1 Data for 2009 through 2011 has been restated to reflect the implementation of ASU 2010-26, Financial Services-Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, which was adopted on January 1, 2012.
2 In 2009, we sold our Selective HR Solutions operations. See Note 7. "Fair Value Measurements" and Note 12. "Discontinued Operations" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K for additional information.
Excess and Surplus ("E&S") Insurance Operations - comprised of Commercial Lines insurance products and services sold to insureds who have not obtained coverage in the standard market; and
Investments - invests the premiums collected by our Standard and E&S Insurance Operations, and amounts generated through our capital management strategies, which may include the issuance of debt and equity securities.
Our Standard Insurance Operations products and services are sold through nine subsidiaries that write Commercial Lines and Personal Lines business, some of which write flood business through the National Flood Insurance Program's ("NFIP") Write Your Own ("WYO") program. Two of these subsidiaries, Selective Casualty Insurance Company ("SCIC") and Selective Fire and Casualty Insurance Company ("SFCIC"), were created in 2012. These subsidiaries began writing direct premium in 2013 and have been included in our reinsurance pooling agreement as of July 1, 2012.
The purpose of the Management’s Discussion and Analysis (“MD&A”) is to provide an understanding of the consolidated results of operations and financial condition and known trends and uncertainties that may have a material impact in future periods.
Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the loss to the insurer, and the insurer’s payment of that loss. To recognize liabilities for unpaid losses and loss expenses, insurers establish reserves as balance sheet liabilities representing an estimate of amounts needed to pay reported and unreported net losses and loss expenses. As of December 31, 2013, we had accrued $3.3 billion of gross loss and loss expense reserves compared to $4.1 billion at December 31, 2012, the decrease of which is largely attributable to the loss and loss expense reserves associated with Hurricane Sandy that were 100% reinsured by the Federal government under the NFIP. The gross loss and loss expense reserves under this program were $51.2 million as of December 31, 2013 compared to $909.9 million as of December 31, 2012.
Using generally accepted actuarial reserving techniques, we project our estimate of ultimate losses and loss expenses at each reporting date. The difference between: (i) the projected ultimate loss and loss expense reserves; and (ii) the case loss reserves and the loss and loss expenses reserved thereon are carried as the IBNR reserve. The actuarial techniques used are part of a comprehensive reserving process that includes two primary components. The first component is a detailed quarterly reserve analysis performed by our internal actuarial staff. In completing this analysis, the actuaries must gather substantially similar data in sufficient volume to ensure statistical credibility of the data, while maintaining appropriate differentiation. This process defines the reserving segments, to which various actuarial projection methods are applied. When applying these methods, the actuaries are required to make numerous assumptions including, for example, the selection of loss and loss expense development factors and the weight to be applied to each individual projection method. These methods include paid and incurred versions for the following: loss and loss expense development, Bornhuetter-Ferguson, Berquist-Sherman, and frequency/severity modeling (chain-ladder approach). The second component of the analysis is the projection of the expected ultimate loss and loss expense ratio for each line of business for the current accident year. This projection is part of our planning process wherein we review and update expected loss and loss expense ratios each quarter. This review includes actual versus expected pricing changes, loss and loss expense trend assumptions, and updated prior period loss and loss expense ratios from the most recent quarterly reserve analysis.
In addition to the quarterly reserve analysis, a range of possible IBNR reserves is estimated annually and continually considered, among other factors, in establishing IBNR for each reporting period. Loss and loss expense trends are also considered, which include, but are not limited to, large loss activity, asbestos and environmental claim activity, large case reserve additions or reductions for prior accident years, and reinsurance recoverable issues. We also consider factors such as: (i) per claim information; (ii) company and industry historical loss experience; (iii) legislative enactments, judicial decisions, legal developments in the imposition of damages, and changes in political attitudes; and (iv) trends in general economic conditions, including the effects of inflation. Based on the consideration of the range of possible IBNR reserves, recent loss and loss expense trends, uncertainty associated with actuarial assumptions and other factors, IBNR is established and the ultimate net liability for losses and loss expenses is determined. Such an assessment requires considerable judgment given that it is frequently not possible to determine whether a change in the data is an anomaly until sometime after the event. Even if a change is determined to be permanent, it is not always possible to reliably determine the extent of the change until sometime later. There is no precise method for subsequently evaluating the impact of any specific factor on the adequacy of reserves because the eventual deficiency or redundancy is affected by many factors. The changes in these estimates, resulting from the continuous review process and the differences between estimates and ultimate payments, are reflected in the Consolidated Statements of Income for the period in which such estimates are changed. Any changes in the liability estimate may be material to the results of operations in future periods.
We have estimated a range of reasonably possible reserves for net loss and loss expense claims to be $2,574 million to $2,966 million at December 31, 2013, which compares to $2,456 million to $2,805 million at December 31, 2012. These ranges reflect low and high reasonable reserve estimates which were selected primarily by considering the range of indications calculated using generally accepted actuarial techniques. Such techniques assume that past experience, adjusted for the effects of current developments and anticipated trends, are an appropriate basis for predicting future events. Although these ranges reflect likely scenarios, it is possible that the final outcomes may fall above or below these amounts. The ranges do not include a provision for potential increases or decreases associated with asbestos, environmental, and other continuous exposure claims, as traditional actuarial techniques cannot be effectively applied to these exposures.
Major trends by line of business creating additional loss and loss expense reserve uncertainty
At December 31, 2013, our workers compensation line of business recorded reserves, net of reinsurance, of $972 million or 35% of our total net reserves. During the past three years, this line has experienced unfavorable reserve development. The 2013 unfavorable development was $23.5 million driven by accident years 2008 and prior. This development reflects increases in the ultimate severities for medical costs, driven largely by case reserve adjustments to long-term care claims, and our review of medical cost development over many years. We continue our efforts to mitigate these impacts through various medical cost containment initiatives.
In addition, changes in the economy could impact reserves in other ways. For example, in 2012, audit and endorsement activity resulted in additional premium of $14.3 million, and in 2013, audit and endorsement activity resulted in additional premium of $7.4 million. Since premiums earned are used as a basis for setting initial reserves on the current accident year, our reserves could be impacted. While audit and endorsement premiums are modeled within our annual budgeting process, they remain uncertain and therefore provide additional variability to the resulting loss and loss expense ratio estimates.
At December 31, 2013, our commercial automobile line of business had recorded reserves, net of reinsurance, of $343 million, which represented 12% of our total net reserves. During the past three years this line experienced favorable reserve development. In 2013 the favorable development was $4.5 million, driven by accident years 2006 through 2010, which represents a continued trend of better than expected reported emergence in these years. This favorable development was partially offset by unfavorable development in the 2012 accident year, due to increased severity.
At December 31, 2013, our E&S line of business had recorded reserves, net of reinsurance, of $117 million, which represented 4% of our total net reserves. In calendar year 2013 this line experienced favorable development of $2.0 million. Since we have limited historical loss experience in these lines of business, our reserve estimates are based largely on development patterns of companies that have similar operations. Therefore, these estimates are subject to somewhat greater uncertainty than the comparable traditional lines of business.
In addition to the line of business specific issues mentioned above, these lines of business have been impacted by a number of initiatives undertaken by our claims department that have resulted in volatility in the average level of case reserves. Some of these initiatives have also impacted changes in claims settlement rates. These changes impact the data upon which the ultimate loss and loss expense projections are made. While these changes in case reserve levels and settlement rates increase the uncertainty in the short run, we expect the longer-term benefit will be a more refined management of the claims process.
Increased activity in the areas of fraud investigation and salvage/subrogation recoveries. These efforts have been supported by the introduction of predictive models that allow us to better focus our efforts.
The importance of any single assumption depends on several considerations, such as the line of business and the accident year. If the actual experience emerges differently than the assumptions used in the process to establish reserves, changes in our reserve estimate are possible and may be material to the results of operations in future periods. Set forth below are sensitivity tests which highlight potential impacts to loss and loss expense reserves under different scenarios, for the major casualty lines of business. It is important to note that these tests consider each assumption and line of business individually, without any consideration of correlation between lines of business and accident years, and therefore, does not constitute an actuarial range. While the figures represent possible impacts from variations in key assumptions as identified by management, there is no assurance that the future emergence of our loss and loss expense experience will be consistent with either our current or alternative sets of assumptions.
Included in our losses and loss expense reserves are amounts for asbestos and environmental claims. The total carried net losses and loss expense reserves for these claims were $25.2 million as of December 31, 2013 and $27.8 million as of December 31, 2012. Our asbestos and environmental claims have arisen primarily from insured exposures in municipal government, small commercial risks, and homeowners policies. The emergence of these claims is slow and highly unpredictable. For example, within our standard Commercial Lines book, certain landfill sites are included on the National Priorities List (“NPL”) by the United States Environmental Protection Agency (“USEPA”). Once on the NPL, the USEPA determines an appropriate remediation plan for these sites. A landfill can remain on the NPL for many years until final approval for the removal of the site is granted from the USEPA. The USEPA also has the authority to re-open previously closed sites and return them to the NPL. We currently have reserves for eight insureds related to four sites on the NPL.
At December 31, 2013, our pension and post-retirement benefit plan obligation was $262.6 million compared to $309.1 million at December 31, 2012. In addition to the assumption changes noted above, our benefit obligation was also impacted by our decision to curtail the accrual of additional benefits for all eligible employees participating in the Retirement Income Plan after March 31, 2016. Volatility in the marketplace, coupled with changes in the discount rate assumption, could materially impact our pension and post-retirement life valuation in the future. For additional information regarding our pension and post-retirement benefit plan obligations, see Note 15. "Retirement Plans" in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
When the fair value of any investment is lower than its cost/amortized cost, an assessment is made to determine if the decline is other than temporary. We regularly review our entire investment portfolio for declines in fair value. If we believe that a decline in the value of an available-for-sale ("AFS") security is temporary, we record the decline as an unrealized loss in Accumulated Other Comprehensive Income ("AOCI"). Temporary declines in the value of a held-to-maturity ("HTM") security are not recognized in the Financial Statements. Our assessment of a decline in fair value includes judgment as to the financial position and future prospects of the entity that issued the investment security, as well as a review of the security’s underlying collateral for fixed maturity investments. Broad changes in the overall market or interest rate environment generally will not lead to a write-down.
The following table reconciles operating income and net income for the periods presented above:
The following table provides a quantitative foundation for analyzing our overall Insurance Subsidiaries underwriting results:
Catastrophe losses in 2012 and 2011 each contained individually significant storms. In 2012, Hurricane Sandy was the single largest event in our history and in 2011, Hurricane Irene was the second largest event in our history.
A.M. Best noted in their year-end review that a relatively subdued year for catastrophes helped clear a path for the industry to achieve an underwriting profit for the first time in four years. Underwriting results reached their best level since 2007, with the industry producing an expected combined ratio of 97.6% for the year. Profitability for 2013 was further bolstered by considerable investment gains achieved in strengthened U.S. equity markets. It should also be noted that the drop in catastrophe losses reduced the industry's 2013 expected combined ratio by 4.3 points. A significant factor that contributed to this improvement was that, unlike the costly presence of Hurricane Sandy in 2012, not a single major storm made landfall in the United States last year. A.M. Best is estimating a more normal level of catastrophe losses in 2014. The report also cited: "In looking ahead to 2014, A.M. Best expects premiums to continue growing through price increases, but the pace of these rate changes are expected to slow and temper growth in premium. Although core accident-year underwriting results should improve slightly on the rate level achieved in recent years, less favorable development of prior years’ loss reserves is anticipated. In addition, the industry will continue to be challenged by the relatively low investment yields that are expected to persist through 2014, and the slow recovery from the recession of 2007 through 2009."
A key component of meeting our combined ratio target is our ability to generate Commercial Lines renewal pure price increases between 6% to 7%. Although A.M. Best is continuing to maintain its negative outlook for the commercial lines market reflecting "the uncertainty around loss-reserve development and continued low profit margins driven by low investment yields", it does anticipate modestly profitable 2014 results driven by continued but moderating rate increases, improving macroeconomic conditions and normal catastrophe losses. A.M. Best also believes that "further improvements in 2014 also are likely to be garnered from another year of business migrating into the excess and surplus lines sector, which is more restrictive in coverage and priced much higher than standard market rates." For personal lines, A.M. Best maintains a stable outlook in the coming year reflecting ongoing stability of the auto line and successful carriers continuing to enhance the granularity of their home pricing models. Standard & Poor's, while maintaining a stable outlook on the property and casualty industry,
believes that "rate increases will lose steam and fail to outpace loss cost trends" in 2014. Our commercial lines renewal pure price increase was 6.3% for January 2014.
12013 includes 0.1 points in the loss and loss expense ratio, 0.3 points in the underwriting expense ratio, and 0.4 points in the combined ratio related to the Retirement Income Plan amendments recorded in the first quarter of 2013 that curtail the accrual of additional benefits for all eligible employees participating in the plans after March 31, 2016.
The improvements in NPW and NPE from 2011 through 2013 are primarily the result of the following:
The improvements in NPW and NPE from 2011 through 2013 is primarily the result of the following:
The increase in the GAAP underwriting expense ratio of 0.6 points in 2013 compared to 2012 was primarily driven by higher profit based compensation as follows: (i) supplemental commissions to agents of 0.3 points; and (ii) annual incentive compensation to employees of 0.4 points.
The fluctuations in the statutory combined ratios were in part, due to changes in prior year development. Prior year development can be volatile year to year and, therefore, requires a longer period of time before true trends are fully recognized. The impact of the prior year development was as follows:
NPW and NPE have seen increases over the three-year time period driven by: (i) renewal pure price increases; (ii) strong retention; and (iii) improvements in new business.
The fluctuations in the statutory combined ratio were driven by favorable prior year casualty reserve development as follows:
Our approach to improving profitability in this line includes: (i) earning renewal pure price increases in excess of loss costs; (ii) increased focus on reducing workers compensation medical costs through more favorable Preferred Provider Organizations ("PPO") contracts and greater PPO penetration; (iii) the introduction of a Complex Claims Unit to which all significant and complex liability claims are assigned which has been staffed with personnel that have significant experience in handling and settling these types of claims; (iv) increased activity in the areas of fraud investigation and salvage/subrogation recoveries supported by the introduction of predictive models that allow us to better focus our efforts; and (v) the establishment of a workers compensation strategic case management unit, which specializes in the investigation and medical management of lost-time claims with high exposure and/or escalation risk.
2013: unfavorable prior year development of 8.6 points driven by 2008 and prior accident years reflecting increases in severities for medical costs. These increases largely related to case reserve adjustments to long-term care claims, and our review of medical cost development over many years.
NPW increased in 2013 compared to 2012, as well as 2012 compared to 2011, primarily due to: (i) renewal pure price increases; and (ii) growth in new business.
The fluctuations in the statutory combined ratios over the three-year period were largely due to fluctuations in catastrophe losses, which are outlined in the table below. In addition, the improvement in 2013 was impacted by non-catastrophe property losses, which were 9.6 points lower than in 2012.
The growth in NPW and NPE for our Personal Lines business from 2011 through 2013 reflected renewal pure price increases and strong retention as follows:
The variances in the loss and loss expense ratio in the three-year period are primarily driven by the impact of catastrophe losses and flood claims handling fees earned from our participation in the NFIP. These amounts are quantified in the table below:
In addition, the ratios are being reduced by: (i) the earned rate increases on this book of business, which have been outpacing loss costs; and (ii) non-catastrophe property losses in both 2013 and 2012 that were lower than they were in 2011.
Our E&S business is a growing segment that was acquired in 2011, whose combined ratios are significantly impacted by premium growth as well as volatility in loss and loss expenses and underwriting expenses. The improvement in the combined ratio in 2013 was driven by a reduction in acquisition and integration costs from 2012, as well as significant underwriting actions to improve profitability. Partially offsetting these improvements were catastrophes that were worse by $2.9 million, or 1.6 points.
Although year-over-year comparisons of this business are difficult considering the volatility caused by the items discussed above, statutory results are on track with our expectations for 2014 to achieve a level of profitability more comparable to our Standard Insurance Operations.
Property Reinsurance - includes our Property Excess of Loss treaties purchased for protection against large individual property losses and our Property Catastrophe treaty purchased to provide protection for the overall property portfolio against severe catastrophic events. Facultative reinsurance is also used for property risks that are in excess of our treaty capacity.
Casualty Reinsurance - purchased to provide protection for both individual large casualty losses and catastrophic casualty losses involving multiple claimants or insureds. Facultative reinsurance is also used for casualty risks that are in excess of our treaty capacity.
Other Reinsurance - includes other treaties that we do not consider core to our reinsurance program, such as our Surety and Fidelity Excess of Loss, National Workers Compensation Reinsurance Pool and our Equipment Breakdown Coverage treaties, which do not fall within the categories above. In addition, Property and Casualty treaties purchased specifically for our E&S business that are substantially smaller than those for standard lines are also considered in this category.
We regularly reevaluate our overall reinsurance program and try to develop effective ways to manage transfer of risk. Our analysis is based on a comprehensive process that includes periodic analysis of modeling results, aggregation of exposures, exposure growth, diversification of risks, limits written, projected reinsurance costs, financial strength of reinsurers, and projected impact on earnings and statutory surplus. We strive to balance sometimes opposing considerations of reinsurer credit quality, price, terms, and our appetite for retaining a certain level of risk.
The Property Excess of Loss treaty (“Property Treaty”), which covers our standard market business, was renewed on July 1, 2013 and is effective through June 30, 2014, with the following terms:
The first through sixth layers provide 100% coverage up to $88.0 million in excess of a $2.0 million retention, consistent with the prior year treaty;
Annual aggregate terrorism limits remain the same as the prior year treaty at $201.0 million.
We structure our portfolio conservatively with a focus on: (i) asset diversification; (ii) investment quality; (iii) liquidity, particularly to meet the cash obligations of our insurance operations segments; (iv) consideration of taxes; and (v) preservation of capital. We believe that we have a high quality and liquid investment portfolio. The breakdown of our investment portfolio is as follows:
The average duration of the fixed maturity securities portfolio as of December 31, 2013 was 3.5 years, including short-term investments, compared to the Insurance Subsidiaries' liability duration of approximately 3.8 years. The current duration of the fixed maturity securities portfolio is within our historical range, and is monitored and managed to maximize yield while managing interest rate risk at an acceptable level. We are experiencing pressure on the yields within our fixed maturity securities portfolio, as higher yielding bonds that are either maturing or have been sold are being replaced with lower yielding bonds that are currently available in the marketplace. We manage liquidity with a laddered maturity structure and an appropriate level of short-term investments to avoid liquidation of AFS fixed maturities in the ordinary course of business. We typically have a long investment time horizon, and every purchase or sale is made with the intent of maximizing risk adjusted investment returns in the current market environment while balancing capital preservation.
We have audited the accompanying consolidated balance sheets of Selective Insurance Group, Inc. and its subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flow for each of the years in the three-year period ended December 31, 2013. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedules I to V. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Selective Insurance Group, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Selective Insurance Group, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2014 expressed an unqualified opinion of the Company’s internal controls over financial reporting.
Our Standard Insurance Operations segment, which is comprised of both commercial lines ("Commercial Lines") and personal lines ("Personal Lines") business, sells property and casualty insurance products and services in the standard market, including flood insurance through the National Flood Insurance Program's ("NFIPs") write-your-own ("WYO") program;
Our E&S Insurance Operations segment sells Commercial Lines property and casualty insurance products and services to insureds who have not obtained coverage in the standard market; and
The accompanying consolidated financial statements ("Financial Statements") include the accounts of the Parent and its subsidiaries, and have been prepared in conformity with: (i) U.S. generally accepted accounting principles ("GAAP"); and (ii) the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). All significant intercompany accounts and transactions are eliminated in consolidation.
Certain amounts in our prior years' Financial Statements and related notes have been reclassified to conform to the 2013 presentation. Such reclassifications had no effect on our net income, stockholders' equity, or cash flows.
When the fair value of any investment is lower than its cost/amortized cost, an assessment is made to determine if the decline is other than temporary. We regularly review our entire investment portfolio for declines in fair value. If we believe that a decline in the value of an AFS security is temporary, we record the decline as an unrealized loss in AOCI. Temporary declines in the value of an HTM security are not recognized in the Financial Statements. Our assessment of a decline in fair value includes judgment as to the financial position and future prospects of the entity that issued the investment security, as well as a review of the security’s underlying collateral for fixed maturity investments. Broad changes in the overall market or interest rate environment generally will not lead to a write-down.
For approximately 99% of our fixed maturity securities portfolio, we utilize a market approach, using primarily matrix pricing models prepared by external pricing services. Matrix pricing models use mathematical techniques to value debt securities by relying on the securities relationship to other benchmark quoted securities, and not relying exclusively on quoted prices for specific securities, as the specific securities are not always frequently traded. As a matter of policy, we consistently use one pricing service as our primary source and secondary pricing services if prices are not available from the primary pricing service. In conjunction with our external investment portfolio managers, fixed maturity securities portfolio pricing is reviewed for reasonableness in the following ways: (i) comparing positions traded directly by the external investment portfolio managers to prices received from the third-party pricing services; (ii) comparing the primary vendor pricing to other third-party pricing services as well as benchmark indexed pricing; (iii) comparing market value fluctuations between months for reasonableness; and (iv) reviewing stale prices. If further analysis is needed, a challenge is sent to the pricing service for review and confirmation of the price. In addition to the tests described above, management performs a comparison of our prices to a secondary price source. Historically, we have not experienced significant variances in prices, and therefore, we have consistently used our primary pricing service. These prices are typically Level 2 in the fair value hierarchy.
Short-term investments are carried at cost, which approximates fair value. Given the liquid nature of our short-term investments, we generally validate their fair value by way of active trades within approximately one week of the financial statement close. These securities are classified as Level 1 in the fair value hierarchy.
Property and equipment used in operations, including certain costs incurred to develop or obtain computer software for internal use, are capitalized and carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The following estimated useful lives can be considered as general guidelines:
The Insurance Subsidiaries' net premiums written include direct insurance policy writings, plus reinsurance assumed and estimates of premiums earned but unbilled on the workers compensation and general liability lines of insurance, less reinsurance ceded. The estimated premium on the workers compensation and general liability lines is referred to as audit premium. We estimate this premium, as it is anticipated to be either billed or returned on policies subsequent to expiration based on exposure levels (i.e. payroll or sales). Audit premium is based on historical trends adjusted for the uncertainty of future economic conditions. Economic instability could ultimately impact our estimates and assumptions, and changes in our estimate may be material to the results of operations in future periods. Premiums written are recognized as revenue over the period that coverage is provided using the semi-monthly pro-rata method. Unearned premiums and prepaid reinsurance premiums represent that portion of premiums written that are applicable to the unexpired terms of policies in force.
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This standard eliminates the option to report other comprehensive income and its components in the statement of stockholders’ equity. ASU 2011-05 was effective, on a retrospective basis, for interim and annual periods beginning after December 15, 2011. Based on an amendment issued in December 2011, companies are not required to present separate line items on the income statement for reclassification adjustments out of accumulated other comprehensive income into net income, as would have been required under the initial ASU. This guidance, which is ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, was effective concurrently with ASU 2011-05. We have retroactively restated the Financial Statements to comply with the presentation required under this accounting guidance.
In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment ("ASU 2011-08"), which simplifies the requirements to test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing events and circumstances, an entity determines that it is not more likely than not that the fair value of the reporting unit is less than the carrying amount, then performing the two-step impairment test is unnecessary. However, if the entity concludes otherwise, then it is required to perform the quantitative impairment test. ASU 2011-08 was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, and early adoption was permitted. The adoption of this guidance did not impact our financial condition or results of operation.
In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"), which adds new disclosure requirements for items reclassified out of Accumulated Other Comprehensive Income ("AOCI"). ASU 2013-02 requires entities to disclose additional information about reclassification adjustments, including: (i) changes in AOCI balances by component; and (ii) significant items reclassified out of AOCI. Prospective application of ASU 2013-02 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. We have included the disclosures required by ASU 2013-02 in the notes to our Financial Statements, as required.
In July 2013, the FASB issued ASU 2013-11, Income Taxes, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force) ("ASU 2013-11"). ASU 2013-11 applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carryforwards in the same tax jurisdiction as of the reporting date. An unrecognized tax benefit is the difference between a tax position taken or expected to be taken in a tax return and the benefit that is more likely than not sustainable under examination. Under ASU 2013-11, an entity must net an unrecognized tax benefit, or a portion of an unrecognized tax benefit, against deferred tax assets for a net operating loss ("NOL") carryforward, a similar tax loss, or a tax credit carryforward except when:
If either of these conditions exists, an entity should present an unrecognized tax benefit in the financial statements as a liability and should not net the unrecognized tax benefit with a deferred tax asset.
ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance will not impact our financial condition or results of operation.
In January 2014, the FASB issued ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects ("ASU 2014-01"). ASU 2014-01 applies to all reporting entities that invest in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. ASU 2014-01 permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the investment should be accounted for as an equity method investment or a cost method investment.
(b) The amortized cost, net unrealized gains and losses, carrying value, unrecognized holding gains and losses, and fair value of HTM fixed maturity securities were as follows:
During 2013, 16 securities with a carrying value of $39.6 million and a net unrecognized gain position of $1.4 million, were reclassified from an HTM designation to an AFS designation due to credit rating downgrades by Moody’s Investors Service (“Moody’s”) and/or Standard and Poor’s ("S&P") Financial Services. These unexpected rating downgrades indicated significant deterioration of credit worthiness, which changed our intention to hold these securities to maturity.
(e) Fixed-maturity securities at December 31, 2013, by contractual maturity are shown below. Mortgage-backed securities ("MBS") are included in the maturity tables using the estimated average life of each security. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Listed below is a summary of AFS fixed maturity securities at December 31, 2013:
These funds pursue strategies that seek to take advantage of dislocations or opportunities in the market that are often related to, or are derivatives of, distressed investing. Special situations are often event-driven and characterized by complexity, market inefficiency, and excess risk premiums.
Also at December 31, 2013, we had fixed maturity securities, with a carrying value of $22.1 million, and short-term investments with a carrying value of $0.7 million, that collateralize reinsurance obligations related to our 2011 acquisition of our E&S book of business. Similar to the FHLBI collateral discussion above, we retain all rights regarding these investments. The fixed maturity securities are included in the "Municipal," "Corporate," "U.S. government and government agencies," "RMBS," and "ABS" classifications of our AFS fixed maturity securities portfolio.
Net realized gains in 2012, excluding OTTI charges, were driven by: (i) calls and maturities; and (ii) the sale of AFS equity securities related to rebalancing of our high-dividend yield strategy holdings within our equity portfolio.
Net realized gains in 2011, excluding OTTI charges, were driven by: (i) calls and maturities; (ii) the sale of AFS fixed maturity securities, primarily corporate, municipal, and government holdings; and (iii) the sale of AFS equity securities to facilitate the reallocation of the equity portfolio to a high-dividend yield strategy.
(c) The balances of, and changes in, each component of AOCI (net of taxes) as of December 31, 2013 and 2012 were as follows:
The following tables provide quantitative disclosures of our financial assets that were measured at fair value at December 31, 2013 and 2012:
2 Amounts are reported in “Net realized gains” for realized gains and losses and “Net investment income earned” for amortization of securities on the Consolidated Statements of Income.
amounts in “Other income” relate to interest accretion on the Consolidated Statements of Income.
As discussed in Note 2. "Summary of Significant Accounting Policies," in this Form 10-K, the fair value of our Level 3 fixed maturity securities are typically obtained through non-binding broker quotes, which we review for reasonableness. At December 31, 2013, there were no fixed maturity securities that were measured using Level 3 inputs. However during 2013, securities with a fair value of $32.0 million were transferred out of level 3 due to the availability of Level 2 pricing at December 31, 2013 that was not available previously.
transfers were primarily related to securities that had been previously priced using Level 2 inputs, but due to the availability
and nature of the pricing used at the valuation dates, were priced using Level 3 inputs at December 31, 2012. In addition,
certain of these transfers related to securities that had previously been classified as HTM, and therefore not measured at fair
Equity securities with fair values of $2.9 million and $3.6 million were measured using Level 3 inputs at December 31, 2013
March 31, 2013, as the pricing as of that date was based on a quoted price in an inactive market. This security was
subsequently sold in the second quarter of 2013 for an amount that approximated the March 31, 2013 value. At each reporting
date, we review the fair value of the remaining Level 3 security for reasonableness.
most significant of which was our assumption regarding the retention of business. In the first quarter of 2013, we reached an
agreement with the purchaser to settle this receivable for an aggregate of $1.0 million, which was paid in two installments. As
The growth in direct premium written (“DPW”) for the Insurance Subsidiaries in both 2013 and 2012 compared to the prior years reflects: (i) pure price increases that we have achieved in our Standard Insurance Operations; (ii) strong retention in our Standard Insurance Operations; and (iii) premium from our newly acquired E&S business. Direct premium earned increases in 2013 and 2012 were consistent with the fluctuation in DPW for 2013 and 2012 compared to the prior year.
Assumed premium levels were high in 2011 as we began writing E&S business through a fronting arrangement in August 2011. This arrangement continued through April 2012, causing an increase in assumed premiums earned in 2012. The subsequent runoff of these earnings in 2013 caused the reduction in assumed net premiums earned in 2013.
The 2011 prior year favorable development of $38.5 million includes $29.5 million of casualty development and $9.0 million of property development. Overall, the prior year development was driven by accident years 2006, 2008, and 2009, partially offset by the 2010 accident year. The favorable development was driven by the following: (i) premises and operations coverages on our general liability line; (ii) lower frequencies in the commercial automobile line; and (iii) continued favorable reported loss emergence on the liability coverage in our businessowners' policy line. The unfavorable development in accident year 2010 was driven by the following: (i) increased severities experienced in our workers compensation line; and (ii) products coverage on our general liability line.
Reserves established for liability insurance include exposure to asbestos and environmental claims. These claims have arisen primarily from insured exposures in municipal government, small non-manufacturing commercial risk, and homeowners policies. The emergence of these claims is slow and highly unpredictable. There are significant uncertainties in estimating our exposure to asbestos and environmental claims (for both case and IBNR reserves) resulting from lack of relevant historical data, the delayed and inconsistent reporting patterns associated with these claims, and uncertainty as to the number and identity of claimants and complex legal and coverage issues. Legal issues that arise in asbestos and environmental cases include federal or state venue, choice of law, causation, admissibility of evidence, allocation of damages and contribution among joint defendants, successor and predecessor liability, and whether direct action against insurers can be maintained. Coverage issues that arise in asbestos and environmental cases include the interpretation and application of policy exclusions, the determination and calculation of policy limits, the determination of the ultimate amount of a loss, the extent to which a loss is covered by a policy, if at all, the obligation of an insurer to defend a claim, and the extent to which a party can prove the existence of coverage. Courts have reached different and sometimes inconsistent conclusions on these legal and coverage issues. We do not discount to present value that portion of our losses and loss expense reserves expected to be paid in future periods.
The following table provides a roll forward of gross and net asbestos and environmental incurred losses and loss expenses and related reserves thereon:
(1) In the first quarter of 2013, we issued $185 million of 5.875% Senior Notes due 2043. These notes pay interest on February 15, May 15, August 15, and November 15 of each year, beginning on May 15, 2013, and at maturity. The notes are callable by us on or after February 8, 2018, at a price equal to 100% of their principal outstanding amount, plus accrued and unpaid interest to, but excluding, the date of redemption. A portion of the proceeds from this debt issuance was used to fully redeem the $100 million aggregate principal amount of our 7.5% Junior Subordinated Notes due 2066, which had an associated $3.3 million pre-tax write-off for the remaining capitalized debt issuance costs on these notes. Of the remaining net proceeds, $57.1 million was used to make capital contributions to the Insurance Subsidiaries, while the balance was used for general corporate purposes. There are no financial debt covenants to which we are required to comply in regards to these Senior Notes.
Our Line of Credit was renewed effective September 26, 2013, with Wells Fargo Bank, National Association, as administrative agent, and Branch Banking and Trust Company, with a borrowing capacity of $30 million, which can be increased to $50 million with the approval of both lending partners. The Line of Credit provides the Parent with an additional source of short-term liquidity. The interest rate on our Line of Credit varies and is based on, among other factors, the Parent’s debt ratings. The Line of Credit expires on September 26, 2017. There have been no balances outstanding under this Line of Credit or the previous credit facility at December 31, 2013 or at any time during Twelve Months 2013.
Our combined insurance operations are subject to certain geographic concentrations, particularly in the Northeast and Mid-Atlantic regions of the country. In 2013, approximately 23% of net premiums written were related to insurance policies written in New Jersey.
The goodwill balance for our operating segments was $7.8 million at December 31, 2013 and 2012 related to our Standard Insurance Operations segment.
In the fourth quarter of 2009, we sold 100% of our interest in Selective HR for proceeds to be received over a 10-year period. These proceeds were based on the ability of the purchaser to retain and generate new worksite lives though the independent agents who distribute the products. In 2013, we settled the remaining receivable for an aggregate of $1.0 million, which was received in two installments during the second quarter of 2013, in full and final settlement of the contingent purchase price. An impairment of $1.5 million was recorded in the first quarter of 2013 and is included in "Loss on disposal of discontinued operations, net of tax" in the Consolidated Statements of Income.
After considering all evidence, both positive and negative, with respect to our federal tax loss carryback availability, expected levels of pre-tax financial statement income, and federal taxable income, we believe it is more likely than not that the existing deductible temporary differences will reverse during periods in which we generate net federal taxable income or have adequate federal carryback availability. As a result, we have no valuation allowance recognized for federal deferred tax assets at December 31, 2013 or 2012. The carryforward availability of our net operating loss will begin to expire in 2029 with the remainder expiring through 2031. Our alternative minimum tax credits, which are available to offset future regular taxable income, can be carried forward for an unlimited period of time.
Employer contributions to the Retirement Savings Plan amounted to $12.2 million in 2013, $8.2 million in 2012, and $7.0 million in 2011.
The funding policy provides that payments to the pension trust shall be equal to the minimum funding requirements of the Employee Retirement Income Security Act, plus additional amounts that the Board of Directors of SICA may approve from time to time.
The estimated net actuarial loss for the Retirement Income Plan and Retirement Life Plan that will be amortized from AOCI into net periodic benefit cost during the 2014 fiscal year are $1.5 million and $0.1 million, respectively.
Our latest measurement date was December 31, 2013 and we lowered our expected return on plan assets to 6.92%, reflecting the lower interest rate environment, coupled with our investment strategy to closer match the duration of the assets and liabilities of the Retirement Income Plan. Our expected return is within a reasonable range considering the lower interest rate environment, as well as our actual 8.1% annualized return achieved since plan inception for all plan assets.
Our 2013 discount rate used to value the liability was 5.16% for the Retirement Income Plan and 4.85% for the Retirement Life Plan. When determining the most appropriate discount rate to be used in the valuation, we consider, among other factors, our expected payout patterns of the plans' obligations as well as our investment strategy and we ultimately select the rate that we believe best represents our estimate of the inherent interest rate at which our pension and post-retirement life benefits can be effectively settled.
Assets of the Retirement Income Plan are invested to ensure that principal is preserved and enhanced over time. In addition, the Retirement Income Plan is expected to perform above average relative to comparable funds without assuming undue risk, and to add value through active management. Our return objective is to exceed the returns of the plan's policy benchmark, which is the return the plan would have earned if the assets were invested according to the target asset class weightings and earned index returns. The Retirement Income Plan's exposure to a concentration of credit risk is limited by the diversification of investments across varied financial instruments, including common stocks, mutual funds, non-publicly traded stocks, investments in limited partnerships, fixed income securities, and short-term investments. Allocations to these instruments may vary from time to time. In 2014, we will continue to phase in adjustments to the asset allocation of the Retirement Income Plan to steadily close the gap between the duration of the assets and the duration of the liabilities.
The Retirement Income Plan’s equity investments may not contain investments in any one security greater than 8% of the portfolio value, nor have more than 5% of the outstanding shares of any one corporation. The use of derivative instruments is permitted under certain circumstances, but shall not be used for unrelated speculative hedging or to apply leverage to portfolio positions. Within the alternative investments portfolio, some leverage is permitted as defined and limited by the partnership agreements.
The techniques used to determine the fair value of the Retirement Income Plan’s remaining invested assets are as follows:
Valuations for the majority of the investment funds utilize the market approach wherein the quoted prices in the active market for identical assets are used. These investment funds are traded in active markets at their net asset value per share. There are no restrictions as to the redemption of these investments nor do we have any contractual obligations to further invest in any of the individual mutual funds. These investments are classified as Level 1 in the fair value hierarchy. Valuations of non-publicly traded investment funds are based upon the observable and verifiable market values of the underlying publicly traded securities and therefore are classified as Level 2 within the fair value hierarchy.
We presently anticipate contributing $9.6 million to the Retirement Income Plan in 2014, none of which represents minimum required contribution amounts.
Stockholders approved the amendment and restatement of the Stock Plan effective as of May 1, 2010 (the “Amended Stock Plan”) on April 28, 2010. Under the Amended Stock Plan, the Parent's Board of Directors' Salary and Employee Benefits Committee ("SEBC") may grant stock options, stock appreciation rights ("SARs"), restricted stock, restricted stock units ("RSUs"), phantom stock, stock bonuses, and other awards in such amounts and with such terms and conditions as it shall determine, subject to the provisions of the Amended Stock Plan. Each award granted under the Amended Stock Plan (except unconditional stock grants and the cash component of Director compensation) shall be evidenced by an agreement containing such restrictions as the SEBC may, in its sole discretion, deem necessary or desirable and which are not in conflict with the terms of the Amended Stock Plan. The maximum exercise period for an option grant under this plan is 10 years from the date of the grant. During 2013, we granted, net of forfeitures, 376,163 RSUs. During 2012, we granted, net of forfeitures, 326,213 RSUs. During 2011, we granted, net of forfeitures, 402,925 RSUs. No options to purchase common stock were granted in 2013, 2012, or 2011. As of December 31, 2013, 4,233,305 shares of the Parent's common stock were authorized under the Amended Stock Plan, and 3,445,663 shares remained available for issuance pursuant to outstanding stock options and RSUs granted under the Stock Plan and the Amended Stock Plan.
The Parent's Cash Incentive Plan (“Cash Incentive Plan”) was approved effective April 1, 2005 by stockholders on April 27, 2005. Stockholders approved the amendment and restatement of the Cash Incentive Plan effective as of May 1, 2010 (the “Amended Cash Incentive Plan”) on April 28, 2010. Under the Amended Cash Incentive Plan, the SEBC may grant cash incentive units in such amounts and with such terms and conditions as it shall determine, subject to the provisions of the Amended Cash Incentive Plan. The initial dollar value of these grants will be adjusted to reflect the percentage increase or decrease in the total shareholder return on the Parent's common stock over a specified performance period. In addition, for certain grants, the number of units granted will be adjusted to reflect our performance on specified indicators as compared to targeted peer companies. Each award granted under the Amended Cash Incentive Plan shall be evidenced by an agreement containing such restrictions as the SEBC may, in its sole discretion, deem necessary or desirable and which are not in conflict with the terms of the Amended Cash Incentive Plan. We granted, net of forfeitures, 55,365 cash incentive units during 2013, 46,961 cash incentive units during 2012, and 46,879 cash incentive units during 2011.
As of December 31, 2013, there were 275,244 shares of the Parent's common stock in the reserve for Stock Option Plan III, under which future grants ceased being available with the approval of the Stock Plan. Under Stock Option Plan III, employees were granted qualified and nonqualified stock options, with or without SARs, and restricted or unrestricted stock: (i) at not less than fair value on the date of grant, and (ii) subject to certain vesting restrictions determined by the SEBC. Restricted stock awards also could be subject to achievement of performance objectives as determined by the SEBC. The maximum exercise period for an option grant under this plan was 10 years from the date of the grant.
As of December 31, 2013, 114,000 shares of the Parent's common stock remained in the reserve for the Stock Option Plan for Directors, under which future grants ceased being available with the approval of the Stock Plan. Non-employee directors participated in this plan and automatically received an annual nonqualified option to purchase 6,000 shares of the Parent's common stock at not less than fair value on the date of grant, which is typically on March 1. Options under this plan vested on the first anniversary of the grant and must be exercised by the tenth anniversary of the grant.
On April 29, 2009, the Parent’s stockholders approved the Parent’s Employee Stock Purchase Plan (2009) (“ESPP”). This plan replaced the previous employee stock purchase savings plan under which no further purchases could be made as of July 1, 2009. Under the ESPP, there were 870,930 shares of the Parent's common stock available for purchase as of December 31, 2013. The ESPP is available to all employees who meet the plan's eligibility requirements. The ESPP provides for the issuance of options to purchase shares of common stock. The purchase price is the lower of: (i) 85% of the closing market price at the time the option is granted; or (ii) 85% of the closing price at the time the option is exercised. Shares are generally issued on June 30 and December 31 of each year. Under the ESPP, we issued 122,951 shares to employees during 2013, 129,081 shares during 2012, and 131,705 shares during 2011.
On July 27, 2010, the SEBC approved the Parent’s Amended and Restated Stock Purchase Plan for Independent Insurance Agencies ("Agent Plan") which made immaterial amendments to the plan approved by stockholders on April 26, 2006. Under the Agent Plan, there were 2,098,020 shares of the Parent’s common stock available for purchase as of December 31, 2013. The Agent Plan provides for quarterly offerings in which our independent retail insurance agencies and wholesale general agencies, and certain eligible persons associated with the agencies, with contracts with the Insurance Subsidiaries can purchase the Parent's common stock at a 10% discount with a one year restricted period during which the shares purchased cannot be sold or transferred. Under the Agent Plan, we issued 86,388 shares in 2013, 89,723 shares in 2012, and 111,427 shares in 2011, and charged to expense $0.2 million in each year, with a corresponding income tax benefit of $0.1 million in each year.
A summary of the stock option transactions under our share-based payment plans is as follows:
A summary of the RSU transactions under our share-based payment plans is as follows:
As of December 31, 2013, total unrecognized compensation expense related to unvested RSU awards granted under our stock plans was $4.5 million. That expense is expected to be recognized over a weighted-average period of 1.8 years. The total intrinsic value of RSU vested was $9.1 million for 2013, $8.4 million for 2012, and $6.6 million for 2011. In connection with the vested RSUs, the total value of the DEU shares that also vested was $0.9 million during both 2013 and 2012, and $0.6 million in 2011.
The grant date fair value of RSUs is based on the market price of our common stock on the grant date, adjusted for the present value of our expected dividend payments. The expense recognized for share-based awards is based on the number of shares or units expected to be issued at the end of the performance period and the grant date fair value, and is amortized over the requisite service period.
The weighted-average fair value of options and stock per share, including RSUs granted for the Parent's stock plans, during 2013, 2012, and 2011 is as follows:
Rue Insurance placed insurance policies with the Insurance Subsidiaries. Direct premiums written associated with these policies were $8.2 million in 2013, $7.7 million in 2012, and $7.8 million in 2011. In return, the Insurance Subsidiaries paid standard market commissions to Rue Insurance of $1.3 million in 2013, $1.3 million in 2012, and $1.2 million in 2011 including supplemental commissions.
In 2005, we established a private foundation, The Selective Group Foundation (the "Foundation"), under Section 501(c)(3) of the Internal Revenue Code. The Board of Directors of the Foundation is comprised of some of the Parent's officers. We made contributions to the Foundation in the amount of $0.4 million in each of 2013, 2012, and 2011.
(b) We have various operating leases for office space and equipment. Such lease agreements, which expire at various times, are generally renewed or replaced by similar leases. Rental expense under these leases amounted to $13.2 million in 2013, $13.1 million in 2012, and $11.6 million in 2011. We also lease computer hardware and software under capital lease agreements expiring at various dates through 2018. See Note 2(p) for information on our accounting policy regarding leases.
In addition, certain leases for rented premises and equipment are non-cancelable, and liability for payment will continue even though the space or equipment may no longer be in use. At December 31, 2013, the total future minimum rental commitments under non-cancelable leases were $49.0 million and such yearly amounts are as follows:
In the ordinary course of conducting business, we are named as defendants in various legal proceedings. Most of these proceedings are claims litigation involving our Insurance Subsidiaries as either: (i) liability insurers defending or providing indemnity for third-party claims brought against insureds; or (ii) insurers defending first-party coverage claims brought against them. We account for such activity through the establishment of unpaid loss and loss expense reserves. We expect that the ultimate liability, if any, with respect to such ordinary course claims litigation, after consideration of provisions made for potential losses and costs of defense, will not be material to our consolidated financial condition, results of operations, or cash flows.
The Parent pays dividends to stockholders from funds available at the holding company level. As of December 31, 2013, the Parent had a $71.2 million investment portfolio available to fund future dividends and interest payments. This portfolio is not subject to any regulatory restrictions, whereas our consolidated retained earnings of $1.2 billion is predominately restricted due to the regulation associated with our Insurance Subsidiaries. In 2014, the Insurance Subsidiaries have the ability to provide for $126.7 million in annual dividends to the Parent; however, as regulated entities these dividends are subject to certain restrictions as is further discussed below. The Parent also has available to it other potential sources of liquidity, such as: (i) borrowings from our Indiana-domiciled Insurance Subsidiaries; (ii) debt issuances; (iii) common stock issuances; and (iv) borrowings under our Line of Credit. Borrowings from SICSE and SICSC are governed by approved intercompany lending agreements with the Parent that provide for additional capacity of $29.7 million as of December 31, 2013, after considering that borrowings under these lending agreements are restricted to 10% of the admitted assets of these respective subsidiaries. For additional restrictions on the Parent's debt, see Note 10. "Indebtedness" in this Form 10-K.
The following table provides quantitative data regarding all Insurance Subsidiaries' dividends paid to the Parent in 2013 for debt service, shareholder dividends, and general operating purposes:
As a result of severe weather conditions, our preliminary estimate for January catastrophe losses is between $28 million and $32 million. The losses were primarily from extreme cold caused by the polar vortex that impacted our entire 22 state footprint.