Our main office is located in Branchville, New Jersey on a site owned by a subsidiary with approximately 114 acres and 315,000 square feet of operational space. We lease all of our other facilities. The principal office locations related to our insurance operations are described in the “Geographic Markets” section of Item 1. “Business.” of this Form 10-K. We believe our facilities provide adequate space for our present needs and that additional space, if needed, would be available on reasonable terms.
Excess and surplus ("E&S") Lines - comprised of insurance products and services provided to customers who have not obtained coverage in the standard marketplace.
Our Standard Commercial and Standard Personal Lines products and services are written through our nine insurance subsidiaries, some of which write flood business through the Write Your Own ("WYO") program of the National Flood Insurance Program ("NFIP"). Our E&S Lines products and services are written through one subsidiary, Mesa Underwriters Specialty Insurance Company ("MUSIC"). This subsidiary provides us with a nationally-authorized non-admitted platform to offer insurance products and services to customers who generally cannot obtain coverage in the standard marketplace.
Financial Highlights of Results for Years Ended December 31, 2017, 2016, and 2015;
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 loss and loss expense, insurers establish reserves as balance sheet liabilities representing an estimate of amounts needed to pay reported and unreported net loss and loss expense. We had accrued $3.8 billion of gross loss and loss expense reserves and $3.2 billion of net loss and loss expense reserves at December 31, 2017. At December 31, 2016, these gross and net reserves were $3.7 billion and $3.1 billion, respectively.
1Includes general liability (95% of net reserves) and commercial auto liability coverages (5% of net reserves).
2Includes commercial property (90% of net reserves) and commercial auto property coverages (10% of net reserves).
During 2016, this line experienced favorable development of $45.0 million, attributable mainly to lower than anticipated claims severities in accident years 2008 through 2013 and 2015.
By its nature, this line presents a diverse set of exposures, and therefore can be influenced by a variety of factors. In recent years, the line has been favorably impacted by decreasing frequencies and relatively benign severity trends. As the economy continues to improve it is possible that these trends will be affected. Our actuarial department actively monitors these trends within our reserve review data, and holds frequent discussions with claims, to identify any potential shifts in these trends.
At December 31, 2017, our commercial automobile line of business had recorded reserves, net of reinsurance, of $475 million, which represented 15% of our total net reserves. In 2017, this line experienced unfavorable development of $35.6 million, which was mainly driven by increases in accident years 2012 through 2016, due to higher than expected frequency and severity.
In 2016, this line experienced unfavorable development of $25.3 million, which was mainly driven by higher severity in accident year 2014 and higher frequency and severity in 2015.
Aggressively managing new business pricing and hazard mix, co-underwriting selected higher hazard classes by the field and home office, providing better recognition of risk drivers and improved pricing.
Reducing premium leakage by improving the quality of our rating information. This includes validating application information using third party data and obtaining more detailed driver information.
Exploring new tools to score drivers to underwrite more effectively and align rate with exposure.
At December 31, 2017, our personal automobile line of business had recorded reserves, net of reinsurance, of $97 million, which represented 3% of our total net reserves. In 2017, this line experienced unfavorable development of $6.7 million mainly attributable to an increase in accident years 2011 through 2016. This line experienced unfavorable prior year development of $1.0 million in 2016.
Some of the drivers affecting the commercial automobile line are also affecting this line. Increased usage and vehicle repair costs, coupled with social trends such as distracted driving, are likely causes of increased frequencies and rising severities. We continue to recalibrate our predictive models, as well as refine our underwriting and pricing approaches. While we believe these changes will ultimately lead to improved profitability and greater stability, they may impact paid and reported development patterns, thereby increasing the uncertainty in the reserves in the near-term.
While E&S results have improved over recent years, they still have not reached our target return. In order to improve outcomes, we have taken the following actions related to E&S casualty claims:
We believe that the actions above will not only lead to earlier identification of severe claims, but also earlier claims resolutions with improved outcomes. With that said, changes in claims operations can result in changes to claims reserving and settlement patterns. Over time, we expect these patterns to stabilize, but in the near term these operational changes increase the uncertainty in reserve estimates.
The continued use of our Property Claims Specialists ("PCS") and our Property Large Loss Unit ("LLU"). Our PCSs handle claims between $5,000 and $100,000, while the LLU handles claims above $100,000. Both groups form the core of our catastrophe response team. During 2016, we began increasing the number of property claims specialists to respond to property claims with higher severity and/or complexity. This provides us with more staff to respond to claim volume, including the fluctuations that result from catastrophes, while ensuring we have the highest level of property expertise available to apply to our more complex claims.
Expected claim frequencies, severities and ultimate loss and loss expense ratios for the current accident year.
While the sources of variability discussed above are generated by different internal and external trends and operational changes, they ultimately manifest themselves as changes in the expected loss and loss expense development patterns. These patterns are a key assumption in the reserving process. In addition to the expected development patterns, the expected loss and loss expense ratios are another key assumption in the reserving process. These expected ratios are developed through a rigorous process of projecting recent accident years' experience to an ultimate settlement basis, and then adjusting it to the current accident year's pricing and loss cost levels. Impact from changes in the underwriting portfolio and changes in claims handling practices are also quantified and reflected, where appropriate. As is the case with all estimates, the ultimate loss and loss expense ratios may differ from those currently estimated.
“Asbestos claims” are claims for bodily injury alleged to have occurred from exposure to asbestos-containing products. Our primary exposure arises from insuring various distributors of asbestos-containing products, such as electrical and plumbing materials. At December 31, 2017, asbestos claims constituted 30% of our $21.2 million net asbestos and environmental reserves, compared to 29% of our $22.7 million net asbestos and environmental reserves at December 31, 2016.
December 31, 2017 compared to 6.24% as of December 31, 2016, reflecting a higher allocation to equity securities in the portfolio.
At December 31, 2017, our pension and post-retirement benefit plan obligation was $381.0 million compared to $346.0 million at December 31, 2016. Plan assets were $363.7 million and $316.5 million at December 31, 2017 and December 31, 2016, respectively. 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 14. “Retirement Plans” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
We have categorized our investment portfolio, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
We delivered strong financial results in 2017 with net income of $168.8 million, up 7% from 2016, and non-GAAP operating income of $184.9 million, up 14% from 2016. We generated a 10.4% ROE in 2017 and an 11.4% non-GAAP operating ROE, our key measure of long term financial success, with our non-GAAP operating ROE increasing 40 basis points from 11.0% in 2016. Our strong financial results were driven by a record level of after-tax underwriting income, despite the record level of insured global catastrophe losses in 2017 and a relatively weak overall commercial lines pricing environment, and a record level of after-tax net investment income, despite the continued low interest rate environment. Our record level of after-tax underwriting income reflect our efforts to: (i) drive renewal pure price increases at the account level within our Standard Commercial and Standard Personal Lines segments as well as our E&S segment; (ii) generate new business and grow our net premiums written; and (iii) improve the underlying profitability of our book of business through various underwriting and claims initiatives. Our NPW growth of 6% in 2017 and 8% in 2016 was driven by our strong franchise value with our "ivy league" distribution partners. In addition, for more than eight years our Standard Commercial Lines renewal pure price increases have cumulatively outperformed the Willis Towers Watson Commercial Lines Pricing (or CLIPs) survey by approximately 2,100 basis points, while maintaining high retention rates, which has helped improve underlying results. Additionally, in 2017, we appointed 102 retail agents, which is exclusive of 26 agents that have been appointed in our new states of Arizona and New Hampshire, as we continue to seek ways to increase our market share.
In addition to the cumulative renewal pure price increases we have achieved over the past several years, we have driven underwriting and claims process enhancements, and we have improved our mix of business based on expected future profitability. For example, our workers compensation book of business, which represents approximately 17% of our Standard Commercial Lines business, continues to benefit from the steps we have taken in recent years to increase premium rates on this line, despite the fact that pricing was flat in 2017. Additionally, this line has benefited from: (i) an improved business mix that is shifting towards lower hazard and smaller accounts from higher hazard and larger accounts; (ii) claims initiatives, such as reducing workers compensation medical costs through more favorable PPO contracts and greater PPO penetration; and (iii) lower inflationary trends for this long-tail line. For a full discussion of the claims initiatives that we have deployed, refer to the “Reserves for Loss and Loss Expenses” section within Critical Accounting Policies and Estimates in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
We generated a non-GAAP operating ROE of 11.4% in 2017, which is in line with our long-term goal of generating a non-GAAP operating ROE that is 300 basis points in excess of our weighted average cost of capital. Our long-term financial target for 2017 was 11.5%, based on an estimated weighted average cost of capital of 8.5%. Our non-GAAP operating ROE was 11.0% for 2016, compared to our target of 11.7%, which was based on our weighted average cost of capital of 8.7%. Underwriting profitability, coupled with the performance of our investment portfolio, contributed to this achievement.
The key metric in understanding our insurance operations’ contribution to ROE is the GAAP combined ratio. The following table provides a quantitative foundation for analyzing this ratio:
Increases in our combined ratio were driven by: (i) lower levels of net favorable prior year casualty loss development; (ii) a slightly higher level of catastrophe losses; and (iii) a slightly higher level of non-catastrophe property losses. These items were offset in part in 2017 by a lower underwriting expense ratio. The details of these items are provided below:
For a qualitative discussion of this reserve development, please see the related insurance segment discussions below.
A 0.4-point decrease in labor expenses as a percentage of premium in 2017, as we recognized productivity gains from the growth of our business; and
A 0.3-point decrease in pension expense in 2017 reflecting expected returns on pension plan assets that have outpaced expenses in the current year periods. For additional information on our pension plan, refer to Note 14. "Retirement Plans" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
Net realized gains/losses, which is another component of our investment segments' results, experienced volatility in its contribution to ROE in 2015 through 2017. For qualitative information regarding these fluctuations, which include OTTI charges and investment sales that are largely discretionary as to timing, refer to Note 5. "Investments" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K.
The reduction to ROE from "other" in the "Reconciliation of ROE to non-GAAP operating ROE" table above is primarily related to share-based compensation expense at the holding company level. This component of ROE improved marginally in 2017, reflecting a 0.3-point benefit from a change in accounting treatment that requires certain share-based compensation tax benefits to be recorded through income beginning in 2017, coupled with a change in our share-based compensation agreements that began with our 2017 awards. We restructured our newly-issued stock compensation awards to be more aligned with grant date fair value expense treatment and lowered the allocation to awards that require fair value adjustments subsequent to grant date. However, the 36% increase in our stock price during 2017 has resulted in fair value adjustments to our outstanding awards that have increased our share-based compensation expense and offset the savings associated with the structural changes.
We continue to execute successfully on several important objectives that have set the table for our performance in 2018, including: (i) achieving Standard Commercial Lines renewal pure price increases of 2.9% for full-year 2017 and 2.8% in January 2018; (ii) improving renewal underwriting quality while maintaining strong and stable retention; (iii) targeting underwriting actions in our E&S Lines to improve profitability in this segment; and (iv) achieving strong investment results with after-tax new money rates of 2.1% and strong operating cash flow that was 16% of NPW in 2017. All of these achievements will help drive our future financial performance in 2018 and beyond.
Despite our strong financial performance in 2017 and expectations for 2018, the U.S. property and casualty insurance industry continues to be characterized by an abundance of capital, intense competition and low overall premium growth. According to A.M. Best's "US Property/Casualty: 2018 Review & Preview," for 2018, rate increases are expected to remain in the low single digits for most lines of business. A.M. Best is estimating an overall statutory combined ratio for the industry for 2018 of 100.0% and an estimated after-tax return on surplus of 5.8%. In addition, A.M. Best estimates that property and casualty loss and loss adjustment expense reserve adequacy peaked several years ago and reserve adequacy has been declining since.
Investing in the development and implementation of leading technologies to enhance our underwriting is integral to our overall strategy. The ability to segment our business on a granular basis allows us to present the right price for a given risk. In 2017, we deployed a new underwriting tool that provides real-time insights into how each piece of new business compares with similar accounts already in our portfolio. We believe this tool positions us better to grow the business regardless of overall market dynamics. It also demonstrates our commitment to developing and implementing a best-in-class technology platform that enhances our decision making capabilities.
Our 2018 results will be favorably impacted by Tax Reform, which we expect to lower our effective tax rate by 10 percentage points, to approximately 18% going forward, including 17% from net investment income and approximately 21% for all other items. This effective rate will fluctuate depending on the investment portfolio's allocation to tax-advantaged municipal securities, which will continue to be taxed at 5.25%. We expect this benefit to assist us in achieving our long-term goal of generating non-GAAP operating ROE that is approximately 300 basis points in excess of our weighted average cost of capital over time.
In January 2018, we experienced an estimated $63 million of insured property losses which were approximately $30 million in excess of our property loss expectations for the month of January. Refer to Note 21. "Subsequent Events" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K for additional information.
After-tax net investment income of $144 million, which includes $10 million of after-tax net investment income from our alternative investments;
An overall effective tax rate of approximately 18%, which includes an effective tax rate of 17% for net investment income, inclusive of tax-advantaged municipal securities' tax rate of 5.25%, and approximately 21% for all other items; and
The increase in the loss and loss expense ratio in 2017 was partially offset by a 1.2-point decrease in the underwriting expense ratio in 2017 compared to 2016. The expense improvement drivers in this segment of our business are similar to those driving our overall insurance results as described in the financial highlights section above and include:
A 0.3-point decrease in pension expense due to the extension of the amortization period over which we are recognizing the net actuarial loss on our pension plan.
There was an increase of 1.0 point in the underwriting expense ratio in 2016 compared to 2015. This increase was primarily attributable to higher supplemental commission expense to our distribution partners of 0.9 points.
Growth in 2017 and 2016 premium was primarily due to direct new business as outlined in the table above, coupled with strong retention and renewal pure price increases.
2017: favorable prior year development of 8.5 points attributable to decreases in accident years 2016 and prior, driven by lower than expected frequencies and severities.
The 8.6-point increase in the combined ratio in 2016 compared to 2015 was driven by: (i) unfavorable prior year casualty reserve development that increased the combined ratio by 5.5 points compared to 2015; (ii) an increase in the current year loss reserve estimate of 2.1 points reflecting higher casualty claim frequency; and (iii) higher property losses of 1.0 point.
2017: Unfavorable development of 8.1 points, which was driven primarily by increases in accident years 2012 through 2016, due to higher than expected frequency and severity.
NPW increases in the last three years were due to strong retention and new business. The NPW increases in 2016 compared to 2015 were also driven by renewal pure price increases.
The 2016 combined ratio decrease compared to 2015 was due primarily to a favorable prior year casualty development, which for all years is outlined in the table below.
Our commercial property business has experienced profitable results during the three-year period in the table above despite a competitive pricing environment. Although the table below reflects higher severities for our property losses, our results have benefited from generally benign catastrophe loss activity in our geographic footprint. We believe pricing will strengthen as a result of the level of industry-wide catastrophic events.
The prior year development in both 2017 and 2016 primarily related to our personal automobile book of business.
The increase in the underwriting expense ratio in 2016 compared to 2015 was primarily driven by increased costs related to: (i) capital improvements of 0.8 points; (ii) underwriting expenses from third-party data vendors of 0.4 points; and (iii) supplemental commission expense to our distribution partners of 0.3 points.
We continue to focus on profitability drivers in our E&S operations and have been actively managing price increases during the past two years. While the NPW growth rate has declined as a consequence of these actions, our primary focus is on bringing this segment to targeted levels of profitability. Quantitative information is as follows:
Unfavorable prior year casualty reserve development for 2017 was $10 million, driven by increases in claims severities in accident years 2014 and 2015. Unfavorable prior year casualty reserve development for 2016 was $6 million, driven by increases in claims severity in accident year 2014.
The underwriting expense ratio improvement in 2017 compared to 2016 was primarily due to a 0.8-point increase in the allocation of corporate services to this segment in 2017. The improvement in the underwriting expense ratio in 2016 compared to 2015 was primarily driven by a 1.6-point reduction year over year from the annual cash incentive plan payment for employees in this segment based on 2015 underwriting results.
We use reinsurance to protect our capital resources and insure us against losses on property and casualty risks that we underwrite. 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.
The following illustrates the pooling percentages by Insurance Subsidiary as of December 31, 2017:
In addition to the above categories, we have entered into several reinsurance agreements with Montpelier Re Insurance Ltd., now part of SOMPO Holdings, Inc., as part of the acquisition of MUSIC in December 2011. Together, these agreements provide protection for losses on policies written prior to the acquisition and any development on reserves established by MUSIC as of the date of acquisition. The reinsurance recoverables under these treaties are collateralized.
The property catastrophe treaty, which covers both our standard market and E&S business, was renewed effective January 2018. An additional $50 million layer was placed at the top of the program, bringing the total program's coverage to $735 million in excess of $40 million. The annual aggregate limit net of our co-participation is approximately $1.1 billion for 2018. We also renewed the separate catastrophe treaty of $35 million in excess of $5 million that covers events outside of our historical standard lines footprint, in support of our growing E&S property book and geographic expansion into Arizona, New Hampshire, and Colorado. Overall catastrophe ceded premium for 2018 increased due to some hardening of the reinsurance market and the purchase of the additional $50 million layer. On a risk-adjusted basis, the expiring layers saw a very modest increase in price.
1 This amount represents reported and unreported gross losses estimated as of December 31, 2017.
We use the results of the Risk Management Solutions and AIR Worldwide models in our review of exposure to hurricane risk. Each of these third party vendors provide two views of the modeled results as follows: (i) a long-term view that closely relates modeled event frequency to historical hurricane activity; and (ii) a medium-term view that adjusts historical frequencies to reflect expectations of hurricane activity in the near future. We believe that modeled estimates provide a range of potential outcomes and we review multiple estimates for purposes of understanding our catastrophic risk. The following table provides modeled hurricane results based on a blended view of the four models for the Insurance Subsidiaries' combined property book as of July 2017:
1 Include assumptions for certain un-modeled costs, such as the impact of loss expenses, residual market assessments, and automobile-related losses, which collectively increase our gross losses by an estimated 13%.
2 Losses are after a 21% Federal income tax benefit and include applicable reinstatement premiums.
- The treaty provides various reinstatement provisions depending on the layer. The annual aggregate limit is $1.1 billion, net of the Insurance Subsidiaries' co-participation.
In addition, our $35 million above $5 million retention treaty covers 85% of losses outside of our standard lines historical footprint states and has an annual aggregate limit of $30 million, net of the Insurance Subsidiaries' co-participation. This layer was purchased primarily to protect the growth of our E&S property book but also provides coverage for our Standard Lines expansion states.
We have other reinsurance treaties that we do not consider core to our reinsurance program, such as our Surety and Fidelity Excess of Loss Reinsurance Treaty, National Workers Compensation Reinsurance Pool Quota Share, which covers business assumed from the involuntary workers compensation pool, our Equipment Breakdown Coverage Reinsurance Treaty, and our Data Compromise Reinsurance Treaty.
The primary objective of the investment portfolio is to maximize after-tax income and total return of the portfolio, while maintaining credit quality and managing our duration risk profile. Our investment philosophy includes certain return and risk objectives for the fixed income, equity, and other investment portfolios. After-tax yield and income generation are key drivers to our investment strategy, which we believe will be obtained through more active management of the portfolio.
The increase in our investment portfolio at December 31, 2017 compared with year-end 2016 was primarily driven by operating cash flow of $370.7 million, $51.1 million of which was used to fund shareholder dividends and capital expenditures in the aggregate. The $59.9 million change in unrealized gains was comprised of $46.8 million from our fixed income securities and $13.0 million from our equity portfolio.
1Includes $75.8 million of preferred stock within corporate securities and $15.0 million of preferred stock within equity securities. In aggregate, these account for approximately 1% of invested assets at December 31, 2017.
Our fixed income securities portfolio maintained a weighted average credit rating of AA- as of December 31, 2017 with 97% of the securities within the portfolio being investment grade quality at both December 31, 2017 and December 31, 2016. For further details on how we manage overall credit quality and the various risks to which our portfolio is subject, see
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 19, 2018, expressed an unqualified opinion on the effectiveness of the Company’s internal controls over financial reporting.
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 financial statement schedules based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risk of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Selective Insurance Group, Inc., through its subsidiaries, (collectively referred to as “we,” “us,” or “our”) offers standard commercial, standard personal, and excess and surplus ("E&S") lines property and casualty insurance products. Selective Insurance Group, Inc. (referred to as the “Parent”) was incorporated in New Jersey in 1977 and its corporate headquarters is located in Branchville, New Jersey. The Parent’s common stock is publicly traded on the NASDAQ Global Select Market under the symbol “SIGI.” We have provided a glossary of terms as Exhibit 99.1 to this Form 10-K, which defines certain industry-specific and other terms that are used in this Form 10-K.
be other than temporary. See the discussion below on realized investment gains and losses for a description of the accounting for impairments. After-tax unrealized gains and losses on: (i) fixed income securities classified as AFS; and (ii) fixed income securities that were transferred into an HTM designation from an AFS designation, are included in accumulated other comprehensive income (loss) ("AOCI").
Short-term investments may include certain money market instruments, savings accounts, commercial paper, and debt issues purchased with a maturity of less than one year. We also enter into reverse repurchase agreements that are included in short-term investments. These loans are fully collateralized with high quality, readily marketable instruments at a minimum of 102% of the loan principal. At maturity, we receive principal and interest income on these agreements. All short-term investments are carried at cost, which approximates fair value. The associated income is included in "Net investment income earned" on our Consolidated Statements of Income.
On a quarterly basis, we review our investment portfolio for impairments that are other than temporary. Interest-related unrealized losses typically do not result in other-than-temporary impairments. The following provides information on this analysis for our fixed income securities and short-term investments, equity securities, and other investments.
To determine if an impairment is other than temporary, we perform assessments that may include, but are not limited to, a discounted cash flow analysis ("DCF") to determine the security's present value of future cash flows. This analysis is also performed on all previously-impaired debt securities that continue to be held by us and all structured securities that were not of high credit quality at the date of purchase. Any shortfall in the expected present value of the future cash flows, based on the DCF, from the amortized cost basis of a security is considered a “credit impairment,” with the remaining decline in fair value of a security considered a “non-credit impairment.” Credit impairments are charged to earnings as a component of realized losses, while non-credit impairments are recorded to Other Comprehensive Income ("OCI") as a component of unrealized losses.
The discount rate we use in a DCF is the effective interest rate implicit in the security at the date of acquisition for those structured securities that were not of high credit quality at acquisition. For all other securities, we use a discount rate that equals the current yield, excluding the impact of previous OTTI charges, used to accrete the beneficial interest. DCFs may include, but are not necessarily limited to: (i) generating cash flows for each tranche considering tranche-specific data, market data, and other pertinent information, such as the historical performance of the underlying collateral, including net operating income generated by underlying properties, conditional default rate assumptions, loan loss severity assumptions, consensus projections, prepayment projections, and actual pool and collateral information; (ii) identifying applicable benchmark yields; and (iii) applying market-based tranche specific spreads to determine an appropriate yield by incorporating collateral performance, tranche-level attributes, trades, bids, and offers.
We review securities that are in an unrealized loss position to determine: (i) if we do not intend to hold the security to its forecasted recovery; or (ii) if the decline is other than temporary, which includes declines driven by market volatility for which we cannot assert the security will recover in the near term. If we determine either that we do not intend to hold a security, or the decline is other than temporary, we write down the security's cost to its fair value through a charge to earnings as a component of realized losses. If we intend to hold the security, our evaluation for OTTI may include, but is not limited to, an evaluation of the following factors:
Less than 1% of our portfolio cannot be priced using our primary or secondary pricing service. At times, we may use non-binding broker quotes to value some of these securities. These prices are from various broker/dealers that use bid or ask prices, or benchmarks to indices, in measuring the fair value of a security. We review these fair value measurements for reasonableness. This review typically includes an analysis of price fluctuations between months with variances over established thresholds being analyzed further.
Further information on our current Level 3 asset pricing is included in the following table:
"Insurance Subsidiaries." This collateral is typically in the form of a letter of credit or cash. An allowance for estimated uncollectible reinsurance is recorded based on an evaluation of balances due from reinsurers and other available information, such as each reinsurers' credit rating from A.M. Best Company ("A.M. Best") or Standard & Poor's Rating Services ("S&P"). We charge off reinsurance recoverables on paid losses when it becomes probable that we will not collect the balance.
There were no premium deficiencies for any of the reported years, as the sum of the anticipated loss and loss expense, unamortized acquisition costs, policyholder dividends, and other expenses for each segment did not exceed that segment’s related unearned premium and anticipated investment income. The investment yields assumed in the premium deficiency assessment for each reporting period, which were based on our actual average investment yield before tax as of the September 30 calculation date, were 2.9% for 2017, 2.4% for 2016, and 2.5% for 2015.
Reserves for loss and loss expense are comprised of both case reserves on individual claims and reserves for claims incurred but not reported ("IBNR"). Case reserves result from claims that have been reported to one or more of our Insurance Subsidiaries, and are estimated at the amount of the expected ultimate payment. IBNR reserves are established at more aggregated levels than case basis reserves, and in addition to reserves on claims that have been incurred but not reported, they include provisions for future emergence on known claims, as well as reopened claims. IBNR reserves are established based on the results of the Insurance Subsidiaries’ internal reserve analysis, supplemented with other internal and external information.
The internal reserve analysis is performed quarterly, and relies upon 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. Our analyses rely upon historical paid and case loss and loss expense experience organized by line of business, accident year, and maturity (i.e., “triangles”). Standard actuarial projection methods are applied to this history,
The selected ultimate losses and loss adjustment expenses are translated into indicated IBNR reserves, which are then compared to the recorded IBNR reserves. Management's judgment is applied in determining any required adjustments and the resulting adjustments are then recorded and assigned or allocated to accident year using the results of the actuarial analysis.
Claims are counted at the occurrence, line of business, and policy level. For example, if a single occurrence (e.g. an auto accident) leads to a claim under an auto and an associated umbrella policy, they are each counted separately. Conversely, multiple claimants under the same occurrence/line/policy would contribute only a single count. The claim counts provided are
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions. We adopted this guidance in the first quarter of 2017, which resulted in the following impacts on our consolidated financial statements:
The new standard requires that the tax effects of share-based compensation be recognized in the income tax provision as discrete items outside of the annual estimated expected tax rate. In addition, all excess tax benefits and tax deficiencies should be recognized as income tax benefit or expense in the income statement. Previously, these amounts were recorded in additional paid-in capital. In addition, in calculating potential common shares used to determine diluted earnings per share, GAAP requires us to use the treasury stock method. The new standard requires that assumed proceeds under the treasury stock method be modified to exclude the amount of excess tax benefits that would have been recognized in additional paid-in capital. These changes were adopted on a prospective basis. As a result of adoption, we recognized an income tax benefit in the Consolidated Statements of Income of $4.3 million in 2017 related to stock grants that have vested this year.
In recording share-based compensation expense, the standard allows companies to make a policy election as to whether they will include an estimate of awards expected to be forfeited or whether they will account for forfeitures as they occur. We have elected to include an estimate of forfeitures in the computation of our share-based compensation expense. As this treatment is consistent with previous guidance, this election had no impact on our consolidated financial statements.
ASU 2016-09 requires that excess tax benefits from share-based awards be reported as operating activities in the consolidated statement of cash flows. Previously, these cash flows were included in financing activities. We elected to apply this change on a prospective basis; therefore, no changes have been made to the prior periods disclosed in this report.
In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities ("ASU 2017-08"). ASU 2017-08 revises the amortization period for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. ASU 2017-08 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 with early adoption permitted. We adopted this guidance in the fourth quarter of 2017 and the adoption did not impact us as we amortize premium on these callable debt securities to the earliest call date.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 provides guidance to improve certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Specifically the guidance: (i) requires equity investments to be measured at fair value with changes in fair value recognized in earnings; (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost; (iv) requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and (v) clarifies that the need for a valuation allowance on a deferred tax asset related to an available-for-sale ("AFS") security should be evaluated with other deferred tax assets.
ASU 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Our adoption of this guidance will require a cumulative-effect adjustment between AOCI and retained earnings on the balance sheet for approximately $25 million, which represents the after-tax unrealized gain on our equity securities portfolio as of December 31, 2017. On a pre-tax basis, the unrealized gain on our equity securities portfolio increased $13 million during 2017 and, had this literature been in effect, we would have recognized additional after-tax net income of approximately $10 million, or $0.17 per diluted share, assuming a 21% corporate tax rate.
In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that fiscal year, with early adoption permitted. ASU 2016-02 requires the application of a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. While we are currently evaluating ASU 2016-02, we do not expect a material impact on our financial condition or results of operations from the adoption of this guidance.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows, including, but not limited to: (i) debt prepayment or debt extinguishment costs; (ii) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (iii) distributions received from equity method investees; and (iv) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective, with retrospective adoption, for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. We anticipate that the adoption of this guidance in 2018 will result in an increase to our 2017 and 2016 operating cash flows of approximately $2 million and $3 million, respectively, reflecting adjustments for distributions received from equity method investees.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash ("ASU 2016-18"). ASU 2016-18, requires that restricted cash and restricted cash equivalents be included with cash and cash equivalents in the reconciliation of beginning and ending cash on the statements of cash flows. This update also requires a reconciliation of the statement of the cash flows to the balance sheet if the balance sheet includes more than one line item containing cash, cash equivalents, and restricted cash. We currently have restricted cash associated with our participation in the National Flood Insurance Program ("NFIP") within "Other assets" on our consolidating balance sheets. This restricted cash amounted to $44.2 million, $36.9 million, and $11.9 million on December 31, 2017, 2016, and 2015, respectively. ASU 2016-18 is effective, with retrospective adoption, for annual periods beginning after December 15, 2017, and interim periods within those annual periods. We anticipate that the adoption of this guidance in 2018 will result in increases to operating cash flows of $7 million and $25 million for 2017 and 2016, respectively. The restricted cash balance will also be included in the reconciliation of beginning and ending cash balances.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 eliminates the second step of the two part goodwill impairment test, which required entities to determine the fair value of individual assets and liabilities of a reporting unit to measure the goodwill impairment. Under the new guidance, a goodwill impairment is calculated as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments in this update should be applied on a prospective basis for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We intend to adopt this guidance in 2018, but do not expect it to impact our financial condition or results of operations.
(d) The severity of impairment on the securities in an unrealized/unrecognized loss position averaged 1% of amortized cost at December 31, 2017 and December 31, 2016. Quantitative information regarding unrealized losses on our AFS portfolio is provided below. Our HTM portfolio had $0.1 million in unrealized/unrecognized losses at December 31, 2017 and no unrealized/unrecognized losses at December 31, 2016.
Listed below are the contractual maturities of fixed income securities at December 31, 2017:
(f) The following table summarizes our other investment portfolio by strategy:
1The maximum exposure to loss includes both the carrying value of these investments and the related unfunded commitments. In addition, tax credits that have been previously recognized in Other securities are subject to the risk of recapture, which we do not consider significant.
We have reviewed various investments included in the table above and have concluded that they are VIEs, but that we are not the primary beneficiary and therefore, consolidation is not required. We do not have a future obligation to fund losses or debts on behalf of these investments; however, we are contractually committed to make additional investments up to the remaining commitment outlined above. We have not provided any non-contractual financial support at any time during 2017 or 2016.
commercial real estate mortgages, and similar non-U.S. securities and debt obligations.
Real Estate: This strategy invests in real estate in North America, Europe, and Asia via direct property ownership, joint ventures, mortgages, and investments in equity and debt instruments.
(g) We did not have exposure to any credit concentration risk of a single issuer greater than 10% of our stockholders' equity, other than certain U.S. government agencies, as of December 31, 2017 or December 31, 2016.
The following table summarizes the market value of these securities at December 31, 2017:
The majority of the OTTI charges in both 2017 and 2016 were on securities for which we had the intent to sell to facilitate our fixed income strategy change to more actively manage the portfolio to maximize after-tax income and total return, while maintaining a similar level of credit quality and duration risk. Charges in 2015 related to equity securities for which we had the intent to sell in relation to our high-dividend yield strategy, with the remaining charges relating to securities that we did not believe would recover in the near term.
Net realized gains in the table above were driven by the following:
The following tables provide quantitative disclosures of our financial assets that were measured and recorded at fair value at December 31, 2017 and 2016:
The following tables provide quantitative information regarding our financial assets and liabilities that were not measured, but were disclosed at fair value at December 31, 2017 and 2016:
As a Standard Commercial Lines and E&S Lines writer, we are subject to the Terrorism Risk Insurance Program Reauthorization Act ("TRIPRA"), which was extended by Congress to December 31, 2020. TRIPRA requires private insurers and the United States government to share the risk of loss on future acts of terrorism certified by the U.S. Secretary of the Treasury. Under TRIPRA, each participating insurer is responsible for paying a deductible of specified losses before federal assistance is available. This deductible is based on a percentage of the prior year’s applicable Standard Commercial Lines and E&S Lines premiums. In 2018, our deductible is approximately $323 million. For losses above the deductible, the federal government will pay 82% of losses to an industry limit of $100 billion, and the insurer retains 18%. The federal share of losses will be reduced by 1% each year to 80% by 2020.
Our net loss and loss expense reserves increased by $104.9 million in 2017, $113.8 million in 2016, and $60.8 million in 2015. The loss and loss expense reserves are net of anticipated recoveries for salvage and subrogation claims, which amounted to $64.8 million for 2017, $64.9 million for 2016, and $62.1 million for 2015. The changes in the net loss and loss expense reserves were the result of growth in exposures, anticipated loss trends, payments of claims, and normal reserve changes inherent in the uncertainty in establishing reserves for loss and loss expense. As additional information is collected in the loss settlement process, reserves are adjusted accordingly. These adjustments are reflected in the Consolidated Statements of Income in the period in which such adjustments are identified. These changes could have a material impact on the results of operations of future periods when the adjustments are made.
In 2017, we experienced overall net favorable prior year loss development of $39.2 million, compared to $65.8 million in 2016 and $69.0 million in 2015. The following table summarizes the prior year development by line of business:
The Insurance Subsidiaries had $65.8 million of favorable prior accident year development during 2016, which included $69.0 million of net favorable casualty development and $3.2 million of unfavorable property development. The net favorable casualty reserve development was largely driven by the workers compensation and general liability lines of business, including products liability and excess liability. Partially offsetting this net favorable development was $25.0 million of unfavorable casualty development in the commercial automobile line of business. In addition, our E&S casualty lines experienced unfavorable development of $6.0 million in 2016.
Reserves for asbestos and environmental claims are highly uncertain. There are significant uncertainties associated with estimating critical assumptions, such as average clean-up costs, third-party costs, potentially responsible party shares, allocation of damages, litigation and coverage costs, and potential state and federal legislative changes. Estimating IBNR is challenging because of the delayed and inconsistent reporting patterns associated with these claims. Traditional actuarial approaches cannot be applied because past loss history is not necessarily indicative of future behavior. While certain alternative projection models
(c) The following is information about incurred and paid claims development as of December 31, 2017, net of reinsurance, as well as cumulative claim frequency and the total of IBNR liabilities. During the experience period, we implemented a series of claims-related initiatives and claims management changes. These initiatives focused on claims handling and reserving, medical claims costs, and loss adjustment expenses. As a result of these initiatives, several historical patterns have changed and may no longer be appropriate to use as the sole basis for projections.
The table below provides a summary of our outstanding debt at December 31, 2017 and 2016:
Selective Insurance Company of America ("SICA") borrowed: (i) $64 million in short-term funds from the FHLBNY on February 28, 2017 at an interest rate of 0.75%, which it repaid on March 21, 2017; and (ii) $20 million in short-term funds from the FHLBNY on November 8, 2017 at an interest rate of 1.29%, which it repaid on November 15, 2017.
The Parent's line of credit with Wells Fargo Bank, National Association, as administrative agent, and Branch Banking and Trust Company (BB&T) (referred to as our "Line of Credit"), was renewed effective December 1, 2015, with a borrowing capacity of $30 million, which can be increased to $50 million with the approval of both lending partners. Our Line of Credit expires on December 1, 2020, and has an interest rate, which varies and is based on, among other factors, the Parent’s debt ratings. There were no balances outstanding under our Line of Credit at December 31, 2017 or at any time during 2017.
(2) In the fourth quarter of 2015, SICA and Selective Insurance Company of New York ("SICNY") joined, and invested in, the FHLBNY, which provides them with access to additional liquidity. The aggregate investment for both subsidiaries was $2.6 million at December 31, 2017 and $2.8 million at December 31, 2016. Our investment provides us the ability to borrow approximately 20 times the total amount of the FHLBNY common stock purchased with additional collateral, at comparatively low borrowing rates. In 2016, SICA borrowed the following amounts from the FHLBNY: (i) $25 million in August 2016 at an interest rate of 1.56%, which is due on August 16, 2021; and (ii) $25 million from the FHLBNY at an interest rate of 1.61%, which is due on July 21, 2021.
Our Investments segment is evaluated based on after-tax net investment income and net realized gains and losses.
Net deferred federal income tax assets decreased by $52.9 million during 2017. As mentioned above, net deferred federal income tax assets were reduced by $20.2 million in relation to Tax Reform. In addition to this charge, net deferred assets decreased by $21.4 million resulting from additional unrealized gains generated during the year on our investment portfolio.
Stockholders' equity reflects tax benefits related to compensation expense deductions for share-based compensation awards of $23.8 million at December 31, 2017 and December 31, 2016, and $22.0 million at December 31, 2015. As mentioned above, beginning in 2017, all excess tax benefits and tax deficiencies on share-based payment awards are recognized as income tax expense or benefit on the Consolidated Statements of Income.
We have analyzed our tax positions in all open tax years, which as of December 31, 2017 were 2014 through 2016, and we believe our tax positions will more likely than not be sustained upon examination, including related appeals or litigation. In the event we had a tax position that did not meet the more likely than not criteria, any tax, interest, and penalties incurred related to such a position would be reflected in "Total federal income tax expense" on our Consolidated Statements of Income. We are not currently under a federal income tax audit for any tax year.
SICA offers a voluntary defined contribution 401(k) plan, which is available to most of our employees and is a tax-qualified retirement plan subject to the Employee Retirement Income Security Act of 1974 ("ERISA"). Expense recorded for this plan was $15.8 million in 2017, $15.0 million in 2016, and $14.1 million in 2015.
SICA offers a nonqualified deferred compensation plan ("Deferred Compensation Plan") to a group of management or highly compensated employees as a method of recognizing and retaining such employees. The Deferred Compensation Plan provides these employees the opportunity to elect to defer receipt of specified portions of compensation and to have such deferred amounts deemed to be invested in specified investment options. In addition to the employee deferrals, SICA may choose to make matching contributions to some or all of the participants in this plan to the extent the participant did not receive the maximum matching or non-elective contributions permissible under the Retirement Savings Plan due to limitations under the Internal Revenue Code or the Retirement Savings Plan. Expense recorded for these contributions was $0.2 million in 2017, $0.3 million in 2016, and $0.2 million in 2015.
Assets of the Pension Plan are invested to adequately support the liability associated with the Pension Plan's defined benefit obligation. 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 shown below. In 2018, we will continue to phase in adjustments to the asset allocation to steadily close the gap between the duration of the assets and the duration of the liabilities, provided certain improved funding targets are achieved. Over time, the target and actual asset allocations may change based on the funded status of the Pension Plan and market return expectations.
The Pension Plan had no investments in the Parent’s common stock as of December 31, 2017 or 2016.
The investments in private equity limited partnerships are valued utilizing net asset value as a practical expedient for fair value. These investments are not classified in the fair value hierarchy.
The investments in other private equity securities are non-publicly traded stocks and are valued by the issuer and reviewed internally. These investments are classified as Level 3 in the fair value hierarchy.
The deposit administration contract is carried at cost, which approximates fair value. Given the liquid nature of the underlying investments in overnight cash deposits and other short-term duration products, we have determined that a correlation exists between the deposit administration contract and other short-term investments, such as money market funds. As such, this investment is classified as Level 2 in the fair value hierarchy.
In addition, refer to Note 5. "Investments" for discussion regarding the limited partnership investment strategies, excluding the middle market lending strategy, as these investments are not part of the Pension Plan. The hedge fund strategy is part of the overall private asset strategy and is only included in the Pension Plan assets. The Pension Plan invests in hedge funds with diversified exposure to a number of underlying systematic strategies that include arbitrage, macro-oriented and equity related strategies. These positions are expected to improve the risk-adjusted return of the portfolio given their lower volatility profile than public equities with returns that are generally uncorrelated to traditional asset classes over a complete market cycle.
We presently do not anticipate contributing to the Pension Plan in 2018, as we have no minimum required contribution amounts.
As of December 31, 2017, the following four plans were available for the issuance of share-based payment awards:
Shares authorized and available for issuance as of December 31, 2017 are as follows:
As of December 31, 2017, total unrecognized compensation expense related to unvested RSU awards granted under our stock plans was $8.0 million. That expense is expected to be recognized over a weighted-average period of 1.8 years. The total intrinsic value of RSUs vested was $16.0 million for 2017, $12.6 million for 2016, and $10.3 million for 2015. In connection with vested RSUs, the total value of the DEU shares that vested was $0.9 million during 2017 and $0.7 million in 2016 and 2015.
The liability recorded in connection with our Cash Plan was $37.0 million at December 31, 2017 and $32.0 million at December 31, 2016. The remaining cost associated with the CIUs is expected to be recognized over a weighted average period of 0.9 years. The CIU payments made were $14.2 million in 2017, $14.3 million in 2016, and $10.2 million in 2015.
Rue Insurance placed insurance policies with the Insurance Subsidiaries for its customers and itself. Direct premiums written associated with these policies were $11.1 million in 2017, $10.4 million in 2016, and $9.6 million in 2015. In return, the Insurance Subsidiaries paid standard market commissions, including supplemental commissions, to Rue Insurance of $2.3 million in 2017, $2.1 million in 2016, and $1.7 million in 2015. Amounts due to Rue Insurance at December 31, 2017 and December 31, 2016 were $0.6 million and $0.7 million, respectively.
BlackRock, Inc., a leading publicly traded investment management firm (“BlackRock”), has purchased our common shares in the ordinary course of its investment business and has previously filed Schedules 13G/A with the SEC. On January 19, 2018, BlackRock filed a Schedule 13G/A reporting beneficial ownership as of December 31, 2017, of 12.8% of our common stock. In connection with purchasing our common shares, BlackRock filed the necessary filings with insurance regulatory authorities. On the basis of those filings, BlackRock is deemed not to be a controlling person for the purposes of applicable insurance law.
We are required to disclose related party information for our transactions with BlackRock. BlackRock is highly regulated, serves its clients as a fiduciary, and has a diverse platform of active (alpha) and index (beta) investment strategies across asset classes that enables it to tailor investment outcomes and asset allocation solutions for clients. BlackRock also offers the BlackRock Solutions® investment and risk management technology platform, Aladdin®, risk analytics, advisory, and technology services and solutions to a broad base of institutional and wealth management investors. In 2017 and 2016, we incurred expenses related to BlackRock of $2.0 million and $0.4 million, respectively, for services rendered. Amounts payable for such services at December 31, 2017 and December 31, 2016, were $0.5 million and $0.4 million, respectively. All contracts with BlackRock were consummated in the ordinary course of business on an arm's-length basis.
(a) We purchase annuities from life insurance companies to fulfill obligations under claim settlements that provide for periodic future payments to claimants. As of December 31, 2017, we had purchased such annuities with a present value of $18.5 million for settlement of claims on a structured basis for which we are contingently liable. To our knowledge, there are no material defaults from any of the issuers of such annuities.
In addition, certain of these leases are non-cancelable, and liability for payment will continue even though the leased asset may no longer be in use. At December 31, 2017, the total future minimum rental commitments under non-cancelable leases were as follows:
(c) As of December 31, 2017, we had contractual obligations that expire at various dates through 2032 to invest up to an additional $221 million in alternative and other investments. There is no certainty that any such additional investment will be required. For additional information regarding these investments, see item (f) of Note 5. "Investments" in this Form 10-K. In addition, as of December 31, 2017, we had contractual obligations that expire in 2023 to invest $16.3 million in a non-publicly traded common stock within our available-for-sale portfolio. We expect to have the capacity to repay and/or refinance these obligations as they become due.
As of December 31, 2017, we do not believe the Company was involved in any legal action that could have a material adverse effect on our consolidated financial condition, results of operations, or cash flows.
The Insurance Subsidiaries are required to maintain certain minimum amounts of statutory surplus to satisfy the requirements of their various state insurance departments of domicile. RBC requirements for property and casualty insurance companies are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. The Insurance Subsidiaries' combined total adjusted capital exceeded the authorized control level RBC, as defined by the NAIC based on their 2017 statutory financial statements. In addition to statutory capital requirements, we are impacted by various rating agency requirements related to certain rating levels. These required capital levels may be more than statutory requirements.
As noted above, the restriction on our net assets and retained earnings is predominantly driven by our Insurance Subsidiaries' ability to pay dividends to the Parent under applicable law and regulations. Under the insurance laws of the domiciliary states of the Insurance Subsidiaries, New Jersey, Indiana, and New York, an insurer can potentially make an ordinary dividend payment if its statutory surplus following such dividend is reasonable in relation to its outstanding liabilities, is adequate to its financial needs, and the dividend does not exceed the insurer's unassigned surplus. In general, New Jersey defines an ordinary dividend as a dividend whose fair market value, together with other dividends made within the preceding 12 months, is less than the greater of 10% of the insurer's statutory surplus as of the preceding December 31, or the insurer's net income (excluding capital gains) for the 12-month period ending on the preceding December 31. Indiana's ordinary dividend calculation is consistent with New Jersey's, except that it does not exclude capital gains from net income. In general, New York defines an ordinary dividend as a dividend whose fair market value, together with other dividends made within the preceding 12 months, is less than the lesser of 10% of the insurer's statutory surplus, or 100% of adjusted net investment income.
exceeding ordinary dividends are referred to as extraordinary dividends and require review and approval by the applicable domiciliary insurance regulatory authority prior to payment.
Based on the 2017 statutory financial statements, the maximum ordinary dividends that can be paid to the Parent by the Insurance Subsidiaries in 2018 are as follows: