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

Amortized

Gains

Carrying

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)

6,682

(389)

241

ABS

2,834

(968)

748

CMBS

2,691

(1,252)

749

Subtotal

1,842

(88)

12,207

(2,609)

1,738

Total AFS and HTM

231,222

(3,753)

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.

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.