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

 
151

 
5,443

 
122

 
—

 
5,565

Obligations of state and political subdivisions
 
372,281

 
4,065

 
376,346

 
19,297

 
—

 
395,643

Corporate securities
 
29,228

 
(466
)
 
28,762

 
3,015

 
—

 
31,777

Asset-backed securities (“ABS”)
 
5,890

 
(755
)
 
5,135

 
776

 
—

 
5,911

Commercial mortgage-backed securities (“CMBS”)
 
7,241

 
(965
)
 
6,276

 
3,357

 
—

 
9,633

Total HTM fixed maturity securities
 
$
419,932

 
2,030

 
421,962

 
26,567

 
—

 
448,529


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 September 30, 2013.

During Nine Months 2013, 16 securities with a carrying value of $39.6 million and a net unrecognized gain position of $1.4 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 September 30, 2013 and December 31, 2012 were as follows:
 
September 30, 2013
 
 
 
 
 
 
 
 
($ in thousands)
 
Cost/
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
U.S. government and government agencies
 
$
169,163

 
11,953

 
(330
)
 
180,786

Foreign government
 
28,797

 
996

 
(84
)
 
29,709

Obligations of states and political subdivisions
 
918,403

 
27,705

 
(16,610
)
 
929,498

Corporate securities
 
1,629,698

 
47,932

 
(14,479
)
 
1,663,151

ABS
 
150,179

 
1,063

 
(476
)
 
150,766

CMBS1
 
152,464

 
2,747

 
(3,263
)
 
151,948

Residential mortgage-backed
securities (“RMBS”)2
 
525,047

 
8,932

 
(6,405
)
 
527,574

AFS fixed maturity securities
 
3,573,751

 
101,328

 
(41,647
)
 
3,633,432

AFS equity securities
 
158,323

 
24,061

 
(1,878
)
 
180,506

Total AFS securities
 
$
3,732,074

 
125,389

 
(43,525
)
 
3,813,938

 
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 $35.5 million at September 30, 2013 and $48.9 million at December 31, 2012.
2 RMBS includes government guaranteed agency securities with a fair value of $61.4 million at September 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 September 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:

September 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
 
$
13,173

 
(327
)
 
510

 
(3
)
Foreign government
 
1,056

 
(12
)
 
2,925

 
(72
)
Obligations of states and political subdivisions
 
417,866

 
(16,610
)
 
—

 
—

Corporate securities
 
422,816

 
(14,200
)
 
3,837

 
(279
)
ABS
 
87,786

 
(471
)
 
302

 
(5
)
CMBS
 
69,322

 
(2,771
)
 
2,030

 
(492
)
RMBS
 
202,428

 
(6,231
)
 
1,579

 
(174
)
Total fixed maturity securities
 
1,214,447

 
(40,622
)
 
11,183

 
(1,025
)
Equity securities
 
35,275

 
(1,878
)
 
—

 
—

Subtotal
 
$
1,249,722

 
(42,500
)
 
11,183

 
(1,025
)
 
 
 
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
 
$
492

 
(20
)
 
19

 
571

 
(24
)
 
17

ABS
 
—

 
—

 
—

 
2,476

 
(690
)
 
642

Subtotal
 
$
492

 
(20
)
 
19

 
3,047

 
(714
)
 
659

Total AFS and HTM
 
$
1,250,214

 
(42,520
)
 
19

 
14,230

 
(1,739
)
 
659


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

 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 increased by $40.6 million as of September 30, 2013 compared to December 31, 2012 as follows:

($ in thousands)
 
 
September 30, 2013
 
December 31, 2012
Number of
Issues
% of Market/Book
Unrealized/
Unrecognized Loss
 
Number of
Issues
% of
Market/Book
Unrealized/
Unrecognized
Loss
501

80% - 99%
$
43,295

 
100

80% - 99%
$
2,701

—

60% - 79%
—

 
1

60% - 79%
233

1

40% - 59%
286

 
—

40% - 59%
—

—

20% - 39%
—

 
—

20% - 39%
—

—

0% - 19%
—

 
—

0% - 19%
—

 

 
$
43,581

 
 

 
$
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 September 30, 2013, we had 502 securities in an aggregate unrealized/unrecognized loss position of $43.6 million, $1.1 million of which have been in a loss position for more than 12 months. 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. During Nine Months 2013, interest rates on the 10-year U.S. Treasury Note rose by 85 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; however, it does reflect an expected reduction in market value due to higher market interest rates. 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.
  
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 September 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 September 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 September 30, 2013:
($ in thousands)
 
Carrying Value
 
Fair Value
Due in one year or less
 
$
72,099

 
74,953

Due after one year through five years
 
312,318

 
331,927

Due after five years through 10 years
 
34,747

 
38,176

Due after 10 years
 
2,798

 
3,473

Total HTM fixed maturity securities
 
$
421,962

 
448,529

 
Listed below are AFS fixed maturity securities at September 30, 2013:
($ in thousands)
 
Fair Value
Due in one year or less
 
$
324,743

Due after one year through five years
 
1,951,770

Due after five years through 10 years
 
1,329,795

Due after 10 years
 
27,124

Total AFS fixed maturity securities
 
$
3,633,432

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

 
 

 
 

  Secondary private equity
 
$
25,954

 
28,032

 
7,703

  Private equity
 
18,951

 
18,344

 
10,502

  Energy/power generation
 
17,049

 
18,640

 
7,076

  Mezzanine financing
 
12,921

 
12,692

 
18,796

  Real estate
 
12,385

 
11,751

 
10,205

  Distressed debt
 
11,911

 
12,728

 
2,964

  Venture capital
 
7,018

 
7,477

 
400

Total alternative investments
 
106,189

 
109,664

 
57,646

Other securities
 
1,884

 
4,412

 
1,289

Total other investments
 
$
108,073

 
114,076

 
58,935


 
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 our other investments portfolio that is 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 nine-month periods ended June 30 is as follows:

Income Statement Information
 
Quarter ended June 30,
 
Nine Months ended June 30,
($ in millions)
 
2013
 
2012
 
2013
 
2012
Net investment income
 
$
97.8

 
80.0

 
352.8

 
170.1

Realized gains
 
162.8

 
19.6

 
762.5

 
1,004.9

Net change in unrealized depreciation
 
104.8

 
(117.1
)
 
85.9

 
(551.1
)
Net income (loss)
 
$
365.4

 
(17.5
)
 
1,201.2

 
623.9

Selective’s insurance subsidiaries’ other investments income
 
$
2.6

 
0.5

 
10.1

 
5.5

 
(f) At September 30, 2013, we had fixed maturity securities, with a carrying value of $61.9 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.

Also at September 30, 2013, we had fixed maturity securities, with a carrying value of $21.3 million, and short-term investments with a carrying value of $1.7 million, that collateralize reinsurance obligations related to our 2011 acquisition of our E&S book of business. Similar to the FHLBI collateral discussion above, we retain all rights regarding these investments. These fixed maturity securities are included in the "Municipal," "Corporate," "U.S. government and government agencies," "RMBS," and "ABS" classifications of our AFS fixed maturity securities portfolio.

In addition, fixed maturity securities with a carrying value of $27.0 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 September 30,
 
Nine Months ended September 30,
($ in thousands)
 
2013
 
2012
 
2013
 
2012
Fixed maturity securities
 
$
30,569


30,839

 
90,956

 
93,948

Equity securities
 
1,341


1,268

 
4,422

 
3,785

Short-term investments
 
21


36

 
102

 
103

Other investments
 
2,639


497

 
10,110

 
5,460

Miscellaneous income
 
—


41

 
—

 
105

Investment expenses
 
(2,113
)

(2,031
)
 
(6,260
)
 
(6,117
)
Net investment income earned
 
$
32,457

 
30,650

 
99,330

 
97,284


Net investment income before tax increased in both Third Quarter and Nine Months 2013 compared to the same periods last year, primarily due to higher income from our alternative investments. Partially offsetting this increase in Nine Months 2013 is a decrease in fixed maturity securities income due to lower investment yields than in the prior year period.

(h) The following tables summarize OTTI by asset type for the periods indicated:
Third Quarter 2013
 
Gross 
 
Included in Other
Comprehensive
Income (“OCI”)
 
Recognized in
Earnings
($ in thousands) 
 
 
 
Equity securities
 
$
680

 
—

 
680

OTTI losses
 
$
680

 
—

 
680

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

 
 

 
 

ABS
 
$
36

 
—

 
36

CMBS
 
(1,504
)
 
(2,023
)
 
519

Total AFS fixed maturities
 
(1,468
)
 
(2,023
)
 
555

Equity securities
 
2,389

 
—

 
2,389

OTTI losses
 
$
921

 
(2,023
)
 
2,944


Nine 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
 
1,326

 
—

 
1,326

Total AFS securities
 
1,304

 
(30
)
 
1,334

Other investments
 
1,847

 
—

 
1,847

OTTI losses
 
$
3,107

 
(77
)
 
3,184


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

 
 

 
 

ABS
 
$
98

 
—

 
98

CMBS
 
(1,396
)
 
(2,023
)
 
627

RMBS
 
(44
)
 
(218
)
 
174

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

Equity securities
 
2,560

 
—

 
2,560

OTTI losses
 
$
1,218

 
(2,241
)
 
3,459


The majority of the OTTI charges in Nine 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. In addition, OTTI charges on our equity portfolio include: (i) $0.7 million recorded in Third Quarter 2013 on securities that we did not believe would recover in the near term; and (ii) $0.6 million recorded within the first half of 2013 primarily related to securities for which we had the intent to sell. 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 September 30,
($ in thousands)
 
2013
 
2012
Balance, beginning of period
 
$
7,488

 
6,775

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

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

 
—

Balance, end of period
 
$
7,488

 
7,294


 
 
Nine Months ended September 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

 
692

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

 
—

Balance, end of period
 
$
7,488

 
7,294


(i) The components of net realized gains, excluding OTTI charges, for the periods indicated were as follows:
 
 
Quarter ended September 30,
 
Nine Months ended September 30,
($ in thousands)
 
2013
 
2012
 
2013
 
2012
HTM fixed maturity securities
 
 
 
 
 
 
 
 
Gains
 
$
32

 
40

 
35

 
195

Losses
 
(37
)
 
(90
)
 
(86
)
 
(196
)
AFS fixed maturity securities
 
 

 
 

 
 
 
 
Gains
 
662

 
2,168

 
2,580

 
2,941

Losses
 
(31
)
 
(262
)
 
(330
)
 
(379
)
AFS equity securities
 
 

 
 

 
 
 
 
Gains
 
13,801

 
—

 
24,272

 
4,775

Losses
 
(236
)
 
—

 
(407
)
 
(428
)
Short-term investments
 
 

 
 

 
 
 
 
Losses
 
—

 
—

 
—

 
(2
)
Other Investments
 
 
 
 
 
 
 
 
Gains
 
—

 
—

 
—

 
1

      Losses
 
(80
)

—

 
(940
)
 
—

Total other net realized investment gains
 
14,111


1,856

 
25,124

 
6,907

Total OTTI charges recognized in earnings
 
(680
)

(2,944
)
 
(3,184
)
 
(3,459
)
Total net realized gains (losses)
 
$
13,431


(1,088
)
 
21,940

 
3,448

 
Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold. Of the $14.1 million and $25.1 million in net realized gains in Third Quarter and Nine Months 2013, $13.5 million and $19.1 million, respectively, were related to the sale of AFS equity securities due to the rebalancing of our high-dividend yield strategy holdings within our equity portfolio. In addition, $4.7 million in net realized gains in Nine Months 2013 related to the sale of a private equity security. Of the $6.9 million of net realized gains in Nine Months 2012, $4.3 million 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 $67.2 million in Third Quarter 2013 and $116.3 million in Nine Months 2013, and $55.0 million and $150.9 million in the same periods a year ago.