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Investments
 6 Months Ended
Jun. 30, 2013
Investments [Abstract]  
Investments
Investments
(a) The amortized cost, net unrealized gain and losses, carrying value, unrecognized holding gains and losses, and fair values of held-to-maturity (“HTM”) fixed maturity securities as of June 30, 2013 and December 31, 2012 were as follows:
 
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Amortized Cost
 
Net
 Unrealized Gains
 (Losses)
 
Carrying
Value
 
Unrecognized
 Holding
Gains
 
Unrecognized Holding
 Losses
 
Fair
Value
Foreign government
 
$
5,292

 
172

 
5,464

 
194

 
—

 
5,658

Obligations of state and political subdivisions
 
421,460

 
4,947

 
426,407

 
20,520

 
(34
)
 
446,893

Corporate securities
 
35,983

 
(643
)
 
35,340

 
3,541

 
—

 
38,881

Asset-backed securities (“ABS”)
 
6,536

 
(824
)
 
5,712

 
868

 
—

 
6,580

Commercial mortgage-backed securities (“CMBS”)
 
7,623

 
(1,039
)
 
6,584

 
3,029

 
—

 
9,613

Total HTM fixed maturity securities
 
$
476,894

 
2,613

 
479,507

 
28,152

 
(34
)
 
507,625


December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Amortized Cost
 
Net
 Unrealized Gains
 (Losses)
 
Carrying
Value
 
Unrecognized
 Holding
Gains
 
Unrecognized Holding
 Losses
 
Fair
Value
Foreign government
 
$
5,292

 
212

 
5,504

 
367

 
—

 
5,871

Obligations of state and political subdivisions
 
491,180

 
6,769

 
497,949

 
28,996

 
(23
)
 
526,922

Corporate securities
 
38,285

 
(812
)
 
37,473

 
4,648

 
—

 
42,121

ABS
 
6,980

 
(1,052
)
 
5,928

 
1,170

 
—

 
7,098

CMBS
 
8,406

 
(1,191
)
 
7,215

 
5,434

 
—

 
12,649

Total HTM fixed maturity securities
 
$
550,143

 
3,926

 
554,069

 
40,615

 
(23
)
 
594,661

 
Unrecognized holding gains and 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 2.3 years as of June 30, 2013.
 
During Six Months 2013, ten securities with a carrying value of $22.9 million and a net unrecognized gain position of $1.1 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/or Standard and Poor's Financial Services (“S&P”). These unexpected rating downgrades raised concerns about the issuers’ credit worthiness, which changed our intention to hold these securities to maturity.

(b) The cost/amortized cost, unrealized gains and losses, and fair value of AFS securities as of June 30, 2013 and December 31, 2012 were as follows:
 
June 30, 2013
 
 
 
 
 
 
 
 
($ in thousands)
 
Cost/
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
U.S. government and government agencies
 
$
165,844

 
12,519

 
(369
)
 
177,994

Foreign government
 
28,802

 
995

 
(127
)
 
29,670

Obligations of states and political subdivisions
 
884,615

 
28,521

 
(18,818
)
 
894,318

Corporate securities
 
1,491,837

 
46,984

 
(14,850
)
 
1,523,971

ABS
 
155,338

 
999

 
(911
)
 
155,426

CMBS1
 
137,048

 
2,318

 
(3,782
)
 
135,584

Residential mortgage-backed
securities (“RMBS”)2
 
500,510

 
8,906

 
(6,568
)
 
502,848

AFS fixed maturity securities
 
3,363,994

 
101,242

 
(45,425
)
 
3,419,811

AFS equity securities
 
142,434

 
30,395

 
(765
)
 
172,064

Total AFS securities
 
$
3,506,428

 
131,637

 
(46,190
)
 
3,591,875

 
December 31, 2012
 
 
 
 
 
 
 
 
($ in thousands)
 
Cost/
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
U.S. government and government agencies
 
$
241,874

 
17,219

 
(1
)
 
259,092

Foreign government
 
28,813

 
1,540

 
(124
)
 
30,229

Obligations of states and political subdivisions
 
773,953

 
44,398

 
(327
)
 
818,024

Corporate securities
 
1,368,954

 
81,696

 
(402
)
 
1,450,248

ABS
 
126,330

 
2,319

 
(9
)
 
128,640

CMBS1
 
133,763

 
4,572

 
(1,216
)
 
137,119

RMBS2
 
456,996

 
15,961

 
(296
)
 
472,661

AFS fixed maturity securities
 
3,130,683

 
167,705

 
(2,375
)
 
3,296,013

AFS equity securities
 
132,441

 
19,400

 
(459
)
 
151,382

Total AFS securities
 
$
3,263,124

 
187,105

 
(2,834
)
 
3,447,395



1 CMBS includes government guaranteed agency securities with a fair value of $39.9 million at June 30, 2013 and $48.9 million at December 31, 2012.
2 RMBS includes government guaranteed agency securities with a fair value of $72.2 million at June 30, 2013 and $91.0 million at December 31, 2012.
 
Unrealized gains and 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 AOCI on the Consolidated Balance Sheets.
 

(c) The following tables summarize, for all securities in a net unrealized/unrecognized loss position at June 30, 2013 and December 31, 2012, 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, 2013
 
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
 
$
16,151

 
(369
)
 
—

 
—

Foreign government
 
1,058

 
(10
)
 
2,880

 
(117
)
Obligations of states and political subdivisions
 
393,204

 
(18,818
)
 
—

 
—

Corporate securities
 
431,753

 
(14,699
)
 
2,952

 
(151
)
ABS
 
98,136

 
(911
)
 
—

 
—

CMBS
 
67,456

 
(3,340
)
 
2,158

 
(442
)
RMBS
 
220,814

 
(6,387
)
 
1,626

 
(181
)
Total fixed maturity securities
 
1,228,572

 
(44,534
)
 
9,616

 
(891
)
Equity securities
 
16,948

 
(765
)
 
—

 
—

Subtotal
 
$
1,245,520

 
(45,299
)
 
9,616

 
(891
)
 
 
 
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
 
$
180

 
(3
)
 
3

 
702

 
(28
)
 
20

ABS
 
—

 
—

 
—

 
2,803

 
(709
)
 
647

Subtotal
 
$
180


(3
)
 
3

 
3,505

 
(737
)
 
667

Total AFS and HTM
 
$
1,245,700

 
(45,302
)
 
3

 
13,121

 
(1,628
)
 
667


December 31, 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
 
$
518

 
(1
)
 
—

 
—

Foreign government
 
—

 
—

 
2,871

 
(124
)
Obligations of states and political subdivisions
 
32,383

 
(327
)
 
—

 
—

Corporate securities
 
50,880

 
(402
)
 
—

 
—

ABS
 
9,137

 
(9
)
 
—

 
—

CMBS
 
7,637

 
(19
)
 
11,830

 
(1,197
)
RMBS
 
8,710

 
(59
)
 
5,035

 
(237
)
Total fixed maturity securities
 
109,265

 
(817
)
 
19,736

 
(1,558
)
Equity securities
 
15,901

 
(459
)
 
—

 
—

Subtotal
 
$
125,166

 
(1,276
)
 
19,736

 
(1,558
)
 

 
 
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
 
$
1,218

 
(33
)
 
29

 
1,108

 
(47
)
 
38

ABS
 
—

 
—

 
—

 
2,860

 
(840
)
 
753

Subtotal
 
1,218

 
(33
)
 
29

 
3,968

 
(887
)
 
791

Total AFS and HTM
 
$
126,384

 
(1,309
)
 
29

 
23,704

 
(2,445
)
 
791

 1Gross 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.
2Unrecognized 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 increased by $43.3 million as of June 30, 2013 compared to December 31, 2012 as follows:

($ in thousands)
 
 
June 30, 2013
 
December 31, 2012
Number of
Issues
% of Market/Book
Unrealized/
Unrecognized Loss
 
Number of
Issues
% of
Market/Book
Unrealized/
Unrecognized
Loss
504

80% - 99%
$
46,022

 
100

80% - 99%
2,701

1

60% - 79%
238

 
1

60% - 79%
233

—

40% - 59%
—

 
—

40% - 59%
—

—

20% - 39%
—

 
—

20% - 39%
—

—

0% - 19%
—

 
—

0% - 19%
—

 

 
$
46,260

 
 

 
2,934

 
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 2012 Annual Report.
  
At June 30, 2013, we had 505 securities in an aggregate unrealized/unrecognized loss position of $46.3 million, $1.0 million of which have been in a loss position for more than 12 months. During Second Quarter 2013, interest rates on the 10 year U.S. Treasury Note rose by 64 basis points. This interest rate movement has negatively impacted our fixed maturity securities portfolio's valuation, thus increasing the number of securities in a loss position and the corresponding dollar amount of unrealized losses. The increase in the unrealized losses does not correspond to any issuer specific credit concerns, rather just interest rate movements. For a discussion regarding the sensitivity of interest rate movements and the related impacts on the fixed maturity securities portfolio, refer to Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" in our 2012 Annual Report.
  
At December 31, 2012, we had 101 securities in an aggregate unrealized/unrecognized loss position of $2.9 million, $1.7 million of which had been in a loss position for more than 12 months. Securities that have had non-credit OTTI impairments comprised $0.9 million of the $1.7 million balance. The remainder of the $1.7 million balance is related to securities that were, on average, 5% impaired compared to their amortized cost.
 
We do not intend 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, 2013. 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, 2013, by contractual maturity, are shown below. Mortgage-backed securities ("MBS") 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, 2013:
($ in thousands)
 
Carrying Value
 
Fair Value
Due in one year or less
 
$
93,387

 
96,086

Due after one year through five years
 
348,188

 
369,227

Due after five years through 10 years
 
35,044

 
38,777

Due after 10 years
 
2,888

 
3,535

Total HTM fixed maturity securities
 
$
479,507

 
507,625

 
Listed below are AFS fixed maturity securities at June 30, 2013:
($ in thousands)
 
Fair Value
Due in one year or less
 
$
326,454

Due after one year through five years
 
1,840,956

Due after five years through 10 years
 
1,202,597

Due after 10 years
 
49,804

Total AFS fixed maturity securities
 
$
3,419,811

  
(e) The following table summarizes our other investment portfolio by strategy and the remaining commitment amount associated with each strategy:
Other Investments
 
Carrying Value
 
June 30,
2013
($ in thousands)
 
June 30,
2013
 
December 31,
2012
 
Remaining Commitment
Alternative Investments
 
 

 
 

 
 

  Secondary private equity
 
$
26,489

 
28,032

 
7,527

  Energy/power generation
 
18,417

 
18,640

 
7,825

  Private equity
 
17,809

 
18,344

 
11,542

  Mezzanine financing
 
12,868

 
12,692

 
19,712

  Real estate
 
12,149

 
11,751

 
10,290

  Distressed debt
 
12,106

 
12,728

 
2,929

  Venture capital
 
7,378

 
7,477

 
400

Total alternative investments
 
107,216

 
109,664

 
60,225

Other securities
 
1,861

 
4,412

 
1,289

Total other investments
 
$
109,077

 
114,076

 
61,514


 
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 2012 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 six-month periods ended March 31 is as follows:

Income Statement Information
 
Quarter ended March 31,
 
Six Months ended March 31,
($ in millions)
 
2013
 
2012
 
2013
 
2012
Net investment income
 
$
46.8

 
54.0

 
255.0

 
90.1

Realized (losses) gains
 
(22.1
)
 
234.6

 
599.7

 
985.3

Net change in unrealized depreciation
 
378.8

 
53.4

 
(18.9
)
 
(434.0
)
Net income
 
$
403.5

 
342.0

 
835.8

 
641.4

Selective’s insurance subsidiaries’ other investments income
 
$
3.9

 
3.0

 
7.5

 
5.0

 
(f) At June 30, 2013, we had 32 fixed maturity securities, with a carrying value of $62.2 million, that were pledged as collateral for our outstanding borrowing of $58.0 million with the Federal Home Loan Bank of Indianapolis (“FHLBI”).  This outstanding borrowing is included in “Notes payable” on the Consolidated Balance Sheets.  In accordance with the terms of our agreement with the FHLBI, we retain all rights regarding these securities, which are included in the “U.S. government and government agencies,” “RMBS,” and “CMBS” classifications of our AFS fixed maturity securities portfolio.

In addition, certain bonds with a carrying value of $27.1 million were on deposit with various state and regulatory agencies to comply with insurance laws. We retain all rights regarding these securities, which are primarily included in the "U.S. government and government agencies" classification of our AFS fixed maturity securities portfolio.
 
(g) The components of net investment income earned for the periods indicated were as follows:
 
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in thousands)
 
2013
 
2012
 
2013
 
2012
Fixed maturity securities
 
$
30,298


31,759

 
60,387

 
63,109

Equity securities
 
1,874


1,280

 
3,081

 
2,517

Short-term investments
 
29


29

 
81

 
67

Other investments
 
3,869


2,963

 
7,471

 
4,963

Miscellaneous income
 
—


25

 
—

 
64

Investment expenses
 
(2,067
)

(2,050
)
 
(4,147
)
 
(4,086
)
Net investment income earned
 
$
34,003

 
34,006

 
66,873

 
66,634


(h) The following tables summarize OTTI by asset type for the periods indicated:
Second Quarter 2013
 
Gross 
 
Included in Other
Comprehensive
Income (“OCI”)
 
Recognized in
Earnings
($ in thousands) 
 
 
 
HTM fixed maturity securities
 
 

 
 

 
 

ABS
 
$
(44
)
 
(47
)
 
3

Total HTM fixed maturity securities
 
(44
)
 
(47
)
 
3

Equity securities
 
429

 
—

 
429

Other investments
 
123

 
—

 
123

OTTI losses
 
$
508

 
(47
)
 
555

 
Second Quarter 2012
 
Gross
 
Included in OCI
 
Recognized in Earnings
($ in thousands)
 
 
 
AFS fixed maturity securities
 
 

 
 

 
 

ABS
 
$
30

 
—

 
30

RMBS
 
10

 
(54
)
 
64

OTTI losses
 
$
40

 
(54
)
 
94


Six Months 2013
 
Gross 
 
Included in OCI
 
Recognized in
Earnings
($ in thousands) 
 
 
 
HTM fixed maturity securities
 
 
 
 
 
 
ABS
 
$
(44
)
 
(47
)
 
3

Total HTM fixed maturity securities
 
(44
)
 
(47
)
 
3

AFS fixed maturity securities
 
 

 
 

 
 

RMBS
 
(22
)
 
(30
)
 
8

Total AFS fixed maturity securities
 
(22
)
 
(30
)
 
8

Equity securities
 
646

 
—

 
646

Total AFS securities
 
624

 
(30
)
 
654

Other investments
 
1,847

 
—

 
1,847

OTTI losses
 
$
2,427

 
(77
)
 
2,504


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

 
 

 
 

ABS
 
$
62

 
—

 
62

CMBS
 
108

 
—

 
108

RMBS
 
(44
)
 
(218
)
 
174

Total AFS fixed maturity securities
 
126

 
(218
)
 
344

Equity securities
 
171

 
—

 
171

Total AFS securities
 
297

 
(218
)
 
515

OTTI losses
 
$
297

 
(218
)
 
515


The majority of the OTTI charges in Six Months 2013 relate to an investment in a limited liability company within our other investments portfolio that has sustained significant losses for which we do not anticipate recovery. For a discussion of our evaluation for OTTI of fixed maturity securities, short-term investments, equity securities and other investments, refer to Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data" of our 2012 Annual Report.

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)
 
2013
 
2012
Balance, beginning of period
 
$
7,486

 
6,711

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
 
2

 
64

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

 
—

Balance, end of period
 
$
7,488

 
6,775


 
 
Six Months ended June 30,
($ in thousands)
 
2013
 
2012
Balance, beginning of period
 
$
7,477

 
6,602

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
 
11

 
173

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

 
—

Balance, end of period
 
$
7,488

 
6,775


(i) The components of net realized gains, excluding OTTI charges, for the periods indicated were as follows:
 
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in thousands)
 
2013
 
2012
 
2013
 
2012
HTM fixed maturity securities
 
 
 
 
 
 
 
 
Gains
 
$
3

 
2

 
3

 
155

Losses
 
(12
)
 
(25
)
 
(49
)
 
(106
)
AFS fixed maturity securities
 
 

 
 

 
 
 
 
Gains
 
967

 
368

 
1,918

 
773

Losses
 
(46
)
 
(74
)
 
(299
)
 
(117
)
AFS equity securities
 
 

 
 

 
 
 
 
Gains
 
4,800

 
—

 
10,471

 
4,775

Losses
 
(3
)
 
—

 
(171
)
 
(428
)
Short-term investments
 
 

 
 

 
 
 
 
Losses
 
—

 
—

 
—

 
(2
)
Other Investments
 
 
 
 
 
 
 
 
Gains
 
—

 
1

 
—

 
1

     Losses
 
—


—

 
(860
)
 
—

Total other net realized investment gains
 
5,709


272

 
11,013

 
5,051

Total OTTI charges recognized in earnings
 
(555
)

(94
)
 
(2,504
)
 
(515
)
Total net realized gains
 
$
5,154


178

 
8,509

 
4,536

 
Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold. Of the $5.7 million and $11.0 million in net realized gains in Second Quarter and Six Months 2013, $4.7 million relates to the sale of a private equity security due to the acquisition of this investment by a third party. In addition, $5.6 million in net realized gains in Six Months 2013 and $4.3 million in Six Months 2012 were related to the sale of AFS equity securities due to the rebalancing of our high dividend yield strategy holdings within our equity portfolio.

Proceeds from the sale of AFS securities were $42.2 million in Second Quarter 2013 and $49.1 million in Six Months 2013, and $24.1 million and $95.9 million in in the same periods a year ago.