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Fair Value Measurements | 6 Months Ended
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Jun. 30, 2012
Fair Value Disclosures [Abstract] |
Fair Value Measurements | Fair Value Measurements The following table presents the carrying amounts and estimated fair values of our financial instruments as of June 30, 2012 and December 31, 2011:
|  | June 30, 2012 |  | December 31, 2011
($ in thousands) |  | Carrying Amount |  | Fair Value |  | Carrying Amount |  | Fair Value
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |  |  |
HTM |  | $ | 643,501 |  |  | 687,981 |  |  | 712,348 |  |  | 758,043 |
AFS |  | 3,123,006 |  |  | 3,123,006 |  |  | 2,897,373 |  |  | 2,897,373 |
Equity securities, AFS |  | 148,117 |  |  | 148,117 |  |  | 157,355 |  |  | 157,355 |
Short-term investments |  | 135,823 |  |  | 135,823 |  |  | 217,044 |  |  | 217,044 |
Receivable for proceeds related to sale of Selective HR Solutions (“Selective HR”) |  | 2,894 |  |  | 2,894 |  |  | 3,212 |  |  | 3,212 |
Financial Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Notes payable: |  |  |  |  |  |  |  |  |  |  |  |
7.25% Senior Notes |  | 49,910 |  |  | 59,534 |  |  | 49,908 |  |  | 51,111 |
6.70% Senior Notes |  | 99,463 |  |  | 112,569 |  |  | 99,452 |  |  | 113,195 |
7.50% Junior Notes |  | 100,000 |  |  | 100,880 |  |  | 100,000 |  |  | 100,360 |
2.90% borrowings from FHLBI |  | 13,000 |  |  | 13,683 |  |  | 13,000 |  |  | 13,759 |
1.25% borrowings from FHLBI |  | 45,000 |  |  | 45,121 |  |  | 45,000 |  |  | 44,629 |
Total notes payable |  | $ | 307,373 |  |  | 331,787 |  |  | 307,360 |  |  | 323,054 |
The techniques used to value our financial assets are as follows:
• | For valuations of a large portion of our equity securities portfolio as well as U.S. Treasury notes held in our fixed maturity securities portfolio, we receive prices from an independent pricing service that are based on observable market transactions. We validate these prices against a second external pricing service, and if established market value comparison thresholds are breached, further analysis is performed, in conjunction with our external investment managers, to determine the price to be used. These securities are classified as Level 1 in the fair value hierarchy.
• | For approximately 95% of our fixed maturity securities portfolio, we utilize a market approach, using primarily matrix pricing models prepared by external pricing services. Matrix pricing models use mathematical techniques to value debt securities by relying on the securities relationship to other benchmark quoted securities, and not relying exclusively on quoted prices for specific securities, as the specific securities are not always frequently traded. As a matter of policy, we consistently use one pricing service as our primary source and secondary pricing services if prices are not available from the primary pricing service. In conjunction with our external investment portfolio managers, fixed maturity securities portfolio pricing is reviewed for reasonableness in the following ways: (i) comparing positions traded directly by the external investment portfolio managers to prices received from the third-party pricing services; (ii) comparing the primary vendor pricing to other third-party pricing services as well as benchmark indexed pricing; (iii) comparing market value fluctuations between months for reasonableness; and (iv) reviewing stale prices. If further analysis is needed, a challenge is sent to the primary pricing service for review and confirmation of the price. In addition to the tests described above, management also selects a sample of prices for a comparison to a secondary price source. Historically, we have not experienced significant variances in prices, and therefore, we have consistently used our primary pricing service. These prices are typically Level 2 in the fair value hierarchy.
• | For the small portion of our fixed maturity securities portfolio that we cannot price using our primary service, we typically use non-binding broker quotes. These prices are from various broker/dealers that utilize bid or ask prices, or benchmarks to indices, in measuring the fair value of a security. For the small portion of non-public equity securities that we hold, we typically receive prices from a third party pricing service or through statements provided by the security issuer. In conjunction with our external investment portfolio managers, these fair value measurements are reviewed for reasonableness. This review typically includes an analysis of price fluctuations between months with variances over established thresholds being analyzed further. These prices are generally classified as Level 3 in the fair value hierarchy, as the inputs cannot be corroborated by observable market data.
• | Short-term investments are carried at cost, which approximates fair value. Given the liquid nature of our short-term investments, we generally validate their fair value by way of active trades within approximately one week of the financial statement close. These securities are classified as Level 1 in the fair value hierarchy.
• | Our investments in other miscellaneous securities are generally accounted for under the equity method. Investments in tax credits are carried under the effective yield method of accounting.
• | The fair value of the receivable for proceeds related to the 2009 sale of Selective HR is estimated using a discounted cash flow analysis, which includes our judgment regarding future worksite life generation and retention assumptions. These assumptions are derived based on our historical experience modified to reflect current and anticipated future trends. Proceeds related to the sale are scheduled to be received over a 10-year period based on the ability of the purchaser to retain and generate new worksite lives though our independent agency distribution channel. We have concluded that these proceeds are not directly related to the operations of Selective HR since we have no continuing involvement with the operations of this company and have no continuing cash flows other than these proceeds. This receivable is classified as Level 3 in the fair value hierarchy.
The techniques used to value our financial liabilities are as follows:
• | The fair values of the 7.25% Senior Notes due November 15, 2034, the 6.70% Senior Notes due November 1, 2035, and the 7.50% Junior Subordinated Notes due September 27, 2066 are based on quoted market prices. These prices are typically Level 1 in the fair value hierarchy.
• | The fair value of the 2.90% and 1.25% borrowings from the FHLBI are estimated using a discounted cash flow analysis based on a current borrowing rate provided by the FHLBI consistent with the remaining term of the borrowing. These prices are typically Level 2 in the fair value hierarchy.
The following tables provide quantitative disclosures of our financial assets that were measured at fair value at June 30, 2012 and December 31, 2011:
June 30, 2012 |  |  |  | Fair Value Measurements Using
($ in thousands) |  | Assets Measured at Fair Value at 6/30/12 |  | Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1)1 |  | Significant Other Observable Inputs (Level 2)1 |  | Significant Unobservable Inputs (Level 3)
Description |  |  |  |  |  |  |  |  |  |  |  |
Measured on a recurring basis: |  |  |  |  |  |  |  |  |  |  |  |
U.S. government and government agencies 2 |  | $ | 287,996 |  |  | 129,555 |  |  | 138,275 |  |  | 20,166 |
Foreign government |  | 42,782 |  |  | — |  |  | 42,782 |  |  | — |
Obligations of states and political subdivisions |  | 736,501 |  |  | — |  |  | 736,501 |  |  | — |
Corporate securities |  | 1,348,747 |  |  | — |  |  | 1,345,676 |  |  | 3,071 |
ABS |  | 94,809 |  |  | — |  |  | 94,809 |  |  | — |
CMBS |  | 118,043 |  |  | — |  |  | 113,368 |  |  | 4,675 |
RMBS |  | 494,128 |  |  | — |  |  | 494,128 |  |  | — |
Total AFS fixed maturity securities |  | 3,123,006 |  |  | 129,555 |  |  | 2,965,539 |  |  | 27,912 |
Equity securities |  | 148,117 |  |  | 144,510 |  |  | — |  |  | 3,607 |
Short-term investments |  | 135,823 |  |  | 135,823 |  |  | — |  |  | — |
Receivable for proceeds related to sale of Selective HR |  | 2,894 |  |  | — |  |  | — |  |  | 2,894 |
Total assets |  | $ | 3,409,840 |  |  | 409,888 |  |  | 2,965,539 |  |  | 34,413 |
December 31, 2011 |  |  |  | Fair Value Measurements Using
($ in thousands) |  | Assets Measured at Fair Value at 12/31/11 |  | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1)1 |  | Significant Other Observable Inputs (Level 2)1 |  | Significant Unobservable Inputs (Level 3)
Description |  |  |  |  |  |  |  |  |  |  |  |
Measured on a recurring basis: |  |  |  |  |  |  |  |  |  |  |  |
U.S. government and government agencies 2 |  | $ | 353,796 |  |  | 126,475 |  |  | 205,580 |  |  | 21,741 |
Foreign government |  | 34,173 |  |  | — |  |  | 34,173 |  |  | — |
Obligations of states and political subdivisions |  | 622,659 |  |  | — |  |  | 622,659 |  |  | — |
Corporate securities |  | 1,213,310 |  |  | — |  |  | 1,210,707 |  |  | 2,603 |
ABS |  | 78,949 |  |  | — |  |  | 78,949 |  |  | — |
CMBS |  | 112,598 |  |  | — |  |  | 112,244 |  |  | 354 |
RMBS |  | 481,888 |  |  | — |  |  | 481,888 |  |  | — |
Total AFS fixed maturity securities |  | 2,897,373 |  |  | 126,475 |  |  | 2,746,200 |  |  | 24,698 |
Equity securities |  | 157,355 |  |  | 157,355 |  |  | — |  |  | — |
Short-term investments |  | 217,044 |  |  | 217,044 |  |  | — |  |  | — |
Receivable for proceeds related to sale of Selective HR |  | 3,212 |  |  | — |  |  | — |  |  | 3,212 |
Total assets |  | $ | 3,274,984 |  |  | 500,874 |  |  | 2,746,200 |  |  | 27,910 |
1 | There were no transfers of securities between Level 1 and Level 2 in Six Months 2012 and in Six Months 2011.
2 | U.S. government includes corporate securities fully guaranteed by the FDIC.
The following table provides a summary of the changes in the fair value of securities measured using Level 3 inputs and related quantitative information as of June 30, 2012:
Six Months 2012 |  |  |  |  |  |  |  |  |  |  |  |
($ in thousands) |  | Government |  | Corporate |  | CMBS |  | Equity |  | Receivable for Proceeds Related to Sale of Selective HR |  | Total
Fair value, December 31, 2011 |  | $ | 21,741 |  |  | 2,603 |  |  | 354 |  |  | — |  |  | 3,212 |  |  | 27,910 |
Total net (losses) gains for the period included in: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
OCI 1 |  | 270 |  |  | 107 |  |  | 128 |  |  | — |  |  | — |  |  | 505 |
Net income 2,3 |  | (107 | ) |  | — |  |  | — |  |  | — |  |  | 127 |  |  | 20 |
Purchases |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Sales |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Issuances |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Settlements |  | (1,738 | ) |  | (427 | ) |  | — |  |  | — |  |  | (445 | ) |  | (2,610 | )
Transfers into Level 3 |  | — |  |  | 788 |  |  | 4,193 |  |  | 3,607 |  |  | — |  |  | 8,588 |
Transfers out of Level 3 |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Fair value, June 30, 2012 |  | $ | 20,166 |  |  | 3,071 |  |  | 4,675 |  |  | 3,607 |  |  | 2,894 |  |  | 34,413 |
1 Amounts are reported in “Unrealized holding gains arising during period” on the Consolidated Statements of Comprehensive Income. 2 Amounts are reported in “Net realized gains (losses)” for realized gains and losses and “Net investment income earned” for amortization of securities on the Consolidated Statements of Income. 3 Amounts are reported in “Other income” for the receivable related to the sale of Selective HR on the Consolidated Statements of Income, and are related to interest accretion on the receivable. Fixed maturity securities transfered into Level 3 were securities that had previously been classified as HTM and therefore not measured at fair value. Recent downgrades in the securities' ratings in Second Quarter 2012 resulted in a transfer into the AFS category with the securities now being measured at fair value as of June 30, 2012. The transfer of equity securities into Level 3 were driven primarily by the nature of the quotes used at the valuation date. As discussed above, the fair value of our Level 3 fixed maturity securities are typically obtained through non-binding broker quotes, which we review for reasonableness. We also review for reasonableness the fair values received on our non-publicly traded equity securities. The receivable related to the sale of Selective HR is also a Level 3 fair value measurement using unobservable inputs, the most significant of which is our assumption regarding the retention of business. If this assumption were to change by +/-10%, the value of this receivable would increase/decrease by approximately $0.1 million. The following table provides a summary of the changes in the fair value of securities measured using Level 3 inputs in 2011:
2011 |  |  |  |  |  |  |  |  |  |
($ in thousands) |  | Government |  | Corporate |  | CMBS |  | Receivable for Proceeds Related to Sale of Selective HR |  | Total
Fair value, December 31, 2010 |  | $ | — |  |  | — |  |  | 185 |  |  | 5,002 |  |  | 5,187 |
Total net (losses) gains for the period included in: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
OCI 1 |  | — |  |  | — |  |  | 507 |  |  | — |  |  | 507 |
Net income 2,3 |  | — |  |  | — |  |  | (322 | ) |  | (638 | ) |  | (960 | )
Purchases |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Sales |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Issuances |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Settlements |  | — |  |  | — |  |  | (16 | ) |  | (1,152 | ) |  | (1,168 | )
Transfers into Level 3 |  | 21,741 |  |  | 2,603 |  |  | — |  |  | — |  |  | 24,344 |
Transfers out of Level 3 |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Fair value, December 31, 2011 |  | $ | 21,741 |  |  | 2,603 |  |  | 354 |  |  | 3,212 |  |  | 27,910 |
1 Amounts are reported in “Other net unrealized gains on investment securities, net of deferred income tax” on the Consolidated Statements of Stockholders’ Equity in our 2011 Annual Report. 2 Amounts are reported in “Net realized gains (losses)” for realized gains and losses and “Net investment income earned” for amortization for the CMBS securities on the Consolidated Statements of Income in our 2011 Annual Report. 3 Amounts are reported in either “Loss on disposal of discontinued operations, net of tax” or “Other income” for the receivable related to the sale of Selective HR on the Consolidated Statements of Income. Amounts in “Loss on disposal of discontinued operations, net of tax” related to charges to reduce the fair value of our receivable, and amounts in “Other income” related to interest accretion on the receivable in our 2011 Annual Report. The transfers of the government and corporate securities into Level 3 classification at December 31, 2011 were primarily the result of broker-priced securities being transferred from an HTM to an AFS designation in 2011. The following tables provide quantitative information regarding our financial assets and liabilities that were disclosed at fair value at June 30, 2012:
June 30, 2012 |  |  |  | Fair Value Measurements Using
($ in thousands) |  | Assets/ Liabilities Disclosed at Fair Value at 6/30/12 |  | Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |
HTM: |  |  |  |  |  |  |  |  |  |  |  |
Foreign government |  | $ | 5,439 |  |  | — |  |  | 5,439 |  |  | — |
Obligations of states and political subdivisions |  | 599,286 |  |  | — |  |  | 599,286 |  |  | — |
Corporate securities |  | 61,977 |  |  | — |  |  | 57,049 |  |  | 4,928 |
ABS |  | 7,537 |  |  | — |  |  | 5,945 |  |  | 1,592 |
CMBS |  | 13,742 |  |  | — |  |  | 13,742 |  |  | — |
Total HTM fixed maturity securities |  | $ | 687,981 |  |  | — |  |  | 681,461 |  |  | 6,520 |
Financial Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Notes payable: |  |  |  |  |  |  |  |  |  |  |  |
7.25% Senior Notes |  | $ | 59,534 |  |  | 59,534 |  |  | — |  |  | — |
6.70% Senior Notes |  | 112,569 |  |  | 112,569 |  |  | — |  |  | — |
7.50% Junior Notes |  | 100,880 |  |  | 100,880 |  |  | — |  |  | — |
2.90% borrowings from FHLBI |  | 13,683 |  |  | — |  |  | 13,683 |  |  | — |
1.25% borrowings from FHLBI |  | 45,121 |  |  | — |  |  | 45,121 |  |  | — |
Total notes payable |  | $ | 331,787 |  |  | 272,983 |  |  | 58,804 |  |  | — |

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=6925170&loc=d3e19296-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 159 -Paragraph 17-22, 27, 28 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. 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