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Fair Value Measurements
 12 Months Ended
Dec. 31, 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 December 31, 2012 and 2011:
 
 
December 31, 2012
 
December 31, 2011
($ in thousands)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Financial Assets
 
 

 
 

 
 

 
 

Fixed maturity securities:
 
 

 
 

 
 

 
 

HTM
 
$
554,069

 
594,661

 
712,348

 
758,043

AFS
 
3,296,013

 
3,296,013

 
2,897,373

 
2,897,373

Equity securities, AFS
 
151,382

 
151,382

 
157,355

 
157,355

Short-term investments
 
214,479

 
214,479

 
217,044

 
217,044

Receivable for proceeds related to sale of Selective HR ("Selective HR")
 
2,705

 
2,705

 
3,212

 
3,212

Financial Liabilities
 
 

 
 

 
 

 
 

Notes payable:
 
 

 
 

 
 

 
 

2.90% borrowings from FHLBI
 
13,000

 
13,595

 
13,000

 
13,759

1.25% borrowings from FHLBI
 
45,000

 
45,590

 
45,000

 
44,629

7.50% Junior Notes
 
100,000

 
101,480

 
100,000

 
100,360

6.70% Senior Notes
 
99,475

 
107,707

 
99,452

 
113,195

7.25% Senior Notes
 
49,912

 
52,689

 
49,908

 
51,111

Total notes payable
 
$
307,387

 
321,061

 
307,360

 
323,054


 
For discussion regarding the fair value techniques of our financial instruments, refer to Note 2. "Summary of Significant Accounting Policies" in this Form 10-K.

The following tables provide quantitative disclosures of our financial assets that were measured at fair value at December 31, 2012 and 2011:
December 31, 2012
 
 
 
Fair Value Measurements Using
($ in thousands)
 
Assets Measured at Fair Value 12/31/12
 
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
 
$
259,092

 
115,861

 
123,442

 
19,789

Foreign government
 
30,229

 
—

 
30,229

 
—

Obligations of states and political subdivisions
 
818,024

 
—

 
818,024

 
—

Corporate securities
 
1,450,247

 
—

 
1,447,301

 
2,946

ABS
 
128,640

 
—

 
122,572

 
6,068

CMBS
 
137,119

 
—

 
129,957

 
7,162

RMBS
 
472,662

 
—

 
472,662

 
—

Total AFS fixed maturity securities
 
3,296,013

 
115,861

 
3,144,187

 
35,965

Equity securities
 
151,382

 
147,775

 
—

 
3,607

Short-term investments
 
214,479

 
214,479

 
—

 
—

Receivable for proceeds related to sale of Selective HR
 
2,705

 
—

 
—

 
2,705

Total assets
 
$
3,664,579

 
478,115

 
3,144,187

 
42,277


 
December 31, 2011
 
 
 
Fair Value Measurements Using
($ in thousands)
 
Assets Measured at Fair Value 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 agencies2
 
$
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.
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 for the year ended December 31, 2012:
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Government
 
Corporate
 
ABS
 
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:
 
 

 
 

 
 
 
 

 
 
 
 

 
 

OCI1
 
(22
)
 
185

 
68

 
858

 
—

 
—

 
1,089

Net income2,3
 
(193
)
 
—

 
—

 
(51
)
 
—

 
244

 
—

Purchases
 
—

 
—

 
7,300

 
5,611

 
—

 
—

 
12,911

Sales
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Issuances
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Settlements
 
(1,737
)
 
(630
)
 
—

 
(624
)
 
—

 
(751
)
 
(3,742
)
Transfers into Level 3
 
—

 
788

 
—

 
8,247

 
3,607

 
—

 
12,642

Transfers out of Level 3
 
—

 
—

 
(1,300
)
 
(7,233
)
 
—

 
—

 
(8,533
)
Fair value, December 31, 2012
 
$
19,789

 
2,946

 
6,068

 
7,162

 
3,607

 
2,705

 
42,277


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.
As discussed in Note 2. "Summary of Significant Accounting Policies," in this Form 10-K, the fair value of our Level 3 fixed maturity securities are typically obtained through non-binding broker quotes, which we review for reasonableness. In 2012, fixed maturity securities with an aggregate fair value of $36.0 million were measured using Level 3 inputs. This amount includes securities with a fair value of $9.0 million that were transferred into Level 3 during the year. These transfers were primarily related to securities that had been previously priced using Level 2 inputs, but due to the availability and nature of the pricing used at the valuation dates, are priced using Level 3 inputs at December 31, 2012. In addition, a portion of these transfers relate to securities that had previously been classified as HTM, and therefore not measured at fair value, for which available pricing at December 31, 2012 used Level 3 inputs. In addition, securities with a fair value of $8.5 million were transfered out of level 3 due to the current availability of level 2 pricing at December 31, 2012 that was not available previously.
Equity securities with a fair value of $3.6 million were transferred into Level 3 during 2012, driven primarily by the nature of the quotes used at the valuation date. We review the fair values received on these non-publicly traded equity securities for reasonableness.
The remaining measurement using Level 3 inputs relates to the receivable from the sale of Selective HR. This security is measured 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 the 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 and related quantitative information for December 31, 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:
 
 

 
 

 
 

 
 

 
 

OCI1
 
—

 
—

 
507

 
—

 
507

Net income2,3
 
—

 
—

 
(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 “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 for the CMBS securities on the Consolidated Statements of Income.
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.

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 December 31, 2012:
December 31, 2012
 
 
 
Fair Value Measurements Using
($ in thousands)
 
Assets/ Liabilities Disclosed at
Fair Value 12/31/2012
 
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
 
$
5,871

 
—

 
5,871

 
—

Obligations of states and political subdivisions
 
526,922

 
—

 
526,922

 
—

Corporate securities
 
42,121

 
—

 
37,289

 
4,832

ABS
 
7,097

 
—

 
5,698

 
1,399

CMBS
 
12,650

 
—

 
12,650

 
—

Total HTM fixed maturity securities
 
$
594,661

 
—

 
588,430

 
6,231

Financial Liabilities
 
 
 
 
 
 
 
 
Notes payable:
 
 
 
 
 
 
 
 
2.90% borrowings from FHLBI
 
13,595

 
—

 
13,595

 
—

1.25% borrowings from FHLBI
 
45,590

 
—

 
45,590

 
—

7.50% Junior Notes
 
101,480

 
101,480

 
—

 
—

6.70% Senior Notes
 
107,707

 
107,707

 
—

 
—

7.25% Senior Notes
 
52,689

 
—

 
52,689

 
—

Total notes payable
 
$
321,061

 
209,187

 
111,874

 
—