Fair Value Measurements

The following table presents the carrying amounts and estimated fair values of our financial instruments as of December 31, 2013 and 2012:



	December 31, 2013			December 31, 2012
($ in thousands)	Carrying Amount		Fair Value	Carrying Amount	Fair Value
Financial Assets
Fixed maturity securities:
HTM	$	392,879	416,981	554,069	594,661
AFS	3,715,536		3,715,536	3,296,013	3,296,013
Equity securities, AFS	192,771		192,771	151,382	151,382
Short-term investments	174,251		174,251	214,479	214,479
Receivable for proceeds related to sale of Selective HR Solutions ("Selective HR")	—		—	2,705	2,705
Financial Liabilities
Notes payable:
2.90% borrowings from the Federal Home Loan Bank of Indianapolis ("FHLBI")	13,000		13,319	13,000	13,595
1.25% borrowings from FHLBI	45,000		45,259	45,000	45,590
7.50% Junior Notes	—		—	100,000	101,480
7.25% Senior Notes	49,916		50,887	49,912	52,689
6.70% Senior Notes	99,498		98,247	99,475	107,707
5.875% Senior Notes	185,000		146,298	—	—
Total notes payable	$	392,414	354,010	307,387	321,061

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, 2013 and 2012:



December 31, 2013			Fair Value Measurements Using
($ in thousands)	Assets Measured at Fair Value 12/31/13		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:
AFS:
U.S. government and government agencies	$	173,375	52,153	121,222	—
Foreign government	30,615		—	30,615	—
Obligations of states and political subdivisions	951,624		—	951,624	—
Corporate securities	1,734,883		—	1,734,883	—
ABS	140,896		—	140,896	—
CMBS	171,284		—	171,284	—
RMBS	512,859		—	512,859	—
Total fixed maturity securities	3,715,536		52,153	3,663,383	—
Equity securities	192,771		189,871	—	2,900
Total AFS securities	3,908,307		242,024	3,663,383	2,900
Short-term investments	174,251		174,251	—	—
Total assets	$	4,082,558	416,275	3,663,383	2,900



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:
AFS:
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 fixed maturity securities	3,296,013		115,861	3,144,187	35,965
Equity securities	151,382		147,775	—	3,607
Total AFS securities	3,447,395		263,636	3,144,187	39,572
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

¹There were no transfers of securities between Level 1 and Level 2.

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 years ended December 31, 2013 and 2012:



2013
($ in thousands)	Government			Corporate		ABS		CMBS		Equity		Receivable for Proceeds Related to Sale of Selective HR		Total
Fair value, December 31, 2012	$	19,789		2,946		6,068		7,162		3,607		2,705		42,277
Total net (losses) gains for the period included in:
OCI¹	(537		)	(7	)	(74	)	772		3,935		—		4,089
Net income^2,3	(76		)	—		—		361		—		(1,480	)	(1,195	)
Purchases	—			—		—		—		—		—		—
Sales	—			—		—		—		—		—		—
Issuances	—			—		—		—		—		—		—
Settlements	(1,847		)	(168	)	—		(2,420	)	—		(225	)	(4,660	)
Transfers into Level 3	—			—		—		—		—		—		—
Transfers out of Level 3	(17,329		)	(2,771	)	(5,994	)	(5,875	)	(4,642	)	(1,000	)	(37,611	)
Fair value, December 31, 2013	$	—		—		—		—		2,900		—		2,900



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 income^2,3	(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

¹Amounts are reported in “Unrealized holding (losses) gains arising during period” on the Consolidated Statements of Comprehensive Income.

²Amounts are reported in “Net realized gains” for realized gains and losses and “Net investment income earned” for amortization of securities on the Consolidated Statements of Income.

³For the receivable related to the sale of Selective HR, amounts in “Loss on disposal of discontinued operations, net of tax” relate to an impairment charge and

amounts in “Other income” relate to interest accretion on the Consolidated Statements of Income.

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. At December 31, 2013, there were no fixed maturity securities that were measured using Level 3 inputs. However during 2013, securities with a fair value of $32.0 million were transferred out of level 3 due to the availability of Level 2 pricing at December 31, 2013 that was not available previously.

In 2012, fixed maturity securities with a fair value of $9.0 million 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, were priced using Level 3 inputs at December 31, 2012. In addition,

certain of these transfers related 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. Fixed maturity securities with a fair value of $8.5 million were transferred out of Level 3 due to the availability of Level 2 pricing at December 31, 2012 that was not available previously.

Equity securities with fair values of $2.9 million and $3.6 million were measured using Level 3 inputs at December 31, 2013

and 2012, respectively. During 2012, two non-publicly traded equity securities were transferred into Level 3 due

to the nature of the quotes used at the valuation date. One of these securities was transferred out of Level 3 and into Level 2 at

March 31, 2013, as the pricing as of that date was based on a quoted price in an inactive market. This security was

subsequently sold in the second quarter of 2013 for an amount that approximated the March 31, 2013 value. At each reporting

date, we review the fair value of the remaining Level 3 security for reasonableness.

At December 31, 2012, the receivable related to the sale of Selective HR was contingent on the purchaser's ability to retain

business subsequent to the sale. At that time, the fair value of this receivable was measured using unobservable inputs, the

most significant of which was our assumption regarding the retention of business. In the first quarter of 2013, we reached an

agreement with the purchaser to settle this receivable for an aggregate of $1.0 million, which was paid in two installments. As

a result, the receivable was transferred out of Level 3. See Note 12. "Discontinued Operations" of this Form 10-K for a

discussion of the impairment charge that was recorded on this receivable in the first quarter of 2013.

The following tables provide quantitative information regarding our financial assets and liabilities that were disclosed at fair value at December 31, 2013 and 2012:



December 31, 2013			Fair Value Measurements Using
($ in thousands)	Assets/Liabilities Disclosed at Fair Value 12/31/2013		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	$	5,591	—	5,591	—
Obligations of states and political subdivisions	369,756		—	369,756	—
Corporate securities	30,274		—	30,274	—
ABS	3,415		—	3,415	—
CMBS	7,945		—	7,945	—
Total HTM fixed maturity securities	$	416,981	—	416,981	—
Financial Liabilities
Notes payable:
2.90% borrowings from FHLBI	13,319		—	13,319	—
1.25% borrowings from FHLBI	45,259		—	45,259	—
7.25% Senior Notes	50,887		—	50,887	—
6.70% Senior Notes	98,247		—	98,247	—
5.875% Senior Notes	146,298		146,298	—	—
Total notes payable	$	354,010	146,298	207,712	—



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	—	—
7.25% Senior Notes	52,689		—	52,689	—
6.70% Senior Notes	107,707		107,707	—	—
Total notes payable	$	321,061	209,187	111,874	—