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Investments
 6 Months Ended
Jun. 30, 2014
Investments [Abstract]  
Investments
Investments
(a) The amortized cost, net unrealized gains and losses, carrying value, unrecognized holding gains and losses, and fair value of HTM fixed income securities as of June 30, 2014 and December 31, 2013 were as follows:
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Amortized
Cost
 
Net
 Unrealized Gains
 (Losses)
 
Carrying
Value
 
Unrecognized
 Holding
Gains
 
Unrecognized Holding
 Losses
 
Fair
Value
Foreign government
 
$
5,292

 
90

 
5,382

 
137

 
—

 
5,519

Obligations of state and political subdivisions
 
327,898

 
2,942

 
330,840

 
15,884

 
—

 
346,724

Corporate securities
 
21,893

 
(347
)
 
21,546

 
2,972

 
(5
)
 
24,513

Asset-backed securities (“ABS”)
 
3,260

 
(583
)
 
2,677

 
608

 
—

 
3,285

Commercial mortgage-backed securities (“CMBS”)
 
5,015

 
(522
)
 
4,493

 
968

 
—

 
5,461

Total HTM fixed income securities
 
$
363,358

 
1,580

 
364,938

 
20,569

 
(5
)
 
385,502

December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Amortized
Cost
 
Net
 Unrealized Gains
 (Losses)
 
Carrying
Value
 
Unrecognized
 Holding
Gains
 
Unrecognized Holding
 Losses
 
Fair
Value
Foreign government
 
$
5,292

 
131

 
5,423

 
168

 
—

 
5,591

Obligations of state and political subdivisions
 
348,109

 
4,013

 
352,122

 
17,634

 
—

 
369,756

Corporate securities
 
28,174

 
(346
)
 
27,828

 
2,446

 
—

 
30,274

ABS
 
3,413

 
(655
)
 
2,758

 
657

 
—

 
3,415

CMBS
 
5,634

 
(886
)
 
4,748

 
3,197

 
—

 
7,945

Total HTM fixed income securities
 
$
390,622

 
2,257

 
392,879

 
24,102

 
—

 
416,981

 
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 1.9 years as of June 30, 2014.

(b) The cost/amortized cost, unrealized gains and losses, and fair value of AFS securities as of June 30, 2014 and December 31, 2013 were as follows:
June 30, 2014
 
 
 
 
 
 
 
 
($ in thousands)
 
Cost/
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
U.S. government and government agencies
 
$
149,537

 
9,474

 
(202
)
 
158,809

Foreign government
 
27,046

 
983

 
(1
)
 
28,028

Obligations of states and political subdivisions
 
1,080,039

 
30,696

 
(3,681
)
 
1,107,054

Corporate securities
 
1,730,192

 
56,587

 
(4,186
)
 
1,782,593

ABS
 
131,434

 
945

 
(210
)
 
132,169

CMBS1
 
170,298

 
3,246

 
(1,073
)
 
172,471

Residential mortgage-backed
securities (“RMBS”)2
 
503,490

 
9,534

 
(3,948
)
 
509,076

AFS fixed income securities
 
3,792,036

 
111,465

 
(13,301
)
 
3,890,200

AFS equity securities
 
166,214

 
45,137

 
(3
)
 
211,348

Total AFS securities
 
$
3,958,250

 
156,602

 
(13,304
)
 
4,101,548

 
December 31, 2013
 
 
 
 
 
 
 
 
($ in thousands)
 
Cost/
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
U.S. government and government agencies
 
$
163,218

 
10,661

 
(504
)
 
173,375

Foreign government
 
29,781

 
906

 
(72
)
 
30,615

Obligations of states and political subdivisions
 
946,455

 
25,194

 
(20,025
)
 
951,624

Corporate securities
 
1,707,928

 
44,004

 
(17,049
)
 
1,734,883

ABS
 
140,430

 
934

 
(468
)
 
140,896

CMBS1
 
172,288

 
2,462

 
(3,466
)
 
171,284

RMBS2
 
515,877

 
7,273

 
(10,291
)
 
512,859

AFS fixed income securities
 
3,675,977

 
91,434

 
(51,875
)
 
3,715,536

AFS equity securities
 
155,350

 
37,517

 
(96
)
 
192,771

Total AFS securities
 
$
3,831,327

 
128,951

 
(51,971
)
 
3,908,307



1 CMBS includes government guaranteed agency securities with a fair value of $23.7 million at June 30, 2014 and $30.0 million at December 31, 2013.
2 RMBS includes government guaranteed agency securities with a fair value of $41.8 million at June 30, 2014 and $55.2 million at December 31, 2013.
 
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 Accumulated other comprehensive income ("AOCI") on the Consolidated Balance Sheets.

(c) The following tables summarize, for all securities in a net unrealized/unrecognized loss position at June 30, 2014 and December 31, 2013, 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, 2014
 
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
 
$
—

 
—

 
13,284

 
(202
)
Foreign government
 
—

 
—

 
2,997

 
(1
)
Obligations of states and political subdivisions
 
54,331

 
(187
)
 
246,340

 
(3,494
)
Corporate securities
 
55,362

 
(186
)
 
170,034

 
(4,000
)
ABS
 
14,992

 
(28
)
 
14,215

 
(182
)
CMBS
 
4,939

 
(4
)
 
58,286

 
(1,069
)
RMBS
 
2,761

 
(13
)
 
169,064

 
(3,935
)
Total fixed income securities
 
132,385

 
(418
)
 
674,220

 
(12,883
)
Equity securities
 
170

 
(3
)
 
—

 
—

Subtotal
 
$
132,555

 
(421
)
 
674,220

 
(12,883
)

 
 
Less than 12 months
 
12 months or longer
($ in thousands)
 
Fair
Value
 
Unrealized
Gains (Losses)1
 
Unrecognized
Losses2
 
Fair
Value
 
Unrealized
Losses1
 
Unrecognized
Gains2
HTM securities
 
 

 
 

 
 

 
 

 
 

 
 

Corporate securities
 
1,482

 
3

 
(5
)
 
—

 
—

 
—

ABS
 
—

 
—

 
—

 
2,496

 
(583
)
 
564

Subtotal
 
$
1,482

 
3

 
(5
)
 
2,496

 
(583
)
 
564

Total AFS and HTM
 
$
134,037

 
(418
)
 
(5
)
 
676,716

 
(13,466
)
 
564


December 31, 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
 
$
16,955

 
(500
)
 
507

 
(4
)
Foreign government
 
2,029

 
(30
)
 
2,955

 
(42
)
Obligations of states and political subdivisions
 
442,531

 
(19,120
)
 
13,530

 
(905
)
Corporate securities
 
511,100

 
(15,911
)
 
14,771

 
(1,138
)
ABS
 
68,725

 
(468
)
 
—

 
—

CMBS
 
100,396

 
(2,950
)
 
6,298

 
(516
)
RMBS
 
268,943

 
(10,031
)
 
2,670

 
(260
)
Total fixed income securities
 
1,410,679

 
(49,010
)
 
40,731

 
(2,865
)
Equity securities
 
1,124

 
(96
)
 
—

 
—

Subtotal
 
$
1,411,803

 
(49,106
)
 
40,731

 
(2,865
)
 

 
 
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
 
$
65

 
(5
)
 
5

 
441

 
(20
)
 
14

ABS
 
—

 
—

 
—

 
2,490

 
(655
)
 
621

Subtotal
 
65

 
(5
)
 
5

 
2,931

 
(675
)
 
635

Total AFS and HTM
 
$
1,411,868

 
(49,111
)
 
5

 
43,662

 
(3,540
)
 
635

 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 improved by $38.7 million as of June 30, 2014 compared to December 31, 2013 as follows:
($ in thousands)
 
 
June 30, 2014
 
December 31, 2013
Number of
Issues
% of Market/Book
Unrealized/
Unrecognized Loss
 
Number of
Issues
% of
Market/Book
Unrealized/
Unrecognized
Loss
288

80% - 99%
$
13,325

 
556

80% - 99%
$
51,835

—

60% - 79%
—

 
1

60% - 79%
176

—

40% - 59%
—

 
—

40% - 59%
—

—

20% - 39%
—

 
—

20% - 39%
—

—

0% - 19%
—

 
—

0% - 19%
—

 

 
$
13,325

 
 

 
$
52,011

 
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 2013 Annual Report.
  
At June 30, 2014, we had 288 securities in an aggregate unrealized/unrecognized loss position of $13.3 million, compared to 557 securities in an aggregate unrealized/unrecognized loss position of $52.0 million at December 31, 2013. This improvement was driven by a lower interest rate environment, as interest rates on the 10-year U.S. Treasury Note fell by 50 basis points in Six Months 2014. This interest rate movement had a positive impact on our fixed income securities portfolio's valuation, thus decreasing the number of securities in a loss position and the corresponding dollar amount of unrealized losses.

At June 30, 2014, $12.9 million of the aggregate unrealized/unrecognized losses related to securities that have been in a loss position for more than 12 months, while at December 31, 2013, these losses amounted to only $2.9 million. Despite these securities being in a loss position, the nature of the loss is interest-rate related as opposed to credit-related concerns, as was evidenced by the fact that the severity of impairment on these securities improved from an average of 6% of its amortized cost at year end to an average of 2% of its amortized cost at the end of the second quarter. This movement is reflective of the overall interest rate decline experienced during the year.

For a discussion regarding the impact of interest rate movements on our fixed income securities portfolio, refer to Item 7A. "Quantitative and Qualitative Disclosures About Market Risk." in our 2013 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 June 30, 2014. 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 income securities at June 30, 2014, 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 income securities at June 30, 2014:
($ in thousands)
 
Carrying Value
 
Fair Value
Due in one year or less
 
$
113,394

 
115,199

Due after one year through five years
 
230,116

 
245,500

Due after five years through 10 years
 
21,428

 
24,803

Total HTM fixed income securities
 
$
364,938

 
385,502

 
Listed below are AFS fixed income securities at June 30, 2014:
($ in thousands)
 
Fair Value
Due in one year or less
 
$
401,681

Due after one year through five years
 
2,007,460

Due after five years through 10 years
 
1,404,203

Due after 10 years
 
76,856

Total AFS fixed income securities
 
$
3,890,200

  
(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,
2014
($ in thousands)
 
June 30,
2014
 
December 31,
2013
 
Remaining Commitment
Alternative Investments
 
 

 
 

 
 

  Secondary private equity
 
$
23,575

 
25,618

 
7,230

  Private equity
 
21,388

 
20,192

 
9,917

  Energy/power generation
 
17,802

 
17,361

 
6,984

  Mezzanine financing
 
13,243

 
12,738

 
14,470

  Real estate
 
11,039

 
11,698

 
10,131

  Distressed debt
 
9,947

 
11,579

 
2,971

  Venture capital
 
7,089

 
7,025

 
350

Total alternative investments
 
104,083

 
106,211

 
52,053

Other securities
 
2,042

 
1,664

 
597

Total other investments
 
$
106,125

 
107,875

 
52,650


 
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 2013 Annual Report.
 
The following table sets forth gross summarized financial information for our other investments portfolio, including the portion not owned by us. The investments are 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 one quarter lag, the summarized financial statement information for the three and six-month periods ended March 31 is as follows:
Income Statement Information
 
Quarter ended March 31,
 
Six Months ended March 31,
($ in millions)
 
2014

2013
 
2014
 
2013
Net investment income
 
$
22.8


46.8

 
$
85.7

 
255.0

Realized gains (losses)
 
74.2


(22.1
)
 
197.6

 
599.7

Net change in unrealized appreciation (depreciation)
 
207.6


378.8

 
842.4

 
(18.9
)
Net income
 
$
304.6


403.5

 
$
1,125.7

 
835.8

Selective’s insurance subsidiaries’ other investments income
 
$
3.6


3.9

 
$
8.8

 
7.5

 
(f) We have pledged certain AFS fixed income securities and short-term investments as collateral related to: (i) our outstanding borrowing of $58 million with the Federal Home Loan Bank of Indianapolis ("FHLBI"); and (ii) our reinsurance obligations related to our 2011 acquisition of our E&S book of business. In addition, certain securities were on deposit with various state and regulatory agencies to comply with insurance laws. We retain all rights regarding all securities pledged as collateral.

The following table summarizes the market value of these securities at June 30, 2014:
($ in millions)
 
FHLBI Collateral
 
Reinsurance Collateral
 
State and Regulatory Deposits
 
Total
U.S. government and government agencies
 
$
22.9

 
—

 
26.0

 
48.9

Obligations of states and political subdivisions
 
—

 
5.7

 
—

 
5.7

Corporate securities
 
—

 
5.3

 
—

 
5.3

ABS
 
—

 
2.0

 
—

 
2.0

CMBS
 
1.9

 
—

 
—

 
1.9

RMBS
 
36.8

 
3.2

 
—

 
40.0

Total fixed income securities
 
$
61.6

 
16.2


26.0


103.8

Short-term investments
 
—

 
0.2

 
—

 
0.2

Total pledged as collateral
 
$
61.6

 
16.4


26.0


104.0


 
(g) The components of pre-tax net investment income earned for the periods indicated were as follows:
 
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in thousands)
 
2014
 
2013
 
2014
 
2013
Fixed income securities
 
$
33,781


30,298

 
$
64,809

 
$
60,387

Equity securities
 
1,736


1,874

 
3,185

 
3,081

Short-term investments
 
14


29

 
33

 
81

Other investments
 
3,553


3,869

 
8,771

 
7,471

Investment expenses
 
(2,310
)

(2,067
)
 
(4,490
)
 
(4,147
)
Net investment income earned
 
$
36,774

 
34,003

 
72,308

 
66,873


(h) The following tables summarize OTTI by asset type for the periods indicated:
Second Quarter 2014

Gross 

Included in Other
Comprehensive
Income (“OCI”)

Recognized in
Earnings
($ in thousands) 



AFS securities









    Equity securities

$
419


—


419

Total AFS Securities

419


—


419

OTTI losses

$
419


—


419

 
Second Quarter 2013

Gross

Included in OCI

Recognized in Earnings
($ in thousands)



HTM fixed income securities









ABS

$
(44
)

(47
)

3

Total HTM fixed income securities

(44
)

(47
)

3

Equity securities

429


—


429

Total AFS securities

429


—


429

Other investments

123


—


123

OTTI losses

$
508


(47
)

555


Six Months 2014
 
Gross 
 
Included in OCI
 
Recognized in
Earnings
($ in thousands) 
 
 
 
AFS securities
 
 
 
 
 
 
    Equity securities
 
$
1,382

 
—

 
1,382

Total AFS Securities
 
1,382

 
—

 
1,382

OTTI losses
 
$
1,382

 
—

 
1,382


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

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

AFS fixed income securities
 
 

 
 

 
 

RMBS
 
(22
)
 
(30
)
 
8

Total AFS fixed income 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



The OTTI charges in Second Quarter 2014 and Six Months 2014 relate to equity securities for which we have the intent to sell. The majority of the OTTI charges in Six Months 2013 related to an investment in a limited liability company within our other investments portfolio that had sustained significant losses for which we did not anticipate recovery. For a discussion of our evaluation for OTTI of fixed income 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 2013 Annual Report.

The following tables set forth, for the periods indicated, credit loss impairments on fixed income 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)
 
2014
 
2013
Balance, beginning of period
 
$
7,488

 
7,486

Addition for the amount related to credit loss for which an OTTI was not previously recognized
 
—

 
—

Reductions for securities sold during the period
 
(1,954
)
 
—

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

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

 
—

Balance, end of period
 
$
5,534

 
7,488

 
 
Six Months ended June 30,
($ in thousands)
 
2014
 
2013
Balance, beginning of period
 
$
7,488

 
7,477

Addition for the amount related to credit loss for which an OTTI was not previously recognized
 
—

 
—

Reductions for securities sold during the period
 
(1,954
)
 
—

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

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

 
—

Balance, end of period
 
$
5,534

 
7,488


(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)
 
2014
 
2013
2014
 
2013
HTM fixed income securities
 
 
 
 
 
 
 
Gains
 
$
3

 
3

3

 
3

Losses
 
(3
)
 
(12
)
(14
)
 
(49
)
AFS fixed income securities
 
 

 
 



 


Gains
 
780

 
967

938

 
1,918

Losses
 
(31
)
 
(46
)
(143
)
 
(299
)
AFS equity securities
 
 

 
 



 


Gains
 
4,362

 
4,800

12,679

 
10,471

Losses
 
(153
)
 
(3
)
(324
)
 
(171
)
Other investments
 
 
 
 


 


Gains
 
—

 
—

—

 
—

      Losses
 
—


—

—

 
(860
)
Total other net realized investment gains
 
4,958


5,709

13,139

 
11,013

Total OTTI charges recognized in earnings
 
(419
)

(555
)
(1,382
)
 
(2,504
)
Total net realized gains
 
$
4,539


5,154

11,757

 
8,509

 
Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold. The $5.0 million and $13.1 million in net realized gains in Second Quarter and Six Months 2014, respectively, were primarily related to the sale of AFS equity securities due to the rebalancing of our high dividend yield strategy holdings within our equity portfolio.

Of the $5.7 million and $11.0 million in net realized gains in Second Quarter and Six Months 2013, $4.7 million related 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 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 $68.7 million in Second Quarter 2014 and $131.6 million in Six Months 2014, and $42.2 million and $49.1 million in the same periods a year ago.