OPERATING SEGMENT INFORMATION

12 Months Ended

Dec. 31, 2017

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 coverages. We also offer select personal lines policies, including homeowners’ coverages. Our crop, property reinsurance and recreational vehicle products are in runoff after we discontinued our crop relationship at the end of 2015 and began curtailing reinsurance and recreational vehicle offerings at the end of 2015 and 2016, respectively. 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-sized 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 consists 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, other director and shareholder relations costs and other compensation-related expenses 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 23 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)	2017		2016		2015
Casualty	$	478,603	$	454,843	$	412,248
Property		138,346		152,167		170,924
Surety		120,988		121,598		116,989
Net premiums earned	$	737,937	$	728,608	$	700,161
Net investment income		54,876		53,075		54,644
Net realized gains		4,411		34,645		39,829
Total	$	797,224	$	816,328	$	794,634

INSURANCE EXPENSES
(in thousands)	2017		2016		2015
Loss and settlement expenses:
Casualty	$	305,679	$	259,907	$	218,414
Property		85,027		71,350		69,851
Surety		10,878		18,521		10,780
Total net loss and settlement expenses	$	401,584	$	349,778	$	299,045
Policy acquisition costs:
Casualty	$	136,135	$	128,566	$	119,529
Property		51,070		54,167		57,214
Surety		65,310		66,879		64,335
Total policy acquisition costs	$	252,515	$	249,612	$	241,078
Other insurance expenses:
Casualty	$	32,885	$	30,040	$	28,042
Property		14,108		13,819		14,834
Surety		10,001		9,234		8,604
Total other insurance expenses	$	56,994	$	53,093	$	51,480
Total	$	711,093	$	652,483	$	591,603

NET EARNINGS (LOSSES)
(in thousands)	2017		2016		2015
Casualty	$	3,904	$	36,329	$	46,263
Property		(11,859)		12,832		29,025
Surety		34,799		26,964		33,270
Net underwriting income	$	26,844	$	76,125	$	108,558
Net investment income		54,876		53,075		54,644
Net realized gains		4,411		34,645		39,829
General corporate expense and interest on debt		(18,766)		(17,596)		(17,263)
Equity in earnings of unconsolidated investees		17,224		10,833		10,914
Total earnings before incomes taxes	$	84,589	$	157,082	$	196,682
Income tax expense (benefit)	$	(20,439)	$	42,162	$	59,138
Total	$	105,028	$	114,920	$	137,544

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

NET PREMIUMS EARNED	Year ended December 31,
(in thousands)	2017		2016		2015
CASUALTY
Commercial and personal umbrella	$	115,543	$	111,079	$	104,598
General liability		90,283		86,853		84,165
Professional services		78,508		75,872		71,034
Commercial transportation		78,061		81,402		65,564
Small commercial		49,601		45,660		40,410
Executive products		18,086		18,755		17,892
Medical professional liability		17,072		17,449		12,292
Other casualty		31,449		17,773		16,293
Total	$	478,603	$	454,843	$	412,248
PROPERTY
Commercial property	$	63,117	$	68,165	$	75,749
Marine		50,931		48,301		47,016
Specialty personal		20,793		24,981		26,395
Other property		3,505		10,720		21,764
Total	$	138,346	$	152,167	$	170,924
SURETY
Miscellaneous	$	47,237	$	46,235	$	42,372
Contract		28,573		28,240		28,269
Commercial		27,625		29,105		29,529
Energy		17,553		18,018		16,819
Total	$	120,988	$	121,598	$	116,989
Grand total	$	737,937	$	728,608	$	700,161