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SELECTIVE INSURANCE GROUP INC – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
Forward-looking Statements
Certain statements in this report, including information incorporated by
reference, are "forward-looking statements" as defined by the Private Securities
Litigation Reform Act of 1995 ("PSLRA"). The PSLRA provides a safe harbor under
the Securities Act of 1933 and the Securities Exchange Act of 1934 for
forward-looking statements. These statements relate to our intentions, beliefs,
projections, estimations, or forecasts of future events and financial
performance. They involve known and unknown risks, uncertainties, and other
factors that may cause our or industry actual results, activity levels, or
performance to materially differ from those expressed or implied by the
forward-looking statements. In some cases, you can identify forward-looking
statements by words such as "may," "will," "could," "would," "should," "expect,"
"plan," "anticipate," "target," "project," "intend," "believe," "estimate,"
"predict," "potential," "pro forma," "seek," "likely," "continue," or comparable
terms. Our forward-looking statements are only predictions, and we can give no
assurance that such expectations will prove correct. We undertake no obligation,
other than as federal securities laws may require, to publicly update or revise
any forward-looking statements for any reason.
Factors that could cause our actual results to differ materially from what we
project, forecast, or estimate in forward-looking statements are discussed in
further detail in Item 1A. "Risk Factors." of this Form 10-K. These risk factors
may not be exhaustive. We operate in a constantly changing business environment,
and new risk factors may emerge at any time. We can neither predict these new
risk factors nor assess their impact, if any, on our businesses or the extent
any new factor or combination of factors may cause actual results to differ
materially from any forward-looking statements. Given these risks,
uncertainties, and assumptions, the forward-looking events we discuss in this
report might not occur.
Introduction
We classify our business into four reportable segments:
•Standard Commercial Lines;
•Standard Personal Lines;
•Excess and Surplus Lines ("E&S Lines"); and
•Investments.
For more details about these segments, refer to Note 1. "Organization" and Note
12. "Segment Information" in Item 8. "Financial Statements and Supplementary
Data." of this Form 10-K.
We write our Standard Commercial and Standard Personal Lines products and
services through nine of our insurance subsidiaries, some of which participate
in the federal government's National Flood Insurance Program's ("NFIP") Write
Your Own Program ("WYO"). We write our E&S products through another subsidiary,
Mesa Underwriters Specialty Insurance Company , a nationally-authorized
non-admitted platform for customers who generally cannot obtain coverage in the
standard marketplace. Collectively, we refer to our ten insurance subsidiaries
as the "Insurance Subsidiaries."
The following is Management's Discussion and Analysis ("MD&A") of the
consolidated results of operations and financial condition, as well as known
trends and uncertainties, that may have a material impact in future periods. The
MD&A discusses and analyzes our 2021 results compared to 2020. Investors should
read the MD&A in conjunction with Item 8. "Financial Statements." of this Form
10-K. For discussion and analysis of our 2020 results compared to 2019, refer to
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations." of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2020 .
In the MD&A, we will discuss and analyze the following:
•Critical Accounting Policies and Estimates; •Financial Highlights of Results for Years EndedDecember 31, 2021 , 2020, and 2019; •Results of Operations and Related Information by Segment; •Federal Income Taxes; and •Liquidity and Capital Resources. 34 -------------------------------------------------------------------------------- Critical Accounting Policies and Estimates We have identified the policies and estimates critical to our business operations and the understanding of our results of operations. The policies and estimates we consider most critical to the preparation of the Financial Statements involved (i) reserves for loss and loss expense, (ii) investment valuations and the allowance for credit losses on available-for-sale ("AFS") fixed income securities, and (iii) reinsurance. Reserves for Loss and Loss Expense Significant time can elapse between the occurrence of an insured loss, the reporting of the claim to us, and the final settlement and payment of the claim. To recognize liabilities for unpaid loss and loss expense, insurers establish reserves as balance sheet liabilities representing an estimate of amounts needed to pay reported and unreported loss and loss expense. The following tables provide case and incurred but not reported ("IBNR") reserves for loss and loss expenses, and reinsurance recoverable on unpaid loss and loss expense as ofDecember 31, 2021 and 2020: As ofDecember 31, 2021 Loss and Loss Expense Reserves Reinsurance Case IBNR Recoverable on Unpaid ($ in thousands) Reserves Reserves Total Loss and Loss Expense Net Reserves General liability $ 345,996 1,427,326 1,773,322 213,253 1,560,069 Workers compensation 351,705 700,304 1,052,009 196,670 855,339 Commercial automobile 271,729 476,176 747,905 15,480 732,425 Businessowners' policies 41,603 67,786 109,389 6,828 102,561 Commercial property 76,406 46,975 123,381 22,277 101,104 Other 3,671 22,474 26,145 2,136 24,009 Total Standard Commercial Lines 1,091,110 2,741,041 3,832,151 456,644 3,375,507 Personal automobile 60,871 82,468 143,339 40,941 102,398 Homeowners 13,709 35,602 49,311 2,392 46,919 Other 44,301 33,115 77,416 64,975 12,441 Total Standard Personal Lines 118,881 151,185 270,066 108,308 161,758 E&S casualty lines1 94,839 361,875 456,714 11,672 445,042 E&S property lines2 9,080 12,892 21,972 2,017 19,955 Total E&S Lines 103,919 374,767 478,686 13,689 464,997 Total $ 1,313,910 3,266,993 4,580,903 578,641 4,002,262 1Includes general liability (95% of net reserves) and commercial auto liability coverages (5% of net reserves). 2Includes commercial property (91% of net reserves) and commercial auto property coverages (9% of net reserves). 35 --------------------------------------------------------------------------------
Loss and Loss Expense Reserves
Reinsurance
Case IBNR Recoverable on Unpaid
($ in thousands) Reserves Reserves Total Loss and Loss Expense Net Reserves
General liability $ 275,133 1,363,508 1,638,641 215,136 1,423,505
Workers compensation 359,344 721,437 1,080,781 210,450 870,331
Commercial auto 246,428 410,123 656,551 11,611 644,940
Businessowners' policies 39,047 62,517 101,564 6,849 94,715
Commercial property 60,254 38,228 98,482 21,760 76,722
Other 5,247 15,073 20,320 2,853 17,467
Total Standard Commercial Lines 985,453 2,610,886 3,596,339 468,659 3,127,680
Personal automobile 60,860 79,596 140,456 42,403 98,053
Homeowners 15,456 31,926 47,382 847 46,535
Other 10,498 30,013 40,511 29,589 10,922
Total Standard Personal Lines 86,814 141,535 228,349 72,839 155,510
E&S casualty lines1 80,506 336,596 417,102 12,195 404,907
E&S property lines2 9,401 9,164 18,565 576 17,989
E&S Lines 89,907 345,760 435,667 12,771 422,896
Total $ 1,162,174 3,098,181 4,260,355 554,269 3,706,086
1Includes general liability (95% of net reserves) and commercial auto liability
coverages (5% of net reserves).
2Includes commercial property (92% of net reserves) and commercial auto property
coverages (8% of net reserves).
The Insurance Subsidiaries' net loss and loss expense reserves duration was
approximately 3.5 years at
31, 2020
How reserves are established Reserves for loss and loss expense include case reserves on reported claims and IBNR reserves. Case reserves are estimated on each individual claim based on claim-specific facts and circumstances known at the time. Case reserves may be adjusted up or down as the claim's specific facts and circumstances change. IBNR reserves are established at more aggregated levels, and they include provisions for (i) claims not yet reported, (ii) future development on reported claims, (iii) closed claims that will reopen in the future, and (iv) anticipated salvage and subrogation recoveries. Our robust reserve process relies on quarterly internal reserve reviews, based on our own loss experience, with consideration given to various internal and external factors. In addition to our internal reserve reviews, we have an external consulting actuary perform an independent review of our reserves semi-annually. We do not rely on the external consulting actuary's report to determine our recorded reserves; however, we review and discuss with the consulting actuary our respective observations regarding trends, key assumptions, and actuarial methodologies. While not required, our independent consulting actuary issues the annual statutory Statements of Actuarial Opinion for our Insurance Subsidiaries. For additional information on our accounting policy for reserves for loss and loss expense, refer to Note. 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Range of reasonable reserve estimates We have estimated a range of reasonable reserve estimates for net loss and loss expense of$3,564 million to$4,236 million atDecember 31, 2021 . This range reflects low and high reasonable reserve estimates determined by judgmentally adjusting the methods, factors, and assumptions selected within the internal reserve review. This approach produces a range of reasonable reserve estimates, and does not represent a distribution of all possible outcomes. Therefore, the final outcomes may fall above or below these amounts. The range does not include a provision for potential increases or decreases associated with asbestos, environmental, and certain other continuous exposure claims, which by their nature are more variable and, therefore, traditional actuarial techniques cannot be effectively applied.
The range of reasonable reserve estimates increased as of
relative to
reserves commensurate with our growth in net premiums earned ("NPE") and
additional risk created by the current inflationary environment.
36 -------------------------------------------------------------------------------- Changes in Reserve Estimates (Loss Development ) Our quarterly reserve process may lead to changes in the recorded reserves for prior accident years, referred to as favorable or unfavorable prior year loss and loss expense development. In 2021, we experienced net favorable prior year loss development of$82.9 million , compared to$72.9 million in 2020 and$50.3 million in 2019. The following table summarizes prior year development by line of business: (Favorable)/Unfavorable Prior Year Loss andLoss Expense Development ($ in millions) 2021 2020 2019 General liability$ (29.0) (35.0) (5.0) Commercial Automobile 13.3 7.1 0.7 Workers compensation (58.0) (60.0) (68.0) Businessowners' policies (0.4) 3.9 1.9 Commercial property (2.6) 9.2 5.1 Homeowners 1.8 7.7 7.5 Personal automobile (0.2) (1.8) 4.4 E&S casualty lines (7.0) - 2.0 E&S property lines (0.8) (4.0) 1.0 Other - - 0.1 Total$ (82.9) (72.9) (50.3)
A detailed discussion of recent reserve development by line of business follows.
Standard Market General Liability Line of Business AtDecember 31, 2021 , our general liability line of business had recorded reserves, net of reinsurance, of$1.6 billion , representing 39% of our total net reserves. In 2021, this line experienced favorable development of$29.0 million , attributable to lower loss severities in accident years 2018 and prior. During 2020, this line experienced favorable development of$35.0 million , attributable to lower loss severities in accident years 2017 and prior. By its nature, general liability presents a diverse set of exposures. Losses and loss trends are influenced by various factors, including legislative enactments, judicial decisions, and economic and social inflation. Economic inflation directly impacts our claims severities by increasing the costs of raw materials, medical procedures and labor. Social inflation may impact both the frequency and severity of claims by affecting (i) the propensity for a claimant to file a claim, (ii) the percentage of claimants who engage lawyers, and (iii) the nature of judicial verdicts and amount of the associated awards, which influence settlement values going forward. We monitor claim litigation rates regularly and have observed modest increases in the percentage of claims with attorney involvement in recent periods. This trend and the impact of court closures are affecting the time to settle claims. We have exposure to abuse or molestation claims, mainly through insurance policies that we (i) underwrite through our Community and Public Services ("CAPS") strategic business unit and (ii) issue to schools, religious institutions, day-care facilities, and other social services. These customers within our CAPS business unit represented approximately 10% of our total Standard Commercial Lines NPW in 2021 and 11% in 2020. Through 2017, our exposure to abuse or molestation risk increased, reflective of our CAPS book's growth. In 2018, we implemented more stringent underwriting eligibility guidelines and partnered with a third party to better assess exposure and enhance loss control measures. In 2019, we filed and approved significant rate increases for this exposure. We continue to monitor each jurisdiction's statute of limitations to ensure our rate level accounts for the changing exposure as best we reasonably can. While these underwriting and pricing actions have been necessary to ensure the profitability of the portfolio going forward, they have limited our CAPS growth in recent years. We also have exposure to abuse or molestation claims from recently enacted state laws that extend the statute of limitations or permit windows for abuse or molestation claims and lawsuits to be filed that statutes of limitations previously barred. Consequently, we may receive claims decades after the alleged acts occurred that will involve complex claims coverage determinations, potential litigation, higher defense costs, and the need to collect from reinsurers under older reinsurance agreements. Our claims and actuarial departments actively monitor these claims to identify changes in frequency or severity and any emerging or shifting trends. While this should help us better understand this rapidly evolving exposure, the ultimate impact of social, political, and legal trends remains highly uncertain, and may significantly impact the ultimate settlement values for these claims. The COVID-19 pandemic and resulting economic slowdown have presented additional risks to this line of business. The impact of the pandemic, including related governmental orders, court closures, and other behavioral and procedural changes, such as slower than usual timing in which an individual might bring a claim, may have or could impact claims reporting or 37 --------------------------------------------------------------------------------
settlement patterns. Settlement patterns may be further impacted by a general
trend towards increased attorney involvement in the claims process, as
previously discussed.
Standard Market Workers Compensation Line of Business AtDecember 31, 2021 , our workers compensation line of business had recorded reserves, net of reinsurance, of$855 million , representing 21% of our total net reserves. During 2021, this line experienced favorable reserve development of$58.0 million , driven by accident years 2019 and prior. Similarly, this line experienced favorable reserve development during 2020 of$60.0 million , driven by accident years 2018 and prior. During both 2021 and 2020, the lower loss emergence than expected was partly due to: (i) medical inflation that was lower than originally anticipated; and (ii) various significant claims initiatives we have implemented. Because of the length of time injured workers can receive related medical treatment, decreases in medical inflation can cause favorable loss development over an extended number of accident years. While we believe our underwriting and claims operational changes improved our underwriting experience, there is risk associated with these changes. Most notably, changes in operations may inherently change paid and reported development patterns. While our reserve analyses incorporate methods that adjust for these changes, a greater risk of fluctuation remains in the estimated reserves. In addition to the operational changes, a variety of other issues can impact the workers compensation line of business, such as the following: Unexpected changes in medical cost inflation -The industry is currently experiencing a period of lower medical claim cost inflation. However, some signs indicate inflationary pressure on these costs. Changes in our historical workers compensation medical costs, along with potential changes in future medical inflation, can create additional variability in our reserves;
Changes in statutory workers compensation benefits - Benefit changes may be
enacted that affect all outstanding claims, including claims that have occurred
in the past, but have not yet been settled. Depending on the social and
political climate, these changes may either increase or decrease associated
claim costs;
Changes in utilization of the workers compensation system - These changes may be
driven by economic, legislative, or other changes, such as increased
pharmaceutical prescriptions, more complex medical procedures, changes in
permanently injured workers' life expectancy, and health insurance availability.
COVID-19-related impacts - While not a major insurer of front-line workers (e.g. medical facilities and hospitals), we have potential exposure to employees contracting COVID-19 in the course of their employment. These claims may be asserted under certain state "presumption statutes" that shift the burden of proof from the claimant to the insurer. Medical system service and supply constraints, coupled with injured workers delaying non-essential procedures, may extend the duration of non-COVID-19 claims. To date, we have not seen significant COVID-19-related workers compensation losses Standard Market Commercial Automobile Line of Business AtDecember 31, 2021 , our commercial automobile line of business had recorded reserves, net of reinsurance, of$732 million , which represented 18% of our total net reserves. In 2021, this line experienced unfavorable prior year reserve development of$13.3 million , driven by higher loss severities in accident years 2016 through 2019. In 2020, this line experienced unfavorable prior year reserve development of$7.1 million , driven by higher loss severities in accident years 2016 through 2019 and higher than expected frequencies in accident year 2019. For both us and the industry, the commercial automobile line has experienced unfavorable trends in recent years. Pre-pandemic, increased frequencies were likely due to increased miles driven related to lower unemployment, poor road quality, and an increase in distracted driving. The onset of the COVID-19 pandemic in early 2020, along with governmental "stay-at-home" orders, dramatically reduced miles driven and road traffic, significantly reducing claims frequency in 2020. While miles driven increased in 2021, driving patterns have also shifted, including changes in the days of the week and times of day people are driving. As of the end of 2021, frequencies remained somewhat below pre-pandemic levels. Since the pandemic's start, we have seen increasing severities in both the liability and physical damage coverages. The average value of our bodily injury paid loss settlements has increased, possibly relating to higher average driving speeds, higher jury awards, and an increase in distracted driving. Increasing property damage severities may relate to elevated repair costs for increasingly complex vehicles that incorporate more technology, as well as recent disruptions to the supply chain. Continued complications in the supply chain, including labor shortages, increase the risk of longer-term elevated economic inflation. 38 --------------------------------------------------------------------------------
Over the last several years, we have taken actions to improve the profitability
of this line of business, including:
•Taking meaningful rate and underwriting actions on our renewal portfolio. We will continue to leverage our predictive modeling and analytical capabilities to provide more granular insights about where we should focus our actions. •Reducing premium leakage by improving the quality of our rating information, including validating application information with third-party data and obtaining more detailed driver information. •Implementing new tools to score drivers to underwrite more effectively and align rate with exposure. •Aggressively managing new business pricing and hazard mix while deploying co-underwriting by our regional underwriters and corporate underwriting teams' subject matter experts for selected higher hazard classes to improve risk driver recognition and exposure-based pricing. Standard Market Personal Automobile Line of Business AtDecember 31, 2021 , our personal automobile line of business had recorded reserves, net of reinsurance, of$102 million , which represented 3% of our total net reserves. In 2021, this line experienced favorable prior year reserve development of$0.2 million . In 2020, this line experienced unfavorable prior year reserve development of$1.8 million . Some of the same issues affecting the commercial automobile line are affecting this line. The COVID-19-related reduction in frequencies was even more pronounced than in commercial automobile line. As with the commercial automobile line, these frequencies significantly rebounded in 2021, yet remain less than pre-pandemic levels. This line also has a similar potential for higher average severities like the commercial automobile line. In addition to the COVID-19-related temporary impacts, the underlying trends of increased vehicle repair costs and poor road quality are likely causes of rising severities, possibly exacerbated by distracted driving trends. We continue to recalibrate our predictive models and refine our underwriting and pricing approaches. While we believe these underwriting and pricing changes will ultimately lead to improved profitability and greater stability, the resulting changes to our exposure profile may impact paid and reported development patterns, thereby increasing the uncertainty in the reserves in the near term. E&S Casualty Lines of Business AtDecember 31, 2021 , our E&S casualty lines of business had recorded reserves, net of reinsurance, of$445 million , representing 11% of our total net reserves. Our E&S casualty lines results have improved over recent years. In 2021, this line experienced favorable prior year reserve development of$7.0 million , primarily attributable to lower loss severities in accident years 2016 and prior. In 2020, this line did not experience prior year reserve development.
Some of the risk factors for the general liability line also affect the E&S
casualty lines. These include (i) economic inflation, such as materials and
labor costs; (ii) social trends, such as increased attorney involvement; and
(iii) COVID-19-related impacts, such as court closures.
The E&S casualty lines also are impacted by operational changes we have made to improve the portfolio's performance. Our underwriting operations have substantially exited several targeted business classes that have historically produced volatile results, including commercial automobile liability, liquor liability, and snow removal.
Recent E&S casualty claims actions have created further casualty improvements:
•In 2020, we created a dedicated E&S claims team in our corporate claims
function, bringing greater expertise and consistency to E&S claims handling.
•We have segregated "litigated," "non-litigated," and "high exposure" claims,
with separate specialized teams for each.
•We implemented the following operational and expense improvement initiatives
for legal counsel:
•Increased the use of staff counsel, increasing legal staff in their assigned
territories to support claims volume;
•Heightened focus on legal budgeting and expense management; and
•Implemented a panel counsel review process.
While we believe these underwriting and claims operational changes improved our
underwriting experience, there is risk associated with these changes. Most
notably, changes in portfolio composition or our claims processes may inherently
change paid and reported development patterns. While our reserve analyses
incorporate methods that adjust for these changes, there remains a greater risk
of fluctuation in the estimated reserves.
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Other impacts creating additional loss and loss expense reserve uncertainty
Claims Initiative Impacts Consistent with our strategic imperative to optimize operational efficiency, ourClaims Department continually identifies areas for improvement and efficiency to increase our value proposition to policyholders. These improvements may lead to claims practice changes that affect average case reserve levels and claims settlement rates, which directly impact the data used to project ultimate loss and loss expense. While these changes may increase uncertainty in our estimates in the short term, we expect refined management of the claims process to be the longer-term benefit. Our internal reserve analyses incorporate certain actuarial projection methods that make adjustments for changes in case reserve adequacy and claims settlement rates. These methods adjust our historical loss experience to the current case adequacy or settlement rate level, providing a more consistent basis for projecting future development patterns. These methods, like all projection methods, have their own associated assumptions and judgments. Therefore, no single method can be interpreted as definitive. Unanticipated Changes in InflationUnited States ("U.S.") monetary policy and global economic conditions will bring additional uncertainty related to inflationary trends. Changes in inflation affect the ultimate settlement costs for many of our lines of business, with the greatest reserve impact on the longer-tailed lines such as general liability and workers compensation. Therefore, uncertainty about future inflation or deflation creates the potential for additional reserve variability in these lines of business. Sensitivity analysis: Potential impact on reserve estimates due to changes in key assumptions Our process to establish reserves includes a variety of key assumptions, including without limitation: •The selection of loss and loss expense development factors; •The weight to be applied to each individual actuarial projection method; •Projected future loss trends; and •Expected claim frequencies, severities, and ultimate loss and loss expense ratios for the current accident year. The importance of any single assumption depends on several considerations, such as the line of business and the accident year. If the actual experience emerges differently than the assumptions underlying the reserve process, changes in our reserve estimates are possible that may be material to the results of operations in future periods. Below are sensitivity tests highlighting potential impacts to loss and loss expense reserves for the major casualty lines of business under different scenarios. These tests consider each assumption and line of business individually, without any consideration of correlation between lines of business and accident years. Therefore, the results do not constitute an actuarial range. While the figures represent possible impacts from variations in certain key assumptions, there is no assurance that future loss and loss expense emergence will be consistent with either our current or alternative sets of assumptions. While the sources of reserve variability are generated by different internal and external trends and operational changes, they ultimately manifest themselves as changes in the expected loss and loss expense development patterns. These patterns are a key assumption in the reserving process. In addition, the current accident year expected loss and loss expense ratios are also a key assumption. These ratios are developed through a rigorous process of projecting recent accident years' experience to an ultimate settlement basis. Then they are adjusted to the current accident year's pricing and loss cost levels. The impact from underwriting portfolio and claims handling practice changes are also quantified and reflected where appropriate. As with all estimates, the ultimate loss and loss expense ratios may differ from those currently estimated. The sensitivities of loss and loss expense reserves to these key assumptions are illustrated below for the major casualty lines. The first table displays estimated impacts from changes in expected reported loss and loss expense development patterns for our major casualty lines of business. It shows line of business reserve impacts if the actual calendar year incurred amounts are greater or less than current expectations by the selected percentages. While judgmental, the selected percentages by line are based on the reserve range analysis and the actual historical reserve development for the line of business. The second table displays the estimated impacts from changes to the expected loss and loss expense ratios for the current accident year. It shows reserve impacts by line of business if the expected loss and loss expense ratios for the current accident year are greater or less than current expectations by the selected percentages. 40 -------------------------------------------------------------------------------- Reserve Impacts of Changes to Expected Loss and Loss Expense Reporting Patterns (Decrease) to Increase to Future Future Calendar Calendar Year
($ in millions) Percentage Decrease/Increase Year Reported Reported General liability 10 % $ (155) $ 155 Workers compensation 18 (105) 105 Commercial automobile liability 15 (90) 90 Personal automobile liability 15 (10) 10 E&S casualty lines 10 (45) 45
Reserve Impacts of Changes to Current Year Expected Ultimate Loss and Loss Expense Ratios
(Decrease) to
Current Accident Increase to Current
Year Expected Loss Accident Year
and Loss Expense Expected Loss and
($ in millions) Percentage Decrease/Increase Ratio Loss Expense Ratio General liability 10 pts $ (80) $ 80 Workers compensation 10 (30) 30 Commercial automobile liability 10 (50) 50 Personal automobile liability 10 (10) 10 E&S casualty lines 10 (20) 20 Note that there is some overlap between the impacts in the two tables. For example, increases in the calendar year development would ultimately impact our view of the current accident year's loss and loss expense ratios. However, these tables provide perspective on the sensitivity of each key assumption. While the changes represent outcomes based on reasonably likely changes to our underlying reserving assumptions, they do not represent a range of possible outcomes. Our reserves could increase or decrease significantly from what the tables above reflect. Asbestos and Environmental Reserves Our general liability, excess liability, and homeowners reserves include exposure to asbestos and environmental claims. The emergence of these claims occurs over an extended period and can be unpredictable. The total recorded net loss and loss expense reserves for these claims were$21.1 million as ofDecember 31, 2021 and$21.4 million as ofDecember 31, 2020 , with asbestos claims constituting approximately 23% of these reserves in both years. Environmental claims have arisen primarily from insured landfill exposures in municipal government and small non-manufacturing commercial risk, as well as leaking underground storage tanks within our homeowners policies. Asbestos claims have arisen primarily from policies issued to various distributors of asbestos-containing products, such as electrical and plumbing materials. We handle our asbestos and environmental claims in a centralized and specialized asbestos and environmental claim unit. That unit establishes case reserves on individual claims based on the facts and circumstances known at a given point in time, supplemented by bulk IBNR reserves. Estimating IBNR reserves for asbestos and environmental claims is difficult because these claims have delayed and inconsistent reporting patterns. In addition, there are significant uncertainties associated with estimating critical reserve assumptions, such as average clean-up costs, third-party costs, potentially responsible party shares, allocation of damages, litigation and coverage costs, and potential state and federal legislative changes. Limiting our exposure to asbestos and environmental claims are (i) the fuel oil system exclusion on ourNew Jersey homeowners policies that we introduced in 2007, and (ii) theInsurance Services Office, Inc.'s Total Pollution Exclusion that was introduced in the mid-1980's, Prior to the mid-1980's, we primarily wrote Standard Personal Lines, which has also limited our exposure to asbestos and environmental claims. Other Latent Exposures We also have other latent and continuous trigger exposures in our ongoing portfolio. Examples include claims for construction defect and abuse or molestation, for which states have increased and expanded the statute of limitations. We manage our exposure to these liabilities through our underwriting and claims practices, and, a dedicated claims unit, similar to our handling of asbestos and environmental claims. The impact of social, political, and legal trends on these claims remains highly uncertain, so our related loss and loss expense reserves remain highly uncertain. These exposures remain in our ongoing portfolio, and as such, are reserved in aggregate, with other exposures within the line of business reserves. 41 --------------------------------------------------------------------------------
Investment Valuation and the Allowance for Credit Losses on
Securities
Investment Valuation Accounting guidance defines the fair value of our investment portfolio as the exit price, or the amount that would be (i) received to sell an asset or (ii) paid to transfer a liability in an orderly transaction between market participants. When determining an exit price we must rely on observable market data, if available. Most securities in our equity portfolio have readily determinable fair values and are recorded at fair value with changes in unrealized gains or losses recognized through income. Our AFS fixed income securities portfolio is recorded at fair value, and the related unrealized gains or losses are reflected in stockholders' equity, net of tax. For our AFS fixed income securities portfolios, fair value is a key factor in the measurement of (i) losses on securities for which we have the intent to sell, and (ii) changes in the allowance for credit losses. The fair value of approximately 96% of our investments measured at fair value are classified as either Level 1 or Level 2 in the fair value hierarchy and are priced using observable inputs for identical or similar assets. About 3% are classified as Level 3 and are based on unobservable market inputs because the related securities are not traded on a public market. For additional information, refer to the following within Item 8. "Financial Statements and Supplementary Data." of this Form 10-K: (i) item (d) of Note 2. "Summary of Significant Accounting Policies" regarding descriptions of the levels within the fair value hierarchy and the valuation techniques used for our Level 3 securities, and (ii) Note 7. "Fair Value Measurements" for additional information on the unobservable inputs in our securities measured using Level 3 inputs. Allowance for Credit Losses onAFS Fixed Income Securities When fixed income securities are in an unrealized loss position and we do not intend to sell them, we record an allowance for credit losses for the portion of the unrealized loss related to an expected credit loss. We estimate expected credit losses on these securities by performing a discounted cash flow ("DCF"). The allowance for credit losses is the excess of amortized cost over the greater of (i) our estimate of the present value of expected future cash flows, or (ii) fair value. The allowance for credit losses cannot exceed the unrealized loss, and therefore it may fluctuate with changes in the security's fair value. We also consider the need to record losses on securities in an unrealized loss position for which we have the intent to sell. We analyze unrealized losses for credit loss in accordance with our existing accounting policy, which includes performing DCF analyses on each security at the lot level and analyzing these DCFs using various economic scenarios. In performing these DCF analyses, we calculate the present value of future cash flows using various models specific to the major security types in our portfolio. These models use security-specific information and forecasted macroeconomic data to determine possible expected credit loss scenarios based on projected changes in the economy. The models contain forecasted economic data from theFederal Reserve Board's annual supervisory stress test review on certain large banks and financial institutions. We also have the ability to incorporate internally-developed forecast information into the models as we deem appropriate. In developing our best estimate of the allowance for credit losses, we consider our outlook as to the probability of the various scenarios occurring. Based on these analyses, we recorded an allowance for credit losses of$9.7 million in 2021 and$4.0 million in 2020 on our AFS fixed income securities portfolio. After considering the allowance for credit losses, the remaining unrealized losses on this portfolio were$17.4 million in 2021 and$11.5 million in 2020. If the security-specific and macroeconomic assumptions in our DCF analyses or our outlook as to the occurrence probability of our DCF model scenarios were to change, our allowance for credit losses and the resulting credit loss expense will negatively impact our results of operations. Factors considered in determining the allowance for credit losses require significant judgment, including our evaluation of the security's projected cash flow stream.
For additional information regarding our allowance for credit losses on AFS
fixed income securities, see item (c) of Note 2. "Summary of Significant
Accounting Policies" and item (i) of Note 5. "Investments" within Item 8.
"Financial Statements and Supplementary Data." of this Form 10-K, respectively.
Reinsurance
Reinsurance recoverables on paid and unpaid loss and loss expense represent our
estimates of the amounts we will recover from reinsurers. Each reinsurance
contract is analyzed to ensure that sufficient risk is transferred to record the
transactions appropriately as reinsurance in the Financial Statements. Amounts
recovered from reinsurers are recognized as assets contemporaneously and in a
manner consistent with the paid and unpaid losses associated with the reinsured
policies. An allowance for credit losses on our reinsurance recoverable balance
is recorded based on an evaluation of balances due from reinsurers and other
available information, including collateral we hold under the terms and
conditions of the underlying agreements. Reinsurers often purchase and rely on
their own retrocessional reinsurance programs to manage their capital position
and improve their financial strength ratings. Details about retrocessional
reinsurance programs are not always transparent, making it difficult to assess
our reinsurers' exposure to counterparty credit risk. Our reinsurer's credit
quality is
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also impacted by other factors, such as their reserve adequacy, investment
portfolio, regulatory capital position, catastrophe aggregations, and risk
management expertise. In addition, contractual language interpretations and
willingness to pay valid claims can impact our allowance for estimated
uncollectible reinsurance. Our allowance for estimated uncollectible reinsurance
totaled $1.6 million at December 31, 2021 , and $1.8 million at December 31,
2020 . We continually monitor developments that may impact recoverability from
our reinsurers, for which we have contractual remedies if necessary. For further
information regarding reinsurance, see the "Reinsurance" section below in
"Results of Operations and Related Information by Segment" and Note 9.
"Reinsurance" in Item 8. "Financial Statements and Supplementary Data." of this
Form 10-K.
Financial Highlights of Results for Years Ended December 31, 2021 , 2020, and 20191
2021 2020
($ in thousands, except per share amounts) 2021 2020 vs. 2020 2019 vs. 2019
Financial Data:
Revenues $ 3,379,164 2,922,274 16 % $ 2,846,491 3 %
After-tax net investment income 263,000 184,612 42 181,161 2
After-tax underwriting income 172,688 107,716 60 129,554 (17)
Net income before federal income tax 505,310 302,988 67 336,390 (10)
Net income 403,837 246,355 64 271,623 (9)
Net income available to common stockholders 394,484 246,355 60 271,623 (9)
Key Metrics:
Combined ratio 92.8 % 94.9 (2.1) pts 93.7 % 1.2 pts
Invested assets per dollar of common stockholders' equity $ 2.88 2.96 (3) % $ 3.05
(3) %
Return on average common equity ("ROE") 14.8 % 10.4 4.4 pts 13.6 (3.2) pts
Net premiums written to statutory surplus ratio 1.33 x 1.30 0.03 pts 1.39 (0.09) pts
Per Common Share Amounts:
Diluted net income per share $ 6.50 4.09 59 % $ 4.53 (10) %
Book value per share 46.24 42.38 9 36.91 15
Dividends declared per share to common stockholders 1.03 0.94 10 0.83 13
Non-GAAP Information:
Non-GAAP operating income2 $ 380,580 249,686 52 % $ 264,418 (6) %
Diluted non-GAAP operating income per common share2 6.27 4.15 51 4.40 (6)
Non-GAAP operating ROE2 14.3 % 10.5 3.8 pts 13.3 % (2.8) pts
1Refer to the Glossary of Terms attached to this Form 10-K as Exhibit 99.1 for
definitions of terms used in this financial review.
2Non-GAAP operating income, non-GAAP operating income per diluted common share,
and non-GAAP operating ROE are measures comparable to net income available to
common stockholders, net income available to common stockholders per diluted
common share, and ROE, respectively, but exclude after-tax net realized and
unrealized gains and losses on investments, and after-tax debt retirement costs.
They are used as important financial measures by us, analysts, and investors
because the timing of realized investment gains and losses on sales of
securities in any given period is largely discretionary. In addition, net
realized and unrealized investment gains and losses on investments that are
charged to earnings and the debt retirement costs could distort the analysis of
trends.
Reconciliations of net income available to common stockholders, net income
available to common stockholders per diluted common share, and ROE to non-GAAP
operating income, non-GAAP operating income per diluted common share, and
non-GAAP operating ROE, respectively, are provided in the tables below:
Reconciliation of net income available to common stockholders to non-GAAP operating income ($ in thousands) 2021 2020 2019 Net income available to common stockholders$ 394,484 246,355 271,623
Net realized and unrealized (gains) losses, before
tax
(17,599) 4,217 (14,422) Debt retirement costs, before tax - - 4,175 Tax on reconciling items 3,695 (886) 3,042 Non-GAAP operating income$ 380,580 249,686 264,418 Reconciliation of net income available to common stockholders per diluted common share to non-GAAP operating income per diluted common share 2021 2020 2019 Net income available to common stockholders per diluted common share$ 6.50 4.09 4.53
Net realized and unrealized (gains) losses, before
tax
(0.29) 0.07 (0.24) Debt retirement costs, before tax - - 0.07 Tax on reconciling items 0.06 (0.01) 0.04
Non-GAAP operating income per diluted common share
4.15 4.40
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Reconciliation of ROE to non-GAAP operating ROE 2021 2020 2019
ROE 14.8 % 10.4 13.6
Net realized and unrealized (gains) losses, before tax (0.7) 0.2 (0.7)
Debt retirement costs, before tax - - 0.2
Tax on reconciling items 0.2 (0.1) 0.2
Non-GAAP operating ROE 14.3 % 10.5 13.3
The components of our ROE and non-GAAP operating ROE are as follows:
ROE Components 2021 2020
2021 2020 vs. 2020 2019 vs. 2019
Standard Commercial Lines
segment 5.9 % 5.1 0.8 pts 5.8 (0.7) pts
Standard Personal Lines segment 0.1 (0.5) 0.6 0.3 (0.8)
E&S Lines segment 0.5 - 0.5 0.4 (0.4)
Total insurance operations 6.5 4.6 1.9 6.5 (1.9)
Investment income 9.9 7.8 2.1 9.1 (1.3)
Net realized and unrealized
gains (losses) 0.5 (0.1) 0.6 0.5 (0.6)
Total investments segment 10.4 7.7 2.7 9.6 (1.9)
Debt retirement costs - - - (0.2) 0.2
Other (2.1) (1.9) (0.2) (2.3) 0.4
ROE 14.8 % 10.4 4.4 13.6 (3.2)
Net realized and unrealized
(gains) losses, after tax (0.5) 0.1 (0.6) (0.5) 0.6
Debt retirement costs, after tax - - - 0.2 (0.2)
Non-GAAP operating ROE 14.3 % 10.5 3.8 13.3 (2.8)
In 2021, we met the challenges associated with (i) the economic and societal
impacts of the COVID-19 pandemic, (ii) higher inflation, (iii) severe natural
catastrophes, and (iv) a competitive labor market and delivered another
exceptional year of results. We generated our eighth consecutive year of
double-digit non-GAAP operating ROEs, with a 14.3% non-GAAP operating ROE, above
our full-year 2021 target of 11% and our 2020 non-GAAP operating ROE of 10.5%.
Our 2021 results included exceptional growth in revenues and a record level of
net income available to common stockholders per diluted common share as
discussed below. Our ongoing financial success led to an AM Best Company ("AM
Best") rating upgrade to "A+" (Superior) from "A" (Excellent) in November 2021 ,
reflecting our financial strength, accomplishments, and future prospects.
In 2021, we grew book value per common share by 9%. This increase reflected
$6.50 per diluted common share of net income available to common stockholders,
partially offset by $2.07 of lower unrealized gains on our fixed income
securities portfolio and $1.03 in dividends paid to our common stockholders.
Non-GAAP operating income per diluted common share of $6.27 in 2021, increased
$2.12 , or 51%, compared to 2020, with the increase driven by strong
contributions from both underwriting and net investment income.
The increase in non-GAAP operating income per diluted common share in 2021
compared to 2020 was primarily driven by (i) a 60% increase in after-tax
underwriting income to $172.7 million , or $2.85 per share, resulting from a
decrease in net catastrophe losses of $1.02 due to industry-wide U.S.
catastrophe loss activity in 2020 that significantly exceeded the 10-year
historical median, and (ii) a 42% increase in after-tax net investment income to
$263 million , or $4.34 per share. The $1.28 per share increase in after-tax net
investment income in 2021 was driven by a $1.19 per share increase in after-tax
net investment income from our alternative investments within our other
investments portfolio. These strong alternative investment returns principally
reflect our private equity holdings and the results were driven by strong
corporate earnings and robust valuations.
Outlook
For 2022, we have established a non-GAAP operating ROE target of 11%. We have
based our 2022 target on (i) our current estimated weighted average cost of
capital ("WACC"), (ii) an approximate 350 basis point spread over our estimated
WACC, (iii) the current interest rate environment, and (iv) property and
casualty insurance market conditions. Our 2022 11% ROE target sets a high bar
for our financial performance, challenges us to perform at our best, and aligns
our incentive compensation structure with shareholder interests. We entered 2022
in the strongest financial position in our 95-year history, with having a record
level of GAAP equity, statutory capital and surplus, and holding company cash
and investments. We are well positioned to continue executing on our strategic
objectives and delivering growth and profitability.
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Our focus in 2022 will be on several areas to position us for ongoing success:
•Delivering on our strategy for continued disciplined and profitable growth by: •Continuing to expand our Standard Commercial Lines market share by (i) increasing our share towards our 12% target of our agents' premiums, (ii) strategically appointing new agents, and (iii) maximizing new business growth in the small business market through utilization of our enhanced small business platform; •Expanding our geographic footprint, with a plan to commence writing Standard Commercial Lines business in the states ofVermont ,Alabama , andIdaho , subject to regulatory approvals, in the near-term, and other states over time; •Increasing customer retention by delivering a superior omnichannel experience and offering value-added technologies and services; •Shifting our focus towards targeting new and renewal customers in the mass affluent market within our Standard Personal Lines segment, where we believe we can be more competitive with the strong coverage and servicing capabilities that we offer; and •Deploying our new underwriting platform in our E&S segment that will improve agents' ease of interactions with us.
•Continuing to achieve written renewal pure price increases, along with
underwriting improvements, that are in line with expected loss trend, while
delivering on our strategy for continued disciplined growth.
•Continuing to build on a culture centered on the values of diversity, equity, and inclusion that fosters innovation, idea generation, and developing a group of specially trained leaders who can guide us successfully into the future.
For 2022, our full-year guidance is as follows:
•A GAAP combined ratio, excluding catastrophe losses, of 91.0%. Our combined ratio estimate assumes no prior-year casualty reserve development; •Net catastrophe losses of 4.0 points on the combined ratio; •After-tax net investment income of$200 million that includes$20 million in after-tax net investment income from our alternative investments; •An overall effective tax rate of approximately 20.5% that assumes an effective tax rate of 19.5% for net investment income and 21.0% for all other items; and •Weighted average shares of 61 million on a fully diluted basis. 45 --------------------------------------------------------------------------------
Results of Operations and Related Information by Segment
Insurance Operations
The following table provides quantitative information for analyzing the combined
ratio:
All Lines
($ in thousands) 2021 2020 2021 vs. 2020 2019 2020 vs. 2019
Insurance Operations Results:
Net premiums written ("NPW") $ 3,189,713 2,773,092 15 % $ 2,679,424 3 %
NPE 3,017,253 2,681,814 13 2,597,171 3
Less:
Loss and loss expense incurred 1,813,984 1,635,823 11 1,551,491 5
Net underwriting expenses
incurred 979,537 905,830 8 876,567 3
Dividends to policyholders 5,140 3,812 35 5,120 (26)
Underwriting income $ 218,592 136,349 60 % $ 163,993 (17) %
Combined Ratios:
Loss and loss expense ratio 60.1 % 61.0 (0.9) pts 59.7 % 1.3 pts
Underwriting expense ratio 32.5 33.8 (1.3) 33.8 -
Dividends to policyholders ratio 0.2 0.1 0.1 0.2 (0.1)
Combined ratio 92.8 94.9 (2.1) 93.7 1.2
The 15% NPW growth in 2021 compared to the prior-year period reflects our strong
relationships with best-in-class distribution partners, sophisticated
underwriting and pricing tools, and excellent customer servicing capabilities.
This solid growth included (i) renewal pure price increases, and (ii) new
business growth, as follows
($ in millions) 2021 2020 2021 vs. 2020 2019 2020 vs. 2019
Direct new business $ 648.5 579.7 12 % $ 548.7 6 %
Renewal pure price increases 4.9 % 4.3 0.6 pts 3.7 % 0.6 pts
In addition, our strong NPW growth in 2021 benefited from exposure growth driven
by robust economic activity in the U.S. , which resulted in our customers
increasing their sales, payrolls, and exposure units, all of which favorably
impacted our NPW.
The growth in 2021 was further impacted by the 2020 COVID-19-related $75 million
estimate of return audit and mid-term endorsement premium and $19.7 million of
premium credits to our personal and commercial automobile customers, which
reduced NPW by $94.7 million in 2020. The reduction in NPW in 2020 from
COVID-19-related adjustments had the impact of increasing our 2021 NPW growth
rate by 4 percentage points.
Consistent with the impacts to NPW, the increase in NPE in 2021 compared to 2020
reflected the items discussed above.
Loss and Loss Expenses
The loss and loss expense ratio decreased 0.9 points in 2021 compared to 2020,
primarily due to (i) non-catastrophe and catastrophe property loss and loss
expenses, (ii) prior year casualty reserve development, and (iii) the current
year loss and loss expense ratio, which is detailed as follows:
Non-Catastrophe Property
($ in millions) Loss and Loss Expenses Net Catastrophe Losses
Total Impact on
For the year ended December Loss and Loss Expense Impact on Loss and
Loss and Loss Impact on Loss and
Loss and Loss
31, Incurred Loss Expense Ratio Expense Incurred Loss Expense Ratio Expense Ratio (Favorable)/Unfavorable Change in Ratio
2021 $ 471.7 15.6 pts $ 164.2 5.4 pts 21.0 (2.3)
2020 410.0 15.3 215.4 8.0 23.3 4.4
2019 410.5 15.8 81.0 3.1 18.9 (1.3)
Net catastrophe losses of 5.4 points in 2021 and 8.0 points in 2020 were higher
than our longer-term net catastrophe loss averages. Catastrophe losses in 2021
included gross losses of $53 million from Hurricane Ida, or net losses of
approximately $41 million , or 1.4 points, after factoring in the benefit from
our Property Catastrophe Excess of Loss Treaty, which attaches at $40 million .
The structure of our Property Catastrophe Excess of Loss Treaty is detailed in
the "Reinsurance" section in "Results of Operations and Related Information by
Segment" of this MD&A. The majority of the Hurricane Ida losses, which included
meaningful property losses from damage to personal and commercial automobiles,
occurred in New Jersey and the
46
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surrounding states. Losses in 2020 were mainly driven by a tornado and
subsequent hail event that impacted
April, civil unrest claims, the Midwestern derecho, and Hurricane Isaias.
($ in millions) Favorable Prior
Loss and Loss Impact on Loss and
For the year ended December 31, Expense Incurred Loss Expense Ratio
(Favorable)/Unfavorable Change in Ratio
2021 (81.0) (2.7) pts 0.5
2020 (85.0) (3.2) (0.9)
2019 (61.0) (2.3) (0.6)
Details of the prior year casualty reserve development were as follows:
(Favorable)/Unfavorable Prior Year Casualty Reserve
Development
($ in millions) 2021 2020 2019
General liability $ (29.0) (35.0) (5.0)
Commercial automobile 15.0 10.0 4.0
Workers compensation (58.0) (60.0) (68.0)
Businessowners' policies (2.0) - -
Total Standard Commercial Lines (74.0) (85.0) (69.0)
Personal automobile - - 6.0
Total Standard Personal Lines - - 6.0
E&S (7.0) - 2.0
Total (favorable) prior year casualty reserve development
(85.0) (61.0) (Favorable) impact on loss ratio (2.7) pts (3.2) (2.3) In addition to the prior year casualty reserve development, the current year loss and loss expense ratio was 0.9 points higher in 2021 compared to 2020. In 2020, we experienced lower claims frequencies in our commercial and personal automobile lines of business reflecting reductions in miles driven due to the pandemic environment, which benefited our loss ratio in 2020. Although some benefit continued in 2021, it was not as significant as in 2020.
For additional qualitative reserve development discussion, refer to the
insurance segment sections below.
Underwriting Expenses The underwriting expense ratio decreased 1.3 points in 2021 compared to 2020. The underwriting expense ratio in 2020 was elevated by 1.1 points for COVID-19-related items. The decrease in the underwriting expense ratio in 2021 reflects the absence of these COVID-19-related impacts, as well as a continued below-normal travel and entertainment expense levels due to most of 2021's pandemic-related limited business travel. The COVID-19-related items included in 2020 results were as follows: (i) lower NPE from the estimate of return audit and mid-term endorsement premium and premium credits given to our personal and commercial automobile customer; and (ii) a$13.5 million increase to our allowance for credit losses on premiums receivable. 47 --------------------------------------------------------------------------------
Standard Commercial Lines Segment
($ in thousands) 2021 2020 2021 vs. 2020 2019 2020 vs. 2019 Insurance Segments Results: NPW$ 2,593,018 2,230,636 16 %$ 2,137,071 4 % NPE 2,443,885 2,143,184 14 2,049,614 5 Less: Loss and loss expense incurred 1,426,768 1,245,627 15 1,187,856 5 Net underwriting expenses incurred 813,381 742,014 10 710,648 4 Dividends to policyholders 5,140 3,812 35 5,120 (26) Underwriting income$ 198,596 151,731 31 %$ 145,990 4 % Combined Ratios: Loss and loss expense ratio 58.4 % 58.1 0.3 pts 58.0 % 0.1 pts Underwriting expense ratio 33.3 34.6 (1.3) 34.7
(0.1)
Dividends to policyholders ratio 0.2 0.2 - 0.2 -
Combined ratio 91.9 92.9 (1.0) 92.9 -
NPW growth of 16% in this segment in 2021 compared to 2020 reflected (i) renewal
pure price increases, (ii) new business growth, and (iii) stable retention as
follows:
For the Year Ended December 31,
($ in millions) 2021 2020
Direct new business $ 469.9 $ 421.1
Retention 85 % 85
Renewal pure price increases on NPW 5.3 4.4
Consistent with our overall insurance operations, NPW growth in 2021 (i)
benefited from exposure growth, and (ii) was positively impacted by
approximately four points due to the following 2020 COVID-19 related items that
did not reoccur in 2021:
•A$75 million estimate of return audit and mid-term endorsement premium that reduced 2020 NPW. •A$15.4 million premium credit to our commercial automobile customers that reduced 2020 NPW.
Consistent with the impacts to NPW, the increase in NPE in 2021 compared to 2020
reflected the items discussed above.
The 0.3-point increase in the loss and loss expense ratio in 2021 compared to
2020 was driven by the following:
($ in millions) Non-Catastrophe Property Losses Catastrophe Losses
Total Impact on
For the year ended Loss and Loss Expense Impact on Loss and Loss and Loss Impact on Loss and Loss and Loss (Favorable)/Unfavorable
December 31, Incurred Loss Expense Ratio Expense Incurred Loss Expense Ratio Expense Ratio Year-Over-Year Change
2021 $ 340.7 13.9 pts $ 104.1 4.3 pts 18.2 (1.1)
2020 296.2 13.8 117.8 5.5 19.3 2.9
Our losses in 2021 and 2020 included elevated levels of catastrophe losses, with
4.3 points this year and 5.5 points last year. Both years compared unfavorably
to our longer-term catastrophe loss average for this segment. Catastrophe losses
for this segment are consistent with the discussion in the "Insurance
Operations" section above.
(Favorable) Prior Year Casualty Reserve
($ in millions) Development
For the year ended December Loss and Loss Impact on Loss
and Loss (Favorable) Year-Over-Year
31, Expense Incurred Expense Ratio Change
2021 $ (74.0) (3.0) pts 1.0
2020 (85.0) (4.0) (0.6)
In addition to the prior year casualty reserve development above, current year
casualty loss costs were 0.4 points higher in 2021 compared to 2020, driven by
our commercial automobile line of business, which experienced an increase in
claim frequencies as driving patterns continued to evolve in the COVID-19
environment, despite still being below our 2019 pre-pandemic levels. In 2020, we
experienced lower claim frequencies in our commercial automobile line of
business due to the pandemic environment. Lower claims frequencies and lower
non-catastrophe property losses provided an offset to the $15.4 million premium
credit to customers in 2020.
48
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For quantitative information on the prior year development by line of business,
see "Financial Highlights of Results for Years Ended December 2021 , 2020, and
2019" above and for qualitative information about the significant drivers of
this development, see the line of business discussions below.
The Standard Commercial Lines underwriting expense ratio decreased 1.3-points in
2021 compared to 2020. The ratio was elevated in 2020 by 1.2 points for
COVID-19-related items, as discussed in the "Insurance Operations" section
above. The decrease in the 2021 underwriting expense ratio reflects the absence
of these COVID-19-related impacts.
The following is a discussion of our most significant Standard Commercial Lines
of business:
General Liability
($ in thousands) 2021 2020 2021 vs. 2020 2019 2020 vs. 2019
NPW $ 859,284 716,119 20 % $ 699,262 2 %
Direct new business 139,255 122,159 14 119,055 3
Retention 85 % 85 - pts 83 % 2 pts
Renewal pure price increases 4.4 3.9 0.5 2.8 1.1
NPE $ 807,158 694,019 16 % $ 669,895 4 %
Underwriting income 123,450 103,262 20 69,932 48
Combined ratio 84.7 85.1 (0.4) 89.6 (4.5)
% of total standard commercial NPW 33 32 33
NPW grew 20% in 2021 due to renewal pure price increases, exposure growth, and
higher direct new business. NPW growth in 2021 also included a 7-point benefit
from the 2020 COVID-19-related $46 million estimate of return audit and mid-term
endorsement premium recorded on this line in the first quarter of 2020, which
did not reoccur in 2021.
The combined ratio decreased 0.4 points in 2021, driven principally by a
decrease in the underwriting expense ratio of 1.5 points, the drivers of which
are consistent with the items discussed in the Standard Commercial Lines Segment
above.
Partially offsetting this decrease in the combined ratio was less favorable
prior year casualty reserve development compared to 2020, as outlined in the
table below.
(Favorable) Prior Year Casualty Reserve
($ in millions) Development
Loss and Loss Impact on Loss and (Favorable)/Unfavorable
For the year ended December 31, Expense Incurred Loss Expense Ratio Year-Over-Year Change
2021 $ (29.0) (3.6) pts 1.4
2020 (35.0) (5.0) 4.3
In 2021, the prior year reserve development was primarily attributable to
favorable reserve development on loss severities in accident years 2018 and
prior. In 2020, the prior year reserve development was primarily attributable to
favorable reserve development on loss severities in accident years 2017 and
prior. While this line experienced favorable prior year casualty reserve
development in 2021 and 2020, it is also exposed to changes in economic and
social trends, including litigation propensity and outcomes, and changes in
state laws such as those that extend the statute of limitations or open windows
for previously time-barred actions.
Commercial Automobile
($ in thousands) 2021 2020 2021 vs. 2020 2019 2020 vs. 2019
NPW $ 767,723 658,930 17 % $ 590,011 12 %
Direct new business 115,088 112,893 2 102,956 10
Retention 86 % 86 - pts 83 % 3 pts
Renewal pure price increases 8.3 8.1 0.2 7.5 0.6
NPE $ 724,398 615,181 18 % $ 554,256 11 %
Underwriting loss (23,335) (3,126) (646) (43,797) 93
Combined ratio 103.2 100.5 2.7 107.9 (7.4)
% of total standard commercial NPW 30 30 28
NPW growth of 17% benefited from renewal pure price increases and higher direct
new business, as shown in the table above. Additionally, NPW growth in 2021
included (i) exposure growth, and (ii) a 3-point benefit from the 2020
COVID-19-related
49 --------------------------------------------------------------------------------
second quarter of 2020, which did not reoccur in 2021.
The 2.7-point increase in the combined ratio in 2021 compared to 2020 was
primarily driven by the items in the tables shown below.
($ in millions) Non-Catastrophe Property Losses Catastrophe Losses
Total Impact on
For the year ended Loss and Loss Expense Impact on Loss and Loss and Loss Impact on Loss and Loss and Loss (Favorable)
December 31, Incurred Loss Expense Ratio Expense Incurred Loss Expense Ratio Expense Ratio Year-Over-Year Change
2021 $ 125.2 17.3 pts $ 9.8 1.4 pts 18.7 3.1
2020 92.2 15.0 3.4 0.6 15.6 (3.0)
Unfavorable Prior Year Casualty Reserve
($ in millions) Development
For the year ended December Loss and Loss Impact on Loss and Loss (Favorable)/ Unfavorable
31, Expense Incurred Expense Ratio Year-Over-Year Change
2021 $ 15.0 2.1 pts 0.5
2020 10.0 1.6 0.9
The 2021 and 2020 prior year casualty reserve development was primarily
attributable to unfavorable reserve development on loss severities in accident
years 2016 through 2019. The 2020 prior year casualty reserve development also
experienced higher than expected frequencies in accident year 2019.
In addition to the items in the table above, the combined ratio variances
included the following:
•A 1.4-point increase in the current year casualty loss costs in 2021 compared
to 2020, driven primarily by increased claim frequencies in 2021 due to driving
patterns that continue to evolve in the COVID-19 environment compared to 2020.
Last year experienced lower claim frequencies reflecting reductions in miles
driven due to the COVID-19-related driving pattern shifts impacting this line of
business. Lower claims frequencies and lower non-catastrophe property losses
provided an offset to the $15.4 million of premium credits to customers in 2020.
•A 2.2-point decrease in the underwriting expense ratio in 2021 compared to
2020, the drivers of which are consistent with the items discussed in the
Standard Commercial Lines Segment above.
This line of business remains an area of focus for us and most of the industry,
as profitability challenges continue to generate
combined ratios higher than risk-adjusted targets. We will continue to (i)
actively implement price increases consistent with levels experienced in 2021
and 2020, (ii) enhance our underwriting tools to further improve the accuracy of
our rating information to prevent premium leakage, and (iii) actively manage our
new and renewal business.
Workers Compensation
($ in thousands) 2021 2020 2021 vs. 2020 2019 2020 vs. 2019
NPW $ 317,035 270,168 17 % $ 309,322 (13) %
Direct new business 59,938 51,078 17 60,139 (15)
Retention 86 % 84 2 pts 84 % - pts
Renewal pure price increases
(decreases) 0.1 (2.0) 2.1 (2.8) 0.8
NPE $ 306,428 278,062 10 % $ 311,370 (11) %
Underwriting income 78,537 70,897 11 80,630 (12)
Combined ratio 74.4 74.5 (0.1) 74.1 0.4
% of total standard commercial
NPW 12 12 14
NPW increased 17% in 2021 compared to 2020 due to higher retention, exposure
growth, and increased direct new business. Additionally, NPW growth in 2021
included an 11-point benefit due to the 2020 COVID-19-related $29 million
estimate of return audit and mid-term endorsement premium recorded on this line
in the first quarter of 2020 that did not reoccur in 2021.
The decrease in the combined ratio in 2021 compared to 2020 was primarily due
to: (i) a decrease in the underwriting expense ratio of 1.7 points, the drivers
of which are consistent with the items discussed in the Standard Commercial
Lines Segment above; and (ii) a 1.4-point reduction in the current year casualty
loss costs. This reduction was in recognition of the favorable frequency trends
and sustained lower medical severity trends impacting this line.
50
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Partially offsetting the decreases in the combined ratio was less favorable
prior year casualty reserve development compared to 2020, as follows:
($ in millions)
(Favorable) Prior Year Casualty Reserve
Development
For the year ended December Loss and Loss Impact on Loss
and Loss Unfavorable/(Favorable)
31, Expense Incurred Expense Ratio Year-Over-Year Change
2021 $ (58.0) (18.9) pts 2.7
2020 (60.0) (21.6) 0.2
For both periods, the favorable reserve development was due to continued
favorable medical severity trends impacting accident years 2019 and prior. Due
to the length of time injured workers can receive related medical treatment,
decreases in medical inflation can cause favorable loss development across an
extended number of accident years.
Commercial Property
($ in thousands) 2021 2020 2021 vs. 2020 2019 2020 vs. 2019 NPW$ 470,043 413,194 14 %$ 373,809 11 % Direct new business 108,418 94,697 14 88,527 7 Retention 84 % 84 - pts 82 % 2 pts Renewal pure price increases 6.0 4.6 1.4 3.3 1.3 NPE$ 436,412 388,120 12 %$ 353,834 10
%
Underwriting income (loss) 10,515 (21,296) (149) 21,639 (198) Combined ratio 97.6 105.5 (7.9) 93.9 11.6 % of total standard commercial NPW 18 19 17
NPW growth of 14% in this line in 2021 compared to 2020 was driven by renewal
pure price increases, exposure growth, and higher new business.
Quantitative information regarding property losses is as follows:
($ in millions)
Non-Catastrophe Property Losses Catastrophe Losses
For the year ended December Loss and Loss Expense Impact on Loss and
Loss and Loss Impact on Loss and Total Impact on Loss (Favorable)/Unfavorable
31, Incurred Loss Expense Ratio Expense Incurred Loss Expense Ratio and Loss Expense Ratio Year-Over-Year Change
2021 $ 182.5 41.8 pts $ 79.3 18.2 pts 60.0 (6.7)
2020 168.6 43.4 90.2 23.3 66.7 11.7
Our losses in 2021 and 2020 included elevated levels of catastrophe losses, with
18.2 points this year and 23.3 points last year. Both years compare unfavorably
to our longer-term catastrophe loss average for this line of business.
Catastrophe losses for this segment are consistent with the discussion in the
"Insurance Operations" section above.
Standard Personal Lines Segment
($ in thousands) 2021 2020 2021 vs. 2020 2019 2020 vs.
2019
Insurance Segments Results: NPW$ 292,265 295,166 (1) %$ 304,592 (3) % NPE 293,559 299,140 (2) 307,739 (3) Less: Loss and loss expense incurred 212,116 233,260 (9) 211,300 10 Net underwriting expenses incurred 77,477 81,388 (5) 88,179 (8) Underwriting income$ 3,966 (15,508) (126) %$ 8,260 (288) % Combined Ratios: Loss and loss expense ratio 72.2 % 78.0 (5.8) pts 68.6 % 9.4 pts Underwriting expense ratio 26.4 27.2 (0.8) 28.7 (1.5) Combined ratio 98.6 105.2 (6.6) 97.3 7.9 NPW declined 1% in 2021 compared to 2020, primarily driven by a reduction in direct new business and slightly lower retention, both of which were impacted by the challenging personal automobile competitive environment. This decrease was 51 -------------------------------------------------------------------------------- partially offset by the impact of the COVID-19 related premium credits to our personal automobile customers, which reduced NPW by$4.3 million in 2020 and added one point of growth in 2021 compared to 2020, as these premium credits did not reoccur in 2021. In the third quarter of 2021, we transitioned our personal lines strategy to targeting new and renewal customers in the mass affluent market where we believe our strong coverage and servicing capabilities can be more competitive. ($ in millions) 2021 2020 Direct new business premiums1$ 40.9 $ 44.7 Retention 82 % 83 Renewal pure price increases on NPW 1.0 2.5
1Excludes our flood direct premiums written, which is 100% ceded to the NFIP and
therefore has no impact on our NPW.
The reduction in NPE in 2021 compared to 2020 reflects the decreases in NPW
discussed above.
The loss and loss expense ratio decreased 5.8 points in 2021 compared to 2020,
the primary drivers of which were as follows:
($ in millions) Non-Catastrophe Property Losses Catastrophe Losses
Total Impact on
For the year ended December Loss and Loss Expense Impact on Loss and
Loss and Loss Impact on Loss and Loss and Loss Unfavorable
31, Incurred Loss Expense Ratio Expense Incurred Loss Expense Ratio Expense Ratio Year-Over-Year Change
2021 $ 102.8 35.0 pts $ 37.4 12.7 pts 47.7 (6.9)
2020 86.0 28.7 77.5 25.9 54.6 13.8
Our 2021 losses were impacted by 44 events that were designated as catastrophes
by Property Claims Services ("PCS"), an internationally recognized authority on
insured catastrophe property losses, including two severe thunderstorms
accompanied by wind and hail occurring in March and June, Hurricane Ida in late
August and early September, and a series of severe tornadoes that swept the
Midwest in December. Our 2020 losses were impacted by 38 events that PCS
designated as catastrophes, including a tornado affecting Tennessee in March,
two severe April storms with damaging winds and tornadoes affecting the
Midwestern states, Hurricane Isaias in late July and early August, and the
August derecho in the Midwest.
There was no prior year casualty reserve development in either 2021 and 2020.
However, current year casualty loss costs were 1.2 points higher in 2021
compared to 2020, driven by our personal automobile line of business, reflecting
increases in claim frequencies as driving patterns continued to evolve in the
COVID-19 environment.
The underwriting expense ratio decreased 0.8-points in 2021 compared to 2020.
The ratio was elevated in 2020 by 1.0 points for COVID-19-related items, as
discussed in the "Insurance Operations" section above. The decrease in the
underwriting expense ratio in 2021 reflects the absence of these
COVID-19-related impacts.
E&S Lines Segment
2020
($ in thousands) 2021 2020 2021 vs. 2020 2019 vs. 2019
Insurance Segments Results:
NPW $ 304,430 247,290 23 % $ 237,761 4 %
NPE 279,809 239,490 17 239,818 -
Less:
Loss and loss expense incurred 175,100 156,936 12 152,335 3
Net underwriting expenses
incurred 88,679 82,428 8 77,740 6
Underwriting income (loss) $ 16,030 126 12,622 % $ 9,743 (99) %
Combined Ratios:
Loss and loss expense ratio 62.6 % 65.5
(2.9) pts 63.5 % 2.0 pts
Underwriting expense ratio
31.7 34.4 (2.7) 32.4 2.0 Combined ratio 94.3 99.9 (5.6) 95.9 4.0
The strong NPW growth of 23% in 2021 was due to increases in direct new
business, renewal pure price, and exposure growth driven by favorable market
conditions in E&S lines in the
52 --------------------------------------------------------------------------------
Quantitative information is as follows:
($ in millions) 2021 2020
Overall renewal price increases 6.5 % 6.2
Direct new business premiums $ 137.7 113.9
The increase in NPE in 2021 compared to 2020 reflects the increases in NPW
discussed above.
The 2.9-point decrease in the loss and loss expense ratio in 2021 compared to 2020 was primarily attributable to favorable prior year casualty reserve development and a decrease in property losses. This was partially offset by an increase in current year casualty loss costs of 1.4 points, driven primarily by increased claim frequencies in 2021 compared to the decreased levels experienced in 2020. Quantitative information regarding our property losses and prior year casualty reserve development are as follows: ($ in millions) Non-Catastrophe Property Losses Catastrophe Losses
For the year ended December Loss and Loss Expense Impact on Loss and
Loss and Loss Impact on Loss and Total Impact on Loss (Favorable)/Unfavorable
31, Incurred Loss Expense Ratio Expense Incurred Loss Expense Ratio and Loss Expense Ratio Year-Over-Year Change
2021 $ 28.2 10.1 pts $ 22.7 8.1 pts 18.2 (1.8)
2020 27.9 11.6 20.0 8.4 20.0 8.3
Our 2021 losses were impacted by 50 events that PCS designated as catastrophes,
including Winter Storm Uri affecting Texas in February, a series of large storms
affecting the Southern and Midwestern states in May, and Hurricane Ida in late
August and early September. Our 2020 losses were impacted by 49 events that PCS
designated as catastrophes, including the civil unrest throughout the country in
June and Hurricane Laura in August.
($ in millions) (Favorable) Prior Year Casualty Reserve
Development
For the year ended December Loss and Loss Impact on Loss and Loss (Favorable)/Unfavorable
31, Expense Incurred Expense Ratio Year-Over-Year Change
2021 $ (7.0) (2.5) pts (2.5)
2020 - - (0.8)
The favorable prior year casualty reserve development in 2021 was primarily
attributable to lower loss severities in accident years 2016 and prior. There
was no prior year casualty reserve development in 2020.
The 2.7-point decrease in the underwriting expense ratio in 2021 compared to 2020 was primarily driven by: (i) a decrease in labor expenses of 1.5 points and (ii) a decrease in compensation to our distribution partners of 0.6 points from changes in premium mix and corresponding commission rates. In addition, the underwriting expense ratio in 2020 was elevated by 0.9 points for the COVID-19-related increase in our allowance for credit losses on premiums receivable, as discussed in "Insurance Operations" above. The decrease in the underwriting expense ratio in 2021 reflects the absence of this COVID-19-related impact.
Reinsurance
We use reinsurance to protect our capital resources and insure against losses on property and casualty risks that we underwrite in excess of the amount that we are prepared to accept. We use two main reinsurance vehicles: (i) a reinsurance pooling agreement among our Insurance Subsidiaries through which each company agrees to share in premiums and losses based on certain specified percentages; and (ii) reinsurance contracts and arrangements with third parties that cover various policies that we issue to our customers. Reinsurance Pooling Agreement The primary purposes of the Insurance Subsidiaries' reinsurance pooling agreement are to:
•Pool or share proportionately the underwriting profit and loss results of
property and casualty insurance underwriting operations through reinsurance;
•Reduce administration expenses; and
53 --------------------------------------------------------------------------------
•Permit all the Insurance Subsidiaries to obtain a uniform rating from AM Best.
The following illustrates the pooling percentages by Insurance Subsidiary as of
Insurance Subsidiary Pooling
Percentage
Selective Insurance Company of America ("SICA")
32.0%
Selective Way Insurance Company ("SWIC")
21.0%
Selective Insurance Company of South Carolina ("SICSC")
9.0%
Selective Insurance Company of the Southeast ("SICSE")
7.0%
Selective Insurance Company of New York ("SICNY")
7.0%
Selective Casualty Insurance Company ("SCIC")
7.0%
Selective Auto Insurance Company of New Jersey ("SAICNJ")
6.0%
Mesa Underwriters Specialty Insurance Company ("MUSIC")
5.0%
Selective Insurance Company of New England ("SICNE")
3.0%
Selective Fire and Casualty Insurance Company ("SFCIC")
3.0%
Reinsurance Treaties and Arrangements By entering into reinsurance treaties and arrangements, we can increase our underwriting capacity, accepting larger individual risks and aggregations of risks without directly increasing our capital or statutory surplus. Our reinsurance program principally consists of traditional reinsurance. Under our reinsurance treaties, we cede to our reinsurers a portion of our incurred losses from an individual policy or group of policies in exchange for a portion of the premium on those policies. Amounts not reinsured below a specified dollar threshold are known as retention. Reinsurance does not legally discharge us from liability under the terms and limits of our policies, but it does make our reinsurers liable to us for the amount of liability we cede to them. Our reinsurers often rely on their own reinsurance programs, or retrocessions, to manage their large loss exposures. The size of the global reinsurance community is relatively small. If our reinsurers are unable to collect on their retrocessional programs, it may impair their ability to pay us for the amounts we cede to them. Consequently, our reinsurers present us with direct, indirect, and contingent counterparty credit risk. We attempt to mitigate this credit risk by (i) pursuing relationships with reinsurers rated "A-" or higher by AM Best and/or (ii) obtaining collateral to secure reinsurance obligations. Some of our reinsurance treaties permit us to terminate or commute them - or require the reinsurer to post collateral if the reinsurer's financial condition or rating deteriorates. We monitor our reinsurers' financial condition, and we review the quality of reinsurance recoverables and reserves for uncollectible reinsurance. For additional information regarding our reinsurance counterparty credit risk, see Note 9. "Reinsurance" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
We have reinsurance contracts that separately cover our property and casualty
insurance business that can be segregated into the following key categories:
•Property Reinsurance, which includes our (i) property excess of loss treaties
purchased for protection against large individual property losses and (ii)
property catastrophe treaties purchased to provide protection for the overall
property portfolio against severe catastrophic events. We also purchase a
limited amount of facultative reinsurance, primarily for large individual
property risks greater than our property excess of loss treaty capacity.
•Casualty Reinsurance, which provides protection for both individual large
casualty losses and catastrophic casualty losses involving multiple claimants or
insureds. We also may use facultative reinsurance for large individual casualty
risks in excess of our treaty capacity. We may also purchase quota share
capacity for certain new or higher severity casualty lines of business.
•Terrorism Reinsurance, which provides a federal reinsurance backstop, behind
the protection built into our property and casualty reinsurance treaties, for
terrorism losses covered under the Terrorism Risk Insurance Program
Reauthorization Act ("TRIPRA"). For further information about TRIPRA, see Item
1A. "Risk Factors." of this Form 10-K.
•Flood Reinsurance, for which all of the premiums and losses related to our
participation in the WYO (for which we also receive a servicing fee) are 100%
ceded to the federal government.
Property Reinsurance
We renewed our main property catastrophe treaty, which covers both our standard
market and E&S business, effective January 1, 2022 . For this treaty, we
purchased an additional $50 million in limit to respond to our growing property
portfolio, thereby
54
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extending the coverage to $835 million in excess of the $40 million retention.
Due to growth in our E&S property book of business, more challenging market
conditions, and our recent and planned Standard Commercial Lines geographic
expansion, we restructured our non-footprint catastrophe treaty from a $35
million in excess of $5 million structure covering a limited number of states to
a $30 million in excess of $10 million treaty, covering all 50 states and the
District of Columbia , for our E&S business only. This removed our five newest
Standard Commercial Lines states from coverage under this treaty, as they are
covered under the main property catastrophe treaty. We also increased our
co-participation from 15% to 34% to balance the cost versus volatility
protection provided by this treaty. Consistent with the prior year, both
treaties were renewed with restrictions in coverage related to the systemic
perils of communicable disease and first-party cybersecurity coverage, in line
with current market conditions. Consequently, the property catastrophe program
excludes coverage for communicable disease, but retains limited reinsurance
coverage for cybersecurity risks. Despite these limitations, coverage for
traditionally covered property perils was maintained.
We seek to minimize reinsurance credit risk by transacting with highly-rated
reinsurance partners and purchasing collateralized reinsurance products,
particularly for high-severity, low-probability events, if feasible. Our current
reinsurance program includes $259 million in collateralized limit, primarily in
the top layer of the catastrophe program, compared to $281 million in
collateralized limit under the prior year's reinsurance program.
Overall, we expect ceded premium for our property catastrophe reinsurance
treaties to increase modestly in 2022 due to three factors: (i) increases in
underlying property exposures in line with our growing property insurance
portfolio; (ii) the addition of $50 million of coverage purchased to maintain
stability in our net risk profile; and (iii) modest risk-adjusted price
increases.
We model various catastrophic perils, and hurricane risk continues to be our
portfolio's most significant natural catastrophe peril because of the geographic
location of the risks we insure. The table below illustrates the impact of the
five largest hurricane losses we have experienced in the last 35 years:
($ in millions) Accident
Hurricane Name Actual Gross Loss1 Net Loss2 Year
Superstorm Sandy $125.5 45.6 2012
Hurricane Ida 53.4 41.5 2021
Hurricane Irene 44.8 40.2 2011
Hurricane Hugo 26.4 3.0 1989
Hurricane Isabel 25.1 15.7 2003
1This amount represents reported and unreported gross losses estimated as of
December 31, 2021 .
2Net loss does not include reinstatement premiums, taxes, or flood claims
handling fees.
We review our exposure to hurricane risk by examining third-party vendor models
and conducting our own proprietary analysis. The third-party vendor models
provide a long-term view that closely relates modeled event frequency to
historical hurricane activity, adjusting to reflect certain non-modeled cost
assumptions, such as the impact of loss expenses, residual market assessments,
and automobile-related losses. We believe that modeled estimates provide a range
of potential outcomes, and we review multiple estimates to understand our
catastrophic risk.
Occurrence Exceedance Probability Modeled Losses
Net Losses
Gross Net as a Percent of
($ in thousands) Losses1 Losses2 GAAP Equity3
4.0% (1 in 25 year event) $196,905 35,304 1 %
2.0% (1 in 50 year event) 325,920 38,613 1
1.0% (1 in 100 year event) 529,858 43,956 1
0.67% (1 in 150 year event) 757,577 61,871 2
0.5% (1 in 200 year event) 831,257 67,544 2
0.4% (1 in 250 year event) 965,971 125,306 4
0.2% (1 in 500 year event) 1,384,970 454,888 15
1Gross losses include uncertainty associated with damage/loss estimation, demand
and storm surge, and assumptions for certain un-modeled costs, such as the
impact of loss expenses, residual market assessments, and automobile-related
losses, which collectively increase our gross losses by approximately 13%.
2Net losses are after-tax losses net of catastrophe reinsurance including
reinstatement premiums.
3GAAP Equity as of December 31, 2021 .
Our current catastrophe reinsurance program exhausts at an approximately 1 in
216 year return period, or events with 0.5% probability, based on a multi-model
view of hurricane risk. Our actual gross and net losses incurred from hurricanes
making U.S. -landfall will vary, perhaps materially, from our estimated modeled
losses.
55
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We renewed the property excess of loss treaty, which covers both our standard
market and E&S business, on July 1, 2021 , and the top layer renewed on January
1, 2022 . This treaty was renewed with an increase in the retention on the first
layer to $3.0 million from $2.0 million to manage the overall reinsurance cost
on our growing portfolio and maintain projected earnings volatility protection
in line with our historical levels.
The following table summarizes of our property reinsurance treaties and
arrangements covering our Insurance Subsidiaries:
PROPERTY REINSURANCE ON INSURANCE PRODUCTS
Treaty Name Reinsurance Coverage Terrorism Coverage
Property Catastrophe $835 million above $40 million retention All nuclear, biological, chemical, and
Excess of Loss treaty that responds on per occurrence radioactive ("NBCR") losses are
(covers all insurance basis in four layers: excluded regardless of whether or not
operations) - 82% of losses in excess of $40 million they are certified under TRIPRA.
up to Non-NBCR losses are covered to the
$100 million ; same extent as non-terrorism losses.
- 97% of losses in excess of $100 million Please see Item 1A. "Risk Factors." of
up to this Form 10-K for discussion
$225 million ; regarding TRIPRA.
- 97% of losses in excess of $225 million
up to
$525 million ; and
- 90% of losses in excess of $525 million
up
to $875 million .
The treaty provides one reinstatement in
each of the first three layers and no
reinstatement in the fourth layer. The per
occurrence limit is $776.5 million and the
annual aggregate limit is $1.2 billion ,
net of the Insurance Subsidiaries'
co-participation.
In addition, our $30 million above $10
million retention treaty that responds on
per occurrence basis covers 66% of E&S
losses only, in all states, and has an
annual aggregate limit of $34 million , net
of the Insurance Subsidiaries'
co-participation.
Property Excess of Loss $57 million above $3 million retention All NBCR losses are excluded
(covers all insurance covering 100% in three layers. Losses regardless of whether or not they are
operations) other than TRIPRA certified losses are certified under TRIPRA. For non-NBCR
subject to the following reinstatements losses, the treaty distinguishes
and annual aggregate limits: between acts committed on behalf of
foreign persons or foreign interests
("Foreign Terrorism") and those that
- $7 million in excess of $3 million layer are not. The treaty provides annual
provides unlimited reinstatements; aggregate limits for Foreign Terrorism
(other than NBCR) acts of $21 million
- $30 million in excess of $10 million for the first layer; $60 million for
layer the second layer; and $40 million for
provides three reinstatements, $120 the third layer. Non-foreign terrorism
million in losses (other than NBCR) are covered
aggregate limits; and to the same extent as non-terrorism
- $20 million in excess of $40 million losses.
layer
provides three reinstatements, $80
million in aggregate
limits.
Flood 100% reinsurance by the federal None
government's WYO.
56
-------------------------------------------------------------------------------- Casualty Reinsurance We renewed the casualty excess of loss treaty, which covers both our standard market and E&S Lines business, onJuly 1, 2021 , substantially on the same terms as the treaty expiringJune 30, 2021 . The following table summarizes our casualty reinsurance treaties and arrangements covering our Insurance Subsidiaries: CASUALTY REINSURANCE ON INSURANCE PRODUCTS Treaty Name Reinsurance Coverage Terrorism Coverage Casualty Excess of Loss There are six layers covering 100% of All NBCR losses are excluded. All (covers all insurance$88 million in excess of$2 million . other losses stemming from the acts operations) Losses other than terrorism losses are of terrorism are subject to the subject to the following: following: -$3 million in excess of$2 million -$3 million in excess of$2 million layer layer with provides 33 reinstatements,$102 $15 million net annual terrorism million annual aggregate aggregate limit; limit; -$7 million in excess of$5 million -$7 million in excess of$5 million layer layer with provides six reinstatements,$49 $28 million net annual terrorism million annual aggregate aggregate limit; limit; -$9 million in excess of$12 million -$9 million in excess of$12 million layer layer with provides three reinstatements;$36 $27 million net annual terrorism million annual aggregate limit; aggregate limit; -$9 million in excess of$21 million -$9 million in excess of$21 million layer layer with provides one reinstatement,$18 $18 million net annual terrorism million annual aggregate aggregate limit; limit; -$20 million in excess of$30 million -$20 million in excess of$30 layer million layer with provides one reinstatement,$40 $40 million net annual terrorism million annual aggregate aggregate limit; and limit; and -$40 million in excess of$50 million -$40 million in excess of$50 layer million layer with provides one reinstatement,$80 $80 million net annual terrorism million annual aggregate aggregate limit. limit. We have other reinsurance treaties, such as our (i) Surety and Fidelity Excess of Loss Reinsurance Treaty, (ii)National Workers Compensation Reinsurance Pool Quota Share, which covers business assumed from the involuntary workers compensation pool, (iii) Endurance Specialty Quota share andLoss Development Cover, which protects against losses on policies written before the acquisition and any development on reserves established by MUSIC as of the date of acquisition, (iv) Equipment Breakdown Coverage Reinsurance Treaty, (v) Multi-line Quota Share, which covers additional personal lines coverages, (vi) Cyber Liability Quota Share, and (vii) Excess Liability Quota Share, which covers MUSIC's excess liability business. We regularly evaluate our overall reinsurance program, and we try to develop effective ways to manage the transfer of risk. We base our analysis on a comprehensive process that includes periodic analysis of modeling results, our own loss experience, aggregation of exposures, exposure growth, diversification of risks, limits written, projected reinsurance costs, reinsurer financial strength, and projected impact on earnings, equity, and statutory surplus. We strive to balance reinsurer credit quality, price, terms, and our appetite to retain a certain level of risk. Investments Segment The primary objective of the investment portfolio is to maximize after-tax net investment income and the overall total return of the portfolio, while maintaining a high credit quality core fixed income securities portfolio and managing our duration risk profile. The effective duration of the fixed income securities portfolio, including short-term investments, was 3.9 years as ofDecember 31, 2021 , compared to the Insurance Subsidiaries' net loss and loss expense reserves duration of 3.5 years. The effective duration is monitored and managed to maximize yield while managing interest rate risk at an acceptable level. We maintain a well-diversified portfolio across sectors, with credit quality and maturities that provide ample liquidity. Purchases and sales are made with the intent of maximizing investment returns in the current market environment while balancing capital preservation. Our fixed income and short-term investments represented 91% of our invested assets atDecember 31, 2021 , and 92% atDecember 31, 2020 . These investments had a weighted average credit rating of "A+" as ofDecember 31, 2021 and "AA-" as ofDecember 31, 2020 , with a 96% allocation to investment grade holdings at bothDecember 31, 2021 andDecember 31, 2020 . The weighted average credit rating decline reflects a planned reduction in our sector allocation to agency residential mortgage-backed securities over the past year as lower interest rates accelerated prepayments, as expected. Given the very low reinvestment rates for this asset class, we reallocated these non-sale disposal cash flows into other high-quality fixed income sectors, including corporate securities and other asset-backed security classes without a "AAA" rating but in our view currently offer a better risk and reward trade-off.
For further details on the composition, credit quality, and the various risks to
which our portfolio is subject, see Item 7A. "Quantitative and Qualitative
Disclosures About Market Risk." of this Form 10-K.
57 --------------------------------------------------------------------------------
Total Invested Assets ($ in thousands) 2021 2020 Change Total invested assets$ 8,026,988 7,505,599 7 % Invested assets per dollar of common stockholders' equity 2.88 2.96 (3) Unrealized gain - before tax1 255,658 395,207 (35) Unrealized gain - after tax1 201,970 312,214 (35)
1Includes unrealized gain on fixed income securities of
securities of
Invested assets increased$521 million atDecember 31, 2021 , compared toDecember 31, 2020 , reflecting strong 2021 operating cash flows of$771 million , partially offset by a decrease in pre-tax unrealized gains of$140 million . The majority of this$140 million decrease was related to our fixed income securities portfolio, which was impacted by an increase in benchmark U. S.Treasury rates, partially offset by a tightening of credit spreads. Net Investment Income The components of net investment income earned were as follows: ($ in thousands) 2021 2020 2021 vs. 2020 2019 2020 vs. 2019 Fixed income securities$ 209,709 203,926 3 % 203,255 - % Equity securities 15,920 9,286 71 6,996 33 Commercial mortgage loans ("CMLs") 2,743 844 225 - n/m Short-term investments 260 1,821 (86) 6,653 (73) Other investments 118,060 26,922 339 18,778 43 Investment expenses (20,103) (15,692) (28) (13,139) (19) Net investment income earned - before tax 326,589 227,107 44 222,543 2 Net investment income tax expense 63,589 42,495 50 41,382 3 Net investment income earned - after tax$ 263,000 184,612 42 181,161 2 Effective tax rate 19.5 % 18.7 0.8 pts 18.6 0.1 pts Annual after-tax yield on fixed income investments 2.6 2.6 - 2.9 (0.3) Annual after-tax yield on investment portfolio 3.4 2.6 0.8 2.9 (0.3) The$78.4 million increase in after-tax net investment income in 2021 compared to 2020 was driven by higher alternative investments gains in our other investment portfolio of$93.0 million , after-tax, in 2021 compared to$20.9 million , after-tax, in 2020, resulting in a$72.0 million increase in after-tax net investment income in 2021. Our alternative investments are accounted for under the equity method of accounting and are recorded on a one-quarter lag. The results on alternative investments in 2021 principally reflected unrealized gains on our holdings that benefited from the strong equity and credit capital market performance in the 12-month period endedSeptember 2021 . Realized and Unrealized Investment Gains and Losses When evaluating securities for sale, our general philosophy is to reduce our exposure to securities and sectors based on economic evaluations of whether the fundamentals for that security or sector have deteriorated or the timing is appropriate to opportunistically trade for other securities with better economic-return characteristics. Net realized and unrealized gains and losses for the indicated periods were as follows: ($ in thousands) 2021 2020 2019 Net realized gains on disposals$ 7,144 9,148 26,715 Net unrealized gains (losses) on equity securities 17,881 7,939 (8,649) Net credit loss (expense) on fixed income securities, AFS (6,858) (5,042) Net credit loss (expense) benefit on fixed income securities, HTM (49) 4 Losses on securities for which we have the intent to sell (519) (16,266)
Net other-than-temporary-impairment losses recognized
earnings
(3,644)
Total net realized and unrealized investment (losses) gains
(4,217) 14,422 Realized and unrealized investment gains (losses) in 2020 were significantly impacted by COVID-19-related market volatility in the first quarter of 2020, and substantially all of the$16.3 million of losses on securities we intended to sell were recorded in that quarter to provide our investment managers flexibility to trade and optimize our investment portfolio. The increase in unrealized gains on equity securities in 2021 was driven by strong public equities performance in the year. 58 -------------------------------------------------------------------------------- For additional information regarding our losses on securities we intend to sell and our methodology for estimating the allowance for credit losses, see Note 2. "Summary of Significant Accounting Policies" and Note 5. "Investments" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Federal Income Taxes The following table provides information regarding federal income taxes. ($ in millions) 2021 2020 2019 Federal income tax expense$ 101.5 56.6 64.8 Effective tax rate1 20.5 % 18.7 19.3
1The effective tax rate is calculated by taking "Total federal income tax
expense" divided by "Income before federal income tax" less "Preferred stock
dividends" on our Consolidated Statements of Income.
Federal income tax expense increased by$44.9 million in 2021 compared to 2020, primarily due to an increase in pre-tax income that is taxed at the statutory rate. The increase in pre-tax income was primarily driven by increases in underwriting income and net investment income earned primarily due to higher gains on alternative investments in our other investment portfolio. See Note 14. "Federal Income Taxes" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K for further information about the following: (i) a reconciliation of our effective tax rate to the statutory rate of 21%; and (ii) details regarding our net deferred tax liability and asset. Liquidity and Capital Resources Capital resources and liquidity reflect our ability to generate cash flows from business operations, borrow funds at competitive rates, and raise new capital to meet our operating and growth needs.
Liquidity
We manage liquidity by focusing on generating sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. We also adjust our liquidity in light of economic or market conditions, as discussed further below. Sources of Liquidity Sources of cash forSelective Insurance Group, Inc. ("Parent") historically have consisted of dividends from the Insurance Subsidiaries, the investment portfolio held at the Parent, borrowings under third-party lines of credit, loan agreements with certain Insurance Subsidiaries, and the issuance of equity (common or preferred) and debt securities. We continue to monitor these sources, considering both our short-term and long-term liquidity and capital preservation strategies. The Parent's investment portfolio includes (i) short-term investments that are generally maintained in "AAA" rated money market funds approved by theNational Association of Insurance Commissioners , (ii) high-quality, highly-liquid government and corporate fixed income securities, (iii) equity securities, (iv) other investments, and (v) a cash balance. In the aggregate, Parent cash and total investments amounted to$527 million atDecember 31, 2021 , and$490 million atDecember 31, 2020 . The composition of the Parent's investment portfolio may change over time based upon various factors, including the amount and availability of dividends from our Insurance Subsidiaries, investment income, expenses, other Parent cash needs, such as dividends payable to shareholders, asset allocation investment decisions, inorganic growth opportunities, debt retirement, and share repurchases. Our target is for the Parent to maintain highly liquid investments of at least twice its expected annual net cash outflow needs, with the target currently estimated at approximately$180 million . Insurance Subsidiary Dividends The Insurance Subsidiaries generate liquidity through insurance float, which is created by collecting premiums and earning investment income before paying claims. The period of float can extend over many years. Our investment portfolio consists of maturity dates that continually provide a source of cash flow for claims payments in the ordinary course of business. To protect our Insurance Subsidiaries' capital, we purchase reinsurance coverage for significantly large claims or catastrophes that may occur. The Insurance Subsidiaries paid$140 million in dividends to the Parent in 2021. As ofDecember 31, 2021 , our allowable ordinary maximum dividend is$322 million for 2022. All Insurance Subsidiary dividends to the Parent are (i) subject to the approval and/or review of its domiciliary state insurance regulator and (ii) generally payable only from earned statutory surplus reported in its annual statements as of the precedingDecember 31 . Although domiciliary state insurance regulators historically have approved dividends, there is no assurance they will approve future Insurance Subsidiary dividends.New Jersey corporate law also limits the maximum amount of dividends the Parent can pay our shareholders if either (i) the Parent would be unable to pay its debts as they became due in the usual course of business, or (ii) the Parent's total assets 59 -------------------------------------------------------------------------------- would be less than its total liabilities. The Parent's ability to pay dividends to shareholders is also impacted by (i) covenants in its credit agreement that obligate it, among other things, to maintain a minimum consolidated net worth and a maximum ratio of consolidated debt to total capitalization, and (ii) the terms of our preferred stock that prohibit dividends to be declared or paid on our common stock if dividends are not declared and paid, or made payable, on all outstanding preferred stock for the latest completed dividend period. For additional information regarding dividend restrictions and financial covenants, where applicable, see Note 11. "Indebtedness," Note 17. "Equity," and Note 22. "Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Line of Credit OnDecember 20, 2019 , the Parent entered into a Credit Agreement with the lenders named therein (the "Lenders") and the Bank of Montreal,Chicago Branch, as Administrative Agent ("Line of Credit"). Under the Line of Credit, the Lenders have agreed to provide the Parent with a$50 million revolving credit facility that can be increased to$125 million with the Lenders' consent. No borrowings were made under the Line of Credit in 2021. The Line of Credit will mature onDecember 20, 2022 , and has a variable interest rate based on, among other factors, the Parent's debt ratings. For additional information regarding the Line of Credit and corresponding representations, warranties, and covenants, refer to Note 11. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Four of the Insurance Subsidiaries are members ofFederal Home Loan Bank ("FHLB") branches, as shown in the following table. Membership requires the ownership of branch stock and includes the right to access to liquidity. AllFederal Home Loan Bank of Indianapolis ("FHLBI") andFederal Home Loan Bank of New York ("FHLBNY") borrowings are required to be secured by investments pledged as collateral. For additional information regarding collateral outstanding, refer to Note 5. "Investments" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Branch Insurance Subsidiary Member FHLBI SICSC1 SICSE1 FHLBNY SICA SICNY
1These subsidiaries are jointly referred to as the "Indiana Subsidiaries" as
they are domiciled in
The Line of Credit permits aggregate borrowings from the FHLBI and the FHLBNY up to 10% of the respective member company's admitted assets for the previous year. As SICNY is domiciled inNew York , its FHLBNY borrowings are limited byNew York insurance regulations to the lower of 5% of admitted assets for the most recently completed fiscal quarter, or 10% of admitted assets for the previous year-end. The following table provides information on the remaining capacity for FHLB borrowings based on these restrictions, as well as the amount of additional FHLB stock that would need to be purchased to allow these member companies to borrow their remaining capacity: ($ in millions) Admitted Borrowing Additional FHLB Stock As of December 31, 2021 Assets
Limitation Amount Borrowed Remaining Capacity Requirements SICSC$ 833.2 $ 83.3 32.0 51.3 0.6 SICSE 665.6 66.6 28.0 38.6 0.5 SICA 3,160.6 316.1 - 316.1 14.2 SICNY 580.2 29.0 - 29.0 1.3 Total$ 495.0 60.0 435.0 16.6 Short-term Borrowings We did not make any short-term borrowings from FHLB branches during 2021. Intercompany Loan Agreements The Parent has lending agreements with the Indiana Subsidiaries approved by theIndiana Department of Insurance that provide additional liquidity. Similar to the Line of Credit, these lending agreements limit the Parent's borrowings from theIndiana 60 --------------------------------------------------------------------------------
Subsidiaries to 10% of the admitted assets of the respective Indiana Subsidiary.
The following table provides information on the Parent's borrowings and
remaining borrowing capacity from the two Indiana Subsidiaries:
($ in millions) Admitted Assets as Borrowing As of December 31, 2021 of December 31, 2021 Limitation Amount Borrowed Remaining Capacity SICSC $ 833.2$ 83.3 24.0 59.3 SICSE 665.6 66.6 16.0 50.6 Total$ 149.9 40.0 109.9 Capital Market Activities The Parent had no private or public issuances of stock during 2021. In the fourth quarter of 2020, we enhanced our capital structure flexibility at the Parent by issuing$200 million of 4.60% non-cumulative perpetual preferred stock. Net proceeds after issuance costs were$195 million . The Parent is using these proceeds for general corporate purposes, which may include the repurchase of common stock under a$100 million share repurchase program authorized by our Board of Directors (the "Board") in conjunction with the preferred stock offering. During 2021, we repurchased 52,781 shares of our common stock under this authorization at a cost of$3.4 million , with a$64.49 average price per share. We have$96.6 million of remaining capacity under our share repurchase program. For additional information on the preferred stock transaction, refer to Note 17. "Preferred Stock" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Uses of Liquidity The Parent's liquidity generated from the sources discussed above is used, among other things, to pay dividends to our shareholders. Dividends on shares of the Parent's common and preferred stock are declared and paid at the discretion of the Board based on our operating results, financial condition, capital requirements, contractual restrictions, and other relevant factors. InOctober 2021 , our Board approved a 12% increase in the quarterly cash dividend, to$0.28 from$0.25 per share. OnFebruary 3, 2022 , our Board declared: •A quarterly cash dividend on common stock of$0.28 per common share, that is payableMarch 1, 2022 , to holders of record onFebruary 15, 2022 ; and •A cash dividend of$287.50 per share on our 4.60% Non-Cumulative Preferred Stock, Series B (equivalent to$0.28750 per depository share) payable onMarch 15, 2022 , to holders of record as ofFebruary 28, 2022 . Our ability to meet our interest and principal repayment obligations on our debt, as well as our ability to continue to pay dividends to our stockholders, is dependent on (i) liquidity at the Parent, (ii) the ability of the Insurance Subsidiaries to pay dividends, if necessary, and/or (iii) the availability of other sources of liquidity to the Parent. Our next FHLB borrowing principal repayment is$60 million to FHLBI due onDecember 16, 2026 . Restrictions on the ability of the Insurance Subsidiaries to declare and pay dividends, without alternative liquidity options, could materially affect our ability to service debt and pay dividends on common and preferred stock. Capital Resources Capital resources ensure we can pay policyholder claims, furnish the financial strength to support the business of underwriting insurance risks, and facilitate continued business growth. AtDecember 31, 2021 , we had GAAP stockholders' equity of$3.0 billion and statutory surplus of$2.4 billion . With total debt of$506.1 million atDecember 31, 2021 , our debt-to-capital ratio was 14.5%. For additional information on our statutory surplus, see Note 22. "Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. 61 -------------------------------------------------------------------------------- The following table summarizes current and long-term material cash requirements as ofDecember 31, 2021 , which we expect to fund primarily with operating cash flows. Payment Due by Period Less than 1-3 3-5 More than ($ in millions) Total 1 year years years 5 years Notes payable $ 510.0 - - 60.0 450.0 Interest on debt obligation 593.6 28.3 56.6 56.6 452.1 Subtotal 1,103.6 28.3 56.6 116.6 902.1 Gross loss and loss expense payments 4,580.9 1,303.5 1,473.8 701.5
1,102.1
Ceded loss and loss expense payments 578.6 174.5 137.3 71.1
195.7
Net loss and loss expense payments 4,002.3 1,129.0 1,336.5 630.4 906.4 Total $ 5,105.9 1,157.3 1,393.1 747.0 1,808.5 Our loss and loss expense payments in the table above represent estimated paid amounts by year on our loss and loss expense reserves that are estimates based on past experience, adjusted for the effects of current developments and anticipated trends, and include considerable judgment. There is no precise method for evaluating the impact of any specific factor on the projected timing of loss and loss expense reserve payments, so the timing and amounts of the actual payments will be affected by many factors. Therefore, the projected settlement of the reserves for net loss and loss expense may differ, perhaps significantly, from actual future payments. For more information on our case reserves and estimates of reserves for loss and loss expense IBNR, refer to the "Reserve for Loss and Loss Expense" section in the "Critical Accounting Policies and Estimates" section of this MD&A and Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. For additional information regarding cross-default provisions associated with our notes payable in the table above or our Line of Credit, see Note 11. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." in this Form 10-K. In addition to the above, the following table summarizes certain contractual obligations we had atDecember 31, 2021 that may require us to invest additional amounts into our investment portfolio, which we would fund primarily with operating cash flows. Amount of Year of Expiration of ($ in millions) Obligation Obligation Alternative and other investments$ 215.0 2036
Non-publicly traded collateralized loan obligations in our
fixed income securities portfolio
59.8 2030
Non-publicly traded common stock within our equity
portfolio
4.2 2027 CMLs 5.5 2023 Privately-placed corporate securities 4.3 Less than 1 year Total$ 288.8 There is no certainty that any such additional investment will be required, and we expect to have the capacity to repay or refinance these obligations as they come due.
Our other cash requirements include, without limitation, dividends to
stockholders, capital expenditures, and other operating expenses, including
commissions to our distribution partners, labor costs, premium taxes, general
and administrative expenses, and income taxes.
As ofDecember 31, 2021 and 2020, we had no (i) material guarantees on behalf of others and trading activities involving non-exchange traded contracts accounted for at fair value, (ii) material transactions with related parties other than those disclosed in Note 18. "Related Party Transactions" included in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K, and (iii) material relationships with unconsolidated entities or financial partnerships atDecember 31, 2021 and 2020, such as structured finance or special purpose entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Consequently, we are not exposed to any material financing, liquidity, market, or credit risk related to off-balance sheet arrangements. We continually monitor our cash requirements and the amount of capital resources we maintain at the holding company and operating subsidiary levels. As part of our long-term capital strategy, we strive to maintain capital metrics that support our targeted financial strength relative to the macroeconomic environment. Based on our analysis and market conditions, we may take a variety of actions, including, without limitation, contributing capital to the Insurance Subsidiaries, issuing additional debt 62 --------------------------------------------------------------------------------
and/or equity securities, repurchasing existing debt, repurchasing shares of the
Parent's common stock, and increasing stockholders' dividends.
Our capital management strategy is intended to protect the interests of the policyholders of the Insurance Subsidiaries and our stockholders, while enhancing our financial strength and underwriting capacity. We have a profitable book of business and solid capital base, positioning us well to take advantage of market opportunities that may arise. Book value per common share increased 9% to$46.24 as ofDecember 31, 2021 , from$42.38 as ofDecember 31, 2020 , driven by$6.50 in net income per diluted common share, partially offset by$2.07 of lower unrealized gains on our fixed income securities portfolio and$1.03 in dividends to our common stockholders. The book value per common share atDecember 31, 2021 included$3.01 of unrealized gains on our fixed income securities portfolio, which have an inverse relationship to changes in interest rates. The yields on benchmarkU.S. Treasury securities have increased subsequent toDecember 31, 2021 , which has resulted in a decrease in the net unrealized gains on our fixed income securities. If interest rates continue to increase and/or credit spreads widen in 2022, our net unrealized gains on our fixed income securities portfolio will come under pressure and could move into a net unrealized loss position. Cash Flows Net cash provided by operating activities was$771 million in 2021 compared to$554 million in 2020. Cash flows from operations increased in 2021 primarily driven by growth in our insurance operations. For more information on our underwriting results, refer to "Insurance Operations" above in this MD&A. Net cash used in investing activities was$619 million in 2021 compared to$688 million in 2020. Investing activity was greater in 2020, as we benefited from$195 million of net proceeds from our perpetual preferred stock issuance last year. Net cash used in financing activities was$123 million in 2021 compared to net cash provided of$141 million in 2020. The cash flows from financing activities decreased due to (i) a long-term debt repayment to the FHLBNY of$50 million in 2021, and (ii) our 2020 perpetual preferred stock issuance that resulted in$195 million of net proceeds last year.
PRINCIPAL FINANCIAL GROUP INC – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
Credit Risk Transfer Update: As of December 31, 2021
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