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Investments
 9 Months Ended
Sep. 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:
 
September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Amortized Cost
 
Net
 Unrealized Gains
 (Losses)
 
Carrying
Value
 
Unrecognized
 Holding
Gains
 
Unrecognized Holding
 Losses
 
Fair
Value
Foreign government
 
$
5,292

 
232

 
5,524

 
72

 
—

 
5,596

Obligations of state and political subdivisions
 
524,807

 
8,261

 
533,068

 
33,438

 
(11
)
 
566,495

Corporate securities
 
49,532

 
(957
)
 
48,575

 
5,048

 
—

 
53,623

Asset-backed securities (“ABS”)
 
7,211

 
(1,152
)
 
6,059

 
1,270

 
—

 
7,329

Commercial mortgage-backed securities (“CMBS”)
 
8,758

 
(1,268
)
 
7,490

 
5,502

 
—

 
12,992

Total HTM fixed maturity securities
 
$
595,600

 
5,116

 
600,716

 
45,330

 
(11
)
 
646,035


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 2.7 years as of September 30, 2012.
 
During Nine Months 2012, seven securities with a carrying value of $14.6 million and a net unrecognized gain position of $1.2 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"), Fitch Ratings, 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:
 
September 30, 2012
 
 
 
 
 
 
 
 
($ in thousands)
 
Cost/
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
U.S. government and government agencies1
 
$
275,417

 
18,797

 
—

 
294,214

Foreign government
 
28,819

 
1,664

 
(191
)
 
30,292

Obligations of states and political subdivisions
 
737,985

 
46,524

 
(8
)
 
784,501

Corporate securities
 
1,340,366

 
85,741

 
(219
)
 
1,425,888

ABS
 
118,923

 
2,232

 
(1
)
 
121,154

CMBS2
 
126,043

 
5,151

 
(1,579
)
 
129,615

Residential mortgage-backed
securities (“RMBS”)3
 
464,187

 
20,359

 
(250
)
 
484,296

AFS fixed maturity securities
 
3,091,740

 
180,468

 
(2,248
)
 
3,269,960

AFS equity securities
 
127,867

 
27,921

 
(211
)
 
155,577

Total AFS securities
 
$
3,219,607

 
208,389

 
(2,459
)
 
3,425,537

 
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 $14.1 million at September 30, 2012 and $76.5 million at December 31, 2011.
2 CMBS includes government guaranteed agency securities with a fair value of $59.9 million at September 30, 2012 and $72.9 million at December 31, 2011.
3 RMBS includes government guaranteed agency securities with a fair value of $98.1 million at September 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 September 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:

September 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
 
$
520

 
(1
)
 
—

 
—

Foreign government
 
2,805

 
(190
)
 
—

 
—

Obligations of states and political subdivisions
 
1,327

 
(8
)
 
—

 
—

Corporate securities
 
17,667

 
(213
)
 
3,997

 
(6
)
ABS
 
1,299

 
(1
)
 
—

 
—

CMBS
 
1,787

 
(17
)
 
12,080

 
(1,562
)
RMBS
 
851

 
(1
)
 
5,503

 
(249
)
Total fixed maturity securities
 
26,256

 
(431
)
 
21,580

 
(1,817
)
Equity securities
 
4,649

 
(211
)
 
—

 
—

Subtotal
 
$
30,905

 
(642
)
 
21,580

 
(1,817
)
 
 
 
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
 
$
1,427

 
(42
)
 
37

 
1,331

 
(57
)
 
46

ABS
 
—

 
—

 
—

 
2,876

 
(884
)
 
781

Subtotal
 
$
1,427


(42
)
 
37

 
4,207

 
(941
)
 
827

Total AFS and HTM
 
$
32,332

 
(684
)
 
37

 
25,787

 
(2,758
)
 
827


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 net unrealized/unrecognized loss positions improved by $8.1 million as of September 30, 2012 compared to December 31, 2011 as follows:

($ in thousands)
 
 
September 30, 2012
 
December 31, 2011
Number of
Issues
% of Market/Book
Unrealized
Unrecognized Loss
 
Number of
Issues
% of
Market/Book
Unrealized
Unrecognized
Loss
46

80% - 99%
$
2,335

 
140

80% - 99%
$
10,166

1

60% - 79%
243

 
—

60% - 79%
—

—

40% - 59%
—

 
1

40% - 59%
469

—

20% - 39%
—

 
—

20% - 39%
—

—

0% - 19%
—

 
—

0% - 19%
—

 

 
$
2,578

 
 

 
$
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 September 30, 2012, we had 47 securities in an aggregate unrealized/unrecognized loss position of $2.6 million, $1.9 million of which have been in a loss position for more than 12 months. Securities with non-credit OTTI impairments comprised $1.2 million of the $1.9 million balance, including two securities that are currently experiencing immaterial interest payment shortfalls. These shortfalls have led to related credit OTTI impairments, one of which was recorded in Third Quarter 2012 and the other in the fourth quarter of 2011. The remainder of the securities in an unrealized loss position for over 12 months 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 September 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 September 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 September 30, 2012:
($ in thousands)
 
Carrying Value
 
Fair Value
Due in one year or less
 
$
105,662

 
110,275

Due after one year through five years
 
419,074

 
449,498

Due after five years through 10 years
 
69,198

 
78,018

Due after 10 years
 
6,782

 
8,244

Total HTM fixed maturity securities
 
$
600,716

 
646,035

 
Listed below are AFS fixed maturity securities at September 30, 2012:
($ in thousands)
 
Fair Value
Due in one year or less
 
$
362,970

Due after one year through five years
 
1,904,084

Due after five years through 10 years
 
930,177

Due after 10 years
 
72,729

Total AFS fixed maturity securities
 
$
3,269,960

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

 
 

 
 

Secondary private equity
 
$
28,883

 
30,114

 
8,153

Private equity
 
24,743

 
21,736

 
3,883

Energy/power generation
 
19,198

 
25,913

 
10,347

Distressed debt
 
13,413

 
16,953

 
7,357

Real estate
 
12,719

 
13,767

 
10,473

Mezzanine financing
 
11,177

 
8,817

 
23,174

Venture capital
 
7,651

 
7,248

 
400

Total alternative investments
 
117,784

 
124,548

 
63,787

Other securities
 
4,297

 
3,753

 
1,059

Total other investments
 
$
122,081

 
128,301

 
64,846


 
The carrying value of our other investments decreased by $6.2 million compared to year end 2011. The carrying value was impacted by distributions of $19.7 million, partially offset by income of $5.2 million and additional contributions of $8.3 million. These contributions included $5.4 million under our previously existing commitments and $2.5 million under two new alternative investment limited partnerships that we entered into during the second quarter of 2012. The remaining commitment on the two new mezzanine financing limited partnerships amounted to $7.9 million at September 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 and other investments carried under the equity method of accounting. 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 nine-month periods ended June 30, 2012, which are included in our Financial Statements as of September 30, 2012, is as follows:

Income Statement Information
 
 
 
 
 
 
 
 
 
 
Quarter ended
June 30,
 
Nine Months ended
June 30,
($ in millions)
 
2012
 
2011
 
2012
 
2011
Net investment income
 
80.0

 
136.8

 
170.1

 
423.6

Realized gains (losses)
 
19.6

 
710.6

 
1,004.9

 
873.6

Net change in unrealized (depreciation) appreciation
 
(117.1
)
 
(194.7
)
 
(551.1
)
 
1,877.8

Net income
 
(17.5
)
 
652.7

 
623.9

 
3,175.0

Selective’s insurance subsidiaries’ other investments income
 
0.5

 
4.5

 
5.5
 
24.0

 
(f) At September 30, 2012, we had 30 fixed maturity securities, with a carrying value of $61.7 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 September 30,
 
Nine Months ended September 30,
($ in thousands)
 
2012
 
2011
 
2012
 
2011
Fixed maturity securities
 
$
30,839


31,960


93,948


97,835

Equity securities
 
1,268


1,197


3,785


2,299

Short-term investments
 
36


28


103


123

Other investments
 
497


4,453


5,460


23,994

Miscellaneous income
 
41


41


105


88

Investment expenses
 
(2,031
)

(1,893
)

(6,117
)

(5,735
)
Net investment income earned
 
$
30,650

 
35,786

 
97,284

 
118,604

  
Net investment income earned, before tax, decreased by $5.1 million in Third Quarter 2012 compared to Third Quarter 2011, and decreased by $21.3 million in Nine Months 2012 compared to Nine Months 2011. These decreases were primarily driven by lower income from alternative investments within our other investment portfolio of $3.5 million and $17.6 million in Third Quarter and Nine 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. Interest income from our fixed maturity securities portfolio decreased by $1.1 million and $3.9 million for Third Quarter and Nine Months 2012, respectively, primarily due to lower reinvestment yields than in the prior year periods.
  
(h) The following tables summarize OTTI by asset type for the periods indicated:
Third Quarter 2012
 
 
 
 
 
 
($ in thousands) 
 
Gross 
 
Included in Other
Comprehensive
Income (“OCI”)
 
Recognized in
Earnings
Fixed maturity securities
 
 

 
 

 
 

ABS
 
$
36

 
—

 
36

CMBS
 
(1,504
)
 
(2,023
)
 
519

Total fixed maturity securities
 
(1,468
)
 
(2,023
)
 
555

Equity securities
 
2,389

 
—

 
2,389

OTTI losses
 
$
921

 
(2,023
)
 
2,944

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

 
 

 
 

ABS
 
$
543

 
493

 
50

CMBS
 
(184
)
 
(316
)
 
132

RMBS
 
22

 
(27
)
 
49

Total fixed maturities
 
381

 
150

 
231

Equity securities
 
2,312

 
—

 
2,312

OTTI losses
 
$
2,693

 
150

 
2,543


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

 
 

 
 

ABS
 
$
98

 
—

 
98

CMBS
 
(1,396
)
 
(2,023
)
 
627

RMBS
 
(44
)
 
(218
)
 
174

Total fixed maturity securities
 
(1,342
)
 
(2,241
)
 
899

Equity securities
 
2,560

 
—

 
2,560

OTTI losses
 
$
1,218

 
(2,241
)
 
3,459

Nine 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

ABS
 
543

 
493

 
50

CMBS
 
(370
)
 
(974
)
 
604

RMBS
 
316

 
201

 
115

Total fixed maturities
 
750

 
(280
)
 
1,030

Equity securities
 
2,312

 
—

 
2,312

OTTI losses
 
$
3,062

 
(280
)
 
3,342



The majority of the OTTI charges in Third Quarter and Nine Months 2012 reflect charges on securities in our high dividend yield strategy equity portfolio that we intend to sell. OTTI charges in Third Quarter and Nine Months 2011 were primarily related to certain securities in the same portfolio that we did not believe would recover in the near term.

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 September 30,
($ in thousands)
 
2012
 
2011
Balance, beginning of period
 
$
6,775

 
14,024

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
 
—

 
—

Additional increases to the amount related to credit loss for which an OTTI was previously recognized
 
519

 
207

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

 
—

Balance, end of period
 
$
7,294

 
14,231


 
 
Nine Months ended
September 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
 
692

 
462

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

 
—

Balance, end of period
 
$
7,294

 
14,231



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

 
 

 
 

 
 

Gains
 
$
40

 
—

 
195

 
9

Losses
 
(90
)
 
(200
)
 
(196
)
 
(522
)
AFS fixed maturity securities
 
 

 
 

 
 

 
 

Gains
 
2,168

 
698

 
2,941

 
3,052

Losses
 
(262
)
 
(5
)
 
(379
)
 
(12
)
AFS equity securities
 
 

 
 

 
 

 
 

Gains
 
—

 
5

 
4,775

 
6,676

Losses
 
—

 
—

 
(428
)
 
—

Short-term investments
 
 

 
 

 
 

 
 

Losses
 
—

 
—

 
(2
)
 
—

Other investments
 
 
 
 
 
 
 
 
     Gains
 
—


—


1


—

Total other net realized investment gains
 
1,856


498


6,907


9,203

Total OTTI charges recognized in earnings
 
(2,944
)

(2,543
)

(3,459
)

(3,342
)
Total net realized gains
 
$
(1,088
)

(2,045
)

3,448


5,861

 
Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold. Of the $6.9 million in net realized investment gains in Nine Months 2012, $4.3 million was related to the sale of AFS equity securities due to a rebalancing of our equity portfolio. Net realized investment gains in Nine Months 2011 of $9.2 million included the impact of reallocating our AFS equity securities into our high-dividend yield strategy. This reallocation generated net realized gains of $6.7 million.

Proceeds from the sale of AFS securities were $55.0 million and $150.9 million in Third Quarter and Nine Months 2012 and $22.0 million and $145.8 million in Third Quarter and Nine Months 2011.