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Investments
 9 Months Ended
Sep. 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 September 30, 2014 and December 31, 2013 were as follows:
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Amortized
Cost
 
Net
 Unrealized Gains
 (Losses)
 
Carrying
Value
 
Unrecognized
 Holding
Gains
 
Unrecognized Holding
 Losses
 
Fair
Value
Foreign government
 
$
5,292

 
68

 
5,360

 
47

 
—

 
5,407

Obligations of state and political subdivisions
 
301,216

 
2,472

 
303,688

 
13,921

 
—

 
317,609

Corporate securities
 
20,303

 
(325
)
 
19,978

 
2,749

 
(1
)
 
22,726

Asset-backed securities (“ABS”)
 
3,111

 
(530
)
 
2,581

 
543

 
—

 
3,124

Commercial mortgage-backed securities (“CMBS”)
 
4,953

 
(478
)
 
4,475

 
849

 
—

 
5,324

Total HTM fixed income securities
 
$
334,875

 
1,207

 
336,082

 
18,109

 
(1
)
 
354,190

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 2.0 years as of September 30, 2014.

(b) The cost/amortized cost, unrealized gains and losses, and fair value of AFS securities as of September 30, 2014 and December 31, 2013 were as follows:
September 30, 2014
 
 
 
 
 
 
 
 
($ in thousands)
 
Cost/
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
U.S. government and government agencies
 
$
143,742

 
8,210

 
(263
)
 
151,689

Foreign government
 
27,041

 
832

 
(6
)
 
27,867

Obligations of states and political subdivisions
 
1,196,478

 
34,533

 
(1,777
)
 
1,229,234

Corporate securities
 
1,725,290

 
44,571

 
(6,631
)
 
1,763,230

ABS
 
146,557

 
791

 
(382
)
 
146,966

CMBS1
 
164,934

 
2,077

 
(1,493
)
 
165,518

Residential mortgage-backed
securities (“RMBS”)2
 
480,210

 
7,664

 
(4,740
)
 
483,134

AFS fixed income securities
 
3,884,252

 
98,678

 
(15,292
)
 
3,967,638

AFS equity securities
 
180,419

 
34,797

 
(3,950
)
 
211,266

Total AFS securities
 
$
4,064,671

 
133,475

 
(19,242
)
 
4,178,904

 
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 $17.6 million at September 30, 2014 and $30.0 million at December 31, 2013.
2 RMBS includes government guaranteed agency securities with a fair value of $35.9 million at September 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 September 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:
September 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
 
$
1,001

 
—

 
13,219

 
(263
)
Foreign government
 
4,755

 
(6
)
 
—

 
—

Obligations of states and political subdivisions
 
121,728

 
(292
)
 
98,944

 
(1,485
)
Corporate securities
 
274,501

 
(1,529
)
 
158,127

 
(5,102
)
ABS
 
47,542

 
(134
)
 
14,149

 
(248
)
CMBS
 
16,969

 
(89
)
 
57,634

 
(1,404
)
RMBS
 
30,958

 
(101
)
 
163,237

 
(4,639
)
Total fixed income securities
 
497,454

 
(2,151
)
 
505,310

 
(13,141
)
Equity securities
 
35,229

 
(3,950
)
 
—

 
—

Subtotal
 
$
532,683

 
(6,101
)
 
505,310

 
(13,141
)

 
 
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
 
460

 
(9
)
 
8

 
—

 
—

 
—

ABS
 
—

 
—

 
—

 
2,428

 
(530
)
 
516

Subtotal
 
$
460

 
(9
)
 
8

 
2,428

 
(530
)
 
516

Total AFS and HTM
 
$
533,143

 
(6,110
)
 
8

 
507,738

 
(13,671
)
 
516


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.

The table below provides our net unrealized/unrecognized loss positions by impairment severity as of September 30, 2014 compared to December 31, 2013:
($ in thousands)
 
 
September 30, 2014
 
December 31, 2013
Number of
Issues
% of Market/Book
Unrealized/
Unrecognized Loss
 
Number of
Issues
% of
Market/Book
Unrealized/
Unrecognized Loss
404

80% - 99%
$
16,417

 
556

80% - 99%
$
51,835

2

60% - 79%
2,840

 
1

60% - 79%
176

—

40% - 59%
—

 
—

40% - 59%
—

—

20% - 39%
—

 
—

20% - 39%
—

—

0% - 19%
—

 
—

0% - 19%
—

 

 
$
19,257

 
 

 
$
52,011

 
At September 30, 2014, we had 406 securities in an aggregate unrealized/unrecognized loss position of $19.3 million, compared to 557 securities in an aggregate unrealized/unrecognized loss position of $52.0 million at December 31, 2013. This improvement was mainly driven by a lower interest rate environment. Fixed income security pricing in the marketplace has improved reflecting the 54 basis point decrease in 10-year U.S. Treasury Note yields during Nine Months 2014.

At September 30, 2014, $13.2 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 $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 amortized cost at year end to an average of 3% of amortized cost at the end of the third 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 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.

In addition, 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, 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 September 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 September 30, 2014:
($ in thousands)
 
Carrying Value
 
Fair Value
Due in one year or less
 
$
99,364

 
100,786

Due after one year through five years
 
220,937

 
235,038

Due after five years through 10 years
 
15,781

 
18,366

Total HTM fixed income securities
 
$
336,082

 
354,190

 
Listed below are AFS fixed income securities at September 30, 2014:
($ in thousands)
 
Fair Value
Due in one year or less
 
$
435,053

Due after one year through five years
 
1,915,327

Due after five years through 10 years
 
1,507,315

Due after 10 years
 
109,943

Total AFS fixed income securities
 
$
3,967,638

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

 
 

 
 

  Secondary private equity
 
$
23,064

 
25,618

 
6,978

  Private equity
 
21,569

 
20,192

 
9,181

  Energy/power generation
 
16,659

 
17,361

 
6,984

  Mezzanine financing
 
11,273

 
12,738

 
13,774

  Real estate
 
11,212

 
11,698

 
10,061

  Distressed debt
 
9,205

 
11,579

 
2,981

  Venture capital
 
7,115

 
7,025

 
350

Total alternative investments
 
100,097

 
106,211

 
50,309

Other securities
 
6,451

 
1,664

 
—

Total other investments
 
$
106,548

 
107,875

 
50,309


 
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 nine-month periods ended September 30 is based on the investments' results through June 30 and is as follows:
Income Statement Information
 
Quarter ended September 30,1
 
Nine Months ended September 30,2
($ in millions)
 
2014

2013
 
2014
 
2013
Net investment income
 
$
81.3


97.8

 
$
167.0

 
352.8

Realized (losses) gains
 
(26.1
)

162.8

 
171.5

 
762.5

Net change in unrealized appreciation
 
628.6


104.8

 
1,471.0

 
85.9

Net income
 
$
683.8


365.4

 
$
1,809.5

 
1,201.2

Selective’s insurance subsidiaries’ other investments income
 
$
3.9


2.6

 
$
12.7

 
10.1

1 The majority of these results are for the second quarter of each respective year.
2 The majority of these results are for the nine months ended June 30 of each respective year.
 
(f) We have pledged certain AFS fixed income securities 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 September 30, 2014:
($ in millions)
 
FHLBI Collateral
 
Reinsurance Collateral
 
State and Regulatory Deposits
 
Total
U.S. government and government agencies
 
$
22.8

 
—

 
25.6

 
48.4

Obligations of states and political subdivisions
 
—

 
5.7

 
—

 
5.7

Corporate securities
 
—

 
5.3

 
—

 
5.3

ABS
 
—

 
2.0

 
—

 
2.0

CMBS
 
1.2

 
—

 
—

 
1.2

RMBS
 
37.6

 
2.3

 
—

 
39.9

Total pledged as collateral
 
$
61.6

 
15.3


25.6


102.5


 
(g) The components of pre-tax net investment income earned for the periods indicated were as follows:
 
 
Quarter ended September 30,
 
Nine Months ended September 30,
($ in thousands)
 
2014
 
2013
 
2014
 
2013
Fixed income securities
 
$
30,706


30,569

 
$
95,515

 
$
90,956

Equity securities
 
1,909


1,341

 
5,094

 
4,422

Short-term investments
 
15


21

 
48

 
102

Other investments
 
3,906


2,639

 
12,677

 
10,110

Investment expenses
 
(2,244
)

(2,113
)
 
(6,734
)
 
(6,260
)
Net investment income earned
 
$
34,292

 
32,457

 
106,600

 
99,330


(h) The following tables summarize OTTI by asset type for the periods indicated. We had no OTTI charges in Third Quarter 2014:
Third Quarter 2013

Gross

Included in Other Comprehensive Income ("OCI")

Recognized in Earnings
($ in thousands)



AFS securities

 


 


 

     Equity securities

$
680


—


680

OTTI losses

$
680


—


680


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

 
—

 
1,382

OTTI losses
 
$
1,382

 
—

 
1,382


Nine 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
 
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



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 portionof the OTTI charge was recognized in OCI, and the corresponding changes in such amounts:
 
 
Quarter ended September 30,
($ in thousands)
 
2014
 
2013
Balance, beginning of period
 
$
5,534

 
7,488

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

 
—

Reductions for securities sold during the period
 
(90
)
 
—

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
 
—

 
—

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

 
—

Balance, end of period
 
$
5,444

 
7,488

 
 
Nine Months ended September 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
 
(2,044
)
 
—

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
 
$
5,444

 
7,488


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

 
32

3

 
35

Losses
 
(4
)
 
(37
)
(18
)
 
(86
)
AFS fixed income securities
 
 

 
 



 


Gains
 
695

 
662

1,633

 
2,580

Losses
 
(29
)
 
(31
)
(172
)
 
(330
)
AFS equity securities
 
 

 
 



 


Gains
 
14,576

 
13,801

27,255

 
24,272

Losses
 
(8
)
 
(236
)
(332
)
 
(407
)
Other investments
 
 
 
 


 


Gains
 
1

 
—

1

 
—

      Losses
 
—


(80
)
—

 
(940
)
Total other net realized investment gains
 
15,231


14,111

28,370

 
25,124

Total OTTI charges recognized in earnings
 
—


(680
)
(1,382
)
 
(3,184
)
Total net realized gains
 
$
15,231


13,431

26,988

 
21,940

 
Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold. The $15.2 million and $28.4 million in net realized gains in Third Quarter and Nine 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 $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, was related to the sale of a private equity security due to the acquisition of this investment by a third party.

Proceeds from the sale of AFS securities were $89.9 million in Third Quarter 2014 and $221.5 million in Nine Months 2014, and $67.2 million and $116.3 million in the same periods a year ago.