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SELECTIVE INSURANCE GROUP INC - Quarter Report: 2020 June (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: June 30, 2020
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from_____________________________to_____________________________
 
Commission File Number: 001-33067
SELECTIVE INSURANCE GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
New Jersey
22-2168890
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)

40 Wantage Avenue
Branchville, New Jersey 07890
(Address of Principal Executive Offices) (Zip Code)
973
948-3000
(Registrant’s Telephone Number, Including Area Code)
 
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock, par value $2 per share
 
SIGI
 
NASDAQ Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes            No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
 
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                                              Yes        No    
As of July 17, 2020, there were 59,812,099 shares of common stock, par value $2.00 per share, outstanding. 



 
SELECTIVE INSURANCE GROUP, INC.
 
 
Table of Contents
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS.
 
SELECTIVE INSURANCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
 
Unaudited
 
 
($ in thousands, except share amounts)
 
June 30,
2020
 
December 31,
2019
ASSETS
 
 

 
 

Investments:
 
 

 
 

Fixed income securities, held-to-maturity – at carrying value (fair value: $20,727 – 2020; $21,975 – 2019)
 
$
19,570

 
20,800

Less: allowance for credit losses
 
(28
)
 

Fixed income securities, held-to-maturity, net of allowance for credit losses
 
19,542

 
20,800

 
 
 
 
 
Fixed income securities, available-for-sale – at fair value
(allowance for credit losses: $10,395 – 2020; amortized cost: $6,065,554 – 2020 and $5,879,986 – 2019)
 
6,358,156

 
6,095,620

 
 
 
 
 
Commercial mortgage loans - at carrying value (fair value: $17,949 – 2020)
 
17,880

 

Less: allowance for credit losses
 
(217
)
 

Commercial mortgage loans, net of allowance for credit losses
 
17,663

 

 
 
 
 
 
Equity securities – at fair value (cost:  $144,617 – 2020; $72,061 – 2019)
 
134,058

 
72,937

Short-term investments (at cost which approximates fair value)
 
370,390

 
282,490

Other investments
 
230,520

 
216,807

Total investments (Note 4 and 6)
 
7,130,329


6,688,654

Cash
 
666

 
300

Restricted cash
 
4,971

 
7,675

Interest and dividends due or accrued
 
45,793

 
44,846

 
 
 
 
 
Premiums receivable
 
887,938

 
830,301

Less: allowance for credit losses (Note 7)
 
(21,000
)
 
(6,400
)
Premiums receivable, net of allowance for credit losses
 
866,938

 
823,901

 
 
 
 
 
Reinsurance recoverable
 
587,127

 
577,635

Less: allowance for credit losses (Note 8)
 
(2,396
)
 
(4,400
)
Reinsurance recoverable, net of allowance for credit losses
 
584,731

 
573,235

 
 
 
 
 
Prepaid reinsurance premiums
 
169,761

 
166,705

Deferred federal income tax
 

 
6,776

Property and equipment – at cost, net of accumulated depreciation and amortization of:
$237,021 – 2020; $227,566 – 2019
 
78,771

 
77,409

Deferred policy acquisition costs
 
285,455

 
271,186

Goodwill
 
7,849

 
7,849

Other assets
 
130,698

 
128,614

Total assets
 
$
9,305,962

 
8,797,150

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Liabilities:
 
 

 
 

Reserve for loss and loss expense (Note 9)
 
$
4,176,906

 
4,067,163

Unearned premiums
 
1,615,928

 
1,523,167

Short-term debt (Note 5)
 
252,000

 

Long-term debt (Note 5)
 
550,588

 
550,597

Current federal income tax
 
10,550

 
2,987

Deferred federal income tax
 
13,065

 

Accrued salaries and benefits
 
82,671

 
126,753

Other liabilities
 
305,579

 
331,547

Total liabilities
 
$
7,007,287

 
6,602,214

 
 
 
 
 
Stockholders’ Equity:
 
 

 
 

Preferred stock of $0 par value per share:
 
$

 

Authorized shares 5,000,000; no shares issued or outstanding
 
 
 
 
Common stock of $2 par value per share:
 
 
 
 
Authorized shares 360,000,000
 
 
 
 
Issued: 103,937,634 – 2020; 103,484,159 – 2019
 
207,875

 
206,968

Additional paid-in capital
 
435,019

 
418,521

Retained earnings
 
2,103,629

 
2,080,529

Accumulated other comprehensive income (Note 12)
 
151,966

 
81,750

Treasury stock – at cost (shares:  44,125,892 – 2020; 44,023,006 – 2019)
 
(599,814
)
 
(592,832
)
Total stockholders’ equity
 
$
2,298,675

 
2,194,936

Commitments and contingencies
 


 


Total liabilities and stockholders’ equity
 
$
9,305,962

 
8,797,150


The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

1


SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in thousands, except per share amounts)
 
2020
 
2019
 
2020
 
2019
Revenues:
 
 

 
 

 
 
 
 
Net premiums earned
 
$
630,671

 
642,619

 
1,282,374

 
1,275,192

Net investment income earned
 
34,444

 
58,505

 
90,411

 
109,123

Net realized and unrealized gains (losses):
 
 

 
 

 
 
 
 
Net realized investment gains on disposals
 
2,615

 
2,883

 
6,715

 
6,327

Unrealized gains (losses) on equity securities
 
5,701

 
2,115

 
(11,436
)
 
12,226

Other-than-temporary impairment benefit (expense)
 
4,333

 
(971
)
 
(27,296
)
 
(1,075
)
Total net realized and unrealized gains (losses)
 
12,649

 
4,027

 
(32,017
)
 
17,478

Other income
 
4,683

 
3,053

 
6,508

 
5,373

Total revenues
 
682,447

 
708,204

 
1,347,276

 
1,407,166

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 
 
 
Loss and loss expense incurred
 
403,949

 
380,984

 
804,273

 
767,563

Amortization of deferred policy acquisition costs
 
136,931

 
133,401

 
273,432

 
263,075

Other insurance expenses
 
84,601

 
86,662

 
179,947

 
171,741

Interest expense
 
7,928

 
7,366

 
15,529

 
18,892

Corporate expenses
 
6,345

 
9,566

 
15,405

 
21,976

Total expenses
 
639,754

 
617,979

 
1,288,586

 
1,243,247

 
 
 
 
 
 
 
 
 
Income before federal income tax
 
42,693

 
90,225

 
58,690

 
163,919

 
 
 
 
 
 
 
 
 
Federal income tax expense:
 
 

 
 

 
 
 
 
Current
 
(1,350
)
 
17,958

 
8,536

 
30,539

Deferred
 
9,860

 
1

 
735

 
(234
)
Total federal income tax expense
 
8,510

 
17,959

 
9,271

 
30,305

 
 
 
 
 
 
 
 
 
Net income
 
$
34,183

 
72,266

 
49,419

 
133,614

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 
 
 
Basic net income
 
$
0.57

 
1.22

 
0.83

 
2.25

 
 
 
 
 
 
 
 
 
Diluted net income
 
$
0.57

 
1.21

 
0.82

 
2.23

 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these unaudited interim consolidated financial statements. 
 


2


SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in thousands)
 
2020
 
2019
 
2020
 
2019
Net income
 
$
34,183

 
72,266

 
49,419

 
133,614

 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 

 
 

 
 
 
 
Unrealized gains on investment securities:
 
 

 
 

 
 
 
 
Unrealized holding gains arising during period
 
149,127

 
66,002

 
74,882

 
147,315

Non-credit portion of OTTI recognized in OCI
 
29,608

 

 
(22,050
)
 

  Amounts reclassified into net income:
 
 
 
 
 
 
 
 
Held-to-maturity securities
 
(25
)
 
(17
)
 
(5
)
 
(24
)
Net realized (gains) losses on disposals and intent-to-sell OTTI on AFS securities
 
(1,332
)
 
(1,027
)
 
7,616

 
(1,878
)
Credit loss (benefit) expense recognized in OTTI
 
(3,890
)
 

 
8,582

 

Total unrealized gains on investment securities
 
173,488

 
64,958

 
69,025

 
145,413

 
 
 
 
 
 
 
 
 
Defined benefit pension and post-retirement plans:
 
 

 
 

 
 
 
 
Amounts reclassified into net income:
 
 
 
 
 
 
 
 
Net actuarial loss
 
595

 
524

 
1,191

 
1,049

  Total defined benefit pension and post-retirement plans
 
595

 
524

 
1,191

 
1,049

Other comprehensive income
 
174,083

 
65,482

 
70,216

 
146,462

Comprehensive income
 
$
208,266

 
137,748

 
119,635

 
280,076

 
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
 


3


SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in thousands, except share and per share amounts)
 
2020
 
2019
 
2020
 
2019
Common stock:
 
 
 
 
 
 

 
 

Beginning of period
 
$
207,665

 
206,451

 
206,968

 
205,697

Dividend reinvestment plan
 
16

 
11

 
30

 
22

Stock purchase and compensation plans
 
194

 
203

 
877

 
946

End of period
 
207,875

 
206,665

 
207,875

 
206,665

 
 
 
 
 
 
 
 
 
Additional paid-in capital:
 
 
 
 
 
 

 
 

Beginning of period
 
427,328

 
398,881

 
418,521

 
390,315

Dividend reinvestment plan
 
407

 
364

 
815

 
729

Stock purchase and compensation plans
 
7,284

 
8,137

 
15,683

 
16,338

End of period
 
435,019

 
407,382

 
435,019

 
407,382

 
 
 
 
 
 
 
 
 
Retained earnings:
 
 
 
 
 
 

 
 

Beginning of period, as previously reported
 
2,083,340

 
1,908,119

 
2,080,529

 
1,858,414

Cumulative effect adjustment due to adoption of lease guidance, net of tax (Note 2)
 

 

 

 
342

Cumulative effect adjustment due to adoption of guidance on allowance for credit losses, net of tax (Note 2)
 

 

 
1,435

 

Balance at beginning of period, as adjusted
 
2,083,340

 
1,908,119

 
2,081,964

 
1,858,756

Net income
 
34,183

 
72,266

 
49,419

 
133,614

Dividends to stockholders
 
(13,894
)
 
(12,011
)
 
(27,754
)
 
(23,996
)
End of period
 
2,103,629

 
1,968,374

 
2,103,629

 
1,968,374

 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss):
 
 
 
 
 
 

 
 

Beginning of period
 
(22,117
)
 
3,024

 
81,750

 
(77,956
)
Other comprehensive income (loss)
 
174,083

 
65,482

 
70,216

 
146,462

End of period
 
151,966

 
68,506

 
151,966

 
68,506

 
 
 
 
 
 
 
 
 
Treasury stock:
 
 
 
 
 
 

 
 

Beginning of period
 
(599,760
)
 
(591,253
)
 
(592,832
)
 
(584,668
)
Acquisition of treasury stock
 
(54
)
 
(130
)
 
(6,982
)
 
(6,715
)
End of period
 
(599,814
)
 
(591,383
)
 
(599,814
)
 
(591,383
)
Total stockholders’ equity
 
$
2,298,675

 
2,059,544

 
2,298,675

 
2,059,544

 
 
 
 
 
 
 
 
 
Dividends declared per share to stockholders
 
$
0.23

 
0.20

 
0.46

 
0.40

 
 
 
 
 
 
 
 
 
Common stock, shares outstanding:
 
 
 
 
 
 
 
 
Beginning of period
 
59,707,545

 
59,222,905

 
59,461,153

 
58,948,554

Dividend reinvestment plan
 
7,899

 
5,218

 
14,874

 
10,912

Stock purchase and compensation plan
 
97,365

 
101,650

 
438,601

 
473,278

Acquisition of treasury stock
 
(1,067
)
 
(1,665
)
 
(102,886
)
 
(104,636
)
End of period
 
59,811,742

 
59,328,108

 
59,811,742

 
59,328,108

 
Selective Insurance Group, Inc. also has authorized, but not issued, 5,000,000 shares of preferred stock, without par value, of which 300,000 shares have been
designated Series A junior preferred stock, without par value.
  
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
 


4


SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months ended June 30,
($ in thousands)
 
2020
 
2019
Operating Activities
 
 

 
 

Net income
 
$
49,419

 
133,614

 
 
 
 
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 

 
 

Depreciation and amortization
 
29,634

 
28,327

Stock-based compensation expense
 
11,198

 
11,654

Undistributed losses (gains) of equity method investments
 
7,319

 
(4,934
)
Distributions in excess of current year income of equity method investments
 
8,488

 
2,157

Net realized and unrealized losses (gains)
 
32,017

 
(17,478
)
Loss on disposal of fixed assets
 
17

 

 
 
 
 
 
Changes in assets and liabilities:
 
 

 
 

Increase in reserve for loss and loss expense, net of reinsurance recoverable
 
101,151

 
105,082

Increase in unearned premiums, net of prepaid reinsurance
 
89,705

 
99,152

Decrease in net federal income taxes
 
8,340

 
1,698

Increase in premiums receivable
 
(44,095
)
 
(107,190
)
Increase in deferred policy acquisition costs
 
(14,269
)
 
(20,516
)
Increase in interest and dividends due or accrued
 
(934
)
 
(1,399
)
Decrease in accrued salaries and benefits
 
(44,082
)
 
(29,124
)
Increase in other assets
 
(2,753
)
 
(22,320
)
Decrease in other liabilities
 
(33,770
)
 
(13,583
)
Net cash provided by operating activities
 
197,385

 
165,140

 
 
 
 
 
Investing Activities
 
 

 
 

Purchase of fixed income securities, available-for-sale
 
(961,803
)
 
(891,241
)
Purchase of commercial mortgage loans
 
(17,934
)
 

Purchase of equity securities
 
(73,879
)
 
(24,699
)
Purchase of other investments
 
(39,400
)
 
(25,822
)
Purchase of short-term investments
 
(3,368,828
)
 
(3,258,852
)
Sale of fixed income securities, available-for-sale
 
302,342

 
372,159

Proceeds from commercial mortgage loans
 
54

 

Sale of short-term investments
 
3,278,106

 
3,291,878

Redemption and maturities of fixed income securities, held-to-maturity
 
1,200

 
4,643

Redemption and maturities of fixed income securities, available-for-sale
 
461,527

 
236,705

Sale of equity securities
 
1,320

 
30,094

Sale of other investments
 
53

 
12,609

Distributions from other investments
 
7,349

 
14,489

Purchase of property and equipment
 
(12,634
)
 
(16,985
)
Net cash used in investing activities
 
(422,527
)
 
(255,022
)
 
 
 
 
 
Financing Activities
 
 

 
 

Dividends to stockholders
 
(26,631
)
 
(22,940
)
Acquisition of treasury stock
 
(6,982
)
 
(6,715
)
Net proceeds from stock purchase and compensation plans
 
4,731

 
5,100

Proceeds from borrowings
 
387,000

 
340,757

Repayments of borrowings
 
(135,000
)
 
(235,000
)
Repayments of finance lease obligations
 
(314
)
 
(596
)
Net cash provided by financing activities
 
222,804

 
80,606

Net decrease in cash and restricted cash
 
(2,338
)
 
(9,276
)
Cash and restricted cash, beginning of year
 
7,975

 
16,919

Cash and restricted cash, end of period
 
$
5,637

 
7,643


The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

5


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Basis of Presentation and Accounting Policies
(a) Basis of Presentation
The words "Company,” “we,” “us,” or “our” refer to Selective Insurance Group, Inc. (the "Parent"), and its subsidiaries except as expressly indicated or the context requires otherwise. We have prepared our interim unaudited consolidated financial statements (“Financial Statements”) in conformity with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. In preparing the Financial Statements in conformity with GAAP, we are required to make estimates and assumptions that affect the reported financial statement balances and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. All significant intercompany accounts and transactions between the Parent and its subsidiaries are eliminated in consolidation.

Our Financial Statements reflect all adjustments that, in our opinion, are normal, recurring, and necessary for a fair presentation of our results of operations and financial condition. Our Financial Statements cover the second quarters ended June 30, 2020 (“Second Quarter 2020”) and June 30, 2019 (“Second Quarter 2019”) and the six-month periods ended June 30, 2020 ("Six Months 2020") and June 30, 2019 ("Six Months 2019"). These Financial Statements do not include all of the information and disclosures required by GAAP and the SEC for audited annual financial statements. Results of operations for any interim period are not necessarily indicative of results for a full year. Consequently, our Financial Statements should be read in conjunction with the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Annual Report”) filed with the SEC.

(b) Accounting Policies
There have been no material changes from the accounting policies disclosed in Note 2. "Summary of Significant Accounting Policies" in Item 8. “Financial Statements and Supplementary Data.” of our 2019 Annual Report other than those associated with our adoption of ASU 2016-13, Financial Instruments - Credit Losses ("CECL") in the first quarter of 2020 and our recent investment allocation to commercial mortgage loans ("CMLs"). The pertinent additions and changes to our accounting policies are centered around the following items: (i) Investments; (ii) Allowance for Uncollectible Premiums Receivable; and (iii) Allowance for Uncollectible Reinsurance Recoverable.

Investments

Fixed Income Securities
We have updated our policy associated with our review of fixed income securities for other-than-temporary impairments ("OTTI"), and we follow a two-step process:

(i) We review our fixed income securities in an unrealized loss position to determine: (i) if we have the intent to sell the security; or (ii) if it is more likely than not we will be required to sell the security before its anticipated recovery. If we determine that we have the intent or likely requirement to sell the security, we write down its amortized cost to its fair value. In writing down amortized cost, any amount previously recorded as an allowance for credit losses is reversed and any incremental impairment is recorded directly to earnings as OTTI.

(ii) If we do not have either the intent or likely requirement to sell the security, our evaluation for expected credit losses primarily focuses on performing a discounted cash flow (“DCF”) analysis on each of our fixed income securities to determine if an allowance for credit loss is required. We incorporate the results of the DCF analysis on individual security holdings into our calculation of the allowance for credit losses as follows:

For our held-to-maturity ("HTM") portfolio, the allowance for credit losses is calculated as the shortfall between amortized cost at the reporting date and the present value of future cash flows calculated in the DCF analysis.

For our available-for-sale ("AFS") portfolio and fixed income securities included in our short-term investment portfolio, the allowance for credit losses is calculated in the same manner as for the HTM portfolio; but the allowance amount is limited to the difference between the security’s amortized cost and fair value, or the fair value floor. This treatment is appropriate as we have the ability to recover the amortized cost of an AFS security either through: (i) collection of the contractual cash flows; or (ii) sale of the security.

Fair value declines on our AFS securities not recorded through OTTI are recognized in accumulated other comprehensive income, after tax.


6


Our DCF analyses calculate the present value of future cash flows using various models that are specific to the major security types within our portfolio. These models use security-specific information as well as forecasted macroeconomic data to determine possible expected credit loss scenarios based on projected changes in the economy. The forecasted economic data incorporated into the models is based on the Federal Reserve Board’s annual supervisory stress test review on certain large banks and financial institutions. Additionally, we have the ability to incorporate internally-developed forecast information into the models as we deem appropriate. Model scenarios include a baseline assumption with projections for moderate economic expansion, an adverse assumption with projections for a weakening economy, and a severely adverse assumption with projections for a global recession. In developing our best estimate of the allowance for credit losses, we consider our outlook as to the probability of each of these scenarios occurring over the estimated contractual cash flows of our investment portfolio.

For additional information about the various assumptions we make, including the discount rates used in our DCF analyses, see Note 2. "Summary of Significant Accounting Policies" in Item 8. “Financial Statements and Supplementary Data.” of our 2019 Annual Report.

The allowance for credit losses are recorded as a contra-asset reflected in the carrying value of the investment on the Consolidated Balance Sheet, and are charged to earnings as credit loss expense, which is a component of "Other-than-temporary impairment benefit (expense)" within "Net realized and unrealized gains (losses)" on our Consolidated Statements of Income. The income statement treatment is consistent with how we accounted for credit losses prior to the adoption of CECL. However, subsequent changes in the expected cash flows associated with a future period's updated DCF analysis are recorded as an increase to (or reversal of) credit loss expense with the offset recorded to the allowance. We charge write-offs against the allowance when either: (i) we determine the recovery of amortized cost to be uncollectible based on our evaluation of the financial condition of the issuer; (ii) we have the intent, or requirement, to sell a security for which an allowance for credit losses was previously established; and (iii) we sold a security for which an allowance for credit losses was previously established.

Accrued interest on fixed income securities and CMLs is recorded as a component of “Interest and dividends due or accrued” on our Consolidated Balance Sheet. If accrued interest is due but not paid within 90 days, we reverse the delinquent amount against investment income, which is a component of “Net investment income earned” on our Consolidated Statements of Income. We do not record a valuation allowance on our accrued interest balance as we reverse delinquent amounts on a timely basis. We consider a debt security to be past due at the time any principal or interest payments become 90 days delinquent.
 
Commercial Mortgage Loans
Beginning in 2020, our investment portfolio contains an allocation to CMLs. As of June 30, 2020, CMLs accounted for less than 1% of our invested assets. CMLs are loans secured by commercial property, such as an office building, multi-family apartment complex, industrial warehouse, or shopping center. We may acquire investments in CMLs through direct originations under a loan syndication arrangement or purchase CMLs in the marketplace. We record our investment in CMLs on the settlement date of the loan. Our CMLs are classified as held-for-investment and reported at amortized cost, net of the applicable allowance for credit losses, on our Consolidated Balance Sheet.

We evaluate our CMLs for expected credit loss under the same methodology described above for fixed income securities using a DCF model. The discount rate used in this DCF model is either the effective interest rate implicit in the CML at the date of acquisition for fixed rate investments, or the effective interest rate in effect as of the reporting date for non-fixed-rate CMLs.

The allowance for credit losses on our CML investments is calculated as the shortfall between amortized cost at the reporting date and the present value of future cash flows calculated in the DCF analysis. The treatment of earnings and the related classification of the expected credit losses on the Consolidated Statements of Income and the Consolidated Balance Sheet are consistent with our fixed income securities as described above.

Allowance for Uncollectible Premiums Receivable
We estimate an allowance for expected credit losses on our outstanding premiums receivable balance at each reporting date. In determining this allowance, we use a method that considers the aging of the receivable, based on the effective year of the related policy, along with our historical receivable loss experience. We also contemplate expected macroeconomic conditions over the expected collection period of these receivables that, because the majority of the balances are collected within a year or two of policy issuance, are short-term in nature.

Expected credit losses on premiums receivable are charged to earnings as credit loss expense, which is a component of "Other insurance expenses" on our Consolidated Statements of Income with an offsetting allowance being recorded as a contra-asset reflected in the carrying value of the receivable. Subsequent changes in the allowance are recorded as an increase to (or

7


reversal of) credit loss expense. We charge write-offs against the allowance when we determine the account to be uncollectible after considering information obtained from our collection efforts.

Allowance for Uncollectible Reinsurance Recoverable
The "Reinsurance recoverable" balance on our Consolidated Balance Sheets represents our estimate of amounts that will be recovered from reinsurers under our various treaties. Generally, amounts recoverable from reinsurers are recognized as assets at the same time and in a manner consistent with the paid and unpaid losses associated with the reinsured policies. We would consider a recoverable balance from a reinsurer to be past due if payment is not received by the first day following the invoice due date. We require collateral to secure reinsurance recoverable balances primarily from our reinsurance carriers that are not authorized, otherwise approved, or certified to do business in one or more of our ten insurance subsidiaries' domiciliary states. Our ten insurance subsidiaries are collectively referred to as the "Insurance Subsidiaries." This collateral is typically in the form of a letter of credit or cash.

We estimate an allowance for expected credit losses on our outstanding reinsurance recoverable balance at each reporting date. Credit risk is mitigated to the extent we have obtained collateral as described above. We, therefore, reduce the recoverable balance by the amount of the collateral as part of our allowance calculation. We then pool the uncollateralized balances by similar risk characteristics, including the financial strength rating of the reinsurer, and use a probability-of-default methodology in calculating the allowance. Historical default rates are sourced from AM Best and are coupled with severity assumptions in developing a baseline scenario. We then stress this scenario by incorporating forecasts of industry catastrophe losses and economic factors sourced through third-party data providers. In developing our best estimate of the allowance for credit losses, we consider our outlook as to the probability of each of these scenarios occurring.

Expected credit losses on reinsurance recoverable balances are charged to earnings as credit loss expense, which is a component of “Loss and loss expense incurred” on our Consolidated Statements of Income with an offsetting allowance for the credit loss being recorded as a contra-asset reflected in the carrying value of the recoverable balance. Subsequent changes in the allowance are recorded as an increase to (or reversal of) credit loss expense. We charge write-offs against the allowance when we determine the recoverable balance to be uncollectible after considering information obtained from our efforts to collect amounts due or through a review of the financial condition of the reinsurer.

NOTE 2. Adoption of Accounting Pronouncements 
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses, and subsequent additional implementation guidance (collectively referred to as “ASU 2016-13”) that changes the way entities recognize impairment of financial assets. The new guidance requires immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets through the establishment of a valuation allowance. The valuation allowance is a measurement of expected losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Additionally, ASU 2016-03 requires the presentation of the impacted financial assets on the consolidated balance sheet net of the valuation allowance.

We adopted this guidance on January 1, 2020, applied a modified retrospective approach for the adoption, and recorded a net cumulative-effect adjustment to increase the opening balance of 2020 retained earnings by $1.4 million, after tax. As prescribed in ASU 2016-13, we did not adjust the amortized cost basis of any securities for which we had previously recorded OTTI. The cumulative-effect increase to retained earnings represents the net adjustment required to (i) establish valuation allowances on our held-to-maturity ("HTM") debt securities, and (ii) re-estimate valuation allowances on our premiums receivables and reinsurance recoverables under ASU 2016-13. See Note 1. "Basis of Presentation and Accounting Policies" of this Form 10-Q for accounting policy updates related to ASU 2016-13. Additionally, see Note 4. "Investments," Note 7. "Allowance for Uncollectible Premiums Receivable," and Note 8. "Reinsurance" of this Form 10-Q for additional information regarding credit losses related to the respective financial assets.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing certain disclosures, and modifying and adding disclosure requirements. The additional disclosure requirements include (i) the change in unrealized gains and losses for the period included in other comprehensive income (“OCI”) for recurring Level 3 fair value measurements held at the end of the reporting period, and (ii) the range and weighted average of significant observable inputs used to develop Level 3 fair value measurements. We adopted the provisions related to removed disclosures in the fourth quarter of 2019 and adopted the remaining disclosure requirements in the first quarter of 2020 as permitted under ASU 2018-13. As this literature requires disclosure only, ASU 2018-13 has no impact on our financial condition or results of operations.


8


In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a cloud computing hosting service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted this guidance prospectively on January 1, 2020, and it did not have a material impact on our financial condition or results of operations.

Pronouncements to be effective in the future
In December 2019, the FASB issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (“ASU 2019-12”). Among other items, the amendments in ASU 2019-12 simplify the accounting treatment of tax law changes and year-to-date losses in interim periods. An entity generally recognizes the effects of a change in tax law in the period of enactment; however, there is an exception for tax laws with delayed effective dates. Under current guidance, an entity may not adjust its annual effective tax rate for a tax law change until the period in which the law is effective. This exception was removed by ASU 2019-12. This guidance provides that all effects of a tax law change are recognized in the period of enactment, including adjustment of the estimated annual effective tax rate.

For year-to-date losses in interim periods, an entity is required to estimate its annual effective tax rate for the full fiscal year at the end of each interim period and use that rate to calculate its income taxes on a year-to-date basis. Current guidance provides an exception that, when an interim period loss exceeds the anticipated loss for the year, the income tax benefit is limited to the amount that would be recognized if the year-to-date loss were the anticipated loss for the full year. ASU 2019-12 removes this exception and provides that, in this situation, an entity would compute its income tax benefit at each interim period based on its estimated annual effective tax rate.

ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact of this guidance on our financial condition and results of operations.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions to the guidance in GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition away from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. Companies can elect to adopt ASU 2020-04 as of the beginning of the interim period that includes March 2020, or any date thereafter through December 31, 2022. We are currently evaluating the impact of this guidance on our financial condition and results of operations.

NOTE 3. Statements of Cash Flows
Supplemental cash flow information was as follows:
 
 
Six Months ended June 30,
($ in thousands)
 
2020
 
2019
Cash paid during the period for:
 
 

 
 

Interest
 
$
14,920

 
10,512

Federal income tax
 

 
28,000

 
 
 
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
 
Operating cash flows from operating leases
 
4,443

 
3,994

Operating cash flows from financing leases
 
10

 
7

Financing cash flows from finance leases
 
314

 
596

 
 
 
 
 
Non-cash items:
 
 
 
 
Corporate actions related to fixed income securities, AFS1
 
18,224

 
25,104

Corporate actions related to fixed income securities, HTM1
 
2,596

 

Corporate actions related to equity securities1
 
890

 

Assets acquired under finance lease arrangements
 
119

 
814

Assets acquired under operating lease arrangements
 
4,358

 
12,881

Non-cash purchase of property and equipment
 
60

 


1Examples of such corporate actions include exchanges, non-cash acquisitions, and stock splits.



9


The following table provides a reconciliation of cash and restricted cash reported within the Consolidated Balance Sheets that equate to the amount reported in the Consolidated Statements of Cash Flows:
($ in thousands)
 
June 30, 2020
 
December 31, 2019
Cash
 
$
666

 
300

Restricted cash
 
4,971

 
7,675

Total cash and restricted cash shown in the Statements of Cash Flows
 
$
5,637

 
7,975



Amounts included in restricted cash represent cash received from the National Flood Insurance Program ("NFIP"), which is restricted to pay flood claims under the Write Your Own program.

NOTE 4. Investments
(a) Information regarding our AFS securities as of June 30, 2020 and December 31, 2019 was as follows:
June 30, 2020
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Cost/
Amortized
Cost
 
Allowance for Credit Losses
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
AFS fixed income securities:
 
 
 
 
 
 
 
 
 
 
U.S. government and government agencies
 
$
112,341

 

 
7,382

 

 
119,723

Foreign government
 
16,936

 
(28
)
 
1,118

 
(104
)
 
17,922

Obligations of states and political subdivisions
 
1,131,597

 
(17
)
 
72,034

 
(200
)
 
1,203,414

Corporate securities
 
2,131,707

 
(8,077
)
 
142,677

 
(10,302
)
 
2,256,005

Collateralized loan obligations ("CLO") and other asset-backed securities ("ABS")
 
853,470

 
(1,389
)
 
11,946

 
(24,506
)
 
839,521

Residential mortgage-backed securities ("RMBS")
 
1,254,472

 
(831
)
 
65,745

 
(1,008
)
 
1,318,378

Commercial mortgage-backed securities ("CMBS")
 
565,031

 
(53
)
 
41,999

 
(3,784
)
 
603,193

Total AFS fixed income securities
 
$
6,065,554

 
(10,395
)
 
342,901

 
(39,904
)
 
6,358,156

 
December 31, 2019
 
 
 
 
 
 
 
 
($ in thousands)
 
Cost/
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
AFS fixed income securities:
 
 
 
 
 
 
 
 
U.S. government and government agencies
 
$
112,680

 
3,506

 

 
116,186

Foreign government
 
18,011

 
533

 
(2
)
 
18,542

Obligations of states and political subdivisions
 
1,168,185

 
62,175

 
(270
)
 
1,230,090

Corporate securities
 
1,866,881

 
81,906

 
(1,310
)
 
1,947,477

CLO and other ABS
 
790,517

 
7,929

 
(5,434
)
 
793,012

RMBS
 
1,409,003

 
43,421

 
(455
)
 
1,451,969

CMBS
 
514,709

 
23,902

 
(267
)
 
538,344

Total AFS fixed income securities
 
$
5,879,986

 
223,372

 
(7,738
)
 
6,095,620



The following tables provide a rollforward of the allowance for credit losses on our AFS fixed income securities for the periods indicated:
Quarter ended June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Beginning Balance
 
Current Provision for Securities without Prior Allowance
 
Increase (Decrease) on Securities with Prior Allowance, excluding intent (or Requirement) to Sell Securities
 
Reductions for Securities Sold
 
Reductions for Securities Identified as Intent (or Requirement) to Sell during the Period
 
Ending Balance
Foreign government
 
$
21

 

 
7

 

 

 
28

Obligations of states and political subdivisions
 
29

 
15

 
(27
)
 

 

 
17

Corporate securities
 
13,412

 
813

 
(5,686
)
 
(395
)
 
(67
)
 
8,077

CLO and other ABS
 
1,565

 
27

 
(145
)
 
(58
)
 

 
1,389

RMBS
 
722

 

 
124

 
(15
)
 

 
831

CMBS
 
38

 
8

 
7

 

 

 
53

Total AFS fixed income securities
 
$
15,787

 
863

 
(5,720
)
 
(468
)
 
(67
)
 
10,395



10


Six Months ended June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Beginning Balance
 
Current Provision for Securities without Prior Allowance
 
Increase (Decrease) on Securities with Prior Allowance, excluding intent (or Requirement) to Sell Securities
 
Reductions for Securities Sold
 
Reductions for Securities Identified as Intent (or Requirement) to Sell during the Period
 
Ending Balance
Foreign government
 
$

 
28

 

 

 

 
28

Obligations of states and political subdivisions
 

 
17

 

 

 

 
17

Corporate securities
 

 
8,539

 

 
(395
)
 
(67
)
 
8,077

CLO and other ABS
 

 
1,447

 

 
(58
)
 

 
1,389

RMBS
 

 
846

 

 
(15
)
 

 
831

CMBS
 

 
53

 

 

 

 
53

Total AFS fixed income securities
 
$

 
10,930

 

 
(468
)
 
(67
)
 
10,395



During 2020, we did not experience any write-offs or recoveries of our AFS fixed income securities, nor did we purchase any assets with credit deterioration, therefore these items are not included in the table above.

As disclosed in Note 1. "Basis of Presentation and Accounting Policies," we do not evaluate accrued interest on our AFS securities for credit impairment as we write-off these balances in a timely manner. As of June 30, 2020, accrued interest on AFS securities amounted to $44.7 million and we did not record any write-offs of accrued interest during 2020.

(b) Quantitative information about unrealized losses on our AFS portfolio is provided below.
June 30, 2020
 
Less than 12 months
 
12 months or longer
 
Total
($ in thousands)
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
AFS fixed income securities:
 
 

 
 

 
 

 
 

 
 
 
 
Foreign government
 
$
1,673

 
(104
)
 

 

 
1,673

 
(104
)
Obligations of states and political subdivisions
 
9,141

 
(200
)
 

 

 
9,141

 
(200
)
Corporate securities
 
175,595

 
(9,852
)
 
3,216

 
(450
)
 
178,811

 
(10,302
)
CLO and other ABS
 
373,896

 
(16,109
)
 
142,759

 
(8,397
)
 
516,655

 
(24,506
)
RMBS
 
39,176

 
(975
)
 
1,352

 
(33
)
 
40,528

 
(1,008
)
CMBS
 
86,573

 
(3,128
)
 
11,739

 
(656
)
 
98,312

 
(3,784
)
Total AFS fixed income securities
 
$
686,054

 
(30,368
)
 
159,066

 
(9,536
)
 
845,120

 
(39,904
)

December 31, 2019
 
Less than 12 months
 
12 months or longer
 
Total
($ in thousands)
 
Fair
Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
AFS fixed income securities:
 
 

 
 

 
 

 
 

 
 
 
 
Foreign government
 
$
1,416

 
(2
)
 

 

 
1,416

 
(2
)
Obligations of states and political subdivisions
 
35,838

 
(270
)
 

 

 
35,838

 
(270
)
Corporate securities
 
84,832

 
(480
)
 
20,182

 
(830
)
 
105,014

 
(1,310
)
CLO and other ABS
 
205,191

 
(1,938
)
 
204,385

 
(3,496
)
 
409,576

 
(5,434
)
RMBS
 
126,089

 
(425
)
 
5,375

 
(30
)
 
131,464

 
(455
)
CMBS
 
62,893

 
(264
)
 
828

 
(3
)
 
63,721

 
(267
)
Total AFS fixed income securities
 
$
516,259

 
(3,379
)
 
230,770

 
(4,359
)
 
747,029

 
(7,738
)


We do not currently intend to sell any of the securities in the tables above, nor is it likely we will be required to sell any of the securities in the table above. Considering these factors and our review of these securities under our methodology for analyzing OTTI, we have concluded that they are temporarily impaired as we believe: (i) they will mature at par value; (ii) they have not incurred a credit impairment; and (iii) future values of these securities will fluctuate with changes in interest rates. This conclusion reflects our current judgment as to the financial position and future prospects of the entity that issued the investment security and underlying collateral.

The COVID-19-related governmental orders have caused uncertainty and volatility in the financial markets. While market conditions improved during Second Quarter 2020, gross unrealized losses on our AFS fixed income securities portfolio increased to $39.9 million at June 30, 2020, from $7.7 million at December 31, 2019. This increase was driven by widening credit spreads as a result of the uncertainty in the marketplace, and was partially offset by a significant decline in benchmark risk-free rates.

11


(c) Fixed income securities at June 30, 2020, are shown below by contractual maturity. Mortgage-backed securities are included in the maturity tables using the estimated average life of each security. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations, with or without call or prepayment penalties. 
 
 
AFS
 
HTM
($ in thousands)
 
Fair Value
 
Carrying Value
 
Fair Value
Due in one year or less
 
$
315,316

 
440

 
448

Due after one year through five years
 
3,639,491

 
16,591

 
17,843

Due after five years through 10 years
 
2,053,058

 
2,511

 
2,436

Due after 10 years
 
350,291

 

 

Total fixed income securities
 
$
6,358,156

 
19,542

 
20,727



(d) The following table summarizes our other investment portfolio by strategy:
Other Investments
 
June 30, 2020
 
December 31, 2019
($ in thousands)
 
Carrying Value
 
Remaining Commitment
 
Maximum Exposure to Loss1
 
Carrying Value
 
Remaining Commitment
 
Maximum Exposure to Loss1
Alternative Investments
 
 

 
 

 
 
 
 
 
 
 
 
   Private equity
 
$
126,780

 
111,284

 
238,064

 
118,352

 
93,138

 
211,490

   Private credit
 
40,239

 
99,039

 
139,278

 
42,532

 
105,340

 
147,872

   Real assets
 
21,178

 
19,384

 
40,562

 
23,256

 
20,741

 
43,997

Total alternative investments
 
188,197

 
229,707

 
417,904

 
184,140

 
219,219

 
403,359

Other securities
 
42,323

 

 
42,323

 
32,667

 

 
32,667

Total other investments
 
$
230,520

 
229,707

 
460,227

 
216,807

 
219,219

 
436,026


1The maximum exposure to loss includes both the carry value of these investments and the related remaining commitments. In addition, tax credits that have been previously recognized in Other securities are subject to the risk of recapture, which we do not consider significant.

We are contractually committed to make additional investments up to the remaining commitments outlined above; however, we do not have a future obligation to fund losses or debts on behalf of these investments. We have not provided any non-contractual financial support at any time during 2020 or 2019.

The following table shows gross summarized financial information for our other investments portfolio, including the portion we do not own. The majority of these investments are carried under the equity method of accounting. The last line of the table below reflects our share of the aggregate income or loss, which is the portion included in our Financial Statements. As the majority of these investments report results to us on a one-quarter lag, the summarized financial statement information for the three-month period ended March 31 is included in our Second Quarter results. This information is as follows:
Income Statement Information
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in millions)
 
2020
 
2019
 
2020
 
2019
Net investment (loss) income
 
$
(3.1
)

174.1

 
9.6

 
24.1

Realized (losses) gains
 
179.0


106.0

 
343.8

 
249.3

Net change in unrealized appreciation (depreciation)
 
(2,862.9
)

2,223.7

 
(1,658.9
)
 
2,778.0

Net income
 
$
(2,687.0
)

2,503.8

 
(1,305.5
)
 
3,051.4

Insurance Subsidiaries’ alternative investments income
 
$
(16.0
)
 
7.3

 
(9.7
)
 
7.9



As noted above, the majority of our alternative investments report their results to us on a one-quarter lag, and therefore the $16.0 million of losses in the table above for Second Quarter 2020 reflects the significant COVID-19-related financial market volatility that existed during the first quarter of 2020.

12


(e) Certain Insurance Subsidiaries have pledged certain AFS fixed income securities as collateral as members of the Federal Home Loan Bank of Indianapolis ("FHLBI") and the Federal Home Loan Bank of New York ("FHLBNY"). In addition, we had certain securities deposited with various state and regulatory agencies at June 30, 2020, to comply with insurance laws. We retain all rights regarding all securities pledged as collateral. The following table summarizes the market value of these securities at June 30, 2020:
($ in millions)
 
FHLBI Collateral
 
FHLBNY Collateral
 
State and Regulatory Deposits
 
Total
U.S. government and government agencies
 
$

 

 
23.3

 
23.3

Obligations of states and political subdivisions
 

 

 
4.1

 
4.1

Corporate securities
 

 

 
0.3

 
0.3

RMBS
 
130.0

 
224.0

 

 
354.0

CMBS
 
7.2

 
28.2

 

 
35.4

Total pledged as collateral
 
$
137.2

 
252.2

 
27.7


417.1



(f) We did not have exposure to any credit concentration risk of a single issuer greater than 10% of our stockholders' equity, other than certain U.S. government-backed investments, as of June 30, 2020, or December 31, 2019.

(g) The components of pre-tax net investment income earned were as follows:
 
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in thousands)
 
2020
 
2019
 
2020
 
2019
Fixed income securities
 
$
51,079


50,907

 
101,332

 
99,940

CMLs
 
156

 

 
218

 

Equity securities
 
2,023


1,740

 
3,575

 
3,380

Short-term investments
 
420


1,759

 
1,586

 
3,803

Other investments
 
(15,846
)

7,494

 
(9,504
)
 
8,154

Investment expenses
 
(3,388
)

(3,395
)
 
(6,796
)
 
(6,154
)
Net investment income earned
 
$
34,444

 
58,505

 
90,411

 
109,123



As previously noted, the significant financial market volatility that existed during the first quarter of 2020 due to COVID-19 resulted in losses on the alternative investments within our other investments portfolio during Second Quarter 2020.

(h) The following table summarizes OTTI by asset type for the periods indicated:
 
 
Quarter ended June 30,
 
 
2020
 
2019
($ in thousands)
 
Credit Loss Expense (Benefit)
 
Other Impairment Expense
 
Recognized in Earnings
 
Recognized in Earnings
HTM fixed income securities:
 
 
 
 
 
 
 
 
Corporate securities
 
$
(1
)
 

 
(1
)
 

Total HTM fixed income securities
 
(1
)
 

 
(1
)
 

AFS fixed income securities:
 
 
 
 
 
 
 
 
Foreign government
 
7

 

 
7

 

Obligations of states and political subdivisions
 
(12
)
 

 
(12
)
 

Corporate securities
 
(4,940
)
 
500

 
(4,440
)
 
774

CLO and other ABS
 
(118
)
 
93

 
(25
)
 

RMBS
 
125

 
20

 
145

 

CMBS
 
15

 

 
15

 

Total AFS fixed income securities
 
(4,923
)
 
613

 
(4,310
)
 
774

CMLs
 
(22
)
 

 
(22
)
 

Other Investments
 

 

 

 
197

Total OTTI (benefit) expense
 
$
(4,946
)
 
613

 
(4,333
)
 
971


13


 
 
Six Months ended June 30,
 
 
2020
 
2019
($ in thousands)
 
Credit Loss Expense (Benefit)
 
Other Impairment Expense
 
Recognized in Earnings
 
Recognized in Earnings
HTM fixed income securities:
 
 
 
 
 
 
 
 
Corporate securities
 
$
(1
)
 

 
(1
)
 

Total HTM fixed income securities
 
(1
)
 

 
(1
)
 

AFS fixed income securities:
 
 
 
 
 
 
 
 
U.S. government and government agencies
 

 
14

 
14

 

Foreign government
 
28

 

 
28

 

Obligations of states and political subdivisions
 
17

 
62

 
79

 
65

Corporate securities
 
8,472

 
12,103

 
20,575

 
774

CLO and other ABS
 
1,447

 
2,093

 
3,540

 

RMBS
 
847

 
91

 
938

 

CMBS
 
53

 
1,852

 
1,905

 

Total AFS fixed income securities
 
10,864

 
16,215

 
27,079

 
839

CMLs
 
218

 

 
218

 

Other Investments
 

 

 

 
236

Total OTTI expense
 
$
11,081

 
16,215

 
27,296

 
1,075



OTTI amounted to $27.3 million in Six Months 2020 and included $16.2 million of impairments on securities we intend to sell to provide our investment managers flexibility to trade and optimize our investment portfolio in the COVID-19-related market volatility and uncertainty. The remainder of the OTTI in Six Months 2020 of $11.1 million related to our allowance for credit losses, and included a reduction in this allowance of approximately $4.9 million in Second Quarter 2020 reflecting the improvement in market conditions during the quarter as compared to March 31, 2020.

(i) Net realized and unrealized gains and losses (excluding OTTI) for Second Quarter 2020 and 2019 included the following:
 
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in thousands)
 
2020
 
2019
 
2020
 
2019
Net realized gains (losses) on the disposals of securities:
 
 
 
 
 
 
 
 
Fixed income securities
 
$
2,300

 
2,061

 
6,576

 
3,204

CMLs
 
1

 

 
1

 

Equity securities
 

 
851

 
(3
)
 
3,131

Short-term investments
 
314

 
1

 
146

 
15

Other investments
 

 
(30
)
 
(5
)
 
(23
)
Net realized gains (losses) on the disposal of securities
 
2,615

 
2,883

 
6,715

 
6,327

OTTI benefit (expense)
 
4,333

 
(971
)
 
(27,296
)
 
(1,075
)
Net realized gains (losses)
 
6,948

 
1,912

 
(20,581
)
 
5,252

Unrealized gains (losses) recognized in income on equity securities
 
5,701

 
2,115

 
(11,436
)
 
12,226

Total net realized and unrealized investment gains (losses)
 
$
12,649

 
4,027

 
$
(32,017
)
 
17,478



During Second Quarter 2020, the $8.6 million increase in net realized and unrealized investment gains was primarily driven by the improvements in the allowance for credit losses on our AFS fixed income securities as discussed above.

For Six Months 2020, net realized and unrealized investment losses were $32.0 million, compared to net gains of $17.5 million for Six Months 2019. This fluctuation was driven by the increase in OTTI expense discussed above, coupled with the impact of unrealized losses on our equity securities portfolio in Six Months 2020 resulting from the COVID-19-related financial market disruption during the first six months of 2020.

Unrealized (losses) recognized in income on equity securities, as reflected in the table above, include the following:
 
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in thousands)
 
2020
 
2019
 
2020
 
2019
Unrealized (losses) gains recognized in income on equity securities:
 
 
 
 
 
 
 
 
On securities remaining in our portfolio at June 30, 2020
 
$
5,701

 
2,394

 
(11,439
)
 
11,817

On securities sold in each respective period
 

 
(279
)
 
3

 
409

Total unrealized (losses) gains recognized in income on equity securities
 
$
5,701

 
2,115

 
(11,436
)

12,226




14


The components of net realized gains on disposals of securities for the periods indicated were as follows:
 
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in thousands)
 
2020
 
2019
 
2020
 
2019
HTM fixed income securities
 
 
 
 
 
 
 
 
Gains
 
$

 
1

 
1

 
1

Losses
 

 
(15
)
 

 
(15
)
AFS fixed income securities
 
 

 
 

 
 
 
 
Gains
 
6,162

 
2,643

 
11,815

 
4,487

Losses
 
(3,862
)
 
(568
)
 
(5,240
)
 
(1,269
)
CMLs
 
 
 
 
 
 
 
 
Gains
 
1

 

 
1

 

Losses
 

 

 

 

Equity securities
 
 

 
 

 
 
 
 
Gains
 

 
958

 

 
3,238

Losses
 

 
(107
)
 
(3
)
 
(107
)
Short-term investments
 
 
 
 
 
 
 
 
Gains
 
315

 
2

 
337

 
16

Losses
 
(1
)
 
(1
)
 
(191
)
 
(1
)
Other investments
 
 
 
 
 
 
 
 
Gains
 

 

 

 
7

Losses
 

 
(30
)
 
(5
)
 
(30
)
Total net realized gains on disposals of securities
 
$
2,615

 
2,883

 
6,715

 
6,327



Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold.

NOTE 5. Indebtedness
The table below provides a summary of our outstanding debt at June 30, 2020, and December 31, 2019:
Outstanding Debt
 
Issuance Date
 
Maturity Date
 
Interest Rate
 
Original Amount
 
2020
 
Carry Value
($ in thousands)
 
 
 
 
 
Unamortized Issuance Costs
 
Debt Discount
 
June 30, 2020
 
December 31, 2019
Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FHLBNY
 
3/12/2020
 
9/14/2020
 
0.78
%
 
100,000

 

 

 
100,000

 

FHLBNY
 
3/18/2020
 
9/18/2020
 
0.68
%
 
85,000

 

 

 
85,000

 

FHLBI
 
3/19/2020
 
12/14/2020
 
0.58
%
 
67,000

 

 

 
67,000

 

Total short-term debt
 
 
 
 
 
 
 
 
 

 

 
252,000

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Other Outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
      FHLBI
 
12/16/2016
 
12/16/2026
 
3.03
%
 
60,000

 

 

 
60,000

 
60,000

      FHLBNY
 
8/15/2016
 
8/16/2021
 
1.56
%
 
25,000

 

 

 
25,000

 
25,000

      FHLBNY
 
7/21/2016
 
7/21/2021
 
1.61
%
 
25,000

 

 

 
25,000

 
25,000

      Senior Notes
 
11/3/2005
 
11/1/2035
 
6.70
%
 
100,000

 
337

 
510

 
99,153

 
99,125

      Senior Notes
 
11/16/2004
 
11/15/2034
 
7.25
%
 
50,000

 
175

 
88

 
49,737

 
49,725

Senior Notes
 
3/1/2019
 
3/1/2049
 
5.375
%
 
300,000

 
3,039

 
5,802

 
291,159

 
291,010

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finance lease obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
539

 
737

Total long-term debt
 
 
 
 
 
 
 

 
3,551

 
6,400

 
550,588

 
550,597

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total debt
 
 
 
 
 
 
 
 
 
3,551

 
6,400

 
802,588

 
550,597



Our long-term debt balance did not materially change from December 31, 2019. However, we increased our short-term debt by $302 million during the first quarter of 2020 as a contingency in light of the COVID-19-related volatility and uncertainty in the financial markets. With the exception of our $50 million line of credit borrowing, all of the short-term borrowings we made in the first quarter of 2020 remained outstanding as of June 30, 2020. The proceeds from these short-term borrowings were invested in high-quality money market funds, and for the most part, were made to increase liquidity and operating flexibility.


15


Our short-term borrowings through Six Months 2020 consisted of the following:

On February 18, 2020, Selective Insurance Company of America (“SICA”) borrowed short-term funds of $85 million from the FHLBNY at an interest rate of 1.81%. This borrowing was refinanced upon its maturity on March 18, 2020, at a lower interest rate of 0.68%. This borrowing matures on September 18, 2020.

On March 12, 2020, SICA borrowed $100 million from the FHLBNY at an interest rate of 0.78%. This borrowing matures on September 14, 2020.

On March 19, 2020 Selective Insurance Company of South Carolina ("SISC") and Selective Insurance Company of the Southeast ("SISE") borrowed $39 million and $28 million, respectively, from the FHLBI at an interest rate of 0.58%. These borrowings mature on December 14, 2020.

On March 24, 2020, the Parent borrowed $50 million on its line of credit issued by the Bank of Montreal at an interest rate of 2.244%. This borrowing was repaid on May 8, 2020.

We currently expect to extend all or a portion of the remaining short-term borrowings until December 2020 and repay them by year end. As of June 30, 2020, we were compliant with our required financial debt covenants under the line of credit.

For additional information on our indebtedness and debt covenants, see Note 10. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." of our 2019 Annual Report.

NOTE 6. Fair Value Measurements
We primarily measure the financial assets in our investment portfolio at fair value as disclosed on the Consolidated Balance Sheets. The following table presents the carrying amounts and estimated fair values of our financial liabilities as of June 30, 2020 and December 31, 2019:
 
 
June 30, 2020
 
December 31, 2019
($ in thousands)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Financial Liabilities
 
 
 
 
 
 
 
 
Short-term debt:
 
 
 
 
 
 
 
 
0.78% Borrowings from FHLBNY
 
$
100,000

 
100,085

 

 

0.68% Borrowings from FHLBNY
 
85,000

 
85,051

 

 

0.58% Borrowings from FHLBI
 
67,000

 
67,074

 

 

Total short-term debt
 
252,000

 
252,210

 

 

 
 
 
 
 
 
 
 
 
Long-term debt:
 
 
 
 
 
 
 
 
7.25% Senior Notes
 
49,912

 
65,004

 
49,910

 
66,365

6.70% Senior Notes
 
99,490

 
126,630

 
99,480

 
123,104

5.375% Senior Notes
 
294,198

 
345,700

 
294,157

 
357,025

1.61% borrowings from FHLBNY
 
25,000

 
25,306

 
25,000

 
24,901

1.56% borrowings from FHLBNY
 
25,000

 
25,314

 
25,000

 
24,875

3.03% borrowings from FHLBI
 
60,000

 
67,820

 
60,000

 
63,002

Subtotal long-term debt
 
553,600

 
655,774

 
553,547

 
659,272

Unamortized debt issuance costs
 
(3,551
)
 
 
 
(3,687
)
 
 
Finance lease obligations
 
539

 
 
 
737

 
 
Total long-term debt
 
$
550,588

 
 
 
550,597

 
 


For more information about our short-term borrowings, refer to Note 5. "Indebtedness" above. For a discussion of the fair value hierarchy and techniques used to value our financial assets and liabilities, refer to Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of our 2019 Annual Report.


16


The following tables provide quantitative disclosures of our financial assets that were measured and recorded at fair value at June 30, 2020, and December 31, 2019:
June 30, 2020
 
 
 
Fair Value Measurements Using
($ in thousands)
 
Assets
Measured at
Fair Value
 
Quoted Prices in
Active Markets for
Identical Assets/
Liabilities (Level 1)
1
 
Significant Other
 Observable
Inputs
 (Level 2)1
 
Significant Unobservable
 Inputs
 (Level 3)
Description
 
 

 
 

 
 

 
 

Measured on a recurring basis:
 
 

 
 

 
 

 
 

AFS fixed income securities:
 
 
 
 
 
 
 
 
U.S. government and government agencies
 
$
119,723

 
43,955

 
75,768

 

Foreign government
 
17,922

 

 
17,922

 

Obligations of states and political subdivisions
 
1,203,414

 

 
1,200,635

 
2,779

Corporate securities
 
2,256,005

 

 
2,233,652

 
22,353

CLO and other ABS
 
839,521

 

 
804,361

 
35,160

RMBS
 
1,318,378

 

 
1,318,378

 

CMBS
 
603,193

 

 
603,193

 

Total AFS fixed income securities
 
6,358,156

 
43,955

 
6,253,909

 
60,292

Equity securities:
 
 
 
 
 
 
 
 
Common stock1
 
132,441

 
92,090

 

 

Preferred stock
 
1,617

 
1,617

 

 

Total equity securities
 
134,058

 
93,707

 

 

Short-term investments
 
370,390

 
369,158

 
1,232

 

Total assets measured at fair value
 
$
6,862,604

 
506,820

 
6,255,141


60,292



December 31, 2019
 
 
 
Fair Value Measurements Using
($ in thousands)
 
Assets
Measured at
Fair Value
 
Quoted Prices in
 Active Markets for
Identical Assets/Liabilities
(Level 1)1
 
Significant
Other Observable
Inputs
 (Level 2)1
 
Significant Unobservable
Inputs
 (Level 3)
Description
 
 

 
 

 
 

 
 

Measured on a recurring basis:
 
 

 
 

 
 

 
 

AFS fixed income securities:
 
 
 
 
 
 
 
 
U.S. government and government agencies
 
$
116,186

 
41,083

 
75,103

 

Foreign government
 
18,542

 

 
18,542

 

Obligations of states and political subdivisions
 
1,230,090

 

 
1,230,090

 

Corporate securities
 
1,947,477

 

 
1,930,426

 
17,051

CLO and other ABS
 
793,012

 
3,635

 
772,343

 
17,034

RMBS
 
1,451,969

 

 
1,451,969

 

CMBS
 
538,344

 

 
538,344

 

Total AFS fixed income securities
 
6,095,620

 
44,718

 
6,016,817

 
34,085

Equity securities:
 
 
 
 
 
 
 
 
Common stock1
 
69,900

 
32,145

 

 

Preferred stock
 
3,037

 
3,037

 

 

Total equity securities
 
72,937

 
35,182

 

 

Short-term investments
 
282,490

 
265,306

 
17,184

 

Total assets measured at fair value
 
$
6,451,047

 
345,206

 
6,034,001

 
34,085


1Investments amounting to $40.4 million at June 30, 2020, and $37.8 million at December 31, 2019, were measured at fair value using net asset value per share (or its practical expedient) and are not classified in the fair value hierarchy. These investments are not redeemable and the timing of liquidations of the underlying assets is unknown at each reporting period disclosed above. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to total assets measured at fair value.


17


The following table provides a summary of Level 3 changes in Six Months 2020 and Six Months 2019:
June 30, 2020
 
 
 
 
 
 
 
 
($ in thousands)
 
Obligations of states and political subdivisions
 
Corporate Securities
 
CLO and Other ABS
 
Total
Fair value, December 31, 2019
 

 
17,051

 
17,034

 
34,085

Total net (losses) gains for the period included in:
 
 
 
 
 
 
 
 
OCI
 
(111
)
 
(1,770
)
 
(367
)
 
(2,248
)
   Net realized and unrealized (losses) gains
 

 
(384
)
 
(349
)
 
(733
)
Net investment income earned
 

 

 
1

 
1

Purchases
 

 
3,002

 
9,690

 
12,692

Sales
 

 

 

 

Issuances
 

 

 

 

Settlements
 

 
(138
)
 
(1,032
)
 
(1,170
)
Transfers into Level 3
 
2,890

 
4,592

 
20,107

 
27,589

Transfers out of Level 3
 

 

 
(9,924
)
 
(9,924
)
Fair value, June 30, 2020
 
2,779

 
22,353

 
35,160

 
60,292

 
 
 
 
 
 
 
 
 
Change in unrealized (losses) gains for the period included in earnings for assets held at period end
 

 
(384
)
 
(349
)
 
(733
)
Change in unrealized gains (losses) for the period included in other comprehensive income for assets held at period end
 
(111
)
 
(1,770
)
 
(367
)
 
(2,248
)


June 30, 2019
 
 
 
 
 
 
($ in thousands)
 
Corporate Securities
 
CLO and Other ABS
 
Total
Fair value, December 31, 2018
 

 
7,409

 
7,409

Total net (losses) gains for the period included in:
 
 
 
 
 
 
OCI
 
(19
)
 
(118
)
 
(137
)
Net investment income earned
 

 
244

 
244

Purchases
 

 
15,984

 
15,984

Sales
 

 

 

Issuances
 

 

 

Settlements
 

 
(40
)
 
(40
)
Transfers into Level 3
 
16,419

 
13,603

 
30,022

Transfers out of Level 3
 

 
(19,662
)
 
(19,662
)
Fair value, June 30, 2019
 
16,400

 
17,420

 
33,820

 
 
 
 
 
 
 
Change in unrealized gains (losses) for the period included in earnings for assets held at period end
 

 

 




18


The following tables provide quantitative information regarding our financial assets and liabilities that were disclosed at fair value at June 30, 2020, and December 31, 2019:
June 30, 2020
 
 
 
Fair Value Measurements Using
($ in thousands)
 
Assets/
Liabilities
Disclosed at
Fair Value
 
Quoted Prices in
 Active Markets for
 Identical Assets/
Liabilities
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial Assets
 
 

 
 

 
 

 
 

HTM:
 
 

 
 

 
 

 
 

Obligations of states and political subdivisions
 
$
4,892

 

 
4,892

 

Corporate securities
 
15,835

 

 
15,835

 

Total HTM fixed income securities
 
$
20,727

 

 
20,727

 

 
 
 
 
 
 
 
 
 
CMLs
 
$
17,949

 

 
3,792

 
14,157

 
 
 
 
 
 
 
 
 
Financial Liabilities
 
 

 
 

 
 

 
 

Short-term debt:
 
 
 
 
 
 
 
 
0.78% Borrowings from FHLBNY
 
$
100,085

 

 
100,085

 

0.68% Borrowings from FHLBNY
 
85,051

 

 
85,051

 

0.58% Borrowings from FHLBI
 
67,074

 

 
67,074

 

Total short-term debt
 
$
252,210

 

 
252,210

 

 
 
 
 
 
 
 
 
 
Long-term debt:
 
 
 
 
 
 
 
 
7.25% Senior Notes
 
$
65,004

 

 
65,004

 

6.70% Senior Notes
 
126,630

 

 
126,630

 

5.375% Senior Notes
 
345,700

 

 
345,700

 

1.61% borrowings from FHLBNY
 
25,306

 

 
25,306

 

1.56% borrowings from FHLBNY
 
25,314

 

 
25,314

 

3.03% borrowings from FHLBI
 
67,820

 

 
67,820

 

Total long-term debt
 
$
655,774

 

 
655,774

 


December 31, 2019
 
 
 
Fair Value Measurements Using
($ in thousands)
 
Assets/
Liabilities
Disclosed at
Fair Value
 
Quoted Prices in
 Active Markets for
 Identical Assets/
Liabilities
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial Assets
 
 

 
 

 
 

 
 

HTM:
 
 

 
 

 
 

 
 
Obligations of states and political subdivisions
 
$
4,921

 

 
4,921

 

Corporate securities
 
17,054

 

 
17,054

 

Total HTM fixed income securities
 
$
21,975

 

 
21,975

 

 
 
 
 
 
 
 
 
 
Financial Liabilities
 
 

 
 
 
 
 
 
Long-term debt:
 
 
 
 
 
 
 
 
7.25% Senior Notes
 
$
66,365

 

 
66,365

 

6.70% Senior Notes
 
123,104

 

 
123,104

 

5.375% Senior Notes
 
357,025

 

 
357,025

 

1.61% borrowings from FHLBNY
 
24,901

 

 
24,901

 

1.56% borrowings from FHLBNY
 
24,875

 

 
24,875

 

3.03% borrowings from FHLBI
 
63,002

 

 
63,002

 

Total long-term debt
 
$
659,272

 

 
659,272

 




19


NOTE 7. Allowance for Uncollectible Premiums Receivable
The following table provides a rollforward of the allowance for credit losses on our premiums receivable balance for the periods indicated:
($ in thousands)
 
Quarter ended June 30, 2020
 
Six Months ended June 30, 2020
Balance at beginning of period
 
$
18,000

 
$
6,400

Cumulative effect adjustment1
 

 
1,058

Balance at beginning of period, as adjusted
 
$
18,000

 
$
7,458

Current period provision for expected credit losses
 
4,597

 
15,792

Write-offs charged against the allowance for credit losses
 
(1,597
)
 
(2,250
)
Recoveries
 

 

Allowance for credit losses, end of period
 
$
21,000

 
$
21,000


1See Note 2. "Adoption of Accounting Pronouncements" above for additional information regarding our adoption of ASU 2016-13.

Based on an evaluation of the recoverability of our premiums receivable, in light of the billing accommodations we announced during the first quarter of 2020 and the impact of recent state regulations that provided for the deferral of payments without cancellation for a period up to 90 days in certain states, which will increase earned but uncollected premiums, we recognized an additional allowance for credit losses of $13.5 million in Six Months 2020, net of write-offs. The billing accommodations include individualized payment flexibility and suspending the effect of policy cancellations, late payment notices, and late or reinstatement fees.

NOTE 8. Reinsurance
We evaluate and monitor the financial condition of our reinsurers under voluntary reinsurance arrangements to minimize our exposure to significant losses from reinsurer insolvencies. The following table provides (i) a disaggregation of our reinsurance recoverable balance by financial strength rating, and (ii) an aging analysis of our past due reinsurance recoverable balances as of June 30, 2020:
 
 
June 30, 2020
($ in thousands)
 
Current
 
Past Due
 
Total Reinsurance Recoverables
Financial strength rating of rated reinsurers1
 
 
 
 
 
 
A++
 
$
21,644

 
$
71

 
$
21,715

A+
 
361,511

 
2,926

 
364,437

A
 
103,553

 
670

 
104,223

A-
 
2,045

 

 
2,045

B++
 
500

 
275

 
775

B+
 
10

 

 
10

Total rated reinsurers
 
$
489,263

 
$
3,942

 
$
493,205

 
 
 
 
 
 
 
Non-rated reinsurers
 
 
 
 
 
 
Federal and state pools
 
88,531

 

 
88,531

Other than federal and state pools
 
5,359

 
32

 
5,391

Total non-rated reinsurers
 
$
93,890

 
$
32

 
$
93,922

 
 
 
 
 
 
 
Total reinsurance recoverable, gross
 
$
583,153

 
$
3,974

 
$
587,127

Less: allowance for credit losses2
 
(2,396
)
 

 
(2,396
)
Total reinsurance recoverable, net
 
$
580,757

 
$
3,974

 
$
584,731

1Credit ratings as of June 30, 2020.
2Represents our current expectation of credit losses on total current and past due reinsurance recoverables, and is not identifiable by reinsurer.

We evaluate our estimate of expected credit losses through the methodology outlined in Note 1. “Basis of Presentation and Accounting Policies” above.


20


The following table provides a rollforward of the allowance for credit losses on our reinsurance recoverable balance for the periods indicated:
($ in thousands)
 
Quarter ended June 30, 2020
 
Six Months ended June 30, 2020
Balance at beginning of period
 
$
1,502

 
$
4,400

Cumulative effect adjustment1
 

 
(2,903
)
Balance at beginning of period, as adjusted
 
$
1,502

 
$
1,497

Current period provision for expected credit losses
 
894

 
899

Write-offs charged against the allowance for credit losses
 

 

Recoveries
 

 

Allowance for credit losses, end of period
 
$
2,396

 
$
2,396

1See Note 2. "Adoption of Accounting Pronouncements" for additional information regarding our adoption of ASU 2016-13.

The following table contains a listing of direct, assumed, and ceded reinsurance amounts for premiums written, premiums earned, and loss and loss expenses incurred for the periods indicated. For more information concerning reinsurance, refer to Note 8. “Reinsurance” in Item 8. “Financial Statements and Supplementary Data.” of our 2019 Annual Report.
 
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in thousands)
 
2020
 
2019
 
2020
 
2019
Premiums written:
 
 

 
 

 
 

 
 

Direct
 
$
834,643

 
807,367

 
$
1,581,074

 
1,573,761

Assumed
 
6,410

 
5,333

 
12,453

 
11,888

Ceded
 
(116,301
)
 
(111,303
)
 
(221,448
)
 
(211,305
)
Net
 
$
724,752

 
701,397

 
$
1,372,079

 
1,374,344

Premiums earned:
 
 

 
 

 
 

 
 

Direct
 
$
733,647

 
740,348

 
$
1,488,538

 
1,468,385

Assumed
 
6,055

 
5,742

 
12,228

 
12,304

Ceded
 
(109,031
)
 
(103,471
)
 
(218,392
)
 
(205,497
)
Net
 
$
630,671

 
642,619

 
$
1,282,374

 
1,275,192

Loss and loss expenses incurred:
 
 

 
 

 
 

 
 

Direct
 
$
451,013

 
435,700

 
$
876,808

 
860,357

Assumed
 
4,300

 
4,348

 
9,198

 
9,613

Ceded
 
(51,364
)
 
(59,064
)
 
(81,733
)
 
(102,407
)
Net
 
$
403,949

 
380,984

 
$
804,273

 
767,563


While direct premiums written increased in Second Quarter 2020 and Six Months 2020 compared to Second Quarter 2019 and Six Months 2019, respectively, Second Quarter 2020 was reduced by a $19.7 million premium credit to our personal and commercial automobile policyholders. Because of the unprecedented nature of the COVID-19-related governmental directives and the associated expected short-term favorable claims frequency impact, we obtained regulatory approval during April to provide this premium credit to our personal and commercial automobile customers. The premium credit to customers with in-force policies was equivalent to 15% of their April and May premiums.

Additionally, direct premiums written in Six Months 2020 was reduced by a $75 million return audit and mid-term endorsement premium accrual recorded during the first quarter of 2020. This accrual reflects a premium reduction due to lower sales and payroll exposures on the general liability and workers compensation lines of business resulting from the economic impacts of the COVID-19 pandemic.

The premium actions described above impacted direct premiums written and direct premiums earned. In addition, due to the lower exposures that drove the reduction in premium, there was a reduction in direct loss and loss expenses incurred. The reduction in direct loss and loss expenses incurred for the premium credit included a $13.3 million reduction in casualty lines and a $6.4 million reduction in non-catastrophe property losses. Direct loss and loss expenses were also impacted in Six Months 2020 by a $10.0 million incurred but not reported ("IBNR") reserve estimate recorded in the first quarter of 2020 for losses related to a small portion of our policies that include a $25,000 sub-limited coverage for specified extra expenses to clean or disinfect a property when ordered by a Board of Health.
COVID-19 Impact
 
Quarter ended June 30, 2020
 
Six Months ended June 30, 2020
($ in thousands)
 
Premium Audit
 
Premium Credit
 
Total
 
Premium Audit
 
Property
IBNR
 
Premium Credit
 
Total
Direct premiums written
 
$

 
(19,740
)
 
(19,740
)
 
$
(75,000
)
 

 
(19,740
)
 
(94,740
)
Direct premiums earned
 
(31,824
)
 
(19,740
)
 
(51,564
)
 
(48,333
)
 

 
(19,740
)
 
(68,073
)
Direct loss and loss expenses incurred
 
(18,198
)
 
(19,740
)
 
(37,938
)
 
(28,073
)
 
10,000

 
(19,740
)
 
(37,813
)



21


Ceded premiums written, ceded premiums earned, and ceded loss and loss expenses incurred related to our participation in the NFIP, under which 100% of our flood premiums, losses, and loss expenses are ceded to the NFIP, are as follows:
Ceded to NFIP
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in thousands)
 
2020
 
2019
 
2020
 
2019
Ceded premiums written
 
$
(74,187
)
 
(71,574
)
 
$
(136,274
)
 
(131,587
)
Ceded premiums earned
 
(67,369
)
 
(63,804
)
 
(134,230
)
 
(126,067
)
Ceded loss and loss expenses incurred
 
(12,991
)
 
(21,063
)
 
(18,087
)
 
(34,749
)


NOTE 9. Reserve for Loss and Loss Expense
The table below provides a rollforward of reserve for loss and loss expense balances:
 
 
Six Months ended June 30,
($ in thousands)
 
2020
 
2019
Gross reserve for loss and loss expense, at beginning of year
 
$
4,067,163

 
3,893,868

Less: reinsurance recoverable on unpaid loss and loss expense, at beginning of year1
 
547,066

 
537,388

Net reserve for loss and loss expense, at beginning of year
 
3,520,097

 
3,356,480

Incurred loss and loss expense for claims occurring in the:
 
 

 
 

Current year
 
825,201

 
783,938

Prior years
 
(20,928
)
 
(16,375
)
Total incurred loss and loss expense
 
804,273

 
767,563

Paid loss and loss expense for claims occurring in the:
 
 

 
 

Current year
 
221,422

 
210,374

Prior years
 
479,736

 
442,820

Total paid loss and loss expense
 
701,158

 
653,194

Net reserve for loss and loss expense, at end of period
 
3,623,212

 
3,470,849

Add: Reinsurance recoverable on unpaid loss and loss expense, at end of period
 
553,694

 
556,203

Gross reserve for loss and loss expense at end of period
 
$
4,176,906

 
4,027,052


1Includes an adjustment of $2.9 million related to our adoption of ASU 2016-13. Refer to Note 2. "Adoption of Accounting Pronouncements" for additional information.

Our current year incurred losses of $825.2 million were impacted by catastrophe losses that were $116.4 million in Six Months 2020, compared to $50.3 million in Six Months 2019. In addition, the current year incurred losses include an estimate of $10.0 million for COVID-19-related losses related to a small portion of our policies that include a $25,000 sub-limited coverage for specified extra expenses to clean or disinfect a property when ordered by a Board of Health. As of June 30, 2020, the $10.0 million remained as an IBNR reserve estimate. In most instances, COVID-19 does not cause a direct physical loss to property, and when combined with other policy wording requirements, we do not expect material business interruption losses from COVID-19. It also is our practice to include in, or attach to, all standard lines commercial property and businessowners policies an exclusion that states that all loss or property damage caused by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness, or disease is not a covered cause of loss. We also attach a regulatory approved virus exclusion to all standard commercial lines property policies. This exclusion is also included within all of our standard businessowners policies.

Prior year reserve development in Six Months 2020 was favorable by $20.9 million, which included $25.0 million of casualty reserve development, partially offset by $4.1 million of unfavorable property reserve development. The favorable casualty reserve development included $25.0 million of development in our workers compensation lines of business and $10.0 million in our general liability line of business, partially offset by $10.0 million of unfavorable reserve development in our commercial automobile line of business.

Prior year reserve development in Six Months 2019 was favorable by $16.4 million, which was driven by casualty reserve development of $20.0 million in our workers compensation line of business and $7.0 million in our general liability line of business. This was partially offset by $10.6 million of unfavorable property reserve development.

NOTE 10. Segment Information
We evaluate the results of our four reportable segments as follows:

Our Standard Commercial Lines, Standard Personal Lines, and Excess & Surplus ("E&S") Lines are evaluated on before and after-tax underwriting results (net premiums earned, incurred loss and loss expense, policyholder

22


dividends, policy acquisition costs, and other underwriting expenses), return on equity ("ROE") contribution, and combined ratios.

Our Investments segment is primarily evaluated on after-tax net investment income and its ROE contribution. After-tax net realized and unrealized gains and losses, which are not included in non-GAAP operating income, are also included in our Investment segment results.

In computing the results of each segment, we do not make adjustments for interest expense or corporate expenses. We do not maintain separate investment portfolios for the segments and do not allocate assets to each segment.

The following summaries present revenues (net investment income and net realized and unrealized gains and losses on investments for the Investments segment) and pre-tax income for the individual segments:
Revenue by Segment
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in thousands)
 
2020
 
2019
 
2020
 
2019
Standard Commercial Lines:
 
 

 
 

 
 
 
 
Net premiums earned:
 
 

 
 

 
 
 
 
Commercial automobile
 
$
138,535

 
136,338

 
288,225

 
267,524

Workers compensation
 
61,906

 
78,464

 
128,612

 
157,179

General liability
 
163,273

 
164,793

 
327,853

 
326,318

Commercial property
 
95,413

 
87,136

 
189,282

 
173,203

Businessowners policies
 
27,516

 
26,172

 
54,552

 
52,253

Bonds
 
9,210

 
8,967

 
18,849

 
17,871

Other
 
5,151

 
4,779

 
10,211

 
9,485

Miscellaneous income
 
4,195

 
2,718

 
5,586

 
4,762

Total Standard Commercial Lines revenue
 
505,199

 
509,367

 
1,023,170

 
1,008,595

Standard Personal Lines:
 
 
 
 
 
 
 
 
Net premiums earned:
 
 
 
 
 
 
 
 
Personal automobile
 
38,189

 
43,388

 
80,676

 
86,551

Homeowners
 
31,652

 
32,013

 
63,142

 
64,143

Other
 
1,792

 
1,712

 
3,943

 
3,726

Miscellaneous income
 
488

 
335

 
922

 
611

Total Standard Personal Lines revenue
 
72,121

 
77,448

 
148,683

 
155,031

E&S Lines:
 
 
 
 
 
 
 
 
Net premiums earned:
 
 
 
 
 
 
 
 
Casualty lines
 
42,722

 
44,756

 
86,794

 
89,284

Property lines
 
15,312

 
14,101

 
30,235

 
27,655

Miscellaneous income
 

 

 

 

Total E&S Lines revenue
 
58,034

 
58,857

 
117,029

 
116,939

Investments:
 
 

 
 

 
 

 
 

Net investment income
 
34,444

 
58,505

 
90,411

 
109,123

Net realized and unrealized investment gains (losses)
 
12,649

 
4,027

 
(32,017
)
 
17,478

Total Investments revenue
 
47,093

 
62,532

 
58,394

 
126,601

Total revenues
 
$
682,447

 
708,204

 
1,347,276

 
1,407,166




23


Income Before and After Federal Income Tax
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in thousands)
 
2020
 
2019
 
2020
 
2019
Standard Commercial Lines:
 
 

 
 

 
 
 
 
Underwriting gain, before federal income tax
 
$
16,730

 
37,143

 
33,856

 
62,958

Underwriting gain, after federal income tax
 
13,217

 
29,343

 
26,747

 
49,737

Combined ratio
 
96.7
 %
 
92.7

 
96.7

 
93.7

ROE contribution
 
2.4

 
5.9

 
2.4

 
5.2

 
 
 
 
 
 
 
 
 
Standard Personal Lines:
 
 
 
 
 
 
 
 
Underwriting (loss) gain, before federal income tax
 
$
(6,325
)
 
4,538

 
(5,938
)
 
7,705

Underwriting (loss) gain, after federal income tax
 
(4,997
)
 
3,585

 
(4,691
)
 
6,087

Combined ratio
 
108.8
 %
 
94.1

 
104.0

 
95.0

ROE contribution
 
(0.9
)
 
0.7

 
(0.4
)
 
0.6

 
 
 
 
 
 
 
 
 
E&S Lines:
 
 
 
 
 
 
 
 
Underwriting (loss) gain, before federal income tax
 
$
(532
)
 
2,944

 
3,312

 
7,523

Underwriting (loss) gain, after federal income tax
 
(420
)
 
2,326

 
2,616

 
5,943

Combined ratio
 
100.9
 %
 
95.0

 
97.2

 
93.6

ROE contribution
 
(0.1
)
 
0.5

 
0.2

 
0.6

 
 
 
 
 
 
 
 
 
Investments:
 
 

 
 

 
 
 
 
Net investment income
 
$
34,444

 
58,505

 
90,411

 
109,123

Net realized and unrealized investment gains (losses)
 
12,649

 
4,027

 
(32,017
)
 
17,478

Total investment segment income, before federal income tax
 
47,093

 
62,532

 
58,394

 
126,601

Tax on investment segment income
 
8,558

 
11,729

 
9,662

 
23,849

Total investment segment income, after federal income tax

$
38,535


50,803

 
48,732

 
102,752

ROE contribution of after-tax net investment income
 
5.2

 
9.6

 
6.6

 
9.2



Reconciliation of Segment Results to Income Before Federal Income Tax
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in thousands)
 
2020
 
2019
 
2020
 
2019
Underwriting gain
 
 
 
 
 
 
 
 
Standard Commercial Lines
 
$
16,730

 
37,143

 
33,856

 
62,958

Standard Personal Lines
 
(6,325
)
 
4,538

 
(5,938
)
 
7,705

E&S Lines
 
(532
)
 
2,944

 
3,312

 
7,523

Investment income
 
47,093

 
62,532

 
58,394

 
126,601

Total all segments
 
56,966

 
107,157

 
89,624

 
204,787

Interest expense
 
(7,928
)
 
(7,366
)
 
(15,529
)
 
(18,892
)
Corporate expenses
 
(6,345
)
 
(9,566
)
 
(15,405
)
 
(21,976
)
Income, before federal income tax
 
$
42,693

 
90,225


58,690

 
163,919



NOTE 11. Retirement Plans
The primary pension plan for our employees is the Retirement Income Plan for Selective Insurance Company of America (the “Pension Plan”). SICA also sponsors the Supplemental Excess Retirement Plan (the “Excess Plan”) and a life insurance benefit plan. All plans are closed to new entrants and benefits ceased accruing under the Pension Plan and the Excess Plan after March 31, 2016. For more information concerning SICA's retirement plans, refer to Note 14. “Retirement Plans” in Item 8. “Financial Statements and Supplementary Data.” of our 2019 Annual Report.

The following tables provide information about the Pension Plan:
 
 
Pension Plan
 
Pension Plan
 
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in thousands)
 
2020
 
2019
 
2020
 
2019
Net Periodic Pension Cost (Benefit):
 
 
 
 
 
 
 
 
Interest cost
 
$
2,828

 
3,376

 
5,656

 
6,753

Expected return on plan assets
 
(5,476
)
 
(5,278
)
 
(10,953
)
 
(10,557
)
Amortization of unrecognized net actuarial loss
 
704

 
643

 
1,408

 
1,287

Total net periodic pension cost (benefit)1
 
$
(1,944
)
 
(1,259
)
 
(3,889
)
 
(2,517
)
1 The components of net periodic pension cost (benefit) are included within "Loss and loss expense incurred" and "Other insurance expenses" on the Consolidated Statements of Income.

24


 
 
Pension Plan
 
 
Six Months ended June 30,
 
 
2020
 
2019
Weighted-Average Expense Assumptions:
 
 
 
 
Discount rate
 
3.33
%
 
4.46
%
Effective interest rate for calculation of interest cost
 
2.95

 
4.12

Expected return on plan assets
 
5.80

 
6.50



NOTE 12. Comprehensive Income
The components of comprehensive income, both gross and net of tax, for Second Quarter and Six Months 2020 and 2019 were as follows:
Second Quarter 2020
 
 
 
 
 
 
($ in thousands)
 
Gross
 
Tax
 
Net
Net income
 
$
42,693

 
8,510

 
34,183

Components of OCI:
 
 

 
 

 
 

Unrealized gains on investment securities:
 
 

 
 

 
 

Unrealized holding gains during the period
 
188,768

 
39,641

 
149,127

Non-credit portion of OTTI recognized in OCI
 
37,479

 
7,871

 
29,608

Amounts reclassified into net income:
 
 
 
 
 
 
HTM securities
 
(31
)
 
(6
)
 
(25
)
Realized gains on disposals and intent-to-sell OTTI on AFS securities
 
(1,686
)
 
(354
)
 
(1,332
)
Credit loss benefit recognized in OTTI
 
(4,924
)
 
(1,034
)
 
(3,890
)
    Total unrealized gains on investment securities
 
219,606

 
46,118

 
173,488

Defined benefit pension and post-retirement plans:
 
 

 
 

 
 

Amounts reclassified into net income:
 
 

 
 

 
 

Net actuarial loss
 
753

 
158

 
595

    Total defined benefit pension and post-retirement plans
 
753

 
158

 
595

Other comprehensive income
 
220,359

 
46,276

 
174,083

Comprehensive income
 
$
263,052

 
54,786

 
208,266

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Second Quarter 2019
 
 
 
 
 
 
($ in thousands)
 
Gross
 
Tax
 
Net
Net income
 
$
90,225

 
17,959

 
72,266

Components of OCI:
 
 

 
 

 
 

Unrealized gains on investment securities:
 
 

 
 

 
 

Unrealized holding gains during the period
 
83,546

 
17,544

 
66,002

Amounts reclassified into net income:
 
 
 
 
 
 
HTM securities
 
(21
)
 
(4
)
 
(17
)
Realized gains on disposals and OTTI of AFS securities
 
(1,300
)
 
(273
)
 
(1,027
)
    Total unrealized gains on investment securities
 
82,225

 
17,267

 
64,958

Defined benefit pension and post-retirement plans:
 
 

 
 

 
 

Amounts reclassified into net income:
 
 

 
 

 
 

Net actuarial loss
 
664

 
140

 
524

    Total defined benefit pension and post-retirement plans
 
664

 
140

 
524

Other comprehensive income
 
82,889

 
17,407

 
65,482

Comprehensive income
 
$
173,114

 
35,366

 
137,748




25


Six Months 2020
 
 
 
 
 
 
($ in thousands)
 
Gross
 
Tax
 
Net
Net income
 
$
58,690

 
9,271

 
49,419

Components of OCI:
 
 

 
 

 
 

Unrealized gains on investment securities:
 
 

 
 

 
 

Unrealized holding gains during the period
 
94,787

 
19,905

 
74,882

Non-credit portion of OTTI recognized in OCI
 
(27,911
)
 
(5,861
)
 
(22,050
)
Amounts reclassified into net income:
 
 
 
 
 
 
HTM securities
 
(6
)
 
(1
)
 
(5
)
Realized losses on disposals and intent-to-sell OTTI on AFS securities
 
9,641

 
2,025

 
7,616

Credit loss expense recognized in OTTI
 
10,863

 
2,281

 
8,582

    Total unrealized gains on investment securities
 
87,374

 
18,349

 
69,025

Defined benefit pension and post-retirement plans:
 
 

 
 

 
 

Amounts reclassified into net income:
 
 

 
 

 
 

Net actuarial loss
 
1,507

 
316

 
1,191

    Total defined benefit pension and post-retirement plans
 
1,507

 
316

 
1,191

Other comprehensive income
 
88,881

 
18,665

 
70,216

Comprehensive income
 
$
147,571

 
27,936

 
119,635

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months 2019
 
 
 
 
 
 
($ in thousands)
 
Gross
 
Tax
 
Net
Net income
 
$
163,919

 
30,305

 
133,614

Components of OCI:
 
 

 
 

 
 

Unrealized gains on investment securities:
 
 

 
 

 
 

Unrealized holding gains during the period
 
186,472

 
39,157

 
147,315

Amounts reclassified into net income:
 
 
 
 
 
 
HTM securities
 
(30
)
 
(6
)
 
(24
)
Realized gains on disposals and OTTI of AFS securities
 
(2,377
)
 
(499
)
 
(1,878
)
    Total unrealized gains on investment securities
 
184,065

 
38,652

 
145,413

Defined benefit pension and post-retirement plans:
 
 

 
 

 
 

Amounts reclassified into net income:
 
 

 
 

 
 

Net actuarial loss
 
1,328

 
279

 
1,049

    Total defined benefit pension and post-retirement plans
 
1,328

 
279

 
1,049

Other comprehensive income
 
185,393

 
38,931

 
146,462

Comprehensive income
 
$
349,312

 
69,236

 
280,076


The balances and changes in each component of Accumulated other comprehensive income ("AOCI") (net of taxes) as of June 30, 2020, were as follows:
June 30, 2020
 
 
 
Defined Benefit
Pension and Post-Retirement Plans
 
 
 
 
Net Unrealized Gains (Losses) on Investment Securities
 
 
Total AOCI
($ in thousands)
 
OTTI
Related1
 
HTM
Related
 
All
Other
 
Investments
Subtotal
 
 
Balance, December 31, 2019
 
$
(71
)
 
25

 
170,439

 
170,393

 
(88,643
)
 
81,750

OCI before reclassifications
 
(22,050
)
 

 
74,882

 
52,832

 

 
52,832

Amounts reclassified from AOCI
 
8,582

 
(5
)
 
7,616

 
16,193

 
1,191

 
17,384

Net current period OCI
 
(13,468
)
 
(5
)
 
82,498

 
69,025

 
1,191

 
70,216

Balance, June 30, 2020
 
$
(13,539
)
 
20

 
252,937

 
239,418

 
(87,452
)
 
151,966


1Represents unrealized gains and losses on AFS securities with credit-related OTTI recognized in earnings.

26


The reclassifications out of AOCI were as follows:
 
Quarter ended June 30,
 
Six Months ended June 30,
Affected Line Item in the Unaudited Consolidated Statements of Income
($ in thousands)
2020
 
2019
 
2020
 
2019
HTM related
 
 
 
 
 
 
 
 
Unrealized (gains) losses on HTM disposals
$

 
(9
)
 
1

 
(9
)
Net realized and unrealized gains (losses)
Amortization of net unrealized gains on HTM securities
(31
)
 
(12
)
 
(7
)
 
(21
)
Net investment income earned
 
(31
)
 
(21
)
 
(6
)
 
(30
)
Income before federal income tax
 
6

 
4

 
1

 
6

Total federal income tax expense
 
(25
)
 
(17
)
 
(5
)
 
(24
)
Net income
Net realized (gains) losses on disposals and intent-to-sell OTTI
 
 
 
 
 
 
 
 
Net realized (gains) losses on disposals and intent-to-sell OTTI
(1,686
)
 
(1,300
)
 
9,641

 
(2,377
)
Net realized and unrealized gains (losses)
 
(1,686
)
 
(1,300
)
 
9,641

 
(2,377
)
Income before federal income tax
 
354

 
273

 
(2,025
)
 
499

Total federal income tax expense
 
(1,332
)
 
(1,027
)
 
7,616

 
(1,878
)
Net income
OTTI related
 
 
 
 
 
 
 
 
    Credit loss (benefit) expense recognized in OTTI
(4,924
)
 

 
10,863

 

Net realized and unrealized gains (losses)
 
(4,924
)
 

 
10,863

 

Income before federal income tax
 
1,034

 

 
(2,281
)
 

Total federal income tax expense
 
(3,890
)
 

 
8,582

 

Net income
 
 
 
 
 
 
 
 
 
Defined benefit pension and post-retirement life plans
 
 
 
 
 
 
 
 
Net actuarial loss
162

 
145

 
324

 
290

Loss and loss expense incurred
 
591

 
519

 
1,183

 
1,038

Other insurance expenses
Total defined benefit pension and post-retirement life
753

 
664

 
1,507

 
1,328

Income before federal income tax
 
(158
)
 
(140
)
 
(316
)
 
(279
)
Total federal income tax expense
 
595

 
524

 
1,191

 
1,049

Net income
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
$
(4,652
)
 
(520
)
 
17,384

 
(853
)
Net income


NOTE 13. Litigation
As of June 30, 2020, we do not believe we are involved in any legal action that could have a material adverse effect on our consolidated financial condition, results of operations, or cash flows.

In the ordinary course of conducting business, we are parties in various legal actions. Most are claims litigation involving our Insurance Subsidiaries as either: (i) liability insurers defending or providing indemnity for third-party claims brought against our customers; (ii) insurers defending first-party coverage claims brought against them; or (iii) liability insurers seeking declaratory judgment on our insurance coverage obligations. We account for such activity through the establishment of unpaid loss and loss expense reserves. In ordinary course claims litigation, we expect that any potential ultimate liability, after consideration of provisions made for potential losses and costs of defense, will not be material to our consolidated financial condition, results of operations, or cash flows.

All of our commercial property and businessowners policies require direct physical loss of or damage to property by a covered cause of loss. Whether COVID-19-related contamination, the existence of the COVID-19 pandemic, and the resulting COVID-19-related government shutdown orders cause physical loss of or damage to property is already the subject of much public debate and first-party coverage litigation against some insurers. We cannot predict the outcome of that litigation, which may interpret language similar or identical to what is in our insurance policies. It also is our practice to include in, or attach to, all standard lines commercial property and businessowners policies an exclusion that states that all loss or property damage caused by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness, or disease is not a covered cause of loss. That exclusion also may be the subject of first-party coverage litigation against some insurers. We cannot predict the outcome of that litigation, which may interpret language similar or identical to what is in our insurance policies.

From time to time, our Insurance Subsidiaries also are named as defendants in other legal actions, some of which assert claims for substantial amounts. Plaintiffs may style these actions as putative class actions and seek judicial certification of a state or national class for allegations involving our business practices, such as improper reimbursement of medical providers paid under workers compensation and personal and commercial automobile insurance policies or improper reimbursement for automobile

27


parts. Similarly, our Insurance Subsidiaries can be named in individual actions seeking extra-contractual damages, punitive damages, or penalties, often alleging bad faith in the handling of insurance claims. We believe that we have valid defenses to these allegations and we account for such activity through the establishment of unpaid loss and loss expense reserves. In these other legal actions, we expect that any potential ultimate liability, after consideration of provisions made for estimated losses, will not be material to our consolidated financial condition. Nonetheless, litigation outcomes are inherently unpredictable and, because the amounts sought in certain of these actions are large or indeterminate, it is possible that any adverse outcomes could have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward-Looking Statements
The terms "Company," "we," "us," and "our" refer to Selective Insurance Group, Inc. (the "Parent"), and its subsidiaries, except as expressly indicated or the context otherwise requires. In this Quarterly Report on Form 10-Q, we discuss and make statements about our intentions, beliefs, current expectations, and projections for our future operations and performance. Such statements are “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These forward-looking statements often are identified by words such as “anticipates,” “believes,” “expects,” “will,” “should,” and “intends” and their negatives. We caution prospective investors that forward-looking statements are not guarantees of future performance. Risks and uncertainties are inherent in our future performance. Factors that could cause actual results to differ materially from those indicated in forward-looking statements include, without limitation, those discussed in Item 1A. “Risk Factors” in Part II. “Other Information” of this Form 10-Q. Our stated risk factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. We can neither predict such new risk factors nor can we assess the impact, if any, such new risk factors may have on our businesses or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied in any forward-looking statement. In light of these risks, uncertainties, and assumptions, the forward-looking events discussed in this report might not occur. We make forward-looking statements based on currently available information and assume no obligation, other than as may be required under the federal securities laws, to publicly update or revise any forward-looking statements for any reason.

Introduction
We classify our business into four reportable segments:

Standard Commercial Lines;
Standard Personal Lines;
E&S Lines; and
Investments.

For further details about these segments, refer to Note 10. "Segment Information" in Item 1. "Financial Statements." of this Form 10-Q and Note 11. "Segment Information" in Item 8. "Financial Statements and Supplementary Data." of our Annual Report on Form 10-K for the year ended December 31, 2019 ("2019 Annual Report").

We write our Standard Commercial and Standard Personal Lines products and services through nine insurance subsidiaries, some of which write flood business through the federal government's National Flood Insurance Program's ("NFIP") Write Your Own Program ("WYO"). We write our E&S products and services through another subsidiary, Mesa Underwriters Specialty Insurance Company, which provides us with 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. Investors should read the MD&A in conjunction with Item 1. "Financial Statements." of this Form 10-Q and the consolidated financial statements in our 2019 Annual Report filed with the U.S. Securities and Exchange Commission.

In the MD&A, we will discuss and analyze the following:

Current Events and economic impacts from the COVID-19-related government directives;
Critical Accounting Policies and Estimates;

28


Financial Highlights of Results for the second quarters ended June 30, 2020 (“Second Quarter 2020”) and June 30, 2019 (“Second Quarter 2019”) and the six-month periods ended June 30, 2020 ("Six Months 2020") and June 30, 2019 ("Six Months 2019") ;
Results of Operations and Related Information by Segment;
Federal Income Taxes;
Financial Condition, Liquidity, and Capital Resources;
Ratings;
Off-Balance Sheet Arrangements; and
Contractual Obligations, Contingent Liabilities, and Commitments.

Current Events: Coronavirus ("COVID-19") Pandemic

Business Overview
Selective entered 2020 with record levels of GAAP equity, holding company cash and invested assets, statutory surplus and strong financial results. We believe our strong financial position reflects our disciplined capital management and underwriting and investment execution. Early in 2020, the COVID-19 pandemic quickly moved from China to the rest of the globe. During Six Months 2020, governmental (international, federal, state, and local) actions to contain or delay the spread of the COVID-19 pandemic resulted in directives requiring social distancing, operational alteration or temporary closure of most non-essential businesses to limit public access, and the “sheltering-in-place” of everyone other than essential workers in many instances. We smoothly transitioned substantially all of our employees to remote, home-based status. Currently, approximately 2,250 of our 2,300 employees are working remotely. Under most governmental directives, insurance is an essential business. While these governmental directives have begun to slowly expire in some of our operating states, we have continued to service our customers, agents, and other stakeholders from a remote work environment. Despite this transition in our work environment, we have successfully been able to maintain our expected service-level standards for claims handling, underwriting, premium audit processes and safety management services.

Because most of our employees are now working remotely, we have changed some of the methods of regular communication and increased the use of video and phone conferencing on robust and secure applications. Our officers, managers, and supervisors have enhanced their connection with their teams. Throughout Second Quarter 2020, our Chief Executive Officer has hosted a number of company-wide virtual town hall meetings to provide organizational updates and address areas of general employee concern. To keep our employees fully informed about COVID-19-related developments, we (i) disseminate regular health, safety, and other communications (ii) established an on-line coronavirus center with information, links to valuable resources, and helpful videos, and (iii) continued our pre-COVID-19 online “pulse surveys” to gauge employees’ views on various issues. Our employees have rated our communications around COVID-19 positively.

Our methods to communicate with customers, agents, and vendors generally have remained the same since the COVID-19 crisis, although the frequency of communication has increased. Additionally, our field model and safety management functions, which typically rely on in-person meetings, have been substantially replaced with greater telecommunications, and virtual or remote interactions, with some limited site visits still occurring. One of our strategic initiatives for several years has been to provide our customers with a superior omni-channel customer experience. Accordingly, we have developed the ability to respond to our customers in their preferred method of communication - whether by phone, email, text, or social media. We have communicated with our customers regarding COVID-19 through phone, email, and social media.

Our internal operations have also been functioning well and continue to work effectively despite the changes in the environment. We continue to process claims, underwrite the renewal inventory of our policies, and operate our corporate functions during this time of working remotely.

AM Best lowered its outlook on the U.S. commercial lines sector to "Negative" from "Stable" after Fitch Ratings ("Fitch") took a similar action. Both cited COVID-19 as the reason for the negative industry outlook and expectations for (i) lower premium volume, (ii) reduced surplus/equity from investment declines, and (iii) lower-for-longer interest rates, which would put pressure on the need for additional underwriting income.

On April 10, 2020, Fitch reaffirmed our "A+" rating with a "stable" outlook. In taking this action, Fitch cited our strong capitalization and financial performance, with stable underwriting results and return metrics that have remained favorable compared to our peers. The review considered Fitch's current assessment of the impact of COVID-19, including (i) its economic impact, under a set of ratings assumptions related to interest rate levels, (ii) declines in the market values of stocks, bonds, derivatives, and other capital market instruments typically owned or traded by insurance companies, (iii) market liquidity, and (iv) the magnitude of claim/benefit exposures related to the COVID-19 pandemic.


29


Our field-based agency management specialist, claims management specialist, and safety management models have proven to be advantageous in the COVID-19 crisis, as our existing IT infrastructure and security were able to accommodate the move of nearly all of our office-based employees to remote, home-based employees and maintain expected customer and agent service levels. Our strong relationships with, and our continued support for, our approximately 1,400 local independent distribution partners, most of whom also have transitioned to a remote work environment, have also enabled us to continue providing our customers with the same levels of service they have come to expect from us.

Control Environment
Since the beginning of the COVID-19 pandemic, we have not had to modify in any significant way our existing internal controls or processes. To monitor and manage COVID-19-related developments, we convened our existing Executive Risk Committee (comprised of our Executive Chairman, Chief Executive Officer, Chief Financial Officer, and other key financial executives, including our Chief Accounting Officer, Chief Investment Officer, Chief Risk Officer, Chief Audit Executive, General Counsel, Chief Claims Officer, Chief Actuary, Chief Information Officer, Chief Human Resources Officer, and Business Unit leaders) (“ERC”), who met daily in March, multiple times a week through April, and transitioned to weekly meetings in May, June, and July. The ERC actively reviews and addresses all significant operational, compliance, and financial risk matters. This oversight includes matters such as employee health and safety, facilities matters, operational business continuity, IT including third-party vendors, regulatory developments, premium collections, past due accounts, investments, liquidity, capital, cash flow, claims activity, and other key business metrics. Our Management Investment Committee ("MIC") also met weekly in the early days of the COVID-19-related financial market disruption, but more recently has transitioned to meeting every two weeks. The MIC has carefully reviewed detailed portfolio metrics and market projections, and has interacted directly with our portfolio managers during this crisis, allowing it to make proactive investment decisions on an informed basis. Our Board of Directors transitioned from weekly meetings with senior executives through April to bi-weekly meetings in May, June, and July to ensure appropriate corporate governance and oversight.

We have not experienced any material impact to our internal control environment over financial reporting despite the fact that the majority of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 current events to minimize the impact these events may have on our internal controls and their design and operating effectiveness.

Given the remote environment, which was initially required by certain governmental directives, remote access to critical systems is required. Our cybersecurity program was well–positioned to support increased remote working arrangements and respond to an increase in attempted attacks to exploit the COVID-19 outbreak without rolling back controls to enable remote working. For several years, our IT security strategy has emphasized endpoint controls for cloud computing and employee mobility. This strategy leveraged a virtual private network with multi-factor authentication, which is supplemented by a virtual desktop infrastructure where necessary or appropriate, to create a highly available and centrally-managed end-user environment. Our cybersecurity strategy has always included an information security education and awareness program that combines training with testing aligned to key security exposures, including phishing and social engineering. We also recently bolstered our phishing risk management by deploying multiple technology-driven controls that include malicious content checks, malicious link blocking, and reputation-based rules. The cybersecurity program also anticipated an increase in attempts to disrupt our information systems and deployed safeguards to prevent interruption to key customer and agent-facing technologies.

Financial Overview
Through Second Quarter and Six Months 2020, underwriting results include the following COVID-19-related items:

A $75 million return audit and mid-term endorsement premium accrual recorded in the first quarter of 2020 to reflect the anticipated decline in sales and payroll exposures on the workers compensation and general liability lines of business based on our estimate of reduced exposures due to the significant economic slowdown. Net of reduced losses and commissions, the earned impact of the return audit and mid-term endorsement premium accrual lowered pre-tax underwriting results by $6.6 million, pre-tax, in Second Quarter 2020 and $10.5 million, pre-tax, in Six Months 2020. During Second Quarter 2020, we endorsed polices that reduced our accrual by approximately $14 million, resulting in a $61 million accrual as of June 30, 2020.

A $19.7 million reduction in NPW recorded in Second Quarter 2020 reflecting a premium credit to our personal and commercial automobile customers with in-force policies equivalent to 15% of their April and May premiums, resulting from the unprecedented nature of the COVID-19-related governmental directives and the associated favorable claims frequency impact. During Second Quarter 2020, the premium credits were offset by an equal reduction in loss and loss expenses, as claims frequency on our personal and commercial automobile lines of business declined due to reduced miles being driven resulting from governmental directives. As the number of vehicles we insure has not

30


significantly declined, frequencies are returning closer to normal levels as the COVID-19-related governmental directives terminate, and there is uncertainty about potential impacts to severities, we do not believe that changes in our filed rating plans are appropriate at this time.

A $10.0 million, pre-tax, incurred but not reported ("IBNR") reserve estimate recorded in the first quarter of 2020 for losses related to a small portion of our policies that include a $25,000 sub-limited coverage for specified extra expenses to clean or disinfect a property when ordered by a Board of Health. Through June 30, 2020, the $10.0 million remained as an IBNR reserve estimate.

An additional allowance for uncollectible premiums receivable of $3.0 million, pre-tax, in Second Quarter 2020 and $13.5 million, pre-tax, in Six Months 2020. We recorded this allowance after evaluating the recoverability of our premiums receivable in light of the COVID-19-related billing accommodations we announced in the first quarter of 2020, and the impact of recent state regulations that provided for the deferral of payments without cancellation for a period up to 90 days in certain states, which will increase earned but uncollected premiums. These state regulations are in the process of expiring, with the last of the regulations currently anticipated to end in early August 2020. We have offered customers, sometimes in collaboration with or at the direction of our regulators, individualized payment flexibility and suspended the effect of policy cancellations, late payment notices, and late or reinstatement fees.

Overall, these four items (i) reduced pre-tax underwriting results by $9.6 million, or $0.13 per diluted share, in Second Quarter 2020 and $34.0 million, or $0.45 per diluted share, in Six Months 2020, (ii) increased the combined ratio by 1.3 points in Second Quarter 2020 and 2.4 points in Six Months 2020, and (iii) decreased our Second Quarter 2020 annualized return on equity ("ROE") by 1.4 points and our Six Months 2020 annualized ROE by 2.4 percentage points.

During Second Quarter and Six Months 2020, investment results included the following items that reflected the significant economic conditions created by COVID-19:

We recorded a benefit for pre-tax other-than-temporary impairments ("OTTI") of $4.3 million in Second Quarter 2020 and OTTI expense of $27.3 million in Six Months 2020. The year-to-date expense reflected the significant widening of credit spreads and reduced future economic activity over the near term due to COVID-19, as well as our desire to provide our investment managers flexibility to trade the portfolio. The benefit in Second Quarter 2020 reflected higher security valuations as a result of improved market conditions during the course of the quarter. For more details about these and other items related to our financial results, see the section below entitled, "Financial Highlights of Results for Second Quarter and Six Months 2020 and Second Quarter and Six Months 2019."

We recorded pre-tax losses of $16.0 million in Second Quarter 2020 and $9.7 million in Six Months 2020 on our alternative investment portfolio, which are recorded on a one-quarter lag. These losses reflect the significant market decline in the first quarter of 2020. As these investments are largely recorded on a one-quarter lag, these results do not reflect the improvement in market conditions during Second Quarter 2020.

Due to the unprecedented financial market volatility and resulting significant decline in fixed income and equity market valuations in March 2020, combined with the COVID-19-related governmental orders, and out of abundance of caution, we increased our short-term debt by $302 million in March 2020 through borrowings from the Federal Home Loan Bank of New York ("FHLBNY") and the Federal Home Loan Bank of Indianapolis (“FHLBI”) and under our credit agreement ("Line of Credit"). Our primary objective was to increase liquidity and operating flexibility of the Parent and the Insurance Subsidiaries. The proceeds from these borrowings were invested in highly-liquid money market funds. We repaid our $50 million borrowing under the Line of Credit in May 2020 and we expect to repay the remaining $252 million of short-term borrowings by the end of 2020. For further details, see Note 5. "Indebtedness" in Item 1. "Financial Statements." of this Form 10-Q.

Critical Accounting Policies and Estimates
Our unaudited interim consolidated financial statements include amounts for which we have made informed estimates and judgments for transactions not yet completed. Such estimates and judgments affect the reported amounts in the consolidated financial statements. As outlined in our 2019 Annual Report, those estimates and judgments most critical to the preparation of the consolidated financial statements involved the following: (i) reserves for loss and loss expense; (ii) pension and post-retirement benefit plan actuarial assumptions; (iii) investment valuation and OTTI; and (iv) reinsurance. There have been no material changes from the critical accounting policies and estimates disclosed on pages 31 through 40 of our 2019 Annual Report; however, in light of the COVID-19 pandemic, we have made additional changes to critical accounting estimates that are described below.

31


Further economic instability related to existing and future COVID-19-related governmental directives or changes in legislation could ultimately impact our estimates and assumptions, and consequently, changes in the below estimates may be material to our results of operations in future periods.

Reserves for Loss and Loss Expenses
There has been considerable discussion and focus on the potential for insurance industry losses arising from COVID-19, particularly as it relates to claims from business interruption losses.  Our Standard Commercial Lines property and businessowners policies require direct physical loss of or damage to property by a covered cause of loss, for our property policies to respond to a claim.  While each potential claim is adjusted on its unique facts and based on the terms and conditions of the specific policy, COVID-19-related contamination, the existence of a pandemic, and/or the resulting preventative government shutdown orders generally are not insured under Standard Commercial property and businessowners policies.

Our Standard Commercial property and businessowners policies also specifically exclude all loss or damage caused by or resulting from a virus or bacteria. We believe this exclusion applies to preclude coverage for losses related to the COVID-19 virus.  Approximately 6% of our policyholders purchase a sub-limited extra expense coverage that provides up to $25,000 in limit for the additional cost associated with cleaning the property when ordered by a Board of Health after an outbreak of communicable disease at the premises. Our current year incurred losses include an estimate of $10 million of IBNR for these sub-limited coverages in response to the COVID-19 pandemic.  For our E&S segment, our property forms contain the same language as our standard commercial lines segment that requires “direct physical loss of or damage to”, but most of these forms do not contain a specific virus or bacteria exclusion.  Property accounts for approximately 30% of our E&S segment premium, and, of that amount, only about a quarter of our customers within our E&S segment purchase policies with business interruption coverage.  In total, within our standard commercial lines and E&S segments, 95% of our property policies include the specific virus or bacteria exclusion.

Through June 30, 2020, actual workers compensation claims activity due to COVID-19-related exposures was minimal.  When considered in conjunction with the overall decrease in claim reporting levels, we believe the COVID-19-related exposures are sufficiently captured within our current workers compensation loss estimates.  It is possible that we might incur increased loss and loss expenses if more covered employees contract COVID-19 in the course of their employment.  There also may be general liability exposure arising out of business re-openings. This would be a slower emerging exposure that remains highly uncertain at this time.

If the COVID-19 pandemic results in significant property or liability related losses, we have substantial reinsurance protection, that we believe would provide us with recoveries. Our main property catastrophe excess of loss treaty program has a $40 million retention and then provides coverage up to $775 million in ground up losses, subject to some co-participation and reinstatement premium.  For losses outside of our original 22 state footprint, including our five new expansion states and some of our largest E&S states, the retention drops to $5 million.  With property losses and potential business interruption claims, including any COVID-19-related losses, our reinsurers “follow the fortunes” of our underlying polices. That means, if any clause in the underlying policy is invalidated - whether by a court or a legislature - our reinsurance coverage would continue to apply.  Our property catastrophe excess of loss program contains aggregating language that allows us, in our sole discretion, to accumulate all property losses commencing within a 168 hour period to a single occurrence or multiple occurrences.  We also have the sole discretion to decide when the 168 hours begins, and all losses that occurred during and continuing after that period, such as the case with business interruption losses, would be included in the reinsured loss calculation.  Our casualty excess of loss contract, which would cover workers compensation and general liability claims and does not include any exclusions for communicable disease or pandemic, has a $2 million retention and provides coverage limits above that to $90 million.  Similar to our property catastrophe reinsurance program, our casualty excess of loss program allows us to aggregate multiple losses, including losses under different liability coverages, as a single occurrence.  Our casualty reinsurers also follow our fortunes in the policy interpretation.  Except for the $10 million of property IBNR we recorded for the sub-limited property coverages, we do not expect material COVID-19-related losses. If the facts and circumstances change, we have a robust reinsurance program that provides significant protection.

OTTI
The various COVID-19-related governmental directives impacted the financial markets, which became volatile. This volatility increased gross unrealized losses on our available-for-sale ("AFS") fixed income securities portfolio from $7.7 million at December 31, 2019, to $116.9 million at March 31, 2020, and back down to $39.9 million at June 30, 2020. We analyzed these unrealized losses for OTTI in accordance with our existing accounting policy, which includes performing discounted cash flow ("DCF") analyses on each security at the lot level and analyzing these DCFs using three different 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

32


determine possible expected credit loss scenarios based on projected changes in the economy. The forecasted economic data incorporated in the models is based on the Federal Reserve Board’s annual supervisory stress test review on certain large banks and financial institutions. We also have the ability to incorporate internally-developed forecast information into the models as we deem appropriate. Model scenarios include a baseline assumption with moderate economic expansion, an adverse assumption with a weakening economy, and a severely adverse assumption with a global recession. In developing our best estimate of the allowance for credit losses, we consider our outlook as to the probability of each of these scenarios occurring.

Based on these analyses, we recorded OTTI expense for expected credit losses of $11.1 million during Six Months 2020. After giving consideration to these credit loss allowances, the remaining unrealized losses on our AFS fixed income securities was $39.9 million. We believe that the volatility and increased unrealized loss balance was driven by fluctuating and widening credit spreads tied to financial market uncertainty about the various COVID-19-related governmental directives. If the assumptions used in our DCF analyses or our outlook as to the occurrence probability of our DCF model scenarios were to change, the resulting impairment could be material to our results of operations. For additional information about the unrealized losses in our AFS fixed income portfolio, see Note 4. "Investments" in Item 1. "Financial Statements." of this Form 10-Q.

Premium Audit
We estimate the amount of premium anticipated to be either billed or returned on policies subsequent to expiration based on exposure levels (i.e., payroll or sales). This estimate of earned but unbilled premium is based on historical trends adjusted for the uncertainty of current and future economic conditions. In the first quarter of 2020, we recorded a $75 million return audit and mid-term endorsement premium accrual, which was in response to the COVID-19 pandemic and the anticipated decline in sales and payroll exposures on the general liability and workers compensation lines of business. During Second Quarter 2020, we endorsed polices that reduced our accrual by approximately $14 million, resulting in a $61 million accrual as of June 30, 2020. We currently anticipate the balance of the endorsements or return audit premiums to occur through the end of 2021. Further economic instability or extended COVID-19-related governmental directives could ultimately impact our estimates and assumptions, and consequently, changes in this liability estimate may be material to the results of operations in future periods. For additional details about this estimate, see Note 8. "Reinsurance" in Item 1. "Financial Statements." of this Form 10-Q.

Allowance for Uncollectible Premiums Receivable
We estimate an allowance for expected credit losses on our outstanding premiums receivable balance at each reporting date. In determining this allowance, we use a method that considers the aging of the receivable, based on the effective year of the related policy, along with our historical credit loss experience. We also contemplate expected macroeconomic conditions over the expected receivables collection period that, because the majority of the balances are collected within a year of policy issuance, is short-term in nature. We increased our allowance for uncollectible accounts by $3.0 million in Second Quarter 2020 and $13.5 million in Six Months 2020, net of write-offs, to reflect (i) the higher risk of non-payment due to the significant COVID-19-related decline in economic activity, (ii) the individualized payment flexibility that we are currently offering our customers, and (iii) our suspension of the effect of policy cancellations, late payment notices, and late or reinstatement fees. These suspensions are in the process of expiring, with the last of the suspensions currently anticipated to end in early August 2020. Due to the impact of recent state regulations that provided for the deferral of payments without cancellation for a period up to 90 days in certain states, which will increase earned but uncollected premiums, we expect an increase in our allowance for uncollectible premiums receivable in the third quarter of 2020 as well.

Similar to our estimate of premium audit, future COVID-19-related economic instability or governmental directives could ultimately impact our estimates and assumptions. Consequently, a change in our allowance estimate may be material to our results of operations in future periods. For additional details about this estimate, see Note 7. "Allowance for Uncollectible Premiums Receivable" in Item 1. "Financial Statements." of this Form 10-Q.


33


Financial Highlights of Results for Second Quarter and Six Months 2020 and Second Quarter and Six Months 20191 
($ and shares in thousands, except per share amounts)
 
Quarter ended June 30,
 
Change
% or Points
 
 
Six Months ended June 30,
 
Change
% or Points
 
 
2020
 
2019
 
 
 
2020
 
2019
 
 
Financial Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
682,447

 
708,204

 
(4
)
%
 
$
1,347,276

 
1,407,166

 
(4
)
%
After-tax net investment income
 
28,542

 
47,622

 
(40
)
 
 
74,025

 
88,945

 
(17
)
 
After-tax underwriting income
 
7,800

 
35,254

 
(78
)
 
 
24,672

 
61,767

 
(60
)
 
Net income before federal income tax
 
42,693

 
90,225

 
(53
)
 
 
58,690

 
163,919

 
(64
)
 
Net income
 
34,183

 
72,266

 
(53
)
 
 
49,419

 
133,614

 
(63
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Key Metrics:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio
 
98.4
%
 
93.1

 
5.3

pts 
 
97.6
%
 
93.9

 
3.7

pts 
Invested assets per dollar of stockholders' equity
 
$
3.10

 
3.12

 
(1
)
%
 
$
3.10

 
3.12

 
(1
)
%
ROE
 
6.2

 
14.5

 
(8.3
)
pts
 
4.4

 
13.9

 
(9.5
)
pts
Statutory premiums to surplus ratio
 
1.4

x
1.4

 

 
 
1.4

x
1.4

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Per Share Amounts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted net income per share
 
0.57

 
1.21

 
(53
)
%
 
0.82

 
2.23

 
(63
)
%
Book value per share
 
$
38.43

 
34.71

 
11

 
 
$
38.43

 
34.71

 
11

 
Dividends declared per share to stockholders
 
0.23

 
0.20

 
15

 
 
0.46

 
0.40

 
15

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP Information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP operating income2
 
$
24,190

 
69,085

 
(65
)
%
 
$
74,712

 
123,105

 
(39
)
%
Diluted non-GAAP operating income per share2
 
0.40

 
1.16

 
(66
)
 
 
1.24

 
2.06

 
(40
)
 
Annualized non-GAAP operating ROE2
 
4.4
%
 
13.9

 
(9.5
)
pts 
 
6.7
%
 
12.8

 
(6.1
)
pts 
1 
Refer to the Glossary of Terms attached to our 2019 Annual Report as Exhibit 99.1 for definitions of terms used of this Form 10-Q.
2 
Non-GAAP operating income is an important financial measure that we, analysts, and investors use because the timing of the realization of net investment gains and losses on sales of securities in any given period is largely discretionary. In addition, net realized investment gains and losses, OTTI recorded to earnings, unrealized gains and losses on equity securities, and debt retirement costs could distort the analysis of trends.

Reconciliations of net income, net income per diluted share, and annualized ROE to non-GAAP operating income, non-GAAP operating income per diluted share, and annualized non-GAAP operating ROE, respectively, are provided in the tables below:
Reconciliation of net income to non-GAAP operating income
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in thousands)
 
2020
 
2019
 
2020
 
2019
Net income
 
$
34,183

 
72,266

 
49,419

 
133,614

Net realized and unrealized (gains) losses, before tax
 
(12,649
)
 
(4,027
)
 
32,017

 
(17,478
)
Debt retirement costs, before tax
 

 

 

 
4,175

Tax on reconciling items
 
2,656

 
846

 
(6,724
)
 
2,794

Non-GAAP operating income
 
$
24,190

 
69,085

 
74,712

 
123,105

Reconciliation of net income per diluted share to non-GAAP operating income per diluted share
 
Quarter ended June 30,
 
Six Months ended June 30,
 
 
2020
 
2019
 
2020
 
2019
Net income per diluted share
 
$
0.57

 
1.21

 
0.82

 
2.23

Net realized and unrealized (gains) losses, before tax
 
(0.21
)
 
(0.06
)
 
0.53

 
(0.29
)
Debt retirement costs, before tax
 

 

 

 
0.07

Tax on reconciling items
 
0.04

 
0.01

 
(0.11
)
 
0.05

Non-GAAP operating income per diluted share
 
$
0.40

 
1.16

 
1.24

 
2.06

Reconciliation of annualized ROE to annualized non-GAAP operating ROE
 
Quarter ended June 30,
 
Six Months ended June 30,
 
 
2020
 
2019
 
2020
 
2019
Annualized ROE
 
6.2
 %
 
14.5

 
4.4

 
13.9

Net realized and unrealized (gains) losses, before tax
 
(2.3
)
 
(0.8
)
 
2.9

 
(1.8
)
Debt retirement costs, before tax
 

 

 

 
0.4

Tax on reconciling items
 
0.5

 
0.2

 
(0.6
)
 
0.3

Annualized non-GAAP operating ROE
 
4.4
 %
 
13.9

 
6.7

 
12.8



34


The components of our annualized ROE are as follows:
Annualized ROE Components
 
Quarter ended June 30,
 
Change Points
 
Six Months ended June 30,
 
Change Points
 
 
2020
 
2019
 
 
2020
 
2019
 
Standard Commercial Lines Segment
 
2.4
 %
 
5.9

 
(3.5
)
 
2.4

 
5.2

 
(2.8
)
Standard Personal Lines Segment
 
(0.9
)
 
0.7

 
(1.6
)
 
(0.4
)
 
0.6

 
(1.0
)
E&S Lines Segment
 
(0.1
)
 
0.5

 
(0.6
)
 
0.2

 
0.6

 
(0.4
)
Total insurance operations
 
1.4

 
7.1

 
(5.7
)
 
2.2

 
6.4

 
(4.2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment income
 
5.2

 
9.6

 
(4.4
)
 
6.6

 
9.2

 
(2.6
)
Net realized and unrealized gains (losses)
 
1.8

 
0.6

 
1.2

 
(2.3
)
 
1.4

 
(3.7
)
Total investments segment
 
7.0

 
10.2

 
(3.2
)
 
4.3

 
10.6

 
(6.3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Other
 
(2.2
)
 
(2.8
)
 
0.6

 
(2.1
)
 
(3.1
)
 
1.0

 
 
 
 
 
 
 
 
 
 
 
 
 
Annualized ROE
 
6.2
 %
 
14.5

 
(8.3
)
 
4.4

 
13.9

 
(9.5
)

We experienced a significant level of catastrophe losses in Second Quarter 2020, driven by industry-wide U.S. catastrophe loss activity that significantly exceeded the 10-year historical median. Second Quarter 2020 pre-tax net catastrophe losses totaled$83.2 million, and were related to losses from numerous catastrophe events designated by the Insurance Services Office's Property Claims Services unit, including two April storms ($43 million) and claims related to civil unrest ($20 million). These losses along with a tornado and subsequent hail event that impacted Tennessee in early March 2020, drove catastrophe losses in Six Months 2020 to $116.4 million. Compared to the same prior year periods, these losses reduced net income by $42.5 million, after-tax, in Second Quarter 2020 and $52.2 million, after-tax, in Six Months 2020. In addition to catastrophe losses, our results were impacted by the COVID-19-related charges discussed in "Current Events" above, partially offset by (i) lower non-catastrophe property loss and loss expenses, and (ii) ongoing expense management initiatives. Some of these initiatives can be seen as temporary as a result of the COVID-19 shelter-in-place government directives, and relate to lower travel and entertainment expenses, and some short-term project and new hire deferrals.
Also contributing to the decline in net income, after-tax net investment income was down 40% in Second Quarter 2020 to $28.5 million compared to Second Quarter 2019, and down 17% in Six Months 2020 to $74.0 million compared to Six Months 2019. These decreases were primarily driven by alternative investment losses of $16.0 million pre-tax, or $12.6 million after-tax, in Second Quarter 2020, and $9.7 million pre-tax, or $7.7 million after-tax, in Six Months 2020. These results are reported on a one-quarter lag, and reflect the market decline during the first quarter of 2020. These losses compare to pre-tax income on the alternative investment portfolio of $7.3 million, or $5.8 million after-tax, in Second Quarter 2019, and $7.9 million pre-tax in Six Months 2019, or $6.2 million after-tax.

Insurance Operations
Our overall insurance operations delivered profitable results in both periods, contributing 1.4 points to an annualized ROE in Second Quarter 2020 and 2.2 points in Six Months 2020. The annualized ROE decreased 5.7 points in Second Quarter 2020 and 4.2 points in Six Months 2020, compared to the same prior year periods. These decreases reflected an increase in our combined ratio of 5.3 points in Second Quarter 2020 and 3.7 points in Six Months 2020, which was largely driven by catastrophe losses.

The following table provides quantitative information for analyzing the combined ratio:
All Lines
 
Quarter ended June 30,
 
Change % or Points
 
 
Six Months ended June 30,
 
Change % or Points
 
($ in thousands)
 
2020
 
2019
 
 
 
2020
 
2019
 
 
Insurance Operations Results:
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written ("NPW")
 
$
724,752

 
701,397

 
3

%
 
$
1,372,079

 
1,374,344

 

%
Net premiums earned (“NPE”)
 
630,671

 
642,619

 
(2
)
 
 
1,282,374

 
1,275,192

 
1

 
Less:
 
 
 
 

 
 
 
 
 
 
 
 
 
 
Loss and loss expense incurred
 
403,949

 
380,984

 
6

 
 
804,273

 
767,563

 
5

 
Net underwriting expenses incurred
 
216,191

 
215,441

 

 
 
445,428

 
426,094

 
5

 
Dividends to policyholders
 
658

 
1,569

 
(58
)
 
 
1,443

 
3,349

 
(57
)
 
Underwriting income
 
$
9,873

 
44,625

 
(78
)
%
 
$
31,230

 
78,186

 
(60
)
%
Combined Ratios:
 
 
 
 

 
 
 
 
 
 
 
 
 
 
Loss and loss expense ratio
 
64.0

%
59.4

 
4.6

pts 
 
62.8

%
60.2

 
2.6

pts 
Underwriting expense ratio
 
34.3

 
33.5

 
0.8

 
 
34.7

 
33.4

 
1.3

 
Dividends to policyholders ratio
 
0.1

 
0.2

 
(0.1
)
 
 
0.1

 
0.3

 
(0.2
)
 
Combined ratio
 
98.4

 
93.1

 
5.3

 
 
97.6

 
93.9

 
3.7

 

35


In Second Quarter 2020, our NPW increased 3% compared to Second Quarter 2019, reflecting our efforts to: (i) achieve overall renewal pure price increases at levels that are in line with expected loss trend; (ii) generate new business; and (iii) increase retention. This increase was partially offset by a $19.7 million premium credit to our personal ($4.3 million) and commercial ($15.4 million) automobile customers, which were accounted for as a reduction in NPW and reduced the overall NPW growth by 3 percentage points. NPW in Six Months 2020 was further impacted by a $75 million accrual for estimated return audit and mid-term endorsement premiums, which resulted in relatively flat NPW in Six Months 2020 compared to Six Months 2019. The premium credit and accrual for estimated return audit and mid-term endorsement premiums are related to the COVID-19 pandemic discussed in "Current Events" above. Although NPW remained flat in Six Months 2020 compared to Six Months 2019, our new business grew to $302.9 million in Six Months 2020 compared to $291.3 million in Six Months 2019. Contributing to our new business growth was the net appointment of 48 retail agents, excluding agency consolidations.

Loss and Loss Expenses
The increase in the loss and loss expense ratio during Second Quarter and Six Months 2020 compared to Second Quarter and Six Months 2019 was impacted by the following:
 
Second Quarter 2020
 
Second Quarter 2019
 
 
($ in millions)
Loss and Loss Expense Incurred
Impact on
Loss and Loss Expense Ratio
 
 
Loss and Loss
Expense
Incurred
Impact on
Loss and Loss Expense Ratio
 
Change in Ratio
 
Catastrophe losses
$
83.2

13.2

pts
 
$
29.5

4.6

pts
8.6

pts
(Favorable) prior year casualty reserve development
(15.0
)
(2.4
)
 
 
(17.0
)
(2.6
)
 
0.2

 
Non-catastrophe property loss and loss expenses
81.8

13.0

 
 
92.8

14.4

 
(1.4
)
 
Total
150.0

23.8

 
 
105.3

16.4

 
7.4

 
 
 
Six Months 2020
 
Six Months 2019
 
 
($ in millions)
Loss and Loss Expense Incurred
Impact on
Loss and Loss Expense Ratio
 
 
Loss and Loss
Expense
Incurred
Impact on
Loss and Loss Expense Ratio
 
Change in Ratio
 
Catastrophe losses
$
116.4

9.1

pts
 
$
50.3

3.9

pts
5.2

pts
(Favorable) prior year casualty reserve development
(25.0
)
(1.9
)
 
 
(27.0
)
(2.1
)
 
0.2

 
Non-catastrophe property loss and loss expenses1
189.9

14.8

 
 
200.8

15.7

 
(0.9
)
 
Total
281.3

22.0

 
 
224.1

17.5

 
4.5

 
1Non-catastrophe property loss and loss expenses include an estimate of $10 million in response to the COVID-19 pandemic, which is discussed in "Current Events" above.

Details of the prior year casualty reserve development were as follows:
(Favorable)/Unfavorable Prior Year Casualty Reserve Development
Quarter ended June 30,
 
Six Months ended June 30,
($ in millions)
2020
 
2019
 
2020
 
2019
General liability
$
(10.0
)
 
(5.0
)
 
(10.0
)
 
(7.0
)
Commercial automobile
10.0

 

 
10.0

 

Workers compensation
(15.0
)
 
(12.0
)
 
(25.0
)
 
(20.0
)
   Total Standard Commercial Lines
(15.0
)
 
(17.0
)
 
(25.0
)
 
(27.0
)
 
 
 
 
 
 
 
 
Total (favorable) prior year casualty reserve development
$
(15.0
)
 
(17.0
)
 
(25.0
)
 
(27.0
)
 
 
 
 
 
 
 
 
(Favorable) impact on loss ratio
(2.4
)
pts
(2.6
)
 
(1.9
)
 
(2.1
)

In addition to the above, the Second Quarter and Six Months 2020 results included a reduction to NPW for the $19.7 million mentioned above, of which there was an offsetting reduction in our casualty loss costs of $13.3 million in both periods. The reduction in our casualty loss costs decreased our loss ratio by 2.4 points in Second Quarter 2020 and 1.1 points in Six Months 2020. These favorable current year loss costs impacted our commercial and personal automobile lines of business, reflecting anticipated decreases in frequencies as a result governmental shelter-in-place directives.

For additional qualitative reserve development discussion, please refer to the insurance segment sections below in "Results of Operations and Related Information by Segment."


36


Underwriting Expenses
The underwriting expense ratio increased 0.8 points in Second Quarter 2020 and 1.3 points in Six Months 2020, compared to the same prior year periods. The COVID-19 items mentioned above, including the impact of the lower premiums earned, increased the expense ratio by 2.2 points in Second Quarter 2020 and 2.1 points in Six Months 2020. This also included a $3.0 million increase in Second Quarter 2020 and a $13.5 million increase in Six Months 2020 in our allowance for uncollectible accounts on our premiums receivable, which is discussed in "Current Events" above. Partially offsetting the COVID-19-related expense increases were expense management initiatives we instituted in March 2020 to help reduce our other insurance expenses, which are included in net underwriting expenses in the table above, as a result of the shelter-in-place government directives. This included reducing our travel and entertainment expenses, canceling or deferring various agency management meetings and events, deferring some projects until later in 2020, and deferring the expected hiring date of open new hire positions until fourth quarter of 2020. While we view these initiatives as temporary, they provided a modest benefit to the expense ratio in the Second Quarter and Six Months 2020.

Investments Segment
Decreased annualized ROE in our Investments segment were driven by after-tax net investment income that decreased 40% in Second Quarter 2020 and 17% in Six Months 2020, compared to the same prior year periods, mainly due to alternative investment portfolio losses of $16.0 million in Second Quarter 2020 and $9.7 million in Six Months 2020. These losses are recorded on a one-quarter lag, and reflect the market decline in the first quarter of 2020.

Net realized and unrealized gains and losses increased Second Quarter 2020 annualized ROE and reduced Six Months 2020 annualized ROE compared to the same prior year periods. During Six Months 2020, net realized and unrealized investment losses were $32.0 million, compared to gains of $17.5 million in the prior year period. These current year losses were significantly impacted by the COVID-19-related market volatility in the first quarter of 2020, which resulted in higher OTTI expense and unrealized losses on our equity securities portfolio. For additional information about the drivers behind the OTTI expense, see "Critical Accounting Policies and Estimates" above.

Net realized and unrealized investment gains in Second Quarter 2020 were $12.6 million, up $8.6 million from net realized and unrealized investment gains of $4.0 million in Second Quarter 2019. The increase was driven by an improvement in both unrealized losses in our equity portfolio and the reversal of previously-recognized credit loss allowance amounts on our fixed income securities portfolio, both reflecting improvements in the market during the quarter.

Other
Our interest and corporate expenses, which are primarily comprised of stock compensation expense at the holding company
level, reduced ROE by 2.2 points in Second Quarter 2020 and 2.1 points in Six Months 2020, compared to 2.8 points in Second Quarter 2019 and 3.1 points in Six Months 2019. The quarter-to-date and year-to-date variances were driven primarily by a 0.4-point and 0.6-point decrease, respectively, in stock compensation expense related to employee long-term incentive compensation awards, as the stock price decreased 19% through Six Months 2020 compared to a 23% increase in Six Months 2019. In the first quarter of 2019, we also incurred debt retirement costs of $3.3 million related to our 5.375% Senior Notes issuance that reduced that quarter's ROE by 0.7 points.

Outlook
We ended 2019 with a well-capitalized balance sheet, a high level of embedded profitability within our underwriting and investment portfolios, and strong financial strength ratings, which placed us in an excellent position to withstand the COVID-19-related period of economic downturn, market volatility, and heightened uncertainty.

However, the impact of COVID-19, an elevated period of catastrophe loss activity in the U.S., and losses within our alternative investments portfolio negatively impacted our results through Six Months 2020. We generated an annualized non-GAAP operating ROE of 6.7% in Six Months 2020, which was 4.3 points below our 2020 target of 11%, and 6.1 points below Six Months 2019. Our 2020 non-GAAP operating ROE target of 11% is based on our current estimated weighted average cost of capital, the current interest rate environment, and property and casualty insurance market conditions.

During these unprecedented times, we remain focused on our key strategic initiatives. In 2020, we will continue to focus on the following areas to maintain our financial position:

Actively managing the investment portfolio to minimize the impact of lower interest rates on after-tax yields while managing credit, duration, and liquidity risk. The sharp decline in the reinvestment rate environment for high-quality fixed income securities will put downward pressure on industry-wide investment portfolio returns and income, forcing the industry to improve its underwriting results to generate adequate returns. We are well positioned with

37


sophisticated underwriting and pricing tools, and an appropriately priced in-force book of business to continue to generate profitable underwriting results.

Continuing to achieve written renewal pure price increases that meet or exceed expected loss trend and delivering on our strategy for continued disciplined growth. Our Six Month 2020 overall renewal pure pricing was 4.0%. While we continue to navigate a challenging economic environment, we are comfortable with the overall price adequacy of our book of business, obtaining renewal pure price increases that have been in line with expected loss trend.

Delivering on our strategy for continued disciplined growth. We have consistently maintained a disciplined underwriting appetite over the past decade. In the current economic environment, we continue to work with our agents to provide our policyholders the support they need. Our field-based model, which provides high-touch service to our policyholders and agents for safety management, claims handling, and underwriting, is a clear advantage in the current environment. We will continue working to achieve our longer-term Standard Commercial Lines target to attain a 3% market share in the states in which we operate, by appointing distribution partners representing approximately 25% of their markets and seeking an average share of wallet of 12% with these partners. This goal represents an additional premium opportunity of about $3 billion.

Identifying opportunities to enhance operational efficiencies, and evaluating process improvements by better leveraging technologies, automation, and robotics, to lower our expense ratio over time. While we recognize it is essential to continue investing in initiatives related to our technology platforms, sophisticated underwriting tools, and customer experience, we are committed to balancing these goals with an efficient operating structure. As previously discussed, our expense ratio was elevated in Second Quarter and Six Months 2020 due to COVID-19 impacts, and in the short-term, we have taken actions to reduce our expenses. Over the longer term, we will focus on right-sizing our expense structure to meet the business opportunity set, and we will seek meaningful opportunities to generate efficiencies through process re-design and technological improvements.

In addition to our focus on maintaining a strong financial position in 2020 and beyond, we continue to enhance our customer experience strategy by offering value-added technologies and services. We have made major strides in recent years to enhance the customer experience, including various self-service and digital service offerings. In the current challenging environment, we provide our policyholders the option of engaging with us in the channel that works best for them. Our marketing tagline, "Be Uniquely Insured," was rolled out in 2019, and speaks to our differentiated value proposition for our customers and distribution partners. Investing in and building out technologies that improve the customer experience journey remains a core focus for us.

As we look to the remainder of 2020, we will not let the COVID-19 pandemic, market volatility, or challenging economic conditions deter us from pursuing our objective of being an industry leader. We have a team in place that is focused on identifying opportunities and ways in which we can enhance our product, service capabilities, and operating structure
to position us well for the post-COVID environment. We will continue to strive to offer best-in-class customer service and product offerings, while also generating superior returns for our shareholders over time.

For 2020, our revised full year guidance, which reflects the current estimated full-year impact of COVID-19, is as follows:

A GAAP combined ratio, excluding catastrophe losses, of between 90% and 91%. This represents an improvement from our first quarter of 2020 guidance, which was between 92% and 93%. Our combined ratio estimate assumes no additional prior-year casualty reserve development in the second half of the year;
Catastrophe losses of 6.0 points on the combined ratio, reflecting higher than expected losses through the first half of the year. As COVID-19 has not been designated a catastrophe event by the Insurance Services Office's Property Claims Services unit, such losses are not included in this ratio;
After-tax net investment income of approximately $170 million, a $10 million improvement from our first quarter of 2020 guidance of $160 million. We now expect up to $5 million in after-tax net investment income from our alternative investments;
An overall effective tax rate of approximately 18.5%, which includes an effective tax rate of 18.5% for net investment income, reflecting a tax rate of 5.25% for tax-advantaged municipal bonds and a tax rate of 21% for all other items; and
Weighted average shares of 60.5 million on a diluted basis.

Our 2020 guidance reflects the estimated full-year impact of COVID-19 on our underwriting results. Our guidance this year has a higher degree of uncertainty than prior years due to the dynamic and fluid nature of the impact of the COVID-19 pandemic on the United States economy, our business and our operations.

38


Results of Operations and Related Information by Segment

Standard Commercial Lines Segment
 
 
Quarter ended June 30,
 
Change
% or
Points
 
 
Six Months ended June 30,
 
Change
% or
Points
 
($ in thousands)
 
2020
 
2019
 
 
 
2020
 
2019
 
 
Insurance Segments Results:
 
 

 
 

 
 

 
 
 
 
 
 
 
 
NPW
 
$
583,342

 
557,379

 
5

%
 
$
1,101,774

 
1,104,062

 

%
NPE
 
501,004

 
506,649

 
(1
)
 
 
1,017,584

 
1,003,833

 
1

 
Less:
 
 
 
  

 
 

 
 
 
 
  
 
 
 
Loss and loss expense incurred
 
307,037

 
293,152

 
5

 
 
619,195

 
591,961

 
5

 
Net underwriting expenses incurred
 
176,579

 
174,785

 
1

 
 
363,090

 
345,565

 
5

 
Dividends to policyholders
 
658

 
1,569

 
(58
)
 
 
1,443

 
3,349

 
(57
)
 
Underwriting income
 
$
16,730

 
37,143

 
(55
)
%
 
$
33,856

 
62,958

 
(46
)
%
Combined Ratios:
 
 

 
 

 
 

 
 
 
 
 
 
 
 
Loss and loss expense ratio
 
61.4

%
57.9

 
3.5

pts
 
60.9

%
59.0

 
1.9

pts
Underwriting expense ratio
 
35.2

 
34.5

 
0.7

 
 
35.7

 
34.4

 
1.3

 
Dividends to policyholders ratio
 
0.1

 
0.3

 
(0.2
)
 
 
0.1

 
0.3

 
(0.2
)
 
Combined ratio
 
96.7

 
92.7

 
4.0

 
 
96.7

 
93.7

 
3.0

 

The increase in NPW for the quarter-to-date period was driven by: (i) renewal pure price increases; and (ii) retention, as shown in the table below. In the year-to-date period, the higher retention and renewal pure price increases shown in the table below were offset by a $75 million return audit and mid-term endorsement premium accrual related to the COVID-19 pandemic discussed in "Current Events" above, of which $46 million was recorded in our general liability line of business and $29 million was recorded in our workers compensation line of business. The quarter-to-date and year-to-date periods also include a $15.4 million premium credit to our commercial automobile customers as a result of the COVID-19 pandemic. These premium items reduced the NPW growth rate by 2 percentage points in Second Quarter 2020 and 8 percentage points in Six Months 2020 compared to the prior year periods. These items also impacted NPE as the premium audit accrual reduced NPE by $30.4 million in Second Quarter 2020 and $46.9 million in Six Months 2020, and the $15.4 million premium credit to our commercial automobile customers was fully earned in Second Quarter and Six Months 2020.

 
 
Quarter ended June 30,
 
Change
% or
Points
 
 
Six Months ended June 30,
Change
% or
Points
 
($ in millions)
 
2020
 
2019
 
 
 
2020
 
2019
Direct new business
 
$
109.9

 
110.7

 
(1
)
%
 
225.3

 
219.7

3
%
Retention
 
86

%
83

 
3

pts
 
85
%
 
83

2
pts
Renewal pure price increases
 
3.9

 
3.1

 
0.8

 
 
4.0

 
3.2

0.8
 

The loss and loss expense ratio increased 3.5 points in Second Quarter 2020 and 1.9 points in Six Months 2020 compared to the respective prior year periods, driven, in part, by the following:
 
Second Quarter 2020
 
Second Quarter 2019
 
 
($ in millions)
Loss and Loss Expense Incurred
Impact on
Loss and Loss Expense Ratio
 
 
Loss and Loss
Expense
Incurred
Impact on
Loss and Loss Expense Ratio
 
Change in Ratio
 
Catastrophe losses
$
50.7

10.1

pts
 
$
21.3

4.2

pts
5.9

pts
Non-catastrophe property loss and loss expenses
60.9

12.2

 
 
62.8

12.4

 
(0.2
)
 
(Favorable) prior year casualty reserve development
(15.0
)
(3.0
)
 
 
(17.0
)
(3.4
)
 
0.4

 
Total
96.6

19.3

 
 
67.1

13.2

 
6.1

 
 
 
 
 
 
 
 
 
 
 
 
Six Months 2020
 
Six Months 2019
 
 
($ in millions)
Loss and Loss Expense Incurred
Impact on
Loss and Loss Expense Ratio
 
 
Loss and Loss
Expense
Incurred
Impact on
Loss and Loss Expense Ratio
 
Change in Ratio
 
Catastrophe losses
$
71.4

7.0

pts
 
$
37.3

3.7

pts
3.3

pts
Non-catastrophe property loss and loss expenses
140.5

13.8

 
 
137.1

13.7

 
0.1

 
(Favorable) prior year casualty reserve development
(25.0
)
(2.5
)
 
 
(27.0
)
(2.7
)
 
0.2

 
Total
186.9

18.3

 
 
147.4

14.7

 
3.6

 

For additional information regarding the amounts in the table above, see "Financial Highlights of Results for Second Quarter and Six Months 2020 and Second Quarter and Six Months 2019" above and the line of business discussions below.


39


In addition to the above, the Second Quarter and Six Months 2020 results included a reduction to NPW for the $15.4 million premium credit to our commercial automobile customers mentioned above, of which there was an offsetting reduction in our casualty loss costs of $10.8 million in both periods. This reduction in our casualty loss costs decreased our loss ratio by 2.5 points in Second Quarter 2020 and 1.1 points in Six Months 2020. As discussed in the "Current Events" section above, the automobile premium credit was income neutral with the remaining offset reflected in lower non-catastrophe property losses, as shown in the table above. These favorable current year loss costs impacted our commercial automobile line of business, reflecting anticipated decreases in frequencies as a result of governmental shelter-in-place directives.

The 0.7-point and 1.3-point increase in the underwriting expense ratio in Second Quarter 2020 and Six Months 2020 compared to Second Quarter 2019 and Six Months 2019 was primarily driven by a 0.8-point increase in Second Quarter 2020 and a 1.1-point increase in Six Months 2020 in the allowance for uncollectible premium receivable mentioned in "Current Events" above.

The following is a discussion of our most significant Standard Commercial Lines of business:
General Liability
 
 
 
 
 
 
 
 
 
Quarter ended June 30,
 
Change
% or
Points
 
 
Six Months ended June 30,
 
Change
% or
Points
 
($ in thousands)
 
2020
 
2019
 
 
 
2020
 
2019
 
 
NPW
 
$
200,917

 
185,278

 
8

%
 
$
351,711

 
363,977

 
(3
)
%
  Direct new business
 
31,468

 
32,314

 
(3
)
 
 
67,354

 
64,499

 
4

 
  Retention
 
87

%
84

 
3

pts
 
86

%
83

 
3

pts
  Renewal pure price increases
 
3.8

 
2.3

 
1.5

 
 
3.8

 
2.4

 
1.4

 
NPE
 
$
163,273

 
164,793

 
(1
)
%
 
$
327,853

 
326,318

 

%
Underwriting income
 
25,108

 
20,784

 
21

 
 
38,182

 
39,833

 
(4
)
 
Combined ratio
 
84.6

%
87.4

 
(2.8
)
pts
 
88.4

%
87.8
%
 
0.6

pts
% of total Standard Commercial Lines NPW
 
34

 
33

 
 

 
 
32

 
33

 


 

Six Months 2020 NPW was reduced by a $46 million estimated return audit and mid-term endorsement premium accrual due to the COVID-19 pandemic discussed in "Current Events" above and reduced the NPW growth rate by 12 percentage points in Six Months 2020 compared to Six Months 2019. This accrual also reduced NPE by $19 million in Second Quarter 2020 and $29 million in Six Months 2020.

The fluctuations in the combined ratios illustrated in the table above included the following:

Second Quarter 2020
Second Quarter 2019


($ in millions)
Loss and Loss Expense Incurred
Impact on
Combined Ratio

Loss and Loss Expense Incurred
Impact on
Combined Ratio

Change
Points

(Favorable) prior year casualty reserve development
$
(10.0
)
(6.1
)
pts
$
(5.0
)
(3.0
)
pts
(3.1
)
pts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months 2020
Six Months 2019
 
 
($ in millions)
Loss and Loss Expense Incurred
Impact on
Combined Ratio
 
Loss and Loss Expense Incurred
Impact on
Combined Ratio
 
Change
Points
 
(Favorable) prior year casualty reserve development
$
(10.0
)
(3.1
)
pts
$
(7.0
)
(2.1
)
pts
(1.0
)
pts

The Second Quarter and Six Months 2020 reserve development was primarily attributable to favorable reserve development on loss severities in accident years 2016 and prior. The Second Quarter and Six Months 2019 reserve development was primarily attributable to favorable reserve development on loss severities in accident years 2015 and 2016.

In addition, the combined ratio increased in Six Months 2020 compared to Six Months 2019 due to an increase in the underwriting expense ratio from a 1.2-point increase in the allowance for uncollectible premiums receivable, which more than offset the favorable prior year casualty development discussed above.


40


Commercial Automobile
 
 
 
 
 
 
 
 
 
Quarter ended June 30,
 
Change
% or
Points
 
 
Six Months ended June 30,
 
Change
% or
Points
 
($ in thousands)
 
2020
 
2019
 
 
 
2020
 
2019
 
 
NPW
 
$
160,697

 
155,191

 
4

%
 
$
329,007

 
302,436

 
9

%
  Direct new business
 
32,143

 
28,554

 
13

 
 
61,000

 
56,744

 
8

 
  Retention
 
86

%
82

 
4

pts
 
86

%
81

 
5

pts
  Renewal pure price increases
 
7.6

 
7.4

 
0.2

 
 
7.6

 
7.3

 
0.3

 
NPE
 
$
138,535

 
136,338

 
2

%
 
$
288,225

 
267,524

 
8

%
Underwriting loss
 
(7,706
)
 
(8,800
)
 
12

 
 
(8,480
)
 
(17,521
)
 
52

 
Combined ratio
 
105.6

%
106.5

 
(0.9
)
pts
 
102.9

%
106.5

 
(3.6
)
pts
% of total Standard Commercial Lines NPW
 
28

 
28

 
 

 
 
30

 
27

 
 

 

The increases in NPW shown in the table above reflect renewal pure price increases, higher retention, and an increase in new business. The growth in NPW also reflects (i) 6% growth of in-force vehicle counts as of June 30, 2020 compared to June 30, 2019, and (ii)7.6% renewal pure price increases for both Second Quarter and Six Months 2020, due to our efforts to improve profitability on this line in recent years. These increases were partially offset by a $15.4 million premium credit to our commercial automobile customers as a result of the COVID-19 pandemic, which reduced the NPW growth rate by 10 percentage points in Second Quarter 2020 and 5 percentage points in Six Months 2020 compared to the same prior year periods. This premium credit was fully earned in Second Quarter and Six Months 2020.

The combined ratio improvements outlined above were driven by the following:
 
Second Quarter 2020
 
Second Quarter 2019
 
 
 
($ in millions)
Loss and Loss Expense Incurred
Impact on
Combined Ratio
 
 
Loss and Loss Expense Incurred
Impact on
Combined Ratio
 
 
Change in Ratio
 
Catastrophe losses
$
1.1

0.8
pts
 
$
0.9

0.7
pts
 
0.1

pts
Non-catastrophe property loss and loss expenses
17.1

12.3
 
 
23.9

17.5
 
 
(5.2
)
 
Unfavorable prior year casualty reserve development
10.0

7.2
 
 

 
 
7.2

 
Total
28.2

20.3
 
 
24.8

18.2
 
 
2.1

 
 
Six Months 2020
 
Six Months 2019
 
 
 
($ in millions)
Loss and Loss Expense Incurred
Impact on
Combined Ratio
 
 
Loss and Loss Expense Incurred
Impact on
Combined Ratio
 
 
Change in Ratio
 
Catastrophe losses
$
1.4

0.5
pts
 
$
1.1

0.4
pts
 
0.1

pts
Non-catastrophe property loss and loss expenses
40.1

13.9
 
 
48.9

18.3
 
 
(4.4
)
 
Unfavorable prior year casualty reserve development
10.0

3.5
 
 

 
 
3.5

 
Total
51.5

17.9
 
 
50.0

18.7
 
 
(0.8
)
 

The Second Quarter and Six Months 2020 results included a reduction to NPW for the $15.4 million premium credit to our commercial automobile customers mentioned above, of which there was an offsetting reduction in our casualty loss costs of $10.8 million in both periods This reduction in our casualty loss costs decreased our loss ratio by 7.8 points in Second Quarter 2020 and 3.7 points in Six Months 2020. As discussed in the "Current Events" section above, the automobile premium credit was income neutral with the remaining offset reflected in lower non-catastrophe property losses, as reflected in the table above. These favorable current year loss costs impacted our commercial automobile line of business, reflecting anticipated decreases in frequencies as a result of governmental shelter-in-place directives.

The Second Quarter and Six Months 2020 prior year casualty reserve development was primarily attributable to unfavorable reserve development on loss severities in accident years 2016 through 2019, and higher than expected frequencies in accident year 2019.

In addition to the items above, the combined ratios were impacted by a 0.7-point increase in Second Quarter 2020 and a 1.2-point increase in Six Months 2020, compared to the same prior year periods, in the allowance for uncollectible premium receivable due to the COVID-19 pandemic discussed in "Current Events" above.

This line of business remains an area of focus for both us and the industry, as profitability challenges continue to generate combined ratios that are higher than our risk-adjusted targeted combined ratio. To address profitability in this line, we have been implementing price increases in recent years while working to enhance our underwriting tools to improve the accuracy of our rating information to prevent premium leakage. We have also been actively managing our new and renewal business, which we expect will have a positive impact on profitability through business mix improvement.
Workers Compensation
 
 
 
 
 
 
 
 
 
Quarter ended June 30,
 
Change
% or
Points
 
 
Six Months ended June 30,
 
Change
% or
Points
 
($ in thousands)
 
2020
 
2019
 
 
 
2020
 
2019
 
 
NPW
 
$
74,984

 
81,438

 
(8
)
%
 
$
126,180

 
166,503

 
(24
)
%
Direct new business
 
12,612

 
17,791

 
(29
)
 
 
27,969

 
34,739

 
(19
)
 
Retention
 
85

%
83

 
2

pts
 
84

%
83

 
1

pts
Renewal pure price decreases
 
(2.9
)
 
(3.9
)
 
1.0

 
 
(2.7
)
 
(2.8
)
 
0.1

 
NPE
 
$
61,906

 
78,464

 
(21
)
%
 
$
128,612

 
157,179

 
(18
)
%
Underwriting income
 
15,720

 
14,514

 
8

 
 
26,755

 
25,233

 
6

 
Combined ratio
 
74.6

%
81.5

 
(6.9
)
pts
 
79.2

%
83.9

 
(4.7
)
pts
% of total Standard Commercial Lines NPW
 
13

 
15

 
 

 
 
11

 
15

 
 
 

In addition to the drivers in the table above, Six Months 2020 NPW was reduced by a $29 million estimated return audit and mid-term endorsement premium accrual due to the COVID-19 pandemic discussed in "Current Events" above and contributed 17 percentage points to the decline in NPW in Six Months 2020 compared to Six Months 2019. This accrual also reduced NPE by $12 million in Second Quarter 2020 and $18 million in Six Months 2020.

The decrease in the combined ratio in Second Quarter and Six Months 2020 compared to the same prior year periods was primarily driven by favorable prior year casualty reserve development, as follows:
 
Second Quarter 2020
Second Quarter 2019
 
 
 
($ in millions)
Loss and Loss Expense Incurred
Impact on
Combined Ratio
 
Loss and Loss Expense Incurred
Impact on
Combined Ratio
 
 
Change
Points
 
(Favorable) prior year casualty reserve development
$
(15.0
)
(24.2
)
pts
$
(12.0
)
(15.3
)
pts
 
(8.9
)
pts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months 2020
Six Months 2019
 
 
 
($ in millions)
Loss and Loss Expense Incurred
Impact on
Combined Ratio
 
Loss and Loss Expense Incurred
Impact on
Combined Ratio
 
 
Change
Points
 
(Favorable) prior year casualty reserve development
$
(25.0
)
(19.4
)
pts
$
(20.0
)
(12.7
)
pts
 
(6.7
)
pts

The development in Second Quarter and Six Months 2020 was primarily due to lower severities in accident years 2017 and prior. The development in Second Quarter and Six Months 2019 was primarily due to lower severities in accident years 2017 and prior.

In addition to the items in the tables above, the combined ratios were impacted by a 0.8-point increase in Second Quarter 2020 and 0.9-point increase in Six Months 2020, compared to the same prior year periods, in the allowance for uncollectible premium receivable due to the COVID-19 pandemic discussed in "Current Events" above.
Commercial Property
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter ended June 30,
 
Change
% or
Points
 
 
Six Months ended June 30,
 
Change
% or
Points
 
($ in thousands)
 
2020
 
2019
 
 
 
2020
 
2019
 
 
NPW
 
$
104,060

 
94,439

 
10

%
 
$
207,186

 
187,468

 
11

%
  Direct new business
 
23,858

 
21,391

 
12

 
 
48,444

 
42,433

 
14

 
  Retention
 
84

%
83

 
1

pts
 
84

%
82

 
2

pts
Renewal pure price increases
 
3.9

 
3.6

 
0.3

 
 
4.0

 
3.6

 
0.4

 
NPE
 
$
95,413

 
87,136

 
9

%
 
$
189,282

 
173,203

 
9

%
Underwriting (loss) income
 
(14,339
)
 
1,372

 
(1,145
)
 
 
(22,891
)
 
3,275

 
(799
)
 
Combined ratio
 
115.0

%
98.4

 
16.6

pts
 
112.1

%
98.1

 
14.0

pts
% of total Standard Commercial Lines NPW
 
18

 
17

 
 

 
 
19

 
17

 
 
 

41


The increase in the combined ratio in Second Quarter and Six Months 2020 compared to Second Quarter and Six Months 2019 was driven by the following:

Second Quarter 2020

Second Quarter 2019
 


($ in millions)
Loss and Loss Expense Incurred
Impact on
Combined Ratio


Loss and Loss Expense Incurred
Impact on
Combined Ratio

 
Change
% or
Points

Catastrophe losses
$
35.3

37.0
pts

$
18.7

21.5
pts
 
15.5
pts
Non-catastrophe property loss and loss expenses
38.3

40.1


34.0

39.0

 
1.1

Total
73.6

77.1
 
 
52.7

60.5
 
 
16.6
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months 2020
 
Six Months 2019
 
 
 
($ in millions)
Loss and Loss Expense Incurred
Impact on
Combined Ratio
 
 
Loss and Loss Expense Incurred
Impact on
Combined Ratio
 
 
Change
% or
Points
 
Catastrophe losses
$
55.0

29.0
pts
 
$
31.2

18.0
pts
 
11.0
pts
Non-catastrophe property loss and loss expenses1
83.9

44.3
 
 
73.1

42.2
 
 
2.1
 
Total
138.9

73.3
 
 
104.3

60.2
 
 
13.1
 
1Non-catastrophe property loss and loss expenses for Six Months 2020 included an estimate of $10 million in response to the COVID-19 pandemic, which is discussed in "Current Events" above.

Higher catastrophe losses in Second Quarter and Six Months 2020 compared to Second Quarter and Six Months 2019 were driven by the events mentioned in Standard Commercial Lines discussion above.

Standard Personal Lines Segment
 
 
Quarter ended June 30,
 
Change
% or
Points
 
 
 
Six Months ended June 30,
 
Change
% or
Points
 
($ in thousands)
 
2020
 
2019
 
 
 
 
2020
 
2019
 
 
Insurance Segments Results:
 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
NPW
 
$
78,173

 
82,709

 
(5
)
 
%
 
$
145,813

 
152,078

 
(4
)
%
NPE
 
71,633

 
77,113

 
(7
)
 
 
 
147,761

 
154,420

 
(4
)
 
Less:
 
 
 
 

 
 
 
 
 
 
 
 

 
 
 
Loss and loss expense incurred
 
58,151

 
50,554

 
15

 
 
 
112,483

 
103,624

 
9

 
Net underwriting expenses incurred
 
19,807

 
22,021

 
(10
)
 
 
 
41,216

 
43,091

 
(4
)
 
Underwriting (loss) income
 
$
(6,325
)
 
4,538

 
(239
)
 
%
 
$
(5,938
)
 
7,705

 
(177
)
%
Combined Ratios:
 
 
 
 

 
 
 
 
 
 
 
 

 
 
 
Loss and loss expense ratio
 
81.1

%
65.5

 
15.6

 
pts
 
76.1

%
67.1

 
9.0

pts
Underwriting expense ratio
 
27.7

 
28.6

 
(0.9
)
 
 
 
27.9

 
27.9

 

 
Combined ratio
 
108.8

 
94.1

 
14.7

 
 
 
104.0

 
95.0

 
9.0

 

NPW decreased in Second Quarter and Six Months 2020 compared to the same prior year periods, reflecting a $4.3 million premium credit to our Standard Personal Lines customers as a result of the COVID-19 pandemic. This premium item contributed 5 percentage points to the decline in NPW in Second Quarter 2020 and 3 percentage points in Six Months 2020 compared to the same prior year periods. This premium credit was fully earned in Second Quarter and Six Months 2020.

 
 
Quarter ended June 30,
Change
% or
Points
 
 
Six Months ended June 30,
Change
% or
Points
 
($ in millions)
 
2020
 
2019
 
 
2020
 
2019
 
Direct new business
 
$
11.8

 
10.5

13

%
 
$
21.8

 
20.9

4

%
Retention
 
84

%
84


pts
 
83

%
83


pts
Renewal pure price increases
 
3.1

 
5.6

(2.5
)
 
 
3.4

 
5.4

(2.0
)


42


The increase in the combined ratio of 14.7 points in Second Quarter 2020 compared to Second Quarter 2019 and 9.0 points in Six Months 2020 compared to Six Months 2019 was driven by the following:
 
Second Quarter 2020
 
Second Quarter 2019
 
 
($ in millions)
Loss and Loss Expense Incurred
Impact on
Loss and Loss Expense Ratio
 
 
Loss and Loss
Expense
Incurred
Impact on
Loss and Loss Expense Ratio
 
Change in Ratio
 
Catastrophe losses
$
26.0

36.2
pts
 
$
6.1

7.9
pts
28.3

pts
Non-catastrophe property loss and loss expenses
15.3

21.4
 
 
24.5

31.7
 
(10.3
)
 
Total
41.3

57.6
 
 
30.6

39.6
 
18.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months 2020
 
Six Months 2019
 
 
($ in millions)
Loss and Loss Expense Incurred
Impact on
Loss and Loss Expense Ratio
 
 
Loss and Loss
Expense
Incurred
Impact on
Loss and Loss Expense Ratio
 
Change in Ratio
 
Catastrophe losses
$
37.9

25.7
pts
 
$
10.2

6.6
pts
19.1

pts
Non-catastrophe property loss and loss expenses
38.1

25.8
 
 
53.6

34.7
 
(8.9
)
 
Total
76.0

51.5
 
 
63.8

41.3
 
10.2

 

Higher catastrophe losses in Second Quarter and Six Months 2020 compared to the same prior year periods were driven by two severe storms in April, which impacted parts of the Mid-West and East Coast regions of the United States with damaging wind and tornadoes. Additionally, Six Months 2020 was impacted by a tornado that affected Tennessee in March.

The Second Quarter and Six Months 2020 results included a reduction to NPW for the $4.3 million premium credit to our personal automobile customers mentioned above, of which there was an offsetting reduction in our casualty loss costs of $2.5 million in both periods. This reduction in our casualty loss costs decreased our loss ratio by 3.5 points in Second Quarter 2020 and 1.7 points in Six Months 2020. As discussed in the "Current Events" section above, the automobile premium credit was income neutral with the remaining offset reflected in lower non-catastrophe property losses, as reflected in the table above. These favorable current year loss costs impacted our personal automobile line of business, reflecting anticipated decreases in frequencies as a result of governmental shelter-in-place directives.

E&S Lines Segment
 
 
Quarter ended June 30,
 
Change
% or
Points
 
 
Six Months ended June 30,
 
Change
% or
Points
 
($ in thousands)
 
2020
 
2019
 
 
 
2020
 
2019
 
 
Insurance Segments Results:
 
 

 
 

 
 

 
 
 
 
 
 
 
 
NPW
 
$
63,237

 
61,309

 
3

%
 
$
124,492

 
118,204

 
5

%
NPE
 
58,034

 
58,857

 
(1
)
 
 
117,029

 
116,939

 

 
Less:
 
 

 
 

 
 

 
 
 

 
 

 
 

 
Loss and loss expense incurred
 
38,761

 
37,278

 
4

 
 
72,595

 
71,978

 
1

 
Net underwriting expenses incurred
 
19,805

 
18,635

 
6

 
 
41,122

 
37,438

 
10

 
Underwriting (loss) income
 
$
(532
)
 
2,944

 
(118
)
%
 
$
3,312

 
7,523

 
(56
)
%
Combined Ratios:
 
 

 
 

 
 

 
 
 

 
 

 
 

 
Loss and loss expense ratio
 
66.8

%
63.3

 
3.5

pts
 
62.1

%
61.6

 
0.5

pts
Underwriting expense ratio
 
34.1

 
31.7

 
2.4

 
 
35.1

 
32.0

 
3.1

 
Combined ratio
 
100.9

 
95.0

 
5.9

 
 
97.2

 
93.6

 
3.6

 

NPW increased 3% in Second Quarter 2020 and 5% in Six Months 2020 compared to the same prior year periods due to increases in direct new business and strong renewal pure price increases. After two consecutive years in which we exited underperforming business segments, our focus has shifted to profitably growing segments of our E&S book that have demonstrated underwriting profitability.

Quantitative information on the premium in this segment is as follows:
 
 
Quarter ended June 30,
Change
% or
Points
 
 
Six Months ended June 30,
Change
% or
Points
 
($ in millions)
 
2020
 
2019
 
 
2020
 
2019
 
Direct new business
 
$
28.3

 
25.1

13
%
 
$
55.8

 
50.7

10
%
Renewal pure price increases
 
5.5

%
4.8

0.7
pts
 
4.8

%
4.6

0.2
pts

43



The loss and loss expense ratio increased 3.5 points in Second Quarter 2020 and 0.5 points in Six Months 2020 compared to the same prior year periods, primarily driven by the items outlined in the tables below:
 
Second Quarter 2020
 
 
Second Quarter 2019
 
 
 
($ in millions)
Loss and Loss Expense Incurred
Impact on
Loss and Loss Expense Ratio
 
 
Loss and Loss
Expense
Incurred
Impact on
Loss and Loss Expense Ratio
 
Change in Ratio
 
Catastrophe losses
$
6.5

11.3
pts
 
$
2.0

3.4
pts
7.9
pts
Non-catastrophe property loss and loss expenses
5.6

9.6
 
 
5.5

9.4
 
0.2
 
Total
12.1

20.9
 
 
7.5

12.8
 
8.1
 
 
 
 
 
 
 
 
 
 
 
 
Six Months 2020
 
 
Six Months 2019
 
 
 
($ in millions)
Loss and Loss Expense Incurred
Impact on
Loss and Loss Expense Ratio
 
 
Loss and Loss
Expense
Incurred
Impact on
Loss and Loss Expense Ratio
 
Change in Ratio
 
Catastrophe losses
$
7.0

6.0
pts
 
$
2.8

2.4
pts
3.6
pts
Non-catastrophe property loss and loss expenses
11.3

9.7
 
 
10.0

8.6
 
1.1
 
Total
18.3

15.7
 
 
12.8

11.0
 
4.7
 

The increase in catastrophe losses in Second Quarter and Six Months 2020 was due primarily to the civil unrest that occurred throughout the country, partially offset by a 3.2-point decrease in current year loss costs in Second Quarter and Six Months 2020 compared to the same prior year periods.

The underwriting expense ratio increased 2.4 points in Second Quarter 2020 and 3.1 points in Six Months 2020 compared to the same prior year periods primarily driven by increases in: (i) the allowance for uncollectible premium receivable mentioned in "Current Events" above of 1.1 points in Second Quarter 2020 and 1.8 points in Six Months 2020; and (ii) labor costs to improve infrastructure efficiency to profitably grow this segment of 1.8 points in Second Quarter 2020 and 1.4 points in Six Months 2020.

Reinsurance
We successfully completed the renewals of our July 1, 2020 excess of loss treaties, which provide coverage for our Standard Commercial Lines, Standard Personal Lines, and E&S Lines. These treaties were renewed with the same structure as the expiring treaties, with only reinsurers that are rated "A" or higher by AM Best. The treaty year ceded deposit premium increase of $14.3 million, or 17%, reflects rate increases for both the Property Excess of Loss ("Property Treaty") and Casualty Excess of Loss (“Casualty Treaty”) programs driven by historical loss experience coupled with various dynamics introduced by COVID-19.

Details of the treaties are as follows:

Property Excess of Loss
Our Property Treaty provides protection against large individual property losses with $58.0 million of coverage in excess of a $2.0 million per risk:
The per occurrence cap on the first and second layers is $84.0 million.
The first layer has unlimited reinstatements and a limit of $8.0 million in excess of $2.0 million.
The annual aggregate limit, for the $30.0 million in excess of $10.0 million second layer, is $120.0 million.
A third layer has a limit of $20.0 million in excess of $40.0 million, with an annual aggregate limit of $80.0 million.
The Property Treaty excludes nuclear, biological, chemical, and radiological ("NBCR") terrorism losses, includes non-NBCR losses from terrorism, and now excludes communicable disease.

Casualty Excess of Loss
Our Casualty Treaty provides protection against large individual casualty losses with $88.0 million of coverage in excess of a $2.0 million per occurrence:
The first through sixth layers provide coverage for 100% of up to $88.0 million in excess of a $2.0 million retention.
The Casualty Treaty includes a $25.0 million limit, per life, on our workers compensation business, which remains unchanged from the prior treaty.
The Casualty Treaty excludes NBCR terrorism losses and has annual aggregate non-NBCR terrorism limits of $208.0 million.

44



Investments
We entered the COVID-19 crisis with our investment portfolio well-positioned from a risk and liquidity perspective. Our fixed income securities and short-term investment portfolios represented 95% of our invested assets at June 30, 2020, and 96% of our invested assets at December 31, 2019. These portfolios had a weighted average credit rating of “ AA- ,” as of both June 30, 2020 and December 31, 2019, with 96% of the securities in these portfolios being investment grade quality as of such dates. The sector composition and credit quality of our major asset categories within our fixed income securities portfolio did not significantly change from December 31, 2019. We have been actively engaged in monitoring and managing the exposure to credit risk in our portfolio associated with the impact of the COVID-19 pandemic and related economic conditions. We have also been managing the portfolio's exposure to floating rate securities, which reset principally to 90-day LIBOR. Given the reduction in the valuation of U.S. public equities and the significant widening of high yield credit spreads earlier in the year, we modestly increased our allocation to risk-seeking assets and will continue to evaluate further changes to our allocation during the course of 2020, subject to economic and market conditions.
Total Invested Assets
 
 
 
 
 
 
 
($ in thousands)
 
June 30, 2020
 
December 31, 2019
 
Change
 
Total invested assets
 
$
7,130,329

 
6,688,654

 
7

%
Invested assets per dollar of stockholders' equity
 
3.10

 
3.05

 
2


Unrealized gain – before tax1
 
292,502

 
216,564

 
35

 
Unrealized gain – after tax1
 
231,077

 
171,085

 
35

 
1Includes unrealized gains on fixed income and equity securities.

The increase in invested assets at June 30, 2020 compared to December 31, 2019, was driven by operating cash flow generated in Six Months 2020 of $197 million and net proceeds of $252 million from short-term borrowings. For additional information regarding these short-term borrowings, see Note 5. "Indebtedness" in Item 1. "Financial Statements." of this Form 10-Q.

In addition, invested assets included an increase in unrealized gains on our fixed income securities portfolio of $87.4 million in Six Months 2020, which increased our book value per share by $1.15. The increase was driven principally by narrowing credit spreads.

For details regarding the credit quality of our portfolio, see Item 3. “Quantitative and Qualitative Disclosures About Market Risk.” of this Form 10-Q.

Net Investment Income
The components of net investment income earned for the indicated periods were as follows:
 
 
Quarter ended June 30,
 
Change
% or Points
 
 
Six Months ended June 30,
Change
% or Points
 
($ in thousands)
 
2020
 
2019
 
 
2020
 
2019
Fixed income securities
 
$
51,079

 
50,907

 
 %
 
 
$
101,332

 
99,940

1
 %
 
Commercial mortgage loans ("CMLs")
 
156

 

 
NM

 
 
218

 

NM

 
Equity securities
 
2,023

 
1,740

 
16

 
 
3,575

 
3,380

6

 
Short-term investments
 
420

 
1,759

 
(76
)
 
 
1,586

 
3,803

(58
)
 
Other investments
 
(15,846
)
 
7,494

 
(311
)
 
 
(9,504
)
 
8,154

(217
)
 
Investment expenses
 
(3,388
)
 
(3,395
)
 

 
 
(6,796
)
 
(6,154
)
10

 
Net investment income earned – before tax
 
34,444

 
58,505

 
(41
)
 
 
90,411

 
109,123

(17
)
 
Net investment income tax expense
 
(5,902
)
 
(10,883
)
 
(46
)
 
 
(16,386
)
 
(20,178
)
(19
)
 
Net investment income earned – after tax
 
$
28,542

 
47,622

 
(40
)
 
 
$
74,025

 
88,945

(17
)
 
Effective tax rate
 
17.1
%
 
18.6

 
(1.5
)
pts
 
18.1
%
 
18.5

(0.4
)
pts
Annualized after-tax yield on fixed income securities
 
2.7

 
2.9

 
(0.2
)
 
 
2.6

 
2.9

(0.3
)
 
Annualized after-tax yield on investment portfolio
 
1.6

 
3.0

 
(1.4
)
 
 
2.1

 
2.9

(0.8
)
 

The decrease in pre-tax net investment income in Second Quarter and Six Months 2020 compared to the same prior year periods was primarily driven by losses from our other investments portfolio. This portfolio largely consists of alternative investments, the results of which are recorded on a one quarter lag. These losses reflected the significant market decline in the first quarter of 2020. As these investments are largely recorded on a one-quarter lag, these results do not yet reflect the improvement in market conditions during Second Quarter 2020.


45


Realized and Unrealized Gains and Losses
Our general philosophy for sales of securities is to reduce our exposure to securities and sectors based on economic evaluations when the fundamentals for that security or sector have deteriorated, or to opportunistically trade out of securities to other securities with better economic return characteristics. Net realized and unrealized gains and losses for the indicated periods were as follows:
 
 
Quarter ended June 30,
 
Change %
 
Six Months ended June 30,
 
Change %
($ in thousands)
 
2020
 
2019
 
2020
 
2019
 
Net realized gains on disposals, excluding OTTI
 
$
2,615

 
2,883

 
(9
)%
 
6,715

 
6,327

 
6
 %
Unrealized gains (losses) recognized in income on equity securities
 
5,701

 
2,115

 
170
 %
 
(11,436
)
 
12,226

 
(194
)%
OTTI benefit (expense)1
 
4,333

 
(971
)
 
(546
)%
 
(27,296
)
 
(1,075
)
 
2,439
 %
Total net realized and unrealized gains (losses)
 
$
12,649

 
4,027

 
214
 %
 
(32,017
)
 
17,478

 
(283
)%
 1See Note 2. "Adoption of Accounting Pronouncements" in Item 1. "Financial Statements." of this Form 10-Q for additional information regarding our adoption of ASU 2016-13, Financial Instruments - Credit Losses.

The current year losses were significantly impacted by COVID-19-related market volatility in the first quarter of 2020, which resulted in higher OTTI expense and unrealized losses on our equity securities portfolio. A portion of our OTTI expense in Six Months 2020 was related to impairments on securities we intend to sell to provide our investment managers flexibility to trade and optimize our investment portfolio, which amounted to $16.2 million. We also incurred credit-related impairment losses under the new CECL accounting standard, which amounted to $11.1 million in Six Months 2020.

During Second Quarter 2020, the increase in net realized and unrealized gains compared to Second Quarter 2019 was driven by an improvement in both unrealized losses in our equity portfolio and the reversal of previously-recognized CECL credit losses on our fixed income portfolio, both reflecting improvements in the market.

Federal Income Taxes
The following table provides information regarding federal income taxes:
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in millions)
2020
 
2019
 
2020
 
2019
Federal income tax expense
$
8.5

 
18.0

 
9.3

 
30.3

Effective tax rate
19.9
%
 
19.9

 
15.8

 
18.5


The effective tax rate in the table above differs from the statutory rate of 21% principally due to: (i) the benefit of tax-advantaged interest and dividend income; and (ii) the impact of excess tax benefits on our stock-based compensation awards, partially offset by the disallowance of certain executive compensation. The decrease in the effective tax rate in Six Months 2020 compared to Six Months 2019 reflects less pre-tax income from our insurance and investments segments compared to tax-advantaged income and excess tax benefits on our stock-based compensation awards.

Financial Condition, Liquidity, and Capital Resources
Capital resources and liquidity reflect our ability to generate cash flows from business operations, borrow funds at competitive rates, and raise new capital to meet operating and growth needs.

We entered the COVID-19 crisis with our investment portfolio well-positioned from a risk and liquidity perspective. During the first quarter of 2020, we increased the liquidity of both the Insurance Subsidiaries and the Parent to reduce the likelihood of becoming a forced seller of invested assets to fund operations if there is a significant slowdown in premium payments as a result of the COVID-19 pandemic. As of June 30, 2020, we had $252 million of outstanding short-term borrowings.  Our short-term investments and cash totaled $371 million at June 30, 2020, compared to $283 million as of December 31, 2019.

As capital markets stabilized during Second Quarter 2020, we repaid $50 million of short-term borrowings under our line of credit. We, however, continued to maintain a greater level of short-term borrowings through Second Quarter 2020 in light of the ongoing pandemic and elevated catastrophe losses we incurred during Six Months 2020.  The cost of the excess liquidity currently is about $0.1 million per month, and represents the additional interest expense on our short-term borrowings, net of the interest income we generate on the high-quality money market funds in which we have invested the proceeds. We currently expect to extend all or a portion of these remaining short-term borrowings until December 2020 and repay them by year end.

Through Six Months 2020, we did not experience a meaningful change in daily cash collections. Given our geographic footprint and focus on small-to-medium size business, we expect many of our customers to have significant disruptions to their businesses. This could result in potential premium collection issues as a result of recent insurance regulations that provided for the deferral of payments without cancellation for a period up to 90 days in certain states. The ultimate depth and duration of

46


the economic slowdown, combined with the impact of the federal fiscal stimulus packages, and whether or not a business is considered essential or non-essential, will in part determine whether our customers' businesses are temporarily or permanently impaired. We continue to monitor our cash positions daily to ensure we remain well positioned from a liquidity perspective.

In addition, we continue to monitor closely market activity and the impact on our investment portfolio. Credit markets stabilized in late-March in response to the Federal Reserve Board’s actions, and conditions continued to improve through Second Quarter 2020. There has been a record level of new issuance in investment grade fixed income markets, and given our strong liquidity position, starting in late-March we began reinvesting the interest and proceeds of maturities back into the investment portfolio, which remains highly liquid and has a high credit quality. We also marginally increased our allocation to risk assets both within public credit, or high-yield bonds, and public equities through funds diversified across large cap value issuers.

The following discussion provides further details about the Company's financial condition, liquidity, and capital resources.

Liquidity
We manage liquidity with a focus on generating sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. We maintain liquidity at the parent primarily through (i) short-term investments that are generally maintained in “AAA” rated money market funds approved by the National Association of Insurance Commissioners, (ii) high-quality, highly-liquid government and corporate fixed income securities; and (iii) a cash balance. In the aggregate, cash and investments at the Parent amounted to $324 million at June 30, 2020 and $278 million at December 31, 2019.

The level of liquidity at the Parent may fluctuate based on various factors, including the amount and availability of dividends from our Insurance Subsidiaries, investment income, expenses, other liquidity needs of the Parent, Parent borrowings, and asset allocation investment decisions. Our target is to maintain liquidity at the Parent of at least two times its expected annual needs, which is currently estimated at approximately $160 million.

Sources of Liquidity
Sources of cash for the Parent have historically consisted of dividends from the Insurance Subsidiaries, the investment portfolio discussed above, borrowings under lines of credit and loan agreements with certain Insurance Subsidiaries, and the issuance of stock and debt securities. We continue to monitor these sources, giving consideration to our long-term liquidity and capital preservation strategies.

Insurance Subsidiary Dividends
The Insurance Subsidiaries paid $70 million in total dividends to the Parent during Six Months 2020. As of December 31, 2019, our allowable ordinary maximum dividend was $267 million for 2020.

Any dividends to the Parent are subject to the approval and/or review of the insurance regulators in the respective Insurance Subsidiaries' domiciliary states and are generally payable only from earned surplus as reported in the statutory annual statements of those subsidiaries as of the preceding December 31. Although past dividends have historically been met with regulatory approval, there is no assurance that future dividends that may be declared will be approved. For additional information regarding dividend restrictions, refer to Note 20. “Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds” in Item 8. “Financial Statements and Supplementary Data.” of our 2019 Annual Report.
In addition to regulatory restrictions on the availability of dividends that our Insurance Subsidiaries can pay to the Parent, the maximum amount of dividends the Parent can pay our shareholders is limited by certain New Jersey corporate law provisions that limit dividends if either: (i) the Parent would be unable to pay its debts as they became due in the usual course of business; or (ii) the Parent's total assets would be less than its total liabilities. The Parent's ability to pay dividends to shareholders also are impacted by covenants in the Line of Credit that obligate it to, among other things, maintain a minimum consolidated net worth and maximum ratio of consolidated debt to total capitalization.

The Insurance Subsidiaries generate liquidity through insurance float, which is created by collecting premiums and earning investment income before claims are paid. The period of the float can extend over many years. Our investment portfolio consists of maturity dates that continually provide a source of cash flow for claims payments in the ordinary course of business. As protection for the capital resources at the Insurance Subsidiaries, we purchase reinsurance coverage for any significantly large claims or catastrophes that may occur during the year and we can make cash calls on those receivables, if needed.


47


Line of Credit
On December 20, 2019, the Parent entered into a Line of Credit among the Parent, the lenders named therein (the “Lenders”), and the Bank of Montreal, Chicago Branch, as Administrative Agent. Under the Line of Credit, the Lenders have agreed to provide the Parent with a $50 million revolving credit facility, which can be increased to $125 million with the consent of the Lenders. The Line of Credit will mature on December 20, 2022 and has an interest rate, which varies and is based on, among other factors, the Parent’s debt ratings. On March 24, 2020, to bolster liquidity, the Parent borrowed $50 million under the Line of Credit for a six-month term at an interest rate of approximately 2.25%. The Parent repaid the borrowing on May 8, 2020.

For additional information regarding the Line of Credit agreement and corresponding representations, warranties, and covenants, refer to Note 10. "Indebtedness" in Item 8. "Financial Statements." of our 2019 Annual Report. We met all covenants under our Line of Credit agreement as of June 30, 2020.

Several of our Insurance Subsidiaries are members of certain branches of the Federal Home Loan Bank, which provides those subsidiaries with additional access to liquidity. Membership is as follows:
Branch
Insurance Subsidiary Member
FHLBI
Selective Insurance Company of South Carolina ("SICSC")1
Selective Insurance Company of the Southeast ("SICSE")1
FHLBNY
Selective Insurance Company of America ("SICA")
Selective Insurance Company of New York ("SICNY")
1These subsidiaries are jointly referred to as the "Indiana Subsidiaries" as they are domiciled in Indiana.

The Line of Credit permits aggregate borrowings from the FHLBI and the FHLBNY up to 10% of the respective member company’s admitted assets for the previous year end. Additionally, as SICNY is domiciled in New York, this company's borrowings from the FHLBNY are limited to the lower of 5% of admitted assets for the most recently completed fiscal quarter or 10% of admitted assets for the previous year end. We have a remaining capacity of $62.2 million for Federal Home Loan Bank borrowings, with a $2.8 million additional stock purchase requirement to allow the member companies to borrow their full remaining capacity amounts.

All borrowings from both the FHLBI and the FHLBNY are required to be secured by investments pledged as collateral. For additional information regarding collateral outstanding, refer to Note 4. "Investments" in Item 1. "Financial Statements." of this Form 10-Q.

Short-term Borrowings
We significantly increased our short-term borrowings during the first quarter of 2020 amid the COVID-19 pandemic, which was followed by a period of extreme volatility and uncertainty in the financial markets. As was noted above, the $302 million of proceeds from these borrowings, including the $50 million borrowing under the Line of Credit that was repaid on May 8, 2020, were invested in high-quality money market funds. With the exception of the $50 million borrowing under the Line of Credit, the remainder of these short-term borrowings were outstanding as of June 30, 2020. We currently expect to extend all or a portion of these remaining short-term borrowings until December 2020 and repay them by year end. For further information regarding these borrowings, see Note 5. "Indebtedness" in Item 1. "Financial Statements." of this Form 10-Q.

Intercompany Loan Agreements
The Parent has lending agreements with the Indiana Subsidiaries that have been approved by the Indiana Department of Insurance, which provide additional liquidity to the Parent. Similar to the Line of Credit agreement, these lending agreements limit borrowings by the Parent from the Indiana Subsidiaries to 10% of the admitted assets of the respective Indiana Subsidiary. The outstanding balance on these intercompany loans was $40.0 million as of both June 30, 2020 and December 31, 2019. The remaining capacity under these intercompany loan agreements was $89.4 million as of both June 30, 2020 and December 31, 2019.

Capital Market Activities
The Parent had no private or public issuances of stock during Second Quarter or Six Months 2020.

Uses of Liquidity
The liquidity generated from the sources discussed above is used, among other things, to pay dividends to our shareholders. Dividends on shares of the Parent's common stock are declared and paid at the discretion of the Board of Directors based on our operating results, financial condition, capital requirements, contractual restrictions, and other relevant factors.

On July 29, 2020, our Board of Directors declared, for stockholders of record as of August 14, 2020, a $0.23 per share dividend

48


to be paid on September 1, 2020.

Our ability to meet our interest and principal repayment obligations on our debt, as well as our ability to continue to pay dividends to our stockholders, is dependent on liquidity at the Parent coupled with the ability of the Insurance Subsidiaries to pay dividends, if necessary, and/or the availability of other sources of liquidity to the Parent. Excluding the short-term borrowings described above, our next two principal repayments each in the amount of $25 million, are due in 2021, and the next principal payment is due in 2026.

Restrictions on the ability of the Insurance Subsidiaries to declare and pay dividends, without alternative liquidity options, could materially affect our ability to service debt and pay dividends on common stock.

Capital Resources
Capital resources provide protection for policyholders, furnish the financial strength to support the business of underwriting insurance risks, and facilitate continued business growth. At June 30, 2020, we had GAAP stockholders' equity of $2.3 billion and statutory surplus of $1.9 billion. With total debt of $802.6 million and long-term debt of $550.6 million at June 30, 2020, our debt-to-capital ratio was 25.9% and our long-term debt-to-capital ratio was 19.3%.

Our cash requirements include, but are not limited to, principal and interest payments on various notes payable, dividends to stockholders, payment of claims, payment of commitments under limited partnership agreements and capital expenditures, as well as other operating expenses, which include commissions to our distribution partners, labor costs, premium taxes, general and administrative expenses, and income taxes. For further details regarding our cash requirements, refer to the section below entitled, “Contractual Obligations, Contingent Liabilities, and Commitments.”

We continually monitor our cash requirements and the amount of capital resources that we maintain at the holding company and operating subsidiary levels. As part of our long-term capital strategy, we strive to maintain capital metrics, relative to the macroeconomic environment, that support our targeted financial strength. Based on our analysis and market conditions, we may take a variety of actions, including, but not limited to, contributing capital to the Insurance Subsidiaries in our insurance operations, issuing additional debt and/or equity securities, repurchasing existing debt, repurchasing shares of the Parent’s common stock, and increasing stockholders’ dividends.

Our capital management strategy is intended to protect the interests of the policyholders of the Insurance Subsidiaries and our stockholders, while enhancing our financial strength and underwriting capacity.

Book value per share increased to $38.43 as of June 30, 2020, from $36.91 as of December 31, 2019, driven by $1.15 in unrealized gains on our fixed income securities portfolio and $0.82 in net income per share, partially offset by $0.46 in dividends to our shareholders.

Ratings
Our ratings remain the same as reported in our "Overview" section of Item 1. "Business." of our 2019 Annual Report and are as follows:
NRSRO
 
Financial Strength Rating
 
Outlook
AM Best
 
A
 
Positive
Moody's Investor Services
 
A2
 
Stable
Fitch
 
A+
 
Stable
Standard & Poor's Global Ratings
 
A
 
Stable

On April 10, 2020, Fitch reaffirmed our "A+" rating with a "stable" outlook. In taking this action, Fitch cited our strong capitalization and financial performance and our stable underwriting results and return metrics that have remained favorable compared to our peers. Fitch's review included its current assessment of COVID-19-related issues, including (i) economic impact under a set of ratings assumptions related to interest rate levels, (ii) declines in the market values of stocks, bonds, derivatives and other capital market instruments typically owned or traded by insurance companies, (iii) market liquidity, and (iv) the magnitude of potential related claim/benefit exposures.

Off-Balance Sheet Arrangements
At June 30, 2020, and December 31, 2019, we had no 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.

49



Contractual Obligations, Contingent Liabilities, and Commitments
Our future cash payments associated with (i) loss and loss expense reserves and (ii) contractual obligations pursuant to operating and financing leases for office space and equipment have not materially changed since December 31, 2019. The following table provides future cash payments on our notes payable as of June 30, 2020, including $252 million of short-term borrowings from the first quarter of 2020, which are discussed in Note 5. "Indebtedness" in Item 1. "Financial Statements." of this Form 10-Q:
Contractual Obligations
 
Payment Due by Period
 
 
 
 
Less than
1 year
 
1-3
years
 
3-5
years
 
More than
5 years
($ in millions)
 
Total
 
 
 
 
Notes payable
 
$
812.0

 
252.0

 
50.0

 

 
510.0

Interest on debt obligations
 
637.9

 
30.0

 
56.7

 
56.6

 
494.6

Total
 
$
1,449.9

 
282.0

 
106.7

 
56.6

 
1,004.6


At June 30, 2020, we also had certain contractual obligations that may require us to invest additional amounts in our investment portfolio as follows:
($ in millions)
 
Amount of Obligation
Year of Expiration of Obligation
Alternative and other investments
 
$
229.7

2036
Non-publicly traded collateralized loan obligations in our fixed income securities portfolio
 
29.6

2030
Non-publicly traded common stock within our equity portfolio
 
2.4

2021
CMLs
 
10.7

Less than a year
Privately-placed corporate securities
 
$
6.0

Less than a year
Total
 
$
278.4

 

There is no certainty that any such additional investment will be required. We expect to have the capacity to repay and/or refinance these obligations as they come due.

We have issued no material guarantees on behalf of others and have no trading activities involving non-exchange traded contracts accounted for at fair value. For additional details on transactions with related parties, see Note 16. "Related Party Transactions" in Item 8. "Financial Statements and Supplementary Data." of our 2019 Annual Report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

While the information provided in Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" as set forth in our 2019 Annual Report remains applicable, please refer to the following additional information regarding credit, liquidity, and equity price risk as of June 30, 2020.

Credit Risk
We entered the COVID-19 crisis with our investment portfolio well-positioned from a risk and liquidity perspective. At June 30, 2020 our allocation to risk assets was 9.3% of our portfolio. Given the reduction in the valuation of U.S. public equities and the significant widening of high yield credit spreads earlier in the year, we modestly increased our allocation to risk-seeking assets and will continue to evaluate further changes to our allocation during the course of 2020, subject to economic and market conditions. Our fixed income securities and short-term investment portfolios had an average credit quality of "AA-" as of June 30, 2020.


50


Details on the credit quality of our invested assets are provided below:
June 30, 2020
 
 
 
 
 
 
 
 
 
Credit Rating
($ in millions)
Amortized Cost
Fair Value
% of Invested Assets
Yield to Worst
Effective Duration in Years
Average Life in Years
 
AAA
AA
A
BBB
Non-Investment Grade
Not Rated
Short-term investments
$
370

$
370

5.2
%
0.2
%
0.0

0.0

 
$
349

$
20

$

$

$
1

$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
112

120

1.7
 
0.9
 
4.1

4.6

 
120






Foreign government obligations
17

18

0.3
 
2.5
 
5.0

5.7

 

2

8

8



State and municipal obligations
1,136

1,208

16.9
 
1.3
 
5.5

5.2

 
219

628

307

55



Corporate securities
2,147

2,272

31.9
 
2.4
 
4.5

6.2

 
14

112

889

1,017

239


Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities ("RMBS"):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency RMBS
1,157

1,220

17.1
 
1.1
 
2.0

3.1

 
1,220






Non-agency RMBS
98

98

1.4
 
3.1
 
1.3

3.3

 
48

6

35


9


Total RMBS
1,254

1,318

18.5
 
1.2
 
2.0

3.1

 
1,268

6

35


9


Commercial mortgage-backed securities ("CMBS")
565

603

8.5
 
2.2
 
5.0

6.4

 
536

30

28

10



Total mortgage-backed securities
1,820

1,922

26.9
 
1.5
 
2.9

4.1

 
1,804

36

62

10

9


Collateralized loan obligations ("CLO") and other asset-backed securities ("ABS"):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Auto
43

44

0.6
 
1.9
 
2.4

2.4

 
34

5

3

1

1


   Aircraft
56

49

0.7
 
8.4
 
3.5

4.1

 

1

43

2

3


   CLOs
558

546

7.7
 
3.5
 
1.2

4.8

 
305

151

30

45

15

1

   Credit cards
17

18

0.2
 
0.4
 
1.9

1.9

 
18






   Other ABS
180

183

2.6
 
3.8
 
2.6

5.1

 
43


107

24

8

1

Total CLOs and Other ABS
853

840

11.8
 
3.7
 
1.7

4.6

 
399

158

184

71

27

1

Total securitized assets
2,673

2,761

38.7
 
2.2
 
2.5

4.3

 
2,203

194

246

81

36

1

Total fixed income securities and short-term investments
6,455

6,749

94.6
 
2.0
 
3.6

4.9

 
2,904

956

1,449

1,162

276

1

Total fixed income securities and short-term investments by credit rating percentage
 
 
 
 
 
 
 
 
 
43.0
%
14.2
%
21.5
%
17.2
%
4.1
%
%
Commercial mortgage loans
18

18

0.3
 
3.8
 
4.6

9.4

 


16

2



Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock1
143

132

1.9
 
0.5
 


 





132

Preferred stock
2

2

 
3.7
 


 




2


Total equity securities
145

134

1.9
 
0.6
 


 




2

132

Other investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Alternative investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Private equity
127

127

1.8
 
 


 





127

Private credit
40

40

0.6
 
 


 





40

Real assets
21

21

0.3
 
 


 





21

Total alternative investments
188

188

2.6
 
 


 





188

Other investments
42

42

0.6
 
 


 





42

Total other investments
231

231

3.2
 
 


 





231

Total invested assets
$
6,848

$
7,132

100
 
 


 
$
2,904

$
956

$
1,465

$
1,163

$
278

$
364

(1)Includes investments in exchange traded funds, mutual funds, business development corporations, and real estate investment trusts.

Equity Price Risk
Our other investment portfolio represented approximately 3% of total invested assets as of June 30, 2020, and primarily includes alternative investments in limited partnerships. We account for these investments under the equity method, and they typically report income on a one-quarter lag. During Second Quarter 2020, we recorded after-tax losses on these alternative

51


investments of approximately $13 million, reflecting the market decline in the first quarter of 2020. For additional information regarding these alternative investment strategies, see Note 5. “Investments” in Item 8. “Financial Statements and Supplementary Data.” of our 2019 Annual Report.

Liquidity Risk
We ended the quarter with strong liquidity with short-term investments and cash of $371.1 million, which provides us significant financial flexibility should we see a slowdown in premium collections, or an acceleration of payments, including commissions and loss payments. Additionally, our investment portfolio remains highly-liquid as illustrated in the table below:
 
June 30, 2020
 
December 31, 2019
 
Asset Category
Percentage of Invested Assets
 
Percentage of Invested Assets
 
Highly-liquid assets
72

%
74

%
Generally liquid assets, may become less liquid with market stress1
24

 
22

 
Generally illiquid assets2
4

 
4

 
Total
100

%
100

%
1These exposures are concentrated within CMBS, CLO and other ABS.
2These exposures include our alternative investments and other non-traded securities.

Indebtedness
Our long-term debt balance did not materially change from December 31, 2019. However, we significantly increased our short-term debt by $302 million during the first quarter of 2020 in light of the COVID-19-related volatility and uncertainty in the financial markets to increase liquidity and operating flexibility. We repaid the $50 million borrowing on our line of credit during Second Quarter 2020, and while we may refinance all or a portion of the borrowings below that are due in September 2020 until December 2020, we expect to repay all short-term borrowings before the end of 2020. The proceeds from the borrowings detailed in the table below, which were outstanding as of June 30, 2020, were invested in high-quality money market funds.
 
 
 
 
June 30, 2020
($ in thousands)
 
Date of
Maturity
 
Carrying
Amount
 
Fair
Value
Financial liabilities
 
 
 
 

 
 

Short-term debt
 
 
 
 

 
 

0.78% Borrowings from FHLBNY
 
9/14/2020
 
$
100,000

 
100,085

0.68% Borrowings from FHLBNY
 
9/18/2020
 
85,000

 
85,051

0.58% Borrowings from FHLBI
 
12/14/2020
 
67,000

 
67,074

Total short-term debt
 
 
 
252,000

 
252,210


Refer to Note 10. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." of our 2019 Annual Report for additional information on our long-term borrowings and Note 5. "Indebtedness" in Part 1. "Financial Information" of this Form 10-Q for additional information regarding our short-term borrowing activity.

ITEM 4. CONTROLS AND PROCEDURES.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. In performing this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control Integrated Framework ("COSO Framework") in 2013. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of such period are: (i) effective in recording, processing, summarizing, and reporting information on a timely basis that we are required to disclose in the reports that we file or submit under the Exchange Act; and (ii) effective in ensuring that information that we are required to disclose in the reports that we file or submit under the Exchange Act is appropriately accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions about required disclosure.

Except for internal controls over financial reporting related to the implementation of ASU 2016-13, Financial Instruments - Credit Losses, no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) of the Exchange Act) occurred during Six Months 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management tested the design and operating effectiveness of internal controls over financial reporting related to the new processes regarding our allowances for credit losses and concluded they were effective.

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We have not experienced any material impact to our internal control environment over financial reporting despite the fact that the majority of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 current events to minimize the impact these events may have on our internal controls and their design and operating effectiveness.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

As of June 30, 2020, we have no material pending legal proceedings that could have a material adverse effect on our consolidated financial condition, results of operations, or cash flows. Incidental to our insurance operations, we are engaged in ordinary routine legal proceedings that, because litigation outcomes are inherently unpredictable, could have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods. For additional information regarding our legal risks, refer to Note 13. "Litigation" in Item 1. "Financial Statements." of this Form 10-Q and Item 1A. “Risk Factors” below in Part II. “Other Information.”

ITEM 1A. RISK FACTORS.

Certain risk factors can have a significant impact on our business, liquidity, capital resources, results of operations, financial condition, and debt ratings. These risk factors might affect, alter, or change actions we might take executing our long-term capital strategy, including without limitation, contributing capital to any or all of the Insurance Subsidiaries, issuing additional debt and/or equity securities, repurchasing our existing debt and/or equity securities, or increasing or decreasing stockholders' dividends. We operate in a continually changing business environment and new risk factors emerge from time to time. Consequently, we can neither predict such new risk factors nor assess the potential future impact, if any, they might have on our business. Our risk factors disclosed in Item 1A. “Risk Factors.” in our 2019 Annual Report remain accurate with the following addition:

Governmental actions to contain or delay the spread of the COVID-19 pandemic since early March 2020 have disrupted ordinary business commerce and impacted financial markets. These governmental actions, for which we cannot predict the extent, duration, and possible alteration based on future COVID-19-related developments, could materially and adversely affect our results of operations, financial position, and liquidity.

Governmental (international, federal, state, and local) actions to contain or delay the spread of the COVID-19 pandemic have resulted in directives requiring social distancing, operational alteration, or temporary closure of most non-essential businesses to limit public access, and the “sheltering-in-place” of everyone other than essential workers in many instances. These actions have generally:

Negatively impacted the global and United States domestic economies, with some sectors such as travel and leisure, retail, energy, and real estate more significantly affected than others;

Increased unemployment;

Increased international, federal, state, and local governmental budget deficits, which has led to adverse rating actions against certain governmental units and increased the general risk of governmental debt default that could impact the value of related fixed income securities;

Induced significant volatility in financial markets;

Decreased valuations in markets for equity, fixed income, and alternative investments in certain sectors;

Impacted individual income and business revenue, and increased the number of individuals and businesses experiencing financial distress with the potential for insolvency;

Decreased premium collections, late payment fees, and reinstatement fees;

Generated other state and federal legislative or executive branch proposals to (i) require insurance policies to retroactively cover COVID-19-related losses that were expressly excluded under the terms of some property insurance policies, and (ii) presume that COVID-19 is a work-related illness for certain employees under workers compensation

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policies;

Generated state insurance department bulletins or orders requesting or mandating premium credits and rebates on certain insurance policies that may exceed actual COVID-19-related frequency experience decreases;

Disrupted regular commerce, supply chains, and travel;

Increased expense management focus by individuals and all-sized businesses;

Increased the demand for and/or limited the availability of medical resources; and

Increased e-commerce, video, phone, and other methods of remote trade and business transaction.

The economic impacts of the COVID-19-related governmental actions may impact our revenue, loss and loss expense, liquidity, or regulatory capital and surplus, and operations, particularly as these relate, without limitation, to the following:

Impact on Our Insurance Operations

Because our general liability and workers compensation policies provide for premium audit, we must estimate the amount of return premium that we may owe policyholders for revenues and payrolls lowered due to the extent and duration of the COVID-19-related governmental directives and any related economic contraction. Such return premiums could be significant and will impact our underwriting results.

To help our customers maintain insurance coverages, we are offering - sometimes in collaboration with or at the direction of our regulators - individualized payment flexibility and suspension of policy cancellations, late payment notices, and late or reinstatement fees. Customers afforded this treatment have until the later of 30 days or the end of the grace period established by the customers’ home state insurance commissioner.

In Second Quarter 2020, we offered a credit equal to 15% of insureds’ premiums for commercial automobile and personal automobile lines of insurance for April and May. This two-month premium credit was based on a limited amount of claims reporting data reflecting the impact of the COVID-19-related governmental directives on miles driven, which has reduced claims frequencies. We do not have traditional actuarial analysis to support these credits. The actual impact of the COVID-19-related governmental actions will not be fully known until some point in the future. Should the various governmental directives be extended or reinstated due to increased infection rates, it is possible that we will give further premium credit to our customers to the extent supported by further analysis. Based on the continued COVID-19-related economic impact, it is possible that state insurance commissioners may take other regulatory actions requiring premium credit in lines other than commercial and personal automobile, and we face the risk that we may be required to return more premium than is warranted by our filed rating plans and actual loss experience.

All of our commercial property and businessowners policies require direct physical loss of or damage to insured property by a covered cause of loss. Whether COVID-19-related contamination, the existence of a pandemic, and/or the resulting government shutdown orders cause physical loss of or damage to property is already the subject of much debate and litigation. We cannot predict the outcome of that litigation. It also is our practice to include in, or attach to, all standard lines commercial property and businessowners policies an exclusion that states that all loss or property damage caused by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness, or disease is not a covered cause of loss. We offer some limited coverages that could apply in COVID-19-related claims and circumstances, primarily tied to clean-up and food-contamination that are subject to sub-limits. Approximately 95% of our commercial property and businessowners policies include the very specific and regulatory approved virus exclusion.

There currently are various public policy debates and legislative proposals at both the federal and state levels that would impose liability (including retroactively) for COVID-19-related business interruption losses on policies that do not provide such coverage terms. We cannot predict the outcome of such proposals, which may be influenced by media attention on and lobbying efforts by property and casualty insurance policyholders whose policies do not provide coverage for business interruption losses connected with the COVID-19-related governmental directives. We are aware of meritorious arguments that such proposals, if enacted, would be unconstitutional and impair future commercial activity. Nonetheless, if such proposals were enacted and upheld as constitutional, they would have a material impact on our profitability, liquidity, and overall financial condition.

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Limited availability of medical resources could result in medical inflation and complicate, delay and/or extend medical treatment that could impact exposure on workers compensation, general liability, and personal and commercial automobile claims.

We may have increased workers compensation loss and loss expenses if policyholders' employees in high-risk roles of essential businesses contracted COVID-19 in the workplace. We may experience higher frequency of workers compensation claims, particularly if state legislative or executive order proposals are enacted that create presumptions that the contraction of COVID-19 by an essential business employee who interacted with the public is work-related. We also may see an extension of workers compensation benefits if employees do not have jobs to which they can return.

We may experience elevated loss frequency and severity related to our liability coverages from efforts by the plaintiffs’ bar to generate COVID-19-related claim activity that impacts our policyholders.

Loss frequency and severity could increase related to our auto and property coverages due to, among other things, disruptions in supply chains and changes in business practices and individual behaviors resulting from the shelter-in-place and social distancing measures, such as arson and fraud.

Due to the COVID-19-related governmental orders, we may experience delayed reporting of losses, settlement negotiations, and trial of disputed claims that may disrupt our normal claims resolution processes and trends.

Service levels could deteriorate if significant numbers of our remote employees or key business partners are unable to work effectively while sheltering-in-place. Examples of potential work impacts include local internet disruption that prevents access to our virtual private network, widespread employee contraction of the COVID-19 illness, other governmental directives, or similar unavoidable events. Because our employees are working remotely, it also is possible that we will be subject to increased cybersecurity attacks from bad actors.

In response to the COVID-19 pandemic and recent increased catastrophic loss activity, the reinsurance industry is seeking to tighten contractual terms and conditions, reduce reinsurance capacity, and increase its pricing for insurance company purchases of reinsurance protection. Tightened terms and conditions include the introduction of new coverage exclusions, such as excluding losses related to communicable diseases, particularly for business interruption losses in property treaties and, to a lesser extent, in casualty treaties. We purchase a significant amount of reinsurance, including a property catastrophe reinsurance program and property and casualty excess of loss reinsurance treaties. To the extent we are exposed to losses on our primary policies that may now be excluded from coverage under our existing reinsurance treaties or in future renewal periods, we will face increased underwriting risk. The increased underwriting risk could increase our net loss and loss expenses and increase the volatility in our underwriting results. Decreased reinsurance capacity also would increase our underwriting risk if we are unable to fully place our existing reinsurance treaties upon renewal. If risk-adjusted reinsurance price increases are at rates higher than we are able to generate on the underlying insurance policies we sell, it will negatively impact our underwriting profitability and have a material adverse effect on our financial condition and results of operations.

Impact on our Investment Operations

The significant equity and debt financial market volatility from the COVID-19 pandemic and the related governmental orders may impact our net investment income due to the following:
  
Financial market volatility is reflected in our alternative investment portfolio performance;

A change in spreads on fixed income securities may create mark-to-market investment valuation losses and volatility in unrealized capital gains, which will impact GAAP equity;

OTTI losses may increase due to securities we intend to sell, as we give our third-party investment managers flexibility to take advantage of the spread widening in fixed income securities, particularly in asset classes more significantly impacted by COVID-19-related governmental directives and to which the Federal Reserve Board is providing liquidity and structural support; and

Economic inflation related to COVID-19 issues could be higher or lower than our expectations and impact our investment returns.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The following table provides information regarding our purchases of our common stock in Second Quarter 2020:
Period
 
Total Number of
Shares Purchased1
 
Average Price
Paid per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Programs
 
Maximum Number of
Shares that May Yet
Be Purchased Under the Announced Programs
April 1 – 30, 2020
 
14

 
$
46.97

 

 

May 1 - 31, 2020
 
13

 
48.15

 

 

June 1 - 30, 2020
 
1,040

 
51.39

 

 

Total
 
1,067

 
$
51.29

 

 

1We purchased these shares from employees to satisfy tax withholding obligations associated with the vesting of their restricted stock units.

ITEM 6. EXHIBITS.

Exhibit No.  
 
 
 
Statement Re: Computation of Per Share Earnings.
 
Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.
 
Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.
 
Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.
 
Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.
*101
 
The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders' Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.
*104
 
The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in iXBRL.
 * Filed herewith.
** Furnished and not filed herewith.





SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

SELECTIVE INSURANCE GROUP, INC.
Registrant 

Date:
July 30, 2020
 
By: /s/ John J. Marchioni
 
 
 
John J. Marchioni
 
 
 
President and Chief Executive Officer
 
 
 
(principal executive officer)
 
 
 
 
Date:
July 30, 2020
 
By: /s/ Mark A. Wilcox
 
 
 
Mark A. Wilcox
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
(principal financial officer)


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