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Investments | 3 Months Ended
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Mar. 31, 2012
Investments [Abstract] |
Investments | NOTE 6. Investments (a) The amortized cost, carrying value, unrecognized holding gains and losses, and fair values of held-to-maturity ("HTM") fixed maturity securities were as follows:
March 31, 2012 |  |  |  | Net |  |  |  |  |  |  |  |
|  |  |  | Unrealized |  |  |  | Unrecognized |  | Unrecognized |  |
|  | Amortized |  | Gains |  | Carrying |  | Holding |  | Holding |  | Fair
($ in thousands) |  | Cost |  | (Losses) |  | Value |  | Gains |  | Losses |  | Value
Foreign government | $ | 5,292 |  | 272 |  | 5,564 |  | - |  | (109) |  | 5,455
Obligations of state and political |  |  |  |  |  |  |  |  |  |  |  |
subdivisions |  | 570,970 |  | 10,526 |  | 581,496 |  | 30,826 |  | (29) |  | 612,293
Corporate securities |  | 64,686 |  | (1,873) |  | 62,813 |  | 6,250 |  | - |  | 69,063
Asset-backed securities ("ABS") |  | 7,856 |  | (1,372) |  | 6,484 |  | 1,379 |  | - |  | 7,863
Commercial mortgage-backed |  |  |  |  |  |  |  |  |  |  |  |
securities ("CMBS") |  | 13,520 |  | (2,685) |  | 10,835 |  | 6,222 |  | - |  | 17,057
Total HTM fixed maturity securities | $ | 662,324 |  | 4,868 |  | 667,192 |  | 44,677 |  | (138) |  | 711,731
##
December 31, 2011 |  |  |  | Net |  |  |  |  |  |  |  |
|  |  |  | Unrealized |  |  |  | Unrecognized |  | Unrecognized |  |
|  | Amortized |  | Gains |  | Carrying |  | Holding |  | Holding |  | Fair
($ in thousands) |  | Cost |  | (Losses) |  | Value |  | Gains |  | Losses |  | Value
Foreign government | $ | 5,292 |  | 292 |  | 5,584 |  | - |  | (88) |  | 5,496
Obligations of state and political |  |  |  |  |  |  |  |  |  |  |  |
subdivisions |  | 614,118 |  | 11,894 |  | 626,012 |  | 31,529 |  | (156) |  | 657,385
Corporate securities |  | 64,840 |  | (2,189) |  | 62,651 |  | 6,887 |  | - |  | 69,538
ABS |  | 8,077 |  | (1,469) |  | 6,608 |  | 1,353 |  | (7) |  | 7,954
CMBS |  | 14,455 |  | (2,962) |  | 11,493 |  | 6,177 |  | - |  | 17,670
Total HTM fixed maturity securities | $ | 706,782 |  | 5,566 |  | 712,348 |  | 45,946 |  | (251) |  | 758,043
Unrecognized holding gains/losses of HTM securities are not reflected in the consolidated financial statements, as they represent fair value fluctuations from the later of: (i) the date a security is designated as HTM; or (ii) the date that an other-than-temporary impairment ("OTTI") charge is recognized on an HTM security, through the date of the balance sheet. Our HTM securities had an average duration of 2.9 years as of March 31, 2012. During First Quarter 2012, two securities with a carrying value of $4.4 million and a net unrecognized gain position of $0.1 million were reclassified from HTM designations to available-for-sale ("AFS") designation due to credit rating downgrades by Moody's Investors Service. These unexpected rating downgrades raised significant concerns about the issuers' credit worthiness, which changed our intention to hold these securities to maturity. There were no downgrades on securities in our HTM portfolio from Standard and Poor's Financial Services, or Fitch Ratings in First Quarter 2012. (b) The cost/amortized cost, unrealized gains (losses), and fair value of AFS securities were as follows: ##
March 31, 2012 |  |  |  |  |  |  |  |
|  | Cost/ |  |  |  |  |  |
|  | Amortized |  | Unrealized |  | Unrealized |  | Fair
($ in thousands) |  | Cost |  | Gains |  | Losses |  | Value
U.S. government and government agencies1 | $ | 316,520 |  | 18,764 |  | (104) |  | 335,180
Foreign government |  | 36,903 |  | 1,252 |  | (338) |  | 37,817
Obligations of states and political subdivisions |  | 628,968 |  | 41,622 |  | (1,517) |  | 669,073
Corporate securities |  | 1,236,899 |  | 59,389 |  | (1,343) |  | 1,294,945
ABS |  | 93,390 |  | 1,408 |  | (56) |  | 94,742
CMBS2 |  | 109,931 |  | 4,686 |  | (2,569) |  | 112,048
Residential mortgage-backed |  |  |  |  |  |  |  |
securities ("RMBS")3 |  | 474,911 |  | 16,626 |  | (831) |  | 490,706
AFS fixed maturity securities |  | 2,897,522 |  | 143,747 |  | (6,758) |  | 3,034,511
AFS equity securities |  | 130,213 |  | 23,166 |  | (393) |  | 152,986
Total AFS securities | $ | 3,027,735 |  | 166,913 |  | (7,151) |  | 3,187,497
December 31, 2011 |  |  |  |  |  |  |  |
|  | Cost/ |  |  |  |  |  |
|  | Amortized |  | Unrealized |  | Unrealized |  | Fair
($ in thousands) |  | Cost |  | Gains |  | Losses |  | Value
U.S. government and government agencies1 | $ | 333,504 |  | 20,292 |  | - |  | 353,796
Foreign government |  | 33,687 |  | 1,042 |  | (556) |  | 34,173
Obligations of states and political subdivisions |  | 578,214 |  | 44,491 |  | (46) |  | 622,659
Corporate securities |  | 1,168,439 |  | 50,167 |  | (5,296) |  | 1,213,310
ABS |  | 77,706 |  | 1,289 |  | (46) |  | 78,949
CMBS2 |  | 107,838 |  | 6,427 |  | (1,667) |  | 112,598
RMBS3 |  | 467,468 |  | 16,187 |  | (1,767) |  | 481,888
AFS fixed maturity securities |  | 2,766,856 |  | 139,895 |  | (9,378) |  | 2,897,373
AFS equity securities |  | 143,826 |  | 13,617 |  | (88) |  | 157,355
Total AFS securities | $ | 2,910,682 |  | 153,512 |  | (9,466) |  | 3,054,728
1 U.S. government includes corporate securities fully guaranteed by the Federal Deposit Insurance Corporation ("FDIC") with a fair value of $61.5 million at March 31, 2012 and $76.5 million at December 31, 2011.
2 CMBS includes government guaranteed agency securities with a fair value of $68.4 million at March 31, 2012 and $72.9 million at December 31, 2011.
3 RMBS includes government guaranteed agency securities with a fair value of $102.8 million at March 31, 2012 and $98.2 million at December 31, 2011.
## Unrealized gains/losses of AFS securities represent fair value fluctuations from the later of: (i) the date a security is designated as AFS; or (ii) the date that an OTTI charge is recognized on an AFS security, through the date of the balance sheet. These unrealized gains and losses are recorded in accumulated other comprehensive income ("AOCI") on the Consolidated Balance Sheets. c) The following tables summarize, for all securities in a net unrealized/unrecognized loss position at March 31, 2012 and December 31, 2011, the fair value and gross pre-tax net unrealized/unrecognized loss by asset class and by length of time those securities have been in a net loss position:
March 31, 2012 |  | Less than 12 months |  | 12 months or longer
($ in thousands) |  | Fair Value |  | Unrealized Losses1 |  |  | Fair Value |  | Unrealized Losses1
AFS securities |  |  |  |  |  |  |  |  |
U.S. government and government agencies | $ | 12,738 |  | (104) |  |  | - |  | -
Foreign government |  | 5,868 |  | (338) |  |  | - |  | -
Obligations of states and political subdivisions |  | 56,839 |  | (1,507) |  |  | 1,202 |  | (10)
Corporate securities |  | 94,148 |  | (1,005) |  |  | 12,310 |  | (338)
ABS |  | 3,971 |  | (27) |  |  | 1,318 |  | (29)
CMBS |  | 4,432 |  | (9) |  |  | 15,603 |  | (2,560)
RMBS |  | 40,136 |  | (282) |  |  | 15,733 |  | (549)
Total fixed maturity securities |  | 218,132 |  | (3,272) |  |  | 46,166 |  | (3,486)
Equity securities |  | 11,248 |  | (393) |  |  | - |  | -
Subtotal | $ | 229,380 |  | (3,665) |  |  | 46,166 |  | (3,486)
|  | Less than 12 months |  | 12 months or longer
($ in thousands) |  | Fair Value |  | Unrealized Losses1 |  | Unrecognized Gains2 |  | Fair Value |  | Unrealized Losses1 |  | Unrecognized Gains2
HTM securities |  |  |  |  |  |  |  |  |  |  |  |
Obligations of states and political |  |  |  |  |  |  |  |  |  |  |  |
subdivisions | $ | 1,842 |  | (88) |  | 81 |  | 6,682 |  | (389) |  | 241
ABS |  | - |  | - |  | - |  | 2,834 |  | (968) |  | 748
CMBS |  | - |  | - |  | - |  | 2,691 |  | (1,252) |  | 749
Subtotal | $ | 1,842 |  | (88) |  | 81 |  | 12,207 |  | (2,609) |  | 1,738
Total AFS and HTM | $ | 231,222 |  | (3,753) |  | 81 |  | 58,373 |  | (6,095) |  | 1,738
##
December 31, 2011 |  | Less than 12 months |  | 12 months or longer
($ in thousands) |  | Fair Value |  | Unrealized Losses1 |  | Fair Value |  | Unrealized Losses1
AFS securities: |  |  |  |  |  |  |  |
Foreign government | $ | 8,299 |  | (556) |  | - |  | -
Obligations of states and political subdivisions |  | 517 |  | (1) |  | 1,740 |  | (45)
Corporate securities |  | 157,510 |  | (4,415) |  | 14,084 |  | (881)
ABS |  | 15,808 |  | (14) |  | 702 |  | (32)
CMBS |  | 4,822 |  | (48) |  | 14,564 |  | (1,619)
RMBS |  | 29,803 |  | (625) |  | 15,007 |  | (1,142)
Total fixed maturity securities |  | 216,759 |  | (5,659) |  | 46,097 |  | (3,719)
Equity securities |  | 743 |  | (88) |  | - |  | -
Subtotal | $ | 217,502 |  | (5,747) |  | 46,097 |  | (3,719)
##
|  | Less than 12 months |  | 12 months or longer
($ in thousands) |  | Fair Value |  | Unrealized Losses1 |  | Unrecognized Gains2 |  | Fair Value |  | Unrealized Losses1 |  | Unrecognized Gains2
HTM securities |  |  |  |  |  |  |  |  |  |  |  |
Obligations of states and political |  |  |  |  |  |  |  |  |  |  |  |
subdivisions | $ | 7,244 |  | (94) |  | 78 |  | 9,419 |  | (519) |  | 324
ABS |  | - |  | - |  | - |  | 2,816 |  | (1,009) |  | 737
CMBS |  | - |  | - |  | - |  | 2,794 |  | (1,447) |  | 761
Subtotal | $ | 7,244 |  | (94) |  | 78 |  | 15,029 |  | (2,975) |  | 1,822
Total AFS and HTM | $ | 224,746 |  | (5,841) |  | 78 |  | 61,126 |  | (6,694) |  | 1,822
1 | Gross unrealized losses include non-OTTI unrealized amounts and OTTI losses recognized in AOCI. In addition, this column includes
| remaining unrealized gain or loss amounts on securities that were transferred to an HTM designation in the first quarter of 2009 for those
| securities that are in a net unrealized/unrecognized loss position.
2 | Unrecognized gains represent fair value fluctuations from the later of: (i) the date a security is designated as HTM; or (ii)
| the date that an OTTI charge is recognized on an HTM security.
As evidenced by the table below, our unrealized/unrecognized loss positions improved by $2.6 million as of March 31, 2012 compared to December 31, 2011 as follows:
($ in thousands) March 31, 2012 |  | December 31, 2011
Number of Issues |  | % of Market/Book |  | Unrealized Unrecognized Loss |  | Number of Issues |  | % of Market/Book |  | Unrealized Unrecognized Loss
153 |  | 80% - 99% | $ | 6,071 |  | 140 |  | 80% - 99% | $ | 10,166
1 |  | 60% - 79% |  | 1,516 |  | - |  | 60% - 79% |  | -
1 |  | 40% - 59% |  | 442 |  | 1 |  | 40% - 59% |  | 469
- |  | 20% - 39% |  | - |  | - |  | 20% - 39% |  | -
- |  | 0% - 19% |  | - |  | - |  | 0% - 19% |  | -
|  |  | $ | 8,029 |  |  |  |  | $ | 10,635
## ## We have reviewed the securities in the tables above in accordance with our OTTI policy, as described in Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of our 2011 Annual Report. ## At March 31, 2012, we had 155 securities in an aggregate unrealized/unrecognized loss position of $8.0 million, $4.4 million of which have been in a loss position for more than 12 months. Securities with non-credit OTTI impairments comprised $2.6 million of the $4.4 million balance, with the remainder related to securities that were, on average, 4% impaired compared to their amortized cost. At December 31, 2011, we had 141 securities in an aggregate unrealized/unrecognized loss position of $10.6 million, $4.9 million of which had been in a loss position for more than 12 months. Non-credit OTTI impairments comprised $2.1 million of the $4.9 million balance, with the remainder related to securities that were, on average, 6% impaired compared to their amortized cost. We do not have the intent to sell any securities in an unrealized/unrecognized loss position nor do we believe we will be required to sell these securities, and therefore we have concluded that they are temporarily impaired as of March 31, 2012. This conclusion reflects our current judgment as to the financial position and future prospects of the entity that issued the investment security and underlying collateral. If our judgment about an individual security changes in the future, we may ultimately record a credit loss after having originally concluded that one did not exist, which could have a material impact on our net income and financial position in future periods. (d) Fixed maturity securities at March 31, 2012, by contractual maturity, are shown below. Mortgage-backed securities are included in the maturity tables using the estimated average life of each security. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Listed below are HTM fixed maturity securities at March 31, 2012:
($ in thousands) |  | Carrying Value |  | Fair Value
Due in one year or less | $ | 81,754 |  | 86,784
Due after one year through five years |  | 495,428 |  | 525,309
Due after five years through 10 years |  | 83,147 |  | 91,452
Due after 10 years |  | 6,863 |  | 8,186
Total HTM fixed maturity securities | $ | 667,192 |  | 711,731
Listed below are AFS fixed maturity securities at March 31, 2012:
($ in thousands) |  | Fair Value
Due in one year or less | $ | 321,292
Due after one year through five years |  | 1,876,518
Due after five years through 10 years |  | 810,211
Due after 10 years |  | 26,490
Total AFS fixed maturity securities | $ | 3,034,511
(e) The following table outlines a summary of our other investment portfolio by strategy and the remaining commitment amount associated with each strategy:
Other Investments |  | Carrying Value | March 31,
|  | March 31, | December 31, | 2012 Remaining
($ in thousands) |  | 2012 | 2011 | Commitment
Alternative Investments |  |  |  |
Secondary private equity | $ | 29,761 | 30,114 | 8,590
Energy/power generation |  | 24,149 | 25,913 | 10,420
Private equity |  | 23,175 | 21,736 | 4,389
Distressed debt |  | 15,081 | 16,953 | 3,074
Real estate |  | 12,825 | 13,767 | 10,506
Mezzanine financing |  | 9,167 | 8,817 | 15,256
Venture capital |  | 7,327 | 7,248 | 800
Total alternative investments |  | 121,485 | 124,548 | 53,035
Other securities |  | 3,655 | 3,753 | 1,235
Total other investments | $ | 125,140 | 128,301 | 54,270
## The carrying value of our other investments decreased by $3.2 million compared to year end 2011. The carrying value was impacted in First Quarter 2012 by distributions of $8.1 million, partially offset by income of $2.0 million and additional contributions of $3.0 million under our existing commitments. For a description of our seven alternative investment strategies outlined above, as well as redemption, restrictions, and fund liquidations, refer to Note 5. "Investments" in Item 8. "Financial Statements and Supplementary Data." of our 2011 Annual Report. The following table sets forth aggregated summarized financial information for the partnerships in our alternative investment portfolio. The last line of the table below reflects our share of the aggregate income, which is the portion included in our consolidated Financial Statements. As the majority of these investments report results to us on a quarter lag, the summarized financial statement information for the three-month periods ended December 31 is as follows:
Income Statement Information |  |  |  |
Quarter ended December 31, |  |  |  |
($ in millions) |  | 2011 |  | 2010
Net investment income | $ | 36.1 |  | 154.2
Realized gains (losses) |  | 750.7 |  | (192.3)
Net change in unrealized (depreciation) appreciation |  | (487.4) |  | 1,464.2
Net income | $ | 299.4 |  | 1,426.1
Selective's insurance subsidiaries' net income | $ | 2.0 |  | 11.6
(f) At March 31, 2012, we had 27 fixed maturity securities, with a carrying value of $63.4 million, pledged as collateral for our outstanding borrowing with the Federal Home Loan Bank of Indianapolis ("FHLBI"). This borrowing, which has an outstanding principal balance of $58.0 million, is included in "Notes payable" on our Consolidated Balance Sheets. In accordance with the terms of our agreement with the FHLBI, we retain all rights regarding the collateral securities, which are included in the "U.S. government and government agencies," "RMBS," and "CMBS" classifications of our AFS fixed maturity securities portfolio. (g) The components of net investment income earned were as follows:
|  | Quarter ended March 31,
($ in thousands) |  | 2012 |  | 2011
Fixed maturity securities | $ | 31,350 |  | 33,123
Equity securities |  | 1,237 |  | 317
Short-term investments |  | 38 |  | 62
Other investments |  | 2,000 |  | 11,641
Miscellaneous income |  | 39 |  | 25
Investment expenses |  | (2,036) |  | (1,695)
Net investment income earned | $ | 32,628 |  | 43,473
Net investment income earned, before tax, decreased by $10.8 million for First Quarter 2012 compared to First Quarter 2011, primarily driven by a decrease of $9.3 million in income from our alternative investments within our other investment portfolio. Our alternative investments, which are accounted for under the equity method, primarily consist of investments in limited partnerships, the majority of which report results to us on a one quarter lag. ## h) The following tables summarize OTTI by asset type for the periods indicated:
First Quarter 2012 ## ## ## ($ in thousands) |  | Gross |  | Included in Other Comprehensive Income ("OCI") |  | Recognized in Earnings
Fixed maturity securities |  |  |  |  |  |
ABS | $ | 32 |  | - |  | 32
CMBS |  | 108 |  | - |  | 108
RMBS |  | (54) |  | (164) |  | 110
Total fixed maturity securities |  | 86 |  | (164) |  | 250
Equity securities |  | 171 |  | - |  | 171
OTTI losses | $ | 257 |  | (164) |  | 421
##
First Quarter 2011 ## ## ## ($ in thousands) |  | Gross |  | ## Included in OCI |  | Recognized in Earnings
Fixed maturity securities |  |  |  |  |  |
Obligations of state and political |  |  |  |  |  |
subdivisions | $ | 17 |  | - |  | 17
Corporate securities |  | 244 |  | - |  | 244
CMBS |  | 74 |  | (256) |  | 330
RMBS |  | 197 |  | 158 |  | 39
OTTI losses | $ | 532 |  | (98) |  | 630
The following table set forth, for the periods indicated, credit loss impairments on fixed maturity securities for which a portion of the OTTI charge was recognized in OCI, and the corresponding changes in such amounts:
|  | Quarter ended March 31,
($ in thousands) |  | 2012 | 2011
Balance, beginning of year | $ | 6,602 | 17,723
Addition for the amount related to credit loss for which an OTTI was not previously recognized |  | - | -
Reductions for securities sold during the period |  | - | -
Reductions for securities for which the amount previously recognized in OCI was recognized in |  |  |
earnings because of intention or potential requirement to sell before recovery of amortized cost |  | - | -
Reductions for securities for which the entire amount previously recognized in OCI was recognized in |  |  |
earnings due to a decrease in cash flows expected |  | - | (3,582)
Additional increases to the amount related to credit loss for which an OTTI was previously recognized |  | 109 | 227
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected |  |  |
to be collected |  | - | -
Balance, end of period | $ | 6,711 | 14,368
(i) The components of net realized gains, excluding OTTI charges, were as follows:
|  | Quarter ended |
|  | March 31, |
($ in thousands) |  | 2012 |  | 2011 |
HTM fixed maturity securities |  |  |  |  |
Gains | $ | 153 |  | 1 |
Losses |  | (81) |  | (214) |
AFS fixed maturity securities |  |  |  |  |
Gains |  | 405 |  | 407 |
Losses |  | (43) |  | (7) |
AFS equity securities |  |  |  |  |
Gains |  | 4,775 |  | 6,203 |
Losses |  | (428) |  | - |
Short-term investments |  |  |  |  |
Gains |  | - |  | - |
Losses |  | (2) |  | - |
Total other net realized investment gains |  | 4,779 |  | 6,390 |
Total OTTI charges recognized in earnings |  | (421) |  | (630) |
Total net realized gains (losses) | $ | 4,358 |  | 5,760 |
Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold. Proceeds from the sale of AFS securities were $71.8 million in First Quarter 2012 and $71.7 million in First Quarter 2011. In addition to calls and maturities, the realized gain, excluding OTTI charges, in First Quarter 2012 was driven primarily by the sale of AFS equity securities for proceeds of $57.5 million with realized gains of $4.3 million due to a rebalancing of securities within the equity securities portfolio. Net realized gains, excluding OTTI charges, in First Quarter 2011 was driven by the sale of AFS equity securities for proceeds of $56.8 million with realized gains of $6.2 million due to a reallocation of the equity securities portfolio into a high dividend yield equities strategy.

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