
Due after 10 years | | 350,291 |
| | — |
| | — |
|
Total fixed income securities | | $ | 6,358,156 |
| | 19,542 |
| | 20,727 |
|
Listed below are the contractual maturities of fixed income securities at September 30, 2019:
|
| | | | | | | | | | |
| | AFS | | HTM |
($ in thousands) | | Fair Value | | Carrying Value | | Fair Value |
Due in one year or less | | $ | 310,387 |
| | 4,754 |
| | 4,773 |
|
Due after one year through five years | | 3,296,126 |
| | 16,334 |
| | 17,589 |
|
Due after five years through 10 years | | 2,191,633 |
| | 5,837 |
| | 5,994 |
|
Due after 10 years | | 132,091 |
| | — |
| | — |
|
Total fixed income securities | | $ | 5,930,237 |
| | 26,925 |
| | 28,356 |
|
(e)(d) The following table summarizes our other investment portfolio by strategy:
| | Other Investments | | September 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
($ 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 | | $ | 105,922 |
| | 97,552 |
| | 203,474 |
| | 84,352 |
| | 93,688 |
| | 178,040 |
| | $ | 126,780 |
| | 111,284 |
| | 238,064 |
| | 118,352 |
| | 93,138 |
| | 211,490 |
|
Private credit | | 37,710 |
| | 109,797 |
| | 147,507 |
| | 41,682 |
| | 81,453 |
| | 123,135 |
| | 40,239 |
| | 99,039 |
| | 139,278 |
| | 42,532 |
| | 105,340 |
| | 147,872 |
|
Real assets | | 21,828 |
| | 22,534 |
| | 44,362 |
| | 27,862 |
| | 27,129 |
| | 54,991 |
| | 21,178 |
| | 19,384 |
| | 40,562 |
| | 23,256 |
| | 20,741 |
| | 43,997 |
|
Total alternative investments | | 165,460 |
| | 229,883 |
| | 395,343 |
| | 153,896 |
| | 202,270 |
| | 356,166 |
| | 188,197 |
| | 229,707 |
| | 417,904 |
| | 184,140 |
| | 219,219 |
| | 403,359 |
|
Other securities | | 23,783 |
| | — |
| | 23,783 |
| | 25,042 |
| | — |
| | 25,042 |
| | 42,323 |
| | — |
| | 42,323 |
| | 32,667 |
| | — |
| | 32,667 |
|
Total other investments | | $ | 189,243 |
| | 229,883 |
| | 419,126 |
| | 178,938 |
| | 202,270 |
| | 381,208 |
| | $ | 230,520 |
| | 229,707 |
| | 460,227 |
| | 216,807 |
| | 219,219 |
| | 436,026 |
|
1The maximum exposure to loss includes both the carry value of these investments and the related remaining 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 are contractually committed to make additional investments up to the remaining commitments outlined above; however, we do not have a future obligation to fund losses or debts on behalf of these investments. We have not provided any non-contractual financial support at any time during 20192020 or 2018.2019.
The following table sets forthshows gross summarized financial information for our other investments portfolio, including the portion we do not owned by us.own. 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 quarterone-quarter lag, the summarized financial statement information for the three-month period ended June 30March 31 is included in our ThirdSecond Quarter results. This information is as follows:
| | Income Statement Information | | Quarter ended September 30, | | Nine Months ended September 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in millions) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Net investment (loss) income | | $ | (14.0 | ) |
| 11.9 |
| | 10.1 |
| | (29.9 | ) | | $ | (3.1 | ) |
| 174.1 |
| | 9.6 |
| | 24.1 |
|
Realized gains | | 121.1 |
|
| 124.8 |
| | 370.4 |
| | 1,348.3 |
| |
Realized (losses) gains | | | 179.0 |
|
| 106.0 |
| | 343.8 |
| | 249.3 |
|
Net change in unrealized appreciation (depreciation) | | 1,739.4 |
|
| 1,434.3 |
| | 4,517.4 |
| | 695.8 |
| | (2,862.9 | ) |
| 2,223.7 |
| | (1,658.9 | ) | | 2,778.0 |
|
Net income | | $ | 1,846.5 |
|
| 1,571.0 |
| | 4,897.9 |
| | 2,014.2 |
| | $ | (2,687.0 | ) |
| 2,503.8 |
| | (1,305.5 | ) | | 3,051.4 |
|
Insurance subsidiaries’ alternative investments income | | $ | 5.2 |
| | 7.1 |
| | 13.0 |
| | 10.6 |
| |
Insurance Subsidiaries’ alternative investments income | | | $ | (16.0 | ) | | 7.3 |
| | (9.7 | ) | | 7.9 |
|
(f) WeAs noted above, the majority of our alternative investments report their results to us on a one-quarter lag, and therefore the $16.0 million of losses in the table above for Second Quarter 2020 reflects the significant COVID-19-related financial market volatility that existed during the first quarter of 2020.
(e) Certain Insurance Subsidiaries have pledged certain AFS fixed income securities as collateral related to our relationships withas members of the Federal Home Loan Bank of Indianapolis ("FHLBI") and the Federal Home Loan Bank of New York ("FHLBNY"). In addition, we had certain securities were on depositdeposited with various state and regulatory agencies at SeptemberJune 30, 20192020, to comply with insurance laws. We retain all rights regarding all securities pledged as collateral.
The following table summarizes the market value of these securities at SeptemberJune 30, 2019:2020:
| | ($ 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 | | $ | — |
| | — |
| | 22.9 |
| | 22.9 |
| | $ | — |
| | — |
| | 23.3 |
| | 23.3 |
|
Obligations of states and political subdivisions | | — |
| | — |
| | 3.9 |
| | 3.9 |
| | — |
| | — |
| | 4.1 |
| | 4.1 |
|
Corporate securities | | — |
| | — |
| | 0.3 |
| | 0.3 |
| | — |
| | — |
| | 0.3 |
| | 0.3 |
|
RMBS | | | 130.0 |
| | 224.0 |
| | — |
| | 354.0 |
|
CMBS | | 7.3 |
| | 19.6 |
| | — |
| | 26.9 |
| | 7.2 |
| | 28.2 |
| | — |
| | 35.4 |
|
RMBS | | 57.4 |
| | 81.1 |
| | — |
| | 138.5 |
| |
Total pledged as collateral | | $ | 64.7 |
| | 100.7 |
| | 27.1 |
|
| 192.5 |
| | $ | 137.2 |
| | 252.2 |
| | 27.7 |
|
| 417.1 |
|
(g)(f) We did not have exposure to any credit concentration risk of a single issuer greater than 10% of our stockholders' equity, other than certain U.S. government-backed investments, as of SeptemberJune 30, 20192020, or December 31, 2018.2019.
(h)(g) The components of pre-tax net investment income earned were as follows:
|
| | | | | | | | | | | | | |
| | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Fixed income securities | | $ | 51,079 |
|
| 50,907 |
| | 101,332 |
| | 99,940 |
|
CMLs | | 156 |
| | — |
| | 218 |
| | — |
|
Equity securities | | 2,023 |
|
| 1,740 |
| | 3,575 |
| | 3,380 |
|
Short-term investments | | 420 |
|
| 1,759 |
| | 1,586 |
| | 3,803 |
|
Other investments | | (15,846 | ) |
| 7,494 |
| | (9,504 | ) | | 8,154 |
|
Investment expenses | | (3,388 | ) |
| (3,395 | ) | | (6,796 | ) | | (6,154 | ) |
Net investment income earned | | $ | 34,444 |
| | 58,505 |
| | 90,411 |
| | 109,123 |
|
|
| | | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine Months ended September 30, |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Fixed income securities | | $ | 50,749 |
|
| 45,088 |
| | 150,689 |
| | 130,903 |
|
Equity securities | | 1,885 |
|
| 2,079 |
| | 5,265 |
| | 5,876 |
|
Short-term investments | | 1,410 |
|
| 867 |
| | 5,213 |
| | 2,001 |
|
Other investments | | 5,267 |
|
| 7,211 |
| | 13,421 |
| | 10,868 |
|
Investment expenses | | (3,485 | ) |
| (2,802 | ) | | (9,639 | ) | | (8,421 | ) |
Net investment income earned | | $ | 55,826 |
| | 52,443 |
| | 164,949 |
| | 141,227 |
|
As previously noted, the significant financial market volatility that existed during the first quarter of 2020 due to COVID-19 resulted in losses on the alternative investments within our other investments portfolio during Second Quarter 2020.
(i)(h) The following table summarizes OTTI charges were $2.3 million and $1.4 million in Third Quarter 2019 and Third Quarter 2018, respectively, and $3.4 million and $5.5 million in Nine Months 2019 and Nine Months 2018, respectively. All of these charges were related to securitiesby asset type for which we had the intent to sell. For a discussion of our evaluation for OTTI, refer to Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of our periods indicated: |
| | | | | | | | | | | | | |
| | Quarter ended June 30, |
| | 2020 | | 2019 |
($ in thousands) | | Credit Loss Expense (Benefit) | | Other Impairment Expense | | Recognized in Earnings | | Recognized in Earnings |
HTM fixed income securities: | | | | | | | | |
Corporate securities | | $ | (1 | ) | | — |
| | (1 | ) | | — |
|
Total HTM fixed income securities | | (1 | ) | | — |
| | (1 | ) | | — |
|
AFS fixed income securities: | | | | | | | | |
Foreign government | | 7 |
| | — |
| | 7 |
| | — |
|
Obligations of states and political subdivisions | | (12 | ) | | — |
| | (12 | ) | | — |
|
Corporate securities | | (4,940 | ) | | 500 |
| | (4,440 | ) | | 774 |
|
CLO and other ABS | | (118 | ) | | 93 |
| | (25 | ) | | — |
|
RMBS | | 125 |
| | 20 |
| | 145 |
| | — |
|
CMBS | | 15 |
| | — |
| | 15 |
| | — |
|
Total AFS fixed income securities | | (4,923 | ) | | 613 |
| | (4,310 | ) | | 774 |
|
CMLs | | (22 | ) | | — |
| | (22 | ) | | — |
|
Other Investments | | — |
| | — |
| | — |
| | 197 |
|
Total OTTI (benefit) expense | | $ | (4,946 | ) | | 613 |
| | (4,333 | ) | | 971 |
|
|
| | | | | | | | | | | | | |
| | Six Months ended June 30, |
| | 2020 | | 2019 |
($ in thousands) | | Credit Loss Expense (Benefit) | | Other Impairment Expense | | Recognized in Earnings | | Recognized in Earnings |
HTM fixed income securities: | | | | | | | | |
Corporate securities | | $ | (1 | ) | | — |
| | (1 | ) | | — |
|
Total HTM fixed income securities | | (1 | ) | | — |
| | (1 | ) | | — |
|
AFS fixed income securities: | | | | | | | | |
U.S. government and government agencies | | — |
| | 14 |
| | 14 |
| | — |
|
Foreign government | | 28 |
| | — |
| | 28 |
| | — |
|
Obligations of states and political subdivisions | | 17 |
| | 62 |
| | 79 |
| | 65 |
|
Corporate securities | | 8,472 |
| | 12,103 |
| | 20,575 |
| | 774 |
|
CLO and other ABS | | 1,447 |
| | 2,093 |
| | 3,540 |
| | — |
|
RMBS | | 847 |
| | 91 |
| | 938 |
| | — |
|
CMBS | | 53 |
| | 1,852 |
| | 1,905 |
| | — |
|
Total AFS fixed income securities | | 10,864 |
| | 16,215 |
| | 27,079 |
| | 839 |
|
CMLs | | 218 |
| | — |
| | 218 |
| | — |
|
Other Investments | | — |
| | — |
| | — |
| | 236 |
|
Total OTTI expense | | $ | 11,081 |
| | 16,215 |
| | 27,296 |
| | 1,075 |
|
2018 Annual Report.
OTTI amounted to $27.3 million in Six Months 2020 and included $16.2 million of impairments on securities we intend to sell to provide our investment managers flexibility to trade and optimize our investment portfolio in the COVID-19-related market volatility and uncertainty. The remainder of the OTTI in Six Months 2020 of $11.1 million related to our allowance for credit losses, and included a reduction in this allowance of approximately $4.9 million in Second Quarter 2020 reflecting the improvement in market conditions during the quarter as compared to March 31, 2020.
(j)
(i) Net realized and unrealized gains and losses (excluding OTTI charges)OTTI) for ThirdSecond Quarter 20192020 and 20182019 included the following:
| | | | Quarter ended September 30, | | Nine Months ended September 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Net realized gains (losses) on the disposals of securities: | | | | | | | | | | | | | | | | |
Fixed income securities | | $ | (1,141 | ) | | (9,413 | ) | | 2,063 |
| | (13,922 | ) | | $ | 2,300 |
| | 2,061 |
| | 6,576 |
| | 3,204 |
|
CMLs | | | 1 |
| | — |
| | 1 |
| | — |
|
Equity securities | | 21,602 |
| | 8,665 |
| | 24,733 |
| | 17,960 |
| | — |
| | 851 |
| | (3 | ) | | 3,131 |
|
Short-term investments | | (36 | ) | | 2 |
| | (21 | ) | | 1 |
| | 314 |
| | 1 |
| | 146 |
| | 15 |
|
Other investments | | — |
| | (5 | ) | | (23 | ) | | (5 | ) | | — |
| | (30 | ) | | (5 | ) | | (23 | ) |
Net realized gains (losses) on the disposal of securities | | 20,425 |
| | (751 | ) | | 26,752 |
| | 4,034 |
| | 2,615 |
| | 2,883 |
| | 6,715 |
| | 6,327 |
|
OTTI charges | | (2,291 | ) | | (1,426 | ) | | (3,366 | ) | | (5,459 | ) | |
OTTI benefit (expense) | | | 4,333 |
| | (971 | ) | | (27,296 | ) | | (1,075 | ) |
Net realized gains (losses) | | 18,134 |
| | (2,177 | ) | | 23,386 |
| | (1,425 | ) | | 6,948 |
| | 1,912 |
| | (20,581 | ) | | 5,252 |
|
Unrealized (losses) recognized in income on equity securities | | (20,317 | ) | | (2,610 | ) | | (8,091 | ) | | (15,563 | ) | |
Total net realized and unrealized investment (losses) gains | | $ | (2,183 | ) | | (4,787 | ) | | $ | 15,295 |
| | (16,988 | ) | |
Unrealized gains (losses) recognized in income on equity securities | | | 5,701 |
| | 2,115 |
| | (11,436 | ) | | 12,226 |
|
Total net realized and unrealized investment gains (losses) | | | $ | 12,649 |
| | 4,027 |
| | $ | (32,017 | ) | | 17,478 |
|
During Second Quarter 2020, the $8.6 million increase in net realized and unrealized investment gains was primarily driven by the improvements in the allowance for credit losses on our AFS fixed income securities as discussed above.
For Six Months 2020, net realized and unrealized investment losses were $32.0 million, compared to net gains of $17.5 million for Six Months 2019. This fluctuation was driven by the increase in OTTI expense discussed above, coupled with the impact of unrealized losses on our equity securities portfolio in Six Months 2020 resulting from the COVID-19-related financial market disruption during the first six months of 2020.
Unrealized (losses) recognized in income on equity securities, as reflected in the table above, include the following:
|
| | | | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine Months ended September 30, |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Unrealized gains (losses) recognized in income on equity securities: | | | | | | | | |
On securities remaining in our portfolio at September 30, 2019 | | $ | 1,109 |
| | 5,476 |
| | 1,805 |
| | 4,199 |
|
On securities sold in each respective period | | (21,426 | ) | | (8,086 | ) | | (9,896 | ) | | (19,762 | ) |
Total unrealized (losses) recognized in income on equity securities | | $ | (20,317 | ) | | (2,610 | ) | | $ | (8,091 | ) |
| (15,563 | ) |
|
| | | | | | | | | | | | | |
| | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Unrealized (losses) gains recognized in income on equity securities: | | | | | | | | |
On securities remaining in our portfolio at June 30, 2020 | | $ | 5,701 |
| | 2,394 |
| | (11,439 | ) | | 11,817 |
|
On securities sold in each respective period | | — |
| | (279 | ) | | 3 |
| | 409 |
|
Total unrealized (losses) gains recognized in income on equity securities | | $ | 5,701 |
| | 2,115 |
| | (11,436 | ) |
| 12,226 |
|
The components of net realized gains on disposals of securities for the periods indicated were as follows:
| | | | Quarter ended September 30, | | Nine Months ended September 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
HTM fixed income securities | | | | | | | | | | | | | | | | |
Gains | | $ | — |
| | — |
| | 1 |
| | 2 |
| | $ | — |
| | 1 |
| | 1 |
| | 1 |
|
Losses | | — |
| | — |
| | (15 | ) | | — |
| | — |
| | (15 | ) | | — |
| | (15 | ) |
AFS fixed income securities | | |
| | |
| | | | | | |
| | |
| | | | |
Gains | | | 6,162 |
| | 2,643 |
| | 11,815 |
| | 4,487 |
|
Losses | | | (3,862 | ) | | (568 | ) | | (5,240 | ) | | (1,269 | ) |
CMLs | | | | | | | | | |
Gains | | 1,078 |
| | 462 |
| | 5,565 |
| | 5,056 |
| | 1 |
| | — |
| | 1 |
| | — |
|
Losses | | (2,219 | ) | | (9,875 | ) | | (3,488 | ) | | (18,980 | ) | | — |
| | — |
| | — |
| | — |
|
Equity securities | | |
| | |
| | | | | | |
| | |
| | | | |
Gains | | 21,630 |
| | 10,584 |
| | 24,868 |
| | 20,209 |
| | — |
| | 958 |
| | — |
| | 3,238 |
|
Losses | | (28 | ) | | (1,919 | ) | | (135 | ) | | (2,249 | ) | | — |
| | (107 | ) | | (3 | ) | | (107 | ) |
Short-term investments | | | | | | | | | | | | | | | | |
Gains | | 2 |
| | 3 |
| | 18 |
| | 6 |
| | 315 |
| | 2 |
| | 337 |
| | 16 |
|
Losses | | (38 | ) | | (1 | ) | | (39 | ) | | (5 | ) | | (1 | ) | | (1 | ) | | (191 | ) | | (1 | ) |
Other investments | | | | | | | | | | | | | | | | |
Gains | | — |
| | — |
| | 7 |
| | — |
| | — |
| | — |
| | — |
| | 7 |
|
Losses | | — |
|
| (5 | ) | | (30 | ) | | (5 | ) | | — |
| | (30 | ) | | (5 | ) | | (30 | ) |
Total net realized gains on disposals of securities | | $ | 20,425 |
|
| (751 | ) | | 26,752 |
| | 4,034 |
| | $ | 2,615 |
| | 2,883 |
| | 6,715 |
| | 6,327 |
|
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 sales of AFS fixed income securities were $89.7 million and $444.4 million in Third Quarter 2019 and Third Quarter 2018, respectively, and $461.8 million and $1,382.7 million in Nine Months 2019 and Nine Months 2018, respectively. Proceeds from the sales of equity securities were $95.2 million and $36.1 million in Third Quarter 2019 and Third Quarter 2018, respectively, and $125.3 million and $79.7 million in Nine Months 2019 and Nine Months 2018, respectively.
NOTE 5. Indebtedness
The table below provides a summary of our outstanding debt at SeptemberJune 30, 20192020, and December 31, 2018:2019:
|
| | | | | | | | | | | | | | | | | | | | | | |
Outstanding Debt | | Issuance Date | | Maturity Date | | Interest Rate | | Original Amount | | 2020 | | Carry Value |
($ in thousands) | | | | | | Unamortized Issuance Costs | | Debt Discount | | June 30, 2020 | | December 31, 2019 |
Description | | | | | | | | | | | | | | | | |
Short-term | | | | | | | | | | | | | | | | |
Issuance: | | | | | | | | | | | | | | | | |
FHLBNY | | 3/12/2020 | | 9/14/2020 | | 0.78 | % | | 100,000 |
| | — |
| | — |
| | 100,000 |
| | — |
|
FHLBNY | | 3/18/2020 | | 9/18/2020 | | 0.68 | % | | 85,000 |
| | — |
| | — |
| | 85,000 |
| | — |
|
FHLBI | | 3/19/2020 | | 12/14/2020 | | 0.58 | % | | 67,000 |
| | — |
| | — |
| | 67,000 |
| | — |
|
Total short-term debt | | | | | | | | | | — |
| | — |
| | 252,000 |
| | — |
|
| | | | | | | | | | | | | | | | |
Other Outstanding: | | | | | | | | | | | | | | | | |
FHLBI | | 12/16/2016 | | 12/16/2026 | | 3.03 | % | | 60,000 |
| | — |
| | — |
| | 60,000 |
| | 60,000 |
|
FHLBNY | | 8/15/2016 | | 8/16/2021 | | 1.56 | % | | 25,000 |
| | — |
| | — |
| | 25,000 |
| | 25,000 |
|
FHLBNY | | 7/21/2016 | | 7/21/2021 | | 1.61 | % | | 25,000 |
| | — |
| | — |
| | 25,000 |
| | 25,000 |
|
Senior Notes | | 11/3/2005 | | 11/1/2035 | | 6.70 | % | | 100,000 |
| | 337 |
| | 510 |
| | 99,153 |
| | 99,125 |
|
Senior Notes | | 11/16/2004 | | 11/15/2034 | | 7.25 | % | | 50,000 |
| | 175 |
| | 88 |
| | 49,737 |
| | 49,725 |
|
Senior Notes | | 3/1/2019 | | 3/1/2049 | | 5.375 | % | | 300,000 |
| | 3,039 |
| | 5,802 |
| | 291,159 |
| | 291,010 |
|
| | | | | | | | | | | | | | | | |
Finance lease obligations | | | | | | | | | | | | | | 539 |
| | 737 |
|
Total long-term debt | | | | | | | |
| | 3,551 |
| | 6,400 |
| | 550,588 |
| | 550,597 |
|
| | | | | | | | | | | | | | | | |
Total debt | | | | | | | | | | 3,551 |
| | 6,400 |
| | 802,588 |
| | 550,597 |
|
|
| | | | | | | | | | | | | | | | | | | | |
Outstanding Debt | | Issuance Date | | Maturity Date | | Interest Rate | | Original Amount | | 2019 | | Carry Value |
($ in thousands) | | | | | | Debt Discount and Unamortized Issuance Costs | | September 30, 2019 | | December 31, 2018 |
Description | | | | | | | | | | | | | | |
Long term | | | | | | | | | | | | | | |
Issuance: | | | | | | | | | | | | | | |
Senior Notes | | 3/1/2019 | | 3/1/2049 | | 5.375 | % | | $ | 300,000 |
| | 9,065 |
| | 290,935 |
| | — |
|
| | | | | | | | | | | | | | |
Redemption: | | | | | | | | | | | | | | |
Senior Notes | | 2/8/2013 | | 2/9/2043 | | 5.875 | % | | 185,000 |
| | — |
| | — |
| | 180,771 |
|
| | | | | | | | | | | | | | |
Other Outstanding: | | | | | | | | | | | | | | |
FHLBI | | 12/16/2016 | | 12/16/2026 | | 3.03 | % | | 60,000 |
| | — |
| | 60,000 |
| | 60,000 |
|
FHLBNY | | 8/15/2016 | | 8/16/2021 | | 1.56 | % | | 25,000 |
| | — |
| | 25,000 |
| | 25,000 |
|
FHLBNY | | 7/21/2016 | | 7/21/2021 | | 1.61 | % | | 25,000 |
| | — |
| | 25,000 |
| | 25,000 |
|
Senior Notes | | 11/3/2005 | | 11/1/2035 | | 6.70 | % | | 100,000 |
| | 889 |
| | 99,111 |
| | 99,069 |
|
Senior Notes | | 11/16/2004 | | 11/15/2034 | | 7.25 | % | | 50,000 |
| | 281 |
| | 49,719 |
| | 49,700 |
|
| | | | | | | | | | | | | | |
Finance lease obligations1 | | | | | | | | | | | | 904 |
| | — |
|
Total long-term debt | | | | | | | |
| | 10,235 |
| | 550,669 |
| | 439,540 |
|
1 Concurrent with the adoption of ASU 2016-02 discussed in Note 2. "Adoption of Accounting Pronouncements," finance lease obligations are now captured in Long-term debt on our Consolidated Balance Sheets.
Short-Term Debt ActivityOur long-term debt balance did not materially change from December 31, 2019. However, we increased our short-term debt by $302 million during the first quarter of 2020 as a contingency in light of the COVID-19-related volatility and uncertainty in the financial markets. With the exception of our $50 million line of credit borrowing, all of the short-term borrowings we made in the first quarter of 2020 remained outstanding as of June 30, 2020. The proceeds from these short-term borrowings were invested in high-quality money market funds, and for the most part, were made to increase liquidity and operating flexibility.
Short-term debt activity included
Our short-term borrowings through Six Months 2020 consisted of the following in Nine Months 2019:following:
On March 7, 2019,February 18, 2020, Selective Insurance Company of America (“SICA”) borrowed short-term funds of $50$85 million from the FHLBNY at an interest rate of 2.64%1.81%. This borrowing was repaidrefinanced upon its maturity on March 28, 2019.18, 2020, at a lower interest rate of 0.68%. This borrowing matures on September 18, 2020.
On August 5, 2019,March 12, 2020, SICA borrowed short-term funds of $15$100 million from the FHLBNY at an interest rate of 2.29%0.78%. This borrowing was repaidmatures on August 12, 2019.September 14, 2020.
Long-Term Debt Activity
InOn March 19, 2020 Selective Insurance Company of South Carolina ("SISC") and Selective Insurance Company of the first quarter of 2019, we issued $300Southeast ("SISE") borrowed $39 million of 5.375% Senior Notes due 2049 at a discount of $5.9and $28 million, which, when coupled with debt issuance costs of approximately $3.3 million, resulted in net proceedsrespectively, from the offeringFHLBI at an interest rate of $290.8 million. The 5.375% Senior Notes pay interest0.58%. These borrowings mature on March 1 and September 1 of each year. The first interest payment was made on September 1, 2019. ADecember 14, 2020.
| |
• | On March 24, 2020, the Parent borrowed $50 million on its line of credit issued by the Bank of Montreal at an interest rate of 2.244%. This borrowing was repaid on May 8, 2020. |
We currently expect to extend all or a portion of the proceeds from thisremaining short-term borrowings until December 2020 and repay them by year end. As of June 30, 2020, we were compliant with our required financial debt issuance was used to fully redeemcovenants under the $185 million aggregate principal amountline of our 5.875% Senior Notes due 2043, with the remaining $106 million being used for general corporate purposes. The 5.875% Senior Notes had pre-tax debt retirement costs of $4.2 million, or $3.3 million after tax, which was recorded in Interest expense on the Consolidated Statements of Income in the first quarter of 2019.credit.
For detailedadditional information on our indebtedness and debt covenants, see Note 10. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." of our 20182019 Annual Report.
NOTE 6. Fair Value Measurements
TheWe primarily measure the financial assets in our investment portfolio are primarily measured at fair value as disclosed on the Consolidated Balance Sheets. The following table presents the carrying amounts and estimated fair values of our financial liabilities as of SeptemberJune 30, 20192020 and December 31, 2018:2019:
| | | | September 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
($ in thousands) | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Financial Liabilities | | | | | | | | | | | | | | | | |
Short-term debt: | | | | | | | | | |
0.78% Borrowings from FHLBNY | | | $ | 100,000 |
| | 100,085 |
| | — |
| | — |
|
0.68% Borrowings from FHLBNY | | | 85,000 |
| | 85,051 |
| | — |
| | — |
|
0.58% Borrowings from FHLBI | | | 67,000 |
| | 67,074 |
| | — |
| | — |
|
Total short-term debt | | | 252,000 |
| | 252,210 |
| | — |
| | — |
|
| | | | | | | | | |
Long-term debt: | | | | | | | | | | | | | | | | |
7.25% Senior Notes | | 49,909 |
| | 65,770 |
| | 49,907 |
| | 57,032 |
| | 49,912 |
| | 65,004 |
| | 49,910 |
| | 66,365 |
|
6.70% Senior Notes | | 99,476 |
| | 125,954 |
| | 99,462 |
| | 107,075 |
| | 99,490 |
| | 126,630 |
| | 99,480 |
| | 123,104 |
|
5.875% Senior Notes | | — |
| | — |
| | 185,000 |
| | 177,230 |
| |
5.375% Senior Notes | | 294,136 |
| | 352,156 |
| | — |
| | — |
| | 294,198 |
| | 345,700 |
| | 294,157 |
| | 357,025 |
|
1.61% borrowings from FHLBNY | | 25,000 |
| | 24,838 |
| | 25,000 |
| | 24,218 |
| | 25,000 |
| | 25,306 |
| | 25,000 |
| | 24,901 |
|
1.56% borrowings from FHLBNY | | 25,000 |
| | 24,808 |
| | 25,000 |
| | 24,162 |
| | 25,000 |
| | 25,314 |
| | 25,000 |
| | 24,875 |
|
3.03% borrowings from FHLBI | | 60,000 |
| | 63,741 |
| | 60,000 |
| | 58,905 |
| | 60,000 |
| | 67,820 |
| | 60,000 |
| | 63,002 |
|
Subtotal long-term debt | | 553,521 |
| | 657,267 |
| | 444,369 |
| | 448,622 |
| | 553,600 |
| | 655,774 |
| | 553,547 |
| | 659,272 |
|
Unamortized debt issuance costs | | (3,756 | ) | | | | (4,829 | ) | | | | (3,551 | ) | | | | (3,687 | ) | | |
Finance lease obligations | | 904 |
| | | | — |
| | | | 539 |
| | | | 737 |
| | |
Total long-term debt | | 550,669 |
| | | | 439,540 |
| | | | $ | 550,588 |
| | | | 550,597 |
| | |
For a discussion ofmore information about our long-term debt activity in 2019, seeshort-term borrowings, refer to Note 5. "Indebtedness" in this Form 10-Q, and forabove. For a discussion of the fair value hierarchy and 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 20182019 Annual Report.
The following tables provide quantitative disclosures of our financial assets that were measured and recorded at fair value at SeptemberJune 30, 20192020, and December 31, 2018:
2019: | | September 30, 2019 | | | | Fair Value Measurements Using | |
June 30, 2020 | | | | | Fair Value Measurements Using |
($ in thousands) | | Assets Measured at Fair Value | | Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1)1 | | Significant Other Observable Inputs (Level 2)1 | | Significant Unobservable Inputs (Level 3) | | 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 | | $ | 120,900 |
| | 41,619 |
| | 79,281 |
| | — |
| | $ | 119,723 |
| | 43,955 |
| | 75,768 |
| | — |
|
Foreign government | | 21,520 |
| | — |
| | 21,520 |
| | — |
| | 17,922 |
| | — |
| | 17,922 |
| | — |
|
Obligations of states and political subdivisions | | 1,190,615 |
| | — |
| | 1,190,615 |
| | — |
| | 1,203,414 |
| | — |
| | 1,200,635 |
| | 2,779 |
|
Corporate securities | | 1,838,927 |
| | — |
| | 1,822,577 |
| | 16,350 |
| | 2,256,005 |
| | — |
| | 2,233,652 |
| | 22,353 |
|
CLO and other ABS | | 768,383 |
| | — |
| | 748,504 |
| | 19,879 |
| | 839,521 |
| | — |
| | 804,361 |
| | 35,160 |
|
RMBS | | | 1,318,378 |
| | — |
| | 1,318,378 |
| | — |
|
CMBS | | 555,731 |
| | — |
| | 555,731 |
| | — |
| | 603,193 |
| | — |
| | 603,193 |
| | — |
|
RMBS | | 1,434,161 |
| | — |
| | 1,434,161 |
| | — |
| |
Total AFS fixed income securities | | 5,930,237 |
| | 41,619 |
| | 5,852,389 |
| | 36,229 |
| | 6,358,156 |
| | 43,955 |
| | 6,253,909 |
| | 60,292 |
|
Equity securities: | | | | | | | | | | | | | | | | |
Common stock2 | | 76,179 |
| | 42,988 |
| | — |
| | — |
| |
Common stock1 | | | 132,441 |
| | 92,090 |
| | — |
| | — |
|
Preferred stock | | 3,034 |
| | 3,034 |
| | — |
| | — |
| | 1,617 |
| | 1,617 |
| | — |
| | — |
|
Total equity securities | | 79,213 |
| | 46,022 |
| | — |
| | — |
| | 134,058 |
| | 93,707 |
| | — |
| | — |
|
Short-term investments | | 326,121 |
| | 319,599 |
| | 6,522 |
| | — |
| | 370,390 |
| | 369,158 |
| | 1,232 |
| | — |
|
Total assets measured at fair value | | $ | 6,335,571 |
| | 407,240 |
| | 5,858,911 |
|
| 36,229 |
| | $ | 6,862,604 |
| | 506,820 |
| | 6,255,141 |
|
| 60,292 |
|
| | December 31, 2018 | | | | Fair Value Measurements Using | |
December 31, 2019 | | | | | Fair Value Measurements Using |
($ in thousands) | | Assets Measured at Fair Value | | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1)1 | | Significant Other Observable Inputs (Level 2)1 | | Significant Unobservable Inputs (Level 3) | | 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 | | $ | 121,310 |
| | 78,381 |
| | 42,929 |
| | — |
| | $ | 116,186 |
| | 41,083 |
| | 75,103 |
| | — |
|
Foreign government | | 23,131 |
| | — |
| | 23,131 |
| | — |
| | 18,542 |
| | — |
| | 18,542 |
| | — |
|
Obligations of states and political subdivisions | | 1,138,469 |
| | — |
| | 1,138,469 |
| | — |
| | 1,230,090 |
| | — |
| | 1,230,090 |
| | — |
|
Corporate securities | | 1,617,408 |
| | — |
| | 1,617,408 |
| | — |
| | 1,947,477 |
| | — |
| | 1,930,426 |
| | 17,051 |
|
CLO and other ABS | | 717,362 |
| | — |
| | 709,953 |
| | 7,409 |
| | 793,012 |
| | 3,635 |
| | 772,343 |
| | 17,034 |
|
RMBS | | | 1,451,969 |
| | — |
| | 1,451,969 |
| | — |
|
CMBS | | 527,078 |
| | — |
| | 527,078 |
| | — |
| | 538,344 |
| | — |
| | 538,344 |
| | — |
|
RMBS | | 1,128,342 |
| | — |
| | 1,128,342 |
| | — |
| |
Total AFS fixed income securities | | 5,273,100 |
| | 78,381 |
| | 5,187,310 |
| | 7,409 |
| | 6,095,620 |
| | 44,718 |
| | 6,016,817 |
| | 34,085 |
|
Equity securities: | | | | | | | | | | | | | | | | |
Common stock2 | | 144,727 |
| | 107,397 |
| | — |
| | — |
| |
Common stock1 | | | 69,900 |
| | 32,145 |
| | — |
| | — |
|
Preferred stock | | 2,912 |
| | 2,912 |
| | — |
| | — |
| | 3,037 |
| | 3,037 |
| | — |
| | — |
|
Total equity securities | | 147,639 |
| | 110,309 |
| | — |
| | — |
| | 72,937 |
| | 35,182 |
| | — |
| | — |
|
Short-term investments | | 323,864 |
| | 321,370 |
| | 2,494 |
| | — |
| | 282,490 |
| | 265,306 |
| | 17,184 |
| | — |
|
Total assets measured at fair value | | $ | 5,744,603 |
| | 510,060 |
| | 5,189,804 |
| | 7,409 |
| | $ | 6,451,047 |
| | 345,206 |
| | 6,034,001 |
| | 34,085 |
|
| |
11Investments amounting to $40.4 million at June 30, 2020, and $37.8 million at December 31, 2019, were measured at fair value using net asset value per share (or its practical expedient) and are not classified in the fair value hierarchy. These investments are not redeemable and the timing of liquidations of the underlying assets is unknown at each reporting period disclosed above. 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 transfers of securities between Level 1 and Level 2. |
| |
2
| Investments amounting to $33.2 million at September 30, 2019, and $37.3 million at December 31, 2018, were measured at fair value using net asset value per share (or its practical expedient) and have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to total assets measured at fair value. |
The following table provides a summary of Level 3 changes in NineSix Months 2020 and Six Months 2019:
| | September 30, 2019 | | | | | | | |
June 30, 2020 | | | | | | | | | |
($ in thousands) | | Corporate Securities | | CLO and Other ABS | | Total | | Obligations of states and political subdivisions | | Corporate Securities | | CLO and Other ABS | | Total |
Fair value, December 31, 2018 | | — |
| | 7,409 |
| | 7,409 |
| |
Fair value, December 31, 2019 | | | — |
| | 17,051 |
| | 17,034 |
| | 34,085 |
|
Total net (losses) gains for the period included in: | | | | | | | | | | | | | | |
OCI | | (69 | ) | | (14 | ) | | (83 | ) | | (111 | ) | | (1,770 | ) | | (367 | ) | | (2,248 | ) |
Net income | | — |
| | 244 |
| | 244 |
| |
Net realized and unrealized (losses) gains | | | — |
| | (384 | ) | | (349 | ) | | (733 | ) |
Net investment income earned | | | — |
| | — |
| | 1 |
| | 1 |
|
Purchases | | — |
| | 18,404 |
| | 18,404 |
| | — |
| | 3,002 |
| | 9,690 |
| | 12,692 |
|
Sales | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Settlements | | — |
| | (105 | ) | | (105 | ) | | — |
| | (138 | ) | | (1,032 | ) | | (1,170 | ) |
Transfers into Level 3 | | 16,419 |
| | 13,603 |
| | 30,022 |
| | 2,890 |
| | 4,592 |
| | 20,107 |
| | 27,589 |
|
Transfers out of Level 3 | | — |
| | (19,662 | ) | | (19,662 | ) | | — |
| | — |
| | (9,924 | ) | | (9,924 | ) |
Fair value, September 30, 2019 | | 16,350 |
| | 19,879 |
| | 36,229 |
| |
Fair value, June 30, 2020 | | | 2,779 |
| | 22,353 |
| | 35,160 |
| | 60,292 |
|
| | | | | | | | | |
Change in unrealized (losses) gains for the period included in earnings for assets held at period end | | | — |
| | (384 | ) | | (349 | ) | | (733 | ) |
Change in unrealized gains (losses) for the period included in other comprehensive income for assets held at period end | | | (111 | ) | | (1,770 | ) | | (367 | ) | | (2,248 | ) |
There were no material changes in the fair value of securities measured using Level 3 prices in Nine Months 2018. |
| | | | | | | | | |
June 30, 2019 | | | | | | |
($ in thousands) | | Corporate Securities | | CLO and Other ABS | | Total |
Fair value, December 31, 2018 | | — |
| | 7,409 |
| | 7,409 |
|
Total net (losses) gains for the period included in: | | | | | | |
OCI | | (19 | ) | | (118 | ) | | (137 | ) |
Net investment income earned | | — |
| | 244 |
| | 244 |
|
Purchases | | — |
| | 15,984 |
| | 15,984 |
|
Sales | | — |
| | — |
| | — |
|
Issuances | | — |
| | — |
| | — |
|
Settlements | | — |
| | (40 | ) | | (40 | ) |
Transfers into Level 3 | | 16,419 |
| | 13,603 |
| | 30,022 |
|
Transfers out of Level 3 | | — |
| | (19,662 | ) | | (19,662 | ) |
Fair value, June 30, 2019 | | 16,400 |
| | 17,420 |
| | 33,820 |
|
| | | | | | |
Change in unrealized gains (losses) for the period included in earnings for assets held at period end | | — |
| | — |
| | — |
|
The following tables provide quantitative information regarding our financial assets and liabilities that were disclosed at fair value at SeptemberJune 30, 20192020, and December 31, 20182019: | | September 30, 2019 | | | | Fair Value Measurements Using | |
June 30, 2020 | | | | | Fair Value Measurements Using |
($ in thousands) | | Assets/ Liabilities Disclosed at Fair Value | | Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | 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 | | $ | 9,426 |
| | — |
| | 9,426 |
| | — |
| | $ | 4,892 |
| | — |
| | 4,892 |
| | — |
|
Corporate securities | | 18,930 |
| | — |
| | 18,930 |
| | — |
| | 15,835 |
| | — |
| | 15,835 |
| | — |
|
Total HTM fixed income securities | | $ | 28,356 |
| | — |
| | 28,356 |
| | — |
| | $ | 20,727 |
| | — |
| | 20,727 |
| | — |
|
| | | | | | | | | | | | | | | | |
CMLs | | | $ | 17,949 |
| | — |
| | 3,792 |
| | 14,157 |
|
| | | | | | | | | |
Financial Liabilities | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Short-term debt: | | | | | | | | | |
0.78% Borrowings from FHLBNY | | | $ | 100,085 |
| | — |
| | 100,085 |
| | — |
|
0.68% Borrowings from FHLBNY | | | 85,051 |
| | — |
| | 85,051 |
| | — |
|
0.58% Borrowings from FHLBI | | | 67,074 |
| | — |
| | 67,074 |
| | — |
|
Total short-term debt | | | $ | 252,210 |
| | — |
| | 252,210 |
| | — |
|
| | | | | | | | | |
Long-term debt: | | | | | | | | | | | | | | | | |
7.25% Senior Notes | | $ | 65,770 |
| | — |
| | 65,770 |
| | — |
| | $ | 65,004 |
| | — |
| | 65,004 |
| | — |
|
6.70% Senior Notes | | 125,954 |
| | — |
| | 125,954 |
| | — |
| | 126,630 |
| | — |
| | 126,630 |
| | — |
|
5.375% Senior Notes | | 352,156 |
| | — |
| | 352,156 |
| | — |
| | 345,700 |
| | — |
| | 345,700 |
| | — |
|
1.61% borrowings from FHLBNY | | 24,838 |
| | — |
| | 24,838 |
| | — |
| | 25,306 |
| | — |
| | 25,306 |
| | — |
|
1.56% borrowings from FHLBNY | | 24,808 |
| | — |
| | 24,808 |
| | — |
| | 25,314 |
| | — |
| | 25,314 |
| | — |
|
3.03% borrowings from FHLBI | | 63,741 |
| | — |
| | 63,741 |
| | — |
| | 67,820 |
| | — |
| | 67,820 |
| | — |
|
Total long-term debt | | $ | 657,267 |
| | — |
| | 657,267 |
| | — |
| | $ | 655,774 |
| | — |
| | 655,774 |
| | — |
|
| | December 31, 2018 | | | | Fair Value Measurements Using | |
December 31, 2019 | | | | | Fair Value Measurements Using |
($ in thousands) | | Assets/ Liabilities Disclosed at Fair Value | | Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | 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 | | $ | 17,969 |
| | — |
| | 17,969 |
| | — |
| | $ | 4,921 |
| | — |
| | 4,921 |
| | — |
|
Corporate securities | | 20,348 |
| | — |
| | 20,348 |
| | — |
| | 17,054 |
| | — |
| | 17,054 |
| | — |
|
Total HTM fixed income securities | | $ | 38,317 |
| | — |
| | 38,317 |
| | — |
| | $ | 21,975 |
| | — |
| | 21,975 |
| | — |
|
| | | | | | | | | | | | | | | | |
Financial Liabilities | | |
| | | | | | | | |
| | | | | | |
Long-term debt: | | | | | | | | | | | | | | | | |
7.25% Senior Notes | | $ | 57,032 |
| | — |
| | 57,032 |
| | — |
| | $ | 66,365 |
| | — |
| | 66,365 |
| | — |
|
6.70% Senior Notes | | 107,075 |
| | — |
| | 107,075 |
| | — |
| | 123,104 |
| | — |
| | 123,104 |
| | — |
|
5.875% Senior Notes | | 177,230 |
| | 177,230 |
| | — |
| | — |
| |
5.375% Senior Notes | | | 357,025 |
| | — |
| | 357,025 |
| | — |
|
1.61% borrowings from FHLBNY | | 24,218 |
| | — |
| | 24,218 |
| | — |
| | 24,901 |
| | — |
| | 24,901 |
| | — |
|
1.56% borrowings from FHLBNY | | 24,162 |
| | — |
| | 24,162 |
| | — |
| | 24,875 |
| | — |
| | 24,875 |
| | — |
|
3.03% borrowings from FHLBI | | 58,905 |
| | — |
| | 58,905 |
| | — |
| | 63,002 |
| | — |
| | 63,002 |
| | — |
|
Total long-term debt | | $ | 448,622 |
| | 177,230 |
| | 271,392 |
| | — |
| | $ | 659,272 |
| | — |
| | 659,272 |
| | — |
|
NOTE 7. Allowance for Uncollectible Premiums Receivable
The following table provides a rollforward of the allowance for credit losses on our premiums receivable balance for the periods indicated:
|
| | | | | | | | |
($ in thousands) | | Quarter ended June 30, 2020 | | Six Months ended June 30, 2020 |
Balance at beginning of period | | $ | 18,000 |
| | $ | 6,400 |
|
Cumulative effect adjustment1 | | — |
| | 1,058 |
|
Balance at beginning of period, as adjusted | | $ | 18,000 |
| | $ | 7,458 |
|
Current period provision for expected credit losses | | 4,597 |
| | 15,792 |
|
Write-offs charged against the allowance for credit losses | | (1,597 | ) | | (2,250 | ) |
Recoveries | | — |
| | — |
|
Allowance for credit losses, end of period | | $ | 21,000 |
| | $ | 21,000 |
|
1See Note 2. "Adoption of Accounting Pronouncements" above for additional information regarding our adoption of ASU 2016-13.
Based on an evaluation of the recoverability of our premiums receivable, in light of the billing accommodations we announced during the first quarter of 2020 and the impact of recent state regulations that provided for the deferral of payments without cancellation for a period up to 90 days in certain states, which will increase earned but uncollected premiums, we recognized an additional allowance for credit losses of $13.5 million in Six Months 2020, net of write-offs. The billing accommodations include individualized payment flexibility and suspending the effect of policy cancellations, late payment notices, and late or reinstatement fees.
NOTE 8. Reinsurance
We evaluate and monitor the financial condition of our reinsurers under voluntary reinsurance arrangements to minimize our exposure to significant losses from reinsurer insolvencies. The following table provides (i) a disaggregation of our reinsurance recoverable balance by financial strength rating, and (ii) an aging analysis of our past due reinsurance recoverable balances as of June 30, 2020:
|
| | | | | | | | | | | | |
| | June 30, 2020 |
($ in thousands) | | Current | | Past Due | | Total Reinsurance Recoverables |
Financial strength rating of rated reinsurers1 | | | | | | |
A++ | | $ | 21,644 |
| | $ | 71 |
| | $ | 21,715 |
|
A+ | | 361,511 |
| | 2,926 |
| | 364,437 |
|
A | | 103,553 |
| | 670 |
| | 104,223 |
|
A- | | 2,045 |
| | — |
| | 2,045 |
|
B++ | | 500 |
| | 275 |
| | 775 |
|
B+ | | 10 |
| | — |
| | 10 |
|
Total rated reinsurers | | $ | 489,263 |
| | $ | 3,942 |
| | $ | 493,205 |
|
| | | | | | |
Non-rated reinsurers | | | | | | |
Federal and state pools | | 88,531 |
| | — |
| | 88,531 |
|
Other than federal and state pools | | 5,359 |
| | 32 |
| | 5,391 |
|
Total non-rated reinsurers | | $ | 93,890 |
| | $ | 32 |
| | $ | 93,922 |
|
| | | | | | |
Total reinsurance recoverable, gross | | $ | 583,153 |
| | $ | 3,974 |
| | $ | 587,127 |
|
Less: allowance for credit losses2 | | (2,396 | ) | | — |
| | (2,396 | ) |
Total reinsurance recoverable, net | | $ | 580,757 |
| | $ | 3,974 |
| | $ | 584,731 |
|
1Credit ratings as of June 30, 2020.
2Represents our current expectation of credit losses on total current and past due reinsurance recoverables, and is not identifiable by reinsurer.
We evaluate our estimate of expected credit losses through the methodology outlined in Note 1. “Basis of Presentation and Accounting Policies” above.
The following table provides a rollforward of the allowance for credit losses on our reinsurance recoverable balance for the periods indicated:
|
| | | | | | | | |
($ in thousands) | | Quarter ended June 30, 2020 | | Six Months ended June 30, 2020 |
Balance at beginning of period | | $ | 1,502 |
| | $ | 4,400 |
|
Cumulative effect adjustment1 | | — |
| | (2,903 | ) |
Balance at beginning of period, as adjusted | | $ | 1,502 |
| | $ | 1,497 |
|
Current period provision for expected credit losses | | 894 |
| | 899 |
|
Write-offs charged against the allowance for credit losses | | — |
| | — |
|
Recoveries | | — |
| | — |
|
Allowance for credit losses, end of period | | $ | 2,396 |
| | $ | 2,396 |
|
1See Note 2. "Adoption of Accounting Pronouncements" for additional information regarding our adoption of ASU 2016-13.
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 20182019 Annual Report. | | | | Quarter ended September 30, | | Nine Months ended September 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Premiums written: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Direct | | $ | 785,680 |
| | 752,834 |
| | $ | 2,359,441 |
| | 2,220,431 |
| | $ | 834,643 |
| | 807,367 |
| | $ | 1,581,074 |
| | 1,573,761 |
|
Assumed | | 6,882 |
| | 7,084 |
| | 18,770 |
| | 19,891 |
| | 6,410 |
| | 5,333 |
| | 12,453 |
| | 11,888 |
|
Ceded | | (115,634 | ) | | (108,250 | ) | | (326,939 | ) | | (308,846 | ) | | (116,301 | ) | | (111,303 | ) | | (221,448 | ) | | (211,305 | ) |
Net | | $ | 676,928 |
| | 651,668 |
| | $ | 2,051,272 |
| | 1,931,476 |
| | $ | 724,752 |
| | 701,397 |
| | $ | 1,372,079 |
| | 1,374,344 |
|
Premiums earned: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Direct | | $ | 752,872 |
| | 706,497 |
| | $ | 2,221,257 |
| | 2,086,953 |
| | $ | 733,647 |
| | 740,348 |
| | $ | 1,488,538 |
| | 1,468,385 |
|
Assumed | | 6,356 |
| | 6,484 |
| | 18,660 |
| | 19,220 |
| | 6,055 |
| | 5,742 |
| | 12,228 |
| | 12,304 |
|
Ceded | | (105,608 | ) | | (98,704 | ) | | (311,105 | ) | | (295,232 | ) | | (109,031 | ) | | (103,471 | ) | | (218,392 | ) | | (205,497 | ) |
Net | | $ | 653,620 |
| | 614,277 |
| | $ | 1,928,812 |
| | 1,810,941 |
| | $ | 630,671 |
| | 642,619 |
| | $ | 1,282,374 |
| | 1,275,192 |
|
Loss and loss expenses incurred: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Direct | | $ | 437,618 |
| | 477,427 |
| | $ | 1,297,975 |
| | 1,289,357 |
| | $ | 451,013 |
| | 435,700 |
| | $ | 876,808 |
| | 860,357 |
|
Assumed | | 4,362 |
| | 6,529 |
| | 13,975 |
| | 16,897 |
| | 4,300 |
| | 4,348 |
| | 9,198 |
| | 9,613 |
|
Ceded | | (43,305 | ) | | (104,757 | ) | | (145,712 | ) | | (175,786 | ) | | (51,364 | ) | | (59,064 | ) | | (81,733 | ) | | (102,407 | ) |
Net | | $ | 398,675 |
| | 379,199 |
| | $ | 1,166,238 |
| | 1,130,468 |
| | $ | 403,949 |
| | 380,984 |
| | $ | 804,273 |
| | 767,563 |
|
While direct premiums written increased in Second Quarter 2020 and Six Months 2020 compared to Second Quarter 2019 and Six Months 2019, respectively, Second Quarter 2020 was reduced by a $19.7 million premium credit to our personal and commercial automobile policyholders. Because of the unprecedented nature of the COVID-19-related governmental directives and the associated expected short-term favorable claims frequency impact, we obtained regulatory approval during April to provide this premium credit to our personal and commercial automobile customers. The premium credit to customers with in-force policies was equivalent to 15% of their April and May premiums.
Additionally, direct premiums written in Six Months 2020 was reduced by a $75 million return audit and mid-term endorsement premium accrual recorded during the first quarter of 2020. This accrual reflects a premium reduction due to lower sales and payroll exposures on the general liability and workers compensation lines of business resulting from the economic impacts of the COVID-19 pandemic.
The premium actions described above impacted direct premiums written and direct premiums earned. In addition, due to the lower exposures that drove the reduction in premium, there was a reduction in direct loss and loss expenses incurred. The reduction in direct loss and loss expenses incurred for the premium credit included a $13.3 million reduction in casualty lines and a $6.4 million reduction in non-catastrophe property losses. Direct loss and loss expenses were also impacted in Six Months 2020 by a $10.0 million incurred but not reported ("IBNR") reserve estimate recorded in the first quarter of 2020 for losses related to a small portion of our policies that include a $25,000 sub-limited coverage for specified extra expenses to clean or disinfect a property when ordered by a Board of Health.
|
| | | | | | | | | | | | | | | | | | | | | | | |
COVID-19 Impact | | Quarter ended June 30, 2020 | | Six Months ended June 30, 2020 |
($ in thousands) | | Premium Audit | | Premium Credit | | Total | | Premium Audit | | Property IBNR | | Premium Credit | | Total |
Direct premiums written | | $ | — |
| | (19,740 | ) | | (19,740 | ) | | $ | (75,000 | ) | | — |
| | (19,740 | ) | | (94,740 | ) |
Direct premiums earned | | (31,824 | ) | | (19,740 | ) | | (51,564 | ) | | (48,333 | ) | | — |
| | (19,740 | ) | | (68,073 | ) |
Direct loss and loss expenses incurred | | (18,198 | ) | | (19,740 | ) | | (37,938 | ) | | (28,073 | ) | | 10,000 |
| | (19,740 | ) | | (37,813 | ) |
Ceded premiums written, ceded premiums earned, and lossesceded loss and loss expenses incurred 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 September 30, | | Nine Months ended September 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Ceded premiums written | | $ | (74,864 | ) | | (70,100 | ) | | $ | (206,451 | ) | | (193,110 | ) | | $ | (74,187 | ) | | (71,574 | ) | | $ | (136,274 | ) | | (131,587 | ) |
Ceded premiums earned | | (65,847 | ) | | (61,448 | ) | | (191,914 | ) | | (180,582 | ) | | (67,369 | ) | | (63,804 | ) | | (134,230 | ) | | (126,067 | ) |
Ceded loss and loss expenses incurred | | (27,459 | ) | | (89,396 | ) | | (62,208 | ) | | (115,376 | ) | | (12,991 | ) | | (21,063 | ) | | (18,087 | ) | | (34,749 | ) |
Excluding the impact of our participation in the NFIP, ceded loss and loss expenses incurred increased in Nine Months 2019 compared to the respective prior year, due to one significant fire loss in the second quarter of 2019, which added $17.4 million to ceded loss and loss expenses. The elevated ceded loss and loss expenses incurred related to our participation in the NFIP in Third Quarter and Nine Months 2018 were due to Hurricane Florence, which impacted our footprint in September 2018.
NOTE 8.9. Reserve for Loss and Loss Expense
The table below provides a roll forwardrollforward of reserve for loss and loss expense balances:
| | | | Nine Months ended September 30, | | Six Months ended June 30, |
($ in thousands) | | 2019 | | 2018 | | 2020 | | 2019 |
Gross reserve for loss and loss expense, at beginning of year | | $ | 3,893,868 |
| | 3,771,240 |
| | $ | 4,067,163 |
| | 3,893,868 |
|
Less: reinsurance recoverable on unpaid loss and loss expense, at beginning of year | | 537,388 |
| | 585,855 |
| |
Less: reinsurance recoverable on unpaid loss and loss expense, at beginning of year1 | | | 547,066 |
| | 537,388 |
|
Net reserve for loss and loss expense, at beginning of year | | 3,356,480 |
| | 3,185,385 |
| | 3,520,097 |
| | 3,356,480 |
|
Incurred loss and loss expense for claims occurring in the: | | |
| | |
| | |
| | |
|
Current year | | 1,200,878 |
| | 1,148,032 |
| | 825,201 |
| | 783,938 |
|
Prior years | | (34,640 | ) | | (17,564 | ) | | (20,928 | ) | | (16,375 | ) |
Total incurred loss and loss expense | | 1,166,238 |
| | 1,130,468 |
| | 804,273 |
| | 767,563 |
|
Paid loss and loss expense for claims occurring in the: | | |
| | |
| | |
| | |
|
Current year | | 384,436 |
| | 369,036 |
| | 221,422 |
| | 210,374 |
|
Prior years | | 631,589 |
| | 610,734 |
| | 479,736 |
| | 442,820 |
|
Total paid loss and loss expense | | 1,016,025 |
| | 979,770 |
| | 701,158 |
| | 653,194 |
|
Net reserve for loss and loss expense, at end of period | | 3,506,693 |
| | 3,336,083 |
| | 3,623,212 |
| | 3,470,849 |
|
Add: Reinsurance recoverable on unpaid loss and loss expense, at end of period | | 548,938 |
| | 589,072 |
| | 553,694 |
| | 556,203 |
|
Gross reserve for loss and loss expense at end of period | | $ | 4,055,631 |
| | 3,925,155 |
| | $ | 4,176,906 |
| | 4,027,052 |
|
1Includes an adjustment of $2.9 million related to our adoption of ASU 2016-13. Refer to Note 2. "Adoption of Accounting Pronouncements" for additional information.
Our current year incurred losses of $825.2 million were impacted by catastrophe losses that were $116.4 million in Six Months 2020, compared to $50.3 million in Six Months 2019. In addition, the current year incurred losses include an estimate of $10.0 million for COVID-19-related losses related to a small portion of our policies that include a $25,000 sub-limited coverage for specified extra expenses to clean or disinfect a property when ordered by a Board of Health. As of June 30, 2020, the $10.0 million remained as an IBNR reserve estimate. In most instances, COVID-19 does not cause a direct physical loss to property, and when combined with other policy wording requirements, we do not expect material business interruption losses from COVID-19. It also is our practice to include in, or attach to, all standard lines commercial property and businessowners policies an exclusion that states that all loss or property damage caused by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness, or disease is not a covered cause of loss. We also attach a regulatory approved virus exclusion to all standard commercial lines property policies. This exclusion is also included within all of our standard businessowners policies.
Prior year reserve development in NineSix Months 2019 of $34.62020 was favorable by $20.9 million, which included $41.0$25.0 million of favorable casualty reserve development, partially offset by $6.4$4.1 million of unfavorable property reserve development. The favorable casualty reserve development included $33.0$25.0 million of development in our workers compensation linelines of business and $10.0 million in our general liability line
of business, partially offset by $2.0$10.0 million of unfavorable casualty reserve development in our personalcommercial automobile line of business.
Prior year reserve development in NineSix Months 2018 of $17.62019 was favorable by $16.4 million, included $24.0 million of favorablewhich was driven by casualty reserve development partially offset by $6.4of $20.0 million of unfavorable property reserve development. The favorable casualty reserve development included $53.0 million of development in our workers compensation line of business and $8.0$7.0 million in our general liability line of business,business. This was partially offset by $25.0$10.6 million of unfavorable casualtyproperty reserve development in our commercial automobile line of business and $12.0 million in our excess and surplus ("E&S") casualty lines.development.
NOTE 9.10. Segment Information
TheWe evaluate the results of our 4 reportable segments are evaluated as follows:
Our Standard Commercial Lines, Standard Personal Lines, and Excess & Surplus ("E&S&S") Lines are evaluated based on before and after-tax underwriting results (net premiums earned, incurred loss and loss expense, policyholder
dividends, policy acquisition costs, and other underwriting expenses), return on equity ("ROE") contribution, and combined ratios.
Our Investments segment is primarily evaluated based on after-tax net investment income and its ROE contribution. Also included in Investment segment results are after-taxAfter-tax net realized and unrealized gains and losses, which are not included in non-GAAP operating income.income, are also included in our Investment segment results.
In computing the results of each segment, we do not make adjustments for interest expense or corporate expenses. We do not maintain separate investment portfolios for the segments and therefore, do not allocate assets to the segments.each segment.
The following summaries present revenues (net investment income and net realized and unrealized gains and losses on investments in the case offor the Investments segment) and pre-tax income for the individual segments:
| | Revenue by Segment | | Quarter ended September 30, | | Nine Months ended September 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Standard Commercial Lines: | | |
| | |
| | | | | | |
| | |
| | | | |
Net premiums earned: | | |
| | |
| | | | | | |
| | |
| | | | |
Commercial automobile | | $ | 141,182 |
| | 124,862 |
| | 408,706 |
| | 365,197 |
| | $ | 138,535 |
| | 136,338 |
| | 288,225 |
| | 267,524 |
|
Workers compensation | | 75,478 |
| | 78,784 |
| | 232,657 |
| | 237,628 |
| | 61,906 |
| | 78,464 |
| | 128,612 |
| | 157,179 |
|
General liability | | 169,084 |
| | 154,974 |
| | 495,402 |
| | 457,805 |
| | 163,273 |
| | 164,793 |
| | 327,853 |
| | 326,318 |
|
Commercial property | | 89,215 |
| | 83,056 |
| | 262,418 |
| | 245,544 |
| | 95,413 |
| | 87,136 |
| | 189,282 |
| | 173,203 |
|
Businessowners’ policies | | 26,371 |
| | 25,994 |
| | 78,624 |
| | 77,414 |
| |
Businessowners policies | | | 27,516 |
| | 26,172 |
| | 54,552 |
| | 52,253 |
|
Bonds | | 8,990 |
| | 8,778 |
| | 26,861 |
| | 25,247 |
| | 9,210 |
| | 8,967 |
| | 18,849 |
| | 17,871 |
|
Other | | 4,841 |
| | 4,608 |
| | 14,326 |
| | 13,597 |
| | 5,151 |
| | 4,779 |
| | 10,211 |
| | 9,485 |
|
Miscellaneous income | | 2,782 |
| | 2,228 |
| | 7,544 |
| | 6,936 |
| | 4,195 |
| | 2,718 |
| | 5,586 |
| | 4,762 |
|
Total Standard Commercial Lines revenue | | 517,943 |
| | 483,284 |
| | 1,526,538 |
| | 1,429,368 |
| | 505,199 |
| | 509,367 |
| | 1,023,170 |
| | 1,008,595 |
|
Standard Personal Lines: | | | | | | | | | | | | | | | | |
Net premiums earned: | | | | | | | | | | | | | | | | |
Personal automobile | | 43,226 |
| | 42,772 |
| | 129,777 |
| | 125,024 |
| | 38,189 |
| | 43,388 |
| | 80,676 |
| | 86,551 |
|
Homeowners | | 31,529 |
| | 32,293 |
| | 95,672 |
| | 96,717 |
| | 31,652 |
| | 32,013 |
| | 63,142 |
| | 64,143 |
|
Other | | 1,983 |
| | 2,092 |
| | 5,709 |
| | 5,349 |
| | 1,792 |
| | 1,712 |
| | 3,943 |
| | 3,726 |
|
Miscellaneous income | | 380 |
| | 310 |
| | 991 |
| | 959 |
| | 488 |
| | 335 |
| | 922 |
| | 611 |
|
Total Standard Personal Lines revenue | | 77,118 |
| | 77,467 |
| | 232,149 |
| | 228,049 |
| | 72,121 |
| | 77,448 |
| | 148,683 |
| | 155,031 |
|
E&S Lines: | | | | | | | | | | | | | | | | |
Net premiums earned: | | | | | | | | | | | | | | | | |
Casualty lines | | 47,171 |
| | 42,179 |
| | 136,455 |
| | 120,098 |
| | 42,722 |
| | 44,756 |
| | 86,794 |
| | 89,284 |
|
Property lines | | 14,550 |
| | 13,885 |
| | 42,205 |
| | 41,321 |
| | 15,312 |
| | 14,101 |
| | 30,235 |
| | 27,655 |
|
Miscellaneous income | | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
Total E&S Lines revenue | | 61,721 |
| | 56,064 |
| | 178,660 |
| | 161,420 |
| | 58,034 |
| | 58,857 |
| | 117,029 |
| | 116,939 |
|
Investments: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Net investment income | | 55,826 |
| | 52,443 |
| | 164,949 |
| | 141,227 |
| | 34,444 |
| | 58,505 |
| | 90,411 |
| | 109,123 |
|
Net realized and unrealized investment (losses) gains | | (2,183 | ) | | (4,787 | ) | | 15,295 |
| | (16,988 | ) | |
Net realized and unrealized investment gains (losses) | | | 12,649 |
| | 4,027 |
| | (32,017 | ) | | 17,478 |
|
Total Investments revenue | | 53,643 |
| | 47,656 |
| | 180,244 |
| | 124,239 |
| | 47,093 |
| | 62,532 |
| | 58,394 |
| | 126,601 |
|
Total revenues | | $ | 710,425 |
| | 664,471 |
| | 2,117,591 |
| | 1,943,076 |
| | $ | 682,447 |
| | 708,204 |
| | 1,347,276 |
| | 1,407,166 |
|
| | Income Before and After Federal Income Tax | | Quarter ended September 30, | | Nine Months ended September 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Standard Commercial Lines: | | |
| | |
| | | | | | |
| | |
| | | | |
Underwriting gain, before federal income tax | | $ | 30,016 |
| | 26,333 |
| | 92,974 |
| | 74,153 |
| | $ | 16,730 |
| | 37,143 |
| | 33,856 |
| | 62,958 |
|
Underwriting gain, after federal income tax | | 23,713 |
| | 20,803 |
| | 73,450 |
| | 58,581 |
| | 13,217 |
| | 29,343 |
| | 26,747 |
| | 49,737 |
|
Combined ratio | | 94.2 | % | | 94.5 |
| | 93.9 |
| | 94.8 |
| | 96.7 | % | | 92.7 |
| | 96.7 |
| | 93.7 |
|
ROE contribution | | 4.5 |
| | 4.9 |
| | 5.0 |
| | 4.5 |
| | 2.4 |
| | 5.9 |
| | 2.4 |
| | 5.2 |
|
| | | | | | | | | | | | | | | | |
Standard Personal Lines: | | | | | | | | | | | | | | | | |
Underwriting (loss) gain, before federal income tax | | $ | (631 | ) | | 3,158 |
| | 7,074 |
| | 6,457 |
| | $ | (6,325 | ) | | 4,538 |
| | (5,938 | ) | | 7,705 |
|
Underwriting (loss) gain, after federal income tax | | (499 | ) | | 2,495 |
| | 5,588 |
| | 5,101 |
| | (4,997 | ) | | 3,585 |
| | (4,691 | ) | | 6,087 |
|
Combined ratio | | 100.8 | % | | 95.9 |
| | 96.9 |
| | 97.2 |
| | 108.8 | % | | 94.1 |
| | 104.0 |
| | 95.0 |
|
ROE contribution | | (0.1 | ) | | 0.6 |
| | 0.4 |
| | 0.4 |
| | (0.9 | ) | | 0.7 |
| | (0.4 | ) | | 0.6 |
|
| | | | | | | | | | | | | | | | |
E&S Lines: | | | | | | | | | | | | | | | | |
Underwriting gain (loss), before federal income tax | | $ | 1,916 |
| | 3,506 |
| | 9,439 |
| | (4,848 | ) | |
Underwriting gain (loss), after federal income tax | | 1,514 |
| | 2,770 |
| | 7,457 |
| | (3,830 | ) | |
Underwriting (loss) gain, before federal income tax | | | $ | (532 | ) | | 2,944 |
| | 3,312 |
| | 7,523 |
|
Underwriting (loss) gain, after federal income tax | | | (420 | ) | | 2,326 |
| | 2,616 |
| | 5,943 |
|
Combined ratio | | 96.9 | % | | 93.7 |
| | 94.7 |
| | 103.0 |
| | 100.9 | % | | 95.0 |
| | 97.2 |
| | 93.6 |
|
ROE contribution | | 0.3 |
| | 0.6 |
| | 0.5 |
| | (0.3 | ) | | (0.1 | ) | | 0.5 |
| | 0.2 |
| | 0.6 |
|
| | | | | | | | | | | | | | | | |
Investments: | | |
| | |
| | | | | | |
| | |
| | | | |
Net investment income | | $ | 55,826 |
| | 52,443 |
| | 164,949 |
| | 141,227 |
| | $ | 34,444 |
| | 58,505 |
| | 90,411 |
| | 109,123 |
|
Net realized and unrealized investment (losses) gains | | (2,183 | ) | | (4,787 | ) | | 15,295 |
| | (16,988 | ) | |
Net realized and unrealized investment gains (losses) | | | 12,649 |
| | 4,027 |
| | (32,017 | ) | | 17,478 |
|
Total investment segment income, before federal income tax | | 53,643 |
| | 47,656 |
| | 180,244 |
| | 124,239 |
| | 47,093 |
| | 62,532 |
| | 58,394 |
| | 126,601 |
|
Tax on investment segment income | | 10,884 |
| | 8,562 |
| | 34,733 |
| | 21,405 |
| | 8,558 |
| | 11,729 |
| | 9,662 |
| | 23,849 |
|
Total investment segment income, after federal income tax |
| $ | 42,759 |
|
| 39,094 |
| | 145,511 |
| | 102,834 |
|
| $ | 38,535 |
|
| 50,803 |
| | 48,732 |
| | 102,752 |
|
ROE contribution of after-tax net investment income | | 8.6 |
| | 10.0 |
| | 9.1 |
| | 9.0 |
| | 5.2 |
| | 9.6 |
| | 6.6 |
| | 9.2 |
|
| | Reconciliation of Segment Results to Income Before Federal Income Tax | | Quarter ended September 30, | | Nine Months ended September 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Underwriting gain (loss) | | | | | | | | | |
Underwriting gain | | | | | | | | | |
Standard Commercial Lines | | $ | 30,016 |
| | 26,333 |
| | 92,974 |
| | 74,153 |
| | $ | 16,730 |
| | 37,143 |
| | 33,856 |
| | 62,958 |
|
Standard Personal Lines | | (631 | ) | | 3,158 |
| | 7,074 |
| | 6,457 |
| | (6,325 | ) | | 4,538 |
| | (5,938 | ) | | 7,705 |
|
E&S Lines | | 1,916 |
| | 3,506 |
| | 9,439 |
| | (4,848 | ) | | (532 | ) | | 2,944 |
| | 3,312 |
| | 7,523 |
|
Investment income | | 53,643 |
| | 47,656 |
| | 180,244 |
| | 124,239 |
| | 47,093 |
| | 62,532 |
| | 58,394 |
| | 126,601 |
|
Total all segments | | 84,944 |
| | 80,653 |
| | 289,731 |
| | 200,001 |
| | 56,966 |
| | 107,157 |
| | 89,624 |
| | 204,787 |
|
Interest expense | | (7,397 | ) | | (6,073 | ) | | (26,289 | ) | | (18,350 | ) | | (7,928 | ) | | (7,366 | ) | | (15,529 | ) | | (18,892 | ) |
Corporate expenses | | (6,369 | ) | | (7,450 | ) | | (28,345 | ) | | (22,065 | ) | | (6,345 | ) | | (9,566 | ) | | (15,405 | ) | | (21,976 | ) |
Income, before federal income tax | | $ | 71,178 |
| | 67,130 |
|
| 235,097 |
| | 159,586 |
| | $ | 42,693 |
| | 90,225 |
|
| 58,690 |
| | 163,919 |
|
NOTE 10.11. Retirement Plans
SICA'sThe primary pension plan for our employees 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 20182019 Annual Report.
The following tables provide information regardingabout the Pension Plan: | | | | Pension Plan | | Pension Plan | | Pension Plan | | Pension Plan |
| | Quarter ended September 30, | | Nine Months ended September 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Net Periodic Pension Cost (Benefit): | | | | | | | | | | | | | | | | |
Interest cost | | $ | 3,376 |
| | 3,095 |
| | 10,129 |
| | 9,285 |
| | $ | 2,828 |
| | 3,376 |
| | 5,656 |
| | 6,753 |
|
Expected return on plan assets | | (5,278 | ) | | (5,681 | ) | | (15,835 | ) | | (17,044 | ) | | (5,476 | ) | | (5,278 | ) | | (10,953 | ) | | (10,557 | ) |
Amortization of unrecognized net actuarial loss | | 644 |
| | 494 |
| | 1,931 |
| | 1,481 |
| | 704 |
| | 643 |
| | 1,408 |
| | 1,287 |
|
Total net periodic pension cost (benefit)1 | | $ | (1,258 | ) | | (2,092 | ) | | (3,775 | ) | | (6,278 | ) | | $ | (1,944 | ) | | (1,259 | ) | | (3,889 | ) | | (2,517 | ) |
1 The components of net periodic pension cost (benefit) are included within "Loss and loss expense incurred" and "Other insurance expenses" on the Consolidated Statements of Income.
| | | | Pension Plan | | Pension Plan |
| | Nine Months ended September 30, | | Six Months ended June 30, |
| | 2019 | | 2018 | | 2020 | | 2019 |
Weighted-Average Expense Assumptions: | | | | | | | | |
Discount rate | | 4.46 | % | | 3.78 | % | | 3.33 | % | | 4.46 | % |
Effective interest rate for calculation of interest cost | | 4.12 |
| | 3.46 |
| | 2.95 |
| | 4.12 |
|
Expected return on plan assets | | 6.50 |
| | 6.36 |
| | 5.80 |
| | 6.50 |
|
NOTE 11.12. Comprehensive Income
The components of comprehensive income, both gross and net of tax, for ThirdSecond Quarter and NineSix Months 20192020 and Third Quarter and Nine Months 20182019 were as follows: | | Third Quarter 2019 | | | | | | | |
Second Quarter 2020 | | | | | | | |
($ in thousands) | | Gross | | Tax | | Net | | Gross | | Tax | | Net |
Net income | | $ | 71,178 |
| | 15,028 |
| | 56,150 |
| | $ | 42,693 |
| | 8,510 |
| | 34,183 |
|
Components of OCI: | | |
| | |
| | |
| | |
| | |
| | |
|
Unrealized gains on investment securities: | | |
| | |
| | |
| | |
| | |
| | |
|
Unrealized holding gains during the period | | 34,392 |
| | 7,224 |
| | 27,168 |
| | 188,768 |
| | 39,641 |
| | 149,127 |
|
Non-credit portion of OTTI recognized in OCI | | | 37,479 |
| | 7,871 |
| | 29,608 |
|
Amounts reclassified into net income: | | | | | | | | | | | | |
HTM securities | | (3 | ) | | (1 | ) | | (2 | ) | | (31 | ) | | (6 | ) | | (25 | ) |
Realized losses on disposals and OTTI of AFS securities | | 2,821 |
| | 592 |
| | 2,229 |
| |
Realized gains on disposals and intent-to-sell OTTI on AFS securities | | | (1,686 | ) | | (354 | ) | | (1,332 | ) |
Credit loss benefit recognized in OTTI | | | (4,924 | ) | | (1,034 | ) | | (3,890 | ) |
Total unrealized gains on investment securities | | 37,210 |
| | 7,815 |
| | 29,395 |
| | 219,606 |
| | 46,118 |
| | 173,488 |
|
Defined benefit pension and post-retirement plans: | | |
| | |
| | |
| | |
| | |
| | |
|
Amounts reclassified into net income: | | |
| | |
| | |
| | |
| | |
| | |
|
Net actuarial loss | | 665 |
| | 140 |
| | 525 |
| | 753 |
| | 158 |
| | 595 |
|
Total defined benefit pension and post-retirement plans | | 665 |
| | 140 |
| | 525 |
| | 753 |
| | 158 |
| | 595 |
|
Other comprehensive income | | 37,875 |
| | 7,955 |
| | 29,920 |
| | 220,359 |
| | 46,276 |
| | 174,083 |
|
Comprehensive income | | $ | 109,053 |
| | 22,983 |
| | 86,070 |
| | $ | 263,052 |
| | 54,786 |
| | 208,266 |
|
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Third Quarter 2018 | | | | | | | |
Second Quarter 2019 | | | | | | | |
($ in thousands) | | Gross | | Tax | | Net | | Gross | | Tax | | Net |
Net income | | $ | 67,130 |
| | 11,695 |
| | 55,435 |
| | $ | 90,225 |
| | 17,959 |
| | 72,266 |
|
Components of other comprehensive loss: | | |
| | |
| | |
| |
Unrealized losses on investment securities: | | |
| | |
| | |
| |
Unrealized holding losses during the period | | (21,565 | ) | | (4,529 | ) | | (17,036 | ) | |
Components of OCI: | | | |
| | |
| | |
|
Unrealized gains on investment securities: | | | |
| | |
| | |
|
Unrealized holding gains during the period | | | 83,546 |
| | 17,544 |
| | 66,002 |
|
Amounts reclassified into net income: | | | | | | | | | | | | |
HTM securities | | (8 | ) | | (2 | ) | | (6 | ) | | (21 | ) | | (4 | ) | | (17 | ) |
Realized losses on disposals and OTTI of AFS securities | | 10,839 |
| | 2,276 |
| | 8,563 |
| |
Total unrealized losses on investment securities | | (10,734 | ) | | (2,255 | ) | | (8,479 | ) | |
Realized gains on disposals and OTTI of AFS securities | | | (1,300 | ) | | (273 | ) | | (1,027 | ) |
Total unrealized gains on investment securities | | | 82,225 |
| | 17,267 |
| | 64,958 |
|
Defined benefit pension and post-retirement plans: | | |
| | |
| | |
| | |
| | |
| | |
|
Amounts reclassified into net income: | | |
| | |
| | |
| | |
| | |
| | |
|
Net actuarial loss | | 532 |
| | 112 |
| | 420 |
| | 664 |
| | 140 |
| | 524 |
|
Total defined benefit pension and post-retirement plans | | 532 |
| | 112 |
| | 420 |
| | 664 |
| | 140 |
| | 524 |
|
Other comprehensive loss | | (10,202 | ) | | (2,143 | ) | | (8,059 | ) | |
Other comprehensive income | | | 82,889 |
| | 17,407 |
| | 65,482 |
|
Comprehensive income | | $ | 56,928 |
| | 9,552 |
| | 47,376 |
| | $ | 173,114 |
| | 35,366 |
| | 137,748 |
|
|
| | | | | | | | | | |
Nine Months 2019 | | | | | | |
($ in thousands) | | Gross | | Tax | | Net |
Net income | | $ | 235,097 |
| | 45,333 |
| | 189,764 |
|
Components of OCI: | | |
| | | | |
Unrealized gains on investment securities: | | |
| | | | |
Unrealized holding gains during the period | | 220,864 |
| | 46,381 |
| | 174,483 |
|
Amounts reclassified into net income: | | | | | | |
HTM securities | | (33 | ) | | (7 | ) | | (26 | ) |
Realized losses on disposals and OTTI of AFS securities | | 444 |
| | 93 |
| | 351 |
|
Total unrealized gains on investment securities | | 221,275 |
| | 46,467 |
| | 174,808 |
|
Defined benefit pension and post-retirement plans: | | |
| | |
| | |
|
Amounts reclassified into net income: | | |
| | | | |
Net actuarial loss | | 1,993 |
| | 419 |
| | 1,574 |
|
Total defined benefit pension and post-retirement plans | | 1,993 |
| | 419 |
| | 1,574 |
|
Other comprehensive income | | 223,268 |
| | 46,886 |
| | 176,382 |
|
Comprehensive income | | $ | 458,365 |
| | 92,219 |
| | 366,146 |
|
| | | | | | |
| | | | | | |
Nine Months 2018 | | | | | | |
($ in thousands) | | Gross | | Tax | | Net |
Net income | | $ | 159,586 |
| | 26,407 |
| | 133,179 |
|
Components of other comprehensive loss: | | |
| | | | |
Unrealized losses on investment securities: | | |
| | | | |
Unrealized holding losses during the period | | (130,873 | ) | | (27,484 | ) | | (103,389 | ) |
Amounts reclassified into net income: | | | | | | |
HTM securities | | (28 | ) | | (6 | ) | | (22 | ) |
Realized losses on disposals and OTTI of AFS securities | | 18,258 |
| | 3,834 |
| | 14,424 |
|
Total unrealized losses on investment securities | | (112,643 | ) | | (23,656 | ) | | (88,987 | ) |
Defined benefit pension and post-retirement plans: | | |
| | |
| | |
|
Amounts reclassified into net income: | | |
| | | | |
Net actuarial loss | | 1,595 |
| | 335 |
| | 1,260 |
|
Total defined benefit pension and post-retirement plans | | 1,595 |
| | 335 |
| | 1,260 |
|
Other comprehensive loss | | (111,048 | ) | | (23,321 | ) | | (87,727 | ) |
Comprehensive income | | $ | 48,538 |
| | 3,086 |
| | 45,452 |
|
| | | | | | |
|
| | | | | | | | | | |
Six Months 2020 | | | | | | |
($ in thousands) | | Gross | | Tax | | Net |
Net income | | $ | 58,690 |
| | 9,271 |
| | 49,419 |
|
Components of OCI: | | |
| | |
| | |
|
Unrealized gains on investment securities: | | |
| | |
| | |
|
Unrealized holding gains during the period | | 94,787 |
| | 19,905 |
| | 74,882 |
|
Non-credit portion of OTTI recognized in OCI | | (27,911 | ) | | (5,861 | ) | | (22,050 | ) |
Amounts reclassified into net income: | | | | | | |
HTM securities | | (6 | ) | | (1 | ) | | (5 | ) |
Realized losses on disposals and intent-to-sell OTTI on AFS securities | | 9,641 |
| | 2,025 |
| | 7,616 |
|
Credit loss expense recognized in OTTI | | 10,863 |
| | 2,281 |
| | 8,582 |
|
Total unrealized gains on investment securities | | 87,374 |
| | 18,349 |
| | 69,025 |
|
Defined benefit pension and post-retirement plans: | | |
| | |
| | |
|
Amounts reclassified into net income: | | |
| | |
| | |
|
Net actuarial loss | | 1,507 |
| | 316 |
| | 1,191 |
|
Total defined benefit pension and post-retirement plans | | 1,507 |
| | 316 |
| | 1,191 |
|
Other comprehensive income | | 88,881 |
| | 18,665 |
| | 70,216 |
|
Comprehensive income | | $ | 147,571 |
| | 27,936 |
| | 119,635 |
|
| | | | | | |
| | | | | | |
Six Months 2019 | | | | | | |
($ in thousands) | | Gross | | Tax | | Net |
Net income | | $ | 163,919 |
| | 30,305 |
| | 133,614 |
|
Components of OCI: | | |
| | |
| | |
|
Unrealized gains on investment securities: | | |
| | |
| | |
|
Unrealized holding gains during the period | | 186,472 |
| | 39,157 |
| | 147,315 |
|
Amounts reclassified into net income: | | | | | | |
HTM securities | | (30 | ) | | (6 | ) | | (24 | ) |
Realized gains on disposals and OTTI of AFS securities | | (2,377 | ) | | (499 | ) | | (1,878 | ) |
Total unrealized gains on investment securities | | 184,065 |
| | 38,652 |
| | 145,413 |
|
Defined benefit pension and post-retirement plans: | | |
| | |
| | |
|
Amounts reclassified into net income: | | |
| | |
| | |
|
Net actuarial loss | | 1,328 |
| | 279 |
| | 1,049 |
|
Total defined benefit pension and post-retirement plans | | 1,328 |
| | 279 |
| | 1,049 |
|
Other comprehensive income | | 185,393 |
| | 38,931 |
| | 146,462 |
|
Comprehensive income | | $ | 349,312 |
| | 69,236 |
| | 280,076 |
|
The balances of, and changes in each component of AOCIAccumulated other comprehensive income ("AOCI") (net of taxes) as of SeptemberJune 30, 20192020, were as follows:
| | September 30, 2019 | | | | Defined Benefit Pension and Post-Retirement Plans | | | |
June 30, 2020 | | | | | Defined Benefit Pension and Post-Retirement Plans | | |
| | Net Unrealized Gains (Losses) 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 Related1 | | HTM Related | | All Other | | Investments Subtotal | |
Balance, December 31, 2018 | | $ | (71 | ) | | 71 |
| | 1,888 |
| | 1,888 |
| | (77,956 | ) | |
Balance, December 31, 2019 | | | $ | (71 | ) | | 25 |
| | 170,439 |
| | 170,393 |
| | (88,643 | ) | | 81,750 |
|
OCI before reclassifications | | — |
| | — |
| | 174,483 |
| | 174,483 |
| | — |
| | 174,483 |
| | (22,050 | ) | | — |
| | 74,882 |
| | 52,832 |
| | — |
| | 52,832 |
|
Amounts reclassified from AOCI | | — |
| | (26 | ) | | 351 |
| | 325 |
| | 1,574 |
| | 1,899 |
| | 8,582 |
| | (5 | ) | | 7,616 |
| | 16,193 |
| | 1,191 |
| | 17,384 |
|
Net current period OCI | | — |
| | (26 | ) | | 174,834 |
| | 174,808 |
| | 1,574 |
| | 176,382 |
| | (13,468 | ) | | (5 | ) | | 82,498 |
| | 69,025 |
| | 1,191 |
| | 70,216 |
|
Balance, September 30, 2019 | | $ | (71 | ) | | 45 |
| | 176,722 |
| | 176,696 |
| | (78,270 | ) | | 98,426 |
| |
Balance, June 30, 2020 | | | $ | (13,539 | ) | | 20 |
| | 252,937 |
| | 239,418 |
| | (87,452 | ) | | 151,966 |
|
1Represents unrealized gains and losses on AFS securities with credit-related OTTI recognized in earnings.
The reclassifications out of AOCI were as follows: | | | Quarter ended September 30, | | Nine Months ended September 30, | Affected Line Item in the Unaudited Consolidated Statements of Income | Quarter ended June 30, | | Six Months ended June 30, | Affected Line Item in the Unaudited Consolidated Statements of Income |
($ in thousands) | 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 | | 2020 | | 2019 |
HTM related | | | | | | | | | | | | | | | | |
Unrealized (gains) losses on HTM disposals | $ | (3 | ) | | 11 |
| | (12 | ) | | 5 |
| Net realized and unrealized (losses) gains | $ | — |
| | (9 | ) | | 1 |
| | (9 | ) | Net realized and unrealized gains (losses) |
Amortization of net unrealized gains on HTM securities | — |
| | (19 | ) | | (21 | ) | | (33 | ) | Net investment income earned | (31 | ) | | (12 | ) | | (7 | ) | | (21 | ) | Net investment income earned |
| (3 | ) | | (8 | ) | | (33 | ) | | (28 | ) | Income before federal income tax | (31 | ) | | (21 | ) | | (6 | ) | | (30 | ) | Income before federal income tax |
| 1 |
| | 2 |
| | 7 |
| | 6 |
| Total federal income tax expense | 6 |
| | 4 |
| | 1 |
| | 6 |
| Total federal income tax expense |
| (2 | ) | | (6 | ) | | (26 | ) | | (22 | ) | Net income | (25 | ) | | (17 | ) | | (5 | ) | | (24 | ) | Net income |
Realized losses on AFS and OTTI | | | | | | | | | |
Realized losses on AFS disposals and OTTI | 2,821 |
| | 10,839 |
| | 444 |
| | 18,258 |
| Net realized and unrealized (losses) gains | |
Net realized (gains) losses on disposals and intent-to-sell OTTI | | | | | | | | | |
Net realized (gains) losses on disposals and intent-to-sell OTTI | | (1,686 | ) | | (1,300 | ) | | 9,641 |
| | (2,377 | ) | Net realized and unrealized gains (losses) |
| | (1,686 | ) | | (1,300 | ) | | 9,641 |
| | (2,377 | ) | Income before federal income tax |
| | 354 |
| | 273 |
| | (2,025 | ) | | 499 |
| Total federal income tax expense |
| | (1,332 | ) | | (1,027 | ) | | 7,616 |
| | (1,878 | ) | Net income |
OTTI related | | | | | | | | | |
Credit loss (benefit) expense recognized in OTTI | | (4,924 | ) | | — |
| | 10,863 |
| | — |
| Net realized and unrealized gains (losses) |
| | (4,924 | ) | | — |
| | 10,863 |
| | — |
| Income before federal income tax |
| 2,821 |
| | 10,839 |
| | 444 |
| | 18,258 |
| Income before federal income tax | 1,034 |
| | — |
| | (2,281 | ) | | — |
| Total federal income tax expense |
| (592 | ) | | (2,276 | ) | | (93 | ) | | (3,834 | ) | Total federal income tax expense | (3,890 | ) | | — |
| | 8,582 |
| | — |
| Net income |
| 2,229 |
| | 8,563 |
| | 351 |
| | 14,424 |
| Net income | | | | | | | | |
Defined benefit pension and post-retirement life plans | | | | | | | | | | | | | | | | |
Net actuarial loss | 146 |
| | 112 |
| | 436 |
| | 337 |
| Loss and loss expense incurred | 162 |
| | 145 |
| | 324 |
| | 290 |
| Loss and loss expense incurred |
| 519 |
| | 420 |
| | 1,557 |
| | 1,258 |
| Other insurance expenses | 591 |
| | 519 |
| | 1,183 |
| | 1,038 |
| Other insurance expenses |
Total defined benefit pension and post-retirement life | 665 |
| | 532 |
| | 1,993 |
| | 1,595 |
| Income before federal income tax | 753 |
| | 664 |
| | 1,507 |
| | 1,328 |
| Income before federal income tax |
| (140 | ) | | (112 | ) | | (419 | ) | | (335 | ) | Total federal income tax expense | (158 | ) | | (140 | ) | | (316 | ) | | (279 | ) | Total federal income tax expense |
| 525 |
| | 420 |
| | 1,574 |
| | 1,260 |
| Net income | 595 |
| | 524 |
| | 1,191 |
| | 1,049 |
| Net income |
| | | | | | | | | | | | | | | | |
Total reclassifications for the period | $ | 2,752 |
| | 8,977 |
| | 1,899 |
| | 15,662 |
| Net income | $ | (4,652 | ) | | (520 | ) | | 17,384 |
| | (853 | ) | Net income |
NOTE 12. Leases13. Litigation
WeAs of June 30, 2020, we do not believe we are involved in any legal action that could have various operating leases for office space, equipment, and fleet vehicles. In addition, we have various finance leases for computer hardware. Such lease agreements, which expire at various dates through 2030, are generally reneweda material adverse effect on our consolidated financial condition, results of operations, or replaced by similar leases.cash flows.
We determine if an arrangement is a lease on the commencement date of the contract. Lease assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. The lease asset and liability are measured by the present value of the future minimum lease payments over the lease term. Our fleet vehicle leases include a residual value guarantee; however, it is not probable of being owed. Therefore, there is no impact to the lease liability or lease asset. To measure the present value, the discount rate available in the contract is used. If the discount rate is not readily determinable, our incremental borrowing rate is used. The lease asset is then adjusted to exclude lease incentives. We recognize variable lease payments in the period in which the obligation for those payments is incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is calculated using the straight-line method.
Upon adoption of ASU 2016-02 on January 1, 2019, we recorded operating lease right-of-use assets of $20.7 million with related lease liabilities of $21.0 million. The differential of $0.3 million was recognized, on an after-tax basis, as a cumulative-effect adjustment to the opening balance of retained earnings as of January 1, 2019. Financing lease right-of-use assets and the related lease liabilities were $0.9 million as of January 1, 2019. See Note 2. "Adoption of Accounting Pronouncements" in this Form 10-Q for additional information regarding ASU 2016-02 and accounting policy elections made.
The components of lease expense in Third Quarter and Nine Months 2019 were as follows:
|
| | | | | | |
($ in thousands) | | Quarter ended September 30, 2019 | Nine Months ended September 30, 2019 |
Operating lease cost, included in Other insurance expenses on the Consolidated Statements of Income | | $ | 2,234 |
| 6,631 |
|
Finance lease cost: | | | |
Amortization of assets, included in Other insurance expenses on the Consolidated Statements of Income | | 217 |
| 816 |
|
Interest on lease liabilities, included in Interest expense on the Consolidated Statements of Income | | 5 |
| 12 |
|
Total finance lease cost | | 222 |
| 828 |
|
| | | |
Variable lease cost, included in Other insurance expenses on the Consolidated Statements of Income | | (548 | ) | 120 |
|
| | | |
Short-term lease cost, included in Other insurance expenses on the Consolidated Statements of Income | | 502 |
| 1,677 |
|
The following table provides supplemental information regarding our operating and finance leases.
|
| | |
| September 30, 2019 |
Weighted-average remaining lease term | | |
Operating leases | 6 | years |
Finance leases | 2 | |
Weighted-average discount rate | | |
Operating leases | 3.4 | % |
Finance leases1
| 2.0 | |
1Prior to adoption of ASU 2016-02, our historical capital lease liability and asset were measured using an un-discounted cash flow stream due to immateriality of the capital lease population.
Operating and finance lease asset and liability balances are included within the following line items on the Consolidated Balance Sheets:
|
| | | |
($ in thousands) | September 30, 2019 |
Operating leases | |
Other assets | $ | 28,348 |
|
Other liabilities | 29,218 |
|
Finance leases | |
Property and equipment - at cost, net of accumulated depreciation and amortization | 899 |
|
Long-term debt | 904 |
|
At September 30, 2019, the maturities of our lease liabilities were as follows:
|
| | | | | | | | |
($ in thousands) | | Finance Leases | Operating Leases | Total |
Year ended December 31, | | | | |
2019 (excluding the nine months ended September 30, 2019) | | $ | 171 |
| 2,071 |
| 2,242 |
|
2020 | | 451 |
| 8,164 |
| 8,615 |
|
2021 | | 248 |
| 6,033 |
| 6,281 |
|
2022 | | 54 |
| 4,443 |
| 4,497 |
|
2023 | | — |
| 3,232 |
| 3,232 |
|
Thereafter | | — |
| 11,446 |
| 11,446 |
|
Total lease payments | | 924 |
| 35,389 |
| 36,313 |
|
Less: imputed interest | | 20 |
| 3,230 |
| 3,250 |
|
Less: leases that have not yet commenced | | — |
| 2,941 |
| 2,941 |
|
Total lease liabilities | | $ | 904 |
| 29,218 |
| 30,122 |
|
At December 31, 2018, the maturities of our lease liabilities for capital and operating leases were as follows:
|
| | | | | | | | |
($ in thousands) | | Capital Leases | Operating Leases | Total |
2019 | | $ | 728 |
| 7,762 |
| 8,490 |
|
2020 | | 141 |
| 7,355 |
| 7,496 |
|
2021 | | 22 |
| 5,083 |
| 5,105 |
|
2022 | | — |
| 3,641 |
| 3,641 |
|
2023 | | — |
| 2,900 |
| 2,900 |
|
Thereafter | | — |
| 9,698 |
| 9,698 |
|
Total minimum payment required | | $ | 891 |
| 36,439 |
| 37,330 |
|
Refer to Note. 3 "Statements of Cash Flows" in this Form 10-Q for supplemental cash and non-cash transactions included in the measurement of operating and finance lease liabilities.
NOTE 13. Litigation
In the ordinary course of conducting business, we can be named as defendantsare parties in various legal actions. Most 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.them; or (iii) liability insurers seeking declaratory judgment on our insurance coverage obligations. We account for such activity through the establishment of unpaid loss and loss expense reserves. In ordinary course claims litigation, we expect that any potential ultimate liability, after consideration of provisions made for potential losses and costs of defense, will not be material to our consolidated financial condition, results of operations, or cash flows.
All of our commercial property and businessowners policies require direct physical loss of or damage to property by a covered cause of loss. Whether COVID-19-related contamination, the existence of the COVID-19 pandemic, and the resulting COVID-19-related government shutdown orders cause physical loss of or damage to property is already the subject of much public debate and first-party coverage litigation against some insurers. We cannot predict the outcome of that litigation, which may interpret language similar or identical to what is in our insurance policies. It also is our practice to include in, or attach to, all standard lines commercial property and businessowners policies an exclusion that states that all loss or property damage caused by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness, or disease is not a covered cause of loss. That exclusion also may be the subject of first-party coverage litigation against some insurers. We cannot predict the outcome of that litigation, which may interpret language similar or identical to what is in our insurance policies.
From time to time, our Insurance Subsidiaries also are named as defendants in other legal actions, some of which assert claims for substantial amounts. Plaintiffs may style these actions as putative class actions and seek judicial certification of a state or national class for allegations involving our business practices, such as improper reimbursement of medical providers paid under workers compensation and personal and commercial automobile insurance policies or improper reimbursement for automobile
parts. Similarly, our Insurance Subsidiaries can be named in individual actions seeking extra-contractual damages, punitive damages, or penalties, often alleging bad faith in the handling of insurance claims. We believe that we have valid defenses to these allegations and we account for such activity through the establishment of unpaid loss and loss expense reserves. In these other legal actions, we expect that any potential ultimate liability, after consideration of provisions made for estimated losses, will not be material to our consolidated financial condition. Nonetheless, litigation outcomes are inherently unpredictable and, because the amounts sought in certain of these actions are large or indeterminate, it is possible that any adverse outcomes could have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods.
As of September 30, 2019, we do not believe we are involved in any legal action that could have a material adverse effect on our consolidated financial condition, results of operations, or cash flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
As used herein, theThe terms "Company," "we," "us," orand "our" refersrefer 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 regardingabout our intentions, beliefs, current expectations, and projections regardingfor our company’s future operations and performance. Such statements are “forward-looking statements” within the meaning ofunder the Private Securities Litigation Reform Act of 1995. These forward-looking statements often 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 suchin forward-looking statements include, but are not limited to,without limitation, those discussed underin Item 1A. “Risk Factors” below in Part II. “Other Information.” TheseInformation” of this Form 10-Q. Our stated 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 may have 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.statement. 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, other than as may be required under the federal securities laws, to publicly update theseor revise any forward-looking statements due to changes in underlying factors, new information, future developments, or otherwise.for any reason.
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:segments:
Standard Commercial Lines;
Standard Personal Lines;
E&S Lines; and
Investments.
For further details regardingabout these segments, refer to Note 9.10. "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, 20182019 ("20182019 Annual Report").
OurWe write our Standard Commercial and Standard Personal Lines products and services are written through nine of our Insurance Subsidiaries,insurance subsidiaries, some of which write flood business through the federal government's National Flood Insurance Program's ("NFIP") Write Your Own Program ("WYO") program of the National Flood Insurance Program ("NFIP"). OurWe write our E&S products and services are written through oneanother subsidiary, Mesa Underwriters Specialty Insurance Company. This subsidiaryCompany, which provides us with a nationally-authorized non-admitted platform to offer insurance products and services tofor customers who have not obtainedgenerally cannot obtain coverage in the standard marketplace. Collectively, we refer to our ten insurance subsidiaries as the "Insurance Subsidiaries."
The following is Management’s Discussion and Analysis (“MD&A”&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, investorsInvestors should read the MD&A in conjunction with Item 1. "Financial Statements." of this Form 10-Q and the consolidated financial statements in our 20182019 Annual Report filed with the U.S. Securities and Exchange Commission. Within this MD&A, all prior year amounts for non-catastrophe property losses, and the related ratios, have been adjusted to include the related loss expenses, which is consistent with the current year presentation.
In the MD&A, we will discuss and analyze the following:
Current Events and economic impacts from the COVID-19-related government directives;
Critical Accounting Policies and Estimates;
| |
• | Financial Highlights of Results for the thirdsecond quarters ended SeptemberJune 30, 2020 (“Second Quarter 2020”) and June 30, 2019 (“ThirdSecond Quarter 2019”) and Septemberthe six-month periods ended June 30, 2018 (“Third Quarter 2018”2020 ("Six Months 2020") and the nine-month periods ended SeptemberJune 30, 2019 (“Nine("Six Months 2019”2019") and September 30, 2018 (“Nine Months 2018”); |
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.
Current Events: Coronavirus ("COVID-19") Pandemic
Business Overview
Selective entered 2020 with record levels of GAAP equity, holding company cash and invested assets, statutory surplus and strong financial results. We believe our strong financial position reflects our disciplined capital management and underwriting and investment execution. Early in 2020, the COVID-19 pandemic quickly moved from China to the rest of the globe. During Six Months 2020, governmental (international, federal, state, and local) actions to contain or delay the spread of the COVID-19 pandemic resulted in directives requiring social distancing, operational alteration or temporary closure of most non-essential businesses to limit public access, and the “sheltering-in-place” of everyone other than essential workers in many instances. We smoothly transitioned substantially all of our employees to remote, home-based status. Currently, approximately 2,250 of our 2,300 employees are working remotely. Under most governmental directives, insurance is an essential business. While these governmental directives have begun to slowly expire in some of our operating states, we have continued to service our customers, agents, and other stakeholders from a remote work environment. Despite this transition in our work environment, we have successfully been able to maintain our expected service-level standards for claims handling, underwriting, premium audit processes and safety management services.
Because most of our employees are now working remotely, we have changed some of the methods of regular communication and increased the use of video and phone conferencing on robust and secure applications. Our officers, managers, and supervisors have enhanced their connection with their teams. Throughout Second Quarter 2020, our Chief Executive Officer has hosted a number of company-wide virtual town hall meetings to provide organizational updates and address areas of general employee concern. To keep our employees fully informed about COVID-19-related developments, we (i) disseminate regular health, safety, and other communications (ii) established an on-line coronavirus center with information, links to valuable resources, and helpful videos, and (iii) continued our pre-COVID-19 online “pulse surveys” to gauge employees’ views on various issues. Our employees have rated our communications around COVID-19 positively.
Our methods to communicate with customers, agents, and vendors generally have remained the same since the COVID-19 crisis, although the frequency of communication has increased. Additionally, our field model and safety management functions, which typically rely on in-person meetings, have been substantially replaced with greater telecommunications, and virtual or remote interactions, with some limited site visits still occurring. One of our strategic initiatives for several years has been to provide our customers with a superior omni-channel customer experience. Accordingly, we have developed the ability to respond to our customers in their preferred method of communication - whether by phone, email, text, or social media. We have communicated with our customers regarding COVID-19 through phone, email, and social media.
Our internal operations have also been functioning well and continue to work effectively despite the changes in the environment. We continue to process claims, underwrite the renewal inventory of our policies, and operate our corporate functions during this time of working remotely.
AM Best lowered its outlook on the U.S. commercial lines sector to "Negative" from "Stable" after Fitch Ratings ("Fitch") took a similar action. Both cited COVID-19 as the reason for the negative industry outlook and expectations for (i) lower premium volume, (ii) reduced surplus/equity from investment declines, and (iii) lower-for-longer interest rates, which would put pressure on the need for additional underwriting income.
On April 10, 2020, Fitch reaffirmed our "A+" rating with a "stable" outlook. In taking this action, Fitch cited our strong capitalization and financial performance, with stable underwriting results and return metrics that have remained favorable compared to our peers. The review considered Fitch's current assessment of the impact of COVID-19, including (i) its economic impact, under a set of ratings assumptions related to interest rate levels, (ii) declines in the market values of stocks, bonds, derivatives, and other capital market instruments typically owned or traded by insurance companies, (iii) market liquidity, and (iv) the magnitude of claim/benefit exposures related to the COVID-19 pandemic.
Our field-based agency management specialist, claims management specialist, and safety management models have proven to be advantageous in the COVID-19 crisis, as our existing IT infrastructure and security were able to accommodate the move of nearly all of our office-based employees to remote, home-based employees and maintain expected customer and agent service levels. Our strong relationships with, and our continued support for, our approximately 1,400 local independent distribution partners, most of whom also have transitioned to a remote work environment, have also enabled us to continue providing our customers with the same levels of service they have come to expect from us.
Control Environment
Since the beginning of the COVID-19 pandemic, we have not had to modify in any significant way our existing internal controls or processes. To monitor and manage COVID-19-related developments, we convened our existing Executive Risk Committee (comprised of our Executive Chairman, Chief Executive Officer, Chief Financial Officer, and other key financial executives, including our Chief Accounting Officer, Chief Investment Officer, Chief Risk Officer, Chief Audit Executive, General Counsel, Chief Claims Officer, Chief Actuary, Chief Information Officer, Chief Human Resources Officer, and Business Unit leaders) (“ERC”), who met daily in March, multiple times a week through April, and transitioned to weekly meetings in May, June, and July. The ERC actively reviews and addresses all significant operational, compliance, and financial risk matters. This oversight includes matters such as employee health and safety, facilities matters, operational business continuity, IT including third-party vendors, regulatory developments, premium collections, past due accounts, investments, liquidity, capital, cash flow, claims activity, and other key business metrics. Our Management Investment Committee ("MIC") also met weekly in the early days of the COVID-19-related financial market disruption, but more recently has transitioned to meeting every two weeks. The MIC has carefully reviewed detailed portfolio metrics and market projections, and has interacted directly with our portfolio managers during this crisis, allowing it to make proactive investment decisions on an informed basis. Our Board of Directors transitioned from weekly meetings with senior executives through April to bi-weekly meetings in May, June, and July to ensure appropriate corporate governance and oversight.
We have not experienced any material impact to our internal control environment over financial reporting despite the fact that the majority of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 current events to minimize the impact these events may have on our internal controls and their design and operating effectiveness.
Given the remote environment, which was initially required by certain governmental directives, remote access to critical systems is required. Our cybersecurity program was well–positioned to support increased remote working arrangements and respond to an increase in attempted attacks to exploit the COVID-19 outbreak without rolling back controls to enable remote working. For several years, our IT security strategy has emphasized endpoint controls for cloud computing and employee mobility. This strategy leveraged a virtual private network with multi-factor authentication, which is supplemented by a virtual desktop infrastructure where necessary or appropriate, to create a highly available and centrally-managed end-user environment. Our cybersecurity strategy has always included an information security education and awareness program that combines training with testing aligned to key security exposures, including phishing and social engineering. We also recently bolstered our phishing risk management by deploying multiple technology-driven controls that include malicious content checks, malicious link blocking, and reputation-based rules. The cybersecurity program also anticipated an increase in attempts to disrupt our information systems and deployed safeguards to prevent interruption to key customer and agent-facing technologies.
Financial Overview
Through Second Quarter and Six Months 2020, underwriting results include the following COVID-19-related items:
A $75 million return audit and mid-term endorsement premium accrual recorded in the first quarter of 2020 to reflect the anticipated decline in sales and payroll exposures on the workers compensation and general liability lines of business based on our estimate of reduced exposures due to the significant economic slowdown. Net of reduced losses and commissions, the earned impact of the return audit and mid-term endorsement premium accrual lowered pre-tax underwriting results by $6.6 million, pre-tax, in Second Quarter 2020 and $10.5 million, pre-tax, in Six Months 2020. During Second Quarter 2020, we endorsed polices that reduced our accrual by approximately $14 million, resulting in a $61 million accrual as of June 30, 2020.
A $19.7 million reduction in NPW recorded in Second Quarter 2020 reflecting a premium credit to our personal and commercial automobile customers with in-force policies equivalent to 15% of their April and May premiums, resulting from the unprecedented nature of the COVID-19-related governmental directives and the associated favorable claims frequency impact. During Second Quarter 2020, the premium credits were offset by an equal reduction in loss and loss expenses, as claims frequency on our personal and commercial automobile lines of business declined due to reduced miles being driven resulting from governmental directives. As the number of vehicles we insure has not
significantly declined, frequencies are returning closer to normal levels as the COVID-19-related governmental directives terminate, and there is uncertainty about potential impacts to severities, we do not believe that changes in our filed rating plans are appropriate at this time.
A $10.0 million, pre-tax, incurred but not reported ("IBNR") reserve estimate recorded in the first quarter of 2020 for losses related to a small portion of our policies that include a $25,000 sub-limited coverage for specified extra expenses to clean or disinfect a property when ordered by a Board of Health. Through June 30, 2020, the $10.0 million remained as an IBNR reserve estimate.
An additional allowance for uncollectible premiums receivable of $3.0 million, pre-tax, in Second Quarter 2020 and $13.5 million, pre-tax, in Six Months 2020. We recorded this allowance after evaluating the recoverability of our premiums receivable in light of the COVID-19-related billing accommodations we announced in the first quarter of 2020, and the impact of recent state regulations that provided for the deferral of payments without cancellation for a period up to 90 days in certain states, which will increase earned but uncollected premiums. These state regulations are in the process of expiring, with the last of the regulations currently anticipated to end in early August 2020. We have offered customers, sometimes in collaboration with or at the direction of our regulators, individualized payment flexibility and suspended the effect of policy cancellations, late payment notices, and late or reinstatement fees.
Overall, these four items (i) reduced pre-tax underwriting results by $9.6 million, or $0.13 per diluted share, in Second Quarter 2020 and $34.0 million, or $0.45 per diluted share, in Six Months 2020, (ii) increased the combined ratio by 1.3 points in Second Quarter 2020 and 2.4 points in Six Months 2020, and (iii) decreased our Second Quarter 2020 annualized return on equity ("ROE") by 1.4 points and our Six Months 2020 annualized ROE by 2.4 percentage points.
During Second Quarter and Six Months 2020, investment results included the following items that reflected the significant economic conditions created by COVID-19:
We recorded a benefit for pre-tax other-than-temporary impairments ("OTTI") of $4.3 million in Second Quarter 2020 and OTTI expense of $27.3 million in Six Months 2020. The year-to-date expense reflected the significant widening of credit spreads and reduced future economic activity over the near term due to COVID-19, as well as our desire to provide our investment managers flexibility to trade the portfolio. The benefit in Second Quarter 2020 reflected higher security valuations as a result of improved market conditions during the course of the quarter. For more details about these and other items related to our financial results, see the section below entitled, "Financial Highlights of Results for Second Quarter and Six Months 2020 and Second Quarter and Six Months 2019."
We recorded pre-tax losses of $16.0 million in Second Quarter 2020 and $9.7 million in Six Months 2020 on our alternative investment portfolio, which are recorded on a one-quarter lag. These losses reflect the significant market decline in the first quarter of 2020. As these investments are largely recorded on a one-quarter lag, these results do not reflect the improvement in market conditions during Second Quarter 2020.
Due to the unprecedented financial market volatility and resulting significant decline in fixed income and equity market valuations in March 2020, combined with the COVID-19-related governmental orders, and out of abundance of caution, we increased our short-term debt by $302 million in March 2020 through borrowings from the Federal Home Loan Bank of New York ("FHLBNY") and the Federal Home Loan Bank of Indianapolis (“FHLBI”) and under our credit agreement ("Line of Credit"). Our primary objective was to increase liquidity and operating flexibility of the Parent and the Insurance Subsidiaries. The proceeds from these borrowings were invested in highly-liquid money market funds. We repaid our $50 million borrowing under the Line of Credit in May 2020 and we expect to repay the remaining $252 million of short-term borrowings by the end of 2020. For further details, see Note 5. "Indebtedness" in Item 1. "Financial Statements." of this Form 10-Q.
Critical Accounting Policies and Estimates
Our unaudited interim consolidated financial statements include amounts based on ourfor which we have made informed estimates and judgments for those transactions that are not yet complete.completed. Such estimates and judgments affect the reported amounts in the consolidated financial statements. ThoseAs outlined in our 2019 Annual Report, 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 expense; (ii) pension and post-retirement benefit plan actuarial assumptions; (iii) investment valuation and other-than-temporary-impairments ("OTTI");OTTI; and (iv) reinsurance. TheseThere have been no material changes from the critical accounting policies and estimates disclosed on pages 31 through 40 of our 2019 Annual Report; however, in light of the COVID-19 pandemic, we have made additional changes to critical accounting estimates that are described below.
Further economic instability related to existing and future COVID-19-related governmental directives or changes in legislation could ultimately impact our estimates and judgmentsassumptions, and consequently, changes in the below estimates may be material to our results of operations in future periods.
Reserves for Loss and Loss Expenses
There has been considerable discussion and focus on the potential for insurance industry losses arising from COVID-19, particularly as it relates to claims from business interruption losses. Our Standard Commercial Lines property and businessowners policies require direct physical loss of or damage to property by a covered cause of loss, for our property policies to respond to a claim. While each potential claim is adjusted on its unique facts and based on the useterms and conditions of assumptionsthe specific policy, COVID-19-related contamination, the existence of a pandemic, and/or the resulting preventative government shutdown orders generally are not insured under Standard Commercial property and businessowners policies.
Our Standard Commercial property and businessowners policies also specifically exclude all loss or damage caused by or resulting from a virus or bacteria. We believe this exclusion applies to preclude coverage for losses related to the COVID-19 virus. Approximately 6% of our policyholders purchase a sub-limited extra expense coverage that provides up to $25,000 in limit for the additional cost associated with cleaning the property when ordered by a Board of Health after an outbreak of communicable disease at the premises. Our current year incurred losses include an estimate of $10 million of IBNR for these sub-limited coverages in response to the COVID-19 pandemic. For our E&S segment, our property forms contain the same language as our standard commercial lines segment that requires “direct physical loss of or damage to”, but most of these forms do not contain a specific virus or bacteria exclusion. Property accounts for approximately 30% of our E&S segment premium, and, of that amount, only about mattersa quarter of our customers within our E&S segment purchase policies with business interruption coverage. In total, within our standard commercial lines and E&S segments, 95% of our property policies include the specific virus or bacteria exclusion.
Through June 30, 2020, actual workers compensation claims activity due to COVID-19-related exposures was minimal. When considered in conjunction with the overall decrease in claim reporting levels, we believe the COVID-19-related exposures are sufficiently captured within our current workers compensation loss estimates. It is possible that arewe might incur increased loss and loss expenses if more covered employees contract COVID-19 in the course of their employment. There also may be general liability exposure arising out of business re-openings. This would be a slower emerging exposure that remains highly uncertain at this time.
If the COVID-19 pandemic results in significant property or liability related losses, we have substantial reinsurance protection, that we believe would provide us with recoveries. Our main property catastrophe excess of loss treaty program has a $40 million retention and therefore, arethen provides coverage up to $775 million in ground up losses, subject to changesome co-participation and reinstatement premium. For losses outside of our original 22 state footprint, including our five new expansion states and some of our largest E&S states, the retention drops to $5 million. With property losses and potential business interruption claims, including any COVID-19-related losses, our reinsurers “follow the fortunes” of our underlying polices. That means, if any clause in the underlying policy is invalidated - whether by a court or a legislature - our reinsurance coverage would continue to apply. Our property catastrophe excess of loss program contains aggregating language that allows us, in our sole discretion, to accumulate all property losses commencing within a 168 hour period to a single occurrence or multiple occurrences. We also have the sole discretion to decide when the 168 hours begins, and all losses that occurred during and continuing after that period, such as the case with business interruption losses, would be included in the reinsured loss calculation. Our casualty excess of loss contract, which would cover workers compensation and general liability claims and does not include any exclusions for communicable disease or pandemic, has a $2 million retention and provides coverage limits above that to $90 million. Similar to our property catastrophe reinsurance program, our casualty excess of loss program allows us to aggregate multiple losses, including losses under different liability coverages, as a single occurrence. Our casualty reinsurers also follow our fortunes in the policy interpretation. Except for the $10 million of property IBNR we recorded for the sub-limited property coverages, we do not expect material COVID-19-related losses. If the facts and circumstances develop. Ifchange, we have a robust reinsurance program that provides significant protection.
OTTI
The various COVID-19-related governmental directives impacted the financial markets, which became volatile. This volatility increased gross unrealized losses on our available-for-sale ("AFS") fixed income securities portfolio from $7.7 million at December 31, 2019, to $116.9 million at March 31, 2020, and back down to $39.9 million at June 30, 2020. We analyzed these unrealized losses for OTTI in accordance with our existing accounting policy, which includes performing discounted cash flow ("DCF") analyses on each security at the lot level and analyzing these DCFs using three different estimateseconomic scenarios.
In performing these DCF analyses, we calculate the present value of future cash flows using various models specific to the major security types in our portfolio. These models use security-specific information and judgments had been applied, materially different amounts might have been reportedforecasted macroeconomic data to
determine possible expected credit loss scenarios based on projected changes in the economy. The forecasted economic data incorporated in the models is based on the Federal Reserve Board’s annual supervisory stress test review on certain large banks and financial statements.institutions. We also have the ability to incorporate internally-developed forecast information into the models as we deem appropriate. Model scenarios include a baseline assumption with moderate economic expansion, an adverse assumption with a weakening economy, and a severely adverse assumption with a global recession. In developing our best estimate of the allowance for credit losses, we consider our outlook as to the probability of each of these scenarios occurring.
Based on these analyses, we recorded OTTI expense for expected credit losses of $11.1 million during Six Months 2020. After giving consideration to these credit loss allowances, the remaining unrealized losses on our AFS fixed income securities was $39.9 million. We believe that the volatility and increased unrealized loss balance was driven by fluctuating and widening credit spreads tied to financial market uncertainty about the various COVID-19-related governmental directives. If the assumptions used in our DCF analyses or our outlook as to the occurrence probability of our DCF model scenarios were to change, the resulting impairment could be material to our results of operations. For additional information regardingabout the unrealized losses in our critical accountingAFS fixed income portfolio, see Note 4. "Investments" in Item 1. "Financial Statements." of this Form 10-Q.
Premium Audit
We estimate the amount of premium anticipated to be either billed or returned on policies refersubsequent to pages 37expiration based on exposure levels (i.e., payroll or sales). This estimate of earned but unbilled premium is based on historical trends adjusted for the uncertainty of current and future economic conditions. In the first quarter of 2020, we recorded a $75 million return audit and mid-term endorsement premium accrual, which was in response to the COVID-19 pandemic and the anticipated decline in sales and payroll exposures on the general liability and workers compensation lines of business. During Second Quarter 2020, we endorsed polices that reduced our accrual by approximately $14 million, resulting in a $61 million accrual as of June 30, 2020. We currently anticipate the balance of the endorsements or return audit premiums to occur through 46the end of 2021. Further economic instability or extended COVID-19-related governmental directives could ultimately impact our 2018 Annual Report.estimates and assumptions, and consequently, changes in this liability estimate may be material to the results of operations in future periods. For additional details about this estimate, see Note 8. "Reinsurance" in Item 1. "Financial Statements." of this Form 10-Q.
Allowance for Uncollectible Premiums Receivable
We estimate an allowance for expected credit losses on our outstanding premiums receivable balance at each reporting date. In determining this allowance, we use a method that considers the aging of the receivable, based on the effective year of the related policy, along with our historical credit loss experience. We also contemplate expected macroeconomic conditions over the expected receivables collection period that, because the majority of the balances are collected within a year of policy issuance, is short-term in nature. We increased our allowance for uncollectible accounts by $3.0 million in Second Quarter 2020 and $13.5 million in Six Months 2020, net of write-offs, to reflect (i) the higher risk of non-payment due to the significant COVID-19-related decline in economic activity, (ii) the individualized payment flexibility that we are currently offering our customers, and (iii) our suspension of the effect of policy cancellations, late payment notices, and late or reinstatement fees. These suspensions are in the process of expiring, with the last of the suspensions currently anticipated to end in early August 2020. Due to the impact of recent state regulations that provided for the deferral of payments without cancellation for a period up to 90 days in certain states, which will increase earned but uncollected premiums, we expect an increase in our allowance for uncollectible premiums receivable in the third quarter of 2020 as well.
Similar to our estimate of premium audit, future COVID-19-related economic instability or governmental directives could ultimately impact our estimates and assumptions. Consequently, a change in our allowance estimate may be material to our results of operations in future periods. For additional details about this estimate, see Note 7. "Allowance for Uncollectible Premiums Receivable" in Item 1. "Financial Statements." of this Form 10-Q.
Financial Highlights of Results for ThirdSecond Quarter and NineSix Months 20192020 and ThirdSecond Quarter and NineSix Months 201820191
| | ($ and shares in thousands, except per share amounts) | | Quarter ended September 30, | | Change % or Points | | Nine Months ended September 30, | | Change % or Points | | | Quarter ended June 30, | | Change % or Points | | Six Months ended June 30, | | Change % or Points | |
| 2019 | | 2018 | | | | 2019 | | 2018 | | | 2020 | | 2019 | | | | 2020 | | 2019 | |
Financial Data: | | | | | | | | | | | | | | |
Revenues | | $ | 710,425 |
| | 664,471 |
| | 7 |
| % | | $ | 2,117,591 |
| | 1,943,076 |
| | 9 |
| % | | $ | 682,447 |
| | 708,204 |
| | (4 | ) | % | | $ | 1,347,276 |
| | 1,407,166 |
| | (4 | ) | % |
After-tax net investment income | | 45,374 |
| | 42,875 |
| | 6 |
| | | 134,319 |
| | 116,254 |
| | 16 |
| | | 28,542 |
| | 47,622 |
| | (40 | ) | | | 74,025 |
| | 88,945 |
| | (17 | ) | |
After-tax underwriting income | | 24,728 |
| | 26,068 |
| | (5 | ) | | 86,495 |
| | 59,852 |
| | 45 |
| | | 7,800 |
| | 35,254 |
| | (78 | ) | | 24,672 |
| | 61,767 |
| | (60 | ) | |
Net income before federal income tax | | 71,178 |
| | 67,130 |
| | 6 |
| | 235,097 |
| | 159,586 |
| | 47 |
| | | 42,693 |
| | 90,225 |
| | (53 | ) | | 58,690 |
| | 163,919 |
| | (64 | ) | |
Net income | | 56,150 |
| | 55,435 |
| | 1 |
| | 189,764 |
| | 133,179 |
| | 42 |
| | | 34,183 |
| | 72,266 |
| | (53 | ) | | 49,419 |
| | 133,614 |
| | (63 | ) | |
Diluted net income per share | | 0.93 |
| | 0.93 |
| | — |
| | 3.16 |
| | 2.23 |
| | 42 |
| | |
Diluted weighted-average outstanding shares | | 60,057 |
| | 59,711 |
| | 1 |
| | | 59,960 |
| | 59,626 |
| | 1 |
| | |
| | | | | | | | | | | | | | |
Key Metrics: | | | | | | | | | | | | | | |
Combined ratio | | 95.2 | % | | 94.6 |
| | 0.6 |
| pts | | 94.3 | % | | 95.8 |
| | (1.5 | ) | pts | | 98.4 | % | | 93.1 |
| | 5.3 |
| pts | | 97.6 | % | | 93.9 |
| | 3.7 |
| pts |
Invested assets per dollar of stockholders' equity | | $ | 3.07 |
| | 3.37 |
| | (9 | ) | % | | $ | 3.07 |
| | 3.37 |
| | (9 | ) | % | | $ | 3.10 |
| | 3.12 |
| | (1 | ) | % | | $ | 3.10 |
| | 3.12 |
| | (1 | ) | % |
After-tax yield on investments | | 2.8 | % | | 3.0 |
| | (0.2 | ) | pts | | 2.9 | % | | 2.7 |
| | 0.2 |
| pts | |
ROE | | | 6.2 |
| | 14.5 |
| | (8.3 | ) | pts | | 4.4 |
| | 13.9 |
| | (9.5 | ) | pts |
Statutory premiums to surplus ratio | | | 1.4 |
| x | 1.4 |
| | — |
| | 1.4 |
| x | 1.4 |
| | — |
| |
| | | | | | | | | | | | | | |
Per Share Amounts: | | | | | | | | | | | | | | |
Diluted net income per share | | | 0.57 |
| | 1.21 |
| | (53 | ) | % | | 0.82 |
| | 2.23 |
| | (63 | ) | % |
Book value per share | | $ | 35.98 |
| | 29.52 |
| | 22 |
| % | | $ | 35.98 |
| | 29.52 |
| | 22 |
| % | | $ | 38.43 |
| | 34.71 |
| | 11 |
| | $ | 38.43 |
| | 34.71 |
| | 11 |
| |
Dividends declared per share to stockholders | | 0.20 |
| | 0.18 |
| | 11 |
| | 0.60 |
| | 0.54 |
| | 11 |
| | | 0.23 |
| | 0.20 |
| | 15 |
| | 0.46 |
| | 0.40 |
| | 15 |
| |
Annualized return on equity ("ROE") | | 10.7 |
| | 12.9 |
| | (2.2 | ) | pts | | 12.9 |
| | 10.3 |
| | 2.6 |
| pts | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-Generally Accepted Accounting Principles ("GAAP") operating income2 | | $ | 58,765 |
| | 59,216 |
| | (1 | ) | % | | $ | 181,870 |
| | 146,599 |
| | 24 |
| % | |
Non-GAAP Information: | | | | | | | | | | | | | | |
Non-GAAP operating income2 | | | $ | 24,190 |
| | 69,085 |
| | (65 | ) | % | | $ | 74,712 |
| | 123,105 |
| | (39 | ) | % |
Diluted non-GAAP operating income per share2 | | 0.97 |
| | 0.99 |
| | (2 | ) | | 3.02 |
| | 2.46 |
| | 23 |
| | | 0.40 |
| | 1.16 |
| | (66 | ) | | 1.24 |
| | 2.06 |
| | (40 | ) | |
Annualized non-GAAP operating ROE2 | | 11.2 | % | | 13.8 |
| | (2.6 | ) | pts | | 12.3 | % | | 11.3 |
| | 1.0 |
| pts | | 4.4 | % | | 13.9 |
| | (9.5 | ) | pts | | 6.7 | % | | 12.8 |
| | (6.1 | ) | pts |
| |
1 | Refer to the Glossary of Terms attached to our 20182019 Annual Report as Exhibit 99.1 for definitions of terms used inof this Form 10-Q. |
| |
2 | Non-GAAP operating income is used as an important financial measure by us,that we, analysts, and investors use because the timing of the realization of net investment gains and losses on sales of securities in any given period is largely discretionary as to timing.discretionary. In addition, these net realized investment gains and losses, OTTI that are chargedrecorded to earnings, unrealized gains and losses on equity securities, and the debt retirement costs could distort the analysis of trends. |
Reconciliations of net income, net income per diluted share, and annualized ROE to non-GAAP operating income, non-GAAP operating income per diluted share, and annualized non-GAAP operating ROE, respectively, are provided in the tables below:
| | Reconciliation of net income to non-GAAP operating income | | Quarter ended September 30, | | Nine Months ended September 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Net income | | $ | 56,150 |
| | 55,435 |
| | 189,764 |
| | 133,179 |
| | $ | 34,183 |
| | 72,266 |
| | 49,419 |
| | 133,614 |
|
Net realized and unrealized losses (gains), before tax | | 2,183 |
| | 4,787 |
| | (15,295 | ) | | 16,988 |
| |
Net realized and unrealized (gains) losses, before tax | | | (12,649 | ) | | (4,027 | ) | | 32,017 |
| | (17,478 | ) |
Debt retirement costs, before tax | | — |
| | — |
| | 4,175 |
| | — |
| | — |
| | — |
| | — |
| | 4,175 |
|
Tax on reconciling items | | 432 |
| | (1,006 | ) | | 3,226 |
| | (3,568 | ) | | 2,656 |
| | 846 |
| | (6,724 | ) | | 2,794 |
|
Non-GAAP operating income | | $ | 58,765 |
| | 59,216 |
| | 181,870 |
| | 146,599 |
| | $ | 24,190 |
| | 69,085 |
| | 74,712 |
| | 123,105 |
|
| | Reconciliation of net income per diluted share to non-GAAP operating income per diluted share | | Quarter ended September 30, | | Nine Months ended September 30, | | Quarter ended June 30, | | Six Months ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Net income per diluted share
| | $ | 0.93 |
| | 0.93 |
| | 3.16 |
| | 2.23 |
| | $ | 0.57 |
| | 1.21 |
| | 0.82 |
| | 2.23 |
|
Net realized and unrealized losses (gains), before tax | | 0.04 |
| | 0.08 |
| | (0.26 | ) | | 0.28 |
| |
Net realized and unrealized (gains) losses, before tax | | | (0.21 | ) | | (0.06 | ) | | 0.53 |
| | (0.29 | ) |
Debt retirement costs, before tax
| | — |
| | — |
| | 0.07 |
| | — |
| | — |
| | — |
| | — |
| | 0.07 |
|
Tax on reconciling items
| | — |
| | (0.02 | ) | | 0.05 |
| | (0.05 | ) | | 0.04 |
| | 0.01 |
| | (0.11 | ) | | 0.05 |
|
Non-GAAP operating income per diluted share
| | $ | 0.97 |
| | 0.99 |
| | 3.02 |
| | 2.46 |
| | $ | 0.40 |
| | 1.16 |
| | 1.24 |
| | 2.06 |
|
| | Reconciliation of annualized ROE to annualized non-GAAP operating ROE | | Quarter ended September 30, | | Nine Months ended September 30, | | Quarter ended June 30, | | Six Months ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Annualized ROE | | 10.7 | % | | 12.9 |
| | 12.9 |
| | 10.3 |
| | 6.2 | % | | 14.5 |
| | 4.4 |
| | 13.9 |
|
Net realized and unrealized losses (gains), before tax | | 0.4 |
| | 1.1 |
| | (1.0 | ) | | 1.3 |
| |
Net realized and unrealized (gains) losses, before tax | | | (2.3 | ) | | (0.8 | ) | | 2.9 |
| | (1.8 | ) |
Debt retirement costs, before tax
| | — |
| | — |
| | 0.3 |
| | — |
| | — |
| | — |
| | — |
| | 0.4 |
|
Tax on reconciling items | | 0.1 |
| | (0.2 | ) | | 0.1 |
| | (0.3 | ) | | 0.5 |
| | 0.2 |
| | (0.6 | ) | | 0.3 |
|
Annualized non-GAAP operating ROE | | 11.2 | % | | 13.8 |
| | 12.3 |
| | 11.3 |
| | 4.4 | % | | 13.9 |
| | 6.7 |
| | 12.8 |
|
The components of our annualized ROE are as follows:
| | Annualized ROE Components | | Quarter ended September 30, | | Change Points | | Nine Months ended September 30, | | Change Points | | Quarter ended June 30, | | Change Points | | Six Months ended June 30, | | Change Points |
| | 2019 | | 2018 | | 2019 | | 2018 | | | 2020 | | 2019 | | 2020 | | 2019 | |
Standard Commercial Lines Segment | | 4.5 | % | | 4.9 |
| | (0.4 | ) | | 5.0 |
| | 4.5 |
| | 0.5 |
| | 2.4 | % | | 5.9 |
| | (3.5 | ) | | 2.4 |
| | 5.2 |
| | (2.8 | ) |
Standard Personal Lines Segment | | (0.1 | ) | | 0.6 |
| | (0.7 | ) | | 0.4 |
| | 0.4 |
| | — |
| | (0.9 | ) | | 0.7 |
| | (1.6 | ) | | (0.4 | ) | | 0.6 |
| | (1.0 | ) |
E&S Lines Segment | | 0.3 |
| | 0.6 |
| | (0.3 | ) | | 0.5 |
| | (0.3 | ) | | 0.8 |
| | (0.1 | ) | | 0.5 |
| | (0.6 | ) | | 0.2 |
| | 0.6 |
| | (0.4 | ) |
Total insurance operations | | 4.7 |
| | 6.1 |
| | (1.4 | ) | | 5.9 |
| | 4.6 |
| | 1.3 |
| | 1.4 |
| | 7.1 |
| | (5.7 | ) | | 2.2 |
| | 6.4 |
| | (4.2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Investment income | | 8.6 |
| | 10.0 |
| | (1.4 | ) | | 9.1 |
| | 9.0 |
| | 0.1 |
| | 5.2 |
| | 9.6 |
| | (4.4 | ) | | 6.6 |
| | 9.2 |
| | (2.6 | ) |
Net realized and unrealized (losses) gains | | (0.5 | ) | | (0.9 | ) | | 0.4 |
| | 0.8 |
| | (1.0 | ) | | 1.8 |
| |
Net realized and unrealized gains (losses) | | | 1.8 |
| | 0.6 |
| | 1.2 |
| | (2.3 | ) | | 1.4 |
| | (3.7 | ) |
Total investments segment | | 8.1 |
| | 9.1 |
| | (1.0 | ) | | 9.9 |
| | 8.0 |
| | 1.9 |
| | 7.0 |
| | 10.2 |
| | (3.2 | ) | | 4.3 |
| | 10.6 |
| | (6.3 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other | | (2.1 | ) | | (2.3 | ) | | 0.2 |
| | (2.9 | ) | | (2.3 | ) | | (0.6 | ) | | (2.2 | ) | | (2.8 | ) | | 0.6 |
| | (2.1 | ) | | (3.1 | ) | | 1.0 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Annualized ROE | | 10.7 | % | | 12.9 |
| | (2.2 | ) | | 12.9 |
| | 10.3 |
| | 2.6 |
| | 6.2 | % | | 14.5 |
| | (8.3 | ) | | 4.4 |
| | 13.9 |
| | (9.5 | ) |
In ThirdWe experienced a significant level of catastrophe losses in Second Quarter 2019, we generated2020, driven by industry-wide U.S. catastrophe loss activity that significantly exceeded the 10-year historical median. Second Quarter 2020 pre-tax net catastrophe losses totaled$83.2 million, and were related to losses from numerous catastrophe events designated by the Insurance Services Office's Property Claims Services unit, including two April storms ($43 million) and claims related to civil unrest ($20 million). These losses along with a tornado and subsequent hail event that impacted Tennessee in early March 2020, drove catastrophe losses in Six Months 2020 to $116.4 million. Compared to the same prior year periods, these losses reduced net income per diluted share of $0.93,by $42.5 million, after-tax, in line with the same quarter a year ago. Non-GAAP operating income per diluted share was $0.97, comparedSecond Quarter 2020 and $52.2 million, after-tax, in Six Months 2020. In addition to $0.99 a year ago. The Third Quarter 2019catastrophe losses, our results were impacted by:by the COVID-19-related charges discussed in "Current Events" above, partially offset by (i) higher than expected levels oflower non-catastrophe property loss and loss expenses, of $5 million, after-tax, or $0.09 per diluted share; and (ii) $3 millionongoing expense management initiatives. Some of after-tax employee severance-relatedthese initiatives can be seen as temporary as a result of the COVID-19 shelter-in-place government directives, and relate to lower travel and entertainment expenses, split between underwriting and corporate expenses onsome short-term project and new hire deferrals.
Also contributing to the Consolidated Statements of Income, that accounted for $0.05 per diluted share. On a year-to-date basis, non-catastrophe property loss and loss expenses were generallydecline in line with expected levels.
We generated 18% growth in book value per share through Nine Months 2019. The strong growth in book value per share was driven by net income, and appreciationafter-tax net investment income was down 40% in the value of our fixed income securities portfolio, which experienced net unrealized after-tax gains of approximately $29Second Quarter 2020 to $28.5 million during Thirdcompared to Second Quarter 2019, and $175down 17% in Six Months 2020 to $74.0 million during Ninecompared to Six Months 2019. This growth was partially offsetThese decreases were primarily driven by dividends paidalternative investment losses of $16.0 million pre-tax, or $12.6 million after-tax, in Second Quarter 2020, and $9.7 million pre-tax, or $7.7 million after-tax, in Six Months 2020. These results are reported on a one-quarter lag, and reflect the market decline during the first quarter of 2020. These losses compare to shareholders.pre-tax income on the alternative investment portfolio of $7.3 million, or $5.8 million after-tax, in Second Quarter 2019, and $7.9 million pre-tax in Six Months 2019, or $6.2 million after-tax.
In addition to strong growth in book value per share, the financial results this year continue to build on our five-year track record of consistently generating double-digit non-GAAP operating ROEs on an annual basis. Our annualized non-GAAP operating ROE of 12.3% in Nine Months 2019 was 30 basis points above our 2019 target of 12% and 100 basis points higher than the annualized non-GAAP operating ROE in Nine Months 2018.
Despite exceeding our target, our annualized non-GAAP operating ROE was negatively impacted by net unrealized after-tax gains of $175 million on our fixed income securities portfolio, which decreased our annualized non-GAAP operating ROE by 60 basis points. We currently expect interest rates to remain low, which will likely put pressure on our ROE and non-GAAP operating ROE in 2020.
Insurance Operations
Our overall insurance segmentsoperations delivered profitable results in Third Quarter and Nine Months 2019,both periods, contributing 1.4 points to a combinedan annualized ROE in the quarter of 4.7%Second Quarter 2020 and 2.2 points in the year-to-date period of 5.9%.Six Months 2020. The Third Quarter 2019 annualized ROE decreased 1.45.7 points in Second Quarter 2020 and 4.2 points in Six Months 2020, compared to Third Quarter 2018, reflectingthe same prior year periods. These decreases reflected an increase in our combined ratio of 0.6 points. The increase5.3 points in Second Quarter 2020 and 3.7 points in Six Months 2020, which was principallylargely driven by higher non-catastrophe property loss and loss expenses and a higher expense ratio. The higher expense ratio of 1.6 points reflected the following: (i) a 0.5-point increase in employee-related expenses, including 0.3 points for employee severance-related expenses noted above; and (ii) a 0.6-point increase in profit-based compensation to our distribution partners and employees.catastrophe losses.
The annualized ROE in Nine Months 2019 increased 1.3 points compared to Nine Months 2018, because of the improvement in the combined ratio of 1.5 points. The combined ratio improvement was principally driven by: (i) lower levels of non-catastrophe property loss and loss expenses; and (ii) higher levels of favorable prior year casualty reserve development. These improvements were partially offset by the increase in the expense ratio of 0.6 points, which reflected a 0.4-point increase in profit-based compensation to our distribution partners and employees.
The following table provides quantitative information for analyzing the combined ratio:
| | All Lines | | Quarter ended September 30, | | Change % or Points | | Nine Months ended September 30, | | Change % or Points | | | Quarter ended June 30, | | Change % or Points | | Six Months ended June 30, | | Change % or Points | |
($ in thousands) | | 2019 | | 2018 | | | | 2019 | | 2018 | | | 2020 | | 2019 | | | | 2020 | | 2019 | |
Insurance Operations Results: | Insurance Operations Results: | | | | | | | | | | | | | Insurance Operations Results: | | | | | | | | | | | | |
Net premiums written ("NPW") | | $ | 676,928 |
| | 651,668 |
| | 4 |
| % | | $ | 2,051,272 |
| | 1,931,476 |
| | 6 |
| % | | $ | 724,752 |
| | 701,397 |
| | 3 |
| % | | $ | 1,372,079 |
| | 1,374,344 |
| | — |
| % |
Net premiums earned (“NPE”) | | 653,620 |
| | 614,277 |
| | 6 |
| | | 1,928,812 |
| | 1,810,941 |
| | 7 |
| | | 630,671 |
| | 642,619 |
| | (2 | ) | | | 1,282,374 |
| | 1,275,192 |
| | 1 |
| |
Less: | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | |
Loss and loss expense incurred | | 398,675 |
| | 379,199 |
| | 5 |
| | | 1,166,238 |
| | 1,130,468 |
| | 3 |
| | | 403,949 |
| | 380,984 |
| | 6 |
| | | 804,273 |
| | 767,563 |
| | 5 |
| |
Net underwriting expenses incurred | | 222,599 |
| | 199,791 |
| | 11 |
| | 648,693 |
| | 598,437 |
| | 8 |
| | | 216,191 |
| | 215,441 |
| | — |
| | 445,428 |
| | 426,094 |
| | 5 |
| |
Dividends to policyholders | | 1,045 |
| | 2,290 |
| | (54 | ) | | | 4,394 |
| | 6,274 |
| | (30 | ) | | | 658 |
| | 1,569 |
| | (58 | ) | | | 1,443 |
| | 3,349 |
| | (57 | ) | |
Underwriting income | | $ | 31,301 |
| | 32,997 |
| | (5 | ) | % | | $ | 109,487 |
| | 75,762 |
| | 45 |
| % | | $ | 9,873 |
| | 44,625 |
| | (78 | ) | % | | $ | 31,230 |
| | 78,186 |
| | (60 | ) | % |
Combined Ratios: | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | |
Loss and loss expense ratio | | 60.9 |
| % | 61.7 |
| | (0.8 | ) | pts | | 60.5 |
| % | 62.5 |
| | (2.0 | ) | pts | | 64.0 |
| % | 59.4 |
| | 4.6 |
| pts | | 62.8 |
| % | 60.2 |
| | 2.6 |
| pts |
Underwriting expense ratio | | 34.1 |
| | 32.5 |
| | 1.6 |
| | 33.6 |
| | 33.0 |
| | 0.6 |
| | | 34.3 |
| | 33.5 |
| | 0.8 |
| | 34.7 |
| | 33.4 |
| | 1.3 |
| |
Dividends to policyholders ratio | | 0.2 |
| | 0.4 |
| | (0.2 | ) | | | 0.2 |
| | 0.3 |
| | (0.1 | ) | | | 0.1 |
| | 0.2 |
| | (0.1 | ) | | | 0.1 |
| | 0.3 |
| | (0.2 | ) | |
Combined ratio | | 95.2 |
| | 94.6 |
| | 0.6 |
| | | 94.3 |
| | 95.8 |
| | (1.5 | ) | | | 98.4 |
| | 93.1 |
| | 5.3 |
| | | 97.6 |
| | 93.9 |
| | 3.7 |
| |
Our ThirdIn Second Quarter and Nine Months2020, our NPW increased 3% compared to Second Quarter 2019, results continue to reflectreflecting our efforts to: (i) achieve overall renewal pure price increases at levels that are in line with expected loss trend; (ii) generate new business; and (iii) improveincrease retention. This increase was partially offset by a $19.7 million premium credit to our personal ($4.3 million) and commercial ($15.4 million) automobile customers, which were accounted for as a reduction in NPW and reduced the underlying profitability of our business through various underwriting and claims initiatives. We continue to execute on our strategy for disciplinedoverall NPW growth with 4% growthby 3 percentage points. NPW in Third Quarter 2019Six Months 2020 was further impacted by a $75 million accrual for estimated return audit and 6% growthmid-term endorsement premiums, which resulted in Ninerelatively flat NPW in Six Months 2020 compared to Six Months 2019. The premium credit and accrual for estimated return audit and mid-term endorsement premiums are related to the COVID-19 pandemic discussed in "Current Events" above. Although NPW remained flat in Six Months 2020 compared to Six Months 2019, our new business grew to $302.9 million in Six Months 2020 compared to the same prior year periods. This growth was primarily due$291.3 million in Six Months 2019. Contributing to renewal pure price increases andour new business growth in our Standard Commercial Lines. Our growth was aided by the net appointment of 5748 retail agents, excluding agency consolidations.
Loss and Loss Expenses
The decreasesincrease in the loss and loss expense ratio during both periods presented above were drivenSecond Quarter and Six Months 2020 compared to Second Quarter and Six Months 2019 was impacted by the following:
| | | Third Quarter 2019 | | Third Quarter 2018 | | | Second Quarter 2020 | | Second Quarter 2019 | | |
($ 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 | | 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 | $ | 24.2 |
| 3.7 |
| pts | | $ | 28.1 |
| 4.6 |
| pts | (0.9 | ) | pts | $ | 83.2 |
| 13.2 |
| pts | | $ | 29.5 |
| 4.6 |
| pts | 8.6 |
| pts |
(Favorable) prior year casualty reserve development | (14.0 | ) | (2.1 | ) | | (12.0 | ) | (2.0 | ) | | (0.1 | ) | | (15.0 | ) | (2.4 | ) | | (17.0 | ) | (2.6 | ) | | 0.2 |
| |
Non-catastrophe property loss and loss expenses | 108.8 |
| 16.7 |
| | 100.8 |
| 16.4 |
| | 0.3 |
| | 81.8 |
| 13.0 |
| | 92.8 |
| 14.4 |
| | (1.4 | ) | |
Total | 119.0 |
| 18.3 |
| | 116.9 |
| 19.0 |
| | (0.7 | ) | | 150.0 |
| 23.8 |
| | 105.3 |
| 16.4 |
| | 7.4 |
| |
| | | | | | | | | | Six Months 2020 | | Six Months 2019 | | |
| Nine Months 2019 | | Nine Months 2018 | | | |
($ 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 | | 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 | $ | 74.5 |
| 3.9 |
| pts | | $ | 72.9 |
| 4.0 |
| pts | (0.1 | ) | pts | $ | 116.4 |
| 9.1 |
| pts | | $ | 50.3 |
| 3.9 |
| pts | 5.2 |
| pts |
(Favorable) prior year casualty reserve development | (41.0 | ) | (2.1 | ) | | (24.0 | ) | (1.3 | ) | | (0.8 | ) | | (25.0 | ) | (1.9 | ) | | (27.0 | ) | (2.1 | ) | | 0.2 |
| |
Non-catastrophe property loss and loss expenses | 309.6 |
| 16.1 |
| | 310.9 |
| 17.2 |
| | (1.1 | ) | | |
Non-catastrophe property loss and loss expenses1 | | 189.9 |
| 14.8 |
| | 200.8 |
| 15.7 |
| | (0.9 | ) | |
Total | 343.1 |
| 17.9 |
| | 359.8 |
| 19.9 |
| | (2.0 | ) | | 281.3 |
| 22.0 |
| | 224.1 |
| 17.5 |
| | 4.5 |
| |
1Non-catastrophe property loss and loss expenses include an estimate of $10 million in response to the COVID-19 pandemic, which is discussed in "Current Events" above.
Details of the prior year casualty reserve development were as follows: | | (Favorable)/Unfavorable Prior Year Casualty Reserve Development | Quarter ended September 30, | | Nine Months ended September 30, | | Quarter ended June 30, | | Six Months ended June 30, |
($ in millions) | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
General liability | $ | (3.0 | ) | | (8.0 | ) | | (10.0 | ) | | (8.0 | ) | | $ | (10.0 | ) | | (5.0 | ) | | (10.0 | ) | | (7.0 | ) |
Commercial automobile | — |
| | 10.0 |
| | — |
| | 25.0 |
| | 10.0 |
| | — |
| | 10.0 |
| | — |
|
Workers compensation | (13.0 | ) | | (20.0 | ) | | (33.0 | ) | | (53.0 | ) | | (15.0 | ) | | (12.0 | ) | | (25.0 | ) | | (20.0 | ) |
Total Standard Commercial Lines | (16.0 | ) | | (18.0 | ) | | (43.0 | ) | | (36.0 | ) | | (15.0 | ) | | (17.0 | ) | | (25.0 | ) | | (27.0 | ) |
| | | | | | | | | | | | | | | |
Homeowners | — |
| | — |
| | — |
| | — |
| | |
Personal automobile | 2.0 |
| | — |
| | 2.0 |
| | — |
| | |
Total Standard Personal Lines | 2.0 |
| | — |
| | 2.0 |
| | — |
| | |
| | | | | | | | | |
E&S | — |
| | 6.0 |
| | — |
| | 12.0 |
| | |
| | | | | | | | | |
Total (favorable) prior year casualty reserve development | $ | (14.0 | ) | | (12.0 | ) | | (41.0 | ) | | (24.0 | ) | | $ | (15.0 | ) | | (17.0 | ) | | (25.0 | ) | | (27.0 | ) |
| | | | | | | | | | | | | | | |
(Favorable) impact on loss ratio | (2.1 | ) | pts | (2.0 | ) | | (2.1 | ) | | (1.3 | ) | | (2.4 | ) | pts | (2.6 | ) | | (1.9 | ) | | (2.1 | ) |
In addition to the above, the Second Quarter and Six Months 2020 results included a reduction to NPW for the $19.7 million mentioned above, of which there was an offsetting reduction in our casualty loss costs of $13.3 million in both periods. The reduction in our casualty loss costs decreased our loss ratio by 2.4 points in Second Quarter 2020 and 1.1 points in Six Months 2020. These favorable current year loss costs impacted our commercial and personal automobile lines of business, reflecting anticipated decreases in frequencies as a result governmental shelter-in-place directives.
For additional qualitative discussions regarding reserve development discussion, please refer to the insurance segment sections below in "Results of Operations and Related Information by Segment."
Underwriting Expenses
The underwriting expense ratio increased 0.8 points in Second Quarter 2020 and 1.3 points in Six Months 2020, compared to the same prior year periods. The COVID-19 items mentioned above, including the impact of the lower premiums earned, increased the expense ratio by 2.2 points in Second Quarter 2020 and 2.1 points in Six Months 2020. This also included a $3.0 million increase in Second Quarter 2020 and a $13.5 million increase in Six Months 2020 in our allowance for uncollectible accounts on our premiums receivable, which is discussed in "Current Events" above. Partially offsetting the COVID-19-related expense increases were expense management initiatives we instituted in March 2020 to help reduce our other insurance expenses, which are included in net underwriting expenses in the table above, as a result of the shelter-in-place government directives. This included reducing our travel and entertainment expenses, canceling or deferring various agency management meetings and events, deferring some projects until later in 2020, and deferring the expected hiring date of open new hire positions until fourth quarter of 2020. While we view these initiatives as temporary, they provided a modest benefit to the expense ratio in the Second Quarter and Six Months 2020.
Investments Segment
NetDecreased annualized ROE in our Investments segment were driven by after-tax net investment income after tax, grew 6%that decreased 40% in ThirdSecond Quarter 20192020 and 16%17% in NineSix Months 2019,2020, compared to the same prior year periods, principally driven by: (i) cash flows from operations that were 22%mainly due to alternative investment portfolio losses of NPW$16.0 million in Second Quarter 2020 and $9.7 million in Six Months 2020. These losses are recorded on a one-quarter lag, and reflect the market decline in the first quarter and 15% of NPW in the year-to-date period; (ii) $106 million in net proceeds from our 5.375% Senior Notes issuance earlier in 2019; and (iii) alternative investment income that, for Nine Months 2019, was $2.4 million higher than the comparable prior year period. Net investment income, after tax, contributed 8.6 points to ROE in Third Quarter 2019 and 9.1 points in Nine Months 2019, compared to 10.0 points in Third Quarter 2018 and 9.0 points in Nine Months 2018.2020.
Net realized and unrealized gains and losses increased Second Quarter 2020 annualized ROE and reduced Six Months 2020 annualized ROE by 0.5 points in Third Quarter 2019, compared to a reductionthe same prior year periods. During Six Months 2020, net realized and unrealized investment losses were $32.0 million, compared to gains of 0.9 points$17.5 million in Third Quarter 2018. the prior year period. These current year losses were significantly impacted by the COVID-19-related market volatility in the first quarter of 2020, which resulted in higher OTTI expense and unrealized losses on our equity securities portfolio. For additional information about the drivers behind the OTTI expense, see "Critical Accounting Policies and Estimates" above.
Net realized and unrealized investment gains in Second Quarter 2020 were $12.6 million, up $8.6 million from net realized and losses increased ROEunrealized investment gains of $4.0 million in Second Quarter 2019. The increase was driven by 0.8 points in Nine Months 2019, compared to a reduction of 1.0 point in Nine Months 2018. Thean improvement in both periods was primarily driven by a reductionunrealized losses in realized lossesour equity portfolio and the reversal of previously-recognized credit loss allowance amounts on our fixed income securities portfolio, which was driven by less opportunistic sales. During Third Quarter 2019, we sold a significant portion of our public equity securities and generated $21.6 million of realized gains onboth reflecting improvements in the sale, which was principally offset by a $21.4 million reversal of previously-recorded unrealized gains on these securities.market during the quarter.
Other
Our interest and corporate expenses, which are primarily comprised of stock compensation expense at the holding company
level, reduced ROE by 2.2 points in Second Quarter 2020 and 2.1 points and 2.9in Six Months 2020, compared to 2.8 points in ThirdSecond Quarter 2019 and Nine Months 2019, respectively, compared to 2.33.1 points in both Third Quarter and NineSix Months 2018.2019. The quarter-to-date variance wasand year-to-date variances were driven primarily by a 0.4-point and 0.6-point decrease, respectively, in stock compensation expense related to our liability-basedemployee long-term incentive compensation awards, as the stock price decreased 19% through Six Months 2020 compared to a 23% increase in Third QuarterSix Months 2019. In the first quarter of 2019, was less than the increase in Third Quarter 2018, partially offset by a 0.3-point increase in stock compensation expense associated with employee severance-related expenses.
In addition, on March 1, 2019, Selective issued 5.375% Senior Notes with an aggregate principal amount of $300 million, the proceeds of which were used, in part, to redeem our 5.875% Senior Notes with an aggregate principal balance of $185 million that became callable last year. As a result of this redemption, we also incurred after-tax debt retirement costs of $3.3 million whichrelated to our 5.375% Senior Notes issuance that reduced ourthat quarter's ROE by 0.2 points in Nine Months 2019. These costs have been excluded from non-GAAP operating income.0.7 points.
Outlook
We ended 20182019 with record levelsa well-capitalized balance sheet, a high level of capitalembedded profitability within our underwriting and liquidityinvestment portfolios, and our strong Nine Months 2019 results have continuedfinancial strength ratings, which placed us in an excellent position to improve our financial position. Inwithstand the first quarterCOVID-19-related period of 2019, we executed our first institutional public debt offering with the issuance of $300 million aggregate principal amount of 5.375% Senior Notes.economic downturn, market volatility, and heightened uncertainty.
For 2019, we have established aHowever, the impact of COVID-19, an elevated period of catastrophe loss activity in the U.S., and losses within our alternative investments portfolio negatively impacted our results through Six Months 2020. We generated an annualized non-GAAP operating ROE of 6.7% in Six Months 2020, which was 4.3 points below our 2020 target of 11%, and 6.1 points below Six Months 2019. Our 2020 non-GAAP operating ROE target of 12%, which11% is an appropriate return for our shareholders based on our current estimated weighted average cost of capital, the current interest rate environment, and property and casualty insurance market conditions, and have exceededconditions.
During these unprecedented times, we remain focused on our target with 12.3% annualized non-GAAP operating ROE through Nine Months 2019.
Askey strategic initiatives. In 2020, we head into the closing months of 2019, ourwill continue to focus will be on the following areas:areas to maintain our financial position:
AchievingActively managing the investment portfolio to minimize the impact of lower interest rates on after-tax yields while managing credit, duration, and liquidity risk. The sharp decline in the reinvestment rate environment for high-quality fixed income securities will put downward pressure on industry-wide investment portfolio returns and income, forcing the industry to improve its underwriting results to generate adequate returns. We are well positioned with
sophisticated underwriting and pricing tools, and an appropriately priced in-force book of business to continue to generate profitable underwriting results.
Continuing to achieve written renewal pure price increases that meet or exceed expected loss trend and delivering on our strategy for continued disciplined growth. Our Six Month 2020 overall renewal pure pricing was 4.0%. While we continue to navigate a challenging economic environment, we are comfortable with the overall price adequacy of our book of business, obtaining renewal pure price increases that have been in line with expected loss trend. We achieved renewal pure price increases on our overall insurance operations of 3.6% in Nine Months 2019.
Delivering on our strategy for continued disciplined growth,growth. We have consistently maintained a disciplined underwriting appetite over the past decade. In the current economic environment, we continue to work with our agents to provide our policyholders the support they need. Our field-based model, which provides high-touch service to our policyholders and agents for safety management, claims handling, and underwriting, is a clear advantage in the current environment. We will be driven by the addition of new agents,
greater "share of wallet" incontinue working to achieve our existing agents’ offices, and geographic expansion. Our longer-term Standard Commercial Lines target is to attain a 3% market share in the states in which we operate, by appointing distribution partner relationships approximatingpartners representing approximately 25% of their markets and seeking an average "shareshare of wallet"wallet of 12% across the relationships.with these partners. This goal represents an additional premium opportunity in excess of $2.7 billion in our 27 state footprint. In Nine Months 2019, we achieved NPW growth of 6%. Our current agency market share stands at over 20%, and our average "share of wallet" is approximately 8% in our legacy states.
| |
• | Continuing to enhance the customer experience strategy that we have been highlighting over the past few years, including value-added technologies and services such as: (i) our “Selective® Drive” program, which was first introduced to certain commercial automobile policyholders through our distribution partners in the fourth quarter of 2018; (ii) proactive communications in relation to product recalls, possible loss activity, policy changes, and risk management activities; (iii) Security Mentor, a product provided to our customers to better understand and manage cybersecurity risks; (iv) technology usage to reduce claim cycle time, such as SWIFTClaim® fast tracking; and (v) digital self-service capabilities for our customers.
|
Improving profitability in our lines of business by: (i) generating overall renewal pure price increases that are in line with expected loss trend; (ii) actively managing new and renewal books of business in targeted industry segments, which we expect will have a positive impact on profitability through business mix; (iii) deploying sophisticated claims tools, including enhanced modeling and segmentation strategies, which we expect will improve loss experience; and (iv) within our E&S segment, exiting some underperforming classes, while entering into new distribution relationships.about $3 billion.
Actively managing the investment portfolioIdentifying opportunities to enhance after-tax yields while managing credit, duration,operational efficiencies, and liquidityevaluating process improvements by better leveraging technologies, automation, and robotics, to lower our expense ratio over time. While we recognize it is essential to continue investing in initiatives related to our technology platforms, sophisticated underwriting tools, and customer experience, we are committed to balancing these goals with an efficient operating structure. As previously discussed, our expense ratio was elevated in Second Quarter and Six Months 2020 due to COVID-19 impacts, and in the short-term, we have taken actions to reduce our expenses. Over the longer term, we will focus on right-sizing our expense structure to meet the business opportunity set, and we will seek meaningful opportunities to generate efficiencies through process re-design and technological improvements.
risk. There was a significant decline in interest rates in Nine Months 2019, which demonstrates the need
In addition to maintainour focus on maintaining a strong financial position in 2020 and beyond, we continue to enhance our customer experience strategy by offering value-added technologies and services. We have made major strides in recent years to enhance the customer experience, including various self-service and digital service offerings. In the current challenging environment, we provide our policyholders the option of engaging with us in the channel that works best for them. Our marketing tagline, "Be Uniquely Insured," was rolled out in 2019, and speaks to our differentiated value proposition for our customers and distribution partners. Investing in and building out technologies that improve the customer experience journey remains a core focus on underwriting discipline to generate adequate returns on invested capital.for us.
Our agile approach to driving underwriting, pricing and claims improvements is best demonstrated by our combined ratio that has averaged 94.0% since 2014, well ahead of the U.S. property and casualty industry average combined ratio that averaged 99.6% during the same period. Our strong technical and underwriting capabilities, underwriting leverage of 1.4x, and proven track record of effectively managing renewal pricing and retention, position us well for continued success in this low interest rate environment. As we look to the remainder of 2019,2020, we remain pleased withwill not let the COVID-19 pandemic, market volatility, or challenging economic conditions deter us from pursuing our financialobjective of being an industry leader. We have a team in place that is focused on identifying opportunities and strategic position. Our steadfast focus on underwriting discipline, combined with the investmentsways in which we are making today incan enhance our franchise distribution model, sophisticated underwriting toolsproduct, service capabilities, and technology, and overall customer experience in an omni-channel environment, willoperating structure
to position us well for continued long-term success.the post-COVID environment. We will continue to strive to offer best-in-class customer service and product offerings, while also generating superior returns for our shareholders over time.
For 2019, Conning, Inc.'s ("Conning") third quarter 2019 "Property-Casualty Forecast & Analysis" forecasts a property and casualty insurance industry statutory combined ratio2020, our revised full year guidance, which reflects the current estimated full-year impact of 96.7%, with a return on equity of 8.5%. This suggests an operating return on equity of approximately 7.5%, after excluding Conning's forecasted after-tax realized gains. We feel positive about the overall environment, and believe our major initiatives highlighted above set the stage for continued financial outperformance.
After three quarters of results, our full-year expectations areCOVID-19, is as follows:
A GAAP combined ratio, excluding catastrophe losses, of 91.0%between 90% and 91%. This represents an improvement from our first quarter of 2020 guidance, which was between 92% and 93%. Our combined ratio estimate assumes no fourth quarteradditional prior-year casualty reserve development;
development in the second half of the year;
Catastrophe losses of 3.5 points;
6.0 points on the combined ratio, reflecting higher than expected losses through the first half of the year. As COVID-19 has not been designated a catastrophe event by the Insurance Services Office's Property Claims Services unit, such losses are not included in this ratio;
After-tax net investment income of $180approximately $170 million, which includes $14a $10 million improvement from our first quarter of 2020 guidance of $160 million. We now expect up to $5 million in after-tax net investment income from our alternative investments;
An overall effective tax rate of approximately 19%18.5%, which includes an effective tax rate of 18.5% for net investment income, reflecting a tax rate of 5.25% for tax-advantaged municipal bonds and a tax rate of 21% for all other items; and
Weighted average shares of 6060.5 million on a diluted basis.
Our 2020 guidance reflects the estimated full-year impact of COVID-19 on our underwriting results. Our guidance this year has a higher degree of uncertainty than prior years due to the dynamic and fluid nature of the impact of the COVID-19 pandemic on the United States economy, our business and our operations.
Results of Operations and Related Information by Segment
Standard Commercial Lines Segment
| | | | Quarter ended September 30, | | Change % or Points | | | Nine Months ended September 30, | | Change % or Points | | | Quarter ended June 30, | | Change % or Points | | | Six Months ended June 30, | | Change % or Points | |
($ in thousands) | | 2019 | | 2018 | | | | 2019 | | 2018 | | | 2020 | | 2019 | | | | 2020 | | 2019 | |
Insurance Segments Results: | | |
| | |
| | |
| | | | | | | | | | |
| | |
| | |
| | | | | | | | |
NPW | | $ | 532,921 |
| | 502,312 |
| | 6 |
| % | | $ | 1,636,983 |
| | 1,526,318 |
| | 7 |
| % | | $ | 583,342 |
| | 557,379 |
| | 5 |
| % | | $ | 1,101,774 |
| | 1,104,062 |
| | — |
| % |
NPE | | 515,161 |
| | 481,056 |
| | 7 |
| | | 1,518,994 |
| | 1,422,432 |
| | 7 |
| | | 501,004 |
| | 506,649 |
| | (1 | ) | | | 1,017,584 |
| | 1,003,833 |
| | 1 |
| |
Less: | | | | |
| | |
| | | | | | | | | | | | |
| | |
| | | | | | | | |
Loss and loss expense incurred | | 304,038 |
| | 291,110 |
| | 4 |
| | | 895,999 |
| | 858,550 |
| | 4 |
| | | 307,037 |
| | 293,152 |
| | 5 |
| | | 619,195 |
| | 591,961 |
| | 5 |
| |
Net underwriting expenses incurred | | 180,062 |
| | 161,323 |
| | 12 |
| | | 525,627 |
| | 483,455 |
| | 9 |
| | | 176,579 |
| | 174,785 |
| | 1 |
| | | 363,090 |
| | 345,565 |
| | 5 |
| |
Dividends to policyholders | | 1,045 |
| | 2,290 |
| | (54 | ) | | | 4,394 |
| | 6,274 |
| | (30 | ) | | | 658 |
| | 1,569 |
| | (58 | ) | | | 1,443 |
| | 3,349 |
| | (57 | ) | |
Underwriting income | | $ | 30,016 |
| | 26,333 |
| | 14 |
| % | | $ | 92,974 |
| | 74,153 |
| | 25 |
| % | | $ | 16,730 |
| | 37,143 |
| | (55 | ) | % | | $ | 33,856 |
| | 62,958 |
| | (46 | ) | % |
Combined Ratios: | | |
| | |
| | |
| | | | | | | | | | |
| | |
| | |
| | | | | | | | |
Loss and loss expense ratio | | 59.0 |
| % | 60.5 |
| | (1.5 | ) | pts | | 59.0 |
| % | 60.4 |
| | (1.4 | ) | pts | | 61.4 |
| % | 57.9 |
| | 3.5 |
| pts | | 60.9 |
| % | 59.0 |
| | 1.9 |
| pts |
Underwriting expense ratio | | 35.0 |
| | 33.5 |
| | 1.5 |
| | | 34.6 |
| | 34.0 |
| | 0.6 |
| | | 35.2 |
| | 34.5 |
| | 0.7 |
| | | 35.7 |
| | 34.4 |
| | 1.3 |
| |
Dividends to policyholders ratio | | 0.2 |
| | 0.5 |
| | (0.3 | ) | | | 0.3 |
| | 0.4 |
| | (0.1 | ) | | | 0.1 |
| | 0.3 |
| | (0.2 | ) | | | 0.1 |
| | 0.3 |
| | (0.2 | ) | |
Combined ratio | | 94.2 |
| | 94.5 |
| | (0.3 | ) | | | 93.9 |
| | 94.8 |
| | (0.9 | ) | | | 96.7 |
| | 92.7 |
| | 4.0 |
| | | 96.7 |
| | 93.7 |
| | 3.0 |
| |
The increasesincrease in NPW for the quarter-to-date period was driven by: (i) renewal pure price increases; and (ii) retention, as shown in the quartertable below. In the year-to-date period, the higher retention and renewal pure price increases shown in the table below were offset by a $75 million return audit and mid-term endorsement premium accrual related to the COVID-19 pandemic discussed in "Current Events" above, of which $46 million was recorded in our general liability line of business and $29 million was recorded in our workers compensation line of business. The quarter-to-date and year-to-date periods reflectedalso include a $15.4 million premium credit to our commercial automobile customers as a result of the COVID-19 pandemic. These premium items reduced the NPW growth rate by 2 percentage points in Second Quarter 2020 and 8 percentage points in Six Months 2020 compared to the table above were driven by: (i) direct new business;prior year periods. These items also impacted NPE as the premium audit accrual reduced NPE by $30.4 million in Second Quarter 2020 and (ii) renewal pure price increases.$46.9 million in Six Months 2020, and the $15.4 million premium credit to our commercial automobile customers was fully earned in Second Quarter and Six Months 2020.
| | | | Quarter ended September 30, | | Change % or Points | | Nine Months ended September 30, | Change % or Points | | | Quarter ended June 30, | | Change % or Points | | Six Months ended June 30, | Change % or Points | |
($ in millions) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Direct new business | | $ | 96.5 |
| | 90.4 |
| | 7 |
| % | | 316.2 |
| | 289.5 |
| 9 |
| % | | $ | 109.9 |
| | 110.7 |
| | (1 | ) | % | | 225.3 |
| | 219.7 |
| 3 | % |
Retention | | | 86 |
| % | 83 |
| | 3 |
| pts | | 85 | % | | 83 |
| 2 | pts |
Renewal pure price increases | | 3.5 |
| | 3.7 |
| | (0.2 | ) | | 3.3 |
| | 3.5 |
| (0.2 | ) | | | 3.9 |
| | 3.1 |
| | 0.8 |
| | 4.0 |
| | 3.2 |
| 0.8 | |
Retention | | 84 |
| % | 84 |
| | — |
| pts | | 83 | % | | 83 |
| — |
| pts | |
The loss and loss expense ratio decreased 1.5increased 3.5 points in ThirdSecond Quarter 20192020 and 1.9 points in Six Months 2020 compared to Third Quarter 2018, and decreased 1.4 pointsthe respective prior year periods, driven, in Nine Months 2019 compared to Nine Months 2018, and were drivenpart, by the following:
|
| | | | | | | | | | | | | | | | |
| Third Quarter 2019 | | Third Quarter 2018 | | |
($ 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 | $ | 14.8 |
| 2.9 |
| pts | | $ | 22.1 |
| 4.6 |
| pts | (1.7 | ) | pts |
Non-catastrophe property loss and loss expenses | 76.7 |
| 14.9 |
| | | 67.1 |
| 13.9 |
| | 1.0 |
| |
(Favorable) prior year casualty reserve development | (16.0 | ) | (3.1 | ) | | | (18.0 | ) | (3.7 | ) | | 0.6 |
| |
Total | 75.5 |
| 14.7 |
| | | 71.2 |
| 14.8 |
| | (0.1 | ) | |
| | | | | | | | | |
| Nine Months 2019 | | Nine Months 2018 | | |
($ 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 | $ | 52.1 |
| 3.4 |
| pts | | $ | 52.0 |
| 3.7 |
| pts | (0.3 | ) | pts |
Non-catastrophe property loss and loss expenses | 213.8 |
| 14.1 |
| | | 208.3 |
| 14.6 |
| | (0.5 | ) | |
(Favorable) prior year casualty reserve development | (43.0 | ) | (2.8 | ) | | | (36.0 | ) | (2.5 | ) | | (0.3 | ) | |
Total | 222.9 |
| 14.7 |
| | | 224.3 |
| 15.8 |
| | (1.1 | ) | |
In addition to the items described above, during the quarter there was a 1.1-point improvement in current year loss costs. This improvement reflects the impact of elevated frequencies we experienced during Third Quarter 2018 related to the then current accident year. |
| | | | | | | | | | | | | | | | |
| Second Quarter 2020 | | Second Quarter 2019 | | |
($ 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 | $ | 50.7 |
| 10.1 |
| pts | | $ | 21.3 |
| 4.2 |
| pts | 5.9 |
| pts |
Non-catastrophe property loss and loss expenses | 60.9 |
| 12.2 |
| | | 62.8 |
| 12.4 |
| | (0.2 | ) | |
(Favorable) prior year casualty reserve development | (15.0 | ) | (3.0 | ) | | | (17.0 | ) | (3.4 | ) | | 0.4 |
| |
Total | 96.6 |
| 19.3 |
| | | 67.1 |
| 13.2 |
| | 6.1 |
| |
| | | | | | | | | |
| Six Months 2020 | | Six Months 2019 | | |
($ 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 | $ | 71.4 |
| 7.0 |
| pts | | $ | 37.3 |
| 3.7 |
| pts | 3.3 |
| pts |
Non-catastrophe property loss and loss expenses | 140.5 |
| 13.8 |
| | | 137.1 |
| 13.7 |
| | 0.1 |
| |
(Favorable) prior year casualty reserve development | (25.0 | ) | (2.5 | ) | | | (27.0 | ) | (2.7 | ) | | 0.2 |
| |
Total | 186.9 |
| 18.3 |
| | | 147.4 |
| 14.7 |
| | 3.6 |
| |
For additional information regarding favorable prior year casualty reserve development by line of business,the amounts in the table above, see the "Financial Highlights of Results for ThirdSecond Quarter and NineSix Months 20192020 and ThirdSecond Quarter and NineSix Months 2018" section2019" above and the line of business discussions below.
There
In addition to the above, the Second Quarter and Six Months 2020 results included a reduction to NPW for the $15.4 million premium credit to our commercial automobile customers mentioned above, of which there was an offsetting reduction in our casualty loss costs of $10.8 million in both periods. This reduction in our casualty loss costs decreased our loss ratio by 2.5 points in Second Quarter 2020 and 1.1 points in Six Months 2020. As discussed in the "Current Events" section above, the automobile premium credit was income neutral with the remaining offset reflected in lower non-catastrophe property losses, as shown in the table above. These favorable current year loss costs impacted our commercial automobile line of business, reflecting anticipated decreases in frequencies as a 1.5-pointresult of governmental shelter-in-place directives.
The 0.7-point and 1.3-point increase in the underwriting expense ratio in ThirdSecond Quarter 2020 and Six Months 2020 compared to Second Quarter 2019 compared to Thirdand Six Months 2019 was primarily driven by a 0.8-point increase in Second Quarter 2018,2020 and a 0.6-point1.1-point increase in the underwriting expense ratio in NineSix Months 2019 compared to Nine Months 2018. The primary driver was increased profit-based expenses to our distribution partners and employees of 0.6 points2020 in the quarter and 0.4 pointsallowance for uncollectible premium receivable mentioned in the year-to-date period."Current Events" above.
The following is a discussion of our most significant Standard Commercial Lines of business:
| | General Liability | General Liability | | | | | | | | General Liability | | | | | | | |
| | Quarter ended September 30, | | Change % or Points | | Nine Months ended September 30, | | Change % or Points | | | Quarter ended June 30, | | Change % or Points | | Six Months ended June 30, | | Change % or Points | |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | | 2020 | | 2019 | | 2020 | | 2019 | |
NPW | | $ | 172,471 |
| | 160,105 |
| | 8 |
| % | | $ | 536,448 |
| | 494,984 |
| | 8 |
| % | | $ | 200,917 |
| | 185,278 |
| | 8 |
| % | | $ | 351,711 |
| | 363,977 |
| | (3 | ) | % |
Direct new business | | 27,788 |
| | 26,768 |
| | 4 |
| | 92,288 |
| | 86,210 |
| | 7 |
| | | 31,468 |
| | 32,314 |
| | (3 | ) | | 67,354 |
| | 64,499 |
| | 4 |
| |
Retention | | 85 |
| % | 85 |
| | — |
| pts | | 83 |
| % | 84 |
| | (1 | ) | pts | | 87 |
| % | 84 |
| | 3 |
| pts | | 86 |
| % | 83 |
| | 3 |
| pts |
Renewal pure price increases | | 3.3 |
| | 2.9 |
| | 0.4 |
| | 2.7 |
| | 2.7 |
| | — |
| | | 3.8 |
| | 2.3 |
| | 1.5 |
| | 3.8 |
| | 2.4 |
| | 1.4 |
| |
NPE | | $ | 169,084 |
| | 154,974 |
| | 9 |
| % | | $ | 495,402 |
| | 457,805 |
| | 8 |
| % | | $ | 163,273 |
| | 164,793 |
| | (1 | ) | % | | $ | 327,853 |
| | 326,318 |
| | — |
| % |
Underwriting income | | 22,399 |
| | 24,374 |
| | (8 | ) | | 62,232 |
| | 54,074 |
| | 15 |
| | | 25,108 |
| | 20,784 |
| | 21 |
| | 38,182 |
| | 39,833 |
| | (4 | ) | |
Combined ratio | | 86.8 |
| % | 84.3 |
| | 2.5 |
| pts | | 87.4 |
| % | 88.2 | % | | (0.8 | ) | pts | | 84.6 |
| % | 87.4 |
| | (2.8 | ) | pts | | 88.4 |
| % | 87.8 | % | | 0.6 |
| pts |
% of total Standard Commercial Lines NPW | | 32 |
| | 32 |
| | |
| | 33 |
| | 32 |
| |
|
| | | 34 |
| | 33 |
| | |
| | 32 |
| | 33 |
| |
|
| |
Six Months 2020 NPW was reduced by a $46 million estimated return audit and mid-term endorsement premium accrual due to the COVID-19 pandemic discussed in "Current Events" above and reduced the NPW growth rate by 12 percentage points in Six Months 2020 compared to Six Months 2019. This accrual also reduced NPE by $19 million in Second Quarter 2020 and $29 million in Six Months 2020.
The fluctuations in the combined ratios illustrated in the table above included the following:
| |
| Third Quarter 2019 | Third Quarter 2018 |
|
| Second Quarter 2020 | Second Quarter 2019 |
|
|
($ in millions) | Loss and Loss Expense Incurred | Impact on Combined Ratio |
| Loss and Loss Expense Incurred | 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 | $ | (3.0 | ) | (1.8 | ) | pts | $ | (8.0 | ) | (5.2 | ) | pts | 3.4 |
| pts | $ | (10.0 | ) | (6.1 | ) | pts | $ | (5.0 | ) | (3.0 | ) | pts | (3.1 | ) | pts |
| | | | | | | | | | | | | | | | |
| Nine Months 2019 | Nine Months 2018 | | | | | | | | | | |
| | Six Months 2020 | Six Months 2019 | | |
($ in millions) | Loss and Loss Expense Incurred | Impact on Combined Ratio | | Loss and Loss Expense Incurred | 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 | $ | (10.0 | ) | (2.0 | ) | pts | $ | (8.0 | ) | (1.7 | ) | pts | (0.3 | ) | pts | $ | (10.0 | ) | (3.1 | ) | pts | $ | (7.0 | ) | (2.1 | ) | pts | (1.0 | ) | pts |
The ThirdSecond Quarter and NineSix Months 2020 reserve development was primarily attributable to favorable reserve development on loss severities in accident years 2016 and prior. The Second Quarter and Six Months 2019 reserve development was primarily attributable to favorable reserve development on loss severities in accident years 2015 through 2017. The Third Quarter and Nine Months 2018 reserve development was primarily attributable to favorable reserve development on loss adjustment expenses in accident years 2014 through 2017.2016.
In addition, the combined ratio increased in Six Months 2020 compared to Six Months 2019 due to an increase in the underwriting expense ratio from a 1.2-point increase in the allowance for uncollectible premiums receivable, which more than offset the favorable prior year casualty development discussed above.
| | Commercial Automobile | Commercial Automobile | | | | | | | | Commercial Automobile | | | | | | | |
| | Quarter ended September 30, | | Change % or Points | | Nine Months ended September 30, | | Change % or Points | | | Quarter ended June 30, | | Change % or Points | | Six Months ended June 30, | | Change % or Points | |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | | 2020 | | 2019 | | 2020 | | 2019 | |
NPW | | $ | 150,765 |
| | 135,579 |
| | 11 |
| % | | $ | 453,201 |
| | 399,506 |
| | 13 |
| % | | $ | 160,697 |
| | 155,191 |
| | 4 |
| % | | $ | 329,007 |
| | 302,436 |
| | 9 |
| % |
Direct new business | | 24,096 |
| | 23,363 |
| | 3 |
| | 80,840 |
| | 70,668 |
| | 14 |
| | | 32,143 |
| | 28,554 |
| | 13 |
| | 61,000 |
| | 56,744 |
| | 8 |
| |
Retention | | 85 |
| % | 82 |
| | 3 |
| pts | | 82 |
| % | 83 |
| | (1 | ) | pts | | 86 |
| % | 82 |
| | 4 |
| pts | | 86 |
| % | 81 |
| | 5 |
| pts |
Renewal pure price increases | | 7.5 |
| | 7.5 |
| | — |
| | 7.4 |
| | 7.4 |
| | — |
| | | 7.6 |
| | 7.4 |
| | 0.2 |
| | 7.6 |
| | 7.3 |
| | 0.3 |
| |
NPE | | $ | 141,182 |
| | 124,862 |
| | 13 |
| % | | $ | 408,706 |
| | 365,197 |
| | 12 |
| % | | $ | 138,535 |
| | 136,338 |
| | 2 |
| % | | $ | 288,225 |
| | 267,524 |
| | 8 |
| % |
Underwriting loss | | (11,398 | ) | | (22,785 | ) | | 50 |
| | (28,919 | ) | | (46,922 | ) | | 38 |
| | | (7,706 | ) | | (8,800 | ) | | 12 |
| | (8,480 | ) | | (17,521 | ) | | 52 |
| |
Combined ratio | | 108.1 |
| % | 118.2 |
| | (10.1 | ) | pts | | 107.1 |
| % | 112.8 |
| | (5.7 | ) | pts | | 105.6 |
| % | 106.5 |
| | (0.9 | ) | pts | | 102.9 |
| % | 106.5 |
| | (3.6 | ) | pts |
% of total Standard Commercial Lines NPW | | 28 |
| | 27 |
| | |
| | 28 |
| | 26 |
| | |
| | | 28 |
| | 28 |
| | |
| | 30 |
| | 27 |
| | |
| |
The increases in NPW shown in the table above reflect renewal pure price increases, on this line, coupled withhigher retention, and an increase in new business as we continue to write commercial automobile policies as part of our overall customer accounts.business. The growth in NPW also reflects (i) 6% growth of 13% in Nine Months 2019in-force vehicle counts as of June 30, 2020 compared to Nine Months 2018 reflects an 8% growth in vehicle countsJune 30, 2019, and a 7.4%(ii)7.6% renewal pure price increase, reflectingincreases for both Second Quarter and Six Months 2020, due to our efforts to improve profitability on this line by actively implementing price increases in recent years. These increases were partially offset by a $15.4 million premium credit to our commercial automobile customers as a result of the COVID-19 pandemic, which reduced the NPW growth rate by 10 percentage points in Second Quarter 2020 and 5 percentage points in Six Months 2020 compared to the same prior year periods. This premium credit was fully earned in Second Quarter and Six Months 2020.
The combined ratio improvements outlined above were driven by the following:
| | | Third Quarter 2019 | | Third Quarter 2018 | | | Second Quarter 2020 | | Second Quarter 2019 | | | |
($ in millions) | Loss and Loss Expense Incurred | Impact on Combined Ratio | | Loss and Loss Expense Incurred | Impact on Combined 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 | |
Catastrophe losses | | $ | 1.1 |
| 0.8 | pts | | $ | 0.9 |
| 0.7 | pts | | 0.1 |
| pts |
Non-catastrophe property loss and loss expenses | $ | 26.5 |
| 18.8 |
| pts | | $ | 21.9 |
| 17.6 |
| pts | 1.2 |
| pts | 17.1 |
| 12.3 | | 23.9 |
| 17.5 | | (5.2 | ) | |
Unfavorable prior year casualty reserve development | — |
| — |
| | 10.0 |
| 8.0 |
| | (8.0 | ) | | 10.0 |
| 7.2 | | — |
| — | | 7.2 |
| |
Catastrophe losses | 1.2 |
| 0.9 |
| | 0.4 |
| 0.3 |
| | 0.6 |
| | |
Total | 27.7 |
| 19.7 |
| | 32.3 |
| 25.9 |
| | (6.2 | ) | | 28.2 |
| 20.3 | | 24.8 |
| 18.2 | | 2.1 |
| |
| | | Nine Months 2019 | | Nine Months 2018 | | | Six Months 2020 | | Six Months 2019 | | | |
($ in millions) | Loss and Loss Expense Incurred | Impact on Combined Ratio | | Loss and Loss Expense Incurred | Impact on Combined 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 | |
Catastrophe losses | | $ | 1.4 |
| 0.5 | pts | | $ | 1.1 |
| 0.4 | pts | | 0.1 |
| pts |
Non-catastrophe property loss and loss expenses | $ | 75.5 |
| 18.5 |
| pts | | $ | 65.6 |
| 18.0 |
| pts | 0.5 |
| pts | 40.1 |
| 13.9 | | 48.9 |
| 18.3 | | (4.4 | ) | |
Unfavorable prior year casualty reserve development | — |
| — |
| | 25.0 |
| 6.8 |
| | (6.8 | ) | | 10.0 |
| 3.5 | | — |
| — | | 3.5 |
| |
Catastrophe losses | 2.3 |
| 0.6 |
| | 1.9 |
| 0.5 |
| | 0.1 |
| | |
Total | 77.8 |
| 19.1 |
| | 92.5 |
| 25.3 |
| | (6.2 | ) | | 51.5 |
| 17.9 | | 50.0 |
| 18.7 | | (0.8 | ) | |
OurThe Second Quarter and Six Months 2020 results included a reduction to NPW for the $15.4 million premium credit to our commercial automobile customers mentioned above, of which there was an offsetting reduction in our casualty loss costs of $10.8 million in both periods This reduction in our casualty loss costs decreased our loss ratio by 7.8 points in Second Quarter 2020 and 3.7 points in Six Months 2020. As discussed in the "Current Events" section above, the automobile premium credit was income neutral with the remaining offset reflected in lower non-catastrophe property losses, as reflected in the table above. These favorable current year loss costs impacted our commercial automobile line of business, has not experiencedreflecting anticipated decreases in frequencies as a result of governmental shelter-in-place directives.
The Second Quarter and Six Months 2020 prior year casualty reserve development in 2019. The unfavorable development in Third Quarter 2018 and Nine Months 2018 was primarily dueattributable to higher claim frequencies, and to some extentunfavorable reserve development on loss severities in accident years 20152016 through 2017.2019, and higher than expected frequencies in accident year 2019.
In addition to the items above, the combined ratios were impacted by a 0.7-point increase in Second Quarter 2020 and a 1.2-point increase in Six Months 2020, compared to the same prior year periods, in the allowance for uncollectible premium receivable due to the COVID-19 pandemic discussed in "Current Events" above.
This line of business remains an area of focus for both us and the industry, as profitability challenges continue to generate combined ratios that are higher than target levels.our risk-adjusted targeted combined ratio. To address profitability in this line, we have been actively implementing price increases which averaged 7.4% for Nine Months 2019. In additionin recent years while working to price increases, weenhance our underwriting tools to improve the accuracy of our rating information to prevent premium leakage. We have also been actively managing our new and renewal business, which we expect will have a positive impact on profitability through business mix improvement. Over the longer term, we expect accounts that adopt our recently introduced Selective® Drive program will have greater insight to their commercial auto risks and have the potential to reduce their loss experience.
| | Workers Compensation | Workers Compensation | | | | | | | | Workers Compensation | | | | | | | |
| | Quarter ended September 30, | | Change % or Points | | Nine Months ended September 30, | | Change % or Points | | | Quarter ended June 30, | | Change % or Points | | Six Months ended June 30, | | Change % or Points | |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | | 2020 | | 2019 | | 2020 | | 2019 | |
NPW | | $ | 71,534 |
| | 77,827 |
| | (8 | ) | % | | $ | 238,037 |
| | 248,728 |
| | (4 | ) | % | | $ | 74,984 |
| | 81,438 |
| | (8 | ) | % | | $ | 126,180 |
| | 166,503 |
| | (24 | ) | % |
Direct new business | | 12,025 |
| | 12,582 |
| | (4 | ) | | 46,765 |
| | 46,000 |
| | 2 |
| | | 12,612 |
| | 17,791 |
| | (29 | ) | | 27,969 |
| | 34,739 |
| | (19 | ) | |
Retention | | 84 |
| % | 84 |
| | — |
| pts | | 83 |
| % | 84 |
| | (1 | ) | pts | | 85 |
| % | 83 |
| | 2 |
| pts | | 84 |
| % | 83 |
| | 1 |
| pts |
Renewal pure price (decreases) increases | | (2.7 | ) | | — |
| | (2.7 | ) | | (2.8 | ) | | 0.1 |
| | (2.9 | ) | | |
Renewal pure price decreases | | | (2.9 | ) | | (3.9 | ) | | 1.0 |
| | (2.7 | ) | | (2.8 | ) | | 0.1 |
| |
NPE | | $ | 75,478 |
| | 78,784 |
| | (4 | ) | % | | $ | 232,657 |
| | 237,628 |
| | (2 | ) | % | | $ | 61,906 |
| | 78,464 |
| | (21 | ) | % | | $ | 128,612 |
| | 157,179 |
| | (18 | ) | % |
Underwriting income | | 17,333 |
| | 23,380 |
| | (26 | ) | | 42,566 |
| | 61,601 |
| | (31 | ) | | | 15,720 |
| | 14,514 |
| | 8 |
| | 26,755 |
| | 25,233 |
| | 6 |
| |
Combined ratio | | 77.0 |
| % | 70.3 |
| | 6.7 |
| pts | | 81.7 |
| % | 74.1 |
| | 7.6 |
| pts | | 74.6 |
| % | 81.5 |
| | (6.9 | ) | pts | | 79.2 |
| % | 83.9 |
| | (4.7 | ) | pts |
% of total Standard Commercial Lines NPW | | 13 |
| | 16 |
| | |
| | 15 |
| | 16 |
| | | | | 13 |
| | 15 |
| | |
| | 11 |
| | 15 |
| | | |
In addition to the drivers in the table above, Six Months 2020 NPW was reduced by a $29 million estimated return audit and mid-term endorsement premium accrual due to the COVID-19 pandemic discussed in "Current Events" above and contributed 17 percentage points to the decline in NPW in Six Months 2020 compared to Six Months 2019. This accrual also reduced NPE by $12 million in Second Quarter 2020 and $18 million in Six Months 2020.
The increasesdecrease in the combined ratio in ThirdSecond Quarter and NineSix Months 20192020 compared to the same prior year periods werewas primarily driven by less favorable prior year casualty reserve development, as follows:
| | | Third Quarter 2019 | Third Quarter 2018 | | Second Quarter 2020 | Second Quarter 2019 | | | |
($ in millions) | Loss and Loss Expense Incurred | Impact on Combined Ratio | | Loss and Loss Expense Incurred | 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 | $ | (13.0 | ) | (17.2 | ) | pts | $ | (20.0 | ) | (25.4 | ) | pts | 8.2 | pts | $ | (15.0 | ) | (24.2 | ) | pts | $ | (12.0 | ) | (15.3 | ) | pts | | (8.9 | ) | pts |
| | | | | | | | | | | | | | |
| Nine Months 2019 | Nine Months 2018 | | | | | | | | | |
| | Six Months 2020 | Six Months 2019 | | | |
($ in millions) | Loss and Loss Expense Incurred | Impact on Combined Ratio | | Loss and Loss Expense Incurred | 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 | $ | (33.0 | ) | (14.2 | ) | pts | $ | (53.0 | ) | (22.3 | ) | pts | 8.1 | pts | $ | (25.0 | ) | (19.4 | ) | pts | $ | (20.0 | ) | (12.7 | ) | pts | | (6.7 | ) | pts |
The development in both ThirdSecond Quarter and NineSix Months 2020 was primarily due to lower severities in accident years 2017 and prior. The development in Second Quarter and Six Months 2019 was primarily due to lower severities in accident years 2017 and prior, and the development in both Third Quarter and Nine Months 2018 was primarily due to lower severities in accident years 2016 and prior.
While reported profitability on this line remains strongIn addition to the items in the tables above, the combined ratios were impacted by a 0.8-point increase in Second Quarter 2020 and 0.9-point increase in Six Months 2020, compared to the same prior year periods, in the allowance for uncollectible premium receivable due to favorable emergence on prior year reserves, current accident year margins do not support the continued negative pricing levels that are being set by the National Council on Compensation Insurance and independent state rating bureaus. A reduction or reversalCOVID-19 pandemic discussed in the trend of favorable frequencies and severities has the potential to significantly increase this line's combined ratio, which we are monitoring closely.
"Current Events" above.
| | Commercial Property | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter ended September 30, | | Change % or Points | | Nine Months ended September 30, | | Change % or Points | | | Quarter ended June 30, | | Change % or Points | | Six Months ended June 30, | | Change % or Points | |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | | 2020 | | 2019 | | 2020 | | 2019 | |
NPW | | $ | 97,393 |
| | 89,737 |
| | 9 |
| % | | $ | 284,861 |
| | 263,318 |
| | 8 |
| % | | $ | 104,060 |
| | 94,439 |
| | 10 |
| % | | $ | 207,186 |
| | 187,468 |
| | 11 |
| % |
Direct new business | | 22,527 |
| | 18,073 |
| | 25 |
| | 64,960 |
| | 57,485 |
| | 13 |
| | | 23,858 |
| | 21,391 |
| | 12 |
| | 48,444 |
| | 42,433 |
| | 14 |
| |
Retention | | 83 |
| % | 83 |
| | — |
| pts | | 82 |
| % | 82 |
| | — |
| pts | | 84 |
| % | 83 |
| | 1 |
| pts | | 84 |
| % | 82 |
| | 2 |
| pts |
Renewal pure price increases | | 2.8 |
| | 3.3 |
| | (0.5 | ) | | 3.3 |
| | 3.1 |
| | 0.2 |
| | | 3.9 |
| | 3.6 |
| | 0.3 |
| | 4.0 |
| | 3.6 |
| | 0.4 |
| |
NPE | | $ | 89,215 |
| | 83,056 |
| | 7 |
| % | | $ | 262,418 |
| | 245,544 |
| | 7 |
| % | | $ | 95,413 |
| | 87,136 |
| | 9 |
| % | | $ | 189,282 |
| | 173,203 |
| | 9 |
| % |
Underwriting (loss) income | | (409 | ) | | (6,768 | ) | | (94 | ) | | 2,866 |
| | (9,266 | ) | | 131 |
| | | (14,339 | ) | | 1,372 |
| | (1,145 | ) | | (22,891 | ) | | 3,275 |
| | (799 | ) | |
Combined ratio | | 100.5 |
| % | 108.1 |
| | (7.6 | ) | pts | | 98.9 |
| % | 103.8 |
| | (4.9 | ) | pts | | 115.0 |
| % | 98.4 |
| | 16.6 |
| pts | | 112.1 |
| % | 98.1 |
| | 14.0 |
| pts |
% of total Standard Commercial Lines NPW | | 18 |
| | 18 |
| | |
| | 17 |
| | 17 |
| | | | | 18 |
| | 17 |
| | |
| | 19 |
| | 17 |
| | | |
The decreaseincrease in the combined ratio in ThirdSecond Quarter 2019and Six Months 2020 compared to ThirdSecond Quarter 2018, and the decrease in the combined ratio in NineSix Months 2019 compared to Nine Months 2018, werewas driven by the following:
| |
| Third Quarter 2019 |
| Third Quarter 2018 |
|
| Second Quarter 2020 |
| Second Quarter 2019 | |
|
($ in millions) | Loss and Loss Expense Incurred | Impact on Combined Ratio |
| Loss and Loss Expense Incurred | 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 | $ | 12.4 |
| 13.9 | pts |
| $ | 20.1 |
| 24.2 | pts | (10.3 | ) | pts | $ | 35.3 |
| 37.0 | pts |
| $ | 18.7 |
| 21.5 | pts | | 15.5 | pts |
Non-catastrophe property loss and loss expenses | 41.5 |
| 46.5 |
| 38.1 |
| 45.9 |
| 0.6 |
|
| 38.3 |
| 40.1 |
| 34.0 |
| 39.0 |
| | 1.1 |
|
Total | 53.9 |
| 60.4 | | 58.2 |
| 70.1 | | (9.7 | ) | | 73.6 |
| 77.1 | | 52.7 |
| 60.5 | | 16.6 | |
| | | | | | | | | | |
| Nine Months 2019 | | Nine Months 2018 | | | | | | |
| | Six Months 2020 | | Six Months 2019 | |
($ in millions) | Loss and Loss Expense Incurred | Impact on Combined Ratio | | Loss and Loss Expense Incurred | 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 | $ | 43.6 |
| 16.6 | pts | | $ | 42.6 |
| 17.4 | pts | (0.8 | ) | pts | $ | 55.0 |
| 29.0 | pts | | $ | 31.2 |
| 18.0 | pts | | 11.0 | pts |
Non-catastrophe property loss and loss expenses | 114.6 |
| 43.7 | | 118.7 |
| 48.3 | | (4.6 | ) | | |
Non-catastrophe property loss and loss expenses1 | | 83.9 |
| 44.3 | | 73.1 |
| 42.2 | | 2.1 | |
Total | 158.2 |
| 60.3 | | 161.3 |
| 65.7 | | (5.4 | ) | | 138.9 |
| 73.3 | | 104.3 |
| 60.2 | | | 13.1 | |
Lower catastrophe losses in Third Quarter 2019 compared to Third Quarter 2018 was driven by the impact of Hurricane Florence in September 2018. On a year-to-date basis, non-catastrophe1Non-catastrophe property loss and loss expenses were lowerfor Six Months 2020 included an estimate of $10 million in Nine Month 2019response to the COVID-19 pandemic, which is discussed in "Current Events" above.
Higher catastrophe losses in Second Quarter and Six Months 2020 compared to NineSecond Quarter and Six Months 2018, as non-catastrophe property loss and loss expenses2019 were driven by the events mentioned in the first quarter of 2018 were elevated by a January deep freeze in our footprint states and an increase in the number of severe fire losses.Standard Commercial Lines discussion above.
Standard Personal Lines Segment
| | | | Quarter ended September 30, | | Change % or Points | | | | Nine Months ended September 30, | | Change % or Points | | | Quarter ended June 30, | | Change % or Points | | | | Six Months ended June 30, | | Change % or Points | |
($ in thousands) | | 2019 | | 2018 | | | | 2019 | | 2018 | | | 2020 | | 2019 | | | | 2020 | | 2019 | |
Insurance Segments Results: | | |
| | |
| | |
| | | | | | | | | | | |
| | |
| | |
| | | | | | | | | |
NPW | | $ | 81,639 |
| | 84,735 |
| | (4 | ) | | % | | $ | 233,717 |
| | 236,530 |
| | (1 | ) | % | | $ | 78,173 |
| | 82,709 |
| | (5 | ) | | % | | $ | 145,813 |
| | 152,078 |
| | (4 | ) | % |
NPE | | 76,738 |
| | 77,157 |
| | (1 | ) | | | | 231,158 |
| | 227,090 |
| | 2 |
| | | 71,633 |
| | 77,113 |
| | (7 | ) | | | | 147,761 |
| | 154,420 |
| | (4 | ) | |
Less: | | | | |
| | | | | | | | |
| | | | | | | |
| | | | | | | | |
| | | |
Loss and loss expense incurred | | 54,843 |
| | 52,631 |
| | 4 |
| | | | 158,467 |
| | 157,330 |
| | 1 |
| | | 58,151 |
| | 50,554 |
| | 15 |
| | | | 112,483 |
| | 103,624 |
| | 9 |
| |
Net underwriting expenses incurred | | 22,526 |
| | 21,368 |
| | 5 |
| | 65,617 |
| | 63,303 |
| | 4 |
| | | 19,807 |
| | 22,021 |
| | (10 | ) | | 41,216 |
| | 43,091 |
| | (4 | ) | |
Underwriting (loss) income | | $ | (631 | ) | | 3,158 |
| | (120 | ) | | % | | $ | 7,074 |
| | 6,457 |
| | 10 |
| % | | $ | (6,325 | ) | | 4,538 |
| | (239 | ) | | % | | $ | (5,938 | ) | | 7,705 |
| | (177 | ) | % |
Combined Ratios: | | | | |
| | | | | | | | |
| | | | | | | |
| | | | | | | | |
| | | |
Loss and loss expense ratio | | 71.4 |
| % | 68.2 |
| | 3.2 |
| | pts | | 68.5 |
| % | 69.3 |
| | (0.8 | ) | pts | | 81.1 |
| % | 65.5 |
| | 15.6 |
| | pts | | 76.1 |
| % | 67.1 |
| | 9.0 |
| pts |
Underwriting expense ratio | | 29.4 |
| | 27.7 |
| | 1.7 |
| | 28.4 |
| | 27.9 |
| | 0.5 |
| | | 27.7 |
| | 28.6 |
| | (0.9 | ) | | 27.9 |
| | 27.9 |
| | — |
| |
Combined ratio | | 100.8 |
| | 95.9 |
| | 4.9 |
| | | | 96.9 |
| | 97.2 |
| | (0.3 | ) | | | 108.8 |
| | 94.1 |
| | 14.7 |
| | | | 104.0 |
| | 95.0 |
| | 9.0 |
| |
NPW was downdecreased in both ThirdSecond Quarter and NineSix Months 20192020 compared to the same prior year periods, reflecting the impact of a decrease in direct new business$4.3 million premium credit to our Standard Personal Lines customers as a result of a competitive marketplace. Retention has decreasedthe COVID-19 pandemic. This premium item contributed 5 percentage points to the decline in both ThirdNPW in Second Quarter 2020 and Nine3 percentage points in Six Months 20192020 compared to the same prior year periods. This premium credit was fully earned in Second Quarter and Six Months 2020.
|
| | | | | | | | | | | | | | | | | | | | |
| | Quarter ended June 30, | Change % or Points | | | Six Months ended June 30, | Change % or Points | |
($ in millions) | | 2020 | | 2019 | | | 2020 | | 2019 | |
Direct new business | | $ | 11.8 |
| | 10.5 |
| 13 |
| % | | $ | 21.8 |
| | 20.9 |
| 4 |
| % |
Retention | | 84 |
| % | 84 |
| — |
| pts | | 83 |
| % | 83 |
| — |
| pts |
Renewal pure price increases | | 3.1 |
| | 5.6 |
| (2.5 | ) | | | 3.4 |
| | 5.4 |
| (2.0 | ) |
|
The increase in the combined ratio of 14.7 points in Second Quarter 2020 compared to Second Quarter 2019 and 9.0 points in Six Months 2020 compared to Six Months 2019 was driven by the following:
|
| | | | | | | | | | | | | | |
| Second Quarter 2020 | | Second Quarter 2019 | | |
($ 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 | $ | 26.0 |
| 36.2 | pts | | $ | 6.1 |
| 7.9 | pts | 28.3 |
| pts |
Non-catastrophe property loss and loss expenses | 15.3 |
| 21.4 | | | 24.5 |
| 31.7 | | (10.3 | ) | |
Total | 41.3 |
| 57.6 | | | 30.6 |
| 39.6 | | 18.0 |
| |
| | | | | | | | | |
| | | | | | | | | |
| Six Months 2020 | | Six Months 2019 | | |
($ 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 | $ | 37.9 |
| 25.7 | pts | | $ | 10.2 |
| 6.6 | pts | 19.1 |
| pts |
Non-catastrophe property loss and loss expenses | 38.1 |
| 25.8 | | | 53.6 |
| 34.7 | | (8.9 | ) | |
Total | 76.0 |
| 51.5 | | | 63.8 |
| 41.3 | | 10.2 |
| |
Higher catastrophe losses in Second Quarter and Six Months 2020 compared to the same prior year periods lastwere driven by two severe storms in April, which impacted parts of the Mid-West and East Coast regions of the United States with damaging wind and tornadoes. Additionally, Six Months 2020 was impacted by a tornado that affected Tennessee in March.
The Second Quarter and Six Months 2020 results included a reduction to NPW for the $4.3 million premium credit to our personal automobile customers mentioned above, of which there was an offsetting reduction in our casualty loss costs of $2.5 million in both periods. This reduction in our casualty loss costs decreased our loss ratio by 3.5 points in Second Quarter 2020 and 1.7 points in Six Months 2020. As discussed in the "Current Events" section above, the automobile premium credit was income neutral with the remaining offset reflected in lower non-catastrophe property losses, as reflected in the table above. These favorable current year as we continue to achieve renewal pure price increases onloss costs impacted our personal automobile line of business, reflecting anticipated decreases in excessfrequencies as a result of loss trends, while the industry has seen a softening in rate activity. Additionally, the deteriorating competitive position on our automobile business has led to lower new homeowners business, as we typically write policies at the account level, which include both automobile and homeowners coverage.governmental shelter-in-place directives.
|
| | | | | | | | | | | | | | | | | | | | |
| | Quarter ended September 30, | Change % or Points | | | Nine Months ended September 30, | Change % or Points | |
($ in millions) | | 2019 | | 2018 | | | 2019 | | 2018 | |
Direct new business | | $ | 10.2 |
| | 13.1 |
| (22 | ) | % | | $ | 31.1 |
| | 40.8 |
| (24 | ) | % |
Retention | | 83 |
| % | 85 |
| (2 | ) | pts | | 83 |
| % | 85 |
| (2 | ) | pts |
Renewal pure price increases | | 5.0 |
| | 3.8 |
| 1.2 |
| | | 5.3 |
| | 3.6 |
| 1.7 |
|
|
The loss and loss expense ratio increased 3.2 points in Third Quarter 2019 compared to Third Quarter 2018, and decreased 0.8 points in Nine Months 2019 compared to Nine Months 2018. The drivers of these fluctuations are as follows:
|
| | | | | | | | | | | | | | | | |
| Third Quarter 2019 | | Third Quarter 2018 | | |
($ 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 loss and loss expenses | $ | 25.2 |
| 32.8 |
| pts | | $ | 28.2 |
| 36.5 |
| pts | (3.7 | ) | pts |
Catastrophe losses | 7.9 |
| 10.3 |
| | | 5.4 |
| 7.1 |
| | 3.2 |
| |
Unfavorable prior year development | 2.0 |
| 2.6 |
| | | — |
| — |
| | 2.6 |
| |
Flood claims handling fees | (1.1 | ) | (1.4 | ) | | | (2.1 | ) | (2.7 | ) | | 1.3 |
| |
Total | 34.0 |
| 44.3 |
| | | 31.5 |
| 40.9 |
| | 3.4 |
| |
| | | | | | | | | |
| Nine Months 2019 | | Nine Months 2018 | | |
($ 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 loss and loss expenses | $ | 78.7 |
| 34.1 |
| pts | | $ | 80.4 |
| 35.4 |
| pts | (1.3 | ) | pts |
Catastrophe losses | 18.1 |
| 7.8 |
| | | 18.1 |
| 8.0 |
| | (0.2 | ) | |
Unfavorable prior year casualty reserve development | 2.0 |
| 0.9 |
| | | — |
| — |
| | 0.9 |
| |
Flood claims handling fees | (2.7 | ) | (1.2 | ) | | | (3.6 | ) | (1.6 | ) | | 0.4 |
| |
Total | 96.1 |
| 41.6 |
| | | 94.9 |
| 41.8 |
| | (0.2 | ) | |
The underwriting expense ratio increased 1.7 points in the Third Quarter 2019 compared to Third Quarter 2018, and 0.5 points in Nine Months 2019 compared to Nine Months 2018. The primary drivers of these changes were increased profit-based expenses to our distribution partners and employees.
| | | | Quarter ended September 30, | | Change % or Points | | Nine Months ended September 30, | | Change % or Points | | | Quarter ended June 30, | | Change % or Points | | Six Months ended June 30, | | Change % or Points | |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | | 2020 | | 2019 | | 2020 | | 2019 | |
Insurance Segments Results: | | |
| | |
| | |
| | | | | | | | | |
| | |
| | |
| | | | | | | |
NPW | | $ | 62,368 |
| | 64,621 |
| | (3 | ) | % | | $ | 180,572 |
| | 168,628 |
| | 7 |
| % | | $ | 63,237 |
| | 61,309 |
| | 3 |
| % | | $ | 124,492 |
| | 118,204 |
| | 5 |
| % |
NPE | | 61,721 |
| | 56,064 |
| | 10 |
| | | 178,660 |
| | 161,419 |
| | 11 |
| | | 58,034 |
| | 58,857 |
| | (1 | ) | | | 117,029 |
| | 116,939 |
| | — |
| |
Less: | | |
| | |
| | |
| | | |
| | |
| | |
| | | |
| | |
| | |
| | | |
| | |
| | |
| |
Loss and loss expense incurred | | 39,794 |
| | 35,458 |
| | 12 |
| | | 111,772 |
| | 114,588 |
| | (2 | ) | | | 38,761 |
| | 37,278 |
| | 4 |
| | | 72,595 |
| | 71,978 |
| | 1 |
| |
Net underwriting expenses incurred | | 20,011 |
| | 17,100 |
| | 17 |
| | | 57,449 |
| | 51,679 |
| | 11 |
| | | 19,805 |
| | 18,635 |
| | 6 |
| | | 41,122 |
| | 37,438 |
| | 10 |
| |
Underwriting income (loss) | | $ | 1,916 |
| | 3,506 |
| | (45 | ) | % | | $ | 9,439 |
| | (4,848 | ) | | 295 |
| % | |
Underwriting (loss) income | | | $ | (532 | ) | | 2,944 |
| | (118 | ) | % | | $ | 3,312 |
| | 7,523 |
| | (56 | ) | % |
Combined Ratios: | | |
| | |
| | |
| | | |
| | |
| | |
| | | |
| | |
| | |
| | | |
| | |
| | |
| |
Loss and loss expense ratio | | 64.5 |
| % | 63.2 |
| | 1.3 |
| pts | | 62.5 |
| % | 71.0 |
| | (8.5 | ) | pts | | 66.8 |
| % | 63.3 |
| | 3.5 |
| pts | | 62.1 |
| % | 61.6 |
| | 0.5 |
| pts |
Underwriting expense ratio | | 32.4 |
| | 30.5 |
| | 1.9 |
| | 32.2 |
| | 32.0 |
| | 0.2 |
| | | 34.1 |
| | 31.7 |
| | 2.4 |
| | 35.1 |
| | 32.0 |
| | 3.1 |
| |
Combined ratio | | 96.9 |
| | 93.7 |
| | 3.2 |
| | | 94.7 |
| | 103.0 |
| | (8.3 | ) | | | 100.9 |
| | 95.0 |
| | 5.9 |
| | | 97.2 |
| | 93.6 |
| | 3.6 |
| |
NPW decreasedincreased 3% in ThirdSecond Quarter 20192020 and increased 7%5% in NineSix Months 2019 compared to the respective prior year periods. Over the past two-year period, we have taken steps to exit certain underperforming classes of E&S business, while entering into new distribution relationships. The premium growth on a year-to-date basis continues to reflect the impact of one particularly large relationship that we reestablished in the second quarter of 2018. We do not anticipate the same level of year-over-year growth going forward from this relationship, as it has now been in place for a full year, which is in part the reason for the decline during the quarter2020 compared to the same period last year.prior year periods due to increases in direct new business and strong renewal pure price increases. After two consecutive years in which we exited underperforming business segments, our focus has shifted to profitably growing segments of our E&S book that have demonstrated underwriting profitability.
Quantitative information on the premium in this segment is as follows: | | | | Quarter ended September 30, | Change % or Points | | Nine Months ended September 30, | Change % or Points | | | Quarter ended June 30, | Change % or Points | | Six Months ended June 30, | Change % or Points | |
($ in millions) | | 2019 | | 2018 | | 2019 | | 2018 | | | 2020 | | 2019 | | 2020 | | 2019 | |
Direct new business | | $ | 23.1 |
| | 32.2 |
| (28 | ) | % | | $ | 73.8 |
| | 70.8 |
| 4 |
| % | | $ | 28.3 |
| | 25.1 |
| 13 | % | | $ | 55.8 |
| | 50.7 |
| 10 | % |
Renewal pure price increases1 | | 3.7 |
| % | 4.9 |
| (1.2 | ) | pts | | 4.4 |
| % | 5.3 |
| (0.9 | ) | pts | |
Renewal pure price increases | | | 5.5 |
| % | 4.8 |
| 0.7 | pts | | 4.8 |
| % | 4.6 |
| 0.2 | pts |
1E&S casualty renewal price increases were 3.0% for Third
The loss and loss expense ratio increased 3.5 points in Second Quarter 2019,2020 and 0.5 points in Six Months 2020 compared to 5.2% for Third Quarter 2018, and 4.0% for Nine Months 2019, compared to 6.2% for Nine Months 2018.
The combined ratio increased 3.2 points in Third Quarter 2019 compared to Third Quarter 2018, and improved 8.3 points in Nine Months 2019 compared to Nine Months 2018,the same prior year periods, primarily due todriven by the items outlined in the tables and commentary below:
| | | Third Quarter 2019 | | Third Quarter 2018 | | | | Second Quarter 2020 | | Second Quarter 2019 | |
($ 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 | | 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 | — |
| — | pts | | 6.0 |
| 10.7 | pts | (10.7 | ) | pts | |
Catastrophe losses | | $ | 6.5 |
| 11.3 | pts | | $ | 2.0 |
| 3.4 | pts | 7.9 | pts |
Non-catastrophe property loss and loss expenses | 7.0 |
| 11.4 | | 5.6 |
| 10.0 | | 1.4 |
| | 5.6 |
| 9.6 | | 5.5 |
| 9.4 | | 0.2 | |
Catastrophe losses | 1.5 |
| 2.4 | | 0.6 |
| 1.0 | | 1.4 |
| | |
Total | 8.5 |
| 13.8 | | 12.2 |
| 21.7 | | (7.9 | ) | | 12.1 |
| 20.9 | | 7.5 |
| 12.8 | | 8.1 | |
| | | | | | | | | | |
| Nine Months 2019 | | Nine Months 2018 | | | | Six Months 2020 | | Six Months 2019 | |
($ 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 | | 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 | $ | — |
| — | pts | | $ | 12.0 |
| 7.4 | pts | (7.4 | ) | pts | |
Catastrophe losses | | $ | 7.0 |
| 6.0 | pts | | $ | 2.8 |
| 2.4 | pts | 3.6 | pts |
Non-catastrophe property loss and loss expenses | 17.1 |
| 9.6 | | 22.2 |
| 13.7 | | (4.1 | ) | | 11.3 |
| 9.7 | | 10.0 |
| 8.6 | | 1.1 | |
Catastrophe losses | 4.3 |
| 2.4 | | 2.7 |
| 1.7 | | 0.7 |
| | |
Total | 21.4 |
| 12.0 | | 36.9 |
| 22.8 | | (10.8 | ) | | 18.3 |
| 15.7 | | 12.8 |
| 11.0 | | 4.7 | |
The improvementincrease in prior year casualty reserve development of 10.7 pointscatastrophe losses in ThirdSecond Quarter 2019 comparedand Six Months 2020 was due primarily to Third Quarter 2018 wasthe civil unrest that occurred throughout the country, partially offset by a 3.2-point decrease in current year loss costs that were 8.6 points higher in ThirdSecond Quarter 2019and Six Months 2020 compared to Third Quarter 2018. These variances were driven by adjustments made during 2018 as a result of the normal reserve review process, which indicated unfavorable development in older years, while showing improvements in the then current year-to-date period,
largely due to our pricing and underwriting actions.same prior year periods.
The underwriting expense ratio increased 1.92.4 points in ThirdSecond Quarter 20192020 and 3.1 points in Six Months 2020 compared to Third Quarter 2018,the same prior year periods primarily driven by an increaseincreases in: (i) the allowance for uncollectible premium receivable mentioned in profit-based compensation"Current Events" above of 1.1 points in Second Quarter 2020 and 1.8 points in Six Months 2020; and (ii) labor costs to our distribution partners.
While the relatively small size ofimprove infrastructure efficiency to profitably grow this segment can lead to some volatilityof 1.8 points in results from quarter to quarter, on a longer-term basis, improved underwriting, pricing,Second Quarter 2020 and claims outcomes have us on track to achieve our risk-adjusted profitability target for this segment by the end of1.4 points in Six Months 2020.
Reinsurance
We have successfully completed the renewals of our July 1, 20192020 excess of loss treaties, which provide coverage for our Standard Commercial Lines, Standard Personal Lines, and E&S Lines. These treaties were renewed with principally the same structure as the expiring treaties, with an underwritingonly reinsurers that are rated "A" or higher by AM Best. The treaty year ceded deposit premium increase estimated at $10of $14.3 million, or 14%17%, which reflects an increase in our estimated subject matter premiumrate increases for both the Property Excess of Loss ("Property Treaty") and a risk-adjusted price increase for our property treaty,Casualty Excess of Loss (“Casualty Treaty”) programs driven by heavyhistorical loss activity from the 2018 underwriting year and the pricing environment in the property per-risk reinsurance marketplace.experience coupled with various dynamics introduced by COVID-19.
Details of the treaties are as follows:
Property Excess of Loss
Our property excess of loss treaty ("Property Treaty")Treaty provides protection against large individual property losses with $58.0 million of coverage in excess of a $2.0 million retention:per risk:
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 $75.0$80.0 million.
The Property Treaty excludes nuclear, biological, chemical, and radiological ("NBCR") terrorism losses, and includes non-NBCR losses from terrorism.terrorism, and now excludes communicable disease.
Casualty Excess of Loss
Our casualty excess of loss treaty (“Casualty Treaty”)Treaty provides protection against large individual casualty losses with $88.0 million of coverage in excess of a $2.0 million retention:per occurrence:
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 $208.0 million.
Investments
The primary objective ofWe entered the COVID-19 crisis with our investment portfolio is to maximize after-tax net investment incomewell-positioned from a risk and the overall total return of the portfolio, while maintaining a high credit quality core fixed income securities portfolio and managing our duration risk profile. The effective duration of the fixed income securities portfolio as of September 30, 2019 was 3.4 years, compared to the Insurance Subsidiaries’ liability duration as of December 31, 2018 of approximately 3.6 years. The effective duration of the fixed income securities portfolio is monitored and managed to maximize yield, while managing interest rate risk at an acceptable level. We maintain a well-diversified portfolio across sectors, credit quality, and maturities that affords us ample liquidity. Purchases and sales are made with the intent of maximizing investment returns in the current market environment while balancing capital preservation. Over time, we may seek to increase or decrease the duration and overall credit quality of the portfolio based on market conditions.
liquidity perspective. Our investment philosophy includes certain return and risk objectives for the fixed income, equity, and other investment portfolios. After-tax yield and net investment income generation are key drivers to our investment strategy, which we believe will be obtained through active management of the portfolio.
|
| | | | | | | | | | | |
Total Invested Assets | | | | | | | |
($ in thousands) | | September 30, 2019 | | December 31, 2018 | | Change | |
Total invested assets | | $ | 6,551,739 |
| | 5,960,651 |
| | 10 |
| % |
Invested assets per dollar of stockholders' equity | | 3.07 |
| | 3.33 |
| | (8 | ) |
|
Unrealized gain – before tax1 | | 225,100 |
| | 11,916 |
| | 1,789 |
| |
Unrealized gain – after tax1 | | 177,829 |
| | 9,414 |
| | 1,789 |
| |
1Includes unrealized gains on fixed income and equity securities.
The increase in invested assets at September 30, 2019, compared to December 31, 2018, was driven by: (i) operating cash flow generated in Nine Months 2019 of $316 million; (ii) pre-tax net unrealized gains in our fixed income and equity securities portfolios of $213 million, due to a reduction in interest rates and tightening corporate credit spreads; and (iii) net proceeds of $106 million from the issuance of our 5.375% Senior Notes. For additional information regarding these debt transactions, see Note 5. "Indebtedness" in Item 1. "Financial Statements" of this Form 10-Q.
At September 30, 2019, our fixed income securities and short-term investment portfolios represented 95% of our invested assets at June 30, 2020, and 96% of our invested assets compared to 95% at December 31, 2018.2019. These portfolios had a weighted average credit rating of “ AA- ,” as of both SeptemberJune 30, 20192020 and December 31, 2018,2019, with 97% and 98%96% of the securities in the portfoliothese portfolios being investment grade quality respectively.as of such dates. The sector composition and credit quality of our major asset categories within our fixed income securities portfolio did not significantly change from December 31, 2018.2019. We have been actively engaged in monitoring and managing the exposure to credit risk in our portfolio associated with the impact of the COVID-19 pandemic and related economic conditions. We have also been managing the portfolio's exposure to floating rate securities, which reset principally to 90-day LIBOR. Given the reduction in the valuation of U.S. public equities and the significant widening of high yield credit spreads earlier in the year, we modestly increased our allocation to risk-seeking assets and will continue to evaluate further changes to our allocation during the course of 2020, subject to economic and market conditions.
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| | | | | | | | | | | |
Total Invested Assets | | | | | | | |
($ in thousands) | | June 30, 2020 | | December 31, 2019 | | Change | |
Total invested assets | | $ | 7,130,329 |
| | 6,688,654 |
| | 7 |
| % |
Invested assets per dollar of stockholders' equity | | 3.10 |
| | 3.05 |
| | 2 |
|
|
Unrealized gain – before tax1 | | 292,502 |
| | 216,564 |
| | 35 |
| |
Unrealized gain – after tax1 | | 231,077 |
| | 171,085 |
| | 35 |
| |
1Includes unrealized gains on fixed income and equity securities.
The increase in invested assets at June 30, 2020 compared to December 31, 2019, was driven by operating cash flow generated in Six Months 2020 of $197 million and net proceeds of $252 million from short-term borrowings. For additional information regarding these short-term borrowings, see Note 5. "Indebtedness" in Item 1. "Financial Statements." of this Form 10-Q.
In addition, invested assets included an increase in unrealized gains on our fixed income securities portfolio of $87.4 million in Six Months 2020, which increased our book value per share by $1.15. The increase was driven principally by narrowing credit spreads.
For details regarding the credit quality of our portfolio, see Item 7A.3. “Quantitative and Qualitative Disclosures About Market Risk.” of our 2018 Annual Report.this Form 10-Q.
Net Investment Income
The components of net investment income earned for the indicated periods were as follows:
| | | | Quarter ended September 30, | | Change % or Points | | | Nine Months ended September 30, | Change % or Points | | | Quarter ended June 30, | | Change % or Points | | | Six Months ended June 30, | Change % or Points | |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Fixed income securities | | $ | 50,749 |
| | 45,088 |
| | 13 | % | | 150,689 |
| | 130,903 |
| 15 | % | | | $ | 51,079 |
| | 50,907 |
| | — | % | | $ | 101,332 |
| | 99,940 |
| 1 | % | |
Commercial mortgage loans ("CMLs") | | | 156 |
| | — |
| | NM |
| | 218 |
| | — |
| NM |
| |
Equity securities | | 1,885 |
| | 2,079 |
| | (9 | ) | | 5,265 |
| | 5,876 |
| (10 | ) | | | 2,023 |
| | 1,740 |
| | 16 |
| | 3,575 |
| | 3,380 |
| 6 |
| |
Short-term investments | | 1,410 |
| | 867 |
| | 63 |
| | 5,213 |
| | 2,001 |
| 161 |
| | | 420 |
| | 1,759 |
| | (76 | ) | | 1,586 |
| | 3,803 |
| (58 | ) | |
Other investments | | 5,267 |
| | 7,211 |
| | (27 | ) | | 13,421 |
| | 10,868 |
| 23 |
| | | (15,846 | ) | | 7,494 |
| | (311 | ) | | (9,504 | ) | | 8,154 |
| (217 | ) | |
Investment expenses | | (3,485 | ) | | (2,802 | ) | | (24 | ) | | (9,639 | ) | | (8,421 | ) | (14 | ) | | | (3,388 | ) | | (3,395 | ) | | — |
| | (6,796 | ) | | (6,154 | ) | 10 |
| |
Net investment income earned – before tax | | 55,826 |
| | 52,443 |
| | 6 |
| | 164,949 |
| | 141,227 |
| 17 |
| | | 34,444 |
| | 58,505 |
| | (41 | ) | | 90,411 |
| | 109,123 |
| (17 | ) | |
Net investment income tax expense | | (10,452 | ) | | (9,568 | ) | | (9 | ) | | (30,630 | ) | | (24,973 | ) | (23 | ) | | | (5,902 | ) | | (10,883 | ) | | (46 | ) | | (16,386 | ) | | (20,178 | ) | (19 | ) | |
Net investment income earned – after tax | | $ | 45,374 |
| | 42,875 |
| | 6 |
| | 134,319 |
| | 116,254 |
| 16 |
| | | $ | 28,542 |
| | 47,622 |
| | (40 | ) | | $ | 74,025 |
| | 88,945 |
| (17 | ) | |
Effective tax rate | | 18.7 | % | | 18.2 |
| | 0.5 |
| pts | | 18.6 |
| | 17.7 |
| 0.9 |
| pts | | 17.1 | % | | 18.6 |
| | (1.5 | ) | pts | | 18.1 | % | | 18.5 |
| (0.4 | ) | pts |
Annualized after-tax yield on fixed income securities | | 2.8 |
| | 2.8 |
| | — |
| | 2.9 |
| | 2.8 |
| 0.1 |
| | | 2.7 |
| | 2.9 |
| | (0.2 | ) | | 2.6 |
| | 2.9 |
| (0.3 | ) | |
Annualized after-tax yield on investment portfolio | | 2.8 |
| | 3.0 |
| | (0.2 | ) | | 2.9 |
| | 2.7 |
| 0.2 |
| | | 1.6 |
| | 3.0 |
| | (1.4 | ) | | 2.1 |
| | 2.9 |
| (0.8 | ) | |
The increasedecrease in pre-tax net investment income in ThirdSecond Quarter and NineSix Months 2019,2020 compared to the same prior year periods last year, was primarily driven by: (i) cash flowby losses from operations that was 22%our other investments portfolio. This portfolio largely consists of NPWalternative investments, the results of which are recorded on a one quarter lag. These losses reflected the significant market decline in the first quarter and 15% of NPW2020. As these investments are largely recorded on a one-quarter lag, these results do not yet reflect the improvement in the year-to-date period; and (ii) $106 million of net proceeds from our 5.375% Senior Notes issuance earlier in 2019, which were invested in fixed income securities. Additionally, Nine Months 2019 included alternative investment returns that were $2.4 million higher than the comparable prior year period.market conditions during Second Quarter 2020.
Realized and Unrealized Gains and Losses
Our general philosophy for sales of securities is to reduce our exposure to securities and sectors based on economic evaluations and when the fundamentals for that security or sector have deteriorated, or to opportunistically trade out of securities to other securities with better economic return characteristics. Net realized and unrealized gains and losses for the indicated periods were as follows:
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| | | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine Months ended September 30, |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Net realized gains (losses) on disposals, excluding OTTI | | $ | 20,425 |
| | (751 | ) | | 26,752 |
| | 4,034 |
|
Unrealized (losses) recognized in income on equity securities | | (20,317 | ) | | (2,610 | ) | | (8,091 | ) | | (15,563 | ) |
OTTI charges | | (2,291 | ) | | (1,426 | ) | | (3,366 | ) | | (5,459 | ) |
Total net realized and unrealized (losses) gains | | $ | (2,183 | ) | | (4,787 | ) | | 15,295 |
| | (16,988 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Quarter ended June 30, | | Change % | | Six Months ended June 30, | | Change % |
($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | |
Net realized gains on disposals, excluding OTTI | | $ | 2,615 |
| | 2,883 |
| | (9 | )% | | 6,715 |
| | 6,327 |
| | 6 | % |
Unrealized gains (losses) recognized in income on equity securities | | 5,701 |
| | 2,115 |
| | 170 | % | | (11,436 | ) | | 12,226 |
| | (194 | )% |
OTTI benefit (expense)1 | | 4,333 |
| | (971 | ) | | (546 | )% | | (27,296 | ) | | (1,075 | ) | | 2,439 | % |
Total net realized and unrealized gains (losses) | | $ | 12,649 |
| | 4,027 |
| | 214 | % | | (32,017 | ) | | 17,478 |
| | (283 | )% |
1See Note 2. "Adoption of Accounting Pronouncements" in Item 1. "Financial Statements." of this Form 10-Q for additional information regarding our adoption of ASU 2016-13, Financial Instruments - Credit Losses.
The $2.6 million improvementcurrent year losses were significantly impacted by COVID-19-related market volatility in net realizedthe first quarter of 2020, which resulted in higher OTTI expense and unrealized losses in Third Quarter 2019 compared to Third Quarter 2018 was primarily driven by an $8.3 million reduction in realized losses on our fixed income securities portfolio reflecting less opportunistic sales, partially offset by a decrease of $4.8 million in unrealized gains due to market value increases on our equity securities that were lessportfolio. A portion of our OTTI expense in Third Quarter 2019 comparedSix Months 2020 was related to Third Quarter 2018.impairments on securities we intend to sell to provide our investment managers flexibility to trade and optimize our investment portfolio, which amounted to $16.2 million. We also incurred credit-related impairment losses under the new CECL accounting standard, which amounted to $11.1 million in Six Months 2020.
The significant drivers ofDuring Second Quarter 2020, the $32.3 million improvementincrease in net realized and unrealized gains in Nine Months 2019 compared to net realized andSecond Quarter 2019 was driven by an improvement in both unrealized losses in Nine Months 2018 were: (i) a $16.0 million reduction in realizedour equity portfolio and the reversal of previously-recognized CECL credit losses on our fixed income securities portfolio, driven by less opportunistic sales; and (ii) an increase of $14.2 million in unrealized gains due to more significant market value increases on our equity securities portfolio in Nine Months 2019 compared to Nine Months 2018.
In addition to the activity above, during Third Quarter 2019, we sold a significant portion of our public equity securities, realizing net gains of $21.6 million on the securities sold. These realized gains were substantially offsetboth reflecting improvements in the quarter by the reversal of previously-recorded unrealized gains related to the securities sold, which accounted for $21.4 million of the $20.3 million reduction in the table above.market.
Federal Income Taxes
The following table provides information regarding federal income taxes:
| | | Quarter ended September 30, | | Nine Months ended September 30, | Quarter ended June 30, | | Six Months ended June 30, |
($ in millions) | 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 | | 2020 | | 2019 |
Federal income tax expense | $ | 15.0 |
| | 11.7 |
| | 45.3 |
| | 26.4 |
| $ | 8.5 |
| | 18.0 |
| | 9.3 |
| | 30.3 |
|
Effective tax rate | 21.1 | % | | 17.4 |
| | 19.3 |
| | 16.5 |
| 19.9 | % | | 19.9 |
| | 15.8 |
| | 18.5 |
|
The effective tax rate in the table above differs from the statutory rate of 21% principally due to: (i) the benefit of tax-advantaged interest and dividend income; and (ii) the impact of excess tax benefits on our stock-based compensation awards, partially offset by the disallowance of certain executive compensation. The increasedecrease in the effective tax rate in Third Quarter and NineSix Months 2020 compared to Six Months 2019 compared to Third Quarter and Nine Months 2018, reflects a greaterless pre-tax income contribution from our insurance operationsand investments segments compared to the relative contribution of tax-advantaged income this year compared to last.and excess tax benefits on our stock-based compensation awards.
Financial Condition, Liquidity, and Capital Resources
Capital resources and liquidity reflect our ability to generate cash flows from business operations, borrow funds at competitive rates, and raise new capital to meet operating and growth needs.
We entered the COVID-19 crisis with our investment portfolio well-positioned from a risk and liquidity perspective. During the first quarter of 2020, we increased the liquidity of both the Insurance Subsidiaries and the Parent to reduce the likelihood of becoming a forced seller of invested assets to fund operations if there is a significant slowdown in premium payments as a result of the COVID-19 pandemic. As of June 30, 2020, we had $252 million of outstanding short-term borrowings. Our short-term investments and cash totaled $371 million at June 30, 2020, compared to $283 million as of December 31, 2019.
As capital markets stabilized during Second Quarter 2020, we repaid $50 million of short-term borrowings under our line of credit. We, however, continued to maintain a greater level of short-term borrowings through Second Quarter 2020 in light of the ongoing pandemic and elevated catastrophe losses we incurred during Six Months 2020. The cost of the excess liquidity currently is about $0.1 million per month, and represents the additional interest expense on our short-term borrowings, net of the interest income we generate on the high-quality money market funds in which we have invested the proceeds. We currently expect to extend all or a portion of these remaining short-term borrowings until December 2020 and repay them by year end.
Through Six Months 2020, we did not experience a meaningful change in daily cash collections. Given our geographic footprint and focus on small-to-medium size business, we expect many of our customers to have significant disruptions to their businesses. This could result in potential premium collection issues as a result of recent insurance regulations that provided for the deferral of payments without cancellation for a period up to 90 days in certain states. The ultimate depth and duration of
the economic slowdown, combined with the impact of the federal fiscal stimulus packages, and whether or not a business is considered essential or non-essential, will in part determine whether our customers' businesses are temporarily or permanently impaired. We continue to monitor our cash positions daily to ensure we remain well positioned from a liquidity perspective.
In addition, we continue to monitor closely market activity and the impact on our investment portfolio. Credit markets stabilized in late-March in response to the Federal Reserve Board’s actions, and conditions continued to improve through Second Quarter 2020. There has been a record level of new issuance in investment grade fixed income markets, and given our strong liquidity position, starting in late-March we began reinvesting the interest and proceeds of maturities back into the investment portfolio, which remains highly liquid and has a high credit quality. We also marginally increased our allocation to risk assets both within public credit, or high-yield bonds, and public equities through funds diversified across large cap value issuers.
The following discussion provides further details about the Company's financial condition, liquidity, and capital resources.
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 $327 million at September 30, 2019 was comprised of $34 millionWe maintain liquidity at the Parent and $293 million at the Insurance Subsidiaries. Short-termparent primarily through (i) short-term investments that are generally maintained in "AAA"“AAA” rated money market funds approved by the National Association of Insurance Commissioners. The Parent maintains a fixed income security investment portfolio containingCommissioners, (ii) high-quality, highly-liquid government and corporate fixed income securities. This portfoliosecurities; and (iii) a cash balance. In the aggregate, cash and investments at the Parent amounted to $224$324 million at SeptemberJune 30, 20192020 and $110$278 million at December 31, 2018. The Parent had a total of $267 million of cash and liquid investments at September 30, 2019, compared to $146 million at December 31, 2018, with the increase driven by our capital market activities discussed below. 2019.
The level of cash and invested assetsliquidity at the Parent may fluctuate 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.Parent, Parent borrowings, and asset allocation investment decisions. Our target is to
maintain the cash and liquidity at the Parent toof at least two times its expected annual needs, which is currently estimated at approximately $160 million.
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 theThe Insurance Subsidiaries may pay $110paid $70 million in total dividends to the Parent in 2019, a $10 million increase from $100 million paid in 2018, of which $83 million was paid during NineSix Months 2019.2020. As of December 31, 2018,2019, our allowable ordinary maximum dividend was $210$267 million for 2019.2020.
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 19.20. “Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds” in Item 8. “Financial Statements and Supplementary Data.” of our 20182019 Annual Report.
In addition to regulatory restrictions on the availability of dividends that our Insurance Subsidiaries can pay to the Parent, the maximum amount of dividends the Parent can pay our shareholders is limited by certain New Jersey corporate law provisions that limit dividends if either: (i) the Parent would be unable to pay its debts as they became due in the usual course of business; or (ii) the Parent's total assets would be less than its total liabilities. The Parent's ability to pay dividends to shareholders also are impacted by covenants in the Line of Credit that obligate it to, among other things, maintain a minimum consolidated net worth and maximum ratio of consolidated debt to total capitalization.
The Insurance Subsidiaries generate liquidity through insurance float, which is created by collecting premiums and earning investment income before lossesclaims 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 flowsflow for claims payments in the ordinary course of business. The effective duration of the fixed income securities portfolio was 3.4 years as of September 30, 2019, while the liabilities of the Insurance Subsidiaries had a duration as of December 31, 2018 of 3.6 years. As protection for the capital resources ofat the Insurance Subsidiaries, we purchase reinsurance coverage for any significantly large claims or catastrophes that may occur during the year.year and we can make cash calls on those receivables, if needed.
Line of Credit
The Parent's lineOn December 20, 2019, the Parent entered into a Line of credit with Wells FargoCredit among the Parent, the lenders named therein (the “Lenders”), and the Bank National Association,of Montreal, Chicago Branch, as administrative agent, and Branch Banking and Trust Company (BB&T) (referredAdministrative Agent. Under the Line of Credit, the Lenders have agreed to as our "Line of Credit"), was renewed effective December 1, 2015provide the Parent with a borrowing capacity of $30$50 million revolving credit facility, which can be increased to $50$125 million with the approvalconsent of both lending partners. Thisthe Lenders. The Line of Credit expireswill mature on December 1, 202020, 2022 and has an interest rate, thatwhich varies and is based on, among other factors, the Parent'sParent’s debt ratings. There were no balances outstandingOn March 24, 2020, to bolster liquidity, the Parent borrowed $50 million under the Line of Credit for a six-month term at September 30, 2019 or at any time during 2019.an interest rate of approximately 2.25%. The Parent repaid the borrowing on May 8, 2020.
For additional information regarding the Line of Credit agreement and corresponding representations, warranties, and covenants, refer to Note 10. "Indebtedness" in Item 8. "Financial Statements." of our 20182019 Annual Report. We continue to meetmet all covenants under our Line of Credit agreement as of SeptemberJune 30, 2019.2020.
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")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")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. We have a remaining capacity of $289.4$62.2 million for Federal Home Loan Bank borrowings, with a $12.9$2.8 million additional stock purchase requirement to allow the member companies to borrow their full remaining capacity amounts.
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.
Short-term Borrowings
During Nine Months 2019, SICA borrowed the following from FHLBNY:
$50 million inWe significantly increased our short-term borrowings during the first quarter of 2019,2020 amid the COVID-19 pandemic, which was followed by a period of extreme volatility and uncertainty in the financial markets. As was noted above, the $302 million of proceeds from these borrowings, including the $50 million borrowing under the Line of Credit that was repaid on March 28, 2019.
$15May 8, 2020, were invested in high-quality money market funds. With the exception of the $50 million in Third Quarter 2019, which was repaid on August 12, 2019.
borrowing under the Line of Credit, the remainder of these short-term borrowings were outstanding as of June 30, 2020. We currently expect to extend all or a portion of these remaining short-term borrowings until December 2020 and repay them by year end. For further information regarding this borrowing,these borrowings, 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 outstanding balance on these intercompany loans was $41.3$40.0 million as of Septemberboth June 30, 2019, compared to $45.0 million as of2020 and December 31, 2018.2019. The remaining capacity under these intercompany loan agreements was $80.0$89.4 million as of Septemberboth June 30, 2019, compared to $76.2 million as of2020 and December 31, 2018. Despite not being contractually obligated to do so, the Parent currently plans to repay the remaining outstanding balance over time.2019.
Capital Market Activities
In the first quarter of 2019, the Parent issued $300 million of 5.375% Senior Notes at a discount of $5.9 million which, when coupled with debt issuance costs of approximately $3.3 million, resulted in net proceeds from the offering of $290.8 million. The Parent used a portion of the proceeds to fully redeem the then outstanding $185 million aggregate principal amount of its 5.875% Senior Notes, with the remaining $106 million being used for general corporate purposes. For additional information on these transactions, refer to Note 5. "Indebtedness" in Item 1. "Financial Statements." of this Form 10-Q. The Parent had no private or public issuances of stock during NineSecond Quarter or Six Months 2019.2020.
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.
On October 30, 2019,July 29, 2020, our Board of Directors declared, for stockholders of record as of November 15, 2019,August 14, 2020, a $0.23 per share dividend
to be paid on December 2, 2019. This is a 15% increase compared to the dividend declared on July 31, 2019.September 1, 2020.
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. OurExcluding the short-term borrowings described above, our next two principal
repayments each in the amount of $25 million, are due in 2021, and the next principal payment is due in 2026.
Restrictions on the ability of the Insurance Subsidiaries to declare and pay dividends, without alternative liquidity options, could materially affect our ability to service debt and pay dividends on common 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 SeptemberJune 30, 2019,2020, we had GAAP stockholders' equity of $2.1$2.3 billion and statutory surplus of $1.9 billion. With total debt of $550.7$802.6 million and long-term debt of $550.6 million at June 30, 2020, our debt-to-capital ratio was 20.5% at September 30, 2019.25.9% and our long-term debt-to-capital ratio was 19.3%.
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, repurchasing existing debt, repurchasing shares of the Parent’s common stock, and increasing stockholders’ dividends.
Our capital management strategy is intended to protect the interests of the policyholders of the Insurance Subsidiaries and our stockholders, while enhancing our financial strength and underwriting capacity.
Book value per share increased to $35.98$38.43 as of SeptemberJune 30, 2019,2020, from $30.40$36.91 as of December 31, 2018,2019, driven by $3.16 in net income per share and $2.94$1.15 in unrealized gains on our fixed income securities portfolio and $0.82 in net income per share, partially offset by $0.60$0.46 in dividends to our shareholders.
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 Company ("A.M. Best"). We have been rated “A” or higher by A.M. Best forOur ratings remain the past 89 years. A downgrade from A.M. Best to a rating below “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.
On October 31, 2019, A.M. Best reaffirmed our "A" rating and upgraded our outlook to "positive" from "stable." In taking this action, A.M. Best cited our strong balance sheet strength, favorable business profile, and appropriate enterprise risk management. In addition, the positive outlook reflects A.M. Best's view of our improved profitability over the past five years on an absolute basis and relative to our peers.
Our other ratings have not changed from thosesame as reported in our "Ratings""Overview" section of Item 7. "Management's Discussion and Analysis1. "Business." of Financial Condition and Results of Operations." in our 20182019 Annual Report and continue to beare as follows:
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| | | | |
NRSRO | | Financial Strength Rating | | Outlook |
AM Best | | A | | Positive |
Moody's Investor Services ("Moody's") | | A2 | | Stable |
Fitch Ratings ("Fitch") | | A+ | | Stable |
Standard & Poor's Global Ratings ("S&P") | | A | | Stable |
In the second quarter of 2019,On April 10, 2020, Fitch reaffirmed our "A+" rating with a "stable" outlook. In taking this action, Fitch cited our strong capitalization and financial performance withand our stable underwriting results and return metrics that have remained favorable compared to our peers.
In Third Quarter 2019, S&P reaffirmed our "A" rating with Fitch's review included its current assessment of COVID-19-related issues, including (i) economic impact under a "stable" outlook. In taking this action, S&P cited our strong capital adequacy and strong operating performance, driven by sound underwriting and steady pure renewal price increases.
Our S&P, Moody's, and Fitch financial strength and associated creditset of ratings affect our abilityassumptions related 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 occurlevels, (ii) declines in the future.market values of stocks, bonds, derivatives and other capital market instruments typically owned or traded by insurance companies, (iii) market liquidity, and (iv) the magnitude of potential related claim/benefit exposures.
Off-Balance Sheet Arrangements
At SeptemberJune 30, 20192020, and December 31, 20182019, we did not have anyhad no 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 facilitatingto facilitate off-balance sheet arrangements or for other contractually narrow or limited purposes. As such,Consequently, we are not exposed to any material financing, liquidity, market, or credit risk that could arise if we had engaged in such relationships.related to off-balance sheet arrangements.
Contractual Obligations, Contingent Liabilities, and Commitments
Our future cash payments associated with:with (i) loss and loss expense reserves;reserves and (ii) contractual obligations pursuant to operating and financing leases for office space and equipment have not materially changed since December 31, 2018.2019. The following table provides future cash payments on our notes payable as of SeptemberJune 30, 2019, giving consideration to the $3002020, including $252 million 5.375% Senior Notes issuance and the redemption of our $185 million 5.875% Senior Notes inshort-term borrowings from the first quarter of 2019, the details of2020, which are containeddiscussed in Note 5. "Indebtedness" in Item 1. "Financial Statements." inof this Form 10-Q:
| | Contractual Obligations | | Payment Due by Period | | Payment Due by Period |
| | | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years | | | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
($ in millions) | | Total | | | Total | |
Notes payable | | $ | 560.0 |
| | — |
| | 50.0 |
| | — |
| | 510.0 |
| | $ | 812.0 |
| | 252.0 |
| | 50.0 |
| | — |
| | 510.0 |
|
Interest on debt obligations | | 657.3 |
| | 29.1 |
| | 57.3 |
| | 56.6 |
| | 514.3 |
| | 637.9 |
| | 30.0 |
| | 56.7 |
| | 56.6 |
| | 494.6 |
|
Total | | $ | 1,217.3 |
| | 29.1 |
| | 107.3 |
| | 56.6 |
| | 1,024.3 |
| | $ | 1,449.9 |
| | 282.0 |
| | 106.7 |
| | 56.6 |
| | 1,004.6 |
|
As of SeptemberAt June 30, 2019,2020, we also had certain contractual obligations that expire at various dates through 2036 that may require us to invest up to $229.9 millionadditional amounts in alternative investments. our investment portfolio as follows: |
| | | | | |
($ in millions) | | Amount of Obligation | Year of Expiration of Obligation |
Alternative and other investments | | $ | 229.7 |
| 2036 |
Non-publicly traded collateralized loan obligations in our fixed income securities portfolio | | 29.6 |
| 2030 |
Non-publicly traded common stock within our equity portfolio | | 2.4 |
| 2021 |
CMLs | | 10.7 |
| Less than a year |
Privately-placed corporate securities | | $ | 6.0 |
| Less than a year |
Total | | $ | 278.4 |
| |
There is no certainty that any such additional investment will be required. Additionally, as of September 30, 2019, we had the following contractual obligations: (i) $6.7 million to further invest in non-publicly traded common stock within our equity portfolio that expire through 2023; and (ii) $31.9 million to further invest in non-publicly traded collateralized loan obligations in our fixed income securities portfolio that expire through 2030. We expect to have the capacity to repay and/or refinance these obligations as they come due.
We have issued no material guarantees on behalf of others and have no trading activities involving non-exchange traded contracts accounted for at fair value. For additional details on transactions with related parties, see Note 16. "Related Party Transactions" in Item 8. "Financial Statements and Supplementary Data." inof our 20182019 Annual Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in
While the information about market riskprovided in Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" as set forth in our 2019 Annual Report remains applicable, please refer to the following additional information regarding credit, liquidity, and equity price risk as of June 30, 2020.
Credit Risk
We entered the COVID-19 crisis with our investment portfolio well-positioned from a risk and liquidity perspective. At June 30, 2020 our allocation to risk assets was 9.3% of our portfolio. Given the reduction in the valuation of U.S. public equities and the significant widening of high yield credit spreads earlier in the year, we modestly increased our allocation to risk-seeking assets and will continue to evaluate further changes to our allocation during the course of 2020, subject to economic and market conditions. Our fixed income securities and short-term investment portfolios had an average credit quality of "AA-" as of June 30, 2020.
Details on the credit quality of our invested assets are provided below:
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2020 | | | | | | | | | | Credit Rating |
($ in millions) | Amortized Cost | Fair Value | % of Invested Assets | Yield to Worst | Effective Duration in Years | Average Life in Years | | AAA | AA | A | BBB | Non-Investment Grade | Not Rated |
Short-term investments | $ | 370 |
| $ | 370 |
| 5.2 | % | 0.2 | % | 0.0 |
| 0.0 |
| | $ | 349 |
| $ | 20 |
| $ | — |
| $ | — |
| $ | 1 |
| $ | — |
|
| | | | | | | | | | | | | | | |
Fixed income securities: | | | | | | | | | | | | | | | |
U.S. government obligations | 112 |
| 120 |
| 1.7 | | 0.9 | | 4.1 |
| 4.6 |
| | 120 |
| — |
| — |
| — |
| — |
| — |
|
Foreign government obligations | 17 |
| 18 |
| 0.3 | | 2.5 | | 5.0 |
| 5.7 |
| | — |
| 2 |
| 8 |
| 8 |
| — |
| — |
|
State and municipal obligations | 1,136 |
| 1,208 |
| 16.9 | | 1.3 | | 5.5 |
| 5.2 |
| | 219 |
| 628 |
| 307 |
| 55 |
| — |
| — |
|
Corporate securities | 2,147 |
| 2,272 |
| 31.9 | | 2.4 | | 4.5 |
| 6.2 |
| | 14 |
| 112 |
| 889 |
| 1,017 |
| 239 |
| — |
|
Mortgage-backed securities: | | | | | | | | | | | | | | | |
Residential mortgage-backed securities ("RMBS"): | | | | | | | | | | | | | | | |
Agency RMBS | 1,157 |
| 1,220 |
| 17.1 | | 1.1 | | 2.0 |
| 3.1 |
| | 1,220 |
| — |
| — |
| — |
| — |
| — |
|
Non-agency RMBS | 98 |
| 98 |
| 1.4 | | 3.1 | | 1.3 |
| 3.3 |
| | 48 |
| 6 |
| 35 |
| — |
| 9 |
| — |
|
Total RMBS | 1,254 |
| 1,318 |
| 18.5 | | 1.2 | | 2.0 |
| 3.1 |
| | 1,268 |
| 6 |
| 35 |
| — |
| 9 |
| — |
|
Commercial mortgage-backed securities ("CMBS") | 565 |
| 603 |
| 8.5 | | 2.2 | | 5.0 |
| 6.4 |
| | 536 |
| 30 |
| 28 |
| 10 |
| — |
| — |
|
Total mortgage-backed securities | 1,820 |
| 1,922 |
| 26.9 | | 1.5 | | 2.9 |
| 4.1 |
| | 1,804 |
| 36 |
| 62 |
| 10 |
| 9 |
| — |
|
Collateralized loan obligations ("CLO") and other asset-backed securities ("ABS"): | | | | | | | | | | | | | | | |
Auto | 43 |
| 44 |
| 0.6 | | 1.9 | | 2.4 |
| 2.4 |
| | 34 |
| 5 |
| 3 |
| 1 |
| 1 |
| — |
|
Aircraft | 56 |
| 49 |
| 0.7 | | 8.4 | | 3.5 |
| 4.1 |
| | — |
| 1 |
| 43 |
| 2 |
| 3 |
| — |
|
CLOs | 558 |
| 546 |
| 7.7 | | 3.5 | | 1.2 |
| 4.8 |
| | 305 |
| 151 |
| 30 |
| 45 |
| 15 |
| 1 |
|
Credit cards | 17 |
| 18 |
| 0.2 | | 0.4 | | 1.9 |
| 1.9 |
| | 18 |
| — |
| — |
| — |
| — |
| — |
|
Other ABS | 180 |
| 183 |
| 2.6 | | 3.8 | | 2.6 |
| 5.1 |
| | 43 |
| — |
| 107 |
| 24 |
| 8 |
| 1 |
|
Total CLOs and Other ABS | 853 |
| 840 |
| 11.8 | | 3.7 | | 1.7 |
| 4.6 |
| | 399 |
| 158 |
| 184 |
| 71 |
| 27 |
| 1 |
|
Total securitized assets | 2,673 |
| 2,761 |
| 38.7 | | 2.2 | | 2.5 |
| 4.3 |
| | 2,203 |
| 194 |
| 246 |
| 81 |
| 36 |
| 1 |
|
Total fixed income securities and short-term investments | 6,455 |
| 6,749 |
| 94.6 | | 2.0 | | 3.6 |
| 4.9 |
| | 2,904 |
| 956 |
| 1,449 |
| 1,162 |
| 276 |
| 1 |
|
Total fixed income securities and short-term investments by credit rating percentage | | | | | | | | | | 43.0 | % | 14.2 | % | 21.5 | % | 17.2 | % | 4.1 | % | — | % |
Commercial mortgage loans | 18 |
| 18 |
| 0.3 | | 3.8 | | 4.6 |
| 9.4 |
| | — |
| — |
| 16 |
| 2 |
| — |
| — |
|
Equity securities: | | | | | | | | | | | | | | | |
Common stock1 | 143 |
| 132 |
| 1.9 | | 0.5 | | — |
| — |
| | — |
| — |
| — |
| — |
| — |
| 132 |
|
Preferred stock | 2 |
| 2 |
| — | | 3.7 | | — |
| — |
| | — |
| — |
| — |
| — |
| 2 |
| — |
|
Total equity securities | 145 |
| 134 |
| 1.9 | | 0.6 | | — |
| — |
| | — |
| — |
| — |
| — |
| 2 |
| 132 |
|
Other investments: | | | | | | | | | | | | | | | |
Alternative investments: | | | | | | | | | | | | | | | |
Private equity | 127 |
| 127 |
| 1.8 | | — | | — |
| — |
| | — |
| — |
| — |
| — |
| — |
| 127 |
|
Private credit | 40 |
| 40 |
| 0.6 | | — | | — |
| — |
| | — |
| — |
| — |
| — |
| — |
| 40 |
|
Real assets | 21 |
| 21 |
| 0.3 | | — | | — |
| — |
| | — |
| — |
| — |
| — |
| — |
| 21 |
|
Total alternative investments | 188 |
| 188 |
| 2.6 | | — | | — |
| — |
| | — |
| — |
| — |
| — |
| — |
| 188 |
|
Other investments | 42 |
| 42 |
| 0.6 | | — | | — |
| — |
| | — |
| — |
| — |
| — |
| — |
| 42 |
|
Total other investments | 231 |
| 231 |
| 3.2 | | — | | — |
| — |
| | — |
| — |
| — |
| — |
| — |
| 231 |
|
Total invested assets | $ | 6,848 |
| $ | 7,132 |
| 100 | | — | | — |
| — |
| | $ | 2,904 |
| $ | 956 |
| $ | 1,465 |
| $ | 1,163 |
| $ | 278 |
| $ | 364 |
|
(1)2018Includes investments in exchange traded funds, mutual funds, business development corporations, and real estate investment trusts.
Equity Price Risk
Our other investment portfolio represented approximately 3% of total invested assets as of June 30, 2020, and primarily includes alternative investments in limited partnerships. We account for these investments under the equity method, and they typically report income on a one-quarter lag. During Second Quarter 2020, we recorded after-tax losses on these alternative
investments of approximately $13 million, reflecting the market decline in the first quarter of 2020. For additional information regarding these alternative investment strategies, see Note 5. “Investments” in Item 8. “Financial Statements and Supplementary Data.” of our 2019 Annual Report.
Liquidity Risk
We ended the quarter with strong liquidity with short-term investments and cash of $371.1 million, which provides us significant financial flexibility should we see a slowdown in premium collections, or an acceleration of payments, including commissions and loss payments. Additionally, our investment portfolio remains highly-liquid as illustrated in the table below:
|
| | | | | | |
| June 30, 2020 | | December 31, 2019 | |
Asset Category | Percentage of Invested Assets | | Percentage of Invested Assets | |
Highly-liquid assets | 72 |
| % | 74 |
| % |
Generally liquid assets, may become less liquid with market stress1 | 24 |
| | 22 |
| |
Generally illiquid assets2 | 4 |
| | 4 |
| |
Total | 100 |
| % | 100 |
| % |
1These exposures are concentrated within CMBS, CLO and other ABS.
2These exposures include our alternative investments and other non-traded securities.
Indebtedness
Our long-term debt balance did not materially change from December 31, 2019. However, we significantly increased our short-term debt by $302 million during the first quarter of 2020 in light of the COVID-19-related volatility and uncertainty in the financial markets to increase liquidity and operating flexibility. We repaid the $50 million borrowing on our line of credit during Second Quarter 2020, and while we may refinance all or a portion of the borrowings below that are due in September 2020 until December 2020, we expect to repay all short-term borrowings before the end of 2020. The proceeds from the borrowings detailed in the table below, which were outstanding as of June 30, 2020, were invested in high-quality money market funds.
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| | | | | | | | | |
| | | | June 30, 2020 |
($ in thousands) | | Date of Maturity | | Carrying Amount | | Fair Value |
Financial liabilities | | | | |
| | |
|
Short-term debt | | | | |
| | |
|
0.78% Borrowings from FHLBNY | | 9/14/2020 | | $ | 100,000 |
| | 100,085 |
|
0.68% Borrowings from FHLBNY | | 9/18/2020 | | 85,000 |
| | 85,051 |
|
0.58% Borrowings from FHLBI | | 12/14/2020 | | 67,000 |
| | 67,074 |
|
Total short-term debt | | | | 252,000 |
| | 252,210 |
|
Refer to Note 10. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." of our 2019 Annual Report for additional information on our long-term borrowings and Note 5. "Indebtedness" in Part 1. "Financial Information" of this Form 10-Q for additional information regarding our short-term borrowing activity.
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 our disclosure controls and procedures 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 appropriately accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regardingabout required disclosure. No
Except for internal controls over financial reporting related to the implementation of ASU 2016-13, Financial Instruments - Credit Losses, 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 NineSix Months 20192020 that materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting. Management tested the design and operating effectiveness of internal controls over financial reporting related to the new processes regarding our allowances for credit losses and concluded they were effective.
We have not experienced any material impact to our internal control environment over financial reporting despite the fact that the majority of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 current events to minimize the impact these events may have on our internal controls and their design and operating effectiveness.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In the ordinary course
As of conducting business,June 30, 2020, we can be named as defendants in varioushave no material pending legal actions. Most 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 loss and loss expense reserves. In ordinary course claims litigation, we expectproceedings that any potential ultimate liability, after consideration of provisions made for potential losses and costs of defense, will not becould have a material toadverse effect on our consolidated financial condition, results of operations, or cash flows.
From time to time, our Insurance Subsidiaries also are named as defendants in other legal actions, some of which assert claims for substantial amounts. Plaintiffs may style these actions as putative class actions and seek judicial certification of a state or national class for allegations such as improper reimbursement of medical providers paid under workers compensation and personal and commercial automobile insurance policies or improper reimbursement for automobile parts. Similarly, our Insurance Subsidiaries can be named in individual actions seeking extra-contractual damages, punitive damages, or penalties,
often alleging bad faith in the handling of insurance claims. We believe that we have valid defenses to these allegations and we account for such activity through the establishment of unpaid loss and loss expense reserves. In these other legal actions, we expect that any potential ultimate liability, after consideration of provisions made for estimated losses, will not be material Incidental to our consolidated financial condition. Nonetheless,insurance operations, we are engaged in ordinary routine legal proceedings that, because litigation outcomes are inherently unpredictable, and, because the amounts sought in certain of these actions are large or indeterminate, it is possible that any adverse outcomes could have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods.
As For additional information regarding our legal risks, refer to Note 13. "Litigation" in Item 1. "Financial Statements." of September 30, 2019, we do not believe we are involvedthis Form 10-Q and Item 1A. “Risk Factors” below in any legal action that could have a material adverse effect on our consolidated financial condition, results of operations, or cash flows.Part II. “Other Information.”
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,without limitation, contributing capital to any or all of the Insurance Subsidiaries, issuing additional debt and/or equity securities, repurchasing our existing debt and/or equity securities, repurchasing our existing debt, 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 theOur risk factors disclosed in Item 1A. “Risk Factors.” in our 20182019 Annual Report remain accurate with the following addition:
Governmental actions to contain or delay the spread of the COVID-19 pandemic since early March 2020 have disrupted ordinary business commerce and impacted financial markets. These governmental actions, for which we cannot predict the extent, duration, and possible alteration based on future COVID-19-related developments, could materially and adversely affect our results of operations, financial position, and liquidity.
Governmental (international, federal, state, and local) actions to contain or delay the spread of the COVID-19 pandemic have resulted in directives requiring social distancing, operational alteration, or temporary closure of most non-essential businesses to limit public access, and the “sheltering-in-place” of everyone other than essential workers in many instances. These actions have generally:
Negatively impacted the global and United States domestic economies, with some sectors such as discussed below.travel and leisure, retail, energy, and real estate more significantly affected than others;
Increased unemployment;
Increased international, federal, state, and local governmental budget deficits, which has led to adverse rating actions against certain governmental units and increased the general risk of governmental debt default that could impact the value of related fixed income securities;
Induced significant volatility in financial markets;
Decreased valuations in markets for equity, fixed income, and alternative investments in certain sectors;
Impacted individual income and business revenue, and increased the number of individuals and businesses experiencing financial distress with the potential for insolvency;
Decreased premium collections, late payment fees, and reinstatement fees;
Generated other state and federal legislative or executive branch proposals to (i) require insurance policies to retroactively cover COVID-19-related losses that were expressly excluded under the terms of some property insurance policies, and (ii) presume that COVID-19 is a work-related illness for certain employees under workers compensation
policies;
Generated state insurance department bulletins or orders requesting or mandating premium credits and rebates on certain insurance policies that may exceed actual COVID-19-related frequency experience decreases;
Disrupted regular commerce, supply chains, and travel;
Increased expense management focus by individuals and all-sized businesses;
Increased the demand for and/or limited the availability of medical resources; and
Increased e-commerce, video, phone, and other methods of remote trade and business transaction.
The economic impacts of the COVID-19-related governmental actions may impact our revenue, loss and loss expense, liquidity, or regulatory capital and surplus, and operations, particularly as these relate, without limitation, to the following:
Impact on Our Insurance Operations
Because our general liability and workers compensation policies provide for premium audit, we must estimate the amount of return premium that we may owe policyholders for revenues and payrolls lowered due to the extent and duration of the COVID-19-related governmental directives and any related economic contraction. Such return premiums could be significant and will impact our underwriting results.
To help our customers maintain insurance coverages, we are offering - sometimes in collaboration with or at the direction of our regulators - individualized payment flexibility and suspension of policy cancellations, late payment notices, and late or reinstatement fees. Customers afforded this treatment have until the later of 30 days or the end of the grace period established by the customers’ home state insurance commissioner.
| |
• | In Second Quarter 2020, we offered a credit equal to 15% of insureds’ premiums for commercial automobile and personal automobile lines of insurance for April and May. This two-month premium credit was based on a limited amount of claims reporting data reflecting the impact of the COVID-19-related governmental directives on miles driven, which has reduced claims frequencies. We do not have traditional actuarial analysis to support these credits. The actual impact of the COVID-19-related governmental actions will not be fully known until some point in the future. Should the various governmental directives be extended or reinstated due to increased infection rates, it is possible that we will give further premium credit to our customers to the extent supported by further analysis. Based on the continued COVID-19-related economic impact, it is possible that state insurance commissioners may take other regulatory actions requiring premium credit in lines other than commercial and personal automobile, and we face the risk that we may be required to return more premium than is warranted by our filed rating plans and actual loss experience. |
All of our commercial property and businessowners policies require direct physical loss of or damage to insured property by a covered cause of loss. Whether COVID-19-related contamination, the existence of a pandemic, and/or the resulting government shutdown orders cause physical loss of or damage to property is already the subject of much debate and litigation. We cannot predict the outcome of that litigation. It also is our practice to include in, or attach to, all standard lines commercial property and businessowners policies an exclusion that states that all loss or property damage caused by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness, or disease is not a covered cause of loss. We offer some limited coverages that could apply in COVID-19-related claims and circumstances, primarily tied to clean-up and food-contamination that are subject to sub-limits. Approximately 95% of our commercial property and businessowners policies include the very specific and regulatory approved virus exclusion.
There currently are various public policy debates and legislative proposals at both the federal and state levels that would impose liability (including retroactively) for COVID-19-related business interruption losses on policies that do not provide such coverage terms. We cannot predict the outcome of such proposals, which may be influenced by media attention on and lobbying efforts by property and casualty insurance policyholders whose policies do not provide coverage for business interruption losses connected with the COVID-19-related governmental directives. We are aware of meritorious arguments that such proposals, if enacted, would be unconstitutional and impair future commercial activity. Nonetheless, if such proposals were enacted and upheld as constitutional, they would have a material impact on our profitability, liquidity, and overall financial condition.
Limited availability of medical resources could result in medical inflation and complicate, delay and/or extend medical treatment that could impact exposure on workers compensation, general liability, and personal and commercial automobile claims.
We face risks regarding our flood business becausemay have increased workers compensation loss and loss expenses if policyholders' employees in high-risk roles of uncertainties regarding the NFIP.
We are the fifth largest insurance groupessential businesses contracted COVID-19 in the WYO arrangementworkplace. We may experience higher frequency of workers compensation claims, particularly if state legislative or executive order proposals are enacted that create presumptions that the NFIP,contraction of COVID-19 by an essential business employee who interacted with the public is work-related. We also may see an extension of workers compensation benefits if employees do not have jobs to which 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. Effective October 1, 2019, the underwriting expense allowance increased to 30.1%, from 30.0%, of direct premium written. The claim servicing fee remains the combination of 0.9% of direct premium written and 1.5% of incurred losses.they can return.
As a WYO carrier, we are requiredWe may experience elevated loss frequency and severity related to follow certain NFIP proceduresour liability coverages from efforts by the plaintiffs’ bar to generate COVID-19-related claim activity that impacts our policyholders.
Loss frequency and severity could increase related to our auto and property coverages due to, among other things, disruptions in the administration of flood policiessupply chains and claims. Some of these requirements may differ from our normalchanges in business practices and individual behaviors resulting from the shelter-in-place and social distancing measures, such as arson and fraud.
Due to the COVID-19-related governmental orders, we may presentexperience delayed reporting of losses, settlement negotiations, and trial of disputed claims that may disrupt our normal claims resolution processes and trends.
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• | Service levels could deteriorate if significant numbers of our remote employees or key business partners are unable to work effectively while sheltering-in-place. Examples of potential work impacts include local internet disruption that prevents access to our virtual private network, widespread employee contraction of the COVID-19 illness, other governmental directives, or similar unavoidable events. Because our employees are working remotely, it also is possible that we will be subject to increased cybersecurity attacks from bad actors. |
In response to the COVID-19 pandemic and recent increased catastrophic loss activity, the reinsurance industry is seeking to tighten contractual terms and conditions, reduce reinsurance capacity, and increase its pricing for insurance company purchases of reinsurance protection. Tightened terms and conditions include the introduction of new coverage exclusions, such as excluding losses related to communicable diseases, particularly for business interruption losses in property treaties and, to a reputationallesser extent, in casualty treaties. We purchase a significant amount of reinsurance, including a property catastrophe reinsurance program and property and casualty excess of loss reinsurance treaties. To the extent we are exposed to losses on our primary policies that may now be excluded from coverage under our existing reinsurance treaties or in future renewal periods, we will face increased underwriting risk. The increased underwriting risk could increase our net loss and loss expenses and increase the volatility in our underwriting results. Decreased reinsurance capacity also would increase our underwriting risk if we are unable to fully place our brand. Whileexisting reinsurance treaties upon renewal. If risk-adjusted reinsurance price increases are at rates higher than we are able to generate on the underlying insurance companies are regulated bypolicies we sell, it will negatively impact our underwriting profitability and have a material adverse effect on our financial condition and results of operations.
Impact on our Investment Operations
The significant equity and debt financial market volatility from the statesCOVID-19 pandemic and the NFIP requires WYO carriersrelated governmental orders may impact our net investment income due to be licensedthe following:
Financial market volatility is reflected in the statesour alternative investment portfolio performance;
A change in spreads on fixed income securities may create mark-to-market investment valuation losses and volatility in unrealized capital gains, which they operate, the NFIP is a federal program and WYO carriers are fiscal agentswill impact GAAP equity;
OTTI losses may increase due to securities we intend to sell, as we give our third-party investment managers flexibility to take advantage of the U.S. Governmentspread widening in fixed income securities, particularly in asset classes more significantly impacted by COVID-19-related governmental directives and must followto which the NFIP's directives. Consequently, we have the risk that directives from the NFIPFederal Reserve Board is providing liquidity and a state regulator on the same issue may conflict.structural support; and
During Third Quarter 2019, the NFIP's authorization was extended until November 21, 2019, as a short-term solution while Congress continuesEconomic inflation related to debate a more comprehensive proposal. There continues to be significant public policy and political debate in Congress about an extension of the NFIP, appropriate compensation for the WYO carriers, and solutions for flood risk throughout the country. Legislation introduced in Congress, if enacted, could greatly reduce the compensation WYO carriers receive under the NFIP. FEMA can act on its own to revise the arrangement, and did so in October 2019 by increasing the WYO’s underwriting expense allowance by 0.1 points, to 30.1%, from 30.0% .
Our flood businessCOVID-19 issues could be impacted by: (i) a lapse in program authorization; (ii) further changes to WYO carrier compensation; (iii) any mandate for primary insurance carriers to provide flood insurance;higher or (iv) private writers becoming more prevalent in the marketplace. The uncertainty created by the public policy debatelower than our expectations and politics of flood insurance reform makes it difficult for us to predict the future of the NFIP andimpact our continued participation in the program.investment returns.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following table provides information regarding our purchases of our common stock in ThirdSecond Quarter 20192020:
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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 |
July 1 – 31, 2019 | | 179 |
| | $ | 77.50 |
| | — |
| | — |
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August 1 - 31, 2019 | | 540 |
| | 80.59 |
| | — |
| | — |
|
September 1 - 30, 2019 | | 16,537 |
| | 78.52 |
| | — |
| | — |
|
Total | | 17,256 |
| | $ | 78.57 |
| | — |
| | — |
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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, 2020 | | 14 |
| | $ | 46.97 |
| | — |
| | — |
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May 1 - 31, 2020 | | 13 |
| | 48.15 |
| | — |
| | — |
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June 1 - 30, 2020 | | 1,040 |
| | 51.39 |
| | — |
| | — |
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Total | | 1,067 |
| | $ | 51.29 |
| | — |
| | — |
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1TheseWe purchased these shares were purchased from employees in connection with the vesting of restricted stock units. These repurchases were made to satisfy tax withholding obligations associated with respect to those employees.the vesting of their restricted stock units.
ITEM 6. EXHIBITS.
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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 | | The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2019,2020, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders' Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements. |
*104 | | The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2019,2020, formatted in iXBRL. |
* 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
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Date: | October 31, 2019July 30, 2020 | | By: /s/ Gregory E. MurphyJohn J. Marchioni |
| | | Gregory E. MurphyJohn J. Marchioni |
| | | Chairman of the BoardPresident and Chief Executive Officer |
| | | (principal executive officer) |
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Date: | October 31, 2019July 30, 2020 | | By: /s/ Mark A. Wilcox |
| | | Mark A. Wilcox |
| | | Executive Vice President and Chief Financial Officer |
| | | (principal financial officer) |