OPERATING SEGMENT INFORMATION

12 Months Ended

Dec. 31, 2016

OPERATING SEGMENT INFORMATION

OPERATING SEGMENT INFORMATION

11. OPERATING SEGMENT INFORMATION

The segments of our insurance operations include casualty, property and surety. The casualty portion of our business consists largely of commercial umbrella, personal umbrella, general liability, transportation and executive products coverages, as well as package business and other specialty coverages, such as professional liability and workers’ compensation for office-based professionals. We offer fidelity and crime coverage for commercial insureds and select financial institutions and medical and healthcare professional liability coverage in the excess and surplus market. We also assume a limited amount of hard-to-place risks through a quota share reinsurance agreement. The casualty business is subject to the risk of estimating losses and related loss reserves because the ultimate settlement of a casualty claim may take several years to fully develop. The casualty segment is also subject to inflation risk and may be affected by evolving legislation and court decisions that define the extent of coverage and the amount of compensation due for injuries or losses.

Our property segment is comprised primarily of commercial fire, earthquake, difference in conditions and marine. We also offer select personal lines policies, including homeowners’ coverages. We discontinued our crop and facultative reinsurance in 2015 as a result of challenging market conditions and began curtailing recreational vehicle and treaty reinsurance offerings at the end of 2016. Facultative and treaty reinsurance operations generated $11.2 million, $12.8 million and $13.1 million of gross written premium in 2016, 2015 and 2014, respectively, while recreational vehicle operations generated $10.4 million, $13.4 million and $16.1 million of gross written premium over the same time period. Property insurance results are subject to the variability introduced by perils such as earthquakes, fires and hurricanes. Our major catastrophe exposure is to losses caused by earthquakes, primarily on the West Coast. Our second largest catastrophe exposure is to losses caused by wind storms to commercial properties throughout the Gulf and East Coast, as well as to homes we insure in Hawaii. We limit our net aggregate exposure to a catastrophic event by minimizing the total policy limits written in a particular region, purchasing reinsurance and maintaining policy terms and conditions throughout market cycles. We also use computer-assisted modeling techniques to provide estimates that help us carefully manage the concentration of risks exposed to catastrophic events.

The surety segment specializes in writing small-to-large commercial and contract surety coverages, as well as those for the energy, petrochemical and refining industries. We also offer miscellaneous bonds including license and permit, notary and court bonds. Often, our surety coverages involve a statutory requirement for bonds. While these bonds typically maintain a relatively low loss ratio, losses may fluctuate due to adverse economic conditions affecting the financial viability of our insureds. The contract surety product guarantees the construction work of a commercial contractor for a specific project. Generally, losses occur due to the deterioration of a contractor’s financial condition. This line has historically produced marginally higher loss ratios than other surety lines during economic downturns.

Net investment income is the by-product of the interest and dividend income streams from our investments in fixed income and equity securities. Interest and general corporate expenses include the cost of debt and other director and shareholder relations costs incurred for the benefit of the corporation, but not attributable to the operations of our insurance segments. Investee earnings represent our share in Maui Jim and Prime earnings. We own 40 percent of Maui Jim, a privately held company which operates in the sunglass and optical goods industries, and 27 percent of Prime Holdings Insurance Services, Inc., a privately-held insurance company which specializes in hard-to-place risks in the excess and surplus market and has recently expanded into certain coverages in the admitted market. Our investment in Maui Jim, which is carried at the holding company, is unrelated to our core insurance operations.

The following table summarizes our segment data based on the internal structure and reporting of information as it is used by management. The net earnings of each segment are before taxes and include revenues (if applicable), direct product or segment costs (such as commissions and claims costs), as well as allocated support costs from various support departments. While depreciation and amortization charges have been included in these measures via our expense allocation system, the related assets are not allocated for management use and, therefore, are not included in this schedule.

REVENUES
(in thousands)	2016		2015		2014
Casualty	$	454,843	$	412,248	$	382,105
Property		152,167		170,924		197,776
Surety		121,598		116,989		107,494
Net premiums earned	$	728,608	$	700,161	$	687,375
Net investment income		53,075		54,644		55,608
Net realized gains		34,645		39,829		32,182
Total	$	816,328	$	794,634	$	775,165

INSURANCE EXPENSES
(in thousands)	2016		2015		2014
Loss and settlement expenses:
Casualty	$	259,907	$	218,414	$	199,133
Property		71,350		69,851		89,589
Surety		18,521		10,780		7,887
Total net loss and settlement expenses	$	349,778	$	299,045	$	296,609
Policy acquisition costs:
Casualty	$	128,566	$	119,529	$	108,747
Property		54,167		57,214		58,646
Surety		66,879		64,335		61,890
Total policy acquisition costs	$	249,612	$	241,078	$	229,283
Other insurance expenses:
Casualty	$	30,040	$	28,042	$	28,284
Property		13,819		14,834		16,623
Surety		9,234		8,604		9,557
Total other insurance expenses	$	53,093	$	51,480	$	54,464
Total	$	652,483	$	591,603	$	580,356

NET EARNINGS (LOSSES)
(in thousands)	2016		2015		2014
Casualty	$	36,329	$	46,263	$	45,941
Property		12,832		29,025		32,918
Surety		26,964		33,270		28,160
Net underwriting income	$	76,125	$	108,558	$	107,019
Net investment income		53,075		54,644		55,608
Net realized gains		34,645		39,829		32,182
General corporate expense and interest on debt		(17,596)		(17,263)		(17,660)
Equity in earnings of unconsolidated investees		10,833		10,914		12,338
Total earnings before incomes taxes	$	157,082	$	196,682	$	189,487
Income taxes	$	42,162	$	59,138	$	54,042
Total	$	114,920	$	137,544	$	135,445

The following table further summarizes revenues by major product type within each segment:

NET PREMIUMS EARNED	Year ended December 31,
(in thousands)	2016		2015		2014
CASUALTY
Commercial and personal umbrella	$	111,079	$	104,598	$	100,420
General liability		83,958		81,213		80,820
Commercial transportation		81,402		65,564		58,911
Professional services		75,872		71,034		58,327
Small commercial		45,660		40,410		35,371
Executive products		18,755		17,892		18,915
Medical professional liability		17,449		12,292		15,943
Other casualty		20,668		19,245		13,398
Total	$	454,843	$	412,248	$	382,105
PROPERTY
Commercial property	$	68,165	$	75,749	$	80,719
Marine		48,301		47,016		49,235
Specialty personal		24,981		26,395		26,627
Property reinsurance		10,953		12,330		12,756
Crop reinsurance		(233)		9,358		28,293
Other property		—		76		146
Total	$	152,167	$	170,924	$	197,776
SURETY
Miscellaneous	$	46,235	$	42,372	$	39,026
Commercial		29,105		29,529		25,778
Contract		28,240		28,269		26,592
Energy		18,018		16,819		16,098
Total	$	121,598	$	116,989	$	107,494
Grand total	$	728,608	$	700,161	$	687,375