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Investments
 6 Months Ended
Jun. 30, 2012
Investments [Abstract]  
Investments
Investments
(a) The amortized cost, carrying value, unrealized and unrecognized holding gains and losses, and fair values of held-to-maturity (“HTM”) fixed maturity securities were as follows:
 
June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Amortized Cost
 
Net
 Unrealized Gains
 (Losses)
 
Carrying
Value
 
Unrecognized
 Holding
Gains
 
Unrecognized Holding
 Losses
 
Fair
Value
Foreign government
 
$
5,292

 
252

 
5,544

 
—

 
(105
)
 
5,439

Obligations of state and political subdivisions
 
557,338

 
9,310

 
566,648

 
32,642

 
(4
)
 
599,286

Corporate securities
 
57,947

 
(1,299
)
 
56,648

 
5,329

 
—

 
61,977

Asset-backed securities (“ABS”)
 
7,579

 
(1,265
)
 
6,314

 
1,223

 
—

 
7,537

Commercial mortgage-backed securities (“CMBS”)
 
9,699

 
(1,352
)
 
8,347

 
5,395

 
—

 
13,742

Total HTM fixed maturity securities
 
$
637,855

 
5,646

 
643,501

 
44,589

 
(109
)
 
687,981


December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Amortized Cost
 
Net
 Unrealized Gains
 (Losses)
 
Carrying
Value
 
Unrecognized
 Holding
Gains
 
Unrecognized Holding
 Losses
 
Fair
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 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 2.8 years as of June 30, 2012.
 
During Six Months 2012, five securities with a carrying value of $7.9 million and a net unrecognized gain position of $1.0 million were reclassified from an HTM designation to an available-for-sale (“AFS”) designation due to credit rating downgrades by Moody’s Investors Services ("Moody's") and Standard and Poor’s ("S&P") Financial Services. These unexpected rating downgrades raised significant concerns about the issuers’ credit worthiness, which changed our intention to hold these securities to maturity.

(b) The cost/amortized cost, unrealized gains (losses), and fair value of AFS securities were as follows:
 
June 30, 2012
 
 
 
 
 
 
 
 
($ in thousands)
 
Cost/
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
U.S. government and government agencies1
 
$
268,949

 
19,050

 
(3
)
 
287,996

Foreign government
 
41,557

 
1,537

 
(312
)
 
42,782

Obligations of states and political subdivisions
 
695,158

 
42,307

 
(964
)
 
736,501

Corporate securities
 
1,283,114

 
66,588

 
(955
)
 
1,348,747

ABS
 
93,031

 
1,785

 
(7
)
 
94,809

CMBS2
 
115,965

 
4,882

 
(2,804
)
 
118,043

Residential mortgage-backed
securities (“RMBS”)3
 
477,045

 
17,636

 
(553
)
 
494,128

AFS fixed maturity securities
 
2,974,819

 
153,785

 
(5,598
)
 
3,123,006

AFS equity securities
 
130,257

 
20,647

 
(2,787
)
 
148,117

Total AFS securities
 
$
3,105,076

 
174,432

 
(8,385
)
 
3,271,123

 
December 31, 2011
 
 
 
 
 
 
 
 
($ in thousands)
 
Cost/
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
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 $14.2 million at June 30, 2012 and $76.5 million at December 31, 2011.
2 CMBS includes government guaranteed agency securities with a fair value of $67.0 million at June 30, 2012 and $72.9 million at December 31, 2011.
3 RMBS includes government guaranteed agency securities with a fair value of $102.6 million at June 30, 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 June 30, 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:

June 30, 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
 
$
8,158

 
(3
)
 
—

 
—

Foreign government
 
4,758

 
(312
)
 
—

 
—

Obligations of states and political subdivisions
 
78,115

 
(958
)
 
511

 
(6
)
Corporate securities
 
46,939

 
(434
)
 
13,924

 
(521
)
ABS
 
2,000

 
(2
)
 
630

 
(5
)
CMBS
 
9,353

 
(39
)
 
13,427

 
(2,765
)
RMBS
 
3,183

 
(9
)
 
14,109

 
(544
)
Total fixed maturity securities
 
152,506

 
(1,757
)
 
42,601

 
(3,841
)
Equity securities
 
32,036

 
(2,787
)
 
—

 
—

Subtotal
 
$
184,542

 
(4,544
)
 
42,601

 
(3,841
)
 
 
 
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
 
$
1,820

 
(70
)
 
63

 
4,033

 
(283
)
 
165

Corporate securities
 
5,995

 
(129
)
 
120

 
—

 
—

 
—

ABS
 
—

 
—

 
—

 
2,800

 
(927
)
 
707

Subtotal
 
$
7,815

 
(199
)
 
183

 
6,833

 
(1,210
)
 
872

Total AFS and HTM
 
$
192,357

 
(4,743
)
 
183

 
49,434

 
(5,051
)
 
872


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 $1.9 million as of June 30, 2012 compared to December 31, 2011 as follows:

($ in thousands)
 
 
June 30, 2012
 
December 31, 2011
Number of
Issues
% of Market/Book
Unrealized
Unrecognized Loss
 
Number of
Issues
% of
Market/Book
Unrealized
Unrecognized
Loss
141

80% - 99%
$
6,817

 
140

80% - 99%
$
10,166

4

60% - 79%
1,580

 
—

60% - 79%
—

1

40% - 59%
342

 
1

40% - 59%
469

—

20% - 39%
—

 
—

20% - 39%
—

—

0% - 19%
—

 
—

0% - 19%
—

 

 
$
8,739

 
 

 
$
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 June 30, 2012, we had 146 securities in an aggregate unrealized/unrecognized loss position of $8.7 million, $4.2 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 $4.2 million balance, with the remainder related to securities that were, on average, 4% impaired compared to their amortized cost. Three of these securities are experiencing immaterial principal and interest shortfalls.
  
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 June 30, 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 June 30, 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 June 30, 2012:
($ in thousands)
 
Carrying Value
 
Fair Value
Due in one year or less
 
$
98,022

 
103,123

Due after one year through five years
 
464,672

 
494,584

Due after five years through 10 years
 
73,941

 
82,051

Due after 10 years
 
6,866

 
8,223

Total HTM fixed maturity securities
 
$
643,501

 
687,981

 
Listed below are AFS fixed maturity securities at June 30, 2012:
($ in thousands)
 
Fair Value
Due in one year or less
 
$
352,423

Due after one year through five years
 
1,861,652

Due after five years through 10 years
 
841,420

Due after 10 years
 
67,511

Total AFS fixed maturity securities
 
$
3,123,006

  
(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
 
June 30,
2012
($ in thousands)
 
June 30,
2012
 
December 31,
2011
 
Remaining Commitment
Alternative Investments
 
 

 
 

 
 

Secondary private equity
 
$
29,596

 
30,114

 
8,651

Private equity
 
23,739

 
21,736

 
3,984

Energy/power generation
 
21,578

 
25,913

 
10,383

Distressed debt
 
14,702

 
16,953

 
2,986

Real estate
 
12,961

 
13,767

 
10,473

Mezzanine financing
 
11,146

 
8,817

 
23,435

Venture capital
 
7,856

 
7,248

 
800

Total alternative investments
 
121,578

 
124,548

 
60,712

Other securities
 
3,962

 
3,753

 
1,494

Total other investments
 
$
125,540

 
128,301

 
62,206


 
The carrying value of our other investments decreased by $2.8 million compared to year end 2011. The carrying value was impacted by distributions of $13.9 million, partially offset by income of $5.0 million and additional contributions of $6.4 million. These contributions included $4.6 million under our previously existing commitments and $1.8 million under one of two new alternative investment limited partnerships that we entered into during Second Quarter 2012. The remaining commitment on these two new mezzanine financing limited partnerships amounted to $8.2 million at June 30, 2012. The two new investments contain redemption restrictions and fund liquidation characteristics that are consistent with our other alternative investments. For a description of our seven alternative investment strategies, as well as information regarding 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 Financial Statements. As the majority of these investments report results to us on a quarter lag, the summarized financial statement information for the three and six-month periods ended March 31 is as follows:

Income Statement Information
 
 
 
 
 
 
 
 
 
 
Quarter ended
March 31,
 
Six Months ended
March 31,
($ in millions)
 
2012
 
2011
 
2012
 
2011
Net investment income
 
$
54.0

 
132.6

 
90.1

 
286.8

Realized gains (losses)
 
234.6

 
355.3

 
985.3

 
163.0

Net change in unrealized (depreciation) appreciation
 
53.4

 
608.3

 
(434.0
)
 
2,072.5

Net income
 
$
342.0

 
1,096.2

 
641.4

 
2,522.3

Selective’s insurance subsidiaries’ other investments net income
 
$
3.0

 
7.9

 
5.0

 
19.5

 
(f) At June 30, 2012, we had 29 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 June 30,
 
Six Months ended June 30,
($ in thousands)
 
2012
 
2011
 
2012
 
2011
Fixed maturity securities
 
$
31,759


32,752


63,109


65,875

Equity securities
 
1,280


785


2,517


1,102

Short-term investments
 
29


33


67


95

Other investments
 
2,963


7,900


4,963


19,541

Miscellaneous income
 
25


22


64


47

Investment expenses
 
(2,050
)

(2,147
)

(4,086
)

(3,842
)
Net investment income earned
 
$
34,006

 
39,345

 
66,634

 
82,818

  
Net investment income earned, before tax, decreased by $5.3 million for Second Quarter 2012 compared to Second Quarter 2011, and decreased by $16.2 million for Six Months 2012 compared to Six Months 2011. These decreases were primarily driven by lower income from alternative investments within our other investment portfolio of $4.7 million and $14.1 million in Second Quarter 2012 and Six Months 2012, respectively. 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:
Second Quarter 2012
 
 
 
 
 
 
($ in thousands) 
 
Gross 
 
Included in Other
Comprehensive
Income (“OCI”)
 
Recognized in
Earnings
Fixed maturity securities
 
 

 
 

 
 

ABS
 
$
30

 
—

 
30

RMBS
 
10

 
(54
)
 
64

OTTI losses
 
$
40

 
(54
)
 
94

 
Second Quarter 2011
 
 
 
 
 
 
($ in thousands)
 
Gross
 
Included in OCI
 
Recognized in Earnings
Fixed maturity securities
 
 

 
 

 
 

CMBS
 
$
(260
)
 
(402
)
 
142

RMBS
 
97

 
70

 
27

OTTI losses
 
$
(163
)
 
(332
)
 
169


Six Months 2012
 
 
 
 
 
 
($ in thousands)
 
Gross
 
Included in OCI
 
Recognized in Earnings
Fixed maturity securities
 
 

 
 

 
 

ABS
 
$
62

 
—

 
62

CMBS
 
108

 
—

 
108

RMBS
 
(44
)
 
(218
)
 
174

Total fixed maturity securities
 
126

 
(218
)
 
344

Equity securities
 
171

 
—

 
171

OTTI losses
 
$
297

 
(218
)
 
515

Six Months 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
 
(186
)
 
(658
)
 
472

RMBS
 
294

 
228

 
66

OTTI losses
 
$
369

 
(430
)
 
799



The following tables 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 June 30,
($ in thousands)
 
2012
 
2011
Balance, beginning of period
 
$
6,711

 
14,368

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
 
—

 
(372
)
Additional increases to the amount related to credit loss for which an OTTI was previously recognized
 
64

 
28

Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected
 
—

 
—

Balance, end of period
 
$
6,775

 
14,024


 
 
Six Months ended
June 30,
($ in thousands)
 
2012
 
2011
Balance, beginning of period
 
$
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
 
—

 
(3,954
)
Additional increases to the amount related to credit loss for which an OTTI was previously recognized
 
173

 
255

Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected
 
—

 
—

Balance, end of period
 
$
6,775

 
14,024


 
(i)The components of net realized gains, excluding OTTI charges, were as follows:
 
 
Quarter ended June 30,
 
Six Months ended
June 30,
($ in thousands)
 
2012
 
2011
 
2012
 
2011
HTM fixed maturity securities
 
 

 
 

 
 

 
 

Gains
 
$
2

 
8

 
155

 
9

Losses
 
(25
)
 
(108
)
 
(106
)
 
(322
)
AFS fixed maturity securities
 
 

 
 

 
 

 
 

Gains
 
368

 
1,947

 
773

 
2,354

Losses
 
(74
)
 
—

 
(117
)
 
(7
)
AFS equity securities
 
 

 
 

 
 

 
 

Gains
 
—

 
468

 
4,775

 
6,671

Losses
 
—

 
—

 
(428
)
 
—

Short-term investments
 
 

 
 

 
 

 
 

Losses
 
—

 
—

 
(2
)
 
—

Other investments
 
 
 
 
 
 
 
 
     Gains
 
1


—


1


—

Total other net realized investment gains
 
272


2,315


5,051


8,705

Total OTTI charges recognized in earnings
 
(94
)

(169
)

(515
)

(799
)
Total net realized gains
 
$
178


2,146


4,536


7,906

 
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 $24.1 million in Second Quarter 2012 and $95.9 million in Six Months 2012. In addition to calls and maturities, the realized gain, excluding OTTI charges, in Six Months 2012 was driven primarily by the sale of AFS equity securities for proceeds of $57.5 million with net realized gains of $4.3 million due to a rebalancing of the equity securities portfolio.

Proceeds from the sale of AFS securities were $52.1 million in Second Quarter 2011 and $123.8 million in Six Months 2011. In addition to calls and maturities and certain bond sales, Six Months 2011 net realized gains, excluding OTTI charges, were driven by the sale of AFS equity securities for proceeds of $59.7 million and realized gains of $6.7 million due to a reallocation of the equity portfolio to a high dividend yield strategy.