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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 The terms "Company," "we," "us," and "our" refer toSelective Insurance Group, Inc. (the "Parent"), and its subsidiaries, except as expressly indicated or the context otherwise requires. Certain statements in this Annual Report on Form 10-K, including information incorporated by reference, are "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995 ("PSLRA"). The PSLRA provides a safe harbor under the Securities Act of 1933 and the Securities Exchange Act of 1934 for forward-looking statements. These statements relate to our intentions, beliefs, projections, estimations, or forecasts 36 -------------------------------------------------------------------------------- Table of Contents of future events and financial performance. They involve known and unknown risks, uncertainties, and other factors that may cause our or industry actual results, activity levels, or performance to materially differ from those expressed or implied by the forward-looking statements. In some cases, forward-looking statements include the words "may," "will," "could," "would," "should," "expect," "plan," "anticipate," "target," "project," "intend," "believe," "estimate," "predict," "potential," "pro forma," "seek," "likely," "continue," or comparable terms. Our forward-looking statements are only predictions, and we can give no assurance that such expectations will prove correct. We undertake no obligation, other than as federal securities laws may require, to publicly update or revise any forward-looking statements for any reason. Factors that could cause our actual results to differ materially from what we project, forecast, or estimate in forward-looking statements are discussed in further detail in Item 1A. "Risk Factors." of this form 10-K. These risk factors may not be exhaustive. We operate in a constantly changing business environment, and new risk factors may emerge anytime. We can neither predict these new risk factors nor assess their impact, if any, on our businesses or the extent any factor or combination of factors may cause actual results to differ materially from any forward-looking statements. Given these risks, uncertainties, and assumptions, the forward-looking events we discuss in this report might not occur.
Introduction
We classify our business into four reportable segments:
•Standard Commercial Lines;
•Standard Personal Lines;
•Excess and Surplus Lines ("E&S Lines"); and
•Investments.
For more details about these segments, refer to Note 1. "Organization" and Note
12. "Segment Information" in Item 8. "Financial Statements and Supplementary
Data." of this Form 10-K.
We write our Standard Commercial and Standard Personal Lines products and
services through nine of our insurance subsidiaries, some of which participate
in the federal government's National Flood Insurance Program's ("NFIP") Write
Your Own Program ("WYO"). We write our E&S products through another subsidiary,
Mesa Underwriters Specialty Insurance Company , a nationally-authorized
non-admitted platform for customers who generally cannot obtain coverage in the
standard marketplace. Collectively, we refer to our ten insurance subsidiaries
as the "Insurance Subsidiaries."
The following is Management's Discussion and Analysis ("MD&A") of the
consolidated results of operations and financial condition, as well as known
trends and uncertainties, that may have a material impact in future periods. The
MD&A discusses and analyzes our 2022 results compared to 2021. Investors should
read the MD&A in conjunction with Item 8. "Financial Statements and
Supplementary Data." of this Form 10-K. For discussion and analysis of our 2021
results compared to 2020, refer to Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations." of our Annual Report on Form
10-K for the fiscal year ended December 31, 2021 .
In the MD&A, we discuss and analyze the following:
•Critical Accounting Policies and Estimates; •Financial Highlights of Results for Years EndedDecember 31, 2022 , 2021, and 2020; •Results of Operations and Related Information by Segment; •Federal Income Taxes; and •Liquidity and Capital Resources. Critical Accounting Policies and Estimates We have identified the policies and estimates critical to our business operations and the understanding of our results of operations. The policies and estimates we considered most critical to the preparation of the Financial Statements involved (i) reserves for loss and loss expense, (ii) investment valuation and the allowance for credit losses on available-for-sale ("AFS") fixed income securities, and (iii) reinsurance. 37 -------------------------------------------------------------------------------- Table of Contents Reserves for Loss and Loss Expense Significant time can elapse between the occurrence of an insured loss, the reporting of the claim to us, and the final settlement and payment of the claim. To recognize liabilities for unpaid loss and loss expense, insurers establish reserves as balance sheet liabilities. The following tables provide case and incurred but not reported ("IBNR") reserves for loss and loss expenses, and reinsurance recoverable on unpaid loss and loss expense as ofDecember 31, 2022 and 2021: As ofDecember 31, 2022 Loss and Loss Expense Reserves Reinsurance Case IBNR Recoverable on Unpaid ($ in thousands) Reserves Reserves Total Loss and Loss Expense Net Reserves General liability $ 358,967 1,624,148 1,983,115 246,736 1,736,379 Workers compensation 347,992 694,777 1,042,769 199,057 843,712 Commercial automobile 299,444 578,283 877,727 14,271 863,456 Businessowners' policies 43,456 89,429 132,885 19,277 113,608 Commercial property 81,377 133,523 214,900 81,970 132,930 Other 11,030 12,576 23,606 4,443 19,163 Total Standard Commercial Lines 1,142,266 3,132,736 4,275,002 565,754 3,709,248 Personal automobile 61,499 79,060 140,559 36,529 104,030 Homeowners 13,237 42,051 55,288 7,124 48,164 Other1 111,355 33,100 144,455 132,525 11,930 Total Standard Personal Lines 186,091 154,211 340,302 176,178 164,124 E&S casualty lines2 88,965 416,299 505,264 11,397 493,867 E&S property lines3 9,303 14,950 24,253 4,184 20,069 Total E&S Lines 98,268 431,249 529,517 15,581 513,936 Total $ 1,426,625 3,718,196 5,144,821 757,513 4,387,308 1Includes our flood loss exposure related to our participation in the NFIP's WYO program, to which we cede 100% of our flood losses. 2Includes general liability (96% of net reserves) and commercial auto liability coverages (4% of net reserves). 3Includes commercial property (90% of net reserves) and commercial auto property coverages (10% of net reserves).
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
Other1 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 lines2 94,839 361,875 456,714 11,672 445,042
E&S property lines3 9,080 12,892 21,972 2,017 19,955
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 our flood loss exposure relates to our participation in the NFIP's WYO
program, to which we cede 100% of our flood losses.
2Includes general liability (95% of net reserves) and commercial auto liability
coverages (5% of net reserves).
3Includes commercial property (91% of net reserves) and commercial auto property
coverages (9% of net reserves).
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The Insurance Subsidiaries' net loss and loss expense reserves duration was
approximately 3.1 years at December 31, 2022 , down from 3.5 years at December
31, 2021 .
How reserves are established
Reserves for loss and loss expense include case reserves on reported claims and
IBNR reserves. Case reserves are estimated on each individual claim based on
claim-specific facts and circumstances known at the time. Case reserves may be
adjusted up or down as the claim's specific facts and circumstances change. IBNR
reserves are established at more aggregated levels, and they include provisions
for (i) claims not yet reported, (ii) future development on reported claims,
(iii) closed claims that could reopen in the future, and (iv) anticipated
salvage and subrogation recoveries.
Our thorough reserving process relies on quarterly internal reserve reviews,
based on our own loss experience, with consideration given to various internal
and external factors. Changes in claim dynamics may inherently change paid and
reported development patterns. While the selections in our reserve analyses aim
to account for these impacts, there remains an increased risk of variability in
the estimated reserves. In addition to our internal reserve reviews, we have an
external consulting actuary perform an independent review of our reserves
semi-annually. We do not rely on the external consulting actuary's report to
determine our recorded reserves; however, we review and discuss with the
consulting actuary our respective observations regarding trends, key
assumptions, and actuarial methodologies. While not required, our independent
consulting actuary issues the annual statutory Statements of Actuarial Opinion
for our Insurance Subsidiaries. For additional information on our accounting
policy for reserves for loss and loss expense, refer to Note. 2. "Summary of
Significant Accounting Policies" in Item 8. "Financial Statements and
Supplementary Data." of this Form 10-K.
Range of Reasonable Reserve Estimates
We have estimated a range of reasonable reserve estimates for net loss and loss
expense of $3,920 million to $4,662 million at December 31, 2022 . This range
reflects low and high reasonable reserve estimates determined by judgmentally
adjusting the methods, factors, and assumptions selected within the internal
reserve review. This approach produces a range of reasonable reserve estimates,
and does not represent a distribution of all possible outcomes. Therefore, the
final outcomes may be greater than or less than these amounts.
The range of reasonable reserve estimates increased as of December 31, 2022 ,
relative to December 31, 2021 . This increase primarily relates to the growth in
reserves commensurate with our growth in net premiums earned ("NPE").
Changes in Reserve Estimates (Loss Development )
Our quarterly reserving process may lead to changes in the recorded reserves for
prior accident years, referred to as favorable or unfavorable prior year loss
and loss expense development. In 2022, we experienced net favorable prior year
loss development of $78.9 million , compared to $82.9 million in 2021 and $72.9
million in 2020. The following table summarizes prior year development by line
of business:
(Favorable)/Unfavorable Prior Year Loss and Loss Expense
Development
($ in millions) 2022 2021 2020
General liability $ (5.0) (29.0) (35.0)
Commercial automobile 22.5 13.3 7.1
Workers compensation (70.0) (58.0) (60.0)
Businessowners' policies (7.3) (0.4) 3.9
Commercial property (1.6) (2.6) 9.2
Bonds (10.0) - -
Homeowners (0.6) 1.8 7.7
Personal automobile 0.5 (0.2) (1.8)
E&S casualty lines (5.0) (7.0) -
E&S property lines (2.5) (0.8) (4.0)
Other 0.1 - -
Total $ (78.9) (82.9) (72.9)
A detailed discussion of recent reserve development by line of business follows.
Standard Market General Liability Line of Business AtDecember 31, 2022 , our general liability line of business had recorded reserves, net of reinsurance, of$1.7 billion , representing 40% of our total net reserves. In 2022, this line experienced favorable development of$5.0 million , attributable to favorable inception-to-date claim frequencies in accident years 2020 and 2021. In 2021, this line experienced favorable development of$29.0 million , attributable to improved loss severities in accident years 2018 and prior. 39
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By its nature, general liability presents a diverse set of exposures. Losses and
loss trends are influenced by various factors, including legislative enactments,
judicial decisions, and economic and social inflation. Economic inflation
directly impacts our claims severities by increasing the costs of raw materials,
medical procedures, and labor. Social inflation may impact both the frequency
and severity of claims by affecting (i) the propensity for a claimant to file a
claim, (ii) the percentage of claimants who engage lawyers, and (iii) the nature
of judicial verdicts and amount of the associated awards, which influence
settlement values going forward. We monitor claim litigation rates regularly and
have observed modest increases in the percentage of claims with attorney
involvement in recent periods. This trend and the impact of previous court
closures are affecting the time to settle claims.
We have exposure to abuse or molestation claims, mainly through insurance
policies that we (i) underwrite through our Community and Public Services
("CAPS") strategic business unit, and (ii) issue to schools, religious
institutions, day-care facilities, and other social services. These customers
within our CAPS business unit represented approximately 10% of our total
Standard Commercial Lines NPW in both 2022 and 2021. Through 2017, our exposure
to abuse or molestation risk increased, reflective of our CAPS book's growth. In
2018, we implemented more stringent underwriting eligibility guidelines and
partnered with a third party to better assess exposure and enhance loss control
measures. In 2019, we filed and approved significant rate increases for this
exposure. We continue to monitor each jurisdiction's statute of limitations to
ensure our rate level accounts for the changing exposure as best we reasonably
can. While these underwriting and pricing actions have been necessary to ensure
the profitability of the portfolio going forward, they have limited our CAPS
growth in recent years.
We also have exposure to abuse or molestation claims from recently enacted state
laws that extend the statute of limitations or permit windows for abuse or
molestation claims and lawsuits to be filed that statutes of limitations
previously barred. Consequently, we may receive claims decades after the alleged
acts occurred that will involve complex claims coverage determinations,
potential litigation, higher defense costs, and potentially the need to collect
from reinsurers under older reinsurance agreements. Our claims and actuarial
departments actively monitor these claims to identify changes in frequency or
severity and any emerging or shifting trends. While this should help us better
understand this rapidly evolving exposure, the ultimate impact of social,
political, and legal trends remains highly uncertain, and may significantly
impact the ultimate settlement values for these claims.
Standard Market Workers Compensation Line of Business
At December 31, 2022 , our workers compensation line of business had recorded
reserves, net of reinsurance, of $844 million , representing 19% of our total net
reserves. During 2022, this line experienced favorable reserve development of
$70.0 million , due to favorable inception-to-date claim frequencies in accident
year 2020, and improved loss severities in accident years 2020 and prior.
Similarly, this line experienced favorable reserve development during 2021 of
$58.0 million , driven by accident years 2019 and prior. During both 2022 and
2021, the lower loss emergence than expected was partly due to: (i) medical
inflation that was lower than originally anticipated; and (ii) various claims
initiatives we have implemented. Because of the length of time injured workers
can receive related medical treatment, decreases in medical inflation can cause
favorable loss development over an extended number of accident years.
A variety of issues can impact the workers compensation line of business, such
as:
Unexpected changes in medical cost inflation - The industry is currently
experiencing a period of lower medical claim cost inflation. However, alongside
elevated inflation as measured by the Consumer Price Index, medical costs are
also beginning to rise, though to a lesser degree. Changes in our historical
workers compensation medical costs, along with potential changes in future
medical inflation, can create additional variability in our reserves;
Changes in statutory workers compensation benefits - Benefit changes may be
enacted that affect all outstanding claims, including claims that have occurred
in the past, but have not yet been settled. Depending on the social and
political climate, these changes may either increase or decrease associated
claim costs;
Changes in utilization of the workers compensation system - These changes may be
driven by economic, legislative, or other changes, such as increased
pharmaceutical prescriptions, more complex medical procedures, changes in
permanently injured workers' life expectancy, and health insurance availability.
Standard Market Commercial Automobile Line of Business AtDecember 31, 2022 , our commercial automobile line of business had recorded reserves, net of reinsurance, of$863 million , which represented 20% of our total net reserves. In 2022, this line experienced unfavorable prior year reserve development of$22.5 million , driven by increased severities in the 2021 accident year. In 2021, this line experienced unfavorable prior year reserve development of$13.3 million , driven by higher loss severities in accident years 2016 through 2019. 40
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For both us and the industry, the commercial automobile line has experienced unfavorable trends in recent years. Pre-pandemic, increased frequencies were likely due to increased miles driven related to lower unemployment, poor road quality, and an increase in distracted driving. The pandemic and the governmental "stay-at-home" orders issued in early 2020 dramatically reduced miles driven and road traffic, significantly reducing claims frequency in 2020. At the same time, along with industry reporting of dramatic increases in risky driving behaviors, such as speeding, distracted driving, and driving while under the influence, traffic deaths per mile driven increased significantly. As miles driven increased in 2021 and 2022, fatality rates per mile driven have somewhat tempered, but remain well above pre-pandemic levels. This, along with the impacts of social inflation, continue to put pressure on claim severities in this line. As of the end of 2022, frequencies remained somewhat below pre-pandemic levels due to shifts in commuting patterns and fewer low-speed crashes. Increasing property damage and physical damage severities relate to (i) elevated repair costs for increasingly complex vehicles that incorporate more technology, (ii) longer periods of rental reimbursement costs for claims, and (iii) recent inflationary impacts and disruptions to the supply chain. Continued complications in the supply chain, including labor shortages, increase the risk of longer-term elevated economic inflation.
Over the last several years, we have taken actions to improve the profitability
of this line of business, including:
•Taking meaningful rate and underwriting actions on our renewal portfolio. We continue to leverage our predictive modeling and analytical capabilities that provide guidance and automatic retrieval of relevant public information on existing and potential policyholders to provide more granular insights about where we should focus our actions. •Reducing premium leakage by improving the quality of our rating information, including validating application information with third-party data and obtaining more detailed vehicle usage information. •Aggressively managing new business pricing and hazard mix while deploying co-underwriting by our regional underwriters and corporate underwriting teams' subject matter experts for selected higher hazard classes to improve risk-driver recognition and exposure-based pricing. Standard Market Personal Automobile Line of Business AtDecember 31, 2022 , our personal automobile line of business had recorded reserves, net of reinsurance, of$104 million , which represented 2% of our total net reserves. In 2022, this line experienced unfavorable prior year reserve development of$0.5 million . In 2021, this line experienced favorable prior year reserve development of$0.2 million . Some of the same issues affecting the commercial automobile line are affecting this line. The COVID-19-related reduction in frequencies was even more pronounced than in the commercial automobile line. As with the commercial automobile line, these frequencies significantly rebounded in 2021 and 2022, yet remain less than pre-pandemic levels. This line has a similar potential for increasing average severities like the commercial automobile line. In addition to the COVID-19-related temporary impacts, the underlying trends of increased vehicle repair costs and poor road quality are likely causes of rising severities, exacerbated by riskier driving behaviors, including distracted driving trends. We continue to recalibrate our predictive models and refine our underwriting and pricing approaches. While we believe these underwriting and pricing changes will ultimately lead to improved profitability and greater stability, the resulting changes to our exposure profile may impact paid and reported development patterns, thereby increasing the uncertainty in the reserves in the near term. E&S Casualty Lines of Business AtDecember 31, 2022 , our E&S casualty lines of business had recorded reserves, net of reinsurance, of$494 million , representing 11% of our total net reserves. Our E&S casualty lines results have improved over recent years. In 2022, this line experienced favorable prior year reserve development of$5.0 million , primarily attributable to favorable inception-to-date claim frequencies and lower loss severities in accident years 2020 and 2021. In 2021, this line experienced favorable prior year reserve development of$7.0 million , primarily attributable to lower loss severities in accident years 2016 and prior.
Some of the risk factors for the general liability line also affect the E&S
casualty lines. These include (i) economic inflation, such as materials and
labor costs; and (ii) social trends, such as increased attorney involvement.
The E&S casualty lines also are impacted by operational changes we have made to
improve the portfolio's performance. Prior to 2022, our underwriting operations
have substantially exited several targeted business classes that have
historically produced volatile results, including commercial automobile
liability, liquor liability, and snow removal. In addition, we have shifted more
of our sales towards middle market business without materially increasing the
overall risk profile of the portfolio.
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Recent E&S casualty claims actions have created further casualty improvements:
•We created a dedicated E&S claims team in our corporate claims function, bringing greater expertise and consistency to E&S claims handling. •We segregated "litigated," "non-litigated," and "high exposure" claims, with separate specialized teams for each. •We implemented the following operational and expense improvement initiatives for legal counsel: •Increased the use of staff counsel, increasing legal staff in their assigned territories to support claims volume; •Heightened focus on legal budgeting and expense management; and •Implemented a panel counsel review process. While we believe these underwriting and claims operational changes improved our underwriting experience, there is risk associated with these changes. Most notably, changes in portfolio composition or our claims processes may inherently change paid and reported development patterns. While our reserve analyses incorporate methods that adjust for these changes, there remains a greater risk of fluctuation in the estimated reserves.
Other impacts creating additional loss and loss expense reserve uncertainty
Claims Initiative Impacts Consistent with our strategic imperative to optimize operational effectiveness and efficiency, 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 bring additional uncertainty related to inflationary trends. Changes in inflation affect the ultimate settlement costs for many of our lines of business, with the greatest reserve impact on the longer-tailed lines, such as general liability and workers compensation. Therefore, uncertainty about future inflation or deflation creates the potential for additional reserve variability in these lines of business. Sensitivity analysis: Potential impact on reserve estimates due to changes in key assumptions Our process to establish reserves includes a variety of key assumptions, such as: •The selection of loss and loss expense development factors; •The weight to be applied to each individual actuarial projection method; •Projected future loss trends; and •Expected claim frequencies, severities, and ultimate loss and loss expense ratios for the current accident year. The importance of any single assumption depends on several considerations, such as line of business and accident year. If the actual experience emerges differently than the assumptions underlying the reserve process, changes in our reserve estimates are possible that may be material to the results of operations in future periods. Below are sensitivity tests highlighting potential impacts to loss and loss expense reserves for the major casualty lines of business under different scenarios. These tests consider each assumption and line of business individually, without any consideration of correlation between lines of business and accident years. Therefore, the results do not constitute an actuarial range. While the figures represent possible impacts from variations in certain key assumptions, there is no assurance that future loss and loss expense emergence will be consistent with either our current or alternative sets of assumptions. While the sources of reserve variability are generated by different internal and external trends and operational changes, they ultimately manifest themselves as changes in the expected loss and loss expense development patterns. These patterns are a key assumption in the reserving process. In addition, the current accident year expected loss and loss expense ratios are a key assumption. These ratios are developed through a rigorous process of projecting recent accident years' experience to an ultimate settlement basis. Then they are adjusted to the current accident year's pricing and loss cost levels. The impact from underwriting portfolio and claims handling practice changes are also quantified and reflected where appropriate. As with all estimates, the ultimate loss and loss expense ratios may differ from those currently estimated. 42
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The sensitivities of loss and loss expense reserves to these key assumptions are
illustrated below for the major casualty lines. The first table displays
estimated impacts from changes in expected reported loss and loss expense
development patterns for our major casualty lines of business. It shows line of
business reserve impacts if the actual calendar year incurred amounts are
greater or less than current expectations by the selected percentages. While
judgmental, the selected percentages by line are based on the reserve range
analysis and the actual historical reserve development for the line of business.
The second table displays the estimated impacts from changes to the expected
loss and loss expense ratios for the current accident year. It shows reserve
impacts by line of business if the expected loss and loss expense ratios for the
current accident year are greater or less than current expectations by the
selected percentages.
Reserve Impacts of Changes to Expected Loss and Loss Expense Reporting Patterns
(Decrease) to Increase to Future
Future Calendar Calendar Year
($ in millions) Percentage Decrease/Increase Year Reported Reported
General liability 10 % $ (180) $ 180
Workers compensation 18 (105) 105
Commercial automobile liability 15 (115) 115
Personal automobile liability 15 (10) 10
E&S casualty lines 10 (50) 50
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 $ (90) $ 90
Workers compensation 10 (35) 35
Commercial automobile liability 10 (60) 60
Personal automobile liability 10 (10) 10
E&S casualty lines 10 (25) 25
Note that there is some overlap between the impacts in the two tables. For
example, increases in the calendar year development would ultimately impact our
view of the current accident year's loss and loss expense ratios. However, these
tables provide perspective on the sensitivity of each key assumption. While the
changes represent outcomes based on reasonably likely changes to our underlying
reserving assumptions, they do not represent a range of possible outcomes. Our
reserves could increase or decrease significantly from what the tables above
reflect.
Asbestos and Environmental Reserves
Our general liability, excess liability, businessowners' policies, and
homeowners reserves include exposure to asbestos and environmental claims. The
emergence of these claims occurs over an extended period and can be
unpredictable. The total recorded net loss and loss expense reserves for these
claims were $20.3 million as of December 31, 2022 and $21.1 million as of
December 31, 2021 , with asbestos claims constituting approximately 23% of these
reserves in both years.
Environmental claims have arisen primarily from insured landfill exposures in
municipal government and small non-manufacturing commercial risk, as well as
leaking underground storage tanks within our homeowners policies. Asbestos
claims have arisen primarily from policies issued to various distributors of
asbestos-containing products, such as electrical and plumbing materials. We
handle our asbestos and environmental claims in a centralized and specialized
asbestos and environmental claim unit. That unit establishes case reserves on
individual claims based on the facts and circumstances known at a given point in
time, which are supplemented by IBNR reserves.
Estimating IBNR reserves for asbestos and environmental claims is difficult
because these claims have delayed and inconsistent reporting patterns. In
addition, there are significant uncertainties associated with estimating
critical reserve assumptions, such as average clean-up costs, third-party costs,
potentially responsible party shares, allocation of damages, litigation and
coverage costs, and potential state and federal legislative changes. Limiting
our exposure to asbestos and environmental claims are (i) the fuel oil system
exclusion on our New Jersey homeowners policies that we introduced in 2007, and
(ii) the Insurance Services Office, Inc.'s Total Pollution Exclusion that was
introduced in the mid-1980s. Prior to the mid-1980s, we primarily wrote Standard
Personal Lines, which has also limited our exposure to asbestos and
environmental claims.
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Other Latent Exposures
We also have other latent and continuous trigger exposures in our ongoing
portfolio. Examples include claims for construction defect and abuse or
molestation, for which states have increased and expanded the statute of
limitations. We manage our exposure to these liabilities through our
underwriting and claims practices, and a dedicated claims unit, similar to our
handling of asbestos and environmental claims. The impact of social, political,
and legal trends on these claims remains highly uncertain, so our related loss
and loss expense reserves remain highly uncertain. These exposures remain in our
ongoing portfolio, and as such, are reserved in aggregate, with other exposures
within the line of business reserves.
Investment Valuation and the Allowance for Credit Losses on
Securities
Investment Valuation Accounting guidance defines the fair value of our investment portfolio as the exit price, or the amount that would be (i) received to sell an asset, or (ii) paid to transfer a liability in an orderly transaction between market participants. When determining an exit price, we must rely on observable market data, if available. Most securities in our equity portfolio have readily determinable fair values and are recorded at fair value with changes in unrealized gains or losses recognized through income. Our AFS fixed income securities portfolio is recorded at fair value, and the related unrealized gains or losses are reflected in stockholders' equity, net of tax. For our AFS fixed income securities portfolios, fair value is a key factor in the measurement of (i) losses on securities for which we have the intent to sell, and (ii) changes in the allowance for credit losses. The fair value of approximately 93% of our investments measured at fair value are classified as either Level 1 or Level 2 in the fair value hierarchy and are priced using observable inputs for identical or similar assets. About 7% are classified as either (i) Level 3 and are based on unobservable market inputs because the related securities are not traded on a public market, or (ii) not leveled because the related securities are measured at fair value using net asset value per share (or its practical expedient). For additional information, refer to the following within Item 8. "Financial Statements and Supplementary Data." of this Form 10-K: (i) item (d) of Note 2. "Summary of Significant Accounting Policies" regarding descriptions of the levels within the fair value hierarchy and the valuation techniques used for our Level 3 securities, and (ii) Note 7. "Fair Value Measurements" for additional information on the unobservable inputs in our securities measured using Level 3 inputs. Allowance for Credit Losses 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 risk-adjusted discounted cash flow ("DCF"). The allowance for credit losses is the excess of amortized cost over the greater of (i) our estimate of the present value of expected future cash flows, or (ii) fair value. The allowance for credit losses cannot exceed the unrealized loss, and therefore it may fluctuate with changes in the security's fair value. We also consider the need to record losses on securities in an unrealized loss position for which we have the intent to sell. We analyze unrealized losses for credit loss in accordance with our existing accounting policy, which includes performing DCF analyses on securities at the lot level and analyzing these DCFs using various economic scenarios. In performing these DCF analyses, we calculate the present value of future cash flows using various models specific to the major security types in our portfolio. These models use security-specific information and forecasted macroeconomic data to determine possible expected credit loss scenarios based on projected changes in the economy. The models contain forecasted economic data from 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$45.7 million in 2022, and$9.7 million in 2021, on our AFS fixed income securities portfolio. After considering the allowance for credit losses, the remaining unrealized losses on this portfolio were$537.2 million in 2022 and$17.4 million in 2021. The increase in 2022 compared to 2021 was driven by an increase in benchmarkU.S. Treasury rates and a widening of credit spreads, with the increase in interest rates having the most significant impact. If the security-specific and macroeconomic assumptions in our DCF analyses or our outlook as to the occurrence probability of our DCF model scenarios were to change, our allowance for credit losses and the resulting credit loss expense or benefit will negatively or positively impact our results of operations. Factors considered in determining the allowance for credit losses require significant judgment, including our evaluation of the security's projected cash flow stream.
For additional information regarding our allowance for credit losses on AFS
fixed income securities, see item (c) of Note 2. "Summary of Significant
Accounting Policies" and item (i) of Note 5. "Investments" within Item 8.
"Financial Statements and Supplementary Data." of this Form 10-K, respectively.
44 -------------------------------------------------------------------------------- Table of Contents Reinsurance Reinsurance recoverables on paid and unpaid loss and loss expense represent our estimates of the amounts we will recover from reinsurers. Each reinsurance contract is analyzed to ensure that sufficient risk is transferred to record the transactions appropriately as reinsurance in the Financial Statements. Amounts recovered from reinsurers are recognized as assets contemporaneously and in a manner consistent with the paid and unpaid losses associated with the reinsured policies. An allowance for credit losses on our reinsurance recoverable balance is recorded based on an evaluation of balances due from reinsurers and other available information, including collateral we hold under the terms and conditions of the underlying agreements. Reinsurers often purchase and rely on their own retrocessional reinsurance programs to manage their capital position and improve their financial strength ratings. Details about retrocessional reinsurance programs are not always transparent, making it difficult to assess our reinsurers' exposure to counterparty credit risk. Our reinsurer's credit quality is also impacted by other factors, such as their reserve adequacy, investment portfolio, regulatory capital position, catastrophe aggregations, and risk management expertise. In addition, contractual language interpretations and willingness to pay valid claims can impact our allowance for estimated uncollectible reinsurance. Our allowance for estimated uncollectible reinsurance was$1.6 million at bothDecember 31, 2022 , andDecember 31, 2021 . We continually monitor developments that may impact recoverability from our reinsurers, for which we have contractual remedies if necessary. For further information regarding reinsurance, see the "Reinsurance" section below in "Results of Operations and Related Information by Segment" and Note 9. "Reinsurance" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Financial Highlights of Results for Years EndedDecember 31, 2022 , 2021, and 20201 2022 2021 ($ in thousands, except per share amounts) 2022 2021 vs. 2021 2020 vs. 2020 Financial Data: Revenues$ 3,558,062 3,379,164 5 %$ 2,922,274 16 % After-tax net investment income 232,199 263,000 (12) 184,612 42 After-tax underwriting income 131,774 172,688 (24) 107,716 60 Net income before federal income tax 280,186 505,310 (45) 302,988 67 Net income 224,886 403,837 (44) 246,355 64 Net income available to common stockholders 215,686 394,484 (45) 246,355 60 Key Metrics: Combined ratio 95.1 % 92.8 2.3 pts 94.9 % (2.1) pts Invested assets per dollar of common stockholders' equity$ 3.37 2.88 17 %$ 2.96 (3) % Total return on investments 2.9 % 3.4 (0.5) pts 2.6 % 0.8 pts Return on average common equity ("ROE") 8.8 14.8 (6.0) 10.4
4.4
Net premiums written to statutory surplus ratio 1.44 x 1.33 0.11 1.30 0.03 Per Common Share Amounts: Diluted net income per share$ 3.54 6.50 (46) %$ 4.09 59 % Book value per share 38.57 46.24 (17) 42.38 9 Dividends declared per share to common stockholders 1.14 1.03 11 0.94 10 Non-GAAP Information: Non-GAAP operating income2$ 306,384 380,580 (19) %$ 249,686 52 % Non-GAAP operating income per diluted common share2 5.03 6.27 (20) 4.15 51 Non-GAAP operating ROE2 12.4 % 14.3 (1.9) pts 10.5 % 3.8 pts Adjusted book value per common share2$ 45.49 43.23 5 %$ 37.29 16 % 1Refer to the Glossary of Terms attached to this Form 10-K as Exhibit 99.1 for definitions of terms used in this financial review. 2Non-GAAP operating income, non-GAAP operating income per diluted common share, and non-GAAP operating ROE are measures comparable to net income available to common stockholders, net income available to common stockholders per diluted common share, and ROE, respectively, but exclude after-tax net realized and unrealized gains and losses on investments included in net income. Adjusted book value per common share is a measure comparable to book value per common share, but excludes total after-tax unrealized gains and losses on investments included in accumulated other comprehensive (loss) income. These non-GAAP measures are important financial measures used by us, analysts, and investors because the timing of realized and unrealized investment gains and losses on securities in any given period is largely discretionary. In addition, net realized and unrealized investment gains and losses on investments could distort the analysis of trends. 45
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Reconciliations of our GAAP to non-GAAP measures are provided in the tables
below:
Reconciliation of net income available to common stockholders to non-GAAP operating income ($ in thousands) 2022 2021 2020 Net income available to common stockholders$ 215,686 394,484 246,355
Net realized and unrealized investment losses (gains)
included in net income, before tax
114,808 (17,599) 4,217 Tax on reconciling items (24,110) 3,695 (886) Non-GAAP operating income$ 306,384 380,580 249,686 Reconciliation of net income available to common stockholders per diluted common share to non-GAAP operating income per diluted common share 2022 2021 2020 Net income available to common stockholders per diluted common share$ 3.54 6.50 4.09
Net realized and unrealized investment losses (gains)
included in net income, before tax
1.89 (0.29) 0.07 Tax on reconciling items (0.40) 0.06 (0.01)
Non-GAAP operating income per diluted common share
6.27 4.15 Reconciliation of ROE to non-GAAP operating ROE 2022 2021 2020 ROE 8.8 % 14.8 10.4
Net realized and unrealized investment losses (gains)
included in net income, before tax
4.7 (0.7) 0.2 Tax on reconciling items (1.1) 0.2 (0.1) Non-GAAP operating ROE 12.4 % 14.3 10.5 Reconciliation of book value per common share to adjusted book value per common share 2022 2021 2020 Book value per common share 38.57 46.24 42.38
Total unrealized investment losses (gains) included
in accumulated other comprehensive (loss) income,
before tax
8.75 (3.80) (6.45) Tax on reconciling items (1.83) 0.79 1.36 Adjusted book value per common share$ 45.49 43.23 37.29
The components of our ROE and non-GAAP operating ROE are as follows:
ROE Components 2022 2021
2022 2021 vs. 2021 2020 vs. 2020
Standard Commercial Lines segment 4.6 % 5.9 (1.3) pts 5.1 0.8 pts
Standard Personal Lines segment (0.2) 0.1 (0.3) (0.5) 0.6
E&S Lines segment 1.0 0.5 0.5 - 0.5
Total insurance operations 5.4 6.5 (1.1) 4.6 1.9
Net investment income 9.4 9.9 (0.5) 7.8 2.1
Net realized and unrealized investment
(losses) gains (3.6) 0.5 (4.1) (0.1) 0.6
Total investments segment 5.8 10.4 (4.6) 7.7 2.7
Other (2.4) (2.1) (0.3) (1.9) (0.2)
ROE 8.8 14.8 (6.0) 10.4 4.4
Net realized and unrealized investment
losses (gains), after tax 3.6 (0.5) 4.1 0.1 (0.6)
Non-GAAP operating ROE 12.4 % 14.3 (1.9) 10.5 3.8
In 2022, we generated our ninth consecutive year of double-digit non-GAAP
operating ROEs, with a 12.4% non-GAAP operating ROE, which was above our
full-year 2022 target of 11%, but below our 2021 non-GAAP operating ROE of
14.3%. This was a significant achievement in a year with elevated net
catastrophe losses, capital market volatility, and higher loss cost trends
driven by elevated inflation, among other factors. Our results reflect the
success of our underwriting discipline and profitable growth strategies.
The 1.9-point decrease in non-GAAP operating ROE in 2022 compared to 2021 was primarily driven by a reduction in after-tax underwriting and investment income. After-tax underwriting income decreased$40.9 million , or 1.1 ROE points, in 2022 compared to 2021, primarily from increased non-catastrophe property loss and loss expenses. The higher non-catastrophe property loss and loss expenses were mainly due to the higher inflationary environment that resulted in an increase in the cost 46 -------------------------------------------------------------------------------- Table of Contents of materials and labor associated with repairs. While net catastrophe losses were down slightly in 2022 compared to 2021, these losses included a significant impact from Winter Storm Elliott. This storm, which occurred inlate-December 2022 , impacted 37 states, 26 of which are in our Standard Commercial Lines footprint. We recorded$135.0 million of gross losses, or$46.1 million net of reinsurance. In addition, we incurred$11.7 million in reinstatement premium, resulting in a total impact of$57.8 million , pre-tax, or 1.9 ROE points and$0.75 per diluted common share. After-tax net investment income decreased$30.8 million , or 0.5 ROE points, in 2022 compared to 2021, from lower after-tax alternative investment income in 2022. Partially offsetting this decrease was an increase in income earned on fixed income securities, which benefited from higher new purchase yields in 2022 as a result of the rapid rise in benchmarkU.S. Treasury rates and slightly wider credit spreads. In addition, our ROE was reduced by the impact of net realized and unrealized investment gains and losses, which was 3.6 ROE points in 2022. Net realized and unrealized investment losses in 2022 compared to net realized and unrealized investment gains in 2021 drove the reduction in our ROE. The increase in net realized and unrealized losses resulted from (i) a decrease in valuations reflecting the current public equities market, (ii) active trading of our fixed income securities to increase the book yield of our fixed income portfolio due to increasing new purchase yields, resulting in realized losses, and (iii) higher credit loss expense on our AFS fixed income securities portfolio.
Outlook
For 2023, we established a non-GAAP operating ROE target of 12%. Our 2023 target
is based on (i) our current estimated weighted average cost of capital ("WACC"),
(ii) an approximate 400 basis point spread over our estimated WACC, (iii) the
current interest rate environment, and (iv) property and casualty insurance
market conditions. Our 2023 12% non-GAAP operating ROE target sets a high bar
for our financial performance, challenges us to perform at our best, and aligns
our incentive compensation structure with shareholder interests.
In 2022, the elevated level of economic inflation, the significant increase in
interest rates, and predictions of a recession in the near term, which led to a
widening of credit spreads, have all contributed to lower investment valuations
and significant financial market volatility. The higher interest rates, and to a
lesser extent the widening of credit spreads, have reduced the fair value of our
fixed income securities, which in turn has negatively impacted our stockholders'
equity, which was down 15% in 2022. The higher economic inflation has also
negatively impacted our property loss and loss expenses through increased
severities in our short-tail property lines, which has reduced our underwriting
income. Should these trends continue, and in the absence of taking enough rate
and other underwriting actions, our underwriting profitability could be
negatively impacted in the near term. We will continue to focus on underwriting
improvements, proper insurance-to-value on our property exposures, and achieving
written renewal pure price increases that meet or exceed expected loss trend. In
2022, we achieved Standard Commercial Lines renewal pure price increases of 5.4%
and exposure growth of 4.0%. These rates were up from 2021, which experienced
renewal pure price increases of 5.3% and exposure growth of 2.6%.
While higher interest rates, wider credit spreads, and financial market
volatility have negatively impacted our investment valuations and certain key
financial metrics, such as stockholders' equity and book value per common share,
they have also provided us with the opportunity to invest our cash flows at
significantly higher new purchase yields. Our pre-tax new purchase yields for
fixed income securities averaged 4.5% in 2022, compared to 2.3% in 2021. The
portfolio's net investment income also benefited from our 11% allocation to
floating rate fixed income securities, which are primarily tied to 90-day U.S.
dollar-denominated London Interbank Offered Rate ("LIBOR"). The 90-day LIBOR
increased to 4.77% at December 31, 2022 from 0.21% at December 31, 2021 . These
floating securities have reset quarterly at higher rates, which combined with
our higher new purchase yields for fixed income securities, contributed to
higher net investment income from our fixed income securities. Partially
offsetting the increase in net investment income from fixed income securities
were lower returns from our allocation to alternative investments. We expect
these dynamics to continue in 2023, and as such, are factored into our full-year
2023 after-tax net investment income expectations, as discussed below.
Our focus in 2023 will continue to be on several other foundational areas to
position us for ongoing success:
•Delivering on our strategy for continued disciplined and profitable growth by: •Continuing to expand our Standard Commercial Lines market share by (i) increasing our share towards our 12% target of our agents' premiums, (ii) strategically appointing new agents, and (iii) maximizing new business growth in the small business market through the utilization of our enhanced small business platform; •Expanding our geographic footprint. InJune 2022 , we began writing Standard Commercial Lines business inVermont . InOctober 2022 , we began writing Standard Commercial Lines business inAlabama andIdaho . 47 -------------------------------------------------------------------------------- Table of Contents We plan to expand our Standard Commercial Lines footprint into other states over time; •Increasing customer retention by delivering a superior omnichannel experience and offering value-added technologies and services; •Shifting our Standard Personal Lines products and services towards customers in the mass affluent market, where we believe we can be more competitive with the strong coverage and servicing capabilities that we offer; and •Deploying our new underwriting platform in our E&S segment and improving agents' ease of interactions with us. •Continuing to build on a culture centered on the values of diversity, equity, and inclusion that fosters innovation, idea generation, and developing a group of specially trained leaders who can guide us successfully into the future. As we look ahead to 2023, we believe the elevated level of economic inflation will persist and continue to negatively impact our short-tail property lines of business and may impact our general and administrative expenses. In addition, we expect reduced reinsurance capacity and higher demand for new and expanded reinsurance purchases byU.S. primary insurance companies will result in higher reinsurance prices in 2023 and less favorable terms and conditions for the industry, including us. We experienced reinsurance price increases at ourJanuary 1, 2023 renewals, as discussed in the "Reinsurance" section below. While these factors could negatively impact our 2023 combined ratio and underwriting profits, we believe we are well-positioned to navigate these challenges and expect to continue generating strong overall returns.
For 2023, our full-year guidance is as follows:
•A GAAP combined ratio of 96.5%, including net catastrophe losses of 4.5 points. Our combined ratio estimate assumes no prior year casualty reserve development; •After-tax net investment income of$300 million that includes after-tax net investment income from our alternative investments of$30 million ; •An overall effective tax rate of approximately 21.0%, which assumes an effective tax rate of 20.0% for net investment income and 21.0% for all other items; and •Weighted average shares of 61 million on a fully diluted basis, which assumes no share repurchases we may make under our authorization.
Results of Operations and Related Information by Segment
Insurance Operations
The following table provides quantitative information for analyzing the combined
ratio:
All Lines
($ in thousands) 2022 2021 2022 vs. 2021 2020 2021 vs. 2020
Insurance Operations Results:
Net premiums written ("NPW") $ 3,573,590 3,189,713 12 % $ 2,773,092 15 %
NPE 3,373,380 3,017,253 12 2,681,814 13
Less:
Loss and loss expense incurred 2,111,778 1,813,984 16 1,635,823
11
Net underwriting expenses incurred 1,089,942 979,537 11 905,830 8 Dividends to policyholders 4,858 5,140 (5) 3,812 35 Underwriting income$ 166,802 218,592 (24) %$ 136,349 60 % Combined Ratios: Loss and loss expense ratio 62.7 % 60.1 2.6 pts 61.0 % (0.9) pts Underwriting expense ratio 32.3 32.5 (0.2) 33.8
(1.3)
Dividends to policyholders ratio 0.1 0.2 (0.1) 0.1 0.1 Combined ratio 95.1 92.8 2.3 94.9 (2.1) The 12% NPW growth in 2022 compared to 2021 reflected (i) overall renewal pure price increases, and (ii) higher direct new business, as shown in the following table: ($ in millions) 2022 2021 2020 Direct new business premiums$ 731.7 648.5 579.7 Renewal pure price increases on NPW 5.1 % 4.9 4.3 48
-------------------------------------------------------------------------------- Table of Contents Our NPW growth in 2022 also benefited from strong retention. In addition, increased economic activity and inflation in theU.S. resulted in our customers increasing their sales, payrolls, and exposure units, all of which favorably impacted our NPW.
The increase in NPE in 2022 compared to 2021 resulted from the same impacts to
NPW described above.
Loss and Loss Expenses
The loss and loss expense ratio increased 2.6 points in 2022 compared to 2021,
primarily due to the following:
Non-Catastrophe Property
($ in millions) Loss and Loss Expenses Net 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
2022 $ 617.9 18.3 pts $ 145.9 4.3 pts 22.6 1.6
2021 471.7 15.6 164.2 5.4 21.0 (2.3)
2020 410.0 15.3 215.4 8.0 23.3 4.4
Net catastrophe losses in 2022 were lower than losses in 2021 and 2020; however,
2022 did include gross losses from Winter Storm Elliott of $135.0 million , or
net losses of approximately $46.1 million , or 1.6 points. This storm impacted 37
states, 26 of which are in our Standard Commercial Lines footprint, and
primarily included property losses from damage to commercial businesses and
personal homes. Including the impact of reinstatement premium of $11.7 million
for this event, the total impact to the overall combined ratio was 1.7 points.
Net catastrophe losses of 5.4 points in 2021 were higher than our longer-term
net catastrophe loss averages. Catastrophe losses in 2021 included gross losses
of $53 million from Hurricane Ida, or net losses of approximately $41 million ,
or 1.4 points. The majority of the Hurricane Ida losses, which included
meaningful property losses from damage to personal and commercial automobiles,
occurred in New Jersey and the surrounding states.
Details of the prior year casualty reserve development were as follows:
($ in millions) (Favorable) Prior Year
Loss and Loss Impact on Loss and
(Favorable)/Unfavorable
For the year ended December 31, Expense Incurred Loss Expense Ratio Year-Over-Year Change
2022 (86.0) (2.5) pts 0.2
2021 (81.0) (2.7) 0.5
2020 (85.0) (3.2) (0.9)
(Favorable)/Unfavorable Prior Year Casualty Reserve
Development
($ in millions) 2022 2021 2020
General liability $ (5.0) (29.0) (35.0)
Commercial automobile 15.0 15.0 10.0
Workers compensation (70.0) (58.0) (60.0)
Businessowners' policies (11.0) (2.0) -
Bonds (10.0) - -
Total Standard Commercial Lines (81.0) (74.0) (85.0)
Homeowners - - -
Personal automobile - - -
Total Standard Personal Lines - - -
E&S (5.0) (7.0) -
Total (favorable) prior year casualty reserve development
(81.0) (85.0) (Favorable) impact on loss ratio (2.5) pts (2.7) (3.2)
In addition to the prior year casualty reserve development, current year
casualty loss costs increased 0.7 points in 2022 compared to 2021, primarily
driven by a higher estimated loss trend.
49 -------------------------------------------------------------------------------- Table of Contents For additional qualitative discussion on prior year reserve development, current year casualty loss costs, and non-catastrophe property loss and loss expenses, refer to the insurance segment sections below.
Standard Commercial Lines Segment
($ in thousands) 2022 2021 2022 vs. 2021 2020 2021 vs. 2020 Insurance Segments Results: NPW$ 2,901,984 2,593,018 12 %$ 2,230,636 16 % NPE 2,739,819 2,443,885 12 2,143,184 14 Less: Loss and loss expense incurred 1,683,988 1,426,768 18 1,245,627 15 Net underwriting expenses incurred 907,277 813,381 12 742,014 10 Dividends to policyholders 4,858 5,140 (5) 3,812 35 Underwriting income$ 143,696 198,596 (28) %$ 151,731 31 % Combined Ratios: Loss and loss expense ratio 61.5 % 58.4 3.1 pts 58.1 % 0.3 pts Underwriting expense ratio 33.1 33.3 (0.2) 34.6 (1.3) Dividends to policyholders ratio 0.2 0.2 - 0.2 - Combined ratio 94.8 91.9 2.9 92.9 (1.0) NPW growth of 12% in 2022 compared to 2021 reflected (i) renewal pure price increases, (ii) higher direct new business, and (iii) strong retention as shown in the table below. In addition, NPW growth in 2022 benefited from exposure growth. For the Year Ended December 31, ($ in millions) 2022 2021 Direct new business premiums $ 512.5$ 469.9 Retention 85 % 85 Renewal pure price increases on NPW 5.4 5.3
The increase in NPE in 2022 compared to 2021 resulted from the same impacts to
NPW described above.
The 3.1-point increase in the loss and loss expense ratio in 2022 compared to
2021 was primarily driven by the following:
($ in millions) Non-Catastrophe Property Loss and Loss Expenses Net Catastrophe Losses
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
2022 $ 461.1 16.8 pts $ 95.6 3.5 pts 20.3 2.1
2021 340.7 13.9 104.1 4.3 18.2 (1.1)
Our loss and loss expenses in 2022 compared to 2021 included (i) elevated
non-catastrophe property loss and loss expenses, primarily due to increased
severities resulting from inflationary pressures on labor and material costs,
and (ii) lower net catastrophe losses, as discussed below and in the "Insurance
Operations" section above.
Our 2022 catastrophe losses were impacted by 48 events designated as
catastrophes by Property Claims Services ("PCS"), an internationally recognized
authority on insured catastrophe property losses, including (i) several wind and
thunderstorm events that occurred throughout the second quarter of 2022, and
(ii) Winter Storm Elliott, a cross-country storm that impacted 26 of our
footprint states in December 2022 . Catastrophe losses in 2021 were impacted by
46 events that PCS designed as catastrophes, including two severe thunderstorms
accompanied by wind and hail, Hurricane Ida, and a series of severe tornadoes.
(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
2022 $ (81.0) (3.0) pts -
2021 (74.0) (3.0) 1.0
50
-------------------------------------------------------------------------------- Table of Contents For quantitative information on favorable prior year casualty reserve development by line of business, see the "Insurance Operations" section above. For qualitative information about the significant drivers of this development, see the line of business discussions below.
The loss and loss expense ratio increase in 2022 also included an increase in
current year casualty loss costs of 0.9 points in 2022 compared to 2021,
primarily driven by a higher estimated loss trend.
The following is a discussion of our most significant Standard Commercial Lines of business: General Liability ($ in thousands) 2022 2021 2022 vs. 20211 2020 2021 vs. 20201 NPW$ 958,121 859,284 12 %$ 716,119 20 % Direct new business 151,005 139,255 n/a 122,159 n/a Retention 85 % 85 n/a 85 % n/a Renewal pure price increases 4.5 4.4 n/a 3.9 n/a NPE$ 902,428 807,158 12 %$ 694,019 16 % Underwriting income 104,517 123,450 (15) 103,262 20 Combined ratio 88.4 % 84.7 3.7 pts 85.1 % (0.4) pts % of total Standard Commercial Lines NPW 33 33 32 1n/a: not applicable.
NPW growth of 12% in 2022 compared to 2021 benefited from exposure growth,
strong retention, renewal pure price increases, and direct new business.
The combined ratio increased 3.7 points in 2022 compared to 2021, primarily
driven by less favorable prior year casualty reserve development, as follows:
($ in millions) (Favorable) Prior Year Casualty Reserve
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
2022 $ (5.0) (0.6) pts 3.0
2021 (29.0) (3.6) 1.4
The favorable prior year casualty reserve development in 2022 was primarily
attributable to favorable inception-to-date claim frequencies in accident years
2021 and 2020. The 2021 favorable prior year casualty reserve development was
primarily attributable to improved loss severities in accident years 2018 and
prior.
The combined ratio increase in 2022 also included an increase in current year
casualty loss costs of 1.1 points in 2022 compared to 2021, primarily driven by
(i) higher estimated loss trend for this line, and (ii) an increase in ceded
casualty reinstatement premium principally due to development on one large loss
from the 2018 treaty year and two large losses from the 2020 treaty year. This
line is exposed to changes in economic and social trends, including litigation
propensity and outcomes, and changes in state laws, such as those that extend
the statute of limitations or open windows for previously time-barred actions.
Commercial Automobile
($ in thousands) 2022 2021 2022 vs. 20211 2020 2021 vs. 20201
NPW $ 860,116 767,723 12 % $ 658,930 17 %
Direct new business 125,129 115,088 n/a 112,893 n/a
Retention 86 % 86 n/a 86 % n/a
Renewal pure price increases 8.1 8.3 n/a 8.1 n/a
NPE $ 812,306 724,398 12 % $ 615,181 18 %
Underwriting loss (63,112) (23,335) (170) (3,126) (646)
Combined ratio 107.8 % 103.2 4.6 pts 100.5 % 2.7 pts
% of total Standard Commercial Lines
NPW 30 30 30
1n/a: not applicable.
NPW growth of 12% in 2022 compared to 2021 benefited from renewal pure price
increases, higher direct new business, and strong retention. NPW also benefited
from 5% growth of in-force vehicle counts as of December 31, 2022 , compared to
December 31, 2021 .
51
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The combined ratio increased 4.6 points in 2022 compared to 2021, primarily
driven by the following:
($ in millions) Non-Catastrophe Property Loss and Loss Expenses Net Catastrophe Losses
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
2022 $ 172.2 21.2 pts $ 3.1 0.4 pts 21.6 2.9
2021 125.2 17.3 9.8 1.4 18.7 3.1
Loss and loss expenses in 2022 compared to 2021 experienced (i) lower net
catastrophe losses, as discussed in the "Insurance Operations" section above,
and (ii) elevated non-catastrophe property loss and loss expenses, primarily due
to higher severities from inflationary and supply chain impacts that have
increased labor, material, and replacement vehicle costs, as well as the
duration of claims, which impacts vehicle rental days.
Unfavorable 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
2022 $ 15.0 1.8 pts (0.3)
2021 15.0 2.1 0.5
The unfavorable prior year casualty reserve development in 2022 was primarily
due to increased severities in the 2021 accident year. The 2021 unfavorable
prior year casualty reserve development was primarily attributable to
unfavorable reserve development on loss severities in accident years 2016
through 2019.
In addition, the combined ratio was impacted by a 1.9-point increase in current year casualty loss costs in 2022 compared to 2021, due to (i) an expected increase in claim frequencies from a more normalized amount of miles driven as COVID-19-related impacts continue to lessen, and (ii) increased loss severity expectations following the unfavorable development for the 2021 accident year. This line of business remains an area of focus for us and most of the industry, as profitability challenges continue to generate combined ratios higher than targets. We will continue to actively seek price increases on this line and execute on targeted underwriting and claims actions to improve the mix of business and claim outcomes. Commercial Property ($ in thousands) 2022
2021 2022 vs. 20211 2020
2021 vs. 20201 NPW$ 535,666 470,043 14 %$ 413,194 14 % Direct new business 118,470 108,418 n/a 94,697 n/a Retention 84 % 84 n/a 84 % n/a Renewal pure price increases 6.2 6.0 n/a 4.6 n/a NPE$ 495,647 436,412 14 %$ 388,120 12 % Underwriting income (loss) (7,015) 10,515 (167) (21,296) (149) Combined ratio 101.4 pts 97.6 3.8 105.5 pts (7.9) % of total Standard Commercial Lines NPW 18 18 19 1n/a: not applicable.
NPW growth of 14% in 2022 compared to 2021 benefited from renewal pure price
increases, exposure growth, strong retention, and higher direct new business.
The combined ratio increased 3.8 points in 2022 compared to 2021, primarily
driven by the following:
($ in millions) Non-Catastrophe Property Loss and Loss Expenses Net Catastrophe Losses
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
2022 $ 240.5 48.5 pts $ 75.3 15.2 pts 63.7 3.7
2021 182.5 41.8 79.3 18.2 60.0 (6.7)
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Loss and loss expenses in 2022 compared to 2021 experienced (i) lower net catastrophe losses, as discussed in the "Insurance Operations" section above, and (ii) elevated non-catastrophe property loss and loss expenses. The elevated non-catastrophe property loss and loss expenses was primarily due to increased severity compared to 2021 reflecting inflationary pressures on building material and labor costs.
As profitability challenges continue to generate combined ratios higher than
targets, we will continue to actively seek price increases on this line and
execute on targeted underwriting and claims actions to improve the mix of
business and claim outcomes.
Workers Compensation ($ in thousands) 2022 2021 2022 vs. 20211 2020 2021 vs. 20201 NPW$ 340,802 317,035 7 %$ 270,168 17 % Direct new business 61,726 59,938 n/a 51,078 n/a Retention 86 % 86 n/a 84 % n/a Renewal pure price increases (decreases) (0.5) 0.1 n/a (2.0) n/a NPE$ 335,955 306,428 10 %$ 278,062 10 % Underwriting income 91,087 78,537 16 70,897 11 Combined ratio 72.9 % 74.4 (1.5) pts 74.5 % (0.1) pts % of total Standard Commercial Lines NPW 12 12 12 1n/a: not applicable.
NPW increased 7% in 2022 compared to 2021 due to exposure growth, strong
retention, and higher direct new business.
The combined ratio decreased 1.5 points in 2022 compared to 2021, primarily
driven by favorable prior year casualty reserve development:
(Favorable) Prior Year Casualty Reserve
($ in millions) Development
Loss and Loss Impact on Loss and Unfavorable/(Favorable)
For the year ended December 31, Expense Incurred Loss Expense Ratio Year-Over-Year Change
2022 $ (70.0) (20.8) pts (1.9)
2021 (58.0) (18.9) 2.7
The favorable prior year casualty reserve development in 2022 was primarily due
to continued favorable medical trends in accident years 2020 and prior, and
favorable inception-to-date claim frequencies in accident year 2020. The
favorable prior year casualty reserve development in 2021 was primarily due to
continued favorable medical trends in accident years 2019 and prior. Due to the
length of time injured workers can receive related medical treatment, decreases
in medical inflation can cause favorable loss development across an extended
number of accident years.
Standard Personal Lines Segment
($ in thousands) 2022 2021 2022 vs. 2021 2020 2021 vs.
2020
Insurance Segments Results: NPW$ 319,059 292,265 9 %$ 295,166 (1) % NPE 299,405 293,559 2 299,140 (2) Less: Loss and loss expense incurred 231,113 212,116 9 233,260 (9) Net underwriting expenses incurred 75,485 77,477 (3) 81,388 (5) Underwriting income$ (7,193) 3,966 (281) %$ (15,508) (126) % Combined Ratios: Loss and loss expense ratio 77.2 % 72.2 5.0 pts 78.0 % (5.8) pts Underwriting expense ratio 25.2 26.4 (1.2) 27.2 (0.8) Combined ratio 102.4 98.6 3.8 105.2 (6.6) NPW increased 9% in 2022 compared to 2021, primarily due to (i) higher direct new business, (ii) stronger retention, (iii) higher homeowner coverage amounts due to inflation adjustments, and (iv) higher average policy sizes from our mass affluent market strategy. In the third quarter of 2021, we transitioned our personal lines strategy to targeting customers in the mass affluent market where we believe our strong coverage and servicing capabilities will be more competitive. 53
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($ in millions) 2022 2021
Direct new business premiums1 $ 62.9 $ 40.9
Retention 85 % 82
Renewal pure price increases on NPW 0.7 1.0
1Excludes our flood direct premiums written, which is 100% ceded to the NFIP and
therefore, has no impact on our NPW.
The increase in NPE in 2022 compared to 2021 resulted from the same impacts to
NPW discussed above.
The loss and loss expense ratio increased 5.0 points in 2022 compared to 2021,
driven by the following:
($ in millions) Non-Catastrophe Property Loss and Loss Expenses Net Catastrophe Losses
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
2022 $ 117.1 39.1 pts $ 40.8 13.6 pts 52.7 5.0
2021 102.8 35.0 37.4 12.7 47.7 (6.9)
Our 2022 catastrophe losses were impacted by 43 events designated as
catastrophes by PCS, including (i) several wind and thunderstorm events that
occurred throughout the second quarter of 2022, and (ii) Winter Storm Elliott in
December 2022 . Our 2021 catastrophe losses were impacted by 44 events designated
as catastrophes by PCS, including two severe thunderstorms accompanied by wind
and hail, Hurricane Ida, and a series of severe tornadoes.
In addition, we experienced elevated non-catastrophe property loss and loss
expenses in 2022 compared to 2021, driven by higher personal automobile physical
damage losses. These higher losses resulted from (i) higher frequencies from
increased miles driven, and (ii) greater severities from inflationary and supply
chain impacts that have increased labor, material, and replacement vehicle
costs, and the duration of claims, which impacts vehicle rental days. The likely
continuation of elevated non-catastrophe property loss and loss expenses,
coupled with renewal pure price increases below loss trend, will put pressure on
this segment's profitability in the near-term. To alleviate pressure on
profitability in our homeowners line of business, we have and continue to apply
valuation inflationary adjustments at renewal, and file rate increases to
mitigate these inflationary impacts. Additionally, the personal automobile line
of business remains an area of focus for us and most of the industry, as
profitability challenges continue to generate combined ratios higher than
targets. We will continue to actively seek price increases on this line and
execute on targeted underwriting and claims actions to improve the mix of
business and claim outcomes.
The underwriting expense ratio decreased 1.2 points in 2022 compared to 2021,
primarily due to a decrease in labor expenses.
E&S Lines Segment
2021
($ in thousands) 2022 2021 2022 vs. 2021 2020 vs. 2020
Insurance Segments Results:
NPW $ 352,547 304,430 16 % $ 247,290 23 %
NPE 334,156 279,809 19 239,490 17
Less:
Loss and loss expense incurred 196,677 175,100 12 156,936 12
Net underwriting expenses
incurred 107,180 88,679 21 82,428 8
Underwriting income (loss) $ 30,299 16,030 89 % $ 126 12,622 %
Combined Ratios:
Loss and loss expense ratio 58.8 % 62.6 (3.8) pts 65.5 % (2.9) pts
Underwriting expense ratio 32.1 31.7 0.4 34.4 (2.7)
Combined ratio 90.9 94.3 (3.4) 99.9 (5.6)
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NPW growth of 16% in 2022 compared to 2021 reflected renewal pure price
increases and higher direct new business as shown in the table below. In
addition, NPW growth in 2022 benefited from exposure growth driven by favorable
E&S Lines marketplace conditions.
($ in millions) 2022 2021
Direct new business premiums $ 156.3 137.7
Renewal pure price increases on NPW 7.3 % 6.5
The increase in NPE in 2022 compared to 2021 resulted from the same impacts to
NPW discussed above.
The loss and loss expense ratio decreased 3.8 points in 2022 compared to 2021,
primarily driven by the following:
($ in millions) Non-Catastrophe Property Loss and Loss Expenses Net Catastrophe Losses
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
2022 $ 39.6 11.9 pts $ 9.6 2.9 pts 14.8 (3.4)
2021 28.2 10.1 22.7 8.1 18.2 (1.8)
We experienced lower net catastrophe losses in 2022 compared 2021. Our 2022
catastrophe losses were impacted by 44 events that PCS designated as
catastrophes, including severe weather affecting Midwestern states. Winter Storm
Elliott did not have a meaningful impact on our E&S Lines segment. Our 2021
losses were impacted by 50 events that PCS designated as catastrophes, including
Winter Storm Uri affecting Texas , a series of large storms affecting Southern
and Midwestern states, and Hurricane Ida.
We experienced elevated non-catastrophe property loss and loss expenses in 2022
compared to 2021, primarily due to increased severity reflecting inflationary
pressures on labor and material costs, and the normal period-to-period
volatility of our property lines of business in this segment.
($ in millions) (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
2022 $ (5.0) (1.5) pts 1.0
2021 (7.0) (2.5) (2.5)
The favorable prior year casualty reserve development in 2022 was primarily
attributable to favorable inception-to-date claim frequencies and lower loss
severities in accident years 2021 and 2020. The favorable prior year casualty
reserve development in 2021 was primarily attributable to lower loss severities
in accident years 2016 and prior.
In addition, the loss and loss expense ratio was favorably impacted by a
1.3-point decrease in current year casualty loss costs in 2022 compared to 2021.
Our E&S casualty lines results have improved over recent years after benefiting
from several underwriting and claims initiatives and strong rate increases. The
decrease in current year casualty loss costs reflects the impacts of these
actions.
Reinsurance
We use reinsurance to protect our capital resources and insure against losses on property and casualty risks that we underwrite in excess of the amount that we are prepared to accept. We use two main reinsurance vehicles: (i) a reinsurance pooling agreement among our Insurance Subsidiaries through which each company agrees to share in premiums and losses based on certain specified percentages; and (ii) reinsurance contracts and arrangements with third parties that cover various policies that we issue to our customers.
Reinsurance Pooling Agreement
The primary purposes of the Insurance Subsidiaries' reinsurance pooling
agreement are to:
•Pool or share proportionately the underwriting profit and loss results of
property and casualty insurance underwriting operations through reinsurance;
•Reduce administration expenses; and
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•Permit all the Insurance Subsidiaries to obtain a uniform rating from
Company
The following illustrates the pooling percentages by Insurance Subsidiary as ofDecember 31, 2022 : Insurance Subsidiary Pooling PercentageSelective 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. Under our reinsurance treaties, we cede to our reinsurers a portion of our incurred losses from an individual policy or group of policies in exchange for a portion of the premium on those policies. Amounts not reinsured below a specified dollar threshold are known as retention. Reinsurance does not legally discharge us from liability under the terms and limits of our policies, but it does make our reinsurers liable to us for the amount of liability we cede to them. Our reinsurers often rely on their own reinsurance programs, or retrocessions, to manage their large loss exposures. The size of the global reinsurance community is relatively small. If our reinsurers are unable to collect on their retrocessional programs, it may impair their ability to pay us for the amounts we cede to them. Consequently, our reinsurers present us with direct, indirect, and contingent counterparty credit risk. We attempt to mitigate this credit risk by (i) pursuing relationships with reinsurers rated "A-" or higher by AM Best and/or (ii) obtaining collateral to secure reinsurance obligations. Some of our reinsurance treaties permit us to terminate or commute them - or require the reinsurer to post collateral if the reinsurer's financial condition or rating deteriorates. We monitor our reinsurers' financial condition, and we review the quality of reinsurance recoverables and reserves for uncollectible reinsurance. For additional information regarding our reinsurance counterparty credit risk, see Note 9. "Reinsurance" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
We have reinsurance contracts that separately cover our property and casualty
insurance business that can be segregated into the following key categories:
•Property Reinsurance, which includes our (i) property excess of loss treaties
purchased for protection against large individual property losses and (ii)
property catastrophe treaties purchased to provide protection for the overall
property portfolio against severe catastrophic events. We also purchase a
limited amount of facultative reinsurance, primarily for large individual
property risks greater than our property excess of loss treaty capacity.
•Casualty Reinsurance, which provides protection for both individual large
casualty losses and catastrophic casualty losses involving multiple claimants or
insureds. We also may use facultative reinsurance, primarily for large
individual casualty risks in excess of our treaty capacity. We may also purchase
quota share capacity for certain new or higher severity casualty lines of
business.
•Terrorism Reinsurance, which provides a federal reinsurance backstop, behind
the protection built into our property and casualty reinsurance treaties, for
terrorism losses covered under the Terrorism Risk Insurance Program
Reauthorization Act ("TRIPRA"). For further information about TRIPRA, see Item
1A. "Risk Factors." of this Form 10-K.
•Flood Reinsurance, for which all of the premiums and losses related to our
participation in the WYO (for which we also receive a servicing fee) are 100%
ceded to the federal government.
Property Reinsurance
We renewed our main property catastrophe treaty, which covers both our standard
market and E&S business, effective January 1, 2023 . For this treaty, we
increased our treaty limit by $100 million and increased our treaty retention by
$20 million to
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respond to our growing property portfolio. As a result, the coverage was
extended to $915 million in excess of the $60 million retention with higher
co-participations in certain layers as our overall net purchased limits
increased to $810 million from $776 million . A hardening reinsurance pricing
environment was also characterized by significant efforts on the part of
reinsurers to impose restrictions on cedents' terms and conditions, particularly
with respect to coverage for non-modeled/under-modeled perils, such as
terrorism, strike, riot, civil unrest, severe convective storms, and the
systemic perils of communicable disease and cyber. Consequently, the property
catastrophe program excludes coverage for communicable disease, but retains
limited reinsurance coverage for terrorism, strike, riot, civil unrest, severe
convective storms, and cybersecurity risks. Despite these limitations, coverage
for other traditionally covered property perils was largely maintained.
Additionally, we made the decision to not purchase our expiring E&S Lines $30
million in excess of $10 million treaty, which covered all 50 states and the
District of Columbia , due to challenging market conditions and our assessment of
the projected reinsurance spend relative to expected covered losses.
We seek to minimize reinsurance credit risk by transacting with highly-rated
reinsurance partners and purchasing collateralized reinsurance products,
particularly for high-severity, low-probability events, if feasible. Our current
reinsurance program includes $216 million in collateralized limit in the top
layer of the catastrophe program, compared to $259 million in collateralized
limit under the prior year's reinsurance program.
Overall, ceded premium for our property catastrophe reinsurance treaty will
increase considerably in 2023 due to three factors: (i) increases in underlying
property exposures in line with our growing property insurance portfolio; (ii)
the addition of $100 million of coverage purchased to maintain stability in our
net risk profile; and (iii) significant risk-adjusted price increases due to a
severely hardening reinsurance market driven by such dynamics as elevated
inflation-driven demand for reinsurance capacity, reinsurer investment losses,
exchange rate impacts, poor reinsurance profitability over the past six years,
limited supply of retrocessional capacity, and reinsurer and investor concerns
over climate change and un-modeled/under-modeled perils.
We model various catastrophic perils, and hurricane risk continues to be our
portfolio's most significant natural catastrophe peril because of the geographic
location of the risks we insure. The table below illustrates the impact of the
five largest hurricane losses we have experienced in the last 35 years:
($ in millions) Accident
Hurricane Name Gross Loss1 Net Loss2 Year Gross Loss Ratio Net Loss Ratio
Superstorm Sandy $125.5 45.6 2012 7.9% 2.9
Hurricane Ida 50.8 41.5 2021 1.7 1.4
Hurricane Irene 44.8 40.2 2011 3.1 2.8
Hurricane Hugo 26.4 3.0 1989 5.9 0.7
Hurricane Isabel 25.1 15.7 2003 2.2 1.4
1This amount represents reported and unreported gross losses estimated as of
December 31, 2022 .
2Net loss does not include reinstatement premiums, taxes, or flood claims
handling fees.
We review our exposure to hurricane risk by examining third-party vendor models
and conducting our own proprietary analysis. The third-party vendor models
provide a long-term view that closely relates modeled event frequency to
historical hurricane activity, adjusting to reflect certain non-modeled cost
assumptions, such as the impact of loss expenses, residual market assessments,
and automobile-related losses. We believe that modeled estimates provide a range
of potential outcomes, and we review multiple estimates to understand our
catastrophic risk.
Our established catastrophic risk tolerance requires that no more than 10% of
stockholders' equity is exposed to a loss from a hurricane event at a 99.6%
confidence level (1-in-250 year event or 0.4% probability) on a net of
reinsurance and after-tax basis. In addition to the 1-in-250 year modeled event,
we evaluate the impact of a number of other scenarios on stockholders' equity.
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The table below shows the gross and net losses modeled results for (i) hurricane
peril in our underwriting property portfolio, and (ii) the gross and net of
reinsurance hurricane losses from the following scenarios:
•Recasts of two large hurricanes that impacted our geographic footprint:
•1938 New England Hurricane, one of the largest hurricanes to impact the
Northeast United States ; and
•Hurricane Hazel, a Category 4 storm that made landfall near the border between
North Carolina and South Carolina in 1954; and
•Realistic disaster scenarios ("RDS") for significant potential storms in the
Northeast and the Carolinas based on Lloyds of London methodology.
Occurrence Exceedance Probability Hurricane
Gross Net
($ in thousands) Losses1 Losses2 Net Losses % of Equity3
4.0% (1 in 25 year event) $212,267 66,724 3 %
2.0% (1 in 50 year event) 354,977 73,001 3
1.0% (1 in 100 year event) 575,734 83,045 3
0.67% (1 in 150 year event) 818,907 118,032 5
0.5% (1 in 200 year event) 906,745 130,419 5
0.4% (1 in 250 year event) 1,041,355 171,671 7
0.2% (1 in 500 year event) 1,504,757 526,564 21
Historical recast - 1938 New England Hurricane 452,577 78,011 3
Lloyd's RDS North-East (Category 4 hurricane) 825,960 122,269 5
Historical recast - 1954 Hurricane Hazel 282,257 66,903 3
Lloyd's RDS Carolinas (Category 5 hurricane) 483,327 78,915 3
1Gross losses include uncertainty associated with damage/loss estimation, demand
and storm surge, and assumptions for certain un-modeled costs, such as the
impact of loss expenses, residual market assessments, and automobile-related
losses, which collectively increase our gross losses by approximately 13%.
2Net losses are after-tax losses net of catastrophe reinsurance including
reinstatement premiums based on the treaty structure effective January 1, 2023 .
3GAAP stockholders' equity as of December 31, 2022 .
As reflected in the table above, we are well within our established tolerance
for catastrophic risk. Our current catastrophe reinsurance program exhausts at
an approximately 1-in-220 year return period, or events with 0.5% probability,
based on a multi-model view of hurricane risk. Our actual gross and net losses
incurred from hurricanes making U.S. -landfall will vary, perhaps materially,
from our estimated modeled losses.
In addition to hurricane peril, the table below shows gross and net losses
modeled by other wind and earthquake perils in our underwriting property
portfolio.
Occurrence Exceedance Probability Other Wind Earthquake
Gross Net Gross Net
($ in thousands) Losses1 Losses2 Net Losses % of Equity3 Losses1 Losses2 Net Losses % of Equity3
4.0% (1 in 25 year event)$114,149 47,782 2 %$7,681 $5,502 - % 2.0% (1 in 50 year event) 153,494 50,526 2$24,349 $16,566 1 1.0% (1 in 100 year event) 206,864 52,843 2$72,657 $43,376 2 0.67% (1 in 150 year event) 236,293 57,050 2$116,502 $54,125 2 0.5% (1 in 200 year event) 265,758 57,548 2$147,880 $63,394 3 0.4% (1 in 250 year event) 295,893 58,486 2$187,630 $63,238 3 0.2% (1 in 500 year event) 351,876 61,968 2$273,747 $65,493 3 1Gross losses include uncertainty associated with damage/loss estimation, demand and storm surge, and assumptions for certain un-modeled costs, such as the impact of loss expenses, residual market assessments, and automobile-related losses, which collectively increase our gross losses by approximately 13%. 2Net losses are after-tax losses net of catastrophe reinsurance including reinstatement premiums based on the treaty structure effectiveJanuary 1, 2023 . 3GAAP stockholders' equity as ofDecember 31, 2022 . As we currently do not write crop insurance, have minimal exposure to private flood, and have a small geographic footprint in theWestern U.S. , our exposures to perils, such as droughts, wildfires, and flooding, tend to be relatively modest. However, as our geographic expansion progresses, we continually evaluate how physical risks from these perils and others are considered in our strategic decision making. In addition, we regularly experience property losses from winter storms, and while we utilize third-party vendor models to help us model and manage our exposure to this peril, we also evaluate our winter storm exposure based on our own historical experience, as winter storm third-party vendor models are currently less mature. As an example of the impact from a large and recent winter storm, we incurred$135.0 million in gross losses from Winter Storm Elliott which took place inlate-December 2022 , or$46.1 million net of reinsurance. In addition, we incurred$11.7 million in reinstatement premium from Winter Storm 58 -------------------------------------------------------------------------------- Table of Contents Elliott, resulting in a total impact of$57.8 million , pre-tax or$45.7 million after-tax. Despite the size of this event, our reinsurance strategy limited the impact on our full-year 2022 results to 1.8% of equity or a 1.7-point impact on our combined ratio. Based on our 2023 property catastrophe reinsurance program discussed above, if Winter Storm Elliott were to recur, the net impact to us would be more significant. We renewed the property excess of loss treaty, which covers both our standard market and E&S business, onJuly 1, 2022 , with a$10 million increase in coverage in the highest layer. The treaty is comprised of three layers, with the$20 million in excess of$40 million layer effectiveJanuary 1, 2022 , being cancelled effectiveJuly 1, 2022 . 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$915 million above$60 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) - 47% of losses in excess of$60 million they are certified under TRIPRA. up to Coverage for non-NBCR losses is$100 million ; limited due to current market - 100% of losses in excess of$100 million conditions. Please see Item 1A. "Risk up to Factors." of this Form 10-K for$225 million ; discussion regarding TRIPRA. - 100% of losses in excess of$225 million up to$525 million ; and - 81% of losses in excess of$525 million up to$975 million . The treaty provides one reinstatement in each of the first three layers and no reinstatement in the fourth layer. The per occurrence limit is$810.1 million and the annual aggregate limit is$1.3 billion , net of the Insurance Subsidiaries' co-participation. Property Excess of Loss$67 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 -$20 million in excess of$10 million for the first layer;$60 million for layer the second layer; and$40 million for provides three reinstatements,$80 the third layer. Non-foreign terrorism million in losses (other than NBCR) are covered aggregate limits; and to the same extent as non-terrorism -$40 million in excess of$30 million losses. layer provides two reinstatements,$120 million in aggregate limits. Flood 100% reinsurance by the federal None government's WYO. Casualty Reinsurance We renewed the casualty excess of loss treaty, which covers both our standard market and E&S Lines business, onJuly 1, 2022 , substantially on the same terms as the treaty expiringJune 30, 2022 .
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 provides 41 reinstatements,$126 layer with million annual aggregate limit;$15 million net annual terrorism aggregate limit; -$7 million in excess of$5 million -$7 million in excess of$5 million layer provides six reinstatements,$49 layer with million annual aggregate limit;$28 million net annual terrorism aggregate limit; -$9 million in excess of$12 million -$9 million in excess of$12 million layer provides three reinstatements,$36 layer with million annual aggregate limit;$27 million net annual terrorism aggregate limit; -$9 million in excess of$21 million -$9 million in excess of$21 million layer provides one reinstatement,$18 layer with million annual aggregate limit;$18 million net annual terrorism aggregate limit; -$20 million in excess of$30 million -$20 million in excess of$30 layer provides one reinstatement,$40 million layer with million annual aggregate limit; and$40 million net annual terrorism aggregate limit; and -$40 million in excess of$50 million -$40 million in excess of$50 layer provides one reinstatement,$80 million layer with million annual aggregate limit.$80 million net annual terrorism aggregate limit. 59
-------------------------------------------------------------------------------- Table of Contents 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, such as personal cyber and home systems protection, (vi) Cyber Liability Quota Share, and (vii) Excess Liability Quota Share, which covers MUSIC's excess liability business. We regularly evaluate our overall reinsurance program and try to develop effective ways to manage the transfer of risk. We base our analysis on a comprehensive process that includes periodic analysis of modeling results, our own loss experience, aggregation of exposures, exposure growth, diversification of risks, limits written, projected reinsurance costs, reinsurer financial strength, and projected impact on earnings, equity, and statutory surplus. We strive to balance reinsurer credit quality, price, terms, and our appetite to retain a certain level of risk. Investments Segment Our investment portfolio's objectives are to maximize after-tax net investment income and generate long-term growth in book value per share by maximizing the overall total return of the portfolio by investing the premiums we receive from our insurance operations and the amounts generated through our capital management strategies, which may include debt and equity security issuances. We balance those objectives against prevailing market conditions, capital preservation considerations, and our enterprise risk-taking appetite. We maintain (i) a well-diversified portfolio across issuers, sectors, and asset classes; and (ii) a high credit quality fixed income securities portfolio with a duration and maturity profile at an acceptable risk level that provides ample liquidity. The effective duration of the fixed income securities portfolio, including short-term investments, was 4.1 years as ofDecember 31, 2022 , compared to the Insurance Subsidiaries' net loss and loss expense reserves duration of 3.1 years. The effective duration is monitored and managed to maximize yield while managing interest rate risk at an acceptable level. Purchases and sales are made with the intent of maximizing investment returns in the current market environment while balancing capital preservation. Our fixed income and short-term investments represented 92% of our invested assets atDecember 31, 2022 , and 91% atDecember 31, 2021 . These investments had a weighted average credit rating of "AA-" as ofDecember 31, 2022 and "A+" as ofDecember 31, 2021 , with a 96% allocation to investment grade holdings at bothDecember 31, 2022 andDecember 31, 2021 . The improvement in our weighted average credit rating reflects active management of our investment portfolio in 2022 to optimize our risk-adjusted investment yields in the rising interest rate environment, which resulted in higher credit quality fixed income security purchases.
For further details on the composition, credit quality, and the various risks to
which our portfolio is subject, see Item 7A. "Quantitative and Qualitative
Disclosures About Market Risk." of this Form 10-K.
Total Invested Assets ($ in thousands) 2022 2021 Change Total invested assets$ 7,837,469 8,026,988 (2) % Invested assets per dollar of common stockholders' equity 3.37 2.88 17 Components of unrealized (losses) gains - before tax: Fixed income securities (527,892) 228,962 (331) Equity securities (5,431) 26,696 (120) Net unrealized (losses) gains - before tax (533,323) 255,658 (309) Components of unrealized (losses) gains - after tax: Fixed income securities (417,035) 180,880 (331) Equity securities (4,290) 21,090 (120) Net unrealized (losses) gains - after tax (421,325) 201,970 (309) Invested assets decreased$189.5 million atDecember 31, 2022 , compared toDecember 31, 2021 , reflecting a$789.0 million increase in pre-tax unrealized losses during 2022. The increase in pre-tax unrealized losses was primarily due to an increase in benchmarkU.S. Treasury rates, and to a lesser extent the widening of credit spreads. This decrease in invested assets was partially offset by operating cash flows during 2022 that were 22% of NPW. 60 -------------------------------------------------------------------------------- Table of Contents Net Investment Income The components of net investment income earned were as follows: ($ in thousands) 2022 2021 2022 vs. 2021 2020 2021 vs. 2020 Fixed income securities$ 259,918 209,709 24 % 203,926 3 % Commercial mortgage loans ("CMLs") 5,555 2,743 103 844 225 Equity securities 13,554 15,920 (15) 9,286 71 Short-term investments 3,997 260 1,437 1,821 (86) Alternative investments 23,003 117,701 (80) 26,504 344 Other investments 258 359 (28) 418 (14) Investment expenses (18,130) (20,103) 10 (15,692) (28) Net investment income earned - before tax 288,155 326,589 (12) 227,107 44 Net investment income tax expense 55,956 63,589 (12) 42,495 50 Net investment income earned - after tax$ 232,199 263,000 (12) 184,612 42 Effective tax rate 19.4 % 19.5 (0.1) pts 18.7 0.8 pts Annual after-tax yield on fixed income investments 3.1 2.6 0.5 2.6 - Annual after-tax yield on investment portfolio 2.9 3.4 (0.5) 2.6 0.8 Net investment income earned decreased 12% in 2022 compared to 2021, driven by lower returns on our alternative investments, reflecting lower valuations. Partially offsetting this decrease was an increase in income earned on fixed income securities. During 2022, we managed our fixed income securities portfolio to opportunistically increase the book yield in a rapidly rising interest rate environment. The pre-tax earned yield for fixed income investments was 3.90% in 2022, compared to 3.18% in 2021. The increase in investment income associated with fixed income securities was driven by (i) investing approximately$2.7 billion of new money, taking advantage of higher investment yields, and simultaneously improving credit quality and liquidity, and (ii) higher resets on our floating rate securities. The average pre-tax new purchase yield on fixed income securities in 2022 was 4.5%, up from 2.3% in 2021. In addition, as ofDecember 31, 2022 , 11% of our fixed income securities portfolio was invested in floating rate securities that reset principally to 90-day LIBOR. LIBOR increased 456 basis points in 2022 to 4.77% atDecember 31, 2022 from 0.21% atDecember 31, 2021 , which increased the book yield on our floating rate securities and increased net investment income. Realized and Unrealized Investment Gains and Losses When evaluating securities for sale, our general philosophy is to reduce our exposure to securities and sectors based on economic evaluations of whether the fundamentals for that security or sector have deteriorated or the timing is appropriate to opportunistically trade for other securities with better economic-return characteristics. Net realized and unrealized gains and losses for the indicated periods were as follows: ($ in thousands) 2022 2021 2020 Net realized (losses) gains on disposals$ (31,636) 7,144 9,148 Net unrealized (losses) gains on equity securities (32,127) 17,881 7,939 Net credit loss (expense) on fixed income securities, AFS (39,169) (6,858) (5,042) Net credit loss benefit (expense) on fixed income securities, HTM 63 (49) 4 Net credit loss (expense) on CMLs (116) - - Losses on securities for which we have the intent to sell (11,823) (519) (16,266) Total net realized and unrealized investment (losses) gains$ (114,808) 17,599 (4,217) Net realized and unrealized investment losses in 2022 were primarily driven by (i) a decrease in valuations reflecting the current public equities market, (ii) active trading of our fixed income securities to opportunistically increase yield in the rising interest rate environment, and (iii) higher credit loss expense on our AFS fixed income securities portfolio. For additional information regarding our losses on securities we intend to sell and our methodology for estimating the allowance for credit losses, see Note 2. "Summary of Significant Accounting Policies" and Note 5. "Investments" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. 61 -------------------------------------------------------------------------------- Table of Contents Federal Income Taxes The following table provides information regarding federal income taxes. ($ in millions) 2022 2021 2020 Federal income tax expense$ 55.3 101.5 56.6 Effective tax rate1 20.4 % 20.5 18.7
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 decreased$46.2 million in 2022 compared to 2021, primarily due to a decrease in pre-tax income that is taxed at the statutory rate. The decrease in pre-tax income was primarily driven by (i) a decrease in underwriting income, (ii) lower net investment income earned, primarily due to lower returns on our alternative investments, and (iii) net realized and unrealized investment losses in 2022 compared to net realized and unrealized investment gains in 2021.
See Note 14. "Federal Income Taxes" in Item 8. "Financial Statements and
Supplementary Data." of this Form 10-K for: (i) a reconciliation of our
effective tax rate to the statutory rate of 21%; and (ii) details regarding our
net deferred tax asset and liability.
Liquidity and Capital Resources Capital resources and liquidity reflect our ability to generate cash flows from business operations, borrow funds at competitive rates, and raise new capital to meet our operating and growth needs.
Liquidity
We manage liquidity by focusing on generating sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. We adjust our liquidity requirements based on economic conditions, market conditions, and future cash flow commitments, as discussed further below. Sources of Liquidity Sources of cash for the Parent historically have consisted of dividends from the Insurance Subsidiaries, the investment portfolio held at the Parent, borrowings under third-party lines of credit, loan agreements with certain Insurance Subsidiaries, and the issuance of equity (common or preferred) and debt securities. We continue to monitor these sources, considering our short-term and long-term liquidity and capital preservation strategies. The Parent's investment portfolio includes (i) short-term investments generally maintained in "AAA" rated money market funds approved by theNational Association of Insurance Commissioners , (ii) high-quality, highly-liquid government and corporate fixed income securities, (iii) equity securities, (iv) alternative investments, and (v) a cash balance. In the aggregate, Parent cash and total investments amounted to$484 million atDecember 31, 2022 , and$527 million atDecember 31, 2021 . The amount and composition of the Parent's investment portfolio may change over time based on various factors, including the amount and availability of dividends from our Insurance Subsidiaries, investment income, expenses, other Parent cash needs, such as dividends payable to stockholders, asset allocation investment decisions, inorganic growth opportunities, debt retirement, and share repurchases. Our target is for the Parent to maintain highly liquid investments of at least twice its expected annual net cash outflow needs, or$180 million . Insurance Subsidiary Dividends The Insurance Subsidiaries generate liquidity through insurance float, which is created by collecting premiums and earning investment income before paying claims. The period of float can extend over many years. Our investment portfolio consists of securities with maturity dates that continually provide a source of cash flow for claims payments in the ordinary course of business. To protect our Insurance Subsidiaries' capital, we purchase reinsurance coverage for significantly large claims or catastrophes that may occur. The Insurance Subsidiaries paid$120 million in total dividends to the Parent in 2022. As ofDecember 31, 2022 , our allowable ordinary maximum dividend is$283 million for 2023. All Insurance Subsidiary dividends to the Parent are (i) subject to the approval and/or review of its domiciliary state insurance regulator and (ii) generally payable only from earned statutory surplus reported in its annual statements as of the 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 stockholders if either (i) the Parent would be unable to pay its debts as they become due in the usual course of business, or (ii) the Parent's total assets 62 -------------------------------------------------------------------------------- Table of Contents would be less than its total liabilities. The Parent's ability to pay dividends to stockholders is also impacted by (i) covenants in its credit agreement that obligate it, among other things, to maintain a minimum consolidated net worth and a maximum ratio of consolidated debt to total capitalization, and (ii) the terms of our preferred stock that prohibit dividends to be declared or paid on our common stock if dividends are not declared and paid, or made payable, on all outstanding preferred stock for the latest completed dividend period.
For additional information regarding dividend restrictions and financial
covenants, where applicable, see Note 11. "Indebtedness," Note 17. "Equity," and
Note 22. "Statutory Financial Information, Capital Requirements, and
Restrictions on Dividends and Transfers of Funds" in Item 8. "Financial
Statements and Supplementary Data." of this Form 10-K.
Line of Credit OnNovember 7, 2022 , the Parent entered into a Credit Agreement with the lenders named therein (the "Lenders") andWells Fargo Bank, National Association , as Administrative Agent ("Line of Credit"). Under the Line of Credit, the Lenders have agreed to provide the Parent with a$50 million revolving credit facility that can be increased to$125 million with the Lenders' consent. The Line of Credit will mature onNovember 7, 2025 , and has a variable interest rate based on the Parent's debt ratings. This agreement replaced a prior credit agreement that the Parent terminated in conjunction with entering into the Line of Credit. No borrowings were made under either credit facility in 2022. For additional information regarding the Line of Credit and corresponding representations, warranties, and covenants, refer to Note 11. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Four of the Insurance Subsidiaries are members ofFederal Home Loan Bank ("FHLB") branches, as shown in the following table. Membership requires the ownership of branch stock and includes the right to access liquidity. AllFederal Home Loan Bank of Indianapolis ("FHLBI") andFederal Home Loan Bank of New York ("FHLBNY") borrowings are required to be secured by investments pledged as collateral. For additional information regarding collateral outstanding, refer to Note 5. "Investments" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Branch Insurance Subsidiary Member FHLBI SICSC1 SICSE1 FHLBNY SICA SICNY
1These subsidiaries are jointly referred to as the "Indiana Subsidiaries"
because they are domiciled in
The Line of Credit permits aggregate borrowings from the FHLBI and the FHLBNY up to 10% of the respective member company's admitted assets for the previous year. As SICNY is domiciled inNew York , its FHLBNY borrowings are limited byNew York insurance regulations to the lower of 5% of admitted assets for the most recently completed fiscal quarter, or 10% of admitted assets for the previous year-end. The following table provides information on the remaining capacity for FHLB borrowings based on these restrictions, as well as the additional FHLB stock purchase requirement to allow these member companies to borrow their remaining capacity amounts: ($ in millions) Admitted Borrowing Additional FHLB Stock As of December 31, 2022 Assets
Limitation Amount Borrowed Remaining Capacity Requirements SICSC$ 899.0 $ 89.9 32.0 57.9 1.2 SICSE 715.8 71.6 28.0 43.6 0.9 SICA 3,356.4 335.6 - 335.6 15.1 SICNY 625.6 31.3 - 31.3 1.4 Total$ 528.4 60.0 468.4 18.6 Short-term Borrowings During 2022, SICA borrowed the following funds from the FHLBNY for general corporate purposes: •$35 million onApril 1, 2022 at an interest rate of 0.70% with repayment due onMay 2, 2022 . This borrowing was refinanced upon its maturity onMay 2, 2022 , at an interest rate of 1.10% and was subsequently repaid onJune 27, 2022 . •$25 million onOctober 3, 2022 at an interest rate of 3.21%, which was repaid onNovember 3, 2022 . 63 -------------------------------------------------------------------------------- Table of Contents Intercompany Loan Agreements The Parent has lending agreements with the Indiana Subsidiaries approved by theIndiana Department of Insurance that provide additional liquidity. Similar to the Line of Credit, these lending agreements limit the Parent's borrowings from the Indiana Subsidiaries to 10% of the admitted assets of the respectiveIndiana Subsidiary. The following table provides information on the Parent's borrowings and remaining borrowing capacity from the two Indiana Subsidiaries: ($ in millions) Admitted Assets as
Borrowing
As of December 31, 2022 of December 31, 2022 Limitation Amount Borrowed Remaining Capacity SICSC $ 899.0$ 89.9 24.0 65.9 SICSE 715.8 71.6 16.0 55.6 Total$ 161.5 40.0 121.5 Capital Market Activities The Parent had no private or public stock issuances during 2022. During 2022, we repurchased 165,159 shares of our common stock under our existing share repurchase program for$12.4 million , or a$75.20 average price per share, excluding commission costs paid. We had$84.2 million of remaining capacity under our share repurchase program as ofDecember 31, 2022 . For additional information on the preferred stock transaction, refer to Note 17. "Equity" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Uses of Liquidity The Parent's liquidity generated from the sources discussed above is used, among other things, to pay dividends to our stockholders. Dividends on shares of the Parent's common and preferred stock are declared and paid at the discretion of the Board based on our operating results, financial condition, capital requirements, contractual restrictions, and other relevant factors. InNovember 2022 , our Board approved a 7% increase in the quarterly cash dividend, to$0.30 from$0.28 per share. OnFebruary 2, 2023 , our Board declared: •A quarterly cash dividend on common stock of$0.30 per common share, that is payableMarch 1, 2023 , to holders of record onFebruary 15, 2023 ; and •A cash dividend of$287.50 per share on our 4.60% Non-Cumulative Preferred Stock, Series B (equivalent to$0.28750 per depository share) payable onMarch 15, 2023 , to holders of record as ofFebruary 28, 2023 . Our ability to meet our interest and principal repayment obligations on our debt and our ability to continue to pay dividends to our stockholders is dependent on (i) liquidity at the Parent, (ii) the ability of the Insurance Subsidiaries to pay dividends, if necessary, and/or (iii) the availability of other sources of liquidity to the Parent. Our next FHLB borrowing principal repayment is$60 million to FHLBI due 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, 2022 , we had GAAP stockholders' equity of$2.5 billion and statutory surplus of$2.5 billion . With total debt of$505 million atDecember 31, 2022 , our debt-to-capital ratio was 16.6%. For additional information on our statutory surplus, see Note 22. "Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. 64 -------------------------------------------------------------------------------- Table of Contents The following table summarizes current and long-term material cash requirements as ofDecember 31, 2022 , which we expect to fund primarily with operating cash flows. Payment Due by Period Less than 1-3 3-5 More than ($ in millions) Total 1 year years years 5 years Notes payable $ 510.0 - - 60.0 450.0 Interest on debt obligation 565.3 28.3 56.6 54.8 425.6 Subtotal 1,075.3 28.3 56.6 114.8 875.6 Gross loss and loss expense payments 5,144.8 1,571.9 1,633.8 778.9
1,160.2
Ceded loss and loss expense payments 757.5 305.8 170.7 79.3
201.7
Net loss and loss expense payments 4,387.3 1,266.1 1,463.1 699.6 958.5 Total $ 5,462.6 1,294.4 1,519.7 814.4 1,834.1 Our loss and loss expense payments in the table above represent estimated paid amounts by year on our loss and loss expense reserves. These estimates are based on past experience, adjusted for the effects of current developments and anticipated trends, and include considerable judgment. There is no precise method for evaluating the impact of any specific factor on the projected timing of loss and loss expense reserve payments, so the timing and amounts of the actual payments will be affected by many factors. Therefore, the projected settlement of the reserves for net loss and loss expense may differ, perhaps significantly, from actual future payments. For more information on our case reserves and estimates of reserves for loss and loss expense IBNR, refer to the "Reserves for Loss and Loss Expense" section in the "Critical Accounting Policies and Estimates" section of this MD&A and Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. For additional information regarding cross-default provisions associated with our notes payable in the table above or our Line of Credit, see Note 11. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." in this Form 10-K. In addition to the above, the following table summarizes certain contractual obligations we had atDecember 31, 2022 that may require us to invest additional amounts into our investment portfolio, which we would fund primarily with operating cash flows. Amount of ($ in millions) Obligation Alternative investments
Non-publicly traded collateralized loan obligations in our fixed income
securities portfolio
106.6 Non-publicly traded common stock within our equity portfolio 35.0 CMLs 4.9 Privately-placed corporate securities 20.1 Total$ 412.7 There is no certainty (i) that any such additional investments will be required, and (ii) of the actual timing of funding. We expect to have the capacity to fund these commitments through our normal operating and investing activities as they come due.
Our other cash requirements include, without limitation, dividends to
stockholders, capital expenditures, and other operating expenses, including
commissions to our distribution partners, labor costs, premium taxes, general
and administrative expenses, and income taxes.
As ofDecember 31, 2022 and 2021, we had no (i) material guarantees on behalf of others and trading activities involving non-exchange traded contracts accounted for at fair value, (ii) material transactions with related parties other than those disclosed in Note 18. "Related Party Transactions" included in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K, and (iii) material relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Consequently, we are not exposed to any material financing, liquidity, market, or credit risk related to off-balance sheet arrangements. We continually monitor our cash requirements and the amount of capital resources we maintain at the holding company and operating subsidiary levels. As part of our long-term capital strategy, we strive to maintain capital metrics that support our targeted financial strength relative to the macroeconomic environment. Based on our analysis and market conditions, we may take a variety of actions, including, without limitation, contributing capital to the Insurance Subsidiaries, issuing additional debt 65
--------------------------------------------------------------------------------
Table of Contents and/or equity securities, repurchasing existing debt, repurchasing shares of the Parent's common stock, and increasing common stockholders' dividends. Our capital management strategy is intended to protect the interests of the policyholders of the Insurance Subsidiaries and our stockholders, while enhancing our financial strength and underwriting capacity. We have a profitable book of business and solid capital base, positioning us well to take advantage of potential market opportunities. Book value per common share decreased 17% to$38.57 as ofDecember 31, 2022 , from$46.24 as ofDecember 31, 2021 , driven by a$9.91 change in net unrealized losses on our fixed income securities portfolio and$1.14 in dividends to our common stockholders, partially offset by$3.54 in net income available to common stockholders per diluted common share. The increase in net unrealized losses on our fixed income securities was primarily driven by an increase in benchmarkU.S. Treasury rates, and to a lesser extent the widening of credit spreads. Our adjusted book value per share, which is book value per share excluding total after-tax unrealized gains or losses on investments included in accumulated other comprehensive (loss) income, increased to$45.49 as ofDecember 31, 2022 , from$43.23 as ofDecember 31, 2021 . Cash Flows Net cash provided by operating activities of$802 million in 2022 reflected a modest 4% increase compared to$771 million in 2021, primarily driven by a 5% increase in total revenues. Operating cash flows during 2022 were 22% of NPW. Net cash used in investing activities increased to$734 million in 2022, compared to$619 million in 2021, primarily due to investing cash received from operating activities. A greater percentage of operating cash flows was used in our investing activities because of the reduced cash required in our financing activities. Net cash used in financing activities decreased to$88 million in 2022, compared to$123 million in 2021, primarily due to a decrease in borrowing repayments made in 2022, partially offset by increased dividends to common stockholders and increased activity in our share repurchase program in 2022.
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