10q10k10q10k.net

What changed in SELECTIVE INSURANCE GROUP INC's 10-K — 2022 vs 2023

vs

Paragraph-level year-over-year comparison of SELECTIVE INSURANCE GROUP INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+644 added−654 removedSource: 10-K (2024-02-09) vs 10-K (2023-02-10)

Top changes in SELECTIVE INSURANCE GROUP INC's 2023 10-K

644 paragraphs added · 654 removed · 535 edited across 8 sections

Item 1. Business

Business — how the company describes what it does

168 edited+31 added−21 removed47 unchanged
Biggest changeStrategic Advantages We have three key sustainable competitive advantages: • A distribution model that emphasizes franchise value, meaning we focus on appointing and having meaningful, close business relationships with high-quality, independent distribution partners who value our relationships and provide us the opportunity to grow profitably with them; • A unique operating model in which we (i) locate our Standard Commercial Lines underwriting and safety management personnel in the geographic territories they serve, (ii) organize our claims operation regionally by specialty, with local personnel managing our customer, claimant, and agency relationships, and (iii) provide our teams with sophisticated tools and technologies to inform underwriting, pricing, safety management, and claims decisions; and • Our best-in-class employees provide a superior omnichannel customer and agency experience, enhanced by digital platforms and value-added services to increase customer engagement and retention.
Biggest changeWe have five key sustainable competitive advantages: • A unique field model, placing empowered underwriting staff near our distribution partners and customers. • Our ability to develop sophisticated risk selection, pricing, and claims management tools, and put them in the hands of our front-line employees. • A franchise value distribution model, defined by meaningful and close business relationships with a group of high-quality independent agents and brokers. • A commitment to delivering a superior omnichannel customer experience enhanced by digital platforms and value-added services. • A highly engaged and aligned team of extremely talented employees.
Net investment income consists primarily of (i) interest earned on fixed income investments and commercial mortgage loans, (ii) dividends earned on equity securities, (iii) income generated from our alternative investments portfolio, partially offset by (iv) investment expenses. • Net realized and unrealized gains and losses on investment securities from our investments segment .
Net investment income consists primarily of (i) interest earned on fixed income investments and commercial mortgage loans, (ii) dividends earned on equity securities, and (iii) income generated from our alternative investments portfolio, partially offset by (iv) investment expenses. • Net realized and unrealized gains and losses on investment securities from our investments segment .
Insurance Operations Competition We face substantial competition in the insurance marketplace from public, private, and mutual insurance companies with varying levels of brand recognition, scale and operational efficiency, capital bases, book of business diversification, and cost of capital. Like us, many competitors rely on independent partners to distribute their products and services.
Insurance Operations Competition We face substantial competition in the insurance marketplace from public, private, and mutual insurance companies with varying levels of brand recognition, scale and operational efficiency, capital bases, book of business diversification, and cost of capital. Many competitors rely on independent partners to distribute their products and services like us.
Other investments include Federal Home Loan Bank ("FHLB") stock and tax credit investments. For further information regarding our risks associated with the overall investment portfolio, see Item 7A. "Quantitative and Qualitative Disclosures About Market Risk." and Item 1A. "Risk Factors." of this Form 10-K. For additional information about investments, see the "Investments Segment" section in Item 7.
Other investments include Federal Home Loan Bank ("FHLB") stock and tax credit investments. For further information regarding our risks associated with the overall investment portfolio, see Item 7A. "Quantitative and Qualitative Disclosures About Market Risk." and Item 1A. "Risk Factors." of this Form 10-K. For additional investment information, see the "Investments Segment" section in Item 7.
The calculation provides state insurance regulators with additional analytical information for assessing group risks and capital adequacy, complementing the existing holding company disclosures and analyses. The GCC expands the existing RBC calculation to include (i) capital requirements for other regulated entities in the group, and (ii) defined capital calculations for other group entities that are unregulated.
The GCC expands the existing RBC calculation to include (i) capital requirements for other regulated entities in the group and (ii) defined capital calculations for other group entities that are unregulated. The calculation provides state insurance regulators with additional analytical information for assessing group risks and capital adequacy, complementing the existing holding company disclosures and analyses.
If any individual location exceeds the CUO's property limit authority, it must be approved by the Underwriting Committee, comprised of the Standard Lines Chief Operating Officer, CFO, Commercial Lines CUO, Executive Vice President of E&S Lines, and CRO.
If any individual location exceeds the CUO's property limit authority, it must be approved by the Underwriting Committee, comprised of the Standard Lines Chief Operating Officer, CFO, Standard Commercial Lines CUO, Executive Vice President of E&S Lines, and CRO.
Our operating model also focuses on improving safety and risk management programs, loss experience, and retention, including: • Risk evaluation and virtual and on-site improvement surveys that evaluate potential exposures and provide solutions for mitigation; • Internet-based safety management educational resources, including an extensive library of coverage-specific safety materials, videos, and online courses, such as defensive driving and employee educational safety courses; • Thermographic infrared surveys that identify potential electrical hazards; and • Occupational Safety and Health Administration construction and general industry certification training.
Our operating model also focuses on improving insured safety and risk management programs, loss experience, and retention, including: • Risk evaluation and virtual and on-site improvement surveys that evaluate potential exposures and provide solutions for mitigation; • Internet-based safety management educational resources, including an extensive library of coverage-specific safety materials, videos, and online courses, such as defensive driving and employee educational safety courses; • Thermographic infrared surveys that identify potential electrical hazards; and • Occupational Safety and Health Administration construction and general industry certification training.
To support and build better and stronger relationships with our independent distribution partners, our (i) Standard Commercial Lines underwriting and safety management personnel are located in the geographic territories they serve, (ii) claims operation is organized regionally by specialty, with local personnel managing our customer, claimant, and distribution partner relationships, and (iii) teams are provided with sophisticated tools and technologies to inform underwriting, pricing, safety management, and claims decisions.
To support and build better and stronger relationships with our independent distribution partners, our (i) Standard Commercial Lines underwriting and safety management personnel are located in the geographic territories they serve, (ii) claims operation is organized regionally by specialty, with local personnel managing our customer, claimant, and distribution partner relationships, and (iii) personnel are provided with sophisticated tools and technologies to inform underwriting, pricing, safety management, and claims decisions.
Property and casualty insurance activities regulated by the states include the following: • Protection of claimants: Oversight of financial matters to ensure claims-paying ability, including minimum capital; statutory surplus; solvency standards; accounting methods; form and content of statutory financial statements and other reports; loss and loss expense reserves; investments; reinsurance; dividend payments and other distributions to shareholders; security deposits; and periodic financial examinations. • Protection of policyholders: Oversight of matters including certificates of authority and other insurance company licenses; licensing and compensation of distribution partners; underwriting criteria; premium rates (required not to be excessive, inadequate, or unfairly discriminatory); policy forms; policy terminations; claims handling and related practices; cybersecurity; data protection and customer privacy; reporting of premium and loss statistical information; periodic market conduct examinations; unfair trade practices; mandatory participation in shared market mechanisms, 15 Table of Contents such as assigned risk pools and reinsurance pools; mandatory participation in state guaranty funds; and mandated continuing workers compensation coverage post-termination of employment. • Protection of policyholders, claimants, and shareholders: Related to our ownership of the Insurance Subsidiaries, oversight of matters including registration of insurance holding company systems in states where we have domiciled insurance subsidiaries, reporting about intra-holding company system developments, self-assessment of current and future risks, including cybersecurity and climate change, and required pre-approval of certain transactions that may materially affect the operations, management, or financial condition of the insurers, including dividends and change in control.
Property and casualty insurance activities regulated by the states include the following: • Protection of claimants: Oversight of financial matters to ensure claims-paying ability, including minimum capital; statutory surplus; solvency standards; accounting methods; form and content of statutory financial statements and other reports; loss and loss expense reserves; investments; reinsurance; dividend payments and other distributions to shareholders; security deposits; and periodic financial examinations. • Protection of policyholders: Oversight of matters including certificates of authority and other insurance company licenses; licensing and compensation of distribution partners; underwriting criteria; premium rates (required not to be excessive, inadequate, or unfairly discriminatory); policy forms; policy terminations; claims handling and related practices; cybersecurity; data protection and customer privacy; reporting of premium and loss statistical information; periodic market conduct examinations; unfair trade practices; mandatory participation in shared market mechanisms, such as assigned risk pools and reinsurance pools; mandatory participation in state guaranty funds; and mandated continuing workers compensation coverage post-termination of employment. • Protection of policyholders, claimants, and shareholders: Related to our ownership of the Insurance Subsidiaries, oversight of matters including registration of insurance holding company systems in states where we have domiciled insurance subsidiaries, reporting about intra-holding company system developments, self-assessment of current and future risks, including cybersecurity and climate change, and required pre-approval of certain transactions that may materially affect the operations, management, or financial condition of the insurers, including dividends and change in control.
We develop our coverages by (i) adopting policy forms created or filed by statistical rating agencies or other third parties, notably Insurance Services Office, Inc. ("ISO"), American Association of Insurance Services, Inc. ("AAIS"), and the National Council on Compensation Insurance, Inc. ("NCCI"), (ii) independently creating our own policy forms, or (iii) modifying third-party policy forms.
We develop our coverages by (i) adopting policy forms created or filed by statistical rating agencies or other third parties, notably Insurance Services Office, Inc. ("ISO"), American Association of Insurance Services, Inc. ("AAIS"), and the National Council on Compensation Insurance, Inc. ("NCCI"), (ii) independently creating our policy forms, or (iii) modifying third-party policy forms.
The following are among the NAIC's various financial monitoring tools, most predicated on NAIC model laws and regulations that are material to the regulators in states in which our Insurance Subsidiaries are organized: • The Insurance Regulatory Information System ("IRIS"). IRIS identifies 13 industry financial ratios and specifies "usual values" for each.
The following are among the NAIC's various financial monitoring tools, most predicated on NAIC model laws and regulations that are material to the regulators in states in which our Insurance Subsidiaries are organized: • The Insurance Regulatory Information System ("IRIS"). IRIS identifies thirteen (13) industry financial ratios and specifies "usual values" for each.
Key inputs in our loss and loss expense ratio include catastrophe and non-catastrophe property loss and loss expenses incurred, current year casualty loss estimates, and prior year casualty reserve development. We use after-tax net investment income earned as the main measure of our investments segment's financial performance.
Key inputs in our loss and loss expense ratio include catastrophe and non-catastrophe property loss and loss expenses incurred, current year casualty loss and loss expenses, and prior year casualty reserve development. We use after-tax net investment income earned as the main measure of our investments segment's financial performance.
Major Risk Category Emerging Risk Committee MIC MSC Disclosure Committee EPMO Reserve Committee Large Claims Committee ERC Underwriting Committee Sustainability Committee Asset Risk X X X Underwriting Risk X X X X X Liquidity Risk X X X Other Risks X X X X X Emerging Risks X X X Our risk governance structure facilitates effective risk conversations across all levels and disciplines of the organization and promotes strong risk management practices.
Major Risk Category Emerging Risk Committee MIC MSC Disclosure Committee EPMO Reserve Committee Large Claims Committee ERC Underwriting Committee Asset Risk X X X Underwriting Risk X X X X X Liquidity Risk X X X Other Risks X X X X Emerging Risks X X Our risk governance structure facilitates effective risk conversations across all levels and disciplines of the organization and promotes strong risk management practices.
We categorize our major risks into five broad categories: • Asset risk, stemming primarily from our investment portfolio and reinsurance recoverables and includes credit and market risk; • Underwriting risk, which is the risk our insured losses exceed our expectations, including: ◦ Losses from inadequate loss reserves; ◦ Larger than expected non-catastrophe current accident year losses; and ◦ Catastrophe losses that exceed our expectations or our reinsurance treaty limits. • Liquidity risk, which is the risk we will be unable to meet our contractual obligations as they become due because we cannot liquidate assets or obtain adequate funding without incurring unacceptable investment losses or borrowing expenses; • Other risks, which include a broad range of operational risks, many challenging to quantify, such as talent/human capital, market conditions, economic, legal, regulatory, reputational, and strategic risks – as well as the risks of fraud, 19 Table of Contents human failure, modeling risks, inadequate business continuity plans, or failure of controls or systems, including cybersecurity risk; and • Emerging risks, which include risks in the other categories that are new, rapidly evolving, or increasing substantially compared to historical levels.
We categorize our major risks into five broad categories: • Asset risk, stemming primarily from our investment portfolio and reinsurance recoverables and includes credit and market risk; • Underwriting risk, which is the risk our insured losses exceed our expectations, including: ◦ Losses from inadequate loss reserves; ◦ Larger than expected non-catastrophe current accident year losses; and ◦ Catastrophe losses that exceed our expectations or our reinsurance treaty limits. • Liquidity risk, which is the risk we will be unable to meet our contractual obligations as they become due because we cannot liquidate assets or obtain adequate funding without incurring unacceptable investment losses or borrowing expenses; • Other risks, which include a broad range of operational risks, many challenging to quantify, such as talent/human capital, market conditions, economic, legal, regulatory, reputational, and strategic risks – as well as the risks of fraud, human failure, modeling risks, inadequate business continuity plans, or failure of controls or systems, including cybersecurity risk; and • Emerging risks, which include risks in the other categories that are new, rapidly evolving, or increasing substantially compared to historical levels.
While many insurers offer digital customer solutions for personal lines, we strive to be a digital and customer experience leader in all three insurance operation segments. Technology We leverage technology in our business and invest significantly in IT platforms, integrated systems, and cloud-based solutions.
While many insurers offer digital customer solutions for personal lines, we strive to be a digital and customer experience leader in all three of our insurance operation segments. Technology We leverage technology in our business and invest significantly in IT platforms, integrated systems, and cloud-based solutions.
This program permits state insurance departments to recognize and rely on the financial examinations and reviews their counterparts conduct, creating efficiencies and limiting overlapping examinations of the same insurance companies.
This program permits state insurance departments to recognize and rely on the financial examinations and other reviews their counterparts conduct, creating efficiencies and limiting overlapping examinations of the same insurance companies.
Other insurance carriers either employ their own agents, who represent only them, or use a combination of distribution partners, captive agents, and direct marketing. The property and casualty insurance market is highly competitive in each of our insurance segments, with market share fragmented among many companies, particularly in Standard Commercial Lines and E&S Lines.
Other insurance carriers either employ their agents, who represent only them, or use a combination of distribution partners, captive agents, and direct marketing. The property and casualty insurance market is highly competitive in our insurance segments, with market share fragmented among many companies, particularly in Standard Commercial Lines and E&S Lines.
Our top 20 distribution partners generated approximately 40% of our DPW, excluding E&S Lines and the flood line of business, in 2022. Independent Retail Agents and Standard Lines A 2022 Independent Insurance Agents & Brokers of America study estimated there are 40,000 independent property/casualty insurance agents and brokers in the U.S., up 11% from their 2020 study.
In 2023, our top 20 distribution partners generated approximately 42% of our DPW, excluding E&S Lines and the flood line of business. Independent Retail Agents and Standard Lines A 2022 Independent Insurance Agents & Brokers of America study estimated there are 40,000 independent property/casualty insurance agents and brokers in the U.S., up 11% from their 2020 study.
Casualty claims are long-tailed, regularly taking several years to be reported and settled — and even longer in certain situations. • Property insurance, which generally covers accidental loss to an insured's real property, personal property, and/or property loss-related earnings. Property claims are usually reported and settled in a relatively short period from the date of loss.
Casualty claims are long-tailed, regularly taking several years to be reported and settled – and even longer in certain situations. • Property insurance, which generally covers accidental loss to an insured's real property, personal property, and/or property loss-related earnings. Property claims are usually reported and settled in a relatively short period after the date of loss.
These risks can directly affect our underwriting results, impact the long-term viability of certain business lines we write, and potentially impact our investment portfolio. Transition risks arise from society’s transition towards a low-carbon economy, driven by policy and regulations, low-carbon technology advancement, and shifting sentiment and societal preferences.
These risks can directly affect our underwriting results, the long-term viability of certain business lines we write, and our investment portfolio. Transition risks arise from society’s transition towards a low-carbon economy, driven by policy and regulations, low-carbon technology advancement, and shifting sentiment and societal preferences.
Through formal letters of authority, our Chief Underwriting Officer ("CUO") delegates underwriting authority after assessing an underwriter's job grade, industry, and line of business expertise. Our corporate underwriting department coordinates with our actuarial department to determine adequate pricing levels for all Standard Commercial Lines products.
Through formal letters of authority, our Chief Underwriting Officer ("CUO") delegates underwriting authority after assessing an underwriter's job grade and segment and line of business expertise. Our corporate underwriting department coordinates with our Actuarial Department to determine adequate pricing levels for all Standard Commercial Lines products.
We do not write crop insurance, have minimal exposure to private flood, and have a small geographic footprint in the Western U.S., so our exposures to certain weather-related perils, such as droughts, wildfires, and flooding, tend to be relatively modest.
We do not write crop insurance, have minimal exposure to private flood, and have a small geographic footprint in the Western U.S., so our exposures to specific weather-related perils, such as droughts, wildfires, and flooding, tend to be relatively modest.
This committee meets as appropriate and evaluates a variety of information related to specific accounts presented, including key projected catastrophe modeling metrics when considering a large property account, as well as underwriting and market considerations. Emerging Risk Committee — Responsible for identifying and monitoring new and evolving risk issues that could significantly impact our financial strength, reputation, or long-term strategy.
This committee meets as appropriate and evaluates a variety of information related to specific accounts presented, including underwriting, safety management, claims, and market considerations, as well as key projected catastrophe modeling metrics when considering a large property account. • Emerging Risk Committee - Responsible for identifying and monitoring new and evolving risk issues that could significantly impact our financial strength, reputation, or long-term strategy.
In developing products and services, we consider market demands, profitability, competitive research, feedback from our independent distribution partners, and the product or service's potential to make our customers' commercial or personal endeavors safer. Our policies provide coverage for future events, so we do not know the actual individual policy loss costs at the time of sale.
In developing products and services, we consider market demands, profitability, competitive research, feedback from our independent distribution partners, and the product or service's potential to make our customers' commercial or personal endeavors safer. 8 Table of Contents Our policies provide coverage for future events, so we do not know actual individual policy loss costs at the time of sale.
Customers and Customer Markets We categorize our Standard Commercial Lines customers into the following strategic business units ("SBUs"): Percentage of Standard Commercial Lines Description Contractors 43% General contractors and trade contractors Mercantile and Services 25% Retail, office, lessors risk/property owners, automobile services, and golf courses Community and Public Services 16% Public entities, social services, religious institutions, and schools Manufacturing and Wholesale 15% Manufacturers, wholesalers, and distributors Bonds 1% Fidelity and surety Total Standard Commercial Lines 100% We do not categorize our Standard Personal Lines or E&S Lines customers into SBUs.
Customers and Customer Markets We categorize our Standard Commercial Lines customers into the following strategic business units ("SBUs"): Percentage of Standard Commercial Lines Description Contractors 44% General contractors and trade contractors Mercantile and Services 25% Retail, office, lessors risk/property owners, automobile services, and golf courses Community and Public Services 16% Public entities, social services, religious institutions, and schools Manufacturing and Wholesale 14% Manufacturers, wholesalers, and distributors Bonds 1% Fidelity and surety Total Standard Commercial Lines 100% We do not categorize Standard Personal Lines or E&S Lines customers into SBUs.
Geographic Markets We sell our insurance products and services in the following geographic markets: • Standard Commercial Lines products and services are primarily sold in 30 states in the contiguous U.S. and the District of Columbia. • Standard Personal Lines products and services are primarily sold in 15 states in the Eastern, Midwestern, and Southwestern regions of the U.S.
Geographic Markets We sell our insurance products and services in the following geographic markets: • Standard Commercial Lines products and services primarily in 30 states in the contiguous U.S. and the District of Columbia. • Standard Personal Lines products and services primarily in 15 states in the Eastern, Midwestern, and Southwestern regions of the U.S.
The Emerging Risk Committee identified climate change as a high-level emerging risk that it reviews at least quarterly with the ERC and our Board. The ERM unit, the ERC, and Management stay informed on key climate change risk developments through industry publications, webinars, conferences, and regular engagement with outside sources, such as our reinsurance brokers, investment managers, and trade associations.
The Emerging Risk Committee identified climate change as a "high" level emerging risk, reviewing it at least quarterly with the ERC and Board. The ERM unit, the ERC, and Management stay informed on key climate change risk developments through industry publications, webinars, conferences, and regular engagement with outside sources, such as our reinsurance brokers, investment managers, and trade associations.
We monitor our investment exposure to carbon-intensive industries as a measure of our vulnerability to climate-related risks involved with the transition to a low-carbon economy. The ERM unit evaluates our catastrophe risk exposure relative to our established tolerances.
We monitor our investment exposure to carbon-intensive industries to measure our vulnerability to climate-related risks involved with the transition to a low-carbon economy. The ERM unit evaluates our catastrophe risk exposure relative to our established tolerances.
Estimating reserves as of any 7 Table of Contents given date is an inherently uncertain process, requiring estimation techniques and a considerable degree of judgment. We regularly analyze our overall reserve position through internal and external actuarial reserve reviews. For a discussion of our loss reserving process, see "Critical Accounting Policies and Estimates" in Item 7.
Estimating reserves as of any given date is inherently uncertain, requiring estimation techniques and a considerable degree of judgment. We regularly analyze our overall reserve position through internal and external actuarial reserve reviews. For a discussion of our loss reserving process, see "Critical Accounting Policies and Estimates" in Item 7.
Due to our business risk profile and geographic concentration in the Northeast and Mid-Atlantic states, hurricane peril is our most significant natural catastrophe exposure, driving the “tail” of our modeled catastrophe loss distribution. This risk has 21 Table of Contents influenced our decision to geographically diversify our underwriting portfolio and set rigorous coastal property exposure guidelines.
Due to our business risk profile and geographic concentration in the Northeast and Mid-Atlantic states, hurricane peril is our most significant natural catastrophe exposure, driving the “tail” of our modeled catastrophe loss distribution. This risk has influenced our decision to diversify our underwriting portfolio geographically and set rigorous coastal property exposure guidelines.
Departure from the usual values on four or more financial ratios can lead to inquiries from individual state insurance departments about certain aspects of an insurer's business. Our Insurance Subsidiaries have consistently met most IRIS ratio tests. • Risk-Based Capital ("RBC").
Departure from the usual values on four or more financial ratios can lead to inquiries from individual state insurance departments about certain aspects of an insurer's business. Our Insurance Subsidiaries have consistently met most IRIS ratio tests. 15 Table of Contents • Risk-Based Capital ("RBC").
We believe that as we transition to a low-carbon economy, the value of these assets could be at greater risk. Other In addition to mitigating insurance operations and investment risk, we: • Have robust plans to ensure operational continuity if we suffer unforeseen or catastrophic events.
We believe that as society transitions to a low-carbon economy, the value of these assets could be at greater risk. Other In addition to mitigating insurance operations and investment risk, we: • Have robust plans to ensure operational continuity if we suffer unforeseen or catastrophic events.
For additional information on the potential impact of regulation and changes in regulation on our business, refer to the regulation risk factor within Item 1A. "Risk Factors." of this Form 10-K. Corporate Governance, Sustainability and Social Responsibility We strive to maintain a high level of ethics and integrity in our business practices.
For additional information on regulation and the potential impact of regulatory changes on our business, refer to the regulation risk factor within Item 1A. "Risk Factors." of this Form 10-K. Corporate Governance, Sustainability, and Social Responsibility We strive to maintain high ethics and integrity in our business practices.
To address the increasing complexity of coverage evaluation, construction methods, and litigation, we have structured our claims organization to emphasize: • Claims handling by technical areas of expertise, such as auto liability, general liability, property, and workers compensation, with each business line having a specialized claims unit focused on high severity or technically complex losses and litigation; • Claims customer managers and agency executives ("CAEs") who are responsible for enhancing the relationship among our policyholders, distribution partners, and claims operation.
To address the increasing complexity of coverage evaluation, construction methods, and litigation, we have structured our claims organization to emphasize: • Claims handling by technical areas of expertise, such as automobile liability, general liability, property, and workers 13 Table of Contents compensation, with each business line having a specialized claims unit focused on high severity or technically complex losses and litigation; • Claims customer managers and agency executives ("CAEs") who are responsible for enhancing the relationship among our policyholders, distribution partners, and claims operation.
Several nationally recognized statistical rating organizations ("NRSROs") issue opinions on our financial strength, operating performance, strategic position, and ability to meet policyholder obligations, as follows: NRSRO Financial Strength Rating Outlook AM Best A+ Stable Standard & Poor’s Global Ratings ("S&P") A Stable Moody’s Investors Services ("Moody’s") A2 Stable Fitch Ratings ("Fitch") A+ Stable We believe our AM Best rating has the greatest influence on our ability to write insurance business.
Several nationally recognized statistical rating organizations ("NRSROs") issue opinions on our financial strength, operating performance, strategic position, and ability to meet policyholder obligations, as follows: NRSRO Financial Strength Rating Outlook AM Best A+ Stable Standard & Poor’s Global Ratings ("S&P") A Stable Moody’s Investors Services ("Moody’s") A2 Positive Fitch Ratings ("Fitch") A+ Stable We believe our AM Best rating has the most significant influence on our ability to write insurance business.
As of December 31, 2022, 50% of our customers registered for MySelective, compared to 47% as of December 31, 2021. MySelective gives policyholders on-demand self-service access to account information, electronic bill payment, and claims reporting. We continue to provide customers with additional digital value-added services, such as proactive messaging about vehicle and product recalls, adverse weather, and claim status.
As of December 31, 2023, 56% of our customers registered for MySelective, compared to 50% as of December 31, 2022. MySelective gives policyholders on-demand self-service access to account information, electronic bill payment, and claims reporting. We continue to provide customers with additional digital value-added services, such as proactive messaging about vehicle and product recalls, adverse weather, and claim status.
We brand these services as "Safety Management: Solutions for a safer workplace." SM We have 86 Safety Management Specialists ("SMS") in the field supporting our policyholders locally. These specialists regularly interact with current and prospective customers. Their safety enhancement and best practices recommendations reduce our customers' property, liability, and workers compensation risks, including higher profile risks like sexual abuse.
We brand these services as "Safety Management: Solutions for a safer workplace." SM We have 93 Safety Management Specialists ("SMSs") in the field supporting our policyholders locally. These specialists regularly interact with current and prospective customers. Their safety enhancement and best practices recommendations reduce our customers' property, liability, and workers compensation risks, including higher-profile risks like sexual abuse.
We balance those objectives against prevailing market conditions, capital preservation considerations, and our enterprise risk-taking appetite. We maintain (i) a well-diversified portfolio across issuers, sectors, and asset classes; and (ii) a high credit quality fixed income securities portfolio with a duration and maturity profile at an acceptable risk level that provides ample liquidity.
We balance those objectives against prevailing market conditions, capital preservation considerations, and our enterprise risk-taking appetite. We maintain (i) a well-diversified portfolio across issuers, sectors, and asset classes and (ii) a high credit quality fixed income securities portfolio with a duration and maturity profile at an acceptable risk level that 14 Table of Contents provides ample liquidity.
These expenses include, but are not limited to, certain labor expenses, depreciation expense, and policyholder dividends. 5 Table of Contents Total underwriting expenses are the sum of Amortization of deferred policy acquisition costs and Other insurance expenses, offset by Other income on our Consolidated Statements of Income.
These expenses include, but are not limited to, certain labor expenses, depreciation expense, and policyholder dividends. Total underwriting expenses are the sum of Amortization of deferred policy acquisition costs and Other insurance expenses, offset by Other income on our Consolidated Statements of Income.
Our Flood business has offices in Branchville, New Jersey, and Miami, Florida. Our Staff Counsel operation, which defends our policyholders with employee-lawyers, has seven leased offices in the Eastern region of the U.S. Distribution Channel The property and casualty insurance market is highly competitive and regulated, and has fragmented market share, particularly in standard commercial lines.
Our Flood business has offices in Branchville, New Jersey, and Miami, Florida. Our Staff Counsel operation, which defends our policyholders with employee-lawyers, has ten leased offices primarily located in the Eastern region of the U.S. Distribution Channel The property and casualty insurance market is highly competitive and regulated, with fragmented market share, particularly in standard commercial lines.
Underwriting Process Our underwriting process by segment is as follows: • Standard Commercial Lines : Our Standard Commercial Lines corporate underwriting department oversees our underwriting guidelines and philosophy for each industry segment and line of business.
Underwriting Process Our underwriting process by segment is as follows: • Standard Commercial Lines : Our Standard Commercial Lines corporate underwriting department oversees our underwriting guidelines and philosophy for each SBU and line of business.
To help our agency partners grow profitability and succeed, we establish meaningful and close business relationships by (i) soliciting, gathering, and acting on their feedback and that of our mutual customers on various topics, including our products and services and brand awareness, (ii) advising them on our new product offerings, and (iii) providing education and development programs focused on producer recruitment, sales training, customer experience enhancement, online marketing, and distribution operations. • Develop and carefully monitor annual goals with each distribution partner on (i) the types and mix of risks they place with us, (ii) new business and renewal retention expectations, (iii) customer service and engagement rates, (iv) new business and renewal pricing, and (v) the profitability of the business they place with us. • Develop brand recognition and meaningful customer engagement through a data-driven multi-channel marketing strategy focused on delivering a superior customer experience.
To help our agency partners grow profitability and succeed, we establish meaningful and close business relationships by 10 Table of Contents (i) soliciting, gathering, and acting on their feedback and that of our mutual customers on various topics, including our products and services and brand awareness, (ii) advising them on our new product offerings, and (iii) providing education and development programs focused on producer recruitment, sales training, agency perpetuation, customer experience enhancement, online marketing, and distribution operations. • Develop and carefully monitor annual goals with each distribution partner on (i) the types and mix of risks they place with us, (ii) new business and renewal retention expectations and pricing, and (iii) the profitability of the business they place with us. • Develop brand recognition and meaningful customer engagement through a data-driven multi-channel marketing strategy focused on delivering a superior customer experience.
Flood insurance, reported in this segment, is sold in all 50 states and the District of Columbia. • E&S Lines products and services are sold in all 50 states and the District of Columbia. We began writing Standard Commercial Lines business in Vermont in June 2022 and Alabama and Idaho in October 2022.
Flood insurance, reported in this segment, is sold in all 50 states and the District of Columbia. • E&S Lines products and services in all 50 states and the District of Columbia. In 2022, we began writing Standard Commercial Lines business in Vermont, Alabama, and Idaho.
Insurance operations-related expenses fall into three categories on our Consolidated Statements of Income: (i) "Loss and loss expense incurred," which includes losses associated with claims and loss expenses for adjusting claims incurred during a policy's term, net of losses and loss expenses ceded to reinsurers; (ii) "Amortization of deferred policy acquisition costs," which includes expenses related to the successful acquisition of insurance policies, such as commissions to our distribution partners and premium taxes, recognized ratably over a policy's term; and (iii) "Other insurance expenses," which includes acquisition and other insurance-related expenses not otherwise classified as "Loss and loss expense incurred" or "Amortization of deferred policy acquisition costs" incurred in maintaining policies and policyholder dividends.
Underwriting income/loss is NPE minus insurance operations-related expenses incurred. 5 Table of Contents Insurance operations-related expenses fall into three categories on our Consolidated Statements of Income: (i) "Loss and loss expense incurred," which includes losses associated with claims and loss expenses for adjusting claims incurred during a policy's term, net of losses and loss expenses ceded to reinsurers; (ii) "Amortization of deferred policy acquisition costs," which includes expenses related to the successful acquisition of insurance policies, such as commissions to our distribution partners and premium taxes, recognized ratably over a policy's term; and (iii) "Other insurance expenses," which includes acquisition and other insurance-related expenses not otherwise classified as "Loss and loss expense incurred" or "Amortization of deferred policy acquisition costs" incurred in maintaining policies and policyholder dividends.
All our strategies and controls, however, have inherent limitations. We cannot be certain that an event or series of unanticipated events will (i) occur or not occur, and generate losses greater than we expect, and (ii) have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings.
All our strategies and controls, however, have inherent limitations. We cannot be 19 Table of Contents sure that an event or series of unanticipated events will (i) occur or not occur and generate losses greater than we expect and (ii) have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings.
As of December 31, 2022, our fixed income securities and short-term investments had a weighted average credit rating of "AA-" and an effective duration of 4.1 years, compared to "A+" and 3.9 years as of December 31, 2021. For additional information about our investments segment's design and credit quality characteristics, see "Credit Risk" in Item 7A.
As of December 31, 2023, our fixed income securities and short-term investments had a weighted average credit rating of "AA-" and an effective duration of 4.0 years, compared to "AA-" and 4.1 years as of December 31, 2022. For additional information about our investments segment's design and credit quality characteristics, see "Credit Risk" in Item 7A.
"Management’s Discussion and Analysis of Financial Condition and Results of Operations." We believe that we have created an effective control environment for managing natural catastrophe risk on a gross exposure basis by (i) setting overall portfolio growth expectations, (ii) monitoring actual results and property aggregations, (iii) having appropriate underwriting authority controls around our largest accounts, and (iv) consistently focusing on appropriate pricing of catastrophe risk.
We believe that we have created an effective control environment for managing natural catastrophe risk on a gross exposure basis by (i) setting overall portfolio growth expectations, (ii) monitoring actual results and property aggregations, (iii) having appropriate underwriting authority controls around our largest accounts, and (iv) consistently focusing on appropriate pricing of catastrophe risk.
For further details about our 2022 ROE results, please see "Financial Highlights of Results for Years Ended December 31, 2022, 2021, and 2020" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." of this Form 10-K.
For further details about our 2023 ROE results, please see "Financial Highlights of Results for Years Ended December 31, 2023, 2022, and 2021" in Item 7. "Management's Discussion and Analysis of Financial Condition and 7 Table of Contents Results of Operations." of this Form 10-K.
For further discussion on this model, see the "Technology, Innovation, and Operating Model" section below. 10 Table of Contents • Develop a distribution model that emphasizes the franchise value of appointment to sell our Insurance Subsidiaries' products and services to the principals and producers of our high-quality independent insurance agency partners.
For further discussion on this model, see the "Technology, Innovation, and Operating Model" section below. • Execute on a distribution model that emphasizes the franchise value of appointment to sell our Insurance Subsidiaries' products and services to the principals and producers of our high-quality independent insurance agency partners.
Our primary technology operations are in Branchville, New Jersey, and Glastonbury, Connecticut. We have agreements with multiple consulting, IT, and supplemental staffing service providers to augment our internal resources. Collectively, these providers supply approximately 53% of our skilled technology capacity, with 74% of their resources overseas. We retain management oversight of all projects and ongoing IT production operations.
Our primary technology operations are in Branchville, New Jersey, and Glastonbury, Connecticut. We have agreements with multiple consulting, IT, and supplemental staffing service providers to augment our internal resources. These providers supply approximately 54% of our skilled technology capacity, with 78% of their resources located overseas. We retain management oversight of all projects and ongoing IT production operations.
Under the CUO's delegated authorities, our regional underwriting operations make most individual policyholder underwriting and pricing decisions. New business is underwritten by Agency Management Specialists ("AMSs"), with contributions from Production Underwriters, Small Business Teams, and Large Account Underwriters. Renewal business is primarily handled in each region, with support from our USC, which assigns underwriters to specific distribution partners.
Under the CUO's delegated authorities, our regional underwriting operations make most individual policyholder underwriting and pricing decisions. New business is underwritten by Agency Management Specialists ("AMSs"), with contributions from Production Underwriters, Small Business Teams, and Large Account Underwriters. Renewal business is primarily handled in each region with support from our USC.
We make these technology investments to provide: • Our distribution partners with accurate business information and seamless integration with our systems, permitting easy policy transaction processing; • Our service representatives with a customer account-centric view of our policyholders, reducing customer inquiry response time and complementing customer access to on-demand digital transactional capabilities; • Our underwriters with advanced underwriting and pricing tools and predictive models that provide guidance and automatic retrieval of relevant public information on existing and potential policyholders, enhancing profitability and enabling premium growth; and • Our claims adjusters with predictive tools to identify specific claims likely to experience escalating losses, fraud, subrogation opportunities, or litigation.
We make these technology investments to provide: • Our distribution partners with accurate business information and seamless integration with our systems, permitting easy policy transaction processing; • Our service representatives with a customer account-centric view of our policyholders, reducing customer inquiry response time and complementing customer access to on-demand digital transactional capabilities; • Our underwriters with advanced underwriting and pricing tools and predictive models that provide guidance and automatic retrieval of relevant public information on existing and potential policyholders, allowing for improved and quicker decisions, contributing to enhanced profitability and premium growth; and • Our claims adjusters with predictive tools to identify specific claims likely to involve escalating losses, fraud, subrogation opportunities, or litigation.
Marketing Our primary marketing strategy is to: • Use an empowered field underwriting model for Standard Commercial Lines to provide our distribution partners with resources near their businesses and our mutual customers.
Marketing Our primary marketing strategy is to: • Use a locally-based, empowered field underwriting model for Standard Commercial Lines to provide our distribution partners with resources near their businesses and our mutual customers.
Ultimately, we plan to expand our Standard Commercial Lines footprint to most of the contiguous U.S. 9 Table of Contents We manage and support our business from offices in (i) Branchville, New Jersey, where we have our corporate headquarters, (ii) Farmington, Connecticut, the principal office for investment operations, (iii) Glastonbury, Connecticut, used by several corporate areas, but primarily our information technology ("IT") department, (iv) Richmond, Virginia, the location of our underwriting and claims service center ("USC"), and (v) six regional branches, with locations shown in the following table: Region Office Location Heartland Indianapolis, Indiana New Jersey Hamilton, New Jersey Northeast Branchville, New Jersey Mid-Atlantic Allentown, Pennsylvania, and Hunt Valley, Maryland Southern Charlotte, North Carolina West Scottsdale, Arizona Our E&S Lines have offices in Scottsdale, Arizona and Dresher, Pennsylvania.
We manage and support our business from offices in (i) Branchville, New Jersey, our corporate headquarters, (ii) Farmington, Connecticut, the principal office for investment operations, (iii) Glastonbury, Connecticut, used by several corporate areas, but primarily our information technology ("IT") department, (iv) Richmond, Virginia, the location of our underwriting and claims 9 Table of Contents service center ("USC"), and (v) six regional branches, with the locations listed in the following table: Region Office Location Heartland Indianapolis, Indiana New Jersey Hamilton, New Jersey Northeast Branchville, New Jersey Mid-Atlantic Allentown, Pennsylvania, and Hunt Valley, Maryland Southern Charlotte, North Carolina West Scottsdale, Arizona Our E&S Lines have offices in Scottsdale, Arizona, and Dresher, Pennsylvania.
Our risk governance structure consists of the following major components: Risk Oversight Board of Directors • Executive Committee • Finance Committee • Corporate Governance & Nominating Committee ("CGNC") • Salary & Employee Benefits Committee • Audit Committee 2 STRATEGY SETTING AND ESTABLISHING RISK TOLERANCE Risk Management Management & Operating Committees • Management Investment Committee ("MIC") • Reserve Committee • Underwriting Committee • Executive Risk Committee ("ERC") • Emerging Risk Committee • Sustainability Committee • Enterprise Project Management Office ("EPMO") • Disclosure Committee • Large Claims Committee • Market Security Committee ("MSC") 2 APPETITE AND LIMIT GOVERNANCE Risk Identification & Reporting Enterprise Risk Management Function • Supported by individual business units and functional areas.
Our risk governance structure consists of the following major components: Risk Oversight Board of Directors • Executive Committee • Finance and Investments Committee • Corporate Governance and Nominating Committee ("CGNC") • Compensation and Human Capital Committee • Audit Committee • Risk Committee 2 STRATEGY SETTING AND ESTABLISHING RISK TOLERANCE Risk Management Management and Operating Committees • Management Investment Committee ("MIC") • Reserve Committee • Underwriting Committee • Executive Risk Committee • Emerging Risk Committee • Disclosure Committee • Enterprise Project Management Office ("EPMO") • Market Security Committee ("MSC") • Large Claims Committee 2 APPETITE AND LIMIT GOVERNANCE Risk Identification & Reporting Enterprise Risk Management Function • Supported by individual business units and functional areas.
Our internal control framework follows the Committee of Sponsoring Organizations of the Treadway Commission (COSO) model, deploying three lines of defense: • The first line of defense is the individual business functions that deliberately assume, own, and manage the risk on a daily operational basis. 17 Table of Contents • The second line of defense is responsible for risk oversight, supporting the first line to understand, monitor, and manage our risk profile through an ERC and dedicated risk team. • The third line of defense is our Internal Audit team, which provides separate, objective assurance in assessing the adequacy and effectiveness of our internal control environment with oversight from our Board's Audit Committee.
Our internal control framework follows the Committee of Sponsoring Organizations of the Treadway Commission (COSO) model, deploying three lines of defense: • The first line of defense is the individual business functions that deliberately assume, own, and manage the risk on a daily operational basis. • The second line of defense is responsible for risk oversight, supporting the first line in understanding, monitoring, and managing our risk profile through an Executive Risk Committee ("ERC") and dedicated risk team. • The third line of defense is our Internal Audit team, which provides separate, objective assurance in assessing the adequacy and effectiveness of our internal control environment with oversight from our Board's Audit Committee.
We are committed to understanding and mitigating risk, serving our customers responsibly, enabling our employees’ professional success and work/life balance, and helping the communities in which we live, work, and serve, while being environmentally responsible. Corporate Governance Strong governance, oversight, and transparency are the foundation of our financial and operating success.
We are committed to understanding and mitigating risk, serving customers and distribution partners responsibly, enabling our employees’ professional development and work/life balance, and helping the communities where we live, work, and serve while being environmentally responsible. Corporate Governance Strong governance, oversight, and transparency are the foundation of our financial and operating success.
We compete primarily with regional and national insurers on coverage terms, claims service, customer experience, safety management services, ease of technology usage, price, and financial strength ratings. We also face increased competition from established direct-to-consumer insurers, existing competitors, and new entrants, many with lower cost structures and digital technology with enhanced servicing and customer experience capabilities.
We compete primarily with regional and national insurers on coverage terms, claims service, customer experience, safety management services, ease of technology use, price, value-added services, and financial strength ratings. We also face increased competition from established direct-to-consumer insurers, existing competitors, and new entrants, many with lower cost structures and digital technology.
We expect this integrated marketing and customer engagement approach will position us as a marketplace leader and (i) afford us a dynamic view of the changing marketplace and customer expectations, (ii) provide us insight into unique value-added products and services with the greatest impact on each customer, and (iii) help drive business acquisition and retention, and brand health.
We expect this integrated marketing and customer engagement approach will position us as a marketplace leader and (i) afford us a dynamic view of the changing marketplace and customer expectations, (ii) provide us insight into unique value-added products and services that might have the greatest impact on each customer, and (iii) help drive brand health and perception leading to increased retention and business acquisition.
We have a mature risk culture and governance structure that are cornerstones of our risk management framework, and are designed to enhance the decision making process and strengthen risk-reward evaluations.
Our mature risk culture and governance structure are cornerstones of our risk management framework, designed to enhance the decision making process and strengthen risk-reward evaluations.
We generate (i) 1.1 points of ROE for each point on the combined ratio and (ii) 2.6 points of ROE for each point of pre-tax investment yield. In 2022, our underwriting and investment income helped generate an 8.8% ROE and a 12.4% non-GAAP operating ROE, with the latter exceeding our 11% ROE target.
We generate (i) 1.2 points of ROE for each point on the combined ratio and (ii) 2.6 points of ROE for each point of pre-tax investment yield. In 2023, our underwriting and investment income helped generate a 14.3% ROE and a 14.4% non-GAAP operating ROE, with the latter exceeding our 12% non-GAAP operating ROE target.
Our insurance subsidiaries transfer risks through an internal reinsurance pooling agreement by which each shares in premiums and losses based on specified percentages. For information regarding our reinsurance treaties and agreements, see "Reinsurance" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." of this Form 10-K.
Our insurance subsidiaries transfer risks and share premiums and losses based on percentages specified in an internal reinsurance pooling agreement. For information on our reinsurance treaties and agreements, see "Reinsurance" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." of this Form 10-K.
The combined ratio is calculated by adding (i) the loss and loss expense ratio, which is the ratio of net loss and loss expense incurred to NPE, (ii) the expense ratio, which is the ratio of underwriting expenses to NPE, and (iii) the dividend ratio, which is the ratio of policyholder dividends to NPE.
The combined ratio is the sum of (i) the loss and loss expense ratio, which is the ratio of net loss and loss expense incurred to NPE, (ii) the expense ratio, which is the ratio of underwriting expenses to NPE, and (iii) the dividend ratio, which is the ratio of policyholder dividends to NPE.
Approximately 78% of our workforce was White at year-end 2022, compared to 80% at year-end 2021, and 22% were a combination of Black, Latin, Asian, and all other ethnicities combined, compared to 20% at December, 31, 2021. We have a diverse board, with five directors on our Board identifying as part of one or more underrepresented groups.
Approximately 77% of our workforce was White at year-end 2023, compared to 78% at year-end 2022, and 23% were a combination of Black, Latin, Asian, and all other ethnicities combined at year-end 2023, compared to 22% at year-end 2022. We have a diverse Board, with five directors on our Board identifying as part of one or more underrepresented groups.
RBC is measured by four major areas of risk to which property and casualty insurers are exposed: (i) asset risk; (ii) credit risk; (iii) underwriting risk; and (iv) off-balance sheet risk. Regulators increase their scrutiny, up to and including intervention, as an insurer's total adjusted capital declines below the NAIC required capital level.
RBC is measured by four major property and casualty insurance risks: (i) asset risk; (ii) credit risk; (iii) underwriting risk; and (iv) off-balance sheet risk. Regulators increase their scrutiny, up to and including intervention, as an insurer's total adjusted capital declines below the NAIC-required capital level.
We are comfortable operating our business with operating leverage above the industry average, as we believe we have a lower financial risk profile than the industry, as noted below. Because we write more longer-tail casualty insurance than shorter-tail property insurance, our operating leverage is higher than the industry average. We also operate with higher investment leverage than the industry.
Used with permission.). We are comfortable managing our business with operating leverage above the industry average, as we believe we have a lower financial risk profile than the industry, as noted below. Primarily because we write more longer-tail casualty insurance than shorter-tail property insurance, our operating leverage is higher than the industry average.
Investments We are beginning to incorporate ESG considerations into our investment process. To establish appropriate ESG investment governance, we maintain (i) a well-diversified portfolio across issuers, sectors, and asset classes; and (ii) a high credit quality fixed income securities portfolio with a duration and maturity profile at an acceptable risk level that provides ample liquidity.
Investments We incorporate sustainability considerations into our robust investment due diligence processes. To establish appropriate sustainability investment governance, we maintain (i) a well-diversified portfolio across issuers, sectors, and asset classes, and (ii) a high credit quality fixed income securities portfolio with a duration and maturity profile at an acceptable risk level that provides ample liquidity.
To better manage the risks of our higher investment leverage, we have adopted a conservative investment management philosophy, with fixed income securities and short-term investments representing 90% of our invested assets.
To better manage the risks of our higher investment leverage, we have adopted a conservative investment management philosophy, with fixed income securities and short-term investments representing 92% of our invested assets as of December 31, 2023.
"Management’s Discussion and Analysis of Financial Condition and Results of Operations." Managing Climate-related Risks For information regarding our risks associated with climate change, refer to risks identified with the symbol " " in Item 1A. "Risk Factors." of this Form 10-K.
"Management’s Discussion and Analysis of Financial Condition and Results of Operations." Managing Climate-related Risks For information regarding our risks associated with climate change, refer to risks identified with the symbol " " in Item 1A.
Our strong financial strength and lower financial and underwriting risk profile have permitted us to operate with higher operating leverage than most of our industry. This strategy requires us to balance growth and profit, providing us the opportunity to generate higher underwriting and investment portfolio ROEs when profitable.
Our financial strength and lower investment and underwriting risk profile have permitted us to operate with higher operating leverage than the industry average. This strategy requires us to balance growth and profit, allowing us to generate higher underwriting and investment portfolio ROEs when profitable.
We derive nearly all of our income/loss in three ways: • Underwriting income/loss from our insurance operations . DPW, gross premiums, NPW, and net premiums earned (“NPE”) are components of evaluating underwriting income/loss. DPW are what we bill policyholders for insurance coverage and services. Gross premiums are DPW plus premiums assumed from other insurers and mandatory pools and associations.
We derive nearly all of our income/loss in three ways: • Underwriting income/loss from our insurance operations . DPW, gross premiums, NPW, and net premiums earned ("NPE") are components of evaluating underwriting income/loss. DPW are the amounts billed to policyholders for insurance coverage and services. Gross premiums are DPW plus premiums assumed from other insurers and mandatory pools and associations.
In addition, we are working with our third-party investment managers to ensure they incorporate ESG guidelines and protocols into their investment process while managing our mandates.
In addition, we work with our third-party investment managers to ensure they incorporate sustainability guidelines and protocols into their investment process while managing our mandates.
Federal Regulation While primarily regulated at the state level, our business is subject to federal laws and regulations, including: • The McCarran-Ferguson Act; • The Terrorism Risk Insurance Program Reauthorization Act ("TRIPRA"); • The NFIP, overseen by the Mitigation Division of the Federal Emergency Management Agency ("FEMA"); • The Medicare, Medicaid, and SCHIP Extension Act of 2007, which subjects our workers compensation business to Mandatory Medicare Secondary Payer Reporting; • The economic and trade sanctions of the Office of Foreign Assets Control ("OFAC"); • Various privacy laws related to possessing personal non-public information, including the following: ◦ Gramm-Leach-Bliley Act; ◦ Fair Credit Reporting Act; ◦ Drivers Privacy Protection Act; and ◦ Health Insurance Portability and Accountability Act. • The Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) govern publicly-traded companies and require or permit national stock exchanges or associations, such as the Nasdaq Stock Market LLC, where we list our equity securities, to mandate certain governance practices.
Federal Regulation While primarily regulated at the state level, our business is subject to federal laws and regulations, including: • The McCarran-Ferguson Act; • The Terrorism Risk Insurance Program Reauthorization Act ("TRIPRA"); • The NFIP, overseen by the Mitigation Division of the Federal Emergency Management Agency ("FEMA"); • The Medicare, Medicaid, and SCHIP Extension Act of 2007, which subjects our workers compensation business to Mandatory Medicare Secondary Payer Reporting; • The economic and trade sanctions of the Office of Foreign Assets Control ("OFAC"); • Various privacy laws related to possessing personal non-public information, including the following: ◦ Gramm-Leach-Bliley Act; ◦ Fair Credit Reporting Act; ◦ Drivers Privacy Protection Act; and ◦ Health Insurance Portability and Accountability Act. • The Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) govern publicly-traded companies.
Investments Segment Our investment portfolio's objectives are to maximize after-tax net investment income and generate long-term book value per share growth. We maximize the portfolio's overall total return by investing our insurance operation's premiums and the amounts generated through our capital management strategies, including debt and equity security issuances.
Investments Segment Our investment portfolio's objectives are to maximize after-tax net investment income and generate long-term growth in book value per share. We aim to accomplish this by maximizing the portfolio's overall total return by investing (i) the premiums from our insurance operations and (ii) amounts generated through our capital management strategies, including debt and equity security issuances.
We conduct quarterly ground-up reserve reviews for most lines of business, with semi-annual reserve reviews by an independent third-party actuary who issues our year-end regulatory actuarial reserve opinions; • We purchase significant levels of reinsurance, including (i) a property catastrophe reinsurance program that limits the net after-tax impact of a 1-in-250 year catastrophe to about 7% of our GAAP equity, and (ii) property and casualty excess of loss reinsurance agreements that limit our retained losses of individual property claims losses to $3 million per risk and casualty claims to $2 million per occurrence; and • We maintain a conservative investment portfolio, with high quality and liquid fixed income and short-term investments, and roughly a 10%-14% allocation to risk assets.
We conduct quarterly ground-up reserve reviews for most lines of business, with semi-annual reserve reviews by an independent third-party actuary who issues our year-end regulatory actuarial reserve opinions; • We purchase significant levels of reinsurance, including (i) a property catastrophe reinsurance program that limits the net after-tax impact of a 1-in-250-year catastrophe to about 4% of our GAAP equity through traditional privately placed reinsurance and a newly-issued catastrophe bond transaction, which provides additional, fully-collateralized coverage at the top end of our reinsurance program and (ii) property and casualty excess of loss reinsurance agreements that limit our retained losses of individual property claims losses to $5 million per risk and casualty claims to $2 million per occurrence; and • We maintain a conservative investment portfolio, with high quality liquid fixed income and short-term investments, and a 10%-14% allocation to risk assets.
Technology, Innovation, and Operating Model We continue to evolve our technology and operating model, maintaining a strong focus on innovation and providing our customers and distribution partners with "around the clock" digital access to account information and transactional capabilities.
Technology, Innovation, and Operating Model We continue to evolve our technology and operating model, focusing on innovation and providing our customers and distribution partners with a superior omnichannel experience and "around-the-clock" digital access to account information and transactional capabilities.
Large Claims Committee — Responsible for the oversight of claims that: (i) have or are likely to exceed a reinsurance policy coverage limit; (ii) have a bad faith exposure of $15 million or more; (iii) are likely to generate significant bad publicity; or (iv) potentially create a significant legal precedent on an insurance coverage issue.
Claims that (i) have or are likely to exceed a reinsurance policy coverage limit, (ii) have bad faith exposure of $15 million or more, (iii) are likely to generate significant news interest or negative publicity, or (iv) potentially create a significant legal precedent on an insurance coverage issue are reported to the Board's Risk Committee.
Our average 2022 E&S lines premium per policyholder was approximately $3,800. • Investments, which represents 5% (including net realized and unrealized gains and losses) of Total revenues, invests the (i) premiums collected by our Insurance Subsidiaries and (ii) amounts generated through our capital management strategies, including debt and equity securities issuance.
Our average 2023 E&S lines premium per policyholder was approximately $4,600. • Investments, which represents 9% (including net realized and unrealized gains and losses) of Total revenues, invests the (i) premiums our Insurance Subsidiaries collect and (ii) amounts generated through our capital management strategies, including debt and equity securities issuance.
We refer throughout this document to the Parent and the Insurance Subsidiaries collectively as "we," "us," or "our," using Parent only to distinguish it from the Insurance Subsidiaries. We also use specific property and casualty industry-related terms defined in a glossary attached as Exhibit 99.1 to this Form 10-K. Our main office is in Branchville, New Jersey.
Throughout this document, we refer to the Parent and the Insurance Subsidiaries collectively as "we," "us," or "our." We use the term "Parent" when appropriate to distinguish it from the Insurance Subsidiaries. We also use specific property and casualty industry-related terms defined in a glossary attached as Exhibit 99.1 to this Form 10-K.
Loss and loss expense reserves are one of our critical accounting estimates and represent the ultimate amounts we will need in the future to pay covered claims and related expenses that have not yet been settled or reported.
Loss and loss expense reserves are one of our critical accounting estimates and represent the ultimate amounts we will need in the future to pay covered claims and related expenses that have been incurred under policies we have sold, but have not yet been paid.

… 140 more changes not shown on this page.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

100 edited+10 added−18 removed54 unchanged
Biggest changeIn addition to considering the effects of any action on our shareholders (including any offer or proposal to acquire the Parent), our Board may consider: (i) the long-term, and short-term interests of the Parent and our shareholders, including the possibility that these interests may best be served by the Parent's continued independence; (ii) the effects of the action on the Parent's employees, suppliers, creditors, and customers; and (iii) the effects of the action on the community in which the Parent operates. 33 Table of Contents These provisions of our Amended and Restated Certificate of Incorporation and New Jersey law could deprive our common shareholders of an opportunity to receive a premium over the prevailing market price in a hostile takeover and could adversely affect the value of our common stock.
Biggest changeIn addition to considering the effects of any action on our shareholders (including any offer or proposal to acquire the Parent), our Board may consider (i) the long-term, and short-term interests of the Parent and our shareholders, including the possibility that the Parent’s continued independence may best serve these interests, (ii) the effects of the action on the Parent's employees, suppliers, creditors, and customers, and (iii) the effects of the action on the community in which the Parent operates.
An economic downturn also could lead to increased credit and premium receivable risk, failure of reinsurance counterparties and other financial institutions, limitations on our ability to issue new debt, reduced liquidity, and declines in our investments' fair value and financial strength ratings.
An economic downturn could also lead to increased credit and premium receivable risk, failure of reinsurance counterparties and other financial institutions, limitations on our ability to issue new debt, reduced liquidity, and declines in our investments' fair value and financial strength ratings.
If we fail to comply with these public statements or federal and state privacy-related and data protection laws and regulations, we could be subject to litigation or governmental actions. Such proceedings could impact our reputation and result in penalties, including ongoing audit requirements and significant legal liability.
We could be subject to litigation or governmental actions if we fail to comply with these public statements or federal and state privacy-related and data protection laws and regulations. Such proceedings could impact our reputation and result in penalties, including ongoing audit requirements and significant legal liability.
Our systems also house proprietary and confidential information, including PII, about our operations, employees, agents, and customers and their employees and property.
Our systems also house proprietary and confidential information about our operations, employees, agents, and customers and their employees and property, including PII.
Certain factors can impact our estimates of ultimate costs for natural and/or human-made catastrophes, including: • Inability to access portions of the affected areas after a catastrophic event; • Scarcity of necessary labor and materials that delay repairs and increase our loss costs; • Regulatory uncertainties, including new or expanded interpretations of coverage; • Residual market assessment-related increases in our catastrophe losses; • Potential fraud and inflated repair costs, partly driven by (a) demand surge post-event, and (b) opportunistic service providers; • Higher loss adjustment expenses due to shortages of claims adjusters available to appraise damage; • Late claims reporting; • Escalation of business interruption costs due to infrastructure disruption; and • Whether the U.S.
Certain factors can impact our estimates of ultimate costs for natural and/or human-made catastrophes, including: • Inability to access portions of the affected areas after a catastrophic event; • Scarcity of necessary labor and materials that delay repairs and increase our loss costs; • Regulatory uncertainties, including new or expanded interpretations of coverage; • Residual market assessment-related increases in our catastrophe losses; • Potential fraud and inflated repair costs, partly driven by (a) demand surge post-event and (b) opportunistic service providers; • Higher loss expenses due to shortages of claims adjusters available to appraise damage; • Late claims reporting; • Escalation of business interruption costs due to infrastructure disruption; and • Whether the U.S.
Our ability to compete successfully depends heavily on our timely and consistent introduction of innovative new products and services. We face substantial competition from a wide range of property and casualty insurance companies for customers, distribution partners, and employees. Competitors include public, private, and mutual insurance companies.
Our ability to compete depends heavily on our timely and consistent introduction of innovative new products and services. We face substantial competition from a wide range of property and casualty insurance companies for customers, distribution partners, and employees. Competitors include public, private, and mutual insurance companies.
We face credit risk in several areas of our insurance operations, including from: • Our reinsurers, which are obligated to make us payments under our reinsurance agreements. Reinsurance credit risk can fluctuate over time, increasing during periods of high industry catastrophe and liability losses.
We are exposed to credit risk. We face credit risk in several areas of our insurance operations, including from: • Our reinsurers, which are obligated to make us payments under our reinsurance agreements. Reinsurance credit risk can fluctuate over time, increasing during periods of high industry catastrophe and liability losses.
A downgrade or a potential downgrade in our financial strength or credit ratings could result in a loss of business and could have a material adverse effect on our financial condition and results of operations. A significant financial strength rating downgrade, particularly from AM Best, would affect our ability to write new or renewal business.
A downgrade or a potential downgrade in our financial strength or credit ratings could result in a loss of business and have a material adverse effect on our financial condition and results of operations. A significant financial strength rating downgrade, particularly from AM Best Company ("AM Best"), would affect our ability to write new or renewal business.
Our operations are subject to complex and changing state and federal laws, regulations, and public policy debates on subjects, including, without limitation, the following: • Pricing and underwriting practices; • Claims practices; • Loss and loss adjustment expense reserves; • Exiting geographic markets and/or canceling or non-renewing policies; • ESG-related issues, including ESG investment mandates; • Climate change, including potential liability for related public disclosures; • Assessments for guaranty funds and second-injury funds, and other mandatory assigned risks and reinsurance; • The types, quality, and concentration of investments we make; • Minimum capital requirements for the Insurance Subsidiaries; • Dividends from our Insurance Subsidiaries to the Parent; • Privacy and data security; • Tax; • Antitrust; • Consumer protection; • Advertising; • Sales; • Billing and e-commerce; • Intellectual property ownership and infringement; • Digital platforms; • Internet, telecommunications, and mobile communications; • Media and digital content; • Availability of third-party software applications and services; • Labor and employment; • Anti-money laundering; and • Workplace environmental, health, and safety issues.
Our operations are subject to complex and changing state and federal laws, regulations, and public policy debates on subjects, including, without limitation, the following: • Pricing and underwriting practices; • Claims practices; • Loss and loss expense reserves; • Exiting geographic markets and/or canceling or non-renewing policies; • Sustainability-related issues, including sustainability investment mandates; • Climate change, including potential liability for related public disclosures; • Assessments for guaranty funds and second-injury funds, and other mandatory assigned risks and reinsurance; • The types, quality, and concentration of investments we make; • Minimum capital requirements for the Insurance Subsidiaries; • Dividends from our Insurance Subsidiaries to the Parent; • Privacy and data security; • Tax; • Antitrust; • Consumer protection; • Advertising; • Sales; • Billing and e-commerce; • Intellectual property ownership and infringement; • Digital platforms; • Internet, telecommunications, and mobile communications; • Media and digital content; • Availability of third-party software applications and services; • Labor and employment; • Anti-money laundering; and • Workplace environmental, health, and safety issues.
If we are found to have violated laws and regulations, it could materially adversely affect our reputation, financial condition, and operating results. Our business is subject to various state, federal, and other laws, rules, policies, and other obligations regarding data protection.
If we are found to have violated laws and regulations, it could materially adversely affect our reputation, financial condition, and operating results. Our business is subject to various state, federal, and other laws, rules, policies, and other obligations regarding data use and protection.
For policies effective October 1, 2022, we implemented cyber incident exclusions that exclude malicious cyber except for the sub-limited coverage provided in the base ISO coverage forms and our property and businessowners' property “virus and harmful code” extension endorsements.
For policies effective October 1, 2022 and later, we implemented cyber incident exclusions that exclude malicious cyber except for the sub-limited coverage provided in the base ISO coverage forms and our property and businessowners' property “virus and harmful code” extension endorsements.
Our reinsurance coverage may prove to be inadequate, particularly if: • We do not purchase sufficient amounts of reinsurance because of defects or inaccuracies in the various modeling software programs we use to analyze our Insurance Subsidiaries' risk; • A major catastrophe loss exceeds (i) the purchased reinsurance limit or (ii) the financial capacity of one or more of our reinsurers even if the loss is within the purchased limit; • The combination of multiple catastrophe events in a single year is such that our Insurance Subsidiaries' insured losses exceed the aggregate limits of the catastrophe reinsurance treaty or our Insurance Subsidiaries experience an unusually large number of catastrophe losses that fall below our per occurrence reinsurance retention; • Our reinsurance counterparties (i) are unable to access their reinsurance markets, or retrocessions, (ii) suffer significant financial losses, (iii) are sold, (iv) cease writing reinsurance business, or (v) are unable or unwilling to satisfy their contractual obligations to us; or • The catastrophe losses insured in our primary policies are excluded from coverage in our reinsurance contracts.
Our reinsurance coverage may prove to be inadequate, particularly if: • We do not purchase sufficient amounts of reinsurance because of defects or inaccuracies in the various modeling 26 Table of Contents software programs we use to analyze our Insurance Subsidiaries' risk; • A major catastrophe loss exceeds (i) the purchased reinsurance limit or (ii) the financial capacity of one or more of our reinsurers even if the loss is within the purchased limit; • The combination of multiple catastrophe events in a single year is such that our Insurance Subsidiaries' insured losses exceed the aggregate limits of the catastrophe reinsurance treaty or our Insurance Subsidiaries experience an unusually large number of catastrophe losses that fall below our per occurrence reinsurance retention; • Our reinsurance counterparties (i) are unable to access their reinsurance markets, or retrocessions, (ii) suffer significant financial losses, (iii) are sold, (iv) cease writing reinsurance business, or (v) are unable or unwilling to satisfy their contractual obligations to us; or • The catastrophe losses insured in our primary policies are excluded from coverage in our reinsurance contracts.
Examples include, without limitation, hurricanes, tornadoes, windstorms, earthquakes, hail, severe convective storms, severe winter weather, derechos, floods, and fires, some related to climate change, and criminal and terrorist acts, including cyber-attacks, civil unrest, and explosions. The frequency and severity of these catastrophes are inherently unpredictable, and the frequency and severity of catastrophe losses have increased globally in recent years.
Examples include hurricanes, tornadoes, windstorms, earthquakes, hail, severe convective storms, severe winter weather, derechos, floods, and fires, some related to climate change, and criminal and terrorist acts, including cyber-attacks, civil unrest, and explosions. The frequency and severity of these catastrophes are inherently unpredictable, and the frequency and severity of catastrophe losses have increased globally in recent years.
We cannot be certain that an event or series of unanticipated events will not occur and result in losses greater than we expect. Given our higher-than-industry average operating leverage, an event or series of unanticipated events could have a more material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings compared to our industry.
We cannot be certain that an event or series of unanticipated events will not occur and result in greater than expected losses. Given our higher-than-industry average operating leverage, an event or series of unanticipated events could have a more material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings compared to our industry.
We are engaged in ordinary routine legal proceedings incidental to our insurance operations that include: • Defense of or indemnity for third-party suits brought against our insureds; • Defense of actions brought against us by our insureds who disagree with our coverage decisions, some of which allege bad faith claims handling and seek extra-contractual damages, punitive damages, or other penalties; • Actions we file, primarily for declaratory judgment, seeking confirmation that we have made appropriate coverage decisions under our insurance contracts; 32 Table of Contents • Actions brought against competitors or us alleging improper business practices and sometimes seeking class status.
We are engaged in ordinary routine legal proceedings incidental to our insurance operations that include: • Defense of or indemnity for third-party suits brought against our insureds; • Defense of actions brought against us by our insureds who disagree with our coverage decisions, some of which allege bad faith claims handling and seek extra-contractual damages, punitive damages, or other penalties; • Actions we file, primarily for declaratory judgment, seeking confirmation that we have made appropriate coverage decisions under our insurance contracts; • Actions brought against competitors or us alleging improper business practices and sometimes seeking class status.
This may interrupt our ability to operate and negatively impact our results of operations, despite our business continuity plans. Our long-term strategy to deploy operational leverage is dependent on the success of our risk management strategies, and their failure could have a material adverse effect on our financial condition or results of operations.
This may interrupt our ability to conduct business and negatively impact our results of operations, despite our business continuity plans. Our long-term strategy to deploy operational leverage is dependent on the success of our risk management strategies, and their failure could have a material adverse effect on our financial condition or results of operations.
These are discussed further below in the Risk Factor entitled, " We are engaged in ordinary routine legal proceedings incidental to our insurance operations that, because litigation outcomes are inherently unpredictable, could impact our reputation and/or have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods." For further discussion on our loss and loss expense reserves, please see the "Critical Accounting Policies and Estimates" section of Item 7.
These are discussed further below in the Risk Factor entitled, " We are engaged in ordinary routine legal proceedings incidental to our insurance operations that are inherently unpredictable and could impact our reputation and/or have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods." For further discussion on our loss and loss expense reserves, please see the "Critical Accounting Policies and Estimates" section of Item 7.
We have implemented systems and processes, through encryption and authentication technologies, intended to mitigate or secure our IT systems and prevent unauthorized access to, or loss of, sensitive data. As cyber-attacks continue to evolve daily, our security measures may not be sufficient for all eventualities.
Through encryption and authentication technologies, we have implemented systems and processes intended to mitigate or secure our IT systems and prevent unauthorized access to, or loss of, sensitive data. Cyber-attacks continue to evolve daily, so our security measures may not be sufficient for all eventualities.
The closer a catastrophe occurs to the end of a reporting period, the more likely we have limited information to estimate loss and loss expense reserves, increasing the uncertainty of our estimates. More detailed claims information available after a reporting period may result in reserve changes in subsequent periods.
The closer a catastrophe occurs to the end of a reporting period, the more likely we have limited information to estimate loss and loss expense reserves, increasing the uncertainty of our estimates. More comprehensive claims information available after a reporting period may result in reserve changes in subsequent periods.
Because the Internet makes it easier and less expensive to bundle products and services, it also is possible that non-insurance companies conducting business on the Internet could enter the insurance business or form strategic alliances with insurers in the future.
Because the Internet makes it easier and less expensive to bundle products and services, it is also possible that non-insurance companies conducting business on the Internet could enter the insurance business or form strategic alliances with insurers.
"Management’s Discussion and Analysis of Financial Condition and Results of Operations." of this Form 10-K. Risks Related to Evolving Laws, Regulations, and Public Policy Debates We are subject to complex and changing laws, regulations, and public policy debates that expose us to regulatory scrutiny, potential liabilities, increased costs, reputational harm, and other adverse effects on our business.
"Management’s Discussion and Analysis of Financial Condition and Results of Operations." of this Form 10-K. 30 Table of Contents Risks Related to Evolving Laws, Regulations, and Public Policy Debates We are subject to complex and changing laws, regulations, and public policy debates that expose us to regulatory scrutiny, potential liabilities, increased costs, reputational harm, and other adverse effects on our business.
Complying with emerging and changing requirements may cause us to incur substantial costs or require us to change our business practices. Noncompliance could result in significant reputational harm, penalties, and legal liability. The EU adopted the General Data Protection Regulation ("GDPR") in 2016 but it did not become effective until 2018.
Complying with emerging and changing requirements may cause us to incur substantial costs or require us to change our business practices. Noncompliance could result in significant reputational harm, penalties, and legal liability. The EU adopted the General Data Protection Regulation ("GDPR") in 2016, but it was not effective until 2018.
We have insurance coverage for certain cybersecurity risks, including privacy breach incidents, which may be insufficient to indemnify against all arising losses or types of claims. In addition to cyber-attack risk, we face system availability risk. Our business relies heavily on various IT and application systems.
We have insurance coverage for certain cybersecurity risks, including privacy breach incidents, which may be insufficient to indemnify against all arising losses or types of claims. In addition to the risk of cyber-attacks, we face system availability risk. Our business relies heavily on various IT and application systems.
An economic downturn in which our policyholders have declining revenue or employee count could adversely affect our total written premium, including audit and endorsement premium. We write business domestically in the United States, and our insurance operations do not have direct exposure to businesses or individuals in Russia or Ukraine.
An economic downturn in which our policyholders have declining revenue or employee count could adversely affect our total written premium, including audit and endorsement premium. We write business domestically in the United States, and our insurance operations do not have direct exposure to businesses or individuals in Russia, Ukraine, Israel, or the West Bank.
Reinsurers generally manage their significant loss exposure through their own reinsurance programs, or retrocessions, about which we do not always have the full details. If our reinsurers experience difficulty collecting on their retrocession programs or reinstating retrocession coverage after a large loss, we may not receive timely or full payment of our reinsurance claims.
Reinsurers generally manage their significant loss exposure through their own reinsurance programs, or retrocessions, and we do not always have the full details about them. If our reinsurers experience difficulty collecting on their retrocession programs or reinstating retrocession coverage after a large loss, we may not receive timely or full payment of our reinsurance claims.
Insurers are subject to regulatory, political, and media scrutiny. We are subject to government market conduct reviews and investigations, legal actions, and penalties. There can be no assurance that our business will not be materially adversely affected by the outcomes of such examinations, investigations, or media scrutiny in the future.
We are subject to government market conduct reviews and investigations, legal actions, and penalties. There can be no assurance that our business will not be materially adversely affected by the outcomes of such examinations, investigations, or media scrutiny in the future.
To mitigate this risk, we have and expect to continue to (i) conduct employee education programs and tabletop exercises and (ii) develop and invest in a variety of controls to prevent, detect, and appropriately react to cyber-attacks, including frequently testing our systems' security and access controls.
To mitigate this risk, we have and expect to continue to (i) conduct employee education programs and tabletop exercises and (ii) develop and invest in a variety of controls to prevent, detect, and appropriately react to cyber-attacks, including frequently 33 Table of Contents testing our systems' security and access controls.
Consequently, growth in our Standard Personal Lines could be more limited than in our Standard Commercial Lines. Competitors have focused on lower-cost "direct-to-customer" distribution models that emphasize digital ease and efficiencies to address the discrepancy in agency control of standard personal lines business.
Consequently, growth in our Standard Personal Lines could be more limited than in our Standard Commercial Lines. Competitors have focused on lower-cost "direct-to-customer" distribution models emphasizing digital ease and efficiencies to address the discrepancy in agency control of standard personal lines business.
Because we record these limited partnership investments under the equity method of accounting, any valuation decreases could negatively impact our results of operations. Determining the amount of credit losses taken on our investments is highly subjective and could materially impact our results of operations or our financial position.
We record these limited partnership investments under the equity method of accounting, so valuation decreases could negatively impact our results of operations. Determining the amount of credit losses taken on our investments is highly subjective and could materially impact our results of operations or our financial position.
We balance and mitigate our operational leverage risk with several risk management strategies within our insurance operations to achieve a balance of growth and profit, including an underwriting risk appetite focused on small-to-medium-sized accounts. We do this by using significant reinsurance, a disciplined reserving approach, and a conservative investment philosophy. These strategies have inherent limitations.
We balance and mitigate our operational leverage risk with several risk management strategies within our insurance operations to achieve a balance of growth and profit, including an underwriting risk appetite focused on small-to-medium-sized accounts. We accomplish this by employing significant reinsurance, a disciplined reserving approach, and a conservative investment philosophy. These strategies have inherent limitations.
These solutions allow us to meet our customers' needs for cyber insurance while mitigating our underwriting risk, as we develop our expertise in the cyber insurance market. 24 Table of Contents Beyond our cyber-specific policies, our other insurance policies provide some first- and third-party cyber coverages: • We offer limited first-party affirmative cyber coverage in our commercial property and businessowners' policy forms.
These solutions allow us to meet our customers' needs for cyber insurance while mitigating our underwriting risk as we develop our expertise in the cyber insurance market. Beyond our cyber-specific policies, our other insurance policies provide some first- and third-party cyber coverages: • We offer limited first-party affirmative cyber coverage in our commercial property and businessowners' policy forms.
Our workers compensation line of business is particularly susceptible to inflation because of its extended payment pattern and exposure to medical care services and commodities.
The workers compensation line of business is particularly susceptible to inflation because of its extended payment pattern and exposure to medical care services and commodities.
Examples include, 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 common stockholders' dividends. We operate in a continually changing business environment, and new risk factors emerge from time to time.
Examples include, without limitation, contributing capital to any or all of our ten property and casualty insurance subsidiaries ("Insurance Subsidiaries"), issuing additional debt and/or equity securities, repurchasing our existing debt and/or equity securities, or increasing or decreasing common stockholders' dividends. We operate in a continually changing business environment, and new risk factors emerge from time to time.
We supplement the estimates with other subjective considerations, including projected impacts from economic, political, social, and legal developments or trends, such as inflation, continually evolving trends driven by the post-COVID-19 pandemic environment, judicial trends and tort decisions, and various state legislative 25 Table of Contents initiatives.
We supplement the estimates with other subjective considerations, including projected impacts from economic, political, social, and legal developments or trends, such as inflation, continually evolving trends driven by the post-COVID-19 pandemic environment, judicial trends and tort decisions, and various state legislative initiatives.
These potential events and other economic factors could adversely and materially affect our business, results of operations, financial condition, and growth. During 2022, 27% of DPW in our Standard Commercial Lines business was based on payroll or sales of our underlying policyholders.
These potential events and other economic factors could adversely and materially affect our business, results of operations, financial condition, and growth. During 2023, 26% of DPW in our Standard Commercial Lines business was based on payroll or sales of our underlying policyholders.
Any disruption or breach of our systems or data security could damage our reputation, result in difficult to quantify monetary damages, and have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings.
Any disruption or breach of our systems or data security could damage our reputation, result in monetary damages that are difficult to estimate, and have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings.
We rely on these financial and other statistical models to analyze historical loss costs and pricing, claims severity and frequency trends, catastrophe losses, reinsurance attachment and exhaustion points, investment performance, portfolio risk, and our economic capital position. Flaws in financial and statistical models and their embedded assumptions could lead to increased losses.
We rely on these financial and other statistical models to analyze historical loss costs and pricing, claims severity and frequency trends, catastrophe losses, reinsurance attachment and exhaustion points, investment performance, portfolio risk, and our economic capital position. Flaws or limitations in financial and statistical models and their embedded assumptions could increase losses.
The primary assets and liabilities underlying in these limited partnership investments generally do not have quoted prices in active markets for the same or similar assets, so their valuation is subject to a higher level of subjectivity and unobservable inputs than substantially all of our other investments.
The primary assets and liabilities underlying these limited partnership investments generally do not have quoted prices in active markets for the same or similar assets. Consequently, their valuation is subject to a higher level of subjectivity and unobservable inputs than most of our other investments.
While our customers find advantages in using independent distribution partners, our reliance on independent distribution partners presents risks and challenges, including: • Competition in our distribution channel, as we must market our products and services to our independent distribution partners who have access to products from multiple carriers and markets. • Brand recognition challenges because we closely coordinate marketing with our distribution partners and some customers cannot differentiate their insurance agent from their insurer. • Our market share growth is tied to our distribution partners' market share.
While our customers find advantages in using independent distribution partners, our reliance on independent distribution partners presents risks and challenges, including: • Competition in our distribution channel, as we must market our products and services to independent distribution partners who have access to products from multiple carriers and markets. 27 Table of Contents • Brand recognition challenges because we closely coordinate marketing with our distribution partners and some customers do not differentiate their insurance agent from their insurer. • Our market share growth is tied to our distribution partners' market share.
These, in turn, can lower residential and commercial property values, household wealth, and corporate profitability, all potentially creating financial and credit market losses impacting insurer asset values. As of December 31, 2022, about 69% of our residential mortgage-backed securities were backed by government agencies.
These, in turn, can lower residential and commercial property values, household wealth, and corporate profitability, potentially creating financial and credit market losses impacting insurer asset values. As of December 31, 2023, about 70% of our residential mortgage-backed securities were backed by government agencies.
Two examples of how loss and loss expense reserves might be affected by economic, political, social, or legal developments or trends are: • If inflation, including medical and social inflation, is higher than our assumptions, our loss and loss expense reserves for our longer tail lines of business could be insufficient.
Three examples of how loss and loss expense reserves might be affected by economic, political, social, or legal developments or trends are: • If economic inflation, including medical inflation, is higher than our assumptions, our loss and loss expense reserves 25 Table of Contents for our longer tail lines of business could be insufficient.
As of December 31, 2022, carbon intensive sectors within our fixed income securities portfolio represented less than 4% of our total invested assets, down from 5% as of December 31, 2021. • Physical investment risks include the risk of investment losses on our commercial and residential mortgage-backed securities that are exposed to climate-related catastrophic losses that can cause business disruption, destroy capital, increase costs to recover from disasters, reduce revenue, and cause population displacement and migration.
As of December 31, 2023 and December 31, 2022, carbon-intensive sectors within our fixed income securities portfolio represented about 4% of our total invested assets. • Physical investment risks include the risk of investment losses on our commercial and residential mortgage-backed securities exposed to climate-related catastrophic losses that can cause business disruption, destroy capital, increase costs to recover from disasters, reduce revenue, and cause population displacement and migration.
We base our loss and loss expense reserve estimates on our internal comprehensive reserve review, which uses our own loss experience, claims payment and reporting patterns, and our view of underlying claims frequency and severity trends.
We base our loss and loss expense reserve estimates on our internal in-depth reserve review, which uses our loss experience, claims payment and reporting patterns, and our view of underlying claims frequency and severity trends.
Changes in competitors and competition, particularly on the Internet, could cause changes in the supply or demand for insurance and adversely affect our business. The increasing importance of the Internet, technology, and digital strategy in our industry also demands that we attract and retain employees in difficult-to-fill data science, advanced analytics, and IT roles – or suffer potential negative impacts.
Changes in competitors and competition, particularly on the Internet, could cause changes in the supply or demand for insurance and adversely affect our business. The increasing importance of the Internet, technology, AI, and digital strategies in our industry also demands that we attract and retain employees in difficult-to-fill data science, advanced analytics, and information technology ("IT") roles.
Item 1A. Risk Factors. Certain risk factors can significantly impact 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 to execute our long-term capital strategy.
Item 1A. Risk Factors. Certain risk factors can significantly impact our business, liquidity, capital resources, results of operations, financial condition, and debt ratings. These risk factors might affect, alter, or change actions in executing our long-term capital strategy.
We have less loss experience data than our larger competitors. Insurers depend on access to reliable data about their policyholders and loss experience to build complex analytics and predictive models that assess risk profitability, reserve adequacy, adverse claim development potential, recovery opportunities, fraudulent activities, and customer buying habits.
Insurers depend on access to reliable data about their policyholders and loss experience to build complex analytics and predictive models that assess risk profitability, reserve adequacy, adverse claim development potential, recovery opportunities, fraudulent activities, and customer buying habits.
Independent distribution partners have – and we expect will continue to have – a significant role in overall insurance industry premium 27 Table of Contents production.
Independent distribution partners have – and we expect will continue to have – a significant role in overall insurance industry premium production.
Consequently, the amount of our cash and cash equivalents, and the value and liquidity of our marketable and non-marketable securities may fluctuate substantially. Future fluctuations in the value of our cash, cash equivalents, and marketable and non-marketable securities could result in significant losses that have a material adverse impact on our financial condition and operating results .
Future fluctuations in the value of our cash, cash equivalents, and marketable and non-marketable securities could result in significant losses that have a material adverse impact on our financial condition and operating results .
We offer our insurance products and services in a highly competitive market characterized by consumer and business price sensitivity, aggressive price competition and improvements based on performance characteristics and large data sets that can compact underwriting margins, new products and services, evolving industry standards, and rapid adoption of technological advancements.
We offer our insurance products and services in a highly competitive market characterized by (i) consumer and business price sensitivity, (ii) aggressive price competition, and (iii) improvements based on performance characteristics and large data sets. These factors can compact underwriting margins, new products and services, evolving industry standards, and rapid adoption of 28 Table of Contents technological advancements.
We do not have material exposure to investments subject to embargoes or Russian reinsurance counterparties. However, the ongoing Russian war against Ukraine is impacting global economic, banking, commodity, and financial markets, exacerbating ongoing economic challenges, including inflation and supply chain disruption, which influence insurance loss costs, premiums, and investment valuation.
We do not have material exposure to investments subject to embargoes or Russian reinsurance counterparties. However, ongoing wars and conflicts are impacting global economic, banking, commodity, and financial markets by exacerbating ongoing economic challenges, including inflation and supply chain disruption, which influence insurance loss costs, premiums, and investment valuation.
The Parent’s ability to pay dividends to its stockholders is also impacted by covenants in its credit agreement (the "Line of Credit") among the Parent, the named lenders (the "Lenders"), and Wells Fargo Bank, National Association, as Administrative Agent.
"Financial Statements and Supplementary Data." of this Form 10-K. The Parent’s ability to pay dividends to its stockholders is also impacted by covenants in its credit agreement (the "Line of Credit") among the Parent, the named lenders (the "Lenders"), and Wells Fargo Bank, National Association, as Administrative Agent.
We supplement our data with industry loss experience from Verisk, AAIS, NCCI, and other publicly available sources. While relevant, industry data may not correlate specifically to the performance of our underwritten risks or be as predictive as data on a larger book of our own business.
We supplement our data with industry loss experience from Verisk, American Association of Insurance Services, Inc., the National Council on Compensation Insurance, Inc., and other publicly available sources. While relevant, industry data may not correlate specifically to the performance of our underwritten risks or be as predictive as data on a larger book of our own business.
Consequently, some competitors may be able to price their products more competitively. The Internet has emerged as a significant competitive digital marketplace for existing and new competitors. Established insurance competitors, like The Progressive Corporation, are beginning to explore broader digital Internet offerings. New competitors with variations on traditional business models have emerged, such as Lemonade, Root, and Next.
Consequently, some competitors may be able to price their products more competitively. The Internet has emerged as a significant competitive digital marketplace for existing and new competitors. Established insurance competitors are beginning to explore broader digital Internet offerings and implement artificial intelligence ("AI"). New competitors with variations on traditional business models have emerged.
However, the conditions and timing of regulatory approval may not align with the actual expense of new reinsurance terms. Disproportionate increases in our reinsurance expense that we cannot include in our filed rates and rating plans will reduce our earnings.
State insurance regulators generally permit us to consider catastrophe reinsurance expense in our filed rates and rating plans. However, the conditions and timing of regulatory approval may not align with the actual expense of new reinsurance terms. Disproportionate increases in our reinsurance expense that we cannot include in our filed rates and rating plans will reduce our earnings.
We track our severe weather and catastrophe losses using definitions and information we obtain from ISO’s Property Claim Services unit, an internationally recognized authority on insured property losses from catastrophes in the U.S., Puerto Rico, and the U.S. Virgin Islands.
We track our severe weather and catastrophe losses using definitions and 23 Table of Contents information we obtain from Insurance Services Office, Inc.'s ("ISO") Property Claim Services unit, an internationally recognized authority on insured property losses from catastrophes in the U.S., Puerto Rico, and the U.S. Virgin Islands.
As an insurer, we assume risk from our policyholders. Our long-term strategy includes using above-average operational leverage, measured as the ratio of NPW to our equity or statutory surplus.
As an insurer, we assume risk from our policyholders. Our long-term strategy includes using above-average operational leverage compared to the U.S. standard commercial and personal lines industry average, measured as the ratio of NPW to our equity or statutory surplus.
Our exposure to credit risk could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. We depend on distribution partners. We market and sell our insurance products through independent, non-employee distribution partners. Insurance law and regulation makes us responsible for our distribution partners' business practices and customer interactions.
Our exposure to credit risk could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. We depend on distribution partners. We market and sell our insurance products through independent, non-employee distribution partners.
Our primary workers compensation policies are required to cover terrorism risk, so TRIPRA applies to those policies. Insureds with non-workers compensation commercial policies can accept or decline our terrorism coverage or negotiate with us for other terms. In 2022, 85% of our Standard Commercial Lines non-workers compensation policyholders purchased terrorism coverage that included nuclear, biological, chemical, and radioactive ("NBCR") events.
Insureds with non-workers compensation commercial policies can accept or decline our terrorism coverage or negotiate with us for other terms. In 2023, 85% of our Standard Commercial Lines non-workers compensation policyholders purchased terrorism coverage that included nuclear, biological, chemical, and radioactive ("NBCR") events.
We transfer a significant portion of our underwriting risk to third parties through reinsurance contracts. These contracts provide reimbursement of losses exceeding specified amounts or percentages of premiums. Typically, our reinsurance coverages align with the coverages offered under our primary insurance policies. The availability, quality, amount, and cost of reinsurance depend on market conditions, including retrocessional reinsurance market capacity.
We transfer a significant portion of our underwriting risk to third parties through reinsurance contracts. These contracts provide reimbursement of losses exceeding specified amounts or percentages of premiums. Typically, our reinsurance coverages align with the coverages offered under our primary insurance policies.
Most notices (i) are blanket notices sent by attorneys representing claimants unsure of the alleged assailant or supervising entity's insurer or policy (if any) and (ii) may not implicate any of our or a predecessor's insurance policies.
Without prior experience, we cannot estimate how many "reviver" claims notices we may receive. Most notices (i) are blanket notices sent by attorneys representing claimants unsure of the alleged assailant or supervising entity's insurer or policy (if any) and (ii) may not implicate any of our or a predecessor's insurance policies.
While we underwrite risks only in the U.S., international regulatory developments, primarily capital adequacy and risk management requirements in the European Union ("EU"), may influence U.S. regulators as they develop or revise domestic regulatory standards.
While we underwrite risks only in the U.S., international regulatory developments, primarily capital adequacy and risk management requirements in the European Union ("EU"), may influence U.S. regulators as they develop or revise domestic regulatory standards. We have implemented policies and procedures designed to ensure compliance with applicable laws and regulations.
We are subject to federal and state laws relating to the collection, use, retention, security, and transfer of personally identifiable information ("PII"). Federal laws include the Gramm-Leach-Bliley Act, the Fair Credit Reporting Act, the Drivers Privacy Protection Act, the Health Insurance Portability and Accountability Act, and Unfair and Deceptive Acts and Practices laws.
We are subject to federal and state laws relating to collecting, using, retaining, securing, and transferring personally identifiable 31 Table of Contents information ("PII"). Federal laws include the Gramm-Leach-Bliley Act, the Fair Credit Reporting Act, the Drivers Privacy Protection Act, the Health Insurance Portability and Accountability Act, and Unfair and Deceptive Acts and Practices laws.
If we are unable to negotiate desired reinsurance amounts or terms, we may experience (i) increased reinsurance expense, (ii) increased risk retention on individual or aggregate claim losses, and (iii) limitations on our ability to write future business. 26 Table of Contents Commercial property and homeowners coverages have historically accounted for most of our catastrophe-related claims.
If we cannot negotiate desired reinsurance amounts or terms, we may experience increased reinsurance expense and increased risk retention on individual or aggregate claim losses that could limit our ability to write future business. Commercial property and homeowners coverages have historically accounted for most of our catastrophe-related claims. To limit our exposure to catastrophe losses, we purchase catastrophe reinsurance.
Human-made catastrophes Cybersecurity The risk of a wide-scale criminal or terrorist cyber-attack has become more significant and has drawn increased attention from IT and national security experts, U.S. policymakers, the U.S. military, and the insurance industry. There is general recognition that a wide-scale cyber-attack that simultaneously impacts multiple victims is more likely, and insurance industry systemic risk has increased.
Human-made catastrophes Cyber Attacks and Incidents The risk of a wide-scale criminal or terrorist cyber-attack has become more significant and has drawn increased attention from IT and national security experts, U.S. policymakers, the U.S. military, and the insurance industry.
These exclusions clarify coverage and have no premium impact. • Most of our general liability and businessowners' policies specifically exclude cyber-related liability losses, except for "bodily injury." Our specific cyber-exclusion and liability forms' lack of affirmative sub-limited cyber coverage, effectively limit most "silent cyber" exposure.
These exclusions clarify coverage and have no premium impact. 24 Table of Contents • Most of our general liability and businessowners' policies exclude cyber-related liability losses, except for "bodily injury." Our specific cyber-exclusion and liability forms' lack of affirmative sub-limited cyber coverage, effectively limit most "silent cyber" exposure. • By statute, workers compensation policies do not have cyber exclusions, and a cyber-attack-related workplace injury could trigger coverage.
Our $480 million deductible is based on a percentage of our prior year’s applicable Standard Commercial Lines and E&S Lines premiums. In 2023, the federal government will pay 80% of losses above the deductible, with the insurer retaining 20%.
Under TRIPRA, each participating insurer must pay a significant deductible of specified losses before federal assistance is available. Our $543 million deductible is based on a percentage of our prior year’s applicable Standard Commercial Lines and E&S Lines premiums. In 2024, the federal government will pay 80% of losses above the deductible, with the insurer retaining 20%.
Restrictions on our Insurance Subsidiaries' ability to pay dividends, make loans or advances to the Parent, or enter into transactions with affiliates may materially affect our ability to pay dividends on our preferred stock and common stock, or repay our indebtedness.
Restrictions on our Insurance Subsidiaries' ability to pay dividends, make loans or advances to the Parent, or enter into transactions with affiliates may materially affect our ability to pay dividends on our preferred and common stock or repay our indebtedness. Based on these restrictions, there is a maximum ordinary annual dividend amount the Insurance Subsidiaries can provide the Parent.
While relatively less affected by recent rising inflation rates, these medical care costs could have a more material impact on our overall loss and loss expense reserves if they were to rise significantly or persist for an extended period.
While medical inflation has been benign for several years, these medical care costs could have a more material impact on our overall loss and loss expense reserves if they were to rise significantly or persist at a higher level for an extended period.
In addition, increasing insurance regulatory interest in data and model use, combined with any potential restrictions on traditional rating factors or model use, could have a material adverse impact on our financial condition and operating results.
In addition, increasing insurance regulatory interest in data and model use, combined with any potential restrictions on traditional rating factors or model use, could have a material adverse impact on our financial condition and operating results. Our statistical models are extremely useful in monitoring and controlling risk, but are no substitute for senior management's experience or judgment.
Continued advancements in "direct-to-customer" distribution models may impact our independent distribution partners' overall market share, make it more difficult for us to grow, or require us to establish relationships with more distribution partners. • Aggregation and consolidation of our independent distribution partners and their market share, as some publicly-traded and private equity-backed independent distribution partners have deployed consolidation strategies to acquire other independent distribution partners and increase their market share ("Aggregators") over the last decade.
Continued advancements in "direct-to-customer" distribution models may impact our independent distribution partners' overall market share, make it more difficult for us to grow, or require us to establish relationships with more distribution partners. • Aggregation and consolidation of our independent distribution partners and their market share.
Our investments can be negatively affected by (i) liquidity, (ii) credit deterioration, (iii) financial results, (iv) public equity and/or debt market changes, (v) economic conditions, including heightened levels of economic inflation and any ongoing post-COVID-19 pandemic impacts, (vi) political risk, (vii) sovereign risk, (viii) interest rate fluctuations, or (ix) other factors, including climate change risk and civil unrest.
Our investments can be negatively affected by (i) liquidity, (ii) credit deterioration, (iii) financial results, (iv) public equity and/or debt market changes, (v) economic conditions, including heightened levels of economic inflation, (vi) political risk, (vii) sovereign risk, (viii) interest rate fluctuations, or (ix) other factors, including climate change risk and civil unrest. 29 Table of Contents Our investment portfolio's value is subject to credit risk from our held securities' issuers, guarantors, and financial guarantee insurers, and other counterparties in certain transactions.
For example, a significant component of climate change risk is that the frequency and severity of extreme weather events may evolve differently relative to historical levels – leading to greater model uncertainty. The increase in the frequency of land-falling hurricanes and tropical storms in the U.S. over the past five years could partly be climate change-related.
For example, a significant component of climate change risk is that the frequency and severity of extreme weather events may evolve differently relative to historical levels – leading to greater model uncertainty.
Most policyholders are required by various third-party agreements, primarily with lenders, to maintain insurance policies from a carrier with a minimum AM Best or S&P rating. Credit rating downgrades could also make it more expensive to access capital markets. We cannot predict the rating actions NRSROs could take that might adversely affect our business or our potential responses.
Most policyholders are required by various third-party agreements, primarily with lenders, to maintain insurance policies from a carrier with a minimum rating from AM Best or Standard & Poor's Global Ratings. Credit rating downgrades could also make it more expensive to access capital markets.
National and global economic conditions could adversely and materially affect our business, results of operations, financial condition, and growth. Unfavorable economic developments, such as increased inflation levels, could adversely affect our earnings if our policyholders need less insurance coverage, cancel existing insurance policies, modify coverage, or choose not to renew with us.
Unfavorable economic developments, such as increased inflation levels, could adversely affect our earnings if our policyholders need less insurance coverage, cancel existing insurance policies, modify coverage, or choose not to renew with us. Inflation could significantly impact our claims severity across multiple lines of business and could result in adverse reserve development.
The impacts of (i) higher inflation-related reinsurance demand, (ii) reduced capacity due to reinsurer investment portfolio losses, (iii) weakened Euro-United States dollar currency exchange rates, (iv) recent Hurricane Ian-related reinsurer losses, (v) poor reinsurer profitability over the past six years, and (vi) investor and reinsurer concerns about the potential impacts of climate change have caused an increase in reinsurance prices and reduced the availability of reinsurance.
Reinsurance prices have increased, and the availability of reinsurance has reduced due to the impacts of (i) social inflation on liability claim outcomes, including exceptionally high jury awards, (ii) reduced capacity due to reinsurer investment portfolio losses, (iii) weakened Euro-United States dollar currency exchange rates, (iv) challenged reinsurer profitability in recent years, and (v) investor and reinsurer concerns about the potential impacts of climate change.
"Business." of this Form 10-K. 28 Table of Contents Markets for insurance products and services are highly competitive and subject to rapid technological change, and we may be unable to compete effectively.
For additional information on our current financial strength and credit ratings, refer to "Overview" in Item 1. "Business." of this Form 10-K. Markets for insurance products and services are highly competitive and subject to rapid technological change, and we may be unable to compete effectively.
For example, catastrophe models did not fully estimate the potential for some recent catastrophe loss activity (such as Hurricane Ida-related severe flooding in the Mid-Atlantic and Northeast in 2021 and Winter Storm Elliott freeze losses in December 2022) and the concurrent recent economic inflation on construction costs.
For example, catastrophe models did not fully estimate the potential for some recent catastrophe loss activity (such as Winter Storm Elliott freeze losses in December 2022) and the concurrent recent economic inflation on construction costs. Our insurance operations primarily write risks in the Eastern, Midwestern, and Southwestern regions of the U.S.
Secretary of the Treasury does not certify specific terrorist events (as occurred with the 2013 Boston Marathon bombing and the 2015 San Bernardino shootings), we could be required to pay terrorism-related covered losses without TRIPRA's risk-sharing benefits. We also could be required to pay terrorism-related losses for customers who declined terrorism coverage.
Secretary of the Treasury does not certify specific terrorist events, we could be required to pay terrorism-related covered losses without TRIPRA's risk-sharing benefits. We also could be required to pay terrorism-related losses for customers who declined terrorism coverage. Our primary workers compensation policies are required to cover terrorism risk, so TRIPRA applies to those policies.
We generally invest in the top tranches of commercial mortgage-backed securities, which limit potential losses from property value declines. Significant future investment value declines could require further losses recorded on securities we sell and credit losses. For more information regarding market interest rate, credit, and equity price risk, see Item 7A.
We generally invest in the top tranches of commercial mortgage-backed securities, which limit potential losses from property value declines. As of December 31, 2023, about 75% of our commercial mortgage-backed securities had "AAA" credit ratings. Significant future investment value declines could require further losses recorded on securities we sell and credit losses.
Consequently, we have the risk that one regulator's position or interpretation may conflict with another regulator on the same issue. The cost of complying with various, potentially conflicting laws and regulations, and changes in those laws and regulations, could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings.
The cost of complying with various laws and regulations, potentially conflicting laws and regulations, and changes in those laws and regulations, could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. Insurers are subject to regulatory, political, and media scrutiny.

… 48 more changes not shown on this page.

Item 2. Properties

Properties — owned and leased real estate

1 edited+0 added−0 removed1 unchanged
Biggest changeOur Investments operations are principally located in leased space in Farmington, Connecticut. Our facilities provide adequate space for our present needs and, if additional space is needed, should be available on reasonable terms.
Biggest changeOur Investments operations are principally located in leased space in Farmington, Connecticut. Our facilities provide adequate space for our present needs. Additional space should be available on reasonable terms, if needed.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

2 edited+0 added−0 removed0 unchanged
Biggest changeItem 3. Legal Proceedings. We are routinely engaged in legal proceedings incidental to our insurance operations that have inherently unpredictable outcomes and 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 Item 1A. "Risk Factors." and Note 21.
Biggest changeItem 3. Legal Proceedings. Incidental to our insurance operations, we are routinely engaged in legal proceedings with inherently unpredictable outcomes that 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 Item 1A. "Risk Factors." and Note 21.
"Litigation" included in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. As of December 31, 2022, 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. Item 4. Mine Safety Disclosures. Not applicable. PART II
"Litigation" included in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. As of December 31, 2023, 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. Item 4. Mine Safety Disclosures. Not applicable. PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

7 edited+1 added−1 removed1 unchanged
Biggest change(f) Purchases of Equity Securities by the Issuer and Affiliated Purchasers The following table provides information about our purchases of our common stock in the fourth quarter of 2022: Period Total Number of Shares Purchased 1 Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Programs 2 Approximate Dollar Value of Shares that May Yet Be Purchased Under the Announced Programs 2 October 1 – 31, 2022 686 $ 91.01 — 84.2 November 1 – 30, 2022 294 93.17 — 84.2 December 1 – 31, 2022 1,894 91.25 — 84.2 Total 2,874 $ 91.39 — $ 84.2 1 We purchased these shares from employees to satisfy tax withholding obligations associated with the vesting of their restricted stock units. 2 On December 2, 2020, we announced our Board authorized a $100 million share repurchase program with no set expiration or termination date.
Biggest changeThis performance graph shall not be deemed "soliciting material" or be "filed" with the SEC unless we specifically request so or incorporate it by reference in any SEC filings we make. 37 Table of Contents (f) Purchases of Equity Securities by the Issuer and Affiliated Purchasers The following table provides information about our purchases of our common stock in the fourth quarter of 2023: Period Total Number of Shares Purchased 1 Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Programs 2 Approximate Dollar Value of Shares that May Yet Be Purchased Under the Announced Programs 2 October 1 – 31, 2023 884 $ 104.11 — 84.2 November 1 – 30, 2023 35 103.61 — 84.2 December 1 – 31, 2023 310 99.48 — 84.2 Total 1,229 $ 102.93 — $ 84.2 1 We purchased these shares from employees to satisfy tax withholding obligations associated with the vesting of their restricted stock units. 2 On December 2, 2020, we announced our Board authorized a $100 million share repurchase program with no set expiration or termination date.
We have not incorporated this performance graph into any other filings we have made with the SEC. Unless we otherwise specifically state, it will not be incorporated by reference into any future SEC filings.
We have not incorporated this performance graph into any other filings we have made with the SEC. Unless we specifically state otherwise, it will not be incorporated by reference into any future SEC filings.
(c) Dividends Dividends on shares of our common stock are declared and paid at the discretion of the Board of Directors (the "Board") based on our results of operations, financial condition, capital requirements, contractual restrictions, and other relevant factors. We expect to continue to pay quarterly cash dividends on shares of our common stock in the future.
(c) Dividends Dividends on shares of our common stock are declared and paid at the discretion of the Board of Directors (the "Board") based on our results of operations, financial condition, capital requirements, contractual restrictions, and other relevant factors. We expect to continue to pay quarterly cash dividends on shares of our common stock.
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. (a) Market Information Our common stock is traded on the Nasdaq Global Select Market under the symbol "SIGI." (b) Holders We had 2,872 common stockholders of record as of January 31, 2023, according to our transfer agent's records.
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. (a) Market Information Our common stock is traded on the Nasdaq Global Select Market under the symbol "SIGI." (b) Holders Our transfer agent’s records reflect that we had 2,783 common stockholders of record as of January 31, 2024.
Future grants under the Stock Plan can be made, among other things, as stock options, restricted stock units, or restricted stock. 35 Table of Contents (e) Performance Graph The following chart, produced by Research Data Group, Inc., depicts our performance for the period beginning December 31, 2017, and ending December 31, 2022, comparing total stockholder return on our common stock to the total return of (i) the NASDAQ Composite Index and (ii) a select group of peer companies comprised of NASDAQ-listed companies in SIC Code 6330-6339, Fire, Marine, and Casualty Insurance.
(e) Performance Graph The following chart, produced by Research Data Group, Inc., depicts our performance for the period beginning December 31, 2018, and ending December 31, 2023, comparing total stockholder return on our common stock to the total return of (i) the NASDAQ Composite Index and (ii) a select group of peer companies comprised of NASDAQ-listed companies in SIC Code 6330-6339, Fire, Marine, and Casualty Insurance.
(d) Securities Authorized for Issuance under Equity Compensation Plans The following table provides information about our common stock authorized for issuance under equity compensation plans as of December 31, 2022: (a) (b) (c) Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) 1 Equity compensation plans approved by security holders — $ — 5,142,946 1 Includes 1,116,863 shares available for issuance under our Employee Stock Purchase Plan (2021); 1,551,498 shares available for issuance under the Stock Purchase Plan for Independent Insurance Agencies; and 2,474,585 shares for issuance under the Selective Insurance Group, Inc. 2014 Omnibus Stock Plan ("Stock Plan").
On January 31, 2024, the Board declared a $0.35 per share quarterly cash dividend on common stock payable March 1, 2024, to stockholders of record as of February 15, 2024. 36 Table of Contents (d) Securities Authorized for Issuance under Equity Compensation Plans The following table provides information about our common stock authorized for issuance under equity compensation plans as of December 31, 2023: (a) (b) (c) Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) 1 Equity compensation plans approved by security holders — $ — 4,877,332 1 Includes 1,049,788 shares available for issuance under our Employee Stock Purchase Plan (2021); 1,508,712 shares available for issuance under the Stock Purchase Plan for Independent Insurance Agencies; and 2,318,832 shares for issuance under the Selective Insurance Group, Inc. 2014 Omnibus Stock Plan ("Stock Plan").
On November 2, 2022, the Board approved a 7% increase in our common stock dividend to $0.30 per share. In addition, on February 2, 2023, the Board declared a $0.30 per share quarterly cash dividend on common stock that is payable March 1, 2023, to stockholders of record as of February 15, 2023.
On November 1, 2023, the Board approved a 17% increase in our common stock dividend to $0.35 per share.
Removed
This performance graph shall not be deemed "soliciting material" or be "filed" with the SEC unless we specifically request so or incorporate it by reference in any SEC filings we make.
Added
Future grants under the Stock Plan can be made, among other things, as stock options, restricted stock units, or restricted stock.

Item 6. [Reserved]

Selected Financial Data — reserved (removed by SEC in 2021)

3 edited+0 added−0 removed0 unchanged
Biggest changeFinancial Statements and Supplementary Data 73 Consolidated Balance Sheets as of December 31, 2022 and 2021 75 Consolidated Statements of Income for the Years Ended December 31, 2022, 2021, and 2020 76 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021, and 2020 77 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022, 2021, and 2020 78 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021, and 2020 79 Notes to Consolidated Financial Statements 80
Biggest changeFinancial Statements and Supplementary Data 76 Consolidated Balance Sheets as of December 31, 2023 and 2022 78 Consolidated Statements of Income for the Years Ended December 31, 2023, 2022, and 2021 79 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2023, 2022, and 2021 80 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2023, 2022, and 2021 81 Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022, and 2021 82 Notes to Consolidated Financial Statements 83
Quantitative and Qualitative Disclosures About Market Risk 66 Item 8.
Quantitative and Qualitative Disclosures About Market Risk 68 Item 8.
Management’s Discussion and Analysis of Financial Condition and Results of Operations 36 Forward-looking Statements 36 Introduction 37 Critical Accounting Policies and Estimates 37 Financial Highlights of Results for Years Ended December 31, 2022, 2021, and 2020 45 Results of Operations and Related Information by Segment 48 Federal Income Taxes 62 Liquidity and Capital Resources 62 Item 7A.
Management’s Discussion and Analysis of Financial Condition and Results of Operations 38 Forward-looking Statements 38 Introduction 38 Critical Accounting Policies and Estimates 39 Financial Highlights of Results for Years Ended December 31, 2023, 2022, and 2021 47 Results of Operations and Related Information by Segment 50 Federal Income Taxes 64 Liquidity and Capital Resources 64 Item 7A.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

214 edited+64 added−76 removed36 unchanged
Biggest changeAll other losses stemming from the acts of terrorism are subject to the following: - $3 million in excess of $2 million layer provides 41 reinstatements, $126 million annual aggregate limit; - $3 million in excess of $2 million layer with $15 million net annual terrorism aggregate limit; - $7 million in excess of $5 million layer provides six reinstatements, $49 million annual aggregate limit; - $7 million in excess of $5 million layer with $28 million net annual terrorism aggregate limit; - $9 million in excess of $12 million layer provides three reinstatements, $36 million annual aggregate limit; - $9 million in excess of $12 million layer with $27 million net annual terrorism aggregate limit; - $9 million in excess of $21 million layer provides one reinstatement, $18 million annual aggregate limit; - $9 million in excess of $21 million layer with $18 million net annual terrorism aggregate limit; - $20 million in excess of $30 million layer provides one reinstatement, $40 million annual aggregate limit; and - $20 million in excess of $30 million layer with $40 million net annual terrorism aggregate limit; and - $40 million in excess of $50 million layer provides one reinstatement, $80 million annual aggregate limit. - $40 million in excess of $50 million layer with $80 million net annual terrorism aggregate limit. 59 Table of Contents We have other reinsurance treaties, such as our (i) Surety and Fidelity Excess of Loss Reinsurance Treaty, (ii) National Workers Compensation Reinsurance Pool Quota Share, which covers business assumed from the involuntary workers compensation pool, (iii) Endurance Specialty Quota share and Loss Development Cover, which protects against losses on policies written before the acquisition and any development on reserves established by MUSIC as of the date of acquisition, (iv) Equipment Breakdown Coverage Reinsurance Treaty, (v) Multi-line Quota Share, which covers additional personal lines coverages, such as personal cyber and home systems protection, (vi) Cyber Liability Quota Share, and (vii) Excess Liability Quota Share, which covers MUSIC's excess liability business.
Biggest changeTo complement our key reinsurance programs and provide reinsurance protection on specific coverages or programs, we have other reinsurance treaties, such as our (i) Surety and Fidelity Excess of Loss Reinsurance Treaty, (ii) National Workers Compensation Reinsurance Pool Quota Share, which covers business assumed from the involuntary workers compensation pool, (iii) Endurance Specialty Quota share and Loss Development Cover, which protects against losses on policies written before the acquisition and any development on reserves established by MUSIC as of the date of acquisition, (iv) Equipment Breakdown Coverage Reinsurance Treaty, (v) Multi-line Quota Share, which covers additional personal lines coverages, such as personal cyber and home systems protection, (vi) Cyber Liability Quota Share, and (vii) Excess Liability Quota Share, which covers MUSIC's excess liability business.
Investment Valuation and the Allowance for Credit Losses on AFS Fixed Income Securities Investment Valuation Accounting guidance defines the fair value of our investment portfolio as the exit price, or the amount that would be (i) received to sell an asset, or (ii) paid to transfer a liability in an orderly transaction between market participants.
Investment Valuation and the Allowance for Credit Losses on AFS Fixed Income Securities Investment Valuation Accounting guidance defines the fair value of our investment portfolio as the exit price or amount that would be (i) received to sell an asset or (ii) paid to transfer a liability in an orderly transaction between market participants.
Adjusted book value per common share is a measure comparable to book value per common share, but excludes total after-tax unrealized gains and losses on investments included in accumulated other comprehensive (loss) income.
Adjusted book value per common share is a measure comparable to book value per common share, but excludes total after-tax unrealized gains and losses on investments included in accumulated other comprehensive income (loss).
We monitor our reinsurers' financial condition, and we review the quality of reinsurance recoverables and reserves for uncollectible reinsurance. For additional information regarding our reinsurance counterparty credit risk, see Note 9. "Reinsurance" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
We monitor our reinsurers' financial condition and review the quality of reinsurance recoverables and reserves for uncollectible reinsurance. For additional information regarding our reinsurance counterparty credit risk, see Note 9. "Reinsurance" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
We adjust our liquidity requirements based on economic conditions, market conditions, and future cash flow commitments, as discussed further below.
As discussed further below, we adjust our liquidity requirements based on economic conditions, market conditions, and future cash flow commitments.
Although domiciliary state insurance regulators historically have approved dividends, there is no assurance they will approve future Insurance Subsidiary dividends.
Although domiciliary state insurance regulators have historically approved dividends, there is no assurance they will approve future Insurance Subsidiary dividends.
Sensitivity analysis: Potential impact on reserve estimates due to changes in key assumptions Our process to establish reserves includes a variety of key assumptions, such as: • The selection of loss and loss expense development factors; • The weight to be applied to each individual actuarial projection method; • Projected future loss trends; and • Expected claim frequencies, severities, and ultimate loss and loss expense ratios for the current accident year.
Sensitivity analysis: Potential impact on reserve estimates due to changes in key assumptions Our process to establish reserves includes a variety of key assumptions, such as: • The selection of loss and loss expense development factors; • The weight applied to each individual actuarial projection method; • Projected future loss trends; and • Expected claim frequencies, severities, and ultimate loss and loss expense ratios for the current accident year.
An allowance for credit losses on our reinsurance recoverable balance is recorded based on an evaluation of balances due from reinsurers and other available information, including collateral we hold under the terms and conditions of the underlying agreements. Reinsurers often purchase and rely on their own retrocessional reinsurance programs to manage their capital position and improve their financial strength ratings.
An allowance for credit losses on our reinsurance recoverable balance is recorded based on an evaluation of balances due from reinsurers and other available information, including collateral we hold under the terms and conditions of the underlying agreements. Reinsurers often purchase and rely on their retrocessional reinsurance programs to manage their capital position and improve their financial strength ratings.
While judgmental, the selected percentages by line are based on the reserve range analysis and the actual historical reserve development for the line of business. The second table displays the estimated impacts from changes to the expected loss and loss expense ratios for the current accident year.
While judgmental, the selected percentages by line are based on the reserve range analysis and the actual historical reserve development for the line of business. The second table displays the estimated impacts of changes to the expected loss and loss expense ratios for the current accident year.
Line of Credit On November 7, 2022, the Parent entered into a Credit Agreement with the lenders named therein (the “Lenders”) and Wells Fargo Bank, National Association, as Administrative Agent ("Line of Credit").
Line of Credit On November 7, 2022, the Parent entered into a Credit Agreement with the lenders named therein (the "Lenders") and Wells Fargo Bank, National Association, as Administrative Agent ("Line of Credit").
“Financial Statements and Supplementary Data.” of this Form 10-K, and (iii) material relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Consequently, we are not exposed to any material financing, liquidity, market, or credit risk related to off-balance sheet arrangements.
"Financial Statements and Supplementary Data." of this Form 10-K, and (iii) material relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Consequently, we are not exposed to any material financing, liquidity, market, or credit risk related to off-balance sheet arrangements.
Realized and Unrealized Investment Gains and Losses When evaluating securities for sale, our general philosophy is to reduce our exposure to securities and sectors based on economic evaluations of whether the fundamentals for that security or sector have deteriorated or the timing is appropriate to opportunistically trade for other securities with better economic-return characteristics.
Realized and Unrealized Investment Gains and Losses When evaluating securities for sale, our general philosophy is to reduce our exposure to securities and sectors based on economic evaluations of whether (i) the fundamentals for that security or sector have deteriorated or (ii) the timing is appropriate to opportunistically trade for other securities with better economic-return characteristics.
We use two main reinsurance vehicles: (i) a reinsurance pooling agreement among our Insurance Subsidiaries through which each company agrees to share in premiums and losses based on certain specified percentages; and (ii) reinsurance contracts and arrangements with third parties that cover various policies that we issue to our customers.
We use two main reinsurance vehicles: (i) a reinsurance pooling agreement among our Insurance Subsidiaries through which each company agrees to share in premiums and losses based on certain specified percentages; and (ii) reinsurance treaties and arrangements with third parties that cover various policies that we issue to our customers.
The Parent’s ability to pay dividends to stockholders is also impacted by (i) covenants in its credit agreement that obligate it, among other things, to maintain a minimum consolidated net worth and a maximum ratio of consolidated debt to total capitalization, and (ii) the terms of our preferred stock that prohibit dividends to be declared or paid on our common stock if dividends are not declared and paid, or made payable, on all outstanding preferred stock for the latest completed dividend period.
The Parent’s ability to pay dividends to stockholders is also impacted by (i) covenants in its credit agreement that obligate it, among other things, to maintain a minimum consolidated net worth and a maximum ratio of consolidated debt to total capitalization, and (ii) the terms of our preferred stock that prohibit dividends from being declared or paid on our common stock if dividends are not declared and paid, or made payable, on all outstanding preferred stock for the latest completed dividend period.
Our reserves could increase or decrease significantly from what the tables above reflect. Asbestos and Environmental Reserves Our general liability, excess liability, businessowners' policies, and homeowners reserves include exposure to asbestos and environmental claims. The emergence of these claims occurs over an extended period and can be unpredictable.
Our reserves could increase or decrease significantly from what the tables reflect. Asbestos and Environmental Reserves Our general liability, businessowners' policies, and homeowners reserves include exposure to asbestos and environmental claims. The emergence of these claims occurs over an extended period and can be unpredictable.
We estimate expected credit losses on these securities by performing a risk-adjusted discounted cash flow (“DCF”). The allowance for credit losses is the excess of amortized cost over the greater of (i) our estimate of the present value of expected future cash flows, or (ii) fair value.
We estimate expected credit losses on these securities by performing a risk-adjusted discounted cash flow ("DCF"). The allowance for credit losses is the excess of amortized cost over the greater of (i) our estimate of the present value of expected future cash flows or (ii) fair value.
If the security-specific and macroeconomic assumptions in our DCF analyses or our outlook as to the occurrence probability of our DCF model scenarios were to change, our allowance for credit losses and the resulting credit loss expense or benefit will negatively or positively impact our results of operations.
If the security-specific and macroeconomic assumptions in our DCF analyses or our outlook on the occurrence probability of our DCF model scenarios were to change, our allowance for credit losses and the resulting credit loss expense or benefit will negatively or positively impact our results of operations.
In addition to the above, the following table summarizes certain contractual obligations we had at December 31, 2022 that may require us to invest additional amounts into our investment portfolio, which we would fund primarily with operating cash flows.
In addition to the above, the following table summarizes certain contractual obligations we had at December 31, 2023 that may require us to invest additional amounts into our investment portfolio, which we would fund primarily with operating cash flows.
The table below illustrates the impact of the five largest hurricane losses we have experienced in the last 35 years: ($ in millions) Gross Loss 1 Net Loss 2 Accident Year Gross Loss Ratio Net Loss Ratio Hurricane Name Superstorm Sandy $125.5 45.6 2012 7.9% 2.9 Hurricane Ida 50.8 41.5 2021 1.7 1.4 Hurricane Irene 44.8 40.2 2011 3.1 2.8 Hurricane Hugo 26.4 3.0 1989 5.9 0.7 Hurricane Isabel 25.1 15.7 2003 2.2 1.4 1 This amount represents reported and unreported gross losses estimated as of December 31, 2022. 2 Net loss does not include reinstatement premiums, taxes, or flood claims handling fees.
The table below illustrates the impact of the five largest hurricane losses we have experienced in the last 35 years: ($ in millions) Gross Loss 1 Net Loss 2 Accident Year Gross Loss Ratio Net Loss Ratio Hurricane Name Superstorm Sandy $125.5 45.6 2012 7.9% 2.9 Hurricane Ida 51.7 40.8 2021 1.7 1.4 Hurricane Irene 44.8 40.2 2011 3.1 2.8 Hurricane Hugo 26.4 3.0 1989 5.9 0.7 Hurricane Isabel 25.1 15.7 2003 2.2 1.4 1 This amount represents reported and unreported gross losses estimated as of December 31, 2023. 2 Net loss does not include reinstatement premiums, taxes, or flood claims handling fees.
The fair value of approximately 93% of our investments measured at fair value are classified as either Level 1 or Level 2 in the fair value hierarchy and are priced using observable inputs for identical or similar assets.
The fair value of approximately 91% of our investments measured at fair value are classified as either Level 1 or Level 2 in the fair value hierarchy and are priced using observable inputs for identical or similar assets.
Below are sensitivity tests highlighting potential impacts to loss and loss expense reserves for the major casualty lines of business under different scenarios. These tests consider each assumption and line of business individually, without any consideration of correlation between lines of business and accident years. Therefore, the results do not constitute an actuarial range.
Below are sensitivity tests highlighting potential impacts to loss and loss expense reserves for the major casualty lines of business under different scenarios. These tests consider each assumption and line of business individually without considering the correlation between lines of business and accident years. Therefore, the results do not constitute an actuarial range.
New Jersey corporate law also limits the maximum amount of dividends the Parent can pay our stockholders if either (i) the Parent would be unable to pay its debts as they become due in the usual course of business, or (ii) the Parent’s total assets 62 Table of Contents would be less than its total liabilities.
New Jersey corporate law also limits the maximum amount of dividends the Parent can pay our stockholders if either (i) the Parent would be unable to pay its debts as they become due in the usual course of business, or (ii) the Parent’s total assets would be less than its total liabilities.
Certain statements in this Annual Report on Form 10-K, including information incorporated by reference, are “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995 (“PSLRA”). The PSLRA provides a safe harbor under the Securities Act of 1933 and the Securities Exchange Act of 1934 for forward-looking statements.
Certain statements in this Annual Report on Form 10-K, including information incorporated by reference, are “forward-looking statements” defined in the Private Securities Litigation Reform Act of 1995 (“PSLRA”). The PSLRA provides a forward-looking statement safe harbor under the Securities Act of 1933 and the Securities Exchange Act of 1934.
The size of the global reinsurance community is relatively small. If our reinsurers are unable to collect on their retrocessional programs, it may impair their ability to pay us for the amounts we cede to them. Consequently, our reinsurers present us with direct, indirect, and contingent counterparty credit risk.
The size of the global reinsurance community is relatively small. If our reinsurers cannot collect on their retrocessional programs, it may impair their ability to pay us for the amounts we cede to them. Consequently, our reinsurers present us with direct, indirect, and contingent counterparty credit risk.
This increase primarily relates to the growth in reserves commensurate with our growth in net premiums earned ("NPE"). Changes in Reserve Estimates (Loss Development) Our quarterly reserving process may lead to changes in the recorded reserves for prior accident years, referred to as favorable or unfavorable prior year loss and loss expense development.
This increase was primarily related to reserve growth commensurate with our net premiums earned ("NPE") growth. Changes in Reserve Estimates (Loss Development) Our quarterly reserving process may lead to changes in the recorded reserves for prior accident years, referred to as favorable or unfavorable prior year loss and loss expense development.
For more information on our case reserves and estimates of reserves for loss and loss expense IBNR, refer to the “Reserves for Loss and Loss Expense” section in the "Critical Accounting Policies and Estimates" section of this MD&A and Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
For more information on our case reserves and estimates of reserves for loss and loss expense IBNR, refer to the "Reserve for Loss and Loss Expense" section in the "Critical Accounting Policies and Estimates" section of this MD&A and Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
We review our exposure to hurricane risk by examining third-party vendor models and conducting our own proprietary analysis. The third-party vendor models provide a long-term view that closely relates modeled event frequency to historical hurricane activity, adjusting to reflect certain non-modeled cost assumptions, such as the impact of loss expenses, residual market assessments, and automobile-related losses.
We review our exposure to hurricane risk by examining third-party vendor models and conducting our proprietary analysis. The third-party vendor models provide a long-term view that closely relates modeled event frequency to historical hurricane activity, adjusting to reflect certain non-modeled cost assumptions, such as the impact of loss expenses, residual market 59 Table of Contents assessments, and automobile-related losses.
Sources of Liquidity Sources of cash for the Parent historically have consisted of dividends from the Insurance Subsidiaries, the investment portfolio held at the Parent, borrowings under third-party lines of credit, loan agreements with certain Insurance Subsidiaries, and the issuance of equity (common or preferred) and debt securities.
Sources of Liquidity Sources of cash for the Parent historically have consisted of dividends from the Insurance Subsidiaries, the investment portfolio held at the Parent, borrowings under third-party lines of credit, intercompany revolving demand loan agreements with certain Insurance Subsidiaries, and the issuance of equity (common or preferred) and debt securities.
In the MD&A, we discuss and analyze the following: • Critical Accounting Policies and Estimates; • Financial Highlights of Results for Years Ended December 31, 2022, 2021, and 2020; • Results of Operations and Related Information by Segment; • Federal Income Taxes; and • Liquidity and Capital Resources.
In the MD&A, we will discuss and analyze the following: • Critical Accounting Policies and Estimates; • Financial Highlights of Results for Years Ended December 31, 2023, 2022, and 2021; • Results of Operations and Related Information by Segment; • Federal Income Taxes; and • Liquidity and Capital Resources.
Our investment portfolio consists of securities with maturity dates that continually provide a source of cash flow for claims payments in the ordinary course of business. To protect our Insurance Subsidiaries' capital, we purchase reinsurance coverage for significantly large claims or catastrophes that may occur. The Insurance Subsidiaries paid $120 million in total dividends to the Parent in 2022.
Our investment portfolio consists of securities with maturity dates that continually provide a source of cash flow for claims payments in the ordinary course of business. To protect our Insurance Subsidiaries' capital, we purchase reinsurance coverage for significantly large claims or catastrophes that may occur. The Insurance Subsidiaries paid $80 million in total dividends to the Parent in 2023.
The treaty provides annual aggregate limits for Foreign Terrorism (other than NBCR) acts of $21 million for the first layer; $60 million for the second layer; and $40 million for the third layer.
The treaty provides annual aggregate limits for Foreign Terrorism (other than NBCR) acts of $15 million for the first layer; $60 million for the second layer; and $40 million for the third layer.
As of December 31, 2022, our allowable ordinary maximum dividend is $283 million for 2023. All Insurance Subsidiary dividends to the Parent are (i) subject to the approval and/or review of its domiciliary state insurance regulator and (ii) generally payable only from earned statutory surplus reported in its annual statements as of the preceding December 31.
As of December 31, 2023, our allowable ordinary maximum dividend is $316 million for 2024. All Insurance Subsidiary dividends to the Parent are (i) subject to the approval and/or review of its domiciliary state insurance regulator, and (ii) generally payable only from earned statutory surplus reported in its annual statements as of the preceding December 31.
We continually monitor our cash requirements and the amount of capital resources we maintain at the holding company and operating subsidiary levels. As part of our long-term capital strategy, we strive to maintain capital metrics that support our targeted financial strength relative to the macroeconomic environment.
We continually monitor our cash requirements and the capital resources we maintain at the holding company and Insurance Subsidiary levels. As part of our long-term capital strategy, we strive to maintain capital metrics that support our targeted financial strength relative to the macroeconomic environment.
Our combined ratio estimate assumes no prior year casualty reserve development; • After-tax net investment income of $300 million that includes after-tax net investment income from our alternative investments of $30 million; • An overall effective tax rate of approximately 21.0%, which assumes an effective tax rate of 20.0% for net investment income and 21.0% for all other items; and • Weighted average shares of 61 million on a fully diluted basis, which assumes no share repurchases we may make under our authorization.
Our combined ratio estimate assumes no prior year casualty reserve development; • After-tax net investment income of $360 million that includes $32 million of after-tax net investment income from our alternative investments; • An overall effective tax rate of approximately 21.0%, which assumes an effective tax rate of 20.5% for net investment income and 21% for all other items; and • Weighted average shares of 61.5 million on a fully diluted basis, which assumes no share repurchases we may make under our authorization.
The following table summarizes of our property reinsurance treaties and arrangements covering our Insurance Subsidiaries: PROPERTY REINSURANCE ON INSURANCE PRODUCTS Treaty Name Reinsurance Coverage Terrorism Coverage Property Catastrophe Excess of Loss (covers all insurance operations) $915 million above $60 million retention treaty that responds on per occurrence basis in four layers: All nuclear, biological, chemical, and radioactive ("NBCR") losses are excluded regardless of whether or not they are certified under TRIPRA.
The following table summarizes of our property reinsurance treaties and arrangements covering our Insurance Subsidiaries: PROPERTY REINSURANCE ON INSURANCE PRODUCTS Treaty Name Reinsurance Coverage Terrorism Coverage Property Catastrophe Excess of Loss (covers all insurance operations) $1.1 billion above $100 million retention treaty that responds on per occurrence basis in four layers: All nuclear, biological, chemical, and radioactive ("NBCR") losses are excluded regardless of whether or not they are certified under TRIPRA.
"Financial Statements and Supplementary Data." of this Form 10-K, respectively. 44 Table of Contents Reinsurance Reinsurance recoverables on paid and unpaid loss and loss expense represent our estimates of the amounts we will recover from reinsurers. Each reinsurance contract is analyzed to ensure that sufficient risk is transferred to record the transactions appropriately as reinsurance in the Financial Statements.
"Financial Statements and Supplementary Data." of this Form 10-K, respectively. Reinsurance Reinsurance recoverables on paid and unpaid loss and loss expense represent our estimates of the amounts we will recover from reinsurers. Each reinsurance contract is analyzed to ensure sufficient risk is transferred to record the transactions appropriately as reinsurance in the Financial Statements.
In addition, contractual language interpretations and willingness to pay valid claims can impact our allowance for estimated uncollectible reinsurance. Our allowance for estimated uncollectible reinsurance was $1.6 million at both December 31, 2022, and December 31, 2021. We continually monitor developments that may impact recoverability from our reinsurers, for which we have contractual remedies if necessary.
In addition, contractual language interpretations and willingness to pay valid claims can impact our allowance for estimated uncollectible reinsurance. Our allowance for estimated uncollectible reinsurance was $1.7 million at December 31, 2023, and $1.6 million at December 31, 2022. We continually monitor developments that may impact recoverability from our reinsurers, for which we have contractual remedies if necessary.
The importance of any single assumption depends on several considerations, such as line of business and accident year. If the actual experience emerges differently than the assumptions underlying the reserve process, changes in our reserve estimates are possible that may be material to the results of operations in future periods.
The importance of any single assumption depends on several considerations, such as line of business and accident year. If the actual experience emerges differently than the assumptions underlying the reserve process, possible changes in our reserve estimates could be material to the results of operations in future periods.
Similar to the Line of Credit, these lending agreements limit the Parent's borrowings from the Indiana Subsidiaries to 10% of the admitted assets of the respective Indiana Subsidiary.
Like the Line of Credit, these lending agreements limit the Parent's borrowings from the Indiana Subsidiaries to 10% of the admitted assets of the respective Indiana Subsidiary.
We also have exposure to abuse or molestation claims from recently enacted state laws that extend the statute of limitations or permit windows for abuse or molestation claims and lawsuits to be filed that statutes of limitations previously barred.
We also have exposure to abuse or molestation claims from enacted state laws that extend the statute of limitations or permit windows for abuse or molestation claims and lawsuits that statutes of limitations previously barred.
Examples include claims for construction defect and abuse or molestation, for which states have increased and expanded the statute of limitations. We manage our exposure to these liabilities through our underwriting and claims practices, and a dedicated claims unit, similar to our handling of asbestos and environmental claims.
Examples include claims for construction defect and abuse or molestation, including in states that have increased and expanded the statute of limitations. We manage our exposure to these liabilities through our underwriting and claims practices and a dedicated claims unit, similar to our handling of asbestos and environmental claims.
In addition, we regularly experience property losses from winter storms, and while we utilize third-party vendor models to help us model and manage our exposure to this peril, we also evaluate our winter storm exposure based on our own historical experience, as winter storm third-party vendor models are currently less mature.
While we regularly experience property losses from winter storms and use third-party vendor models to help us model and manage our exposure to this peril, we also evaluate our winter storm exposure based on our own historical experience, as winter storm third-party vendor models are currently less mature.
This approach produces a range of reasonable reserve estimates, and does not represent a distribution of all possible outcomes. Therefore, the final outcomes may be greater than or less than these amounts. The range of reasonable reserve estimates increased as of December 31, 2022, relative to December 31, 2021.
This approach produces a range of reasonable reserve estimates but does not represent a distribution of all possible outcomes. Therefore, the final outcomes may be greater than or less than these amounts. The range of reasonable reserve estimates increased as of December 31, 2023, relative to December 31, 2022.
"Fair Value Measurements" for additional information on the unobservable inputs in our securities measured using Level 3 inputs.
"Fair Value Measurements" for quantitative information on the unobservable inputs in our securities measured using Level 3 inputs.
"Financial Statements and Supplementary Data." of this Form 10-K. 64 Table of Contents The following table summarizes current and long-term material cash requirements as of December 31, 2022, which we expect to fund primarily with operating cash flows.
"Financial Statements and Supplementary Data." of this Form 10-K. The following table summarizes current and long-term material cash requirements as of December 31, 2023, which we expect to fund primarily with operating cash flows.
The following table summarizes prior year development by line of business: (Favorable)/Unfavorable Prior Year Loss and Loss Expense Development ($ in millions) 2022 2021 2020 General liability $ (5.0) (29.0) (35.0) Commercial automobile 22.5 13.3 7.1 Workers compensation (70.0) (58.0) (60.0) Businessowners' policies (7.3) (0.4) 3.9 Commercial property (1.6) (2.6) 9.2 Bonds (10.0) — — Homeowners (0.6) 1.8 7.7 Personal automobile 0.5 (0.2) (1.8) E&S casualty lines (5.0) (7.0) — E&S property lines (2.5) (0.8) (4.0) Other 0.1 — — Total $ (78.9) (82.9) (72.9) A detailed discussion of recent reserve development by line of business follows.
The following table summarizes prior year development by line of business: (Favorable)/Unfavorable Prior Year Loss and Loss Expense Development ($ in millions) 2023 2022 2021 General liability $ 55.0 (5.0) (29.0) Commercial automobile 8.0 22.5 13.3 Workers compensation (74.5) (70.0) (58.0) Businessowners' policies 7.6 (7.3) (0.4) Commercial property 0.7 (1.6) (2.6) Bonds — (10.0) — Homeowners 4.6 (0.6) 1.8 Personal automobile 15.3 0.5 (0.2) E&S casualty lines (5.0) (5.0) (7.0) E&S property lines (1.6) (2.5) (0.8) Other (0.1) 0.1 — Total $ 10.0 (78.9) (82.9) A detailed discussion of recent reserve development by line of business follows.
Based on our analysis and market conditions, we may take a variety of actions, including, without limitation, contributing capital to the Insurance Subsidiaries, issuing additional debt 65 Table of Contents and/or equity securities, repurchasing existing debt, repurchasing shares of the Parent’s common stock, and increasing common stockholders’ dividends.
Based on our analysis and market conditions, we may take a variety of actions, including, without limitation, contributing capital to the Insurance Subsidiaries, issuing additional debt and/or equity securities, repurchasing existing debt, repurchasing shares of the Parent’s common stock, and adjusting common stockholders’ dividends.
Depending on the social and political climate, these changes may either increase or decrease associated claim costs; Changes in utilization of the workers compensation system – These changes may be driven by economic, legislative, or other changes, such as increased pharmaceutical prescriptions, more complex medical procedures, changes in permanently injured workers' life expectancy, and health insurance availability.
Depending on the social and political climate, these changes may either increase or decrease associated claim costs; and Changes in utilization of the workers compensation system – These changes may be driven by economic, legislative, or other changes, like increased prescriptions for pharmaceuticals, more complex medical procedures, changes in permanently injured workers' life expectancy, and health insurance availability.
Dividends on shares of the Parent's common and preferred stock are declared and paid at the discretion of the Board based on our operating results, financial condition, capital requirements, contractual restrictions, and other relevant factors. In November 2022, our Board approved a 7% increase in the quarterly cash dividend, to $0.30 from $0.28 per share.
Dividends on shares of the Parent's common and preferred stock are declared and paid at the discretion of the Board based on our operating results, financial condition, capital requirements, contractual restrictions, and other relevant factors. In November 2023, our Board approved a 17% increase in the quarterly cash dividend on common stock, to $0.35 from $0.30 per share.
For further information regarding reinsurance, see the “Reinsurance” section below in "Results of Operations and Related Information by Segment" and Note 9. “Reinsurance” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
For further information regarding reinsurance, see the "Reinsurance" section below in "Results of Operations and Related Information by Segment" and Note 9. "Reinsurance" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
NPW growth of 14% in 2022 compared to 2021 benefited from renewal pure price increases, exposure growth, strong retention, and higher direct new business.
NPW growth of 14% in 2023 compared to 2022 benefited from renewal pure price increases, higher direct new business, and strong retention.
However, as our geographic expansion progresses, we continually evaluate how physical risks from these perils and others are considered in our strategic decision making.
However, as our geographic expansion progresses, we continually evaluate how we consider physical risks from these perils and others in our strategic decision making.
Our target is for the Parent to maintain highly liquid investments of at least twice its expected annual net cash outflow needs, or $180 million. Insurance Subsidiary Dividends The Insurance Subsidiaries generate liquidity through insurance float, which is created by collecting premiums and earning investment income before paying claims. The period of float can extend over many years.
Our target is for the Parent to maintain liquid investments of at least twice its expected annual net cash outflow needs, or $210 million. 64 Table of Contents Insurance Subsidiary Dividends The Insurance Subsidiaries generate liquidity through insurance float, created by collecting premiums and earning investment income before paying claims. The period of float can extend over many years.
Liquidity and Capital Resources Capital resources and liquidity reflect our ability to generate cash flows from business operations, borrow funds at competitive rates, and raise new capital to meet our operating and growth needs. Liquidity We manage liquidity by focusing on generating sufficient cash flows to meet the short-term and long-term cash requirements of our business operations.
Liquidity and Capital Resources Capital resources and liquidity reflect our ability to generate cash flows from business operations, borrow funds at competitive rates, and raise new capital to meet our operating and growth needs. Liquidity We manage liquidity by generating sufficient cash flows to meet our business operations' short-term and long-term cash requirements.
As reflected in the table above, we are well within our established tolerance for catastrophic risk. Our current catastrophe reinsurance program exhausts at an approximately 1-in-220 year return period, or events with 0.5% probability, based on a multi-model view of hurricane risk.
As the table above reflects, we are well within our established tolerance for catastrophic risk. Based on a multi-model view of hurricane risk, our current catastrophe reinsurance program exhausts at an approximately 1-in-260-year return period, or events with 0.4% probability.
Non-foreign terrorism losses (other than NBCR) are covered to the same extent as non-terrorism losses. - $7 million in excess of $3 million layer provides unlimited reinstatements; - $20 million in excess of $10 million layer provides three reinstatements, $80 million in aggregate limits; and - $40 million in excess of $30 million layer provides two reinstatements, $120 million in aggregate limits.
Non-foreign terrorism losses (other than NBCR) are covered to the same extent as non-terrorism losses. - $5 million in excess of $5 million layer provides 15 reinstatements; $80 million in aggregate limits; - $20 million in excess of $10 million layer provides three reinstatements, $80 million in aggregate limits; and - $40 million in excess of $30 million layer provides two reinstatements, $120 million in aggregate limits.
E&S Casualty Lines of Business At December 31, 2022, our E&S casualty lines of business had recorded reserves, net of reinsurance, of $494 million, representing 11% of our total net reserves. Our E&S casualty lines results have improved over recent years.
E&S Casualty Lines of Business At December 31, 2023, our E&S casualty lines of business had recorded reserves, net of reinsurance, of $532 million, representing 11% of our total net reserves. Our E&S casualty lines results have improved over recent years.
These risk factors may not be exhaustive. We operate in a constantly changing business environment, and new risk factors may emerge anytime. We can neither predict these new risk factors nor assess their impact, if any, on our businesses or the extent any factor or combination of factors may cause actual results to differ materially from any forward-looking statements.
We operate in a constantly changing business environment, and new risk factors may emerge at any time. We can neither predict these new risk factors nor assess their impact, if any, on our businesses or the extent to which any factor or combination of factors may cause actual results to differ materially from any forward-looking statements.
As of December 31, 2022 and 2021, we had no (i) material guarantees on behalf of others and trading activities involving non-exchange traded contracts accounted for at fair value, (ii) material transactions with related parties other than those disclosed in Note 18. “Related Party Transactions” included in Item 8.
As of December 31, 2023 and 2022, we had no (i) material guarantees on behalf of others and trading activities involving non-exchange traded contracts accounted for at fair value, (ii) material transactions with related parties other than those disclosed in 67 Table of Contents Note 18. "Related Party Transactions" included in Item 8.
Flood 100% reinsurance by the federal government’s WYO. None Casualty Reinsurance We renewed the casualty excess of loss treaty, which covers both our standard market and E&S Lines business, on July 1, 2022, substantially on the same terms as the treaty expiring June 30, 2022.
Flood 100% reinsurance by the federal government’s WYO. None. 61 Table of Contents Casualty Reinsurance We renewed the casualty excess of loss treaty, which covers our standard market and E&S Lines business, on July 1, 2023, on substantially the same terms as the treaty expiring June 30, 2023.
A variety of issues can impact the workers compensation line of business, such as: Unexpected changes in medical cost inflation – The industry is currently experiencing a period of lower medical claim cost inflation. However, alongside elevated inflation as measured by the Consumer Price Index, medical costs are also beginning to rise, though to a lesser degree.
A variety of issues can impact the workers compensation line of business, such as: Unexpected changes in medical cost inflation – The industry currently is experiencing an extended period of lower medical claim cost inflation. However, medical costs are beginning to rise, though to a lesser degree than the recent elevated economic inflation measured by the Consumer Price Index.
Pre-pandemic, increased frequencies were likely due to increased miles driven related to lower unemployment, poor road quality, and an increase in distracted driving. The pandemic and the governmental "stay-at-home" orders issued in early 2020 dramatically reduced miles driven and road traffic, significantly reducing claims frequency in 2020.
Pre-pandemic, increased frequencies were attributable to increased miles driven, likely related to lower unemployment, poor road quality, and increased distracted driving. The pandemic and the governmental "stay-at-home" orders issued in early 2020 dramatically reduced miles driven and road traffic, significantly reducing claims frequency that year.
Our adjusted book value per share, which is book value per share excluding total after-tax unrealized gains or losses on investments included in accumulated other comprehensive (loss) income, increased to $45.49 as of December 31, 2022, from $43.23 as of December 31, 2021.
Our adjusted book value per share, which is book value per share excluding total after-tax unrealized gains or losses on investments included in accumulated other comprehensive income (loss), increased to $50.03 as of December 31, 2023, from $45.49 as of December 31, 2022.
We also have the ability to incorporate internally-developed forecast information into the models as we deem appropriate. In developing our best estimate of the allowance for credit losses, we consider our outlook as to the probability of the various scenarios occurring.
We also can incorporate internally-developed forecast information into the models as we deem appropriate. In developing our best estimate of the allowance for credit losses, we consider our outlook on the probability of the various scenarios occurring.
Our capital management strategy is intended to protect the interests of the policyholders of the Insurance Subsidiaries and our stockholders, while enhancing our financial strength and underwriting capacity. We have a profitable book of business and solid capital base, positioning us well to take advantage of potential market opportunities.
Our capital management strategy is intended to protect the interests of the policyholders of the Insurance Subsidiaries and our stockholders and enhance our financial strength and underwriting capacity. We have a profitable underwriting portfolio and solid capital base, positioning us well to take advantage of potential market opportunities.
These improvements may lead to claims practice changes that affect average case reserve levels and claims settlement rates, which directly impact the data used to project ultimate loss and loss expense. While these changes may increase uncertainty in our estimates in the short term, we expect refined management of the claims process to be the longer-term benefit.
These improvements may lead to claims practice changes affecting average case reserve levels and claims settlement rates, directly impacting the data used to project ultimate loss and loss expense. While these changes may increase uncertainty in our estimates in the short term, we expect refined claims process management to be the longer-term benefit.
In some cases, forward-looking statements include the words “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “target,” “project,” “intend,” “believe,” “estimate,” “predict,” “potential,” “pro forma,” “seek,” “likely,” “continue,” or comparable terms. Our forward-looking statements are only predictions, and we can give no assurance that such expectations will prove correct.
In some cases, forward-looking statements include the words “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “target,” “project,” “intend,” “believe,” “estimate,” “predict,” “potential,” “pro forma,” “seek,” “likely,” “continue,” or comparable terms. Our forward-looking statements are only predictions; we cannot guarantee or assure that such expectations will prove correct.
Amounts recovered from reinsurers are recognized as assets contemporaneously and in a manner consistent with the paid and unpaid losses associated with the reinsured policies.
Amounts recovered from reinsurers are recognized as assets contemporaneously and 46 Table of Contents in a manner consistent with the paid and unpaid losses associated with the reinsured policies.
We model various catastrophic perils, and hurricane risk continues to be our portfolio's most significant natural catastrophe peril because of the geographic location of the risks we insure.
We model various catastrophic perils, and hurricane risk remains our portfolio's most significant natural catastrophe peril because of the geographic location of the risks we insure.
Details about retrocessional reinsurance programs are not always transparent, making it difficult to assess our reinsurers' exposure to counterparty credit risk. Our reinsurer's credit quality is also impacted by other factors, such as their reserve adequacy, investment portfolio, regulatory capital position, catastrophe aggregations, and risk management expertise.
Details about retrocessional reinsurance programs are not always transparent, making it difficult to assess our reinsurers' exposure to counterparty credit risk. Other factors impact our reinsurer's credit quality, such as their reserve adequacy, investment portfolio, regulatory capital position, catastrophe aggregations, and risk management practices.
These models use security-specific information and forecasted macroeconomic data to determine possible expected credit loss scenarios based on projected changes in the economy. The models contain forecasted economic data from the Federal Reserve Board’s annual supervisory stress test review on certain large banks and financial institutions.
These models use security-specific information and forecasted macroeconomic data to determine possible expected credit loss scenarios based on projected economic changes. 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.
Our actual gross and net losses incurred from hurricanes making U.S.-landfall will vary, perhaps materially, from our estimated modeled losses. In addition to hurricane peril, the table below shows gross and net losses modeled by other wind and earthquake perils in our underwriting property portfolio.
Our actual gross and net losses incurred from hurricanes making U.S. landfall will vary, perhaps materially, from our estimated modeled losses. In addition to hurricane peril, the table below shows gross and net losses modeled by other wind and earthquake perils in our underwriting property portfolio. Other wind perils include the sub-perils of hail, straight-line wind, and tornado.
($ in millions) 2022 2021 2020 Federal income tax expense $ 55.3 101.5 56.6 Effective tax rate 1 20.4 % 20.5 18.7 1 The effective tax rate is calculated by taking "Total federal income tax expense" divided by "Income before federal income tax" less "Preferred stock dividends" on our Consolidated Statements of Income.
($ in millions) 2023 2022 2021 Federal income tax expense $ 93.2 55.3 101.5 Effective tax rate 1 20.7 % 20.4 20.5 1 The effective tax rate is calculated by taking "Total federal income tax expense" divided by "Income before federal income tax" less "Preferred stock dividends" on our Consolidated Statements of Income.
“Risk Factors.” of this Form 10-K. • Flood Reinsurance , for which all of the premiums and losses related to our participation in the WYO (for which we also receive a servicing fee) are 100% ceded to the federal government.
For further information about TRIPRA, see Item 1A. “Risk Factors.” of this Form 10-K. • Flood Reinsurance , for which all of the premiums and losses related to our participation in the WYO (for which we also receive a servicing fee) are 100% ceded to the federal government.
We continue to recalibrate our predictive models and refine our underwriting and pricing approaches. While we believe these underwriting and pricing changes will ultimately lead to improved profitability and greater stability, the resulting changes to our exposure profile may impact paid and reported development patterns, thereby increasing the uncertainty in the reserves in the near term.
While we believe these underwriting and pricing changes will ultimately lead to improved profitability and greater stability, the resulting changes to our exposure profile may impact paid and reported development patterns, increasing the uncertainty in the reserves in the near-term.
Reinsurance We use reinsurance to protect our capital resources and insure against losses on property and casualty risks that we underwrite in excess of the amount that we are prepared to accept.
Reinsurance We use reinsurance to protect our capital resources and insure against losses on property and casualty risks that we underwrite above the amount of losses we are willing to accept.
Range of Reasonable Reserve Estimates We have estimated a range of reasonable reserve estimates for net loss and loss expense of $3,920 million to $4,662 million at December 31, 2022. This range reflects low and high reasonable reserve estimates determined by judgmentally adjusting the methods, factors, and assumptions selected within the internal reserve review.
Range of Reasonable Reserve Estimates We have estimated a range of reasonable reserve estimates for net loss and loss expense of $4,253 million to $5,004 million at December 31, 2023. This range reflects low and high reasonable reserve estimates determined by judgmentally adjusting the methods, factors, and assumptions selected within the internal reserve review.
"Financial Statements and Supplementary Data." of this Form 10-K: (i) item (d) of Note 2. "Summary of Significant Accounting Policies" regarding descriptions of the levels within the fair value hierarchy and the valuation techniques used for our Level 3 securities, and (ii) Note 7.
For additional information, refer to the following sections within Item 8. "Financial Statements and Supplementary Data." of this Form 10-K: (i) item (d) of Note 2. "Summary of Significant Accounting Policies" for descriptions of the levels within the fair value hierarchy and the valuation techniques used for our Level 3 securities, and (ii) Note 7.
($ in millions) Unfavorable Prior Year Casualty Reserve Development (Favorable)/ Unfavorable Year-Over-Year Change For the year ended December 31, Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio 2022 $ 15.0 1.8 pts (0.3) 2021 15.0 2.1 0.5 The unfavorable prior year casualty reserve development in 2022 was primarily due to increased severities in the 2021 accident year.
($ in millions) Unfavorable Prior Year Casualty Reserve Development (Favorable)/ Unfavorable Year-Over-Year Change For the year ended December 31, Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio 2023 $ 4.0 0.4 pts (1.4) 2022 15.0 1.8 (0.3) The unfavorable prior year casualty reserve development in 2023 was primarily due to increased loss expenses in accident years 2022 and prior.
These statements relate to our intentions, beliefs, projections, estimations, or forecasts 36 Table of Contents of future events and financial performance. They involve known and unknown risks, uncertainties, and other factors that may cause our or industry actual results, activity levels, or performance to materially differ from those expressed or implied by the forward-looking statements.
These statements discuss our intentions, beliefs, projections, estimations, or forecasts of future events and financial performance. They involve known and unknown risks, uncertainties, and other factors that may cause our or our industry's actual results, activity levels, or performance to materially differ from those in or implied by the forward-looking statements.

… 274 more changes not shown on this page.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

40 edited+3 added−3 removed10 unchanged
Biggest changeThe improvement in our weighted average credit rating reflects active management of our investment portfolio in 2022 to optimize our risk-adjusted investment yields in the rising interest rate environment, resulting in higher credit quality fixed income security purchases. 67 Table of Contents Details on the credit quality of our invested assets at December 31, 2022 are provided below: December 31, 2022 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 $ 440 $ 440 5.6 % 4.2 % 0.01 0.01 $ 420 $ 20 $ — $ — $ — $ — Fixed income securities: U.S. government obligations 210 189 2.4 4.6 5.1 7.5 187 2 — — — — Foreign government obligations 11 10 0.1 5.2 6.7 8.2 — 2 5 2 — — State and municipal obligations 969 921 11.8 3.8 5.0 6.1 181 419 286 37 — — Corporate securities 2,586 2,361 30.2 5.8 4.6 6.3 41 270 974 916 160 — MBS: Residential mortgage-backed securities ("RMBS"): Agency RMBS 809 737 9.4 4.7 5.9 8.6 737 — — — — — Non-agency RMBS 360 323 4.1 5.8 4.5 7.1 213 35 76 — — — Total RMBS 1,170 1,060 13.5 5.1 5.5 8.2 949 35 76 — — — Commercial mortgage-backed securities ("CMBS") 664 614 7.9 6.5 3.3 4.3 523 44 42 5 — — Total mortgage-backed securities 1,833 1,674 21.4 5.6 4.7 6.8 1,472 79 117 5 — — CLO and other ABS: Auto 30 29 0.4 8.5 1.8 1.9 29 — — — — — Aircraft 58 48 0.6 11.4 2.9 3.5 — 1 20 22 6 — CLOs 867 809 10.3 7.6 2.1 5.2 386 261 47 38 59 17 Credit cards 8 8 0.1 6.2 3.1 3.5 7 — 1 — — — Other ABS 644 592 7.6 6.8 4.1 5.2 155 91 277 55 6 7 Total CLOs and Other ABS 1,608 1,486 19.0 7.4 2.9 5.1 578 354 345 114 71 25 Total securitized assets 3,441 3,160 40.4 6.4 3.8 6.0 2,050 433 462 120 71 25 Total fixed income securities and short-term investments 7,807 7,222 92.3 5.7 4.1 5.8 2,879 1,157 1,785 1,141 234 25 Total fixed income securities and short-term investments by credit rating percentage 39.9 % 16.0 % 24.7 % 15.8 % 3.2 % 0.3 % Commercial mortgage loans 149 139 1.8 4.9 4.4 6.2 — 11 58 67 3 — Equity securities: Common stock 1 165 160 2 — — — — — — — — 160 Preferred stock 2 2 — — — — — — — 2 — — Total equity securities 167 162 2.1 — — — — — — 2 — 160 Alternative investments: Private equity 281 281 3.6 — — — — — — — — 281 Private credit 55 55 0.7 — — — — — — — — 55 Real assets 35 35 0.5 — — — — — — — — 35 Total alternative investments 371 371 4.7 — — — — — — — — 371 Other investments 71 71 0.9 — — — — — — — — 71 Total invested assets $ 8,417 $ 7,826 100 % — % — — $ 2,879 $ 1,157 $ 1,785 $ 1,143 $ 234 $ 628 1 Includes investments in exchange traded funds, mutual funds, business development corporations, and real estate investment trusts.
Biggest changeNon-investment grade exposure represented approximately 4% of the total fixed income and short-term investments at both December 31, 2023 and December 31, 2022. 69 Table of Contents Details on the credit quality of our invested assets at December 31, 2023 are provided below: December 31, 2023 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 Fixed income securities: U.S. government obligations $ 223 $ 205 2.4 % 4.7 % 4.7 7.2 $ — $ 205 $ — $ — $ — $ — Foreign government obligations 11 10 0.1 5.0 6.0 7.2 1 2 4 3 — — State and municipal obligations 613 586 6.7 4.1 5.3 6.6 92 261 212 21 — — Corporate securities 2,857 2,733 31.5 5.5 4.4 6.0 51 306 1,157 1,035 182 1 MBS: Residential mortgage-backed securities ("RMBS"): Agency RMBS 1,098 1,036 11.9 4.8 5.1 8.0 — 1,036 — — — — Non-agency RMBS 471 441 5.1 5.8 4.0 6.0 383 27 22 9 — — Total RMBS 1,569 1,477 17.0 5.1 4.8 7.4 383 1,063 22 9 — — Commercial mortgage-backed securities ("CMBS") 719 675 7.8 6.8 3.2 4.0 498 158 17 2 — — Total MBS 2,288 2,152 24.8 5.6 4.3 6.3 882 1,220 39 11 — — CLO and other ABS: Auto 139 140 1.6 6.9 1.9 2.0 135 1 4 — — — Aircraft 49 43 0.5 10.1 2.7 3.1 — — 21 17 5 — CLOs 863 825 9.5 7.7 2.3 4.6 394 270 52 39 56 14 Credit cards 16 16 0.2 5.0 3.0 3.3 16 — 1 — — — Other ABS 844 811 9.3 6.2 4.9 6.2 247 115 358 63 7 19 Total CLOs and Other ABS 1,912 1,835 21.1 7.0 3.4 5.1 792 386 436 119 68 33 Total securitized assets 4,199 3,987 45.9 6.3 3.9 5.8 1,674 1,607 475 130 68 33 CMLs 189 179 2.1 5.7 3.4 5.1 — 11 71 94 3 — Total fixed income investments 8,092 7,700 89 5.8 4.2 5.9 1,817 2,391 1,919 1,284 253 35 Short-term investments 309 309 3.6 5.1 — — 296 13 — — — — Total fixed income and short-term investments 8,401 8,009 92.2 5.8 4.0 5.7 2,114 2,404 1,919 1,284 253 35 Total fixed income and short-term investments by credit rating percentage 26.4 % 30.0 % 24.0 % 16.0 % 3.2 % 0.5 % Equity securities: Common stock 1 181 185 2.1 0.9 — — — — — — — 185 Preferred stock 2 2 — 9.3 — — — — — 2 — — Total equity securities 183 187 2.2 0.9 — — — — — 2 — 185 Alternative investments: Private equity 302 302 3.5 — — — — — — — — 302 Private credit 54 54 0.6 — — — — — — — — 54 Real assets 40 40 0.5 — — — — — — — — 40 Total alternative investments 396 396 4.6 — — — — — — — — 396 Other investments 91 91 1 — — — — — — — — 91 Total invested assets $ 9,071 $ 8,683 100 % — % — — $ 2,114 $ 2,404 $ 1,919 $ 1,286 $ 253 $ 707 1 Includes investments in exchange traded funds, mutual funds, business development corporations, and real estate investment trusts.
However, new and reinvested money used to purchase fixed income securities would benefit from rising interest rates and would be negatively impacted by falling interest rates.
However, new and reinvested money used to purchase fixed income securities would benefit from rising interest rates and be negatively impacted by falling interest rates.
Our fixed income securities portfolio is comprised of primarily investment grade (investments receiving Standard & Poor's Global Ratings ("S&P") or an equivalent rating of BBB- or above) corporate securities, U.S. government and agency securities, municipal obligations, collateralized loan obligations ("CLO") and other asset-backed securities ("ABS"), and mortgage-backed securities ("MBS").
Our fixed income securities portfolio is comprised of primarily investment grade (investments receiving Standard & Poor's Global Ratings or an equivalent rating of BBB- or above) corporate securities, U.S. government and agency securities, municipal obligations, collateralized loan obligations ("CLO") and other asset-backed securities ("ABS"), and mortgage-backed securities ("MBS").
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 November 7, 2025, and has a variable interest rate based on the Parent’s debt ratings.
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 Lenders' consent. The Line of Credit will mature on November 7, 2025, and has a variable interest rate based on the Parent’s debt ratings.
No individual CLO comprised more than 1% of our fixed income securities portfolio at December 31, 2022, and this portfolio had an average credit quality of AA-. Equity Price Risk Our equity securities portfolio is exposed to risk from potential volatility in equity market prices.
No individual CLO comprised more than 1% of our fixed income securities portfolio at December 31, 2023, and this portfolio had an average credit quality of "AA-." Equity Price Risk Our equity securities portfolio is exposed to risk from potential volatility in equity market prices.
Investment grade CLOs accounted for the majority of this portfolio at 9% of invested assets, while non-investment grade CLOs represented only 1% of invested assets. The CLO portfolio is well diversified by issuer, manager, vintage year, and underlying corporate borrowers and sectors.
Investment grade CLOs accounted for the majority of this portfolio at 8% of invested assets, while non-investment grade CLOs represented only 1% of invested assets. The CLO portfolio is well diversified by issuer, manager, vintage year, and underlying corporate borrowers and sectors.
These holdings represented 15% of our total investment portfolio. The corporate securities portfolio allocation to financials is well-diversified by issuer and has a weighted average credit rating of “A-.” No individual issuer comprised more than 1% of our fixed income securities portfolio at December 31, 2022. MBS (RMBS and CMBS Portfolios) MBS represent our most significant exposure to real estate.
These holdings represented 15% of our total investment portfolio. The corporate securities portfolio allocation to financials is well-diversified by issuer and has a weighted average credit rating of "A-." No individual issuer comprised more than 1% of our fixed income securities portfolio at December 31, 2023. MBS (RMBS and CMBS Portfolios) MBS represent our most significant exposure to real estate.
The effective duration of the fixed income securities portfolio, including short-term investments, at December 31, 2022, was 4.1 years, which is within our historical range. The Insurance Subsidiaries’ net loss and loss expense reserves duration was approximately 3.1 years at December 31, 2022.
The effective duration of the fixed income securities portfolio, including short-term investments, at December 31, 2023, was 4.0 years, which is within our historical range. The Insurance Subsidiaries’ net loss and loss expense reserves duration was approximately 3.1 years at December 31, 2023.
Our debt is not exposed to material changes in interest rates because the interest rates are fixed. (b) Short-Term Debt On November 7, 2022, the Parent entered into a Credit Agreement (the “Line of Credit”) among the Parent, the lenders named therein (the “Lenders”), and Wells Fargo Bank, National Association, as Administrative Agent.
Our debt is not exposed to material changes in interest rates because the interest rates are fixed. (b) Short-Term Debt On November 7, 2022, the Parent entered into a Credit Agreement (the "Line of Credit") among the Parent, the lenders named therein (the "Lenders"), and Wells Fargo Bank, National Association, as Administrative Agent.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Market Risk The fair value of our assets and liabilities are subject to market risks — primarily interest rate risk, credit risk, equity price risk, and liquidity risk related to our investment portfolio — and fluctuations in the value of our alternative investment portfolio.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Market Risk The fair value of our assets and liabilities are subject to market risks — primarily interest rate risk, credit risk, equity price risk, and liquidity risk related to our investment portfolio.
Because of the quality of these dedicated revenue streams, we believe our special revenue bond portfolio is appropriate for the current environment. Corporate Securities Our corporate securities represented 30% of our invested assets at December 31, 2022. For investment-grade corporate bonds, we address the risk of an individual issuer's default by maintaining a diverse portfolio of holdings.
Because of the quality of these dedicated revenue streams, we believe our special revenue bond portfolio is appropriate for the current environment. Corporate Securities Our corporate securities represented 31% of our invested assets at December 31, 2023. For investment-grade corporate bonds, we address the risk of an individual issuer's default by maintaining a diverse portfolio.
We use fair values to measure the potential loss. This analysis is not intended to provide a precise forecast, or range, of the effect of changes in market interest rates and equity prices on our income or stockholders’ equity, but rather provides insight into the portfolio's sensitivity.
We use fair values to measure the potential loss. This analysis is not intended to provide a precise forecast or range of the effect of changes in market interest rates and equity prices on our income or stockholders’ equity. However, it provides insight into the portfolio's sensitivity.
Our fixed income securities portfolio contains interest rate-sensitive instruments, and its performance could be 66 Table of Contents adversely affected by changes in interest rates resulting from governmental monetary policies, domestic and international economic and political conditions, and other factors beyond our control.
Our fixed income securities portfolio contains interest rate-sensitive instruments, and its performance could be adversely affected by changes in interest rates resulting from governmental monetary policies, domestic and international economic and political conditions, and other factors beyond our control.
These analyses includes review of loan-to-value ratios, geographic spread of the assets securing the bond, delinquencies in payments on the underlying mortgages, gains/losses on sales, evaluations of projected cash flows, as well as other information that aids in determination of the health of the underlying assets.
These analyses include reviews of loan-to-value ratios, geographic spread of the assets securing the bond, delinquencies in payments on the underlying mortgages, gains/losses on sales, evaluations of projected cash flows, as well as other information that aids in determination of the health of the underlying assets.
For our special revenue bonds, 65% of the dedicated revenue stream is comprised of the following: (i) essential services (53%), which is comprised of transportation, water and sewer, and electric; and (ii) education (12%), which includes school districts and higher education, including state-wide university systems.
For our special revenue bonds, 63% of the dedicated revenue stream is comprised of the following: (i) essential services (53%), which is comprised of transportation, water and sewer, and electric; and (ii) education (10%), which includes school districts and higher education, including state-wide university systems.
Since these partnerships' underlying investments consist primarily of assets or liabilities for which there are no quoted prices in active markets for the same or similar assets, the valuation of interests in these partnerships are subject to a higher level of subjectivity 71 Table of Contents and unobservable inputs than substantially all of our other invested assets.
As these partnerships' underlying investments consist primarily of assets or liabilities for which there are no quoted prices in active markets for the same or similar assets, the valuation of interests in these partnerships are subject to a higher level of subjectivity and unobservable inputs than substantially all of our other invested assets.
Our portfolio allocation was 85% fixed income securities, 2% commercial mortgage loans, 2% equity securities, 5% short-term investments, 5% alternative investments, and 1% other investments as of December 31, 2022. Alternative investments are limited partnership investments in private equity, private credit, and real estate strategies. We do not directly hold derivatives, commodities, or other investments denominated in foreign currency.
Our portfolio allocation was 86% fixed income securities, 2% commercial mortgage loans ("CML"), 2% equity securities, 4% short-term investments, 5% alternative investments, and 1% other investments as of December 31, 2023. Alternative investments are limited partnership investments in private equity, private credit, and real estate strategies. We do not directly hold derivatives, commodities, or other investments denominated in foreign currency.
As we record our investments in these various partnerships under the equity method of accounting, any decreases in the valuation of these investments would negatively impact our results of operations. For additional information regarding these alternative investment strategies, see Note 5. “Investments” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
We record our investments in these various partnerships under the equity method of accounting, so any decreases in these investments' valuations would negatively impact our results of operations. For additional information regarding these alternative investment strategies, see Note 5. "Investments" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
We discuss each of these sector holdings in more detail below. 68 Table of Contents State and Municipal Obligations Our state and municipal obligations represented 10% of our invested assets at December 31, 2022.
We discuss each of these sector holdings in more detail below. 70 Table of Contents State and Municipal Obligations Our state and municipal obligations represented 12% of our invested assets at December 31, 2023.
The tables below provide details on our CLO and other ABS holdings at December 31, 2022, and December 31, 2021: December 31, 2022 Fair Value Carry Value Net Unrealized/ Unrecognized Gain (Loss) Weighted Average Credit Quality ($ in millions) Investment grade: CLO $ 732.6 732.6 (49.6) AA+ Other ABS 658.0 658.0 (60.9) A+ Total investment grade 1,390.6 1,390.6 (110.5) AA Non-investment grade: CLO 76.1 76.1 (6.9) B Other ABS 19.3 19.3 (1.9) CCC+ Total non-investment grade 95.4 95.4 (8.8) B Total CLO and other ABS $ 1,486.0 1,486.0 (119.3) AA- December 31, 2021 Fair Value Carry Value Net Unrealized/ Unrecognized Gain (Loss) Weighted Average Credit Quality ($ in millions) Investment grade: CLO $ 788.6 788.6 2.6 AA+ Other ABS 475.9 475.9 5.9 A+ Total investment grade 1,264.5 1,264.5 8.5 AA Non-investment grade: CLO 69.8 69.8 (0.3) B Other ABS 16.5 16.5 (0.2) CCC+ Total non-investment grade 86.3 86.3 (0.5) B Total CLO and other ABS $ 1,350.8 1,350.8 8.0 AA- CLOs represented 10% of our total invested assets as of December 31, 2022.
The tables below provide details on our CLO and other ABS holdings at December 31, 2023, and December 31, 2022: December 31, 2023 Fair Value Carry Value Net Unrealized/ Unrecognized Gain (Loss) Weighted Average Credit Quality ($ in millions) Investment grade: CLO $ 754.6 754.6 (33.1) AA+ Other ABS 978.9 978.9 (36.8) AA- Total investment grade 1,733.5 1,733.5 (69.9) AA Non-investment grade: CLO 70.0 70.0 (3.4) B Other ABS 31.3 31.3 (0.9) CCC Total non-investment grade 101.3 101.3 (4.3) B Total CLO and other ABS $ 1,834.8 1,834.8 (74.2) A- 73 Table of Contents December 31, 2022 Fair Value Carry Value Net Unrealized/ Unrecognized Gain (Loss) Weighted Average Credit Quality ($ in millions) Investment grade: CLO $ 732.6 732.6 (49.6) AA+ Other ABS 658.0 658.0 (60.9) A+ Total investment grade 1,390.6 1,390.6 (110.5) AA Non-investment grade: CLO 76.1 76.1 (6.9) B Other ABS 19.3 19.3 (1.9) CCC+ Total non-investment grade 95.4 95.4 (8.8) B Total CLO and other ABS $ 1,486.0 1,486.0 (119.3) AA- CLOs represented 9% of our total invested assets as of December 31, 2023.
Our holdings of non-investment grade corporate bonds, which typically exhibit weaker credit profiles and are subject to more risk of credit loss, represent 2% of our overall investment portfolio. 69 Table of Contents The tables below provide details on our corporate bond holdings at December 31, 2022 and 2021: December 31, 2022 Fair Value Carry Value Net Unrealized/ Unrecognized Gain (Loss) Weighted Average Credit Quality ($ in millions) Investment grade $ 2,201.1 2,202.4 (189.8) A- Non-investment grade 160.4 160.4 (4.8) B+ Total corporate securities $ 2,361.5 2,362.8 (194.6) A- December 31, 2021 Fair Value Carry Value Net Unrealized/ Unrecognized Gain (Loss) Weighted Average Credit Quality ($ in millions) Investment grade $ 2,424.8 2,424.3 100.0 A- Non-investment grade 174.6 174.6 2.5 B+ Total corporate securities $ 2,599.4 2,598.9 102.5 BBB+ The following tables provide the sector composition of this portfolio at December 31, 2022 and 2021: December 31, 2022 December 31, 2021 ($ in millions) Fair Value Weighted Average Credit Rating % of Fixed Income Securities Fair Value Weighted Average Credit Rating % of Fixed Income Securities Financials 1,194.3 A- 18 % 1,286.9 A- 19 % Consumer non-cyclicals 178.5 BBB+ 3 % 242.8 BBB+ 4 % Communications 136.2 A- 2 % 133.3 A- 2 % Utilities 97.7 A- 1 % 123.7 A- 2 % Consumer cyclicals 81.4 BBB 1 % 101.6 BBB 1 % Technology 77.1 BBB+ 1 % 95.6 BBB+ 1 % Energy 77.0 BBB 1 % 94.2 BBB 1 % Bank loans 37.6 B 1 % 57.3 B 1 % Basic materials 23.7 BBB- 0.3 % 33.0 BBB- 1 % Other 251.7 A- 4 % 188.6 BBB+ 3 % Other industrials 206.3 BBB 3 % 242.4 BBB 4 % Total corporate securities 2,361.5 A- 35 2,599.4 BBB+ 39 As illustrated in the table above, within our allocation to corporate securities, financials is our most significant industry concentration at 18% of our fixed income securities portfolio at December 31, 2022.
Our holdings of non-investment grade corporate bonds, which typically exhibit weaker credit profiles and are subject to more risk of credit loss, represent 2% of our overall investment portfolio. 71 Table of Contents The tables below provide details on our corporate bond holdings at December 31, 2023 and 2022: December 31, 2023 Fair Value Carry Value Net Unrealized/ Unrecognized Gain (Loss) Weighted Average Credit Quality ($ in millions) Investment grade $ 2,549.8 2,550.5 (112.6) A- Non-investment grade 183.4 183.4 2.0 B+ Total corporate securities $ 2,733.2 2,733.9 (110.6) A- December 31, 2022 Fair Value Carry Value Net Unrealized/ Unrecognized Gain (Loss) Weighted Average Credit Quality ($ in millions) Investment grade $ 2,201.1 2,202.4 (189.8) A- Non-investment grade 160.4 160.4 (4.8) B+ Total corporate securities $ 2,361.5 2,362.8 (194.6) A- The following tables provide the sector composition of this portfolio at December 31, 2023 and 2022: December 31, 2023 December 31, 2022 ($ in millions) Fair Value Weighted Average Credit Rating % of Fixed Income Securities Fair Value Weighted Average Credit Rating % of Fixed Income Securities Financials $ 1,284.4 A- 17 % $ 1,194.3 A- 18 % Consumer non-cyclicals 221.7 A- 3 178.5 BBB+ 3 Communications 130.7 BBB+ 2 136.2 A- 2 Utilities 142.3 A- 2 97.7 A- 1 Consumer cyclicals 115.5 BBB 1 81.4 BBB 1 Energy 96.9 BBB 1 77.0 BBB 1 Technology 88.1 BBB 1 77.1 BBB+ 1 Basic Materials 23.4 BBB 1 23.7 BBB- 1 Bank Loans 19.6 B+ 1 37.6 B 1 Other 342.6 A- 4 251.7 A- 4 Other industrials 268.0 BBB 3 206.3 BBB 3 Total corporate securities $ 2,733.2 A- 36 $ 2,361.5 A- 36 As illustrated in the table above, within our allocation to corporate securities, financials is our most significant industry concentration at 17% of our fixed income securities portfolio at December 31, 2023.
Indebtedness (a) Long-Term Debt As of December 31, 2022, we had outstanding long-term debt of $504.7 million that matures as shown in the following table: 2022 ($ in thousands) Year of Maturity Carrying Amount Fair Value Financial liabilities Long-term debt 3.03% Borrowings from FHLBI 2026 60,000 57,175 7.25% Senior Notes 2034 49,921 51,705 6.70% Senior Notes 2035 99,542 99,264 5.375% Senior Notes 2049 294,424 258,459 Subtotal 503,887 466,603 Unamortized debt issuance costs (2,929) Finance lease obligations 3,718 Total notes payable $ 504,676 The weighted average effective interest rate for our outstanding long-term debt was 5.5% at December 31, 2022.
Indebtedness (a) Long-Term Debt As of December 31, 2023, we had outstanding long-term debt of $503.9 million that matures as shown in the following table: 2023 ($ in thousands) Year of Maturity Carrying Amount Fair Value Financial liabilities Long-term debt 3.03% Borrowings from FHLBI 2026 60,000 57,932 7.25% Senior Notes 2034 49,926 53,047 6.70% Senior Notes 2035 99,565 104,039 5.375% Senior Notes 2049 294,523 288,787 Subtotal 504,014 503,805 Unamortized debt issuance costs (2,704) Finance lease obligations 2,636 Total notes payable $ 503,946 The weighted average effective interest rate for our outstanding long-term debt was 5.5% at December 31, 2023.
The liquidity characteristics of our portfolio are illustrated below: Asset Category Percentage of Invested Assets Highly-liquid assets 58 % Generally liquid assets, may become less liquid with market stress 1 33 Generally illiquid assets 2 9 Total 100 % 1 These exposures are concentrated within CMBS and CLO and other ABS. 2 These exposures include our alternative investments and other non-publicly traded securities.
In addition to this, we monitor our investment portfolio's liquidity profile to ensure it meets our operational liquidity needs. 74 Table of Contents The liquidity characteristics of our portfolio are illustrated below: Asset Category Percentage of Invested Assets Highly-liquid assets 59 % Generally liquid assets, may become less liquid with market stress 1 23 Generally illiquid assets 2 18 Total 100 % 1 These exposures are concentrated within CMBS and CLO and other ABS. 2 These exposures include our alternative investments and other non-publicly traded securities.
These investments are subject to the risks arising from the fact that their valuation is inherently subjective. The general partner of each of these partnerships usually reports the change in the value of the interests in the partnership on a one quarter lag because of the nature of the underlying assets or liabilities.
The general partner of each of these partnerships usually reports the change in the value of the interests in the partnership on a one quarter lag because of the nature of the underlying assets or liabilities.
This agreement replaced a prior credit agreement that the Parent terminated in conjunction with entering into the Line of Credit. For additional information regarding the Line of Credit agreement and corresponding representations, warranties, and covenants, refer to Note 11. “Indebtedness” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. 72 Table of Contents
For additional information regarding the Line of Credit agreement and corresponding representations, warranties, and covenants, refer to Note 11. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. 75 Table of Contents
These are investments in private limited partnerships that invest in various strategies such as private equity, direct lending, mezzanine financing, distressed debt, infrastructure, and real estate. As of December 31, 2022, alternative investments represented 5% of our total invested assets and 15% of our stockholders’ equity.
These are investments in private limited partnerships that invest in various strategies such as private equity, private credit, and real assets. As of December 31, 2023, alternative investments represented 5% of our total invested assets and 13% of our stockholders’ equity. These investments are subject to risks arising from their valuation being inherently subjective.
Additionally, we purchase substantial reinsurance to mitigate exposure to significant loss events and we have access to various borrowing facilities if the need to raise capital were to arise. See the "Liquidity and Capital Resources" section in Item 7.
We also purchase substantial reinsurance to mitigate exposure to significant loss events and we have access to various borrowing facilities if the need to raise capital arises. See the "Liquidity and Capital Resources" section in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K for additional information regarding our available borrowing capacity.
We consider the overall credit environment, economic conditions, the investment's total projected return, and overall portfolio asset allocation in deciding to purchase or sell these securities. CLO and Other ABS Portfolio For CLO and other ABS, the primary risk is credit risk.
We consider the overall credit environment, economic conditions, the investment's total projected return, and overall portfolio asset allocation in deciding to purchase or sell these securities. Agency RMBS represented approximately 70% of our RMBS allocation and 12% of our total invested assets as of December 31, 2023.
Special revenue fixed income securities of municipalities (referred to as “special revenue bonds”) represented 10% of our total invested assets at December 31, 2022. These securities generally do not have the “full faith and credit” backing of the municipal or state governments, like general obligation bonds, but special revenue bonds have a dedicated revenue stream for repayment.
Special revenue bonds generally do not have the “full faith and credit” backing of the municipal or state governments like general obligation bonds. However, they have a dedicated revenue stream for repayment.
We manage this risk by evaluating a number of factors, including the deal's structure, the credit quality of underlying loans or assets, the composition of the underlying portfolio, and the portfolio manager's track record and capabilities. We monitor key performance metrics, including over-collateralization, interest coverage, and cash flows, on an on-going basis.
CLO and Other ABS Portfolio For CLO and other ABS, the primary risk is credit risk. We manage this risk by evaluating several factors, including the deal's structure, the credit quality of underlying loans or assets, the composition of the underlying portfolio, and the portfolio manager's track record and capabilities.
The following table presents the hypothetical increases and decreases in 10% increments in the market value of the equity portfolio as of December 31, 2022: Change in Equity Values in Percent ($ in thousands) (30)% (20)% (10)% 0% 10% 20% 30% Fair value of equity securities portfolio $ 113,400 129,600 145,800 162,000 178,200 194,400 210,600 Fair value change (48,600) (32,400) (16,200) 16,200 32,400 48,600 In addition to our equity securities, we invest in alternative investments that are also subject to price risk.
The following table presents the hypothetical increases and decreases in 10% increments in the market value of the equity portfolio as of December 31, 2023: Change in Equity Values in Percent ($ in thousands) (30)% (20)% (10)% 0% 10% 20% 30% Fair value of equity securities portfolio $ 131,008 149,724 168,439 187,155 205,871 224,586 243,302 Fair value change (56,147) (37,431) (18,716) 18,716 37,431 56,147 In addition to our equity securities, we invest in alternative investments that are subject to price risk.
The following table presents the sensitivity analysis of interest rate risk as of December 31, 2022: 2022 Interest Rate Shift in Basis Points ($ in thousands) -200 -100 — 100 200 Fixed income securities Fair value of fixed income securities portfolio $ 7,187,341 6,914,779 6,641,944 6,369,000 6,096,178 Fair value change 545,397 272,835 (272,944) (545,766) Fair value change from base (%) 8.2 % 4.1 % (4.1) % (8.2) % Credit Risk Our most significant credit risk is within our fixed income securities portfolio, which had an overall credit quality of “AA-” as of December 31, 2022, and “A+” as of December 31, 2021.
The following table presents the sensitivity analysis of interest rate risk as of December 31, 2023: 2023 Interest Rate Shift in Basis Points ($ in thousands) -200 -100 — 100 200 Fixed income securities Fair value of fixed income securities portfolio $ 8,107,686 7,814,361 7,521,120 7,226,181 6,931,379 Fair value change 586,566 293,241 (294,939) (589,741) Fair value change from base (%) 7.8 % 3.9 % (3.9) % (7.8) % Credit Risk Our most significant credit risk is within our fixed income securities portfolio, which had an overall credit quality of "AA-" as of December 31, 2023 and December 31, 2022.
We seek to mitigate our interest rate risk associated with holding fixed income investments by monitoring and managing the effective duration of our portfolio to maximize yield while managing interest rate risk at an acceptable level.
We seek to manage our interest rate risk associated with holding fixed income investments by maintaining an effective duration of our portfolio that balances maximizing yield and total return with our overall enterprise risk tolerance for potential interest rate changes.
Further breakdown of this exposure is provided in the table above that shows details on the credit quality of our invested assets. Agency RMBS represented approximately 70% of our RMBS allocation, and 9% of our total invested assets, as of December 31, 2022.
Further breakdown of this exposure is provided in the table above that shows details on the credit quality of our invested assets. To manage and mitigate exposure on our RMBS and CMBS portfolios, we perform analyses at the time of purchase and as part of the ongoing portfolio evaluation.
We consider the overall credit environment, economic conditions, the 70 Table of Contents investment's total projected return, and overall portfolio asset allocation when deciding to purchase or sell CLO and other ABS. Other ABS includes structured note obligations and securities collateralized by loans and other financial assets, including, without limitation, auto loans, credit card receivables, equipment leases, and student loans.
Other ABS includes structured note obligations and securities collateralized by loans and other financial assets, including, without limitation, auto loans, credit card receivables, equipment leases, and student loans.
These securities are rated “AAA" and had an unrealized loss of approximately $72.7 million, primarily due to an increase in benchmark U.S. Treasury rates, as of December 31, 2022. To manage and mitigate exposure on our RMBS and CMBS portfolios, we perform analyses both at the time of purchase and as part of the ongoing portfolio evaluation.
These securities are rated “AA+" and had an aggregate unrealized loss of approximately $61.6 million, primarily due to a decrease in benchmark U.S. Treasury rates as of December 31, 2023. 72 Table of Contents Our CMBS portfolio comprises most of our commercial real estate ("CRE") exposure.
As of December 31, 2022, approximately 11% (15% at December 31, 2021) of our fixed income securities portfolio was floating rate securities, primarily tied to the 90-day U.S. dollar-denominated London Interbank Offered Rate ("LIBOR"). Our strategy to manage interest rate risk is to purchase intermediate-term fixed income investments that are attractively priced in relation to perceived credit risks.
As of December 31, 2023, approximately 7% (11% at December 31, 2022) of our fixed income securities portfolio was floating rate securities, 68 Table of Contents primarily tied to the 90-day U.S. dollar-denominated Secured Overnight Financing Rate.
The sectors representing 10% or more of our invested assets at December 31, 2022 were (i) special revenue bonds within our state and municipal obligations portfolio (10%), (ii) the financial sector within corporate securities (15%), and (iii) collateralized loan obligations within our CLOs and other ABS portfolio (10%).
Amounts may not foot due to rounding. Every quarter, we review our invested assets for concentrations of credit risk. The sectors representing 10% or more of our invested assets at December 31, 2023 were (i) agency RMBS within our RMBS allocation (12%) and (ii) the financial sector within corporate securities (15%).
The tables below provide details on this portfolio at December 31, 2022 and 2021: December 31, 2022 Fair Value Carry Value Net Unrealized/ Unrecognized Gain (Loss) Weighted Average Credit Quality ($ in millions) General obligation state & local $ 148.6 148.6 (5.8) AA+ Special revenue 772.8 772.8 (40.4) AA- Total state and municipal obligations $ 921.4 921.4 (46.2) AA- December 31, 2021 Fair Value Carry Value Net Unrealized/ Unrecognized Gain (Loss) Weighted Average Credit Quality ($ in millions) General obligation state & local $ 235.9 235.9 11.6 AA+ Special revenue 957.0 956.8 56.6 AA- Total state and municipal obligations $ 1,192.9 1,192.7 68.2 AA- The following table details the top 10 state exposures of this portfolio at December 31, 2022: State Exposures of Municipal Bonds General Obligation Special Revenue Fair Value Weighted Average Credit Quality ($ in thousands) State & Local % of Total California 35,541 68,934 104,475 11% A+ New York 5,730 84,090 89,820 10% AA- Texas 1 36,115 36,312 72,427 8% AA New Jersey — 60,662 60,662 7% A+ Colorado 1,142 38,127 39,269 4% AA- Pennsylvania — 37,699 37,699 4% AA- Ohio 2,090 31,155 33,245 4% AA- Massachusetts 5,315 26,131 31,446 3% AA Florida — 29,718 29,718 3% AA- Louisiana — 28,669 28,669 3% AA Other 42,615 274,131 316,746 34% AA- 128,548 715,628 844,176 92% AA- Pre-refunded/escrowed to maturity bonds 20,047 57,200 77,247 8% AAA Total $ 148,595 772,828 921,423 100% AA- % of Total Municipal Portfolio 16 % 84 % 100 % % of Total Investment Portfolio 2 % 10 % 12 % 1 Of the $36.1 million in state and local Texas general obligation bonds, $15.7 million represents investments in Texas Permanent School Fund bonds, which are considered to have lower risk as a result of the bond guarantee programs that support these bonds.
The tables below provide details on this portfolio at December 31, 2023, and 2022: December 31, 2023 Fair Value Carry Value Net Unrealized/ Unrecognized Gain (Loss) Weighted Average Credit Quality ($ in millions) General obligation state & local $ 68.7 68.7 (3.2) AA- Special revenue 517.3 517.3 (23.1) AA- Total state and municipal obligations $ 586.0 586.0 (26.3) AA- December 31, 2022 Fair Value Carry Value Net Unrealized/ Unrecognized Gain (Loss) Weighted Average Credit Quality ($ in millions) General obligation state & local $ 148.6 148.6 (5.8) AA+ Special revenue 772.8 772.8 (40.4) AA- Total state and municipal obligations $ 921.4 921.4 (46.2) AA- The following table details the top 10 state exposures of this portfolio at December 31, 2023: State Exposures of Municipal Bonds General Obligation State & Local Special Revenue Fair Value Weighted Average Credit Quality ($ in thousands) % of Total California $ 36,933 59,353 96,286 17% A+ New York 1,739 43,328 45,067 8% AA- Texas 7,109 37,009 44,118 8% AA- Colorado 1,142 35,247 36,389 6% AA- New Jersey — 31,329 31,329 5% A Pennsylvania — 25,056 25,056 4% A+ Florida — 24,767 24,767 4% AA- Louisiana — 22,627 22,627 4% AA+ Massachusetts 4,870 16,654 21,524 4% AA Oklahoma 3,738 15,624 19,362 3% AA+ Other 9,087 177,893 186,980 32% AA- 64,618 488,887 553,505 94% AA- Pre-refunded/escrowed to maturity bonds 4,036 28,424 32,460 6% AAA Total $ 68,654 517,311 585,965 100% AA- % of Total Municipal Portfolio 12 % 88 % 100 % % of Total Investment Portfolio 1 % 6 % 7 % Special revenue fixed income securities of municipalities (“special revenue bonds”) represented 6% of our total invested assets at December 31, 2023.
For more information on the upcoming transition away from LIBOR, refer to "Risks Related to our Investments Segment" in Item 1A. "Risk Factors." of this Form 10-K. Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates.
Our strategy to manage interest rate risk is to purchase intermediate-term fixed income investments that are priced attractively in relation to perceived credit risks. Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates.
Removed
Non-investment grade exposure represented approximately 4% of the total fixed income securities portfolio at both December 31, 2022 and December 31, 2021.
Added
The following table shows our total exposure to CRE: December 31, 2023 December 31, 2022 ($ in millions) Fair Value Weighted Average Credit Rating % of Invested Assets Fair Value Weighted Average Credit Rating % of Invested Assets CMBS: Agency $ 169.4 AA+ 2 % $ 96.0 AAA 1 % Non-agency 505.4 AAA 6 % 518.4 AA+ 7 % CMLs 178.9 A- 2 % 139.2 A- 2 % Real Estate Investment Trusts: Corporate securities 109.9 BBB+ 1 % 93.1 BBB+ 1 % Equity securities 33.6 — 0.4 % 20.9 0 — — % Alternative investments 28.9 — 0.3 % 26.4 — — % Total CRE exposure $ 1,026.1 12 % $ 894.0 11 % Agency-backed securities represented 25% of our CMBS portfolio as of December 31, 2023.
Removed
Amounts may not foot due to rounding. On a quarterly basis, we review our invested assets for concentrations of credit risk.
Added
The remaining 75% was high-quality non-agency backed securities, with 92% rated "AAA" and an aggregate net unrealized losses of $34.6 million. Our CML portfolio represented 2% of invested assets as of December 31, 2023, and is focused on multi-family and industrial property types, representing more than half of the exposure.
Removed
"Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K for additional information regarding our available borrowing capacity. In addition to this, we monitor our investment portfolio's liquidity profile to ensure it meets our operational liquidity needs.
Added
We monitor key performance metrics, including over-collateralization, interest coverage, and cash flows, on an on-going basis. When deciding to purchase or sell CLO and other ABS, we consider the overall credit environment, economic conditions, the investment's total projected return, and overall portfolio asset allocation.

Other SIGIP 10-K year-over-year comparisons