Statutory Financial Information and Restrictions on Dividends and Transfers of Funds

In Third Quarter 2012, we formed two new Insurance Subsidiaries, Selective Casualty Insurance Company (“SCIC”) and Selective Fire and Casualty Insurance Company (“SFCIC”). These New Jersey-domiciled subsidiaries are expected to begin writing premium in 2013 and have been included in our reinsurance pooling agreement as of July 1, 2012. See the “Reinsurance” section of Item 2. “Management's Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q for additional information regarding the change to our pooling agreement.

In Third Quarter 2012, Selective Insurance Company of America ("SICA") received approval from the New Jersey Department of Banking and Insurance to pay an extraordinary dividend of $134.0 million to the Parent. This dividend, along with a portion of the ordinary dividends received, was used by the Parent as follows: (i) $74.4 million and $31.9 million respectively, to capitalize SCIC and SFCIC; (ii) $13.3 million to provide additional capitalization of our recently-acquired Insurance Subsidiary, MUSIC; and (iii) $19.5 million to further capitalize Selective Insurance Company of New England. In addition to the extraordinary dividend, the Insurance Subsidiaries provided $45.7 million in ordinary dividends to the Parent in Nine Months 2012. The following table provides data regarding all Insurance Subsidiary dividends paid in 2012:



Dividends
	2012		Nine Months ended September 30, 2012
($ in millions)	Maximum Ordinary Dividend¹		Ordinary Dividends Paid		Extraordinary Dividends Paid	Total Dividends Paid
SICA	$	50.7	28.7	²	134.0	162.7
Selective Way Insurance Company ("SWIC")	22.2		12.5		—	12.5
Selective Insurance Company of South Carolina ("SICSC")	9.1		0.8		—	0.8
Selective Insurance Company of the Southeast ("SICSE")	6.9		0.5		—	0.5
Selective Insurance Company of New York ("SICNY")	7.3		1.6		—	1.6
Selective Insurance Company of New England ("SICNE")	1.4		1.0		—	1.0
Selective Auto Insurance Company of New Jersey ("SAICNJ")	6.0		0.6		—	0.6
Total	$	103.6	45.7		134.0	179.7

¹Based on December 31, 2011 statutory data.

²SICA's ordinary dividends paid in the 12-month period ended September 30, 2012 were $50.7 million.

As of September 30, 2012, the Parent has stand-alone retained earnings of $1.1 billion. Of this amount, $1.0 billion is related to investments in our Insurance Subsidiaries and Parent company issued debt. As referenced in the table above, the Insurance Subsidiaries have the ability to provide for approximately $104 million in annual ordinary dividends to the Parent; however, as regulated entities, these dividends are subject to certain restrictions as is further discussed below. In addition to the restrictions on the Insurance Subsidiaries, there are also restrictions on the Parent company's issued debt, which is further discussed in Note 10, “Indebtedness” in Item 8. "Financial Statements and Supplementary Data" of our 2011 Annual Report. The remaining $87 million of retained earnings is not restricted, and is primarily comprised of Parent company investments and cash that could be used to fund debt interest payments, of which approximately $7 million is due in the fourth quarter of 2012, with the remainder available to fund dividend payments to shareholders. If necessary, the Parent company also has other potential sources of liquidity that could provide for additional funding of its stockholder dividends, which include common stock and debt issuances.

As noted above, the restriction on our net assets and retained earnings is predominantly driven by our Insurance Subsidiaries' ability to pay dividends to the Parent under applicable law and regulations. Under the insurance laws of the domiciliary states of the Insurance Subsidiaries, New Jersey, Indiana, and New York, an insurer can potentially make an ordinary dividend payment if its statutory surplus following such dividend is reasonable in relation to its outstanding liabilities, is adequate to its financial needs, and the dividend does not exceed the insurer's unassigned surplus. In general, New Jersey defines an ordinary dividend as a dividend whose fair market value, together with other dividends made within the preceding 12 months, is less than the greater of 10% of the insurer's statutory surplus as of the preceding December 31, or the insurer's net income (excluding capital gains) for the 12-month period ending on the preceding December 31. Indiana's ordinary dividend calculation is consistent with New Jersey's, except that it does not exclude capital gains from net income. In general, New York defines an ordinary dividend as a dividend whose fair market value, together with other dividends made within the preceding 12 months, is less than the lesser of 10% of the insurer's statutory surplus, or 100% of adjusted net investment income. New Jersey and Indiana require notice of the declaration of any ordinary dividend distribution. During the notice period, the relevant state regulatory authority may disallow all or part of the proposed dividend if it determines that the dividend is not appropriate given the above considerations. New York does not require notice of ordinary dividends. Dividend payments exceeding ordinary dividends are referred to as extraordinary dividends and require review and approval by the applicable domiciliary insurance regulatory authority prior to payment.

The following table provides statutory data for each of our Insurance Subsidiaries after consideration of the dividends paid in Nine Months 2012, along with other surplus activities in the normal course of business:



	Unassigned Surplus					Statutory Surplus			Statutory Net Income
($ in millions)	September 30, 2012			December 31, 2011		September 30, 2012		December 31, 2011	Nine Months ended September 30, 2012		Nine Months ended September 30, 2011
SICA	$	261.9		360.7		$	385.6	507.4	47.4		5.1
SWIC	179.6			169.1		223.2		221.7	7.1		2.8
SICSC	72.2			65.5		93.4		90.5	2.6		(1.9	)
SICSE	51.6			46.8		71.2		69.3	1.6		(1.5	)
SICNY	47.4			43.0		74.7		73.3	2.1		(1.0	)
SICNE	2.9			3.8		32.7		14.3	(3.6	)	0.2
SAICNJ	9.1			5.6		59.9		60.1	1.6		(1.1	)
MUSIC	(12.5		)	(15.4	)	56.0		39.9	(6.5	)	N/A
SCIC	(1.6		)	N/A		72.9		N/A	(11.2	)	N/A
SFCIC	(0.6		)	N/A		31.3		N/A	(4.8	)	N/A
Total	$	610.0		679.1		$	1,100.9	1,076.5	36.3		2.6

In addition to the Insurance Subsidiaries' ability to provide dividends to the Parent company, our two Indiana-domiciled Insurance Subsidiaries have approved intercompany lending agreements with the Parent that provide for additional lending capacity of $18.0 million after considering that borrowings under these lending agreements are restricted to 10% of the admitted assets of these respective subsidiaries.