OPERATING SEGMENT INFORMATION

12 Months Ended

Dec. 31, 2015

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, package business, executive products, medical professional liability and other specialty coverages, such as our professional liability for design professionals. We also offer fidelity and crime coverage for commercial insureds and select financial institutions. 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, marine, facultative and treaty reinsurance, including crop, and select personal lines policies, including recreational vehicle insurance and Hawaii homeowners coverages. Property insurance and reinsurance 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 through extensive use of computer-assisted modeling techniques. These techniques provide estimates that help us carefully manage the concentration of risks exposed to catastrophic events. Our assumed multi-peril crop and hail treaty reinsurance business covers revenue shortfalls or production losses due to natural causes such as drought, excessive moisture, hail, wind, frost, insects and disease. Significant aggregation of these losses is mitigated by the Federal Government reinsurance program that provides stop loss protection inuring to our benefit. As noted in previous filings, our portion of assumed crop reinsurance was reduced for 2015 and will expire at the end of the 2015 crop year due to the acquisition of the cedant. Additionally, we discontinued offering facultative reinsurance at the end of the third quarter of 2015 as a result of challenging market conditions. Our facultative reinsurance operations generated $3.5 million, $5.9 million and $9.1 million of gross written premium in 2015, 2014 and 2013, respectively.

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, 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)	2015		2014		2013
Casualty	$	412,248	$	382,105	$	324,022
Property		170,924		197,776		200,141
Surety		116,989		107,494		106,639
Net premiums earned	$	700,161	$	687,375	$	630,802
Net investment income		54,644		55,608		52,763
Net realized gains		39,829		32,182		22,036
Total	$	794,634	$	775,165	$	705,601

INSURANCE EXPENSES
(in thousands)	2015		2014		2013
Loss and settlement expenses:
Casualty	$	218,414	$	199,133	$	148,860
Property		69,851		89,589		96,271
Surety		10,780		7,887		14,670
Total net loss and settlement expenses	$	299,045	$	296,609	$	259,801
Policy acquisition costs:
Casualty	$	119,529	$	108,747	$	93,463
Property		57,214		58,646		58,650
Surety		64,335		61,890		58,538
Total policy acquisition costs	$	241,078	$	229,283	$	210,651
Other insurance expenses:
Casualty	$	28,042	$	28,284	$	26,107
Property		14,834		16,623		17,616
Surety		8,604		9,557		9,834
Total other insurance expenses	$	51,480	$	54,464	$	53,557
Total	$	591,603	$	580,356	$	524,009

NET EARNINGS (LOSSES)
(in thousands)	2015		2014		2013
Casualty	$	46,263	$	45,941	$	55,592
Property		29,025		32,918		27,604
Surety		33,270		28,160		23,597
Net underwriting income	$	108,558	$	107,019	$	106,793
Net investment income		54,644		55,608		52,763
Net realized gains		39,829		32,182		22,036
General corporate expense and interest on debt		(17,263)		(17,660)		(16,841)
Equity in earnings of unconsolidated investees		10,914		12,338		10,915
Total earnings before incomes taxes	$	196,682	$	189,487	$	175,666
Income taxes	$	59,138	$	54,042	$	49,411
Total	$	137,544	$	135,445	$	126,255

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

NET PREMIUMS EARNED	Year ended December 31,
(in thousands)	2015		2014		2013
CASUALTY
Commercial and personal umbrella	$	104,598	$	100,420	$	85,532
General liability		81,213		80,820		81,427
Professional services		71,034		58,327		42,063
Commercial transportation		65,564		58,911		50,287
P&C package business		40,410		35,371		30,603
Executive products		17,892		18,915		19,123
Medical professional liability		12,292		15,943		8,626
Other casualty		19,245		13,398		6,361
Total	$	412,248	$	382,105	$	324,022
PROPERTY
Commercial property	$	75,749	$	80,719	$	76,939
Marine		47,016		49,235		57,122
Specialty personal		26,395		26,627		16,308
Property reinsurance		12,330		12,756		15,770
Crop reinsurance		9,358		28,293		31,421
Other property		76		146		2,581
Total	$	170,924	$	197,776	$	200,141
SURETY
Miscellaneous	$	42,372	$	39,026	$	38,131
Commercial		29,529		25,778		23,133
Contract		28,269		26,592		27,176
Energy		16,819		16,098		18,199
Total	$	116,989	$	107,494	$	106,639
Grand total	$	700,161	$	687,375	$	630,802