10-Q 1 sigi-9302015x10q.htm 10-Q
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2015
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____________________________to_____________________________
Commission File Number: 001-33067
SELECTIVE INSURANCE GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)

New Jersey |  | 22-2168890
(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
40 Wantage Avenue |  |
Branchville, New Jersey |  | 07890
(Address of Principal Executive Offices) |  | (Zip Code)

(973) 948-3000
(Registrant’s Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x |  | Accelerated filer o
Non-accelerated filer o |  | Smaller reporting company o

(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of October 15, 2015, there were 57,195,450 shares of common stock, par value $2.00 per share, outstanding.

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| SELECTIVE INSURANCE GROUP, INC. |
| Table of Contents |
|  | Page No.
PART I. FINANCIAL INFORMATION |
Item 1. | Financial Statements |
| Consolidated Balance Sheets as of September 30, 2015 (Unaudited) and December 31, 2014 | 1
| Unaudited Consolidated Statements of Income for the Quarter and Nine Months Ended September 30, 2015 and 2014 | 2
| Unaudited Consolidated Statements of Comprehensive Income for the Quarter and Nine Months Ended September 30, 2015 and 2014 | 3
| Unaudited Consolidated Statements of Stockholders' Equity for the Nine Months Ended September 30, 2015 and 2014 | 4
| Unaudited Consolidated Statements of Cash Flow for the Nine Months Ended September 30, 2015 and 2014 | 5
| Notes to Unaudited Interim Consolidated Financial Statements | 6
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| Forward-Looking Statements | 28
| Introduction | 28
| Critical Accounting Policies and Estimates | 29
| Financial Highlights of Results for Third Quarter and Nine Months 2015 and Third Quarter and Nine Months 2014 | 29
| Results of Operations and Related Information by Segment | 33
| Federal Income Taxes | 45
| Financial Condition, Liquidity, Short-term Borrowings, and Capital Resources | 45
| Ratings | 48
| Off-Balance Sheet Arrangements | 48
| Contractual Obligations, Contingent Liabilities, and Commitments | 48
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 49
Item 4. | Controls and Procedures | 49
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings | 50
Item 1A. | Risk Factors | 50
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 51
Item 6. | Exhibits | 52
Signatures | 53

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PART I. FINANCIAL INFORMATION |

ITEM 1. FINANCIAL STATEMENTS. |

SELECTIVE INSURANCE GROUP, INC. CONSOLIDATED BALANCE SHEETS |  | Unaudited |  |
($ in thousands, except share amounts) |  | September 30, 2015 |  | December 31, 2014
ASSETS |  |  |  |  |  |
Investments: |  |  |  |  |  |
Fixed income securities, held-to-maturity – at carrying value (fair value: $240,388 – 2015; $333,961 – 2014) |  | $ | 229,869 |  |  | 318,137 |
Fixed income securities, available-for-sale – at fair value (amortized cost: $4,273,771 – 2015; $3,975,786 – 2014) |  | 4,351,046 |  |  | 4,066,122 |
Equity securities, available-for-sale – at fair value (cost: $220,820 – 2015; $159,011 – 2014) |  | 221,951 |  |  | 191,400 |
Short-term investments (at cost which approximates fair value) |  | 125,855 |  |  | 131,972 |
Other investments |  | 85,146 |  |  | 99,203 |
Total investments (Note 4) |  | 5,013,867 |  |  | 4,806,834 |
Cash |  | 15,113 |  |  | 23,959 |
Interest and dividends due or accrued |  | 38,009 |  |  | 38,901 |
Premiums receivable, net of allowance for uncollectible accounts of: $4,612 – 2015; $4,137 – 2014 |  | 653,966 |  |  | 558,778 |
Reinsurance recoverables, net |  | 561,364 |  |  | 581,548 |
Prepaid reinsurance premiums |  | 148,634 |  |  | 146,993 |
Deferred federal income tax |  | 93,062 |  |  | 98,449 |
Property and equipment – at cost, net of accumulated depreciation and amortization of: $184,406 – 2015; $172,183 – 2014 |  | 65,657 |  |  | 59,416 |
Deferred policy acquisition costs |  | 213,666 |  |  | 185,608 |
Goodwill |  | 7,849 |  |  | 7,849 |
Other assets |  | 86,930 |  |  | 73,215 |
Total assets |  | $ | 6,898,117 |  |  | 6,581,550 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |  |  |  |
Liabilities: |  |  |  |  |  |
Reserve for loss and loss expenses |  | $ | 3,517,751 |  |  | 3,477,870 |
Unearned premiums |  | 1,218,884 |  |  | 1,095,819 |
Notes payable |  | 394,309 |  |  | 379,297 |
Current federal income tax |  | 12,607 |  |  | 3,921 |
Accrued salaries and benefits |  | 158,044 |  |  | 158,382 |
Other liabilities |  | 237,500 |  |  | 190,675 |
Total liabilities |  | $ | 5,539,095 |  |  | 5,305,964 |
Stockholders’ Equity: |  |  |  |  |  |
Preferred stock of $0 par value per share: |  | $ | — |  |  | — |
Authorized shares 5,000,000; no shares issued or outstanding |  |  |  |
Common stock of $2 par value per share: |  |  |  |
Authorized shares 360,000,000 |  |  |  |
Issued: 100,673,864 – 2015; 99,947,933 – 2014 |  | 201,348 |  |  | 199,896 |
Additional paid-in capital |  | 320,987 |  |  | 305,385 |
Retained earnings |  | 1,409,536 |  |  | 1,313,440 |
Accumulated other comprehensive (loss) income (Note 10) |  | (6,039 | ) |  | 19,788 |
Treasury stock – at cost (shares: 43,492,212 – 2015; 43,353,181 – 2014) |  | (566,810 | ) |  | (562,923 | )
Total stockholders’ equity |  | $ | 1,359,022 |  |  | 1,275,586 |
Commitments and contingencies |  |  |  |  |  |
Total liabilities and stockholders’ equity |  | $ | 6,898,117 |  |  | 6,581,550 |

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
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SELECTIVE INSURANCE GROUP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF INCOME |  | Quarter ended September 30, |  | Nine Months ended September 30,
($ in thousands, except per share amounts) |  | 2015 |  | 2014 |  | 2015 |  | 2014
Revenues: |  |  |  |  |  |  |  |  |  |
Net premiums earned |  | $ | 507,390 |  |  | 462,639 |  |  | 1,473,822 |  |  | 1,382,759 |
Net investment income earned |  | 32,061 |  |  | 34,292 |  |  | 91,208 |  |  | 106,600 |
Net realized gains: |  |  |  |  |  |  |  |  |  |
Net realized investment gains |  | 1,590 |  |  | 15,231 |  |  | 23,598 |  |  | 28,370 |
Other-than-temporary impairments |  | (1,282 | ) |  | — |  |  | (7,827 | ) |  | (1,382 | )
Total net realized gains |  | 308 |  |  | 15,231 |  |  | 15,771 |  |  | 26,988 |
Other income |  | 698 |  |  | 3,196 |  |  | 5,521 |  |  | 14,931 |
Total revenues |  | 540,457 |  |  | 515,358 |  |  | 1,586,322 |  |  | 1,531,278 |
Expenses: |  |  |  |  |  |  |  |  |  |
Loss and loss expense incurred |  | 285,161 |  |  | 270,932 |  |  | 861,721 |  |  | 889,273 |
Policy acquisition costs |  | 174,802 |  |  | 158,101 |  |  | 509,295 |  |  | 462,540 |
Interest expense |  | 5,489 |  |  | 5,558 |  |  | 16,458 |  |  | 16,544 |
Other expenses |  | 9,166 |  |  | 5,441 |  |  | 29,954 |  |  | 22,990 |
Total expenses |  | 474,618 |  |  | 440,032 |  |  | 1,417,428 |  |  | 1,391,347 |
Income before federal income tax |  | 65,839 |  |  | 75,326 |  |  | 168,894 |  |  | 139,931 |
Federal income tax expense: |  |  |  |  |  |  |  |  |  |
Current |  | 9,141 |  |  | 7,373 |  |  | 29,128 |  |  | 22,692 |
Deferred |  | 9,702 |  |  | 14,791 |  |  | 19,294 |  |  | 16,762 |
Total federal income tax expense |  | 18,843 |  |  | 22,164 |  |  | 48,422 |  |  | 39,454 |
Net income |  | $ | 46,996 |  |  | 53,162 |  |  | 120,472 |  |  | 100,477 |
Earnings per share: |  |  |  |  |  |  |  |  |  |
Basic net income |  | $ | 0.82 |  |  | 0.94 |  |  | 2.11 |  |  | 1.79 |
Diluted net income |  | $ | 0.81 |  |  | 0.93 |  |  | 2.08 |  |  | 1.75 |
Dividends to stockholders |  | $ | 0.14 |  |  | 0.13 |  |  | 0.42 |  |  | 0.39 |

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
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SELECTIVE INSURANCE GROUP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |  | Quarter ended September 30, |  | Nine Months ended September 30,
($ in thousands) |  | 2015 |  | 2014 |  | 2015 |  | 2014
Net income |  | $ | 46,996 |  |  | 53,162 |  |  | 120,472 |  |  | 100,477 |
Other comprehensive income (loss), net of tax: |  |  |  |  |  |  |  |  |  |
Unrealized gains (losses) on investment securities: |  |  |  |  |  |  |  |  |  |
Unrealized holding gains (losses) arising during period |  | 5,442 |  |  | (8,988 | ) |  | (18,132 | ) |  | 41,767 |
Amount reclassified into net income: |  |  |  |  |  |  |  |
Held-to-maturity securities |  | (63 | ) |  | (243 | ) |  | (353 | ) |  | (683 | )
Non-credit other-than-temporary impairments |  | — |  |  | 780 |  |  | 232 |  |  | 1,085 |
Realized gains on available-for-sale securities |  | (199 | ) |  | (10,683 | ) |  | (10,906 | ) |  | (18,637 | )
Total unrealized gains (losses) on investment securities |  | 5,180 |  |  | (19,134 | ) |  | (29,159 | ) |  | 23,532 |
Defined benefit pension and post-retirement plans: |  |  |  |  |  |  |  |  |  |
Amounts reclassified into net income: |  |  |  |  |  |  |  |
Net actuarial loss |  | 1,110 |  |  | 247 |  |  | 3,332 |  |  | 742 |
Total defined benefit pension and post-retirement plans |  | 1,110 |  |  | 247 |  |  | 3,332 |  |  | 742 |
Other comprehensive income (loss) |  | 6,290 |  |  | (18,887 | ) |  | (25,827 | ) |  | 24,274 |
Comprehensive income |  | $ | 53,286 |  |  | 34,275 |  |  | 94,645 |  |  | 124,751 |

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
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SELECTIVE INSURANCE GROUP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY |  | Nine Months ended September 30,
($ in thousands) |  | 2015 |  | 2014
Common stock: |  |  |  |  |  |
Beginning of year |  | $ | 199,896 |  |  | 198,240 |
Dividend reinvestment plan (shares: 38,947 – 2015; 44,322 – 2014) |  | 78 |  |  | 89 |
Stock purchase and compensation plans (shares: 686,984 – 2015; 588,858 – 2014) |  | 1,374 |  |  | 1,178 |
End of period |  | 201,348 |  |  | 199,507 |
Additional paid-in capital: |  |  |  |  |  |
Beginning of year |  | 305,385 |  |  | 288,182 |
Dividend reinvestment plan |  | 1,014 |  |  | 957 |
Stock purchase and compensation plans |  | 14,588 |  |  | 11,286 |
End of period |  | 320,987 |  |  | 300,425 |
Retained earnings: |  |  |  |  |  |
Beginning of year |  | 1,313,440 |  |  | 1,202,015 |
Net income |  | 120,472 |  |  | 100,477 |
Dividends to stockholders ($0.42 per share – 2015; $0.39 per share – 2014) |  | (24,376 | ) |  | (22,344 | )
End of period |  | 1,409,536 |  |  | 1,280,148 |
Accumulated other comprehensive (loss) income: |  |  |  |  |  |
Beginning of year |  | 19,788 |  |  | 24,851 |
Other comprehensive (loss) income |  | (25,827 | ) |  | 24,274 |
End of period |  | (6,039 | ) |  | 49,125 |
Treasury stock: |  |  |  |  |  |
Beginning of year |  | (562,923 | ) |  | (559,360 | )
Acquisition of treasury stock (shares: 139,031 – 2015; 130,573 – 2014) |  | (3,887 | ) |  | (2,920 | )
End of period |  | (566,810 | ) |  | (562,280 | )
Total stockholders’ equity |  | $ | 1,359,022 |  |  | 1,266,925 |

Selective Insurance Group, Inc. also has authorized, but not issued, 5,000,000 shares of preferred stock, without par value, of which 300,000 shares have been
designated Series A junior preferred stock, without par value.
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
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SELECTIVE INSURANCE GROUP, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW |  | Nine Months ended September 30,
($ in thousands) |  | 2015 |  | 2014
Operating Activities |  |  |  |  |  |
Net income |  | $ | 120,472 |  |  | 100,477 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |  |
Depreciation and amortization |  | 43,868 |  |  | 31,059 |
Sale of renewal rights |  | — |  |  | (8,000 | )
Stock-based compensation expense |  | 7,626 |  |  | 7,421 |
Undistributed losses (gains) of equity method investments |  | 781 |  |  | (131 | )
Net realized gains |  | (15,771 | ) |  | (26,988 | )
Changes in assets and liabilities: |  |  |  |  |  |
Increase in reserve for loss and loss expenses, net of reinsurance recoverables |  | 60,065 |  |  | 86,887 |
Increase in unearned premiums, net of prepaid reinsurance |  | 121,424 |  |  | 68,935 |
Decrease in net federal income taxes |  | 27,980 |  |  | 33,596 |
Increase in premiums receivable |  | (95,188 | ) |  | (66,816 | )
Increase in deferred policy acquisition costs |  | (28,058 | ) |  | (16,700 | )
Decrease (increase) in interest and dividends due or accrued |  | 979 |  |  | (82 | )
Decrease in accrued salaries and benefits |  | (338 | ) |  | (13,958 | )
Increase (decrease) in accrued insurance expenses |  | 7,154 |  |  | (12,545 | )
Increase (decrease) in other assets and other liabilities |  | 8,039 |  |  | (25,036 | )
Net adjustments |  | 138,561 |  |  | 57,642 |
Net cash provided by operating activities |  | 259,033 |  |  | 158,119 |
Investing Activities |  |  |  |  |  |
Purchase of fixed income securities, available-for-sale |  | (731,154 | ) |  | (560,493 | )
Purchase of equity securities, available-for-sale |  | (192,717 | ) |  | (185,529 | )
Purchase of other investments |  | (6,589 | ) |  | (8,498 | )
Purchase of short-term investments |  | (1,084,794 | ) |  | (1,082,192 | )
Sale of fixed income securities, available-for-sale |  | 22,323 |  |  | 35,499 |
Sale of short-term investments |  | 1,090,911 |  |  | 1,074,850 |
Redemption and maturities of fixed income securities, held-to-maturity |  | 79,972 |  |  | 56,375 |
Redemption and maturities of fixed income securities, available-for-sale |  | 403,510 |  |  | 336,939 |
Sale of equity securities, available-for-sale |  | 148,228 |  |  | 186,001 |
Distributions from other investments |  | 22,038 |  |  | 13,514 |
Purchase of property and equipment |  | (11,869 | ) |  | (9,178 | )
Sale of renewal rights |  | — |  |  | 8,000 |
Net cash used in investing activities |  | (260,141 | ) |  | (134,712 | )
Financing Activities |  |  |  |  |  |
Dividends to stockholders |  | (22,848 | ) |  | (20,899 | )
Acquisition of treasury stock |  | (3,887 | ) |  | (2,920 | )
Net proceeds from stock purchase and compensation plans |  | 6,016 |  |  | 3,554 |
Proceeds from borrowings |  | 15,000 |  |  | — |
Excess tax benefits from share-based payment arrangements |  | 1,498 |  |  | 1,024 |
Repayments of capital lease obligations |  | (3,517 | ) |  | (1,858 | )
Net cash used in financing activities |  | (7,738 | ) |  | (21,099 | )
Net (decrease) increase in cash |  | (8,846 | ) |  | 2,308 |
Cash, beginning of year |  | 23,959 |  |  | 193 |
Cash, end of period |  | $ | 15,113 |  |  | 2,501 |

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Basis of Presentation
As used herein, the "Company,” “we,” “us,” or “our” refers to Selective Insurance Group, Inc. (the "Parent"), and its subsidiaries, except as expressly indicated or unless the context otherwise requires. Our interim unaudited consolidated financial statements (“Financial Statements”) have been prepared by us in conformity with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The preparation of the Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported financial statement balances, as well as the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. All significant intercompany accounts and transactions between the Parent and its subsidiaries are eliminated in consolidation.
Our Financial Statements reflect all adjustments that, in our opinion, are normal, recurring, and necessary for a fair presentation of our results of operations and financial condition. Our Financial Statements cover the third quarters ended September 30, 2015 (“Third Quarter 2015”) and September 30, 2014 (“Third Quarter 2014”) and the nine-month periods ended September 30, 2015 ("Nine Months 2015") and September 30, 2014 ("Nine Months 2014"). The Financial Statements do not include all of the information and disclosures required by GAAP and the SEC for audited annual financial statements. Results of operations for any interim period are not necessarily indicative of results for a full year. Consequently, our Financial Statements should be read in conjunction with the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2014 (“2014 Annual Report”) filed with the SEC.
NOTE 2. Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). ASU 2014-12 requires that performance targets that affect vesting and could be achieved after the requisite service period be treated as performance conditions. The effective date for ASU 2014-12 is for interim and annual periods beginning after December 15, 2015. The amendments in ASU 2014-12 may be applied either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented and all modified awards thereafter. The adoption of ASU 2014-12 will not affect us, as we are currently recording expense consistent with the requirements of this accounting update.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and provide related footnote disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted. As the requirements of this literature are disclosure only, ASU 2014-15 will not impact our financial condition or results of operations.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 affects the following areas: (i) limited partnerships and similar legal entities; (ii) the evaluation of fees paid to a decision maker or a service provider as a variable interest; (iii) the effect of fee arrangements on the primary beneficiary determination; (iv) the effect of related parties on the primary beneficiary determination; and (v) certain investment funds. ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. The amendments in ASU 2015-02 may be applied either retrospectively or by applying a modified retrospective approach, which would include recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. While we are currently evaluating ASU 2015-02, we do not expect a material impact on our financial condition or results of operations from the adoption of this guidance.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires debt issuance costs to be netted against the related debt liability in the balance sheet rather than presented as a separate asset. However, ASU 2015-03 does not address the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Therefore, in August 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (“ASU 2015-15”). ASU 2015-15 clarifies that, in the absence of authoritative guidance on line-of-credit arrangements within ASU 2015-03, the SEC would not object to the deferral and presentation of debt issuance costs as an asset and the subsequent amortization of the deferred costs over the term of the line-of-credit arrangement.
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ASU 2015-03 is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted, and should be applied on a retrospective basis. As the requirement of ASU 2015-03 is disclosure only, the adoption of this guidance will not impact our financial condition or results of operations.
ASU 2015-15 is effective upon adoption of ASU 2015-03. While we are currently evaluating ASU 2015-15, we do not expect a material impact on our financial condition or results of operations from the adoption of this guidance.
In April 2015, the FASB issued ASU 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”). ASU 2015-05 provides guidance to customers with cloud computing arrangements that include a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The amendments in ASU 2015-05 can be adopted either prospectively, to all arrangements entered into or materially modified after the effective date, or retrospectively. While we are currently evaluating ASU 2015-05, we do not expect a material impact on our financial condition or results of operations from the adoption of this guidance.
In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (“ASU 2015-07”). ASU 2015-07 provides guidance that investments for which the practical expedient is used to measure fair value at net asset value per share ("NAV") must be removed from the fair value hierarchy. Instead, those investments must be included as a reconciling line item so that the total fair value amount of investments in the disclosure is consistent with the amount on the balance sheet. ASU 2015-07 also includes disclosure requirements for investments for which the NAV practical expedient was used to determine fair value. ASU 2015-07 is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The amendments in ASU 2015-07 should be applied retrospectively to all periods presented. As the requirements of this literature are disclosure only, the application of this guidance will not impact our financial condition or results of operations.
In May 2015, the FASB issued ASU 2015-09, Disclosures about Short-Duration Contracts (“ASU 2015-09”). ASU 2015-09 requires companies that issue short duration contracts to disclose additional information, including: (i) incurred and paid claims development tables; (ii) frequency and severity of claims; and (iii) information about material changes in judgments made in calculating the liability for unpaid claim adjustment expenses, including reasons for the change and the effects on the financial statements. ASU 2015-09 is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. The amendments in ASU 2015-09 should be applied retrospectively by providing comparative disclosures for each period presented, except for those requirements that apply only to the current period. As the requirements of this literature are disclosure only, the application of this guidance will not impact our financial condition or results of operations.
NOTE 3. Statements of Cash Flow
Supplemental cash flow information is as follows:

|  | Nine Months ended September 30,
($ in thousands) |  | 2015 |  | 2014
Cash paid during the period for: |  |  |  |  |  |
Interest |  | $ | 13,843 |  |  | 14,089 |
Federal income tax |  | 18,500 |  |  | 4,699 |
Non-cash items: |  |  |  |
Tax-free exchange of fixed income securities, available-for-sale ("AFS") |  | 35,425 |  |  | 14,954 |
Tax-free exchange of fixed income securities, held-to-maturity ("HTM") |  | 10,045 |  |  | 4,288 |
Corporate actions related to equity securities, AFS 1 |  | 4,239 |  |  | 334 |
Assets acquired under capital lease arrangements |  | 6,933 |  |  | 4,853 |

1 Examples of such corporate actions include non-cash acquisitions and stock splits.
Included in "Other assets" on the Consolidated Balance Sheet was $9.9 million at September 30, 2015 and $8.1 million at September 30, 2014 of cash received from the National Flood Insurance Program ("NFIP"), which is restricted to pay flood claims under the Write Your Own ("WYO") program.
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NOTE 4. 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, 2015 and December 31, 2014 were as follows:

September 30, 2015 |  |  |  |  |  |  |  |  |  |  |  |
($ in thousands) |  | Amortized Cost |  | Net Unrealized Gains (Losses) |  | Carrying Value |  | Unrecognized Holding Gains |  | Unrecognized Holding Losses |  | Fair Value
Obligations of states and political subdivisions |  | $ | 205,443 |  |  | 1,108 |  |  | 206,551 |  |  | 7,423 |  |  | — |  |  | 213,974 |
Corporate securities |  | 18,147 |  |  | (241 | ) |  | 17,906 |  |  | 2,467 |  |  | — |  |  | 20,373 |
Asset-backed securities (“ABS”) |  | 1,209 |  |  | (157 | ) |  | 1,052 |  |  | 158 |  |  | — |  |  | 1,210 |
Commercial mortgage-backed securities (“CMBS”) |  | 4,656 |  |  | (296 | ) |  | 4,360 |  |  | 471 |  |  | — |  |  | 4,831 |
Total HTM fixed income securities |  | $ | 229,455 |  |  | 414 |  |  | 229,869 |  |  | 10,519 |  |  | — |  |  | 240,388 |

December 31, 2014 |  |  |  |  |  |  |  |  |  |  |  |
($ in thousands) |  | Amortized Cost |  | Net Unrealized Gains (Losses) |  | Carrying Value |  | Unrecognized Holding Gains |  | Unrecognized Holding Losses |  | Fair Value
Foreign government |  | $ | 5,292 |  |  | 47 |  |  | 5,339 |  |  | 55 |  |  | — |  |  | 5,394 |
Obligations of states and political subdivisions |  | 285,301 |  |  | 2,071 |  |  | 287,372 |  |  | 11,760 |  |  | — |  |  | 299,132 |
Corporate securities |  | 18,899 |  |  | (273 | ) |  | 18,626 |  |  | 2,796 |  |  | — |  |  | 21,422 |
ABS |  | 2,818 |  |  | (455 | ) |  | 2,363 |  |  | 460 |  |  | — |  |  | 2,823 |
CMBS |  | 4,869 |  |  | (432 | ) |  | 4,437 |  |  | 753 |  |  | — |  |  | 5,190 |
Total HTM fixed income securities |  | $ | 317,179 |  |  | 958 |  |  | 318,137 |  |  | 15,824 |  |  | — |  |  | 333,961 |

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 1.5 years as of September 30, 2015.
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(b) The cost/amortized cost, unrealized gains and losses, and fair value of AFS securities as of September 30, 2015 and December 31, 2014 were as follows:

September 30, 2015 |  |  |  |  |  |  |  |
($ in thousands) |  | Cost/ Amortized Cost |  | Unrealized Gains |  | Unrealized Losses |  | Fair Value
AFS fixed income securities: |  |  |  |  |  |  |  |
U.S. government and government agencies |  | $ | 109,062 |  |  | 6,069 |  |  | (1 | ) |  | 115,130 |
Foreign government |  | 19,030 |  |  | 657 |  |  | — |  |  | 19,687 |
Obligations of states and political subdivisions |  | 1,303,188 |  |  | 35,552 |  |  | (545 | ) |  | 1,338,195 |
Corporate securities |  | 1,859,834 |  |  | 35,222 |  |  | (8,882 | ) |  | 1,886,174 |
ABS |  | 255,716 |  |  | 1,312 |  |  | (105 | ) |  | 256,923 |
CMBS 1 |  | 220,009 |  |  | 2,450 |  |  | (457 | ) |  | 222,002 |
Residential mortgage-backed securities (“RMBS”)2 |  | 506,932 |  |  | 7,400 |  |  | (1,397 | ) |  | 512,935 |
Total AFS fixed income securities |  | 4,273,771 |  |  | 88,662 |  |  | (11,387 | ) |  | 4,351,046 |
AFS equity securities: |  |  |  |  |  |  |  |
Common stock |  | 208,995 |  |  | 13,542 |  |  | (12,340 | ) |  | 210,197 |
Preferred stock |  | 11,825 |  |  | 46 |  |  | (117 | ) |  | 11,754 |
Total AFS equity securities |  | 220,820 |  |  | 13,588 |  |  | (12,457 | ) |  | 221,951 |
Total AFS securities |  | $ | 4,494,591 |  |  | 102,250 |  |  | (23,844 | ) |  | 4,572,997 |

December 31, 2014 |  |  |  |  |  |  |  |
($ in thousands) |  | Cost/ Amortized Cost |  | Unrealized Gains |  | Unrealized Losses |  | Fair Value
AFS fixed income securities: |  |  |  |  |  |  |  |
U.S. government and government agencies |  | $ | 116,666 |  |  | 7,592 |  |  | (128 | ) |  | 124,130 |
Foreign government |  | 27,035 |  |  | 796 |  |  | — |  |  | 27,831 |
Obligations of states and political subdivisions |  | 1,208,776 |  |  | 38,217 |  |  | (729 | ) |  | 1,246,264 |
Corporate securities |  | 1,763,427 |  |  | 42,188 |  |  | (5,809 | ) |  | 1,799,806 |
ABS |  | 176,837 |  |  | 760 |  |  | (373 | ) |  | 177,224 |
CMBS 1 |  | 177,932 |  |  | 2,438 |  |  | (777 | ) |  | 179,593 |
RMBS 2 |  | 505,113 |  |  | 8,587 |  |  | (2,426 | ) |  | 511,274 |
Total AFS fixed income securities |  | 3,975,786 |  |  | 100,578 |  |  | (10,242 | ) |  | 4,066,122 |
AFS equity securities: |  |  |  |  |  |  |  |
Common stock |  | 159,011 |  |  | 32,725 |  |  | (336 | ) |  | 191,400 |
Total AFS equity securities |  | 159,011 |  |  | 32,725 |  |  | (336 | ) |  | 191,400 |
Total AFS securities |  | $ | 4,134,797 |  |  | 133,303 |  |  | (10,578 | ) |  | 4,257,522 |

1 CMBS includes government guaranteed agency securities with a fair value of $7.4 million at September 30, 2015 and $13.2 million at December 31, 2014.
2 RMBS includes government guaranteed agency securities with a fair value of $22.5 million at September 30, 2015 and $32.4 million at December 31, 2014.
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 (loss) income ("AOCI") on the Consolidated Balance Sheets.
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(c) The following tables summarize, for all securities in a net unrealized/unrecognized loss position at September 30, 2015 and December 31, 2014, the fair value and 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, 2015 |  | Less than 12 months |  | 12 months or longer
($ in thousands) |  | Fair Value |  | Unrealized Losses 1 |  | Fair Value |  | Unrealized Losses 1
AFS fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |
U.S. government and government agencies |  | $ | — |  |  | — |  |  | 399 |  |  | (1 | )
Obligations of states and political subdivisions |  | 96,861 |  |  | (545 | ) |  | — |  |  | — |
Corporate securities |  | 430,481 |  |  | (7,187 | ) |  | 50,552 |  |  | (1,695 | )
ABS |  | 55,856 |  |  | (71 | ) |  | 12,530 |  |  | (34 | )
CMBS |  | 59,004 |  |  | (367 | ) |  | 15,561 |  |  | (90 | )
RMBS |  | 95,254 |  |  | (457 | ) |  | 65,417 |  |  | (940 | )
Total AFS fixed income securities |  | 737,456 |  |  | (8,627 | ) |  | 144,459 |  |  | (2,760 | )
AFS equity securities: |  |  |  |  |  |  |  |
Common stock |  | 133,601 |  |  | (12,340 | ) |  | — |  |  | — |
Preferred stock |  | 8,562 |  |  | (117 | ) |  | — |  |  | — |
Total AFS equity securities |  | 142,163 |  |  | (12,457 | ) |  | — |  |  | — |
Subtotal |  | $ | 879,619 |  |  | (21,084 | ) |  | 144,459 |  |  | (2,760 | )

|  | Less than 12 months |  | 12 months or longer
($ in thousands) |  | Fair Value |  | Unrealized Losses 1 |  | Unrecognized Gains 2 |  | Fair Value |  | Unrealized Losses 1 |  | Unrecognized Gains 2
HTM securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
ABS |  | $ | — |  |  | — |  |  | — |  |  | 942 |  |  | (157 | ) |  | 153 |
Subtotal |  | $ | — |  |  | — |  |  | — |  |  | 942 |  |  | (157 | ) |  | 153 |
Total AFS and HTM |  | $ | 879,619 |  |  | (21,084 | ) |  | — |  |  | 145,401 |  |  | (2,917 | ) |  | 153 |

December 31, 2014 |  | Less than 12 months |  | 12 months or longer
($ in thousands) |  | Fair Value |  | Unrealized Losses 1 |  | Fair Value |  | Unrealized Losses 1
AFS fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |
U.S. government and government agencies |  | $ | 7,567 |  |  | (13 | ) |  | 10,866 |  |  | (115 | )
Obligations of states and political subdivisions |  | 47,510 |  |  | (105 | ) |  | 64,018 |  |  | (624 | )
Corporate securities |  | 276,648 |  |  | (1,734 | ) |  | 153,613 |  |  | (4,075 | )
ABS |  | 113,202 |  |  | (178 | ) |  | 15,618 |  |  | (195 | )
CMBS |  | 12,799 |  |  | (34 | ) |  | 59,219 |  |  | (743 | )
RMBS |  | 3,399 |  |  | (8 | ) |  | 138,724 |  |  | (2,418 | )
Total AFS fixed income securities |  | 461,125 |  |  | (2,072 | ) |  | 442,058 |  |  | (8,170 | )
AFS equity securities: |  |  |  |  |  |  |  |
Common stock |  | 5,262 |  |  | (336 | ) |  | — |  |  | — |
Total AFS equity securities |  | 5,262 |  |  | (336 | ) |  | — |  |  | — |
Subtotal |  | $ | 466,387 |  |  | (2,408 | ) |  | 442,058 |  |  | (8,170 | )

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|  | Less than 12 months |  | 12 months or longer
($ in thousands) |  | Fair Value |  | Unrealized Losses 1 |  | Unrecognized Gains 2 |  | Fair Value |  | Unrealized Losses 1 |  | Unrecognized Gains 2
HTM securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Obligations of states and political subdivisions |  | $ | 196 |  |  | (3 | ) |  | 1 |  |  | — |  |  | — |  |  | — |
ABS |  | — |  |  | — |  |  | — |  |  | 2,235 |  |  | (455 | ) |  | 439 |
Subtotal |  | 196 |  |  | (3 | ) |  | 1 |  |  | 2,235 |  |  | (455 | ) |  | 439 |
Total AFS and HTM |  | $ | 466,583 |  |  | (2,411 | ) |  | 1 |  |  | 444,293 |  |  | (8,625 | ) |  | 439 |

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, 2015 compared with December 31, 2014:

($ in thousands) |  |
September 30, 2015 |  | December 31, 2014
Number of Issues | % of Market/Book | Unrealized/ Unrecognized Loss |  | Number of Issues | % of Market/Book | Unrealized/ Unrecognized Loss
389 |  | 80% - 99% | $ | 21,841 |  |  | 350 |  | 80% - 99% | $ | 10,596 |
4 |  | 60% - 79% | 2,007 |  |  | — |  | 60% - 79% | — |
— |  | 40% - 59% | — |  |  | — |  | 40% - 59% | — |
— |  | 20% - 39% | — |  |  | — |  | 20% - 39% | — |
— |  | 0% - 19% | — |  |  | — |  | 0% - 19% | — |
|  |  | $ | 23,848 |  |  |  |  |  | $ | 10,596 |

We do not intend to sell any of the securities in the tables above, nor do we believe we will be required to sell any of these securities. We have also reviewed these securities under our OTTI policy, as described in Note 2. “Summary of Significant Accounting Policies” within Item 8. “Financial Statements and Supplementary Data.” of our 2014 Annual Report, and have concluded that they are temporarily impaired. 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.
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(d) Fixed income securities at September 30, 2015, 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 the contractual maturities of HTM fixed income securities at September 30, 2015:

($ in thousands) |  | Carrying Value |  | Fair Value
Due in one year or less |  | $ | 102,507 |  |  | 103,945 |
Due after one year through five years |  | 116,833 |  |  | 123,960 |
Due after five years through 10 years |  | 10,529 |  |  | 12,483 |
Total HTM fixed income securities |  | $ | 229,869 |  |  | 240,388 |

Listed below are the contractual maturities of AFS fixed income securities at September 30, 2015:

($ in thousands) |  | Fair Value
Due in one year or less |  | $ | 501,398 |
Due after one year through five years |  | 2,180,671 |
Due after five years through 10 years |  | 1,589,038 |
Due after 10 years |  | 79,939 |
Total AFS fixed income securities |  | $ | 4,351,046 |

(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, 2015
($ in thousands) |  | September 30, 2015 |  | December 31, 2014 |  | Remaining Commitment
Alternative Investments |  |  |  |  |  |  |  |  |
Secondary private equity |  | $ | 17,503 |  |  | 21,807 |  |  | 7,095 |
Private equity |  | 15,792 |  |  | 20,126 |  |  | 23,826 |
Energy/power generation |  | 11,643 |  |  | 14,445 |  |  | 16,857 |
Real estate |  | 8,854 |  |  | 11,452 |  |  | 9,919 |
Mezzanine financing |  | 6,948 |  |  | 9,853 |  |  | 13,383 |
Distressed debt |  | 6,889 |  |  | 8,679 |  |  | 3,048 |
Venture capital |  | 6,539 |  |  | 6,606 |  |  | 150 |
Total alternative investments |  | 74,168 |  |  | 92,968 |  |  | 74,278 |
Other securities |  | 10,978 |  |  | 6,235 |  |  | 2,269 |
Total other investments |  | $ | 85,146 |  |  | 99,203 |  |  | 76,547 |

For a full 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 2014 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 June 30 is as follows:

Income Statement Information |  | Quarter ended June 30, |  | Nine months ended June 30,
($ in millions) |  | 2015 |  | 2014 |  | 2015 |  | 2014
Net investment income |  | $ | 44.1 |  |  | 81.3 |  |  | $ | 139.6 |  |  | 167.0 |
Realized gains (losses) |  | 385.2 |  |  | (26.1 | ) |  | 977.7 |  |  | 171.5 |
Net change in unrealized (depreciation) appreciation |  | (222.2 | ) |  | 628.6 |  |  | (1,089.0 | ) |  | 1,471.0 |
Net income |  | $ | 207.1 |  |  | 683.8 |  |  | $ | 28.3 |  |  | 1,809.5 |
Selective’s insurance subsidiaries’ other investments income (loss) |  | $ | 1.3 |  |  | 3.9 |  |  | $ | (0.8 | ) |  | 12.7 |

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(f) We have pledged certain AFS fixed income securities as collateral related to our: (i) outstanding borrowing of $60 million with the Federal Home Loan Bank of Indianapolis ("FHLBI"); and (ii) reinsurance obligations related to our 2011 acquisition of our excess and surplus lines ("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, 2015:

($ in millions) |  | FHLBI Collateral |  | Reinsurance Collateral |  | State and Regulatory Deposits |  | Total
U.S. government and government agencies |  | $ | 7.7 |  |  | — |  |  | 24.4 |  |  | 32.1 |
Obligations of states and political subdivisions |  | — |  |  | 5.0 |  |  | — |  |  | 5.0 |
Corporate securities |  | — |  |  | 4.8 |  |  | — |  |  | 4.8 |
CMBS |  | 1.4 |  |  | — |  |  | — |  |  | 1.4 |
RMBS |  | 55.5 |  |  | 1.9 |  |  | — |  |  | 57.4 |
Total pledged as collateral |  | $ | 64.6 |  |  | 11.7 |  |  | 24.4 |  |  | 100.7 |

(g) The Company did not have exposure to any credit concentration risk of a single issuer greater than 10% of the Company's stockholders' equity, other than certain U.S. government agencies, as of September 30, 2015 or December 31, 2014.
(h) 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) |  | 2015 |  | 2014 |  | 2015 |  | 2014
Fixed income securities |  | $ | 30,601 |  |  | 30,706 |  |  | $ | 92,227 |  |  | 95,515 |
Equity securities |  | 2,370 |  |  | 1,909 |  |  | 6,546 |  |  | 5,094 |
Short-term investments |  | 24 |  |  | 15 |  |  | 72 |  |  | 48 |
Other investments |  | 1,337 |  |  | 3,906 |  |  | (781 | ) |  | 12,677 |
Investment expenses |  | (2,271 | ) |  | (2,244 | ) |  | (6,856 | ) |  | (6,734 | )
Net investment income earned |  | $ | 32,061 |  |  | 34,292 |  |  | $ | 91,208 |  |  | 106,600 |

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

Third Quarter 2015 |  | Gross |  | Included in Other Comprehensive Income ("OCI") |  | Recognized in Earnings
($ in thousands) |  |  |
AFS fixed income securities: |  |  |  |  |  |
Corporate securities |  | $ | 253 |  |  | — |  |  | 253 |
Total AFS fixed income securities |  | 253 |  |  | — |  |  | 253 |
AFS equity securities: |  |  |  |  |  |
Common stock |  | 1,029 |  |  | — |  |  | 1,029 |
Total AFS equity securities |  | 1,029 |  |  | — |  |  | 1,029 |
Total OTTI losses |  | $ | 1,282 |  |  | — |  |  | 1,282 |

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Nine Months 2015 |  | Gross |  | Included in OCI |  | Recognized in Earnings
($ in thousands) |  |  |
AFS fixed income securities: |  |  |  |  |  |
Corporate securities |  | $ | 1,445 |  |  | — |  |  | 1,445 |
RMBS |  | 1 |  |  | — |  |  | 1 |
Total AFS fixed income securities |  | 1,446 |  |  | — |  |  | 1,446 |
AFS equity securities: |  |  |  |  |  |
Common stock |  | 6,201 |  |  | — |  |  | 6,201 |
Preferred stock |  | 180 |  |  | — |  |  | 180 |
Total AFS equity securities |  | 6,381 |  |  | — |  |  | 6,381 |
Total OTTI losses |  | $ | 7,827 |  |  | — |  |  | 7,827 |

Nine Months 2014 |  | Gross |  | Included in OCI |  | Recognized in Earnings
($ in thousands) |  |  |
AFS equity securities: |  |  |  |  |  |  |  |  |
Common stock |  | $ | 1,382 |  |  | — |  |  | 1,382 |
Total OTTI losses |  | $ | 1,382 |  |  | — |  |  | 1,382 |

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 2014 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 September 30,
($ in thousands) |  | 2015 |  | 2014
Balance, beginning of period |  | $ | 1,013 |  |  | 5,534 |
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 |  | — |  |  | — |
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 |  | $ | 1,013 |  |  | 5,444 |

|  | Nine Months ended September 30,
($ in thousands) |  | 2015 |  | 2014
Balance, beginning of period |  | $ | 5,444 |  |  | 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 |  | (4,431 | ) |  | (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 |  | — |  |  | — |
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 |  | $ | 1,013 |  |  | 5,444 |

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(j) 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) |  | 2015 |  | 2014 |  | 2015 |  | 2014
HTM fixed income securities |  |  |  |  |  |  |  |
Gains |  | $ | 3 |  |  | — |  |  | 5 |  |  | 3 |
Losses |  | — |  |  | (4 | ) |  | (1 | ) |  | (18 | )
AFS fixed income securities |  |  |  |  |  |  |  |  |  |  |  |
Gains |  | 169 |  |  | 695 |  |  | 2,158 |  |  | 1,633 |
Losses |  | — |  |  | (29 | ) |  | (130 | ) |  | (172 | )
AFS equity securities |  |  |  |  |  |  |  |  |  |  |  |
Gains |  | 1,419 |  |  | 14,576 |  |  | 23,567 |  |  | 27,255 |
Losses |  | (1 | ) |  | (8 | ) |  | (1,347 | ) |  | (332 | )
Other investments |  |  |  |  |  |  |  |
Gains |  | — |  |  | 1 |  |  | — |  |  | 1 |
Losses |  | — |  |  | — |  |  | (654 | ) |  | — |
Total net realized gains (excluding OTTI charges) |  | $ | 1,590 |  |  | 15,231 |  |  | 23,598 |  |  | 28,370 |

Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold. Proceeds from the sale of AFS securities were $12.7 million and $170.6 million in Third Quarter and Nine Months 2015, respectively. The $23.6 million in net realized gains for Nine Months 2015 was primarily related to the sale of AFS equity securities due to a change in our dividend equity strategy from a quantitative, model-driven stock selection strategy to a fundamentally-based stock selection approach that incorporates an assessment of the sustainability and growth rate of a company’s dividends and future cash flow.
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 quantitative rebalancing of our dividend yield strategy holdings within our equity portfolio.
NOTE 5. Indebtedness
Of our ten insurance subsidiaries ("Insurance Subsidiaries"), we have two domiciled in Indiana ("Indiana Subsidiaries") that are members of the FHLBI. In January 2015, the Indiana Subsidiaries borrowed $15 million in the aggregate from the FHLBI for general corporate purposes. The unpaid principal amount accrues interest of 0.63%, which is paid on the 15th of every month. The principal amount is due on July 22, 2016. For a summary of the Indiana Subsidiaries' borrowings from the FHLBI, refer to Note 10. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data." of our 2014 Annual Report.
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NOTE 6. Fair Value Measurements
The following table presents the carrying amounts and estimated fair values of our financial instruments as of September 30, 2015 and December 31, 2014:

|  | September 30, 2015 |  | December 31, 2014
($ in thousands) |  | Carrying Amount |  | Fair Value |  | Carrying Amount |  | Fair Value
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |
HTM |  | $ | 229,869 |  |  | 240,388 |  |  | 318,137 |  |  | 333,961 |
AFS |  | 4,351,046 |  |  | 4,351,046 |  |  | 4,066,122 |  |  | 4,066,122 |
Equity securities, AFS |  | 221,951 |  |  | 221,951 |  |  | 191,400 |  |  | 191,400 |
Short-term investments |  | 125,855 |  |  | 125,855 |  |  | 131,972 |  |  | 131,972 |
Financial Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Notes payable: |  |  |  |  |  |  |  |  |  |  |  |
0.63% borrowings from FHLBI |  | 15,000 |  |  | 14,995 |  |  | — |  |  | — |
1.25% borrowings from FHLBI |  | 45,000 |  |  | 45,277 |  |  | 45,000 |  |  | 45,244 |
7.25% Senior Notes |  | 49,898 |  |  | 57,929 |  |  | 49,896 |  |  | 59,181 |
6.70% Senior Notes |  | 99,411 |  |  | 112,387 |  |  | 99,401 |  |  | 114,845 |
5.875% Senior Notes |  | 185,000 |  |  | 187,960 |  |  | 185,000 |  |  | 185,000 |
Total notes payable |  | $ | 394,309 |  |  | 418,548 |  |  | 379,297 |  |  | 404,270 |

The fair values of our financial assets and liabilities are generated using various valuation techniques and are placed into the fair value hierarchy considering the following: (i) the highest priority is given to quoted prices in active markets for identical assets (Level 1); (ii) the next highest priority is given to quoted prices in markets that are not active or inputs that are observable either directly or indirectly, including quoted prices for similar assets in markets that are not active and other inputs that can be derived principally from, or corroborated by, observable market data for substantially the full term of the assets (Level 2); and (iii) the lowest priority is given to unobservable inputs supported by little or no market activity and that reflect our assumptions about the exit price, including assumptions that market participants would use in pricing the asset (Level 3). An asset or liability's classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. Transfers between levels in the fair value hierarchy are recognized at the end of the reporting period.
For a discussion of the techniques used to value our financial assets and liabilities, refer to Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of our 2014 Annual Report.
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The following tables provide quantitative disclosures of our financial assets that were measured at fair value at September 30, 2015 and December 31, 2014:

September 30, 2015 |  |  |  | Fair Value Measurements Using
($ in thousands) |  | Assets Measured at Fair Value at 9/30/2015 |  | 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 fixed income securities: |  |  |  |  |  |  |  |
U.S. government and government agencies |  | $ | 115,130 |  |  | 51,963 |  |  | 63,167 |  |  | — |
Foreign government |  | 19,687 |  |  | — |  |  | 19,687 |  |  | — |
Obligations of states and political subdivisions |  | 1,338,195 |  |  | — |  |  | 1,338,195 |  |  | — |
Corporate securities |  | 1,886,174 |  |  | — |  |  | 1,886,174 |  |  | — |
ABS |  | 256,923 |  |  | — |  |  | 256,923 |  |  | — |
CMBS |  | 222,002 |  |  | — |  |  | 222,002 |  |  | — |
RMBS |  | 512,935 |  |  | — |  |  | 512,935 |  |  | — |
Total AFS fixed income securities |  | 4,351,046 |  |  | 51,963 |  |  | 4,299,083 |  |  | — |
AFS equity securities: |  |  |  |  |  |  |  |
Common stock |  | 210,197 |  |  | 207,412 |  |  | — |  |  | 2,785 |
Preferred stock |  | 11,754 |  |  | 11,754 |  |  | — |  |  | — |
Total AFS equity securities |  | 221,951 |  |  | 219,166 |  |  | — |  |  | 2,785 |
Total AFS securities |  | 4,572,997 |  |  | 271,129 |  |  | 4,299,083 |  |  | 2,785 |
Short-term investments |  | 125,855 |  |  | 125,855 |  |  | — |  |  | — |
Total assets measured at fair value |  | $ | 4,698,852 |  |  | 396,984 |  |  | 4,299,083 |  |  | 2,785 |

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

December 31, 2014 |  |  |  | Fair Value Measurements Using
($ in thousands) |  | Assets Measured at Fair Value at 12/31/14 |  | 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 fixed income securities: |  |  |  |  |  |  |  |
U.S. government and government agencies |  | $ | 124,130 |  |  | 53,199 |  |  | 70,931 |  |  | — |
Foreign government |  | 27,831 |  |  | — |  |  | 27,831 |  |  | — |
Obligations of states and political subdivisions |  | 1,246,264 |  |  | — |  |  | 1,246,264 |  |  | — |
Corporate securities |  | 1,799,806 |  |  | — |  |  | 1,799,806 |  |  | — |
ABS |  | 177,224 |  |  | — |  |  | 177,224 |  |  | — |
CMBS |  | 179,593 |  |  | — |  |  | 179,593 |  |  | — |
RMBS |  | 511,274 |  |  | — |  |  | 511,274 |  |  | — |
Total AFS fixed income securities |  | 4,066,122 |  |  | 53,199 |  |  | 4,012,923 |  |  | — |
AFS equity securities: |  |  |  |  |  |  |  |
Common stock |  | 191,400 |  |  | 188,500 |  |  | — |  |  | 2,900 |
Total AFS equity securities |  | 191,400 |  |  | 188,500 |  |  | — |  |  | 2,900 |
Total AFS securities |  | 4,257,522 |  |  | 241,699 |  |  | 4,012,923 |  |  | 2,900 |
Short-term investments |  | 131,972 |  |  | 131,972 |  |  | — |  |  | — |
Total assets measured at fair value |  | $ | 4,389,494 |  |  | 373,671 |  |  | 4,012,923 |  |  | 2,900 |

1 | There 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 nine-month period ended September 30, 2015.
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September 30, 2015 | Common Stock
($ in thousands)
Fair value, December 31, 2014 | $ | 2,900 |
Total net (losses) gains for the period included in: |
OCI | — |
Net income | — |
Purchases | — |
Sales | (115 | )
Issuances | — |
Settlements | — |
Transfers into Level 3 | — |
Transfers out of Level 3 | — |
Fair value, September 30, 2015 | $ | 2,785 |

The $2.9 million in fair value of securities measured using Level 3 prices remained unchanged during the full year 2014. The price for these securities, which were measured using Level 3 inputs at September 30, 2015 and December 31, 2014, was obtained through statements provided by the issuer, which we review for reasonableness.
The following tables provide quantitative information regarding our financial assets and liabilities that were disclosed at fair value at September 30, 2015 and December 31, 2014:

September 30, 2015 |  |  |  | Fair Value Measurements Using
($ in thousands) |  | Assets/ Liabilities Disclosed at Fair Value at 9/30/2015 |  | 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: |  |  |  |  |  |  |  |  |  |  |  |
Obligations of states and political subdivisions |  | $ | 213,974 |  |  | — |  |  | 213,974 |  |  | — |
Corporate securities |  | 20,373 |  |  | — |  |  | 20,373 |  |  | — |
ABS |  | 1,210 |  |  | — |  |  | 1,210 |  |  | — |
CMBS |  | 4,831 |  |  | — |  |  | 4,831 |  |  | — |
Total HTM fixed income securities |  | $ | 240,388 |  |  | — |  |  | 240,388 |  |  | — |
Financial Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Notes payable: |  |  |  |  |  |  |  |  |  |  |  |
0.63% borrowings from FHLBI |  | $ | 14,995 |  |  | — |  |  | 14,995 |  |  | — |
1.25% borrowings from FHLBI |  | 45,277 |  |  | — |  |  | 45,277 |  |  | — |
7.25% Senior Notes |  | 57,929 |  |  | — |  |  | 57,929 |  |  | — |
6.70% Senior Notes |  | 112,387 |  |  | — |  |  | 112,387 |  |  | — |
5.875% Senior Notes |  | 187,960 |  |  | 187,960 |  |  | — |  |  | — |
Total notes payable |  | $ | 418,548 |  |  | 187,960 |  |  | 230,588 |  |  | — |

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December 31, 2014 |  |  |  | Fair Value Measurements Using
($ in thousands) |  | Assets/ Liabilities Disclosed at Fair Value at 12/31/2014 |  | 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 |  | $ | 5,394 |  |  | — |  |  | 5,394 |  |  | — |
Obligations of states and political subdivisions |  | 299,132 |  |  | — |  |  | 299,132 |  |  | — |
Corporate securities |  | 21,422 |  |  | — |  |  | 21,422 |  |  | — |
ABS |  | 2,823 |  |  | — |  |  | 2,823 |  |  | — |
CMBS |  | 5,190 |  |  | — |  |  | 5,190 |  |  | — |
Total HTM fixed income securities |  | $ | 333,961 |  |  | — |  |  | 333,961 |  |  | — |
Financial Liabilities |  |  |  |  |  |  |  |  |
Notes payable: |  |  |  |  |  |  |  |  |
1.25% borrowings from FHLBI |  | $ | 45,244 |  |  | — |  |  | 45,244 |  |  | — |
7.25% Senior Notes |  | 59,181 |  |  | — |  |  | 59,181 |  |  | — |
6.70% Senior Notes |  | 114,845 |  |  | — |  |  | 114,845 |  |  | — |
5.875% Senior Notes |  | 185,000 |  |  | 185,000 |  |  | — |  |  | — |
Total notes payable |  | $ | 404,270 |  |  | 185,000 |  |  | 219,270 |  |  | — |

NOTE 7. Reinsurance
The following table contains a listing of direct, assumed, and ceded reinsurance amounts for premiums written, premiums earned, and loss and loss expenses incurred for the periods indicated. For more information concerning reinsurance, refer to
Note 8. “Reinsurance” in Item 8. “Financial Statements and Supplementary Data.” of our 2014 Annual Report.

|  | Quarter ended September 30, |  | Nine Months ended September 30,
($ in thousands) |  | 2015 |  | 2014 |  | 2015 |  | 2014
Premiums written: |  |  |  |  |  |  |  |  |  |  |  |
Direct |  | $ | 631,429 |  |  | 592,858 |  |  | $ | 1,851,620 |  |  | 1,723,063 |
Assumed |  | 6,099 |  |  | 5,780 |  |  | 17,140 |  |  | 19,467 |
Ceded |  | (92,503 | ) |  | (103,517 | ) |  | (273,514 | ) |  | (290,836 | )
Net |  | $ | 545,025 |  |  | 495,121 |  |  | $ | 1,595,246 |  |  | 1,451,694 |
Premiums earned: |  |  |  |  |  |  |  |  |  |  |  |
Direct |  | $ | 590,716 |  |  | 548,734 |  |  | $ | 1,728,865 |  |  | 1,630,347 |
Assumed |  | 5,830 |  |  | 6,789 |  |  | 16,831 |  |  | 27,359 |
Ceded |  | (89,156 | ) |  | (92,884 | ) |  | (271,874 | ) |  | (274,947 | )
Net |  | $ | 507,390 |  |  | 462,639 |  |  | $ | 1,473,822 |  |  | 1,382,759 |
Loss and loss expense incurred: |  |  |  |  |  |  |  |  |  |  |  |
Direct |  | $ | 306,635 |  |  | 304,525 |  |  | $ | 935,529 |  |  | 995,581 |
Assumed |  | 4,224 |  |  | 5,362 |  |  | 13,114 |  |  | 20,218 |
Ceded |  | (25,698 | ) |  | (38,955 | ) |  | (86,922 | ) |  | (126,526 | )
Net |  | $ | 285,161 |  |  | 270,932 |  |  | $ | 861,721 |  |  | 889,273 |

Ceded premiums and losses related to our participation in the NFIP, under which 100% of our flood premiums, losses, and loss expenses are ceded to the NFIP, are as follows:

Ceded to NFIP |  | Quarter ended September 30, |  | Nine Months ended September 30,
($ in thousands) |  | 2015 |  | 2014 |  | 2015 |  | 2014
Ceded premiums written |  | $ | (62,463 | ) |  | (69,922 | ) |  | $ | (178,784 | ) |  | (193,000 | )
Ceded premiums earned |  | (58,340 | ) |  | (60,761 | ) |  | (176,119 | ) |  | (178,260 | )
Ceded loss and loss expense incurred |  | (15,382 | ) |  | (14,008 | ) |  | (36,315 | ) |  | (48,099 | )

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NOTE 8. Segment Information
Selective Insurance Group, Inc., through its Insurance Subsidiaries, offers property and casualty insurance products in the standard and E&S marketplaces. We classify our business into four reportable segments, which are as follows:

• | Standard Commercial Lines - comprised of insurance products and services provided in the standard marketplace to

commercial enterprises, which are typically businesses, non-profit organizations, and local government agencies.

• | Standard Personal Lines - comprised of insurance products and services, including flood insurance coverage, provided primarily to individuals acquiring coverage in the standard marketplace.

• | E&S Lines - comprised of insurance products and services provided to customers who have not obtained coverage in

the standard marketplace.

• | Investments - invests the premiums collected by our Standard Commercial Lines, Standard Personal Lines, and E&S

Lines, as well as our earnings and amounts generated through our capital management strategies, which may include the issuance of debt and equity securities.
In the fourth quarter of 2014, we revised our reporting segments from our previously-reported Standard Insurance Operations segment to Standard Commercial Lines and Standard Personal Lines. For information regarding this change, see Note 11. "Segment Information" in Item 8. "Financial Statements and Supplementary Data." of our 2014 Annual Report.
In computing the results of each segment, we do not make adjustments for interest expense or net general corporate expenses. While we do not fully allocate taxes to all segments, we do allocate taxes to our Investments segment as we manage that segment on after-tax results. We do not maintain separate investment portfolios for the segments and therefore, do not allocate assets to the segments.
In the first quarter of 2014, we sold the renewal rights to our $37 million self-insured group, or "SIG," book of business within the Standard Commercial Lines segment. We decided to opportunistically sell this small and specialized book of pooled business as a significant portion of the business was produced outside of our standard lines footprint, and proved difficult to grow. As this was a renewal rights sale, we continued to service policies that were in force at the date of the sale. We continue to remain active in the municipal and public school marketplace for individual risks that procure traditional insurance programs rather than pooling arrangements. The proceeds from this sale, which amounted to $8 million, are included in "Miscellaneous income" within the table below as a component of Standard Commercial Lines revenue for Nine Months 2014.
The following summaries present revenues (net investment income and net realized gains on investments in the case of the Investments segment) and pre-tax income for the individual segments:
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Revenue by Segment |  | Quarter ended September 30, |  | Nine Months ended September 30,
($ in thousands) |  | 2015 |  | 2014 |  | 2015 |  | 2014
Standard Commercial Lines: |  |  |  |  |  |  |  |  |  |
Net premiums earned: |  |  |  |  |  |  |  |  |  |
Commercial automobile |  | $ | 90,758 |  |  | 83,536 |  |  | 265,771 |  |  | 249,224 |
Workers compensation |  | 74,560 |  |  | 66,732 |  |  | 213,991 |  |  | 205,137 |
General liability |  | 123,252 |  |  | 110,894 |  |  | 357,430 |  |  | 331,303 |
Commercial property |  | 68,587 |  |  | 61,304 |  |  | 199,699 |  |  | 182,716 |
Businessowners’ policies |  | 23,726 |  |  | 21,649 |  |  | 69,603 |  |  | 63,797 |
Bonds |  | 5,031 |  |  | 4,791 |  |  | 15,137 |  |  | 14,281 |
Other |  | 3,628 |  |  | 3,237 |  |  | 10,649 |  |  | 9,633 |
Miscellaneous income |  | 448 |  |  | 2,830 |  |  | 4,680 |  |  | 13,315 |
Total Standard Commercial Lines revenue |  | 389,990 |  |  | 354,973 |  |  | 1,136,960 |  |  | 1,069,406 |
Standard Personal Lines: |  |  |  |  |  |  |  |
Net premiums earned: |  |  |  |  |  |  |  |
Personal automobile |  | 36,623 |  |  | 37,695 |  |  | 110,373 |  |  | 113,943 |
Homeowners |  | 33,670 |  |  | 33,957 |  |  | 101,122 |  |  | 100,831 |
Other |  | 1,795 |  |  | 2,725 |  |  | 5,143 |  |  | 8,965 |
Miscellaneous income |  | 250 |  |  | 366 |  |  | 841 |  |  | 1,608 |
Total Standard Personal Lines revenue |  | 72,338 |  |  | 74,743 |  |  | 217,479 |  |  | 225,347 |
E&S Lines: |  |  |  |  |  |  |  |
Net premiums earned: |  |  |  |  |  |  |  |
General liability |  | 32,395 |  |  | 24,659 |  |  | 87,914 |  |  | 70,526 |
Commercial property |  | 11,309 |  |  | 10,048 |  |  | 31,428 |  |  | 28,544 |
Commercial automobile |  | 2,056 |  |  | 1,412 |  |  | 5,562 |  |  | 3,859 |
Total E&S Lines revenue |  | 45,760 |  |  | 36,119 |  |  | 124,904 |  |  | 102,929 |
Investments: |  |  |  |  |  |  |  |  |  |  |  |
Net investment income |  | 32,061 |  |  | 34,292 |  |  | 91,208 |  |  | 106,600 |
Net realized investment gains |  | 308 |  |  | 15,231 |  |  | 15,771 |  |  | 26,988 |
Total Investments revenue |  | 32,369 |  |  | 49,523 |  |  | 106,979 |  |  | 133,588 |
Total segments revenue |  | 540,457 |  |  | 515,358 |  |  | 1,586,322 |  |  | 1,531,270 |
Other income |  | — |  |  | — |  |  | — |  |  | 8 |
Total revenues |  | $ | 540,457 |  |  | 515,358 |  |  | 1,586,322 |  |  | 1,531,278 |

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Income Before Federal Income Tax |  | Quarter ended September 30, |  | Nine Months ended September 30,
($ in thousands) |  | 2015 |  | 2014 |  | 2015 |  | 2014
Standard Commercial Lines: |  |  |  |  |  |  |  |  |  |
Underwriting gain |  | $ | 44,027 |  |  | 27,771 |  |  | 109,304 |  |  | 39,844 |
GAAP combined ratio |  | 88.7 | % |  | 92.1 |  |  | 90.3 |  |  | 96.2 |
Statutory combined ratio |  | 88.4 |  |  | 90.9 |  |  | 89.4 |  |  | 95.5 |
Standard Personal Lines: |  |  |  |  |  |  |  |
Underwriting gain (loss) |  | $ | 2,826 |  |  | 8,037 |  |  | (4,295 | ) |  | 95 |
GAAP combined ratio |  | 96.1 | % |  | 89.2 |  |  | 102.0 |  |  | 100.0 |
Statutory combined ratio |  | 95.0 |  |  | 88.9 |  |  | 101.7 |  |  | 99.9 |
E&S Insurance Operations: |  |  |  |  |  |  |  |
Underwriting loss |  | $ | (2,022 | ) |  | (1,371 | ) |  | (5,033 | ) |  | (433 | )
GAAP combined ratio |  | 104.4 | % |  | 103.8 |  |  | 104.0 |  |  | 100.4 |
Statutory combined ratio |  | 101.1 |  |  | 102.9 |  |  | 101.8 |  |  | 100.3 |
Investments: |  |  |  |  |  |  |  |  |  |
Net investment income |  | $ | 32,061 |  |  | 34,292 |  |  | 91,208 |  |  | 106,600 |
Net realized investment gains |  | 308 |  |  | 15,231 |  |  | 15,771 |  |  | 26,988 |
Total investment income, before federal income tax |  | 32,369 |  |  | 49,523 |  |  | 106,979 |  |  | 133,588 |
Tax on investment income |  | 7,614 |  |  | 13,858 |  |  | 26,186 |  |  | 36,374 |
Total investment income, after federal income tax |  | $ | 24,755 |  |  | 35,665 |  |  | 80,793 |  |  | 97,214 |

Reconciliation of Segment Results to Income Before Federal Income Tax |  | Quarter ended September 30, |  | Nine Months ended September 30,
($ in thousands) |  | 2015 |  | 2014 |  | 2015 |  | 2014
Underwriting gain (loss), before federal income tax |  |  |  |  |  |  |  |
Standard Commercial Lines |  | $ | 44,027 |  |  | 27,771 |  |  | 109,304 |  |  | 39,844 |
Standard Personal Lines |  | 2,826 |  |  | 8,037 |  |  | (4,295 | ) |  | 95 |
E&S Lines |  | (2,022 | ) |  | (1,371 | ) |  | (5,033 | ) |  | (433 | )
Investment income, before federal income tax |  | 32,369 |  |  | 49,523 |  |  | 106,979 |  |  | 133,588 |
Total all segments |  | 77,200 |  |  | 83,960 |  |  | 206,955 |  |  | 173,094 |
Interest expense |  | (5,489 | ) |  | (5,558 | ) |  | (16,458 | ) |  | (16,544 | )
General corporate and other expenses |  | (5,872 | ) |  | (3,076 | ) |  | (21,603 | ) |  | (16,619 | )
Income before federal income tax |  | $ | 65,839 |  |  | 75,326 |  |  | 168,894 |  |  | 139,931 |

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NOTE 9. Retirement Plans
The following tables show the net periodic benefit cost related to the Retirement Income Plan for Selective Insurance Company of America (“Retirement Income Plan”) and the life insurance benefits provided to eligible Selective Insurance Company of America retirees (referred to as the "Retirement Life Plan"). The Retirement Income Plan was amended in the first quarter of 2013 to curtail the accrual of additional benefits for all eligible employees after March 31, 2016. For more information concerning these plans, refer to Note 15. “Retirement Plans” in Item 8. “Financial Statements and Supplementary Data.” of our 2014 Annual Report.

|  | Retirement Income Plan Quarter ended September 30, |  | Retirement Life Plan Quarter ended September 30,
($ in thousands) |  | 2015 |  | 2014 |  | 2015 |  | 2014
Components of Net Periodic Benefit Cost: |  |  |  |  |  |  |  |  |  |  |  |
Net Periodic Benefit Cost: |  |  |  |  |  |  |  |
Service cost |  | $ | 1,964 |  |  | 1,627 |  |  | $ | — |  |  | — |
Interest cost |  | 3,501 |  |  | 3,253 |  |  | 64 |  |  | 73 |
Expected return on plan assets |  | (3,991 | ) |  | (3,919 | ) |  | — |  |  | — |
Amortization of unrecognized net actuarial loss |  | 1,696 |  |  | 367 |  |  | 13 |  |  | 14 |
Total net periodic cost |  | $ | 3,170 |  |  | 1,328 |  |  | $ | 77 |  |  | 87 |

|  | Retirement Income Plan Nine Months ended September 30, |  | Retirement Life Plan Nine Months ended September 30,
($ in thousands) |  | 2015 |  | 2014 |  | 2015 |  | 2014
Components of Net Periodic Benefit Cost: |  |  |  |  |  |  |  |  |  |  |  |
Net Periodic Benefit Cost: |  |  |  |  |  |  |  |
Service cost |  | $ | 5,891 |  |  | 4,880 |  |  | $ | — |  |  | — |
Interest cost |  | 10,504 |  |  | 9,760 |  |  | 190 |  |  | 219 |
Expected return on plan assets |  | (11,972 | ) |  | (11,756 | ) |  | — |  |  | — |
Amortization of unrecognized net actuarial loss |  | 5,086 |  |  | 1,102 |  |  | 41 |  |  | 40 |
Total net periodic cost |  | $ | 9,509 |  |  | 3,986 |  |  | $ | 231 |  |  | 259 |

|  | Retirement Income Plan Nine Months ended September 30, |  | Retirement Life Plan Nine Months ended September 30,
|  | 2015 |  | 2014 |  | 2015 |  | 2014
Weighted-Average Expense Assumptions: |  |  |  |  |  |  |  |
Discount rate |  | 4.29 | % |  | 5.16 |  | 4.08 | % |  | 4.85
Expected return on plan assets |  | 6.27 |  |  | 6.92 |  | — |  |  | —
Rate of compensation increase |  | 4.00 |  |  | 4.00 |  | — |  |  | —

We presently anticipate contributing $11.9 million to the Retirement Income Plan in 2015, $9.6 million of which has been funded as of September 30, 2015.
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NOTE 10. Comprehensive Income
The components of comprehensive income, both gross and net of tax, for Third Quarter and Nine Months 2015 and 2014 are as follows:

Third Quarter 2015 |  |  |  |  |  |
($ in thousands) |  | Gross |  | Tax |  | Net
Net income |  | $ | 65,839 |  |  | 18,843 |  |  | 46,996 |
Components of OCI: |  |  |  |  |  |  |  |  |
Unrealized gains on investment securities: |  |  |  |  |  |  |  |  |
Unrealized holding gains during the period |  | 8,371 |  |  | 2,929 |  |  | 5,442 |
Amounts reclassified into net income: |  |  |  |  |  |
HTM securities |  | (97 | ) |  | (34 | ) |  | (63 | )
Realized gains on AFS securities |  | (305 | ) |  | (106 | ) |  | (199 | )
Net unrealized gains |  | 7,969 |  |  | 2,789 |  |  | 5,180 |
Defined benefit pension and post-retirement plans: |  |  |  |  |  |  |  |  |
Amounts reclassified into net income: |  |  |  |  |  |  |  |  |
Net actuarial loss |  | 1,709 |  |  | 599 |  |  | 1,110 |
Defined benefit pension and post-retirement plans |  | 1,709 |  |  | 599 |  |  | 1,110 |
Other comprehensive income |  | 9,678 |  |  | 3,388 |  |  | 6,290 |
Comprehensive income |  | $ | 75,517 |  |  | 22,231 |  |  | 53,286 |

Third Quarter 2014 |  |  |  |  |  |
($ in thousands) |  | Gross |  | Tax |  | Net
Net income |  | $ | 75,326 |  |  | 22,164 |  |  | 53,162 |
Components of OCI: |  |  |  |  |  |  |  |  |
Unrealized losses on investment securities: |  |  |  |  |  |  |  |  |
Unrealized holding losses during the period |  | (13,831 | ) |  | (4,843 | ) |  | (8,988 | )
Amounts reclassified into net income: |  |  |  |  |  |
HTM securities |  | (373 | ) |  | (130 | ) |  | (243 | )
Non-credit OTTI |  | 1,200 |  |  | 420 |  |  | 780 |
Realized gains on AFS securities |  | (16,435 | ) |  | (5,752 | ) |  | (10,683 | )
Net unrealized losses |  | (29,439 | ) |  | (10,305 | ) |  | (19,134 | )
Defined benefit pension and post-retirement plans: |  |  |  |  |  |  |  |  |
Amounts reclassified into net income: |  |  |  |  |  |  |  |  |
Net actuarial loss |  | 381 |  |  | 134 |  |  | 247 |
Defined benefit pension and post-retirement plans |  | 381 |  |  | 134 |  |  | 247 |
Other comprehensive loss |  | (29,058 | ) |  | (10,171 | ) |  | (18,887 | )
Comprehensive income |  | $ | 46,268 |  |  | 11,993 |  |  | 34,275 |

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Nine Months 2015 |  |  |  |  |  |
($ in thousands) |  | Gross |  | Tax |  | Net
Net income |  | $ | 168,894 |  |  | 48,422 |  |  | 120,472 |
Components of OCI: |  |  |  |  |  |  |  |  |
Unrealized losses on investment securities: |  |  |  |  |  |  |  |  |
Unrealized holding losses during the period |  | (27,896 | ) |  | (9,764 | ) |  | (18,132 | )
Amounts reclassified into net income: |  |  |  |  |  |
HTM securities |  | (543 | ) |  | (190 | ) |  | (353 | )
Non-credit OTTI |  | 357 |  |  | 125 |  |  | 232 |
Realized gains on AFS securities |  | (16,778 | ) |  | (5,872 | ) |  | (10,906 | )
Net unrealized losses |  | (44,860 | ) |  | (15,701 | ) |  | (29,159 | )
Defined benefit pension and post-retirement plans: |  |  |  |  |  |  |  |  |
Amounts reclassified into net income: |  |  |  |  |  |  |  |  |
Net actuarial loss |  | 5,127 |  |  | 1,795 |  |  | 3,332 |
Defined benefit pension and post-retirement plans |  | 5,127 |  |  | 1,795 |  |  | 3,332 |
Other comprehensive loss |  | (39,733 | ) |  | (13,906 | ) |  | (25,827 | )
Comprehensive income |  | $ | 129,161 |  |  | 34,516 |  |  | 94,645 |

Nine Months 2014 |  |  |  |  |  |
($ in thousands) |  | Gross |  | Tax |  | Net
Net income |  | $ | 139,931 |  |  | 39,454 |  |  | 100,477 |
Components of OCI: |  |  |  |  |  |  |
Unrealized gains on investment securities: |  |  |  |  |  |  |
Unrealized holding gains during the period |  | 64,255 |  |  | 22,488 |  |  | 41,767 |
Amounts reclassified into net income: |  |  |  |  |  |
HTM securities |  | (1,050 | ) |  | (367 | ) |  | (683 | )
Non-credit OTTI |  | 1,669 |  |  | 584 |  |  | 1,085 |
Realized gains on AFS securities |  | (28,672 | ) |  | (10,035 | ) |  | (18,637 | )
Net unrealized gains |  | 36,202 |  |  | 12,670 |  |  | 23,532 |
Defined benefit pension and post-retirement plans: |  |  |  |  |  |  |  |  |
Amounts reclassified into net income: |  |  |  |  |  |  |  |  |
Net actuarial loss |  | 1,142 |  |  | 400 |  |  | 742 |
Defined benefit pension and post-retirement plans |  | 1,142 |  |  | 400 |  |  | 742 |
Other comprehensive income |  | 37,344 |  |  | 13,070 |  |  | 24,274 |
Comprehensive income |  | $ | 177,275 |  |  | 52,524 |  |  | 124,751 |

The balances of, and changes in, each component of AOCI (net of taxes) as of September 30, 2015 are as follows:

September 30, 2015 |  |  |  |  |  |
|  | Net Unrealized (Loss) Gain on Investment Securities |  | Defined Benefit Pension and Post-Retirement Plans |  | Total AOCI
($ in thousands) |  | OTTI Related |  | HTM Related |  | All Other |  | Investments Subtotal |  |
Balance, December 31, 2014 |  | $ | (514 | ) |  | 623 |  |  | 80,284 |  |  | 80,393 |  |  | (60,605 | ) |  | 19,788 |
OCI before reclassifications |  | — |  |  | — |  |  | (18,132 | ) |  | (18,132 | ) |  | — |  |  | (18,132 | )
Amounts reclassified from AOCI |  | 232 |  |  | (353 | ) |  | (10,906 | ) |  | (11,027 | ) |  | 3,332 |  |  | (7,695 | )
Net current period OCI |  | 232 |  |  | (353 | ) |  | (29,038 | ) |  | (29,159 | ) |  | 3,332 |  |  | (25,827 | )
Balance, September 30, 2015 |  | $ | (282 | ) |  | 270 |  |  | 51,246 |  |  | 51,234 |  |  | (57,273 | ) |  | (6,039 | )

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The reclassifications out of AOCI are as follows:

| Quarter ended September 30, |  | Nine Months ended September 30, |
($ in thousands) | 2015 |  | 2014 |  | 2015 |  | 2014 | Affected Line Item in the Unaudited Consolidated Statement of Income
OTTI related |  |  |  |  |  |  |  |
Non-credit OTTI on disposed securities | $ | — |  |  | 1,200 |  |  | 357 |  |  | 1,669 |  | Net realized gains
| — |  |  | 1,200 |  |  | 357 |  |  | 1,669 |  | Income before federal income tax
| — |  |  | (420 | ) |  | (125 | ) |  | (584 | ) | Total federal income tax expense
| — |  |  | 780 |  |  | 232 |  |  | 1,085 |  | Net income
HTM related |  |  |  |  |  |  |  |
Unrealized losses on HTM disposals | 121 |  |  | 12 |  |  | 258 |  |  | 87 |  | Net realized gains
Amortization of net unrealized gains on HTM securities | (218 | ) |  | (385 | ) |  | (801 | ) |  | (1,137 | ) | Net investment income earned
| (97 | ) |  | (373 | ) |  | (543 | ) |  | (1,050 | ) | Income before federal income tax
| 34 |  |  | 130 |  |  | 190 |  |  | 367 |  | Total federal income tax expense
| (63 | ) |  | (243 | ) |  | (353 | ) |  | (683 | ) | Net income
Realized gains on AFS and OTTI |  |  |  |  |  |  |  |
Realized gains on AFS disposals and OTTI | (305 | ) |  | (16,435 | ) |  | (16,778 | ) |  | (28,672 | ) | Net realized gains
| (305 | ) |  | (16,435 | ) |  | (16,778 | ) |  | (28,672 | ) | Income before federal income tax
| 106 |  |  | 5,752 |  |  | 5,872 |  |  | 10,035 |  | Total federal income tax expense
| (199 | ) |  | (10,683 | ) |  | (10,906 | ) |  | (18,637 | ) | Net income
Defined benefit pension and post-retirement life plans |  |  |  |  |  |  |  |
Net actuarial loss | 371 |  |  | 88 |  |  | 1,114 |  |  | 263 |  | Loss and loss expense incurred
| 1,338 |  |  | 293 |  |  | 4,013 |  |  | 879 |  | Policy acquisition costs
Total defined benefit pension and post-retirement life | 1,709 |  |  | 381 |  |  | 5,127 |  |  | 1,142 |  | Income before federal income tax
| (599 | ) |  | (134 | ) |  | (1,795 | ) |  | (400 | ) | Total federal income tax expense
| 1,110 |  |  | 247 |  |  | 3,332 |  |  | 742 |  | Net income
Total reclassifications for the period | $ | 848 |  |  | (9,899 | ) |  | (7,695 | ) |  | (17,493 | ) | Net income

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Note 11. Litigation
In the ordinary course of conducting business, we are named as defendants in various legal proceedings. Most of these proceedings are claims litigation involving our Insurance Subsidiaries as either: (i) liability insurers defending or providing indemnity for third-party claims brought against our customers; or (ii) insurers defending first-party coverage claims brought against them. We account for such activity through the establishment of unpaid loss and loss expense reserves. We expect that the ultimate liability, if any, with respect to such ordinary course claims litigation, after consideration of provisions made for potential losses and costs of defense, will not be material to our consolidated financial condition, results of operations, or cash flows.
Our Insurance Subsidiaries are also from time to time involved in other legal actions, some of which assert claims for substantial amounts. These actions include, among others, putative class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, improper reimbursement of medical providers paid under workers compensation and personal and commercial automobile insurance policies. Our Insurance Subsidiaries also are involved from time to time in individual actions in which extra-contractual damages, punitive damages, or penalties are sought, such as claims alleging bad faith in the handling of insurance claims. We believe that we have valid defenses to these cases. We expect that the ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for estimated losses, will not be material to our consolidated financial condition. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation, an adverse outcome in certain matters could, from time to time, have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods. As of September 30, 2015, we do not believe the Company was involved in any legal action that could have a material adverse effect on our consolidated financial condition, results of operations, or cash flows.
Note 12. Subsequent Events
On October 28, 2015, our Board of Directors declared, for stockholders of record as of November 13, 2015, a $0.15 per share dividend to be paid on December 1, 2015. This is a 7% increase compared with the dividend declared on July 29, 2015.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
As used herein, the "Company," "we," "us," or "our" refers to Selective Insurance Group, Inc., and its subsidiaries, except as expressly indicated or unless the context otherwise requires. In this Quarterly Report on Form 10-Q, we discuss and make statements regarding our intentions, beliefs, current expectations, and projections regarding our company’s future operations and performance. Such statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are often identified by words such as “anticipates,” “believes,” “expects,” “will,” “should,” and “intends” and their negatives. We caution prospective investors that such forward-looking statements are not guarantees of future performance. Risks and uncertainties are inherent in our future performance. Factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to, those discussed under Item 1A. “Risk Factors” below in Part II “Other Information.” These risk factors may not be exhaustive. We operate in a continually changing business environment and new risk factors emerge from time to time. We can neither predict such new risk factors nor can we assess the impact, if any, of such new risk factors on our businesses or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied in any forward-looking statements in this report. In light of these risks, uncertainties, and assumptions, the forward-looking events discussed in this report might not occur. We make forward-looking statements based on currently available information and assume no obligation to update these statements due to changes in underlying factors, new information, future developments, or otherwise.
Introduction
Selective Insurance Group, Inc., through its subsidiaries, offers property and casualty insurance products in the standard and excess and surplus ("E&S") marketplaces. We classify our business into four reportable segments, which are as follows:

• | Standard Commercial Lines - which represents 78% of our combined insurance segments' net premiums written ("NPW"), sells commercial lines insurance products and services to businesses, non-profit organizations, and local government agencies located primarily in 22 states in the Eastern and Midwestern U.S. and the District of Columbia through 1,140 distribution partners in the standard marketplace.

• | Standard Personal Lines - which includes our flood business, represents approximately 14% of our combined insurance segments' NPW and sells personal lines insurance products and services to individuals located primarily in 13 states through approximately 700 distribution partners in the standard marketplace. In addition, we have approximately 5,500 distribution partners selling our flood business.

• | E&S Lines - which represents 8% of our combined insurance segments' NPW, sells commercial lines insurance products and services in all 50 states and the District of Columbia through approximately 80 distribution partners. Insurance policies in this segment are sold to customers that typically have business risks with unique characteristics, such as the nature of the business or its claim history and cannot obtain coverage in the standard marketplace. E&S insurers have more flexibility in coverage terms and rates compared to standard market insurers, generally resulting in policies with higher rates and terms and conditions that are more narrowly customized for specific risks.

• | Investments - invests the premiums collected by our Standard Commercial Lines, Standard Personal Lines, and E&S

Lines, as well as our earnings and amounts generated through our capital management strategies, which may include the issuance of debt and equity securities.
Our Standard Commercial and Standard Personal Lines products and services are written through nine subsidiaries, some of which write flood business through the Write Your Own ("WYO") program of the National Flood Insurance Program ("NFIP").
Our E&S products and services are written through one subsidiary. This subsidiary, Mesa Underwriters Specialty Insurance Company ("MUSIC"), provides us with a nationally-authorized non-admitted platform to offer insurance products and services to customers who have not obtained coverage in the standard marketplace.
Our ten insurance subsidiaries are collectively referred to as the "Insurance Subsidiaries."
The following is Management’s Discussion and Analysis (“MD&A”) of the consolidated results of operations and financial condition, as well as known trends and uncertainties, that may have a material impact in future periods. Consequently, investors should read the MD&A in conjunction with the consolidated financial statements in our 2014 Annual Report filed with the U.S. Securities and Exchange Commission ("SEC").
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In the MD&A, we will discuss and analyze the following:

• | Critical Accounting Policies and Estimates;

• | Financial Highlights of Results for the third quarters ended September 30, 2015 (“Third Quarter 2015”) and September 30, 2014 (“Third Quarter 2014”) and the nine-month periods ended September 30, 2015 ("Nine Months 2015") and September 30, 2014 ("Nine Months 2014");

• | Results of Operations and Related Information by Segment;

• | Federal Income Taxes;

• | Financial Condition, Liquidity, Short-term Borrowings, and Capital Resources;

• | Ratings;

• | Off-Balance Sheet Arrangements; and

• | Contractual Obligations, Contingent Liabilities, and Commitments.

Critical Accounting Policies and Estimates
Our unaudited interim consolidated financial statements include amounts based on our informed estimates and judgments for those transactions that are not yet complete. Such estimates and judgments affect the reported amounts in the consolidated financial statements. Those estimates and judgments most critical to the preparation of the consolidated financial statements involve the following: (i) reserves for loss and loss expenses; (ii) pension and post-retirement benefit plan actuarial assumptions; (iii) other-than-temporary investment impairments ("OTTI"); and (iv) reinsurance. These estimates and judgments require the use of assumptions about matters that are highly uncertain and, therefore, are subject to change as facts and circumstances develop. If different estimates and judgments had been applied, materially different amounts might have been reported in the financial statements. For additional information regarding our critical accounting policies, refer to pages 37 through 48 of our 2014 Annual Report.
Financial Highlights of Results for Third Quarter and Nine Months 2015 and Third Quarter and Nine Months 2014 1

|  | Quarter ended September 30, |  |  |  |  |  | Nine Months ended September 30, |  |  |  |
($ and shares in thousands, except per share amounts) |  | 2015 |  | 2014 |  | Change % or Points |  |  |  | 2015 |  | 2014 |  | Change % or Points |  |
Generally Accepted Accounting Principles ("GAAP") measures: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Revenues |  | $ | 540,457 |  |  | 515,358 |  |  | 5 |  |  | % |  | $ | 1,586,322 |  |  | 1,531,278 |  |  | 4 |  |  | %
Net investment income earned |  | 32,061 |  |  | 34,292 |  |  | (7 | ) |  |  |  | 91,208 |  |  | 106,600 |  |  | (14 | ) |  |
Income before federal income tax |  | 65,839 |  |  | 75,326 |  |  | (13 | ) |  |  |  | 168,894 |  |  | 139,931 |  |  | 21 |  |  |
Net income |  | 46,996 |  |  | 53,162 |  |  | (12 | ) |  |  |  | 120,472 |  |  | 100,477 |  |  | 20 |  |  |
Diluted net income per share |  | 0.81 |  |  | 0.93 |  |  | (13 | ) |  |  |  | 2.08 |  |  | 1.75 |  |  | 19 |  |  |
Diluted weighted-average outstanding shares |  | 57,984 |  |  | 57,406 |  |  | 1 |  |  |  |  | 57,838 |  |  | 57,286 |  |  | 1 |  |  |
GAAP combined ratio |  | 91.2 | % |  | 92.6 |  |  | (1.4 | ) |  | pts |  | 93.2 | % |  | 97.1 |  |  | (3.9 | ) |  | pts
Statutory combined ratio |  | 90.5 |  |  | 91.5 |  |  | (1.0 | ) |  |  |  | 92.3 |  |  | 96.6 |  |  | (4.3 | ) |  |
Invested assets per dollar of stockholders' equity |  | $ | 3.69 |  |  | 3.79 |  |  | (3 | ) |  | % |  | $ | 3.69 |  |  | 3.79 |  |  | (3 | ) |  | %
After-tax yield on investments |  | 2.0 | % |  | 2.2 |  |  | (0.2 | ) |  | pts |  | 1.9 | % |  | 2.3 |  |  | (0.4 | ) |  | pts
Return on average equity ("ROE") |  | 14.1 |  |  | 17.0 |  |  | (2.9 | ) |  |  |  | 12.2 |  |  | 11.1 |  |  | 1.1 |  |  |
Non-GAAP measures: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Operating income 2 |  | $ | 46,796 |  |  | 43,262 |  |  | 8 |  |  | % |  | $ | 110,221 |  |  | 82,935 |  |  | 33 |  |  | %
Diluted operating income per share 2 |  | 0.81 |  |  | 0.76 |  |  | 7 |  |  |  |  | 1.90 |  |  | 1.44 |  |  | 32 |  |  |
Operating ROE 2 |  | 14.0 | % |  | 13.8 |  |  | 0.2 |  |  | pts |  | 11.2 | % |  | 9.1 |  |  | 2.1 |  |  | pts

1 | Refer to the Glossary of Terms attached to our 2014 Annual Report as Exhibit 99.1 for definitions of terms used in this Form 10-Q.

2 | Operating income is used as an important financial measure by us, analysts, and investors, because the realization of investment gains and losses on sales in any given period is largely discretionary as to timing. In addition, these realized investment gains and losses, as well as OTTI that are charged to earnings and the results of discontinued operations, could distort the analysis of trends. See below for a reconciliation of operating income to net income in accordance with GAAP. Operating ROE is calculated by dividing annualized operating income by average stockholders’ equity.

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The following table reconciles operating income and net income for the periods presented above:

|  | Quarter ended September 30, |  | Nine Months ended September 30,
($ in thousands, except per share amounts) |  | 2015 |  | 2014 |  | 2015 |  | 2014
Operating income |  | $ | 46,796 |  |  | 43,262 |  |  | $ | 110,221 |  |  | 82,935 |
Net realized gains, net of tax |  | 200 |  |  | 9,900 |  |  | 10,251 |  |  | 17,542 |
Net income |  | $ | 46,996 |  |  | 53,162 |  |  | $ | 120,472 |  |  | 100,477 |
Diluted operating income per share |  | $ | 0.81 |  |  | 0.76 |  |  | $ | 1.90 |  |  | 1.44 |
Diluted net realized gains per share |  | — |  |  | 0.17 |  |  | 0.18 |  |  | 0.31 |
Diluted net income per share |  | $ | 0.81 |  |  | 0.93 |  |  | $ | 2.08 |  |  | 1.75 |

It is our goal to average an operating ROE that is at least three points higher than our weighted-average cost of capital. At September 30, 2015, our weighted-average cost of capital was 8%. Our ROE contributions by component are as follows:

ROE |  | Quarter ended September 30, |  | Nine Months ended September 30,
|  | 2015 |  | 2014 |  | 2015 |  | 2014
Insurance Segments |  | 8.7 | % |  | 7.1 |  |  | 6.6 | % |  | 2.9 |
Investment income 1 |  | 7.4 |  |  | 8.2 |  |  | 7.1 |  |  | 8.8 |
Other |  | (2.1 | ) |  | (1.5 | ) |  | (2.5 | ) |  | (2.6 | )
Operating ROE |  | 14.0 |  |  | 13.8 |  |  | 11.2 |  |  | 9.1 |
Net realized gains 1 |  | 0.1 |  |  | 3.2 |  |  | 1.0 |  |  | 2.0 |
ROE |  | 14.1 | % |  | 17.0 |  |  | 12.2 | % |  | 11.1 |

1 Investment segment results are the combination of Investment income and Net realized gains.
Insurance Segments
The key metric in understanding our insurance segments’ contribution to operating ROE is the GAAP combined ratio. The following table provides a quantitative foundation for analyzing this ratio:

All Lines |  | Quarter ended September 30, |  |  |  |  |  | Nine Months ended September 30, |  |  |  |
($ in thousands) |  | 2015 |  | 2014 |  | Change % or Points |  |  |  | 2015 |  | 2014 |  | Change % or Points |  |
GAAP Insurance Operations Results: |  |  |  |  |  |  |  |  |  |  |  |  |  |
NPW |  | $ | 545,025 |  |  | 495,121 |  |  | 10 |  |  | % |  | $ | 1,595,246 |  |  | 1,451,694 |  |  | 10 |  |  | %
Net premiums earned (“NPE”) |  | 507,390 |  |  | 462,639 |  |  | 10 |  |  |  |  | 1,473,822 |  |  | 1,382,759 |  |  | 7 |  |  |
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loss and loss expense incurred |  | 285,161 |  |  | 270,932 |  |  | 5 |  |  |  |  | 861,721 |  |  | 889,273 |  |  | (3 | ) |  |
Net underwriting expenses incurred |  | 175,477 |  |  | 156,114 |  |  | 12 |  |  |  |  | 506,835 |  |  | 450,037 |  |  | 13 |  |  |
Dividends to policyholders |  | 1,921 |  |  | 1,156 |  |  | 66 |  |  |  |  | 5,290 |  |  | 3,943 |  |  | 34 |  |  |
Underwriting gain |  | $ | 44,831 |  |  | 34,437 |  |  | 30 |  |  | % |  | $ | 99,976 |  |  | 39,506 |  |  | 153 |  |  | %
GAAP Ratios: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loss and loss expense ratio |  | 56.2 |  | % | 58.6 |  |  | (2.4 | ) |  | pts |  | 58.5 |  | % | 64.3 |  |  | (5.8 | ) |  | pts
Underwriting expense ratio |  | 34.6 |  |  | 33.8 |  |  | 0.8 |  |  |  |  | 34.3 |  |  | 32.5 |  |  | 1.8 |  |  |
Dividends to policyholders ratio |  | 0.4 |  |  | 0.2 |  |  | 0.2 |  |  |  |  | 0.4 |  |  | 0.3 |  |  | 0.1 |  |  |
Combined ratio |  | 91.2 |  |  | 92.6 |  |  | (1.4 | ) |  |  |  | 93.2 |  |  | 97.1 |  |  | (3.9 | ) |  |
Statutory Ratios: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loss and loss expense ratio |  | 56.1 |  |  | 58.4 |  |  | (2.3 | ) |  |  |  | 58.5 |  |  | 64.2 |  |  | (5.7 | ) |  |
Underwriting expense ratio |  | 34.0 |  |  | 32.9 |  |  | 1.1 |  |  |  |  | 33.4 |  |  | 32.1 |  |  | 1.3 |  |  |
Dividends to policyholders ratio |  | 0.4 |  |  | 0.2 |  |  | 0.2 |  |  |  |  | 0.4 |  |  | 0.3 |  |  | 0.1 |  |  |
Combined ratio |  | 90.5 |  | % | 91.5 |  |  | (1.0 | ) |  | pts |  | 92.3 |  | % | 96.6 |  |  | (4.3 | ) |  | pts

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The improvements in our GAAP combined ratio in both the quarter and year-to-date periods were driven by the following factors:

• | Earned rate in excess of expected loss inflation in Third Quarter and Nine Months 2015. Renewal pure price increases of 3.5% in Nine Months 2015 and 4.9% in the last three months of 2014 provided earned rate that was above our expected loss inflation. After taking into account the incremental expenses associated with the additional premium, the net benefit to the combined ratios was approximately 0.5 points and 1 point in Third Quarter and Nine Months 2015, respectively.

• | Favorable prior year casualty reserve development of approximately $15.0 million, or 3.0 points, in Third Quarter 2015, and $55.0 million, or 3.8 points, in Nine Months 2015, primarily driven by accident years 2013 and prior. The overall net favorable development was driven by the general liability and workers compensation lines of business. Refer to the table below for further details:

(Favorable)/Unfavorable Prior Year Casualty Reserve Development |  |  |  |  |  |  |  |
| Quarter ended September 30, |  | Nine Months ended September 30, |
($ in millions) | 2015 |  | 2014 |  | 2015 |  | 2014 |
General liability | $ | (5.0 | ) |  | (11.0 | ) |  | $ | (41.0 | ) |  | (36.0 | ) |
Commercial automobile | — |  |  | — |  |  | 3.0 |  |  | (4.0 | ) |
Workers compensation | (14.0 | ) |  | — |  |  | (27.0 | ) |  | — |  |
Businessowners' policies | — |  |  | 1.0 |  |  | 4.0 |  |  | 2.5 |  |
Total Standard Commercial Lines | (19.0 | ) |  | (10.0 | ) |  | (61.0 | ) |  | (37.5 | ) |
Personal automobile | — |  |  | (2.0 | ) |  | — |  |  | (6.0 | ) |
Total Standard Personal Lines | — |  |  | (2.0 | ) |  | — |  |  | (6.0 | ) |
E&S | 4.0 |  |  | 4.0 |  |  | 6.0 |  |  | 4.0 |  |
Total (favorable) prior year casualty reserve development | $ | (15.0 | ) |  | (8.0 | ) |  | $ | (55.0 | ) |  | (39.5 | ) |
(Favorable) impact on loss ratio | (3.0 | ) | pts | (1.6 | ) |  | (3.8 | ) | pts | (2.8 | ) |

For a qualitative discussion of this reserve development, please refer to the respective insurance segment section below in
"Results of Operations and Related Information by Segment."
In addition, lower catastrophe and non-catastrophe property losses, as a result of reduced severity in weather-related events in Nine Months 2015, compared with the same periods last year, contributed to the improvement in our GAAP combined ratio. Quantitative details are as follows:

| Nine Months ended 2015 |  |  | Nine Months ended 2014 |  |  |
($ in millions) | Losses Incurred | Impact on Loss Ratio |  |  | Losses Incurred | Impact on Loss Ratio |  | Change in Ratio |
Catastrophe losses | $ | 56.1 |  | 3.8 | pts |  | $ | 66.9 |  | 4.8 | pts | (1.0 | ) | pts
Non-catastrophe property losses | 206.7 |  | 14.0 |  |  | 224.8 |  | 16.3 |  | (2.3 | ) |

Partially offsetting the improvements in the loss and loss expense ratios above were increases in the underwriting expense ratios of 0.8 points for Third Quarter 2015 and 1.8 points for Nine Months 2015. The increases in both periods were primarily related to the following factors, each of which contributed 0.3 points to the underwriting expense ratios:

• | Improved underwriting profitability, which resulted in higher supplemental commission expense to our distribution partners;

• | Improved underwriting profitability, which also resulted in higher annual incentive compensation expense to employees; and

• | Pension expense increases due to the accrual of service costs for eligible employees and the negative impact of declining interest rates last year.

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In addition, the underwriting expense ratio for Nine Months 2014 included $8.0 million, or 0.6 points, of a non-recurring benefit related to the sale of the renewal rights to our self-insured group, or "SIG", book of business in March 2014.
For additional information regarding: (i) the sale of our SIG book of business; and (ii) our Retirement Income Plan, see Note 8. “Segment Information” and Note 9. "Retirement Plans," respectively, in Item 1. “Financial Statements.” of this Form 10-Q.
Investments Segment
The investment segment's operating ROE was negatively impacted by lower investment income from our alternative investment portfolio in Third Quarter and Nine Months 2015, which was primarily driven by declining oil prices in energy-exposed limited partnerships, the results of which are reported to us on a one quarter lag. Additionally, lower reinvestment yields on our fixed income securities portfolio continue to negatively impact investment income. In Nine Months 2015, fixed income securities that we purchased had an average after-tax yield of 1.6% compared with our full year expectation of 2%, while those that were called, matured, or otherwise disposed of yielded an average of 2.5%, after tax.
The decreases in net realized gains in Third Quarter and Nine Months 2015, compared with the respective prior year periods, were driven by the sale of AFS equity securities in Third Quarter and Nine Months 2014 related to the quantitative rebalancing of our dividend yield strategy holdings within our equity portfolio. In addition, net realized gains decreased in Nine Months 2015 compared with Nine Months 2014 due to OTTI charges primarily within our equity portfolio. For further details, refer to the section below entitled "Investments."
Outlook
Based on its Review & Preview report issued in February 2015, A.M. Best Company, Inc. ("A.M. Best") expects the industry combined ratio to deteriorate almost 200 basis points in 2015 to 99.1%, compared with 97.2% in 2014, reflecting: (i) a reduction in the level of rate increases; (ii) a 0.5-point increase in their catastrophe loss estimate to a more normal level of approximately five points; and (iii) reductions in the level of favorable prior year development. Additionally, after declining in each of the past two years, A.M. Best expects investment income to increase modestly in 2015, driven by growth in invested assets from positive cash flow, as yields will continue to be challenged. They believe the main challenges facing the industry include: (i) continued pressure on net investment income reflecting low returns on fixed income investments; (ii) reserve shortfalls due to current accident year underestimations and prior accident year unfavorable development; (iii) developing, attracting, and maintaining underwriting talent; (iv) continuing the evolution of data analytics; and (v) addressing the uncertainties surrounding emerging risks such as terrorism, cyber risk, and infectious diseases. Considering these, among other factors, A.M. Best has a negative outlook on the commercial lines market and a stable outlook on the personal lines market.
Based on our results through Nine Months 2015, we are providing the following refinements to our 2015 full-year guidance:

• | A statutory combined ratio, excluding catastrophes and further prior year casualty reserve development, of 89%, an improvement from our original guidance of 91%;

• | Four points of catastrophe losses;

• | Overall renewal pure pricing between 3% and 3.5%;

• | After-tax investment income of approximately $95 million, at the low end of our previous guidance provided in the second quarter of 2015; and

• | Weighted average shares of approximately 58 million.

While we expect the competitive market environment to continue, we believe that we have a strong foundation to continue to deliver strong profitability considering:

• | The size of our company and field model that provides us with the ability to be agile and responsive to our customers' needs;

• | Our reserve position that reflects the discipline we have always maintained in our reserving practices;

• | Our customer-centric approach to our business with a focus on our policyholders and the service we bring to them;

• | The utilization of our capabilities regarding data analytics; and

• | Our deep bench of talent in the organization and our continuous cultivation of that talent.

It is our goal to average an operating ROE that is at least three points higher than our weighted-average cost of capital. At September 30, 2015, our weighted-average cost of capital was 8%.
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Results of Operations and Related Information by Segment
Standard Commercial Lines

|  | Quarter ended September 30, |  |  |  |  | Nine Months ended September 30, |  |  |
($ in thousands) |  | 2015 |  | 2014 |  | Change % or Points |  |  | 2015 |  | 2014 |  | Change % or Points |
GAAP Insurance Operations Results: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
NPW |  | $ | 414,031 |  |  | 376,438 |  |  | 10 |  | % |  | $ | 1,240,110 |  |  | 1,119,648 |  |  | 11 |  | %
NPE |  | 389,542 |  |  | 352,143 |  |  | 11 |  |  |  | 1,132,280 |  |  | 1,056,091 |  |  | 7 |  |
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loss and loss expense incurred |  | 203,621 |  |  | 201,352 |  |  | 1 |  |  |  | 619,857 |  |  | 660,523 |  |  | (6 | ) |
Net underwriting expenses incurred |  | 139,973 |  |  | 121,864 |  |  | 15 |  |  |  | 397,829 |  |  | 351,781 |  |  | 13 |  |
Dividends to policyholders |  | 1,921 |  |  | 1,156 |  |  | 66 |  |  |  | 5,290 |  |  | 3,943 |  |  | 34 |  |
Underwriting gain |  | $ | 44,027 |  |  | 27,771 |  |  | 59 |  | % |  | $ | 109,304 |  |  | 39,844 |  |  | 174 |  | %
GAAP Ratios: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loss and loss expense ratio |  | 52.3 |  | % | 57.2 |  |  | (4.9 | ) | pts |  | 54.7 |  | % | 62.5 |  |  | (7.8 | ) | pts
Underwriting expense ratio |  | 35.9 |  |  | 34.6 |  |  | 1.3 |  |  |  | 35.1 |  |  | 33.3 |  |  | 1.8 |  |
Dividends to policyholders ratio |  | 0.5 |  |  | 0.3 |  |  | 0.2 |  |  |  | 0.5 |  |  | 0.4 |  |  | 0.1 |  |
Combined ratio |  | 88.7 |  |  | 92.1 |  |  | (3.4 | ) |  |  | 90.3 |  |  | 96.2 |  |  | (5.9 | ) |
Statutory Ratios: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loss and loss expense ratio |  | 52.2 |  |  | 56.9 |  |  | (4.7 | ) |  |  | 54.7 |  |  | 62.5 |  |  | (7.8 | ) |
Underwriting expense ratio |  | 35.7 |  |  | 33.7 |  |  | 2.0 |  |  |  | 34.2 |  |  | 32.6 |  |  | 1.6 |  |
Dividends to policyholders ratio |  | 0.5 |  |  | 0.3 |  |  | 0.2 |  |  |  | 0.5 |  |  | 0.4 |  |  | 0.1 |  |
Combined ratio |  | 88.4 |  | % | 90.9 |  |  | (2.5 | ) | pts |  | 89.4 |  | % | 95.5 |  |  | (6.1 | ) | pts

The increases in NPW in Third Quarter and Nine Months 2015 compared with the same periods last year were driven by: (i) increases in direct new business; (ii) renewal pure price increases; and (iii) strong retention.

|  | Quarter ended September 30, |  | Nine Months ended September 30,
($ in millions) |  | 2015 |  | 2014 |  | 2015 |  | 2014
Retention |  | 84 |  | % | 83 |  |  | 83 |  | % | 82 |
Renewal pure price increases |  | 2.8 |  |  | 5.3 |  |  | 3.1 |  |  | 5.8 |
Direct new business |  | $ | 83.9 |  |  | 71.1 |  |  | $ | 262.3 |  |  | 204.7 |

NPE increases in Third Quarter and Nine Months 2015 compared with Third Quarter and Nine Months 2014 were consistent with the fluctuations in NPW for the twelve-month period ended September 30, 2015 compared with the twelve-month period ended September 30, 2014.
The GAAP loss and loss expense ratio decreased by 4.9 and 7.8 points in Third Quarter and Nine Months 2015, respectively, compared with the same prior year periods, driven by: (i) decreases in catastrophe and non-catastrophe property losses; (ii) renewal pure price increases that averaged 3.1% in Nine Months 2015 and 4.7% in the last three months of 2014, the earning of which exceeded our expected loss inflation and improved profitability by approximately 0.5 and 1 point in the current quarter and year-to-date periods, respectively; and (iii) favorable prior year casualty reserve development.
Quantitative information regarding property losses and prior year development is as follows:

| Quarter ended September 30, 2015 |  | Quarter ended September 30, 2014 |  |
($ in millions) | Losses Incurred | Impact on Loss Ratio |  |  | Losses Incurred | Impact on Loss Ratio |  | Change in Ratio |
Catastrophe losses | $ | 0.7 |  | 0.2 |  | pts |  | $ | 3.3 |  | 0.9 |  | pts | (0.7 | ) | pts
Non-catastrophe property losses | 37.9 |  | 9.7 |  |  |  | 35.3 |  | 10.0 |  |  | (0.3 | ) |
Favorable prior year casualty reserve development | (19.0 | ) | (4.9 | ) |  |  | (10.0 | ) | (2.7 | ) |  | (2.2 | ) |

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| Nine Months ended September 30, 2015 |  | Nine Months ended September 30, 2014 |  |
($ in millions) | Losses Incurred | Impact on Loss Ratio |  |  | Losses Incurred | Impact on Loss Ratio |  | Change in Ratio |
Catastrophe losses | $ | 33.0 |  | 2.9 |  | pts |  | $ | 41.9 |  | 4.0 |  | pts | (1.1 | ) | pts
Non-catastrophe property losses | 120.8 |  | 10.7 |  |  |  | 137.7 |  | 13.0 |  |  | (2.3 | ) |
Favorable prior year casualty reserve development | (61.0 | ) | (5.4 | ) |  |  | (37.5 | ) | (3.5 | ) |  | (1.9 | ) |

The favorable prior year casualty reserve development was driven by the general liability and workers compensation lines of business. The significant contributor to the favorable prior year casualty reserve development is the claims and underwriting initiatives we have undertaken, particularly in the workers compensation line of business. These initiatives are described in the "Reserves for Losses and Loss Expenses" section of "Critical Accounting Policies and Estimates" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." of our 2014 Annual Report.
Partially offsetting the improvements in the loss and loss expense ratio above were increases of 1.3 and 1.8 points in the underwriting expense ratio in Third Quarter and Nine Months 2015, respectively, compared with the same prior year periods. These increases were primarily attributable to: (i) higher supplemental commission expense to our distribution partners; (ii) increases in annual incentive compensation expense to employees; and (iii) pension expense increases, which are discussed further in "Financial Highlights of Results for Third Quarter and Nine Months 2015 and Third Quarter and Nine Months 2014" above. Additionally, the prior year underwriting ratio included $8.0 million, or 0.8 points, of non-recurring benefit related to the sale of the renewal rights to our SIG book of business in March 2014.
For additional information regarding the sale of our SIG book of business, see Note 8. “Segment Information” in Item 1. “Financial Statements.” of this Form 10-Q.
The following is a discussion of our most significant standard Commercial Lines of business and their respective statutory results:

General Liability |  |  |  |  |  |  |
|  | Quarter ended September 30, |  |  |  |  | Nine Months ended September 30, |  |  |
($ in thousands) |  | 2015 |  | 2014 |  | Change % or Points |  |  | 2015 |  | 2014 |  | Change % or Points |
Statutory NPW |  | $ | 130,722 |  |  | 117,731 |  |  | 11 |  | % |  | $ | 395,840 |  |  | 355,411 |  |  | 11 |  | %
Direct new business |  | 24,739 |  |  | 20,738 |  |  | 19 |  |  |  | 77,144 |  |  | 60,412 |  |  | 28 |  |
Retention |  | 84 |  | % | 83 |  |  | 1 |  | pts |  | 83 |  | % | 82 |  |  | 1 |  | pts
Renewal pure price increases |  | 2.3 |  |  | 6.1 |  |  | (3.8 | ) |  |  | 2.8 |  |  | 7.0 |  |  | (4.2 | ) |
Statutory NPE |  | $ | 123,252 |  |  | 110,894 |  |  | 11 |  | % |  | $ | 357,430 |  |  | 331,303 |  |  | 8 |  | %
Statutory combined ratio |  | 89.1 |  | % | 84.2 |  |  | 4.9 |  | pts |  | 80.0 |  | % | 81.8 |  |  | (1.8 | ) | pts
% of total statutory standard Commercial Lines NPW |  | 32 |  |  | 31 |  |  |  |  |  |  | 32 |  |  | 32 |  |  |  |  |

The increases in NPW in Third Quarter and Nine Months 2015 compared with Third Quarter and Nine Months 2014 were driven by: (i) increases in direct new business; (ii) renewal pure price increases; and (iii) strong retention.
NPE increases in the same periods were consistent with the fluctuations in NPW for the twelve-month period ended September 30, 2015 compared with the twelve-month period ended September 30, 2014.
In addition to the quantitative information in the tables below, the statutory combined ratios in the quarter and year-to-date periods were positively impacted by the pricing we have achieved. Renewal pure price increases were 2.8% in Nine Months 2015 and 5.7% in the last three months of 2014, the earning of which exceeded our expected loss inflation and improved profitability by approximately 0.5 points and 1 point in the current quarter and year-to-date periods, respectively.
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| Quarter ended September 30, 2015 | Quarter ended September 30, 2014 |  |
($ in millions) | (Benefit) Expense | Impact on Combined Ratio |  | (Benefit) Expense | Impact on Combined Ratio |  | Change Points |
Favorable prior year casualty reserve development | $ | (5.0 | ) | (4.1 | ) | pts | $ | (11.0 | ) | (9.9 | ) | pts | 5.8 | pts

| Nine Months ended September 30, 2015 | Nine Months ended September 30, 2014 |  |
($ in millions) | (Benefit) Expense | Impact on Combined Ratio |  | (Benefit) Expense | Impact on Combined Ratio |  | Change Points |
Favorable prior year casualty reserve development | $ | (41.0 | ) | (11.5 | ) | pts | $ | (36.0 | ) | (10.9 | ) | pts | (0.6 | ) | pts
Sale of SIG renewal rights | — |  | — |  |  | (2.1 | ) | (0.6 | ) |  | 0.6 |  |

Favorable prior year casualty reserve development in Third Quarter and Nine Months 2015 was driven by the 2009 through 2013 accident years, primarily due to lower claims frequencies and severities in those accident years. This is partially offset by unfavorable development in the 2014 accident year. Favorable prior year casualty reserve development in Third Quarter and Nine Months 2014 was driven by accident years 2012 and prior.

Commercial Automobile |  |  |  |  |  |  |
|  | Quarter ended September 30, |  |  |  |  | Nine Months ended September 30, |  |  |
($ in thousands) |  | 2015 |  | 2014 |  | Change % or Points |  |  | 2015 |  | 2014 |  | Change % or Points |
Statutory NPW |  | $ | 97,941 |  |  | 90,599 |  |  | 8 |  | % |  | $ | 291,547 |  |  | 267,134 |  |  | 9 |  | %
Direct new business |  | 17,345 |  |  | 14,275 |  |  | 22 |  |  |  | 54,200 |  |  | 42,760 |  |  | 27 |  |
Retention |  | 85 |  | % | 83 |  |  | 2 |  | pts |  | 84 |  | % | 82 |  |  | 2 |  | pts
Renewal pure price increases |  | 3.7 |  |  | 5.1 |  |  | (1.4 | ) |  |  | 3.7 |  |  | 5.8 |  |  | (2.1 | ) |
Statutory NPE |  | $ | 90,758 |  |  | 83,536 |  |  | 9 |  | % |  | $ | 265,771 |  |  | 249,224 |  |  | 7 |  | %
Statutory combined ratio |  | 104.5 |  | % | 92.8 |  |  | 11.7 |  | pts |  | 101.5 |  | % | 93.7 |  |  | 7.8 |  | pts
% of total statutory standard Commercial Lines NPW |  | 24 |  |  | 24 |  |  |  |  |  |  | 24 |  |  | 24 |  |  |  |  |

The increases in NPW in Third Quarter and Nine Months 2015 compared with Third Quarter and Nine Months 2014 were driven by: (i) increases in direct new business; (ii) renewal pure price increases; and (iii) strong retention.
NPE increases in the same periods were consistent with the fluctuations in NPW for the twelve-month period ended September 30, 2015 compared with the twelve-month period ended September 30, 2014.
The 11.7-point increase in the statutory combined ratio in Third Quarter 2015 compared with Third Quarter 2014 was driven by: (i) higher non-catastrophe property losses; and (ii) higher current year loss costs driven by a modest increase in loss severities.
These increases were partially offset by renewal pure price increases of 3.7% in Nine Months 2015 and 4.7% in the last three months of 2014, the earning of which exceeded our expected loss inflation and improved profitability by approximately 1 point in Third Quarter 2015.
Quantitative information regarding the non-catastrophe property losses is as follows:

| Quarter ended September 30, 2015 |  | Quarter ended September 30, 2014 |  |
($ in millions) | Losses Incurred | Impact on Loss Ratio |  |  | Losses Incurred | Impact on Loss Ratio |  | Change in Ratio |
Non-catastrophe property losses | $ | 14.2 |  | 15.6 |  | pts |  | $ | 10.0 |  | 11.9 | pts | 3.7 | pts

The 7.8-point increase in the statutory combined ratio in Nine Months 2015 compared with Nine Months 2014 was driven by: (i) higher non-catastrophe property losses, (ii) unfavorable prior year casualty reserve development; and (iii) higher current year loss costs driven by a modest increase in loss severities.
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These increases were partially offset by renewal pure price increases of 3.7% in Nine Months 2015 and 4.7% in the last three months of 2014, the earning of which exceeded our expected loss inflation and improved profitability by approximately 1 point in Nine Months 2015.
Quantitative information regarding these items is as follows:

| Nine Months ended September 30, 2015 |  | Nine Months ended September 30, 2014 |  |
($ in millions) | Losses Incurred | Impact on Loss Ratio |  |  | Losses Incurred | Impact on Loss Ratio |  | Change in Ratio |
Non-catastrophe property losses | $ | 40.1 |  | 15.1 | pts |  | $ | 34.0 |  | 13.6 |  | pts | 1.5 |  | pts
Unfavorable/ (Favorable) prior year casualty reserve development | 3.0 |  | 1.1 |  |  | (4.0 | ) | (1.6 | ) |  | 2.7 |  |
Sale of SIG renewal rights | — |  | — |  |  | (1.5 | ) | (0.6 | ) |  | 0.6 |  |

Workers Compensation |  |  |  |  |  |  |
|  | Quarter ended September 30, |  |  |  |  | Nine Months ended September 30, |  |  |
($ in thousands) |  | 2015 |  | 2014 |  | Change % or Points |  |  | 2015 |  | 2014 |  | Change % or Points |
Statutory NPW |  | $ | 74,446 |  |  | 65,740 |  |  | 13 |  | % |  | $ | 233,722 |  |  | 206,921 |  |  | 13 |  | %
Direct new business |  | 17,116 |  |  | 12,512 |  |  | 37 |  |  |  | 55,394 |  |  | 37,239 |  |  | 49 |  |
Retention |  | 84 |  | % | 81 |  |  | 3 |  | pts |  | 83 |  | % | 81 |  |  | 2 |  | pts
Renewal pure price increases |  | 2.5 |  |  | 5.1 |  |  | (2.6 | ) |  |  | 2.9 |  |  | 5.2 |  |  | (2.3 | ) |
Statutory NPE |  | $ | 74,560 |  |  | 66,732 |  |  | 12 |  | % |  | $ | 213,991 |  |  | 205,137 |  |  | 4 |  | %
Statutory combined ratio |  | 84.0 |  | % | 111.2 |  |  | (27.2 | ) | pts |  | 87.7 |  | % | 109.6 |  |  | (21.9 | ) | pts
% of total statutory standard Commercial Lines NPW |  | 18 |  |  | 17 |  |  |  |  |  |  | 19 |  |  | 18 |  |  |  |

The increases in NPW in Third Quarter and Nine Months 2015 compared with Third Quarter and Nine Months 2014 were driven by: (i) increases in direct new business; (ii) renewal pure price increases; and (iii) strong retention.
NPE increases in the same periods were consistent with the fluctuations in NPW for the twelve-month period ended September 30, 2015 compared with the twelve-month period ended September 30, 2014.
The decrease in the statutory combined ratio in Third Quarter and Nine Months 2015 compared with the same prior year periods was due to the following:

• | Favorable prior year casualty reserve development of $14 million, or 18.8 points, in Third Quarter 2015, related primarily to accident years 2014 and prior, compared to no development in Third Quarter 2014;

• | Favorable prior year casualty reserve development of $27 million, or 12.6 points, in Nine Months 2015, related primarily to accident years 2014 and prior, compared to no development in Nine Months 2014; and

• | Lower expected loss costs for the current accident year that resulted in a 9.3-point decrease in Third Quarter and Nine Months 2015, reflecting our ongoing focus on improving this competitive line of business through underwriting, pricing, and claims initiatives, as further discussed below.

Reductions in current and prior year loss costs in this line of business were primarily driven by continued lower frequencies and severities. We believe these trends are evidence of the significant claims and underwriting initiatives that we have undertaken on this line of business. These initiatives include:

• | Centralizing all workers compensation claim handling in Charlotte, North Carolina;

• | Managing non-complex workers compensation claims within our footprint through jurisdictionally-trained and aligned medical only and lost-time adjusters; and

• | Referring claims with high exposure and/or significant escalation risk to our workers compensation strategic case management unit.

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In addition, the industry has experienced a period of lower medical cost inflation, which has favorably impacted our estimate of ultimate losses on this line of business.
As a result of our performance, we are revising our workers compensation combined ratio guidance for full-year 2015 to 91%, assuming no additional reserve development, from our original guidance to be below 103%.

Commercial Property |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Quarter ended September 30, |  |  |  |  | Nine Months ended September 30, |  |  |
($ in thousands) |  | 2015 |  | 2014 |  | Change % or Points |  |  | 2015 |  | 2014 |  | Change % or Points |
Statutory NPW |  | $ | 77,674 |  |  | 71,463 |  |  | 9 |  | % |  | $ | 219,308 |  |  | 198,189 |  |  | 11 |  | %
Direct new business |  | 17,730 |  |  | 16,783 |  |  | 6 |  |  |  | 54,457 |  |  | 44,549 |  |  | 22 |  |
Retention |  | 83 |  | % | 82 |  |  | 1 |  | pts |  | 82 |  | % | 81 |  |  | 1 |  | pts
Renewal pure price increases |  | 2.7 |  |  | 4.2 |  |  | (1.5 | ) |  |  | 2.8 |  |  | 4.6 |  |  | (1.8 | ) |
Statutory NPE |  | $ | 68,587 |  |  | 61,304 |  |  | 12 |  | % |  | $ | 199,699 |  |  | 182,716 |  |  | 9 |  | %
Statutory combined ratio |  | 67.8 |  | % | 79.9 |  |  | (12.1 | ) | pts |  | 86.9 |  | % | 104.1 |  |  | (17.2 | ) | pts
% of total statutory standard Commercial Lines NPW |  | 19 |  |  | 19 |  |  |  |  |  |  | 18 |  |  | 18 |  |  |  |

The increases in NPW in Third Quarter and Nine Months 2015 compared with Third Quarter and Nine Months 2014 were driven by: (i) increases in direct new business; (ii) renewal pure price increases; and (iii) strong retention.
NPE increases in the same periods were consistent with the fluctuations in NPW for the twelve-month period ended September 30, 2015 compared with the twelve-month period ended September 30, 2014.
The decreases in the statutory combined ratio in Third Quarter and Nine Months 2015 compared with Third Quarter and Nine Months 2014 were due to the following:

| Quarter ended September 30, 2015 |  | Quarter ended September 30, 2014 |  |
($ in millions) | (Benefit) Expense | Impact on Combined Ratio |  |  | (Benefit) Expense | Impact on Combined Ratio |  | Change % or Points |
Catastrophe losses | $ | (0.5 | ) | (0.8 | ) | pts |  | $ | 2.7 |  | 4.4 | pts | (5.2 | ) | pts
Non-catastrophe property losses | 17.4 |  | 25.3 |  |  |  | 20.8 |  | 34.0 |  | (8.7 | ) |

| Nine Months ended September 30, 2015 |  | Nine Months ended September 30, 2014 |  |
($ in millions) | (Benefit) Expense | Impact on Combined Ratio |  |  | (Benefit) Expense | Impact on Combined Ratio |  | Change % or Points |
Catastrophe losses | $ | 25.6 |  | 12.8 | pts |  | $ | 31.7 |  | 17.4 |  | pts | (4.6 | ) | pts
Non-catastrophe property losses | 62.6 |  | 31.3 |  |  | 83.4 |  | 45.6 |  |  | (14.3 | ) |
Sale of SIG renewal rights | — |  | — |  |  | (1.4 | ) | (0.7 | ) |  | 0.7 |  |

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Standard Personal Lines

|  | Quarter ended September 30, |  |  |  |  |  | Nine Months ended September 30, |  |  |
($ in thousands) |  | 2015 |  | 2014 |  | Change % or Points |  |  |  | 2015 |  | 2014 |  | Change % or Points |
GAAP Insurance Operations Results: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
NPW |  | $ | 76,927 |  |  | 79,048 |  |  | (3 | ) |  | % |  | $ | 217,937 |  |  | 224,567 |  |  | (3 | ) | %
NPE |  | 72,088 |  |  | 74,377 |  |  | (3 | ) |  |  |  | 216,638 |  |  | 223,739 |  |  | (3 | ) |
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loss and loss expense incurred |  | 49,588 |  |  | 45,137 |  |  | 10 |  |  |  |  | 156,490 |  |  | 162,027 |  |  | (3 | ) |
Net underwriting expenses incurred |  | 19,674 |  |  | 21,203 |  |  | (7 | ) |  |  |  | 64,443 |  |  | 61,617 |  |  | 5 |  |
Underwriting gain (loss) |  | $ | 2,826 |  |  | 8,037 |  |  | (65 | ) |  | % |  | $ | (4,295 | ) |  | 95 |  |  | (4,621 | ) | %
GAAP Ratios: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loss and loss expense ratio |  | 68.8 |  | % | 60.7 |  |  | 8.1 |  |  | pts |  | 72.2 |  | % | 72.4 |  |  | (0.2 | ) | pts
Underwriting expense ratio |  | 27.3 |  |  | 28.5 |  |  | (1.2 | ) |  |  |  | 29.8 |  |  | 27.6 |  |  | 2.2 |  |
Combined ratio |  | 96.1 |  |  | 89.2 |  |  | 6.9 |  |  |  |  | 102.0 |  |  | 100.0 |  |  | 2.0 |  |
Statutory Ratios: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loss and loss expense ratio |  | 68.7 |  |  | 60.7 |  |  | 8.0 |  |  |  |  | 72.4 |  |  | 72.4 |  |  | — |  |
Underwriting expense ratio |  | 26.3 |  |  | 28.2 |  |  | (1.9 | ) |  |  |  | 29.3 |  |  | 27.5 |  |  | 1.8 |  |
Combined ratio |  | 95.0 |  | % | 88.9 |  |  | 6.1 |  |  | pts |  | 101.7 |  | % | 99.9 |  |  | 1.8 |  | pts

The decreases in NPW for the current quarter and year-to-date periods compared with the same prior year periods were primarily driven by targeted non-renewals of less profitable accounts coupled with a decrease in new business. Quantitative information is as follows:

|  | Quarter ended September 30, |  |  | Nine Months ended September 30, |
($ in millions) |  | 2015 |  | 2014 |  |  | 2015 |  | 2014 |
New business |  | $ | 9.1 |  |  | 10.1 |  |  | $ | 25.0 |  |  | 27.8 |
Retention |  | 83 |  | % | 81 |  |  | 82 |  | % | 81 |
Renewal pure price increases |  | 5.4 |  |  | 6.8 |  |  | 6.3 |  |  | 6.5 |

NPE decreases in Third Quarter and Nine Months 2015 compared with Third Quarter and Nine Months 2014 were consistent with the fluctuations in NPW for the twelve-month period ended September 30, 2015 compared with the twelve-month period ended September 30, 2014.
The GAAP loss and loss expense ratio increased 8.1 points in Third Quarter 2015 compared with the same period last year. In addition to the quantitative information below, renewal pure price increases of 6.3% in Nine Months 2015 and 6.7% in the last three months of 2014 provided earned rate that exceeded our expected loss inflation and improved profitability by approximately 2.5 points in Third Quarter 2015.

| Quarter ended September 30, 2015 |  | Quarter ended September 30, 2014 |  |
($ in millions) | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio |  |  | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio |  | Change in Ratio |
Catastrophe losses | $ | 5.8 |  | 8.0 |  | pts |  | $ | 1.6 |  | 2.2 |  | pts | 5.8 |  | pts
Non-catastrophe property losses | 21.0 |  | 29.1 |  |  |  | 21.7 |  | 29.2 |  |  | (0.1 | ) |
Flood claims handling fees | (0.8 | ) | (1.1 | ) |  |  | (0.8 | ) | (1.1 | ) |  | — |  |
Favorable prior year casualty development | — |  | — |  |  |  | (2.0 | ) | (2.7 | ) |  | 2.7 |  |

The GAAP loss and loss expense ratio decreased 0.2 points compared with the same period last year. In addition to the quantitative information below, renewal pure price increases of 6.3% in the Nine Months 2015 and 6.7% in the last three months of 2014 provided earned rate that exceeded our expected loss inflation and improved profitability by approximately 3 points in Nine Months 2015.
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| Nine Months ended September 30, 2015 |  | Nine Months ended September 30, 2014 |  |
($ in millions) | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio |  |  | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio |  | Change in Ratio |
Catastrophe losses | $ | 20.4 |  | 9.4 |  | pts |  | $ | 22.6 |  | 10.1 |  | pts | (0.7 | ) | pts
Non-catastrophe property losses | 68.0 |  | 31.4 |  |  |  | 73.0 |  | 32.6 |  |  | (1.2 | ) |
Flood claims handling fees | (2.0 | ) | (0.9 | ) |  |  | (2.4 | ) | (1.1 | ) |  | 0.2 |  |
Favorable prior year casualty development | — |  | — |  |  |  | (6.0 | ) | (2.7 | ) |  | 2.7 |  |

Favorable prior year casualty reserve development in Third Quarter and Nine Months 2014 was driven by the 2010 through 2012 accident years on our personal automobile line of business.
The decrease in the GAAP underwriting expense ratio in Third Quarter 2015 compared with Third Quarter 2014 was due to a year-to-date reallocation of overhead expenses to Standard Commercial Lines to match actual production. The increase in the GAAP underwriting expense ratio in Nine Months 2015 compared with the prior year period was primarily due to the following factors:

• | Staffing additions, such as Standard Personal Lines marketing specialists, to support our growth initiatives;

• | Increases in annual incentive compensation expense to employees;

• | Pension expense increases, which are discussed further in "Financial Highlights of Results for Third Quarter and Nine Months 2015 and Third Quarter and Nine Months 2014" above; and

• | Increased costs associated with capital improvements.

In addition, declining premiums in this segment, which are driven by lower new business due to competition and the targeted non-renewal actions we have taken on this book of business, have put pressure on the components of our combined ratio.
E&S Insurance Operations

|  | Quarter ended September 30, |  |  |  |  | Nine Months ended September 30, |  |  |
($ in thousands) |  | 2015 |  | 2014 |  | Change % or Points |  |  | 2015 |  | 2014 |  | Change % or Points |
GAAP Insurance Operations Results: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
NPW |  | $ | 54,067 |  |  | 39,635 |  |  | 36 |  | % |  | $ | 137,199 |  |  | 107,479 |  |  | 28 |  | %
NPE |  | 45,760 |  |  | 36,119 |  |  | 27 |  |  |  | 124,904 |  |  | 102,929 |  |  | 21 |  |
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loss and loss expense incurred |  | 31,952 |  |  | 24,443 |  |  | 31 |  |  |  | 85,374 |  |  | 66,723 |  |  | 28 |  |
Net underwriting expenses incurred |  | 15,830 |  |  | 13,047 |  |  | 21 |  |  |  | 44,563 |  |  | 36,639 |  |  | 22 |  |
Underwriting loss |  | $ | (2,022 | ) |  | (1,371 | ) |  | (47 | ) | % |  | $ | (5,033 | ) |  | (433 | ) |  | (1,062 | ) | %
GAAP Ratios: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loss and loss expense ratio |  | 69.8 |  | % | 67.7 |  |  | 2.1 |  | pts |  | 68.4 |  | % | 64.8 |  |  | 3.6 |  | pts
Underwriting expense ratio |  | 34.6 |  |  | 36.1 |  |  | (1.5 | ) |  |  | 35.6 |  |  | 35.6 |  |  | — |  |
Combined ratio |  | 104.4 |  |  | 103.8 |  |  | 0.6 |  |  |  | 104.0 |  |  | 100.4 |  |  | 3.6 |  |
Statutory Ratios: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loss and loss expense ratio |  | 69.9 |  |  | 67.6 |  |  | 2.3 |  |  |  | 68.3 |  |  | 64.9 |  |  | 3.4 |  |
Underwriting expense ratio |  | 31.2 |  |  | 35.3 |  |  | (4.1 | ) |  |  | 33.5 |  |  | 35.4 |  |  | (1.9 | ) |
Combined ratio |  | 101.1 |  | % | 102.9 |  |  | (1.8 | ) | pts |  | 101.8 |  | % | 100.3 |  |  | 1.5 |  | pts

The increases in NPW for both the current quarter and year-to-date periods, compared with the same prior year periods, were primarily driven by direct new business increases of $5.6 million, or 26%, and $18.9 million, or 34%, respectively, coupled with increases in net renewals.
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NPE increases in Third Quarter and Nine Months 2015 compared with Third Quarter and Nine Months 2014 were consistent with the fluctuations in NPW for the twelve-month period ended September 30, 2015 compared with the twelve-month period ended September 30, 2014.
The GAAP loss and loss expense ratio increased by 2.1 points in Third Quarter 2015 and 3.6 points in Nine Months 2015 compared with the same periods a year ago. These increases include the impact of renewal pure price increases that are not sufficient to offset expected loss inflation on this segment of our business. Given the nature of the E&S Lines business, approximately half of the business each year is new and half is renewal. Price adequacy is calculated by applying a surcharge to Insurance Services Office ("ISO") rates by class and territory. Currently, new business is estimated to be more adequately priced than renewal business, as renewal rates are only slightly higher than the previous year and still below currently calculated required surcharges. We continue to work within market conditions to achieve our desired level of profitability and believe the new business is priced to achieve that.
In addition, the following fluctuations impacted the loss and loss expense ratio:

| Third Quarter 2015 |  |  | Third Quarter 2014 |  |  |
($ in millions) | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio |  |  | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio |  | Change in Ratio |
Non-catastrophe property losses | $ | 6.3 |  | 13.7 | pts |  | $ | 3.4 |  | 9.2 | pts | 4.5 |  | pts
Unfavorable prior year casualty development | 4.0 |  | 8.6 |  |  | 4.0 |  | 11.0 |  | (2.4 | ) |
Catastrophe losses | 0.3 |  | 0.7 |  |  | 0.5 |  | 1.4 |  | (0.7 | ) |

| Nine Months ended 2015 |  |  | Nine Months ended 2014 |  |  |
($ in millions) | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio |  |  | Loss and Loss Expense Incurred | Impact on Loss and Loss Expense Ratio |  | Change in Ratio |
Non-catastrophe property losses | $ | 18.0 |  | 14.4 | pts |  | $ | 14.1 |  | 13.7 | pts | 0.7 |  | pts
Unfavorable prior year casualty development | 6.0 |  | 4.8 |  |  | 4.0 |  | 3.8 |  | 1.0 |  |
Catastrophe losses | 2.8 |  | 2.2 |  |  | 2.4 |  | 2.3 |  | (0.1 | ) |

Unfavorable prior year casualty reserve development in Third Quarter and Nine Months 2015 was driven by increased severities in the 2012 through 2014 accident years. Unfavorable prior year casualty reserve development in Third Quarter and Nine Months 2014 was driven by the 2012 and 2013 accident years.
The GAAP and statutory underwriting expense ratios benefited in the current quarter and year-to-date periods from increases in premiums that have outpaced fixed costs.
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Reinsurance
We have successfully completed negotiations of our July 1, 2015 excess of loss treaties, which now incorporate coverage for our E&S Lines insurance operations, as well as Standard Commercial Lines and Standard Personal Lines. The renewal of these treaties included some enhancements in terms and conditions and the same structure as the expiring treaties as follows:
Property Excess of Loss
The property excess of loss treaty ("Property Treaty") continues to provide $38.0 million of coverage in excess of a $2.0 million retention:

• | The per occurrence cap on the total program is $84.0 million.

• | The first layer has unlimited reinstatements. The annual aggregate limit for the $30.0 million in excess of $10.0 million second layer is $120.0 million.

• | The Property Treaty excludes nuclear, biological, chemical, and radiological terrorism losses.

Casualty Excess of Loss
The casualty excess of loss treaty (“Casualty Treaty”) continues to provide $88.0 million of coverage in excess of a $2.0 million retention:

• | The first through sixth layers provide coverage for 100% of up to $88.0 million in excess of a $2.0 million retention.

• | The Casualty Treaty excludes nuclear, biological, chemical, and radiological terrorism losses, with the annual aggregate terrorism limits remaining at $208.0 million.

Investments
Our investment philosophy includes certain return and risk objectives for the fixed income, equity, and other investment portfolios. Although yield and income generation remain the key drivers to our investment strategy, our overall philosophy is to invest with a long-term horizon along with predominantly a “buy-and-hold,” low turnover approach. The primary fixed income portfolio return objective is to maximize after-tax investment yield and income while balancing risk. A secondary objective is to meet or exceed a weighted-average benchmark of public fixed income indices. Within the equity portfolio, a dividend-focused strategy is designed to generate consistent dividend income while maintaining a lower risk profile relative to the Standard & Poor's Ratings Services ("S&P") 500 Index. Additional equity strategies are focused on meeting or exceeding strategy-specific benchmarks of public equity indices. The return objective of the other investment portfolio, which includes alternative investments, is to meet or exceed the S&P 500 Index.

Total Invested Assets |  |  |  |  |  |  |
($ in thousands) |  | September 30, 2015 |  | December 31, 2014 |  | Change % or Points |
Total invested assets |  | $ | 5,013,867 |  |  | 4,806,834 |  |  | 4 |  | %
Unrealized gain – before tax |  | 78,822 |  |  | 123,682 |  |  | (36 | ) |
Unrealized gain – after tax |  | 51,234 |  |  | 80,394 |  |  | (36 | ) |
Invested assets per dollar of stockholders' equity |  | 3.69 |  |  | 3.77 |  |  | (2 | ) |
Annualized after-tax yield on investment portfolio |  | 1.9 |  |  | 2.2 |  |  | (0.3 | ) | pts

The increase in our investment portfolio at September 30, 2015 compared with year-end 2014 was primarily driven by operating cash flow of $259.0 million, partially offset by a decrease in unrealized gains of $44.9 million. Of this $44.9 million, $31.3 million was in our equity portfolio, which was impacted by the volatility in the stock market during the year. In addition, unrealized gains in our fixed income securities portfolio decreased by $13.6 million due to widening credit spreads that more than offset the decline in U.S. Treasury rates during the year.
We continue to structure our portfolio conservatively with a focus on: (i) asset diversification; (ii) investment quality; (iii) liquidity, particularly to meet the cash obligations of our insurance operations segments; (iv) consideration of taxes; and (v) preservation of capital. We believe that we have a high quality and liquid investment portfolio. The breakdown of our investment portfolio is as follows:
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|  | September 30, 2015 |  | December 31, 2014
Fixed income securities: |  |  |  |
U.S. government obligations |  | 2 | % | 2
Foreign government obligations |  | — |  | 1
State and municipal obligations |  | 31 |  | 32
Corporate securities |  | 38 |  | 38
Mortgage-backed securities (“MBS”) |  | 15 |  | 14
Asset-backed securities (“ABS”) |  | 5 |  | 4
Total fixed income securities |  | 91 |  | 91
Equity securities: |  |  |  |
Common stock |  | 4 |  | 4
Preferred stock 1 |  | — |  | —
Total equity securities |  | 4 |  | 4
Short-term investments |  | 3 |  | 3
Other investments |  | 2 |  | 2
Total |  | 100 | % | 100

1 Preferred stock represented less than 1% of our portfolio as of September 30, 2015. We did not hold any of these securities as of December 31, 2014.
Fixed Income Securities
The average duration of the fixed income securities portfolio as of September 30, 2015 was 3.6 years, including short-term investments, compared to the Insurance Subsidiaries’ liability duration of approximately 4.2 years. The current duration of the fixed income securities portfolio is within our historical range, and is monitored and managed to maximize yield while managing interest rate risk at an acceptable level. We maintain a well-diversified portfolio across sectors, credit quality, and maturities that affords us ample liquidity. We typically have a long investment time horizon, and every purchase or sale is made with the intent of maximizing risk-adjusted investment returns in the current market environment while balancing capital preservation.
Our fixed income securities portfolio had a weighted average credit rating of “AA-" as of September 30, 2015. The following table presents the credit ratings of this portfolio:

Fixed Income Security Rating |  | September 30, 2015 |  | December 31, 2014 |
Aaa/AAA |  | 18 | % | 17 |
Aa/AA |  | 42 |  | 44 |
A/A |  | 26 |  | 25 |
Baa/BBB |  | 13 |  | 13 |
Ba/BB or below |  | 1 |  | 1 |
Total |  | 100 | % | 100 |

The following table summarizes the fair value, net unrealized gains, and weighted average credit qualities of our AFS fixed income securities at September 30, 2015 and December 31, 2014:

|  | September 30, 2015 |  | December 31, 2014
($ in millions) |  | Fair Value |  | Net Unrealized Gains |  | Weighted Average Credit Quality |  | Fair Value |  | Net Unrealized Gains |  | Weighted Average Credit Quality
AFS Fixed Income Portfolio: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government and government agencies |  | $ | 115.1 |  |  | 6.1 |  |  | AA+ |  | $ | 124.1 |  |  | 7.4 |  |  | AA+
Foreign government |  | 19.7 |  |  | 0.7 |  |  | AA- |  | 27.8 |  |  | 0.8 |  |  | AA-
Obligations of states and political subdivisions |  | 1,338.2 |  |  | 35.0 |  |  | AA |  | 1,246.3 |  |  | 37.5 |  |  | AA
Corporate securities |  | 1,886.2 |  |  | 26.3 |  |  | A- |  | 1,799.8 |  |  | 36.4 |  |  | A-
ABS |  | 256.9 |  |  | 1.2 |  |  | AAA |  | 177.2 |  |  | 0.4 |  |  | AAA
Residential MBS ("RMBS") |  | 512.9 |  |  | 6.0 |  |  | AA+ |  | 511.3 |  |  | 6.2 |  |  | AA+
Commercial MBS ("CMBS") |  | 222.0 |  |  | 2.0 |  |  | AAA |  | 179.6 |  |  | 1.6 |  |  | AA+
Total AFS fixed income portfolio |  | $ | 4,351.0 |  |  | 77.3 |  |  | AA- |  | $ | 4,066.1 |  |  | 90.3 |  |  | AA-

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The following tables provide information regarding our held-to-maturity (“HTM”) fixed income securities and their credit qualities at September 30, 2015 and December 31, 2014:

September 30, 2015 |  |  |  |  |  |  |  |  |  |  |  |
($ in millions) |  | Fair Value |  | Carry Value |  | Unrecognized Holding Gains |  | Net Unrealized Gains (Losses) in Accumulated Other Comprehensive Income ("AOCI") |  | Total Unrealized/ Unrecognized Gains |  | Weighted Average Credit Quality
HTM Fixed Income Portfolio: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Obligations of states and political subdivisions |  | $ | 214.0 |  |  | 206.6 |  |  | 7.4 |  |  | 1.1 |  |  | 8.5 |  |  | AA
Corporate securities |  | 20.4 |  |  | 17.9 |  |  | 2.5 |  |  | (0.2 | ) |  | 2.3 |  |  | A+
ABS |  | 1.2 |  |  | 1.1 |  |  | 0.1 |  |  | (0.2 | ) |  | (0.1 | ) |  | AAA
CMBS |  | 4.8 |  |  | 4.3 |  |  | 0.5 |  |  | (0.3 | ) |  | 0.2 |  |  | AAA
Total HTM fixed income portfolio |  | $ | 240.4 |  |  | 229.9 |  |  | 10.5 |  |  | 0.4 |  |  | 10.9 |  |  | AA

December 31, 2014 |  |  |  |  |  |  |  |  |  |  |  |
($ in millions) |  | Fair Value |  | Carry Value |  | Unrecognized Holding Gains |  | Net Unrealized Gains (Losses) in AOCI |  | Total Unrealized/ Unrecognized Gains |  | Weighted Average Credit Quality
HTM Portfolio: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign government |  | $ | 5.4 |  |  | 5.3 |  |  | 0.1 |  |  | — |  |  | 0.1 |  |  | AA+
Obligations of states and political subdivisions |  | 299.1 |  |  | 287.4 |  |  | 11.7 |  |  | 2.1 |  |  | 13.8 |  |  | AA
Corporate securities |  | 21.4 |  |  | 18.6 |  |  | 2.8 |  |  | (0.3 | ) |  | 2.5 |  |  | A+
ABS |  | 2.9 |  |  | 2.4 |  |  | 0.5 |  |  | (0.5 | ) |  | — |  |  | AAA
CMBS |  | 5.2 |  |  | 4.4 |  |  | 0.8 |  |  | (0.4 | ) |  | 0.4 |  |  | AAA
Total HTM portfolio |  | $ | 334.0 |  |  | 318.1 |  |  | 15.9 |  |  | 0.9 |  |  | 16.8 |  |  | AA

The sector composition and credit quality of our major asset categories shown above did not significantly change from December 31, 2014. Our top 10 state exposures still represent approximately 53% of the total municipal bond portfolio and have an average rating of "AA." A portion of our municipal bond portfolio contains insurance enhancements; however, the ratings of the securities with and without insurance remained unchanged as we generally purchase securities based on their underlying credit quality. For details regarding this information, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.” of our 2014 Annual Report.
In addition, as of September 30, 2015 and December 31, 2014, we did not hold any securities in our fixed income or equity portfolios issued by Greece, Puerto Rico, or China.
Equity Securities
Our equity securities portfolio was $222.0 million at September 30, 2015 and $191.4 million at December 31, 2014, which was 4% of total invested assets at each date. During Nine Months 2015, we purchased $194.3 million of securities and sold securities that had an original cost of $148.3 million primarily as a result of a change in our dividend equity strategy earlier this year from a quantitative, model-driven stock selection strategy to a fundamentally-based stock selection approach that incorporates an assessment of the sustainability and growth rate of a company’s dividends based on expected future cash flows.
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Unrealized/Unrecognized Losses
The following table presents amortized cost and fair value information for our AFS fixed income securities that were in an unrealized loss position at September 30, 2015 by contractual maturity:

($ in thousands) |  | Amortized Cost |  | Fair Value | Unrealized Loss
One year or less |  | $ | 56,969 |  |  | 56,910 |  | 59 |
Due after one year through five years |  | 468,969 |  |  | 464,753 |  | 4,216 |
Due after five years through ten years |  | 357,187 |  |  | 350,095 |  | 7,092 |
Due after ten years |  | 10,177 |  |  | 10,157 |  | 20 |
Total |  | $ | 893,302 |  |  | 881,915 |  | 11,387 |

The following table presents amortized cost and fair value information for our HTM fixed income securities that were in an unrealized/unrecognized loss position at September 30, 2015 by contractual maturity:

($ in thousands) |  | Amortized Cost |  | Fair Value | Unrecognized/Unrealized Loss
One year or less |  | $ | 946 |  |  | 942 |  | 4 |
Due after one year through five years |  | — |  |  | — |  | — |
Total |  | $ | 946 |  |  | 942 |  | 4 |

We have reviewed the securities in a loss position within our fixed income and equity portfolios, in accordance with our OTTI policy, which is discussed in Note 2. “Summary of Significant Accounting Policies” within Item 8. “Financial Statements and Supplementary Data.” of our 2014 Annual Report. We have concluded that these securities were temporarily impaired as of September 30, 2015. For additional information regarding the unrealized/unrecognized losses in our AFS and HTM portfolios, see Note 4. “Investments” in Item 1. “Financial Statements.” of this Form 10-Q.
Other Investments
As of September 30, 2015, other investments of $85.1 million represented 2% of our total invested assets. In addition to the capital that we have already invested to date, we are contractually obligated to invest up to an additional $76.5 million in our other investments portfolio through commitments that currently expire at various dates through 2028. For a description of our seven alternative investment strategies, as well as redemption, restrictions, and fund liquidations, refer to Note 5. “Investments” in Item 8. “Financial Statements and Supplementary Data.” of our 2014 Annual Report.
Net Investment Income
The components of net investment income earned for the indicated periods were as follows:

|  | Quarter ended September 30, |  | Nine Months ended September 30,
($ in thousands) |  | 2015 |  | 2014 |  | 2015 |  | 2014
Fixed income securities |  | $ | 30,601 |  |  | 30,706 |  |  | 92,227 |  |  | 95,515 |
Equity securities |  | 2,370 |  |  | 1,909 |  |  | 6,546 |  |  | 5,094 |
Short-term investments |  | 24 |  |  | 15 |  |  | 72 |  |  | 48 |
Other investments |  | 1,337 |  |  | 3,906 |  |  | (781 | ) |  | 12,677 |
Investment expenses |  | (2,271 | ) |  | (2,244 | ) |  | (6,856 | ) |  | (6,734 | )
Net investment income earned – before tax |  | 32,061 |  |  | 34,292 |  |  | 91,208 |  |  | 106,600 |
Net investment income tax expense |  | (7,506 | ) |  | (8,527 | ) |  | (20,666 | ) |  | (26,928 | )
Net investment income earned – after tax |  | $ | 24,555 |  |  | 25,765 |  |  | 70,542 |  |  | 79,672 |
Effective tax rate |  | 23.4 | % |  | 24.9 |  |  | 22.7 |  |  | 25.3 |
Annualized after-tax yield on fixed income securities |  | 2.1 |  |  | 2.2 |  |  | 2.1 |  |  | 2.3 |
Annualized after-tax yield on investment portfolio |  | 2.0 |  |  | 2.2 |  |  | 1.9 |  |  | 2.3 |

Net investment income before tax decreased in Third Quarter and Nine Months 2015 compared with the same prior year periods. Net investment income was negatively impacted by lower income from the alternative investments within our other investments portfolio. In particular, our energy-related limited partnerships have been negatively impacted by declining oil prices. Additionally, lower reinvestment yields on our fixed income securities portfolio continue to put pressure on investment income.
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Realized Gains and Losses
Our general philosophy for sales of securities is to reduce our exposure to securities and sectors based on economic evaluations and when the fundamentals for that security or sector have deteriorated, or to opportunistically trade out of securities to other securities with better economic return characteristics. We typically have a long investment time horizon, and every purchase or sale is made with the intent of maximizing risk-adjusted investment returns in the current market environment while balancing capital preservation. Net realized gains decreased by $14.9 million in Third Quarter 2015 and $11.2 million in Nine Months 2015, compared with the respective prior year periods, driven by the sale of AFS equity securities in Third Quarter and Nine Months 2014 related to the quantitative rebalancing of our dividend yield strategy holdings within our equity portfolio. The decrease in Nine Months 2015 also includes OTTI charges primarily within our equity portfolio that were higher than last year by $6.4 million. Refer to Note 4. "Investments" in Item 1. "Financial Statements." of this Form 10-Q for further details.
We regularly review our entire investment portfolio for declines in fair value. If we believe that a decline in the value of a particular investment is other than temporary, we record it as an OTTI, through realized losses in earnings for the credit-related portion and through unrealized losses in other comprehensive income ("OCI") for the non-credit related portion for fixed income securities. If there is a decline in fair value of an equity security that we do not intend to hold, or if we determine that the decline is other than temporary, we write down the cost of the investment to fair value and record the charge through earnings as a component of realized losses.
For further discussion of our realized gains and losses, as well as our OTTI methodology, see Note 2. “Summary of Significant Accounting Policies” in Item 8. “Financial Statements and Supplementary Data.” of our 2014 Annual Report. For additional information about our OTTI charges, see Note 4. "Investments" in Item 1. "Financial Statements." of this Form 10-Q.
Federal Income Taxes
The following table provides information regarding federal income taxes:

| Quarter ended September 30, |  | Nine Months ended September 30,
($ in million) | 2015 |  | 2014 |  | 2015 |  | 2014
Federal income tax expense | $ | 18.8 |  |  | 22.2 |  |  | 48.4 |  |  | 39.5 |
Effective tax rate | 29 | % |  | 29 |  |  | 29 |  |  | 28 |

Federal income tax expense decreased in Third Quarter 2015 compared with the same prior year period due to lower pre-tax income, primarily driven by a decrease in net realized gains. Federal income tax expense increased in Nine Months 2015 compared with the same prior year period due to higher pre-tax income, primarily driven by an improvement in our underwriting results. The effective tax rate for Third Quarter 2015 compared with Third Quarter 2014 remained flat, while the effective tax rate for Nine Months 2015 compared with Nine Months 2014 increased slightly, as tax-advantaged income remained flat compared to the increase in overall pre-tax income. The majority of our differences from the statutory rate are from recurring nontaxable items, such as tax-advantaged interest and dividends received deductions.
We believe that our future effective tax rate will continue to be impacted by similar items, assuming no significant changes to tax laws occur that would impact our tax-advantaged investments.
Financial Condition, Liquidity, Short-term Borrowings, and Capital Resources
Capital resources and liquidity reflect our ability to generate cash flows from business operations, borrow funds at competitive rates, and raise new capital to meet operating and growth needs.
Liquidity
We manage liquidity with a focus on generating sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. Our cash and short-term investment position of $141 million at September 30, 2015 was comprised of $32 million at Selective Insurance Group, Inc. (the "Parent") and $109 million at the Insurance Subsidiaries. Short-term investments are generally maintained in "AAA" rated money market funds approved by the National Association of Insurance Commissioners. The Parent continues to maintain a fixed income security investment portfolio containing high-quality, highly-liquid government and corporate fixed income securities to generate additional yield. This portfolio amounted to $64 million at September 30, 2015, compared with $50 million at December 31, 2014.
Sources of cash for the Parent have historically consisted of dividends from the Insurance Subsidiaries, borrowings under lines of credit and loan agreements with certain Insurance Subsidiaries, and the issuance of stock and debt securities. We continue to monitor these sources, giving consideration to our long-term liquidity and capital preservation strategies.
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We currently anticipate the Insurance Subsidiaries will pay $58 million in total dividends to the Parent in 2015. Cash dividends of $43 million were paid during Nine Months 2015. As of December 31, 2014, our allowable ordinary maximum dividend was $162 million for 2015.
Any dividends to the Parent are subject to the approval and/or review of the insurance regulators in the respective domiciliary states and are generally payable only from earned surplus as reported in the statutory annual statements of those subsidiaries as of the preceding December 31. Although past dividends have historically been met with regulatory approval, there is no assurance that future dividends that may be declared will be approved. For additional information regarding dividend restrictions, refer to Note 20. “Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds” in Item 8. “Financial Statements and Supplementary Data.” of our 2014 Annual Report.
The Parent had no private or public issuances of stock or debt instruments during Nine Months 2015 and there were no borrowings under its $30 million line of credit ("Line of Credit").
We have two Insurance Subsidiaries domiciled in Indiana ("Indiana Subsidiaries") that are members of the FHLBI. These Insurance Subsidiaries are Selective Insurance Company of South Carolina ("SICSC") and Selective Insurance Company of the Southeast ("SICSE"). Membership in the FHLBI provides these subsidiaries with access to additional liquidity. The Indiana Subsidiaries' aggregate investment of $2.8 million provides them with the ability to borrow approximately 20 times the total amount of the FHLBI common stock purchased, at comparatively low borrowing rates. All borrowings from the FHLBI are required to be secured by certain investments. For additional information regarding the required collateral, refer to Note 4. "Investments" in Item 1. "Financial Statements." of this Form 10-Q.
The Parent's Line of Credit agreement permits collateralized borrowings by the Indiana Subsidiaries from the FHLBI so long as the aggregate amount borrowed does not exceed 10% of the respective Indiana Subsidiary's admitted assets from the preceding calendar year. Admitted assets amounted to $564.3 million for SICSC and $429.8 million for SICSE as of December 31, 2014, for a borrowing capacity of approximately $99 million, of which $60 million is currently outstanding (including $15 million that was borrowed during the first quarter of 2015). Accordingly, the Indiana Subsidiaries have the ability to borrow an additional $39 million before the Line of Credit borrowing limit is met. The Parent has the ability to borrow an additional $48 million from the Indiana Subsidiaries under lending agreements approved by the Indiana Department of Insurance. Similar to the Line of Credit agreement, these lending agreements limit borrowings by the Parent from the Indiana Subsidiaries to 10% of the admitted assets of the respective Indiana Subsidiary. For additional information regarding the Parent's Line of Credit, refer to the section below entitled “Short-term Borrowings.”
The Insurance Subsidiaries also generate liquidity through insurance float, which is created by collecting premiums and earning investment income before losses are paid. The period of the float can extend over many years. Our investment portfolio consists of maturity dates that continually provide a source of cash flows for claims payments in the ordinary course of business. The duration of the fixed income securities portfolio including short-term investments was 3.6 years as of September 30, 2015, while the liabilities of the Insurance Subsidiaries have a duration of 4.2 years. In addition, the Insurance Subsidiaries purchase reinsurance coverage for protection against any significantly large claims or catastrophes that may occur during the year.
The liquidity generated from the sources discussed above is used, among other things, to pay dividends to our shareholders. Dividends on shares of the Parent's common stock are declared and paid at the discretion of the Board of Directors based on our operating results, financial condition, capital requirements, contractual restrictions, and other relevant factors. On October 28, 2015, our Board of Directors declared, for stockholders of record as of November 13, 2015, a $0.15 per share dividend to be paid on December 1, 2015. This is a 7% increase compared with the dividend declared on July 29, 2015.
Our ability to meet our interest and principal repayment obligations on our debt, as well as our ability to continue to pay dividends to our stockholders, is dependent on liquidity at the Parent coupled with the ability of the Insurance Subsidiaries to pay dividends, if necessary, and/or the availability of other sources of liquidity to the Parent. Scheduled repayments of our FHLBI borrowings include $15 million in July 2016 and $45 million in December 2016. Subsequent to these payments, our next principal repayment is due in 2034. Restrictions on the ability of the Insurance Subsidiaries to declare and pay dividends, without alternative liquidity options, could materially affect our ability to service debt and pay dividends on common stock.
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Short-term Borrowings
Our Line of Credit with Wells Fargo Bank, National Association, as administrative agent, and Branch Banking and Trust Company (BB&T), was renewed effective September 26, 2013 with a borrowing capacity of $30 million, which can be increased to $50 million with the approval of both lending partners.
The Line of Credit provides the Parent with an additional source of short-term liquidity. The interest rate on our Line of Credit varies and is based on, among other factors, the Parent’s debt ratings. The Line of Credit expires on September 26, 2017. There were no balances outstanding under the Line of Credit at any time during Nine Months 2015.
The Line of Credit agreement contains representations, warranties, and covenants that are customary for credit facilities of this type, including, without limitation, financial covenants under which we are obligated to maintain a minimum consolidated net worth, a minimum combined statutory surplus, and a maximum ratio of consolidated debt to total capitalization, as well as covenants limiting our ability to: (i) merge or liquidate; (ii) incur debt or liens; (iii) dispose of assets; (iv) make certain investments and acquisitions; and (v) engage in transactions with affiliates.
The table below outlines information regarding certain of the covenants in the Line of Credit:

| Required as of September 30, 2015 | Actual as of September 30, 2015
Consolidated net worth | $949 million | $1.4 billion
Statutory surplus | Not less than $750 million | $1.4 billion
Debt-to-capitalization ratio 1 | Not to exceed 35% | 22.9%
A.M. Best financial strength rating | Minimum of A- | A

1 | Calculated in accordance with the Line of Credit agreement.

Capital Resources
Capital resources provide protection for policyholders, furnish the financial strength to support the business of underwriting insurance risks, and facilitate continued business growth. At September 30, 2015, we had statutory surplus of $1.4 billion, GAAP stockholders’ equity of $1.4 billion, and total debt of $394 million, which equates to a debt-to-capital ratio of approximately 22%.
Our cash requirements include, but are not limited to, principal and interest payments on various notes payable, dividends to stockholders, payment of claims, payment of commitments under limited partnership agreements and capital expenditures, as well as other operating expenses, which include commissions to our distribution partners, labor costs, premium taxes, general and administrative expenses, and income taxes. For further details regarding our cash requirements, refer to the section below entitled, “Contractual Obligations, Contingent Liabilities, and Commitments.”
We continually monitor our cash requirements and the amount of capital resources that we maintain at the holding company and operating subsidiary levels. As part of our long-term capital strategy, we strive to maintain capital metrics, relative to the macroeconomic environment, that support our targeted financial strength. Based on our analysis and market conditions, we may take a variety of actions, including, but not limited to, contributing capital to the Insurance Subsidiaries in our insurance operations, issuing additional debt and/or equity securities, repurchasing shares of the Parent’s common stock, and increasing stockholders’ dividends.
Our capital management strategy is intended to protect the interests of the policyholders of the Insurance Subsidiaries and our stockholders, while enhancing our financial strength and underwriting capacity.
Book value per share increased to $23.77 as of September 30, 2015, from $22.54 as of December 31, 2014, due to $2.08 in net income, partially offset by $0.51 in unrealized losses in our investment portfolio and $0.42 in dividends to our shareholders.
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Ratings
We are rated by major rating agencies that issue opinions on our financial strength, operating performance, strategic position, and ability to meet policyholder obligations. We believe that our ability to write insurance business is most influenced by our rating from A.M. Best. In the second quarter of 2015, A.M. Best reaffirmed our rating of "A (Excellent)," their third highest of 13 financial strength ratings, with a “stable” outlook. The rating reflects A.M. Best's view that we have an excellent level of risk-adjusted capitalization, disciplined underwriting focus, targeted regional markets with strong distribution partner relationships, and consistently profitable operating performance. We have been rated “A” or higher by A.M. Best for the past 85 years. A downgrade from A.M. Best to a rating below “A-” is an event of default under our Line of Credit and could affect our ability to write new business with customers and/or distribution partners, some of whom are required (under various third-party agreements) to maintain insurance with a carrier that maintains a specified A.M. Best minimum rating.
Ratings by other major rating agencies are as follows:

• | Fitch Ratings ("Fitch") – Our “A+” rating was reaffirmed in Third Quarter 2015 with a stable outlook by Fitch. In taking this action, Fitch cited our improved underwriting results across all segments, solid capitalization with strong growth in stockholders' equity, and continued improvement in leverage and interest coverage metrics.

• | S&P's Ratings Services – On October 15, 2015, S&P issued a report on Selective maintaining our financial strength rating as “A-” with a positive outlook. The rating reflects S&P's view of our strong business risk profile, strong competitive position, and very strong capital and earnings. The positive outlook for the rating reflects S&P's view of our ongoing efforts to improve geographic and product diversification and reduce risk concentrations in catastrophe prone areas. In addition, the positive outlook reflects S&P's expectation that we will steadily improve our operating performance and that our capital adequacy will remain redundant at a very strong level.

• | Moody's Investor Service ("Moody's") – Our "A2" financial strength rating was reaffirmed in the second quarter of 2015 by Moody's. In taking this action, Moody's cited our solid regional franchise with established independent agency support, solid risk adjusted capitalization, strong invested asset quality, and good underwriting profitability. The outlook was revised to stable from negative, reflecting Moody's view of our improved profitability as a result of our stronger price adequacy in commercial lines, re-underwriting initiatives, and claims processing improvements.

Our S&P, Moody's, and Fitch financial strength and associated credit ratings affect our ability to access capital markets. The interest rate on our Line of Credit varies and is based on, among other factors, the Parent's debt ratings. There can be no assurance that our ratings will continue for any given period of time or that they will not be changed. It is possible that positive or negative ratings actions by one or more of the rating agencies may occur in the future.
Off-Balance Sheet Arrangements
At September 30, 2015 and December 31, 2014, we did not have any material relationships with unconsolidated entities or financial partnerships, also referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, we are not exposed to any material financing, liquidity, market, or credit risk that could arise if we had engaged in such relationships.
Contractual Obligations, Contingent Liabilities, and Commitments
Our future cash payments associated with: (i) loss and loss expense reserves; (ii) contractual obligations pursuant to operating leases for office space and equipment; (iii) notes payable; and (iv) contractual obligations related to our alternative and other investments portfolio have not materially changed since December 31, 2014. We expect to have the capacity to repay and/or refinance these obligations as they come due.
We have issued no material guarantees on behalf of others and have no trading activities involving non-exchange traded contracts accounted for at fair value. We have no material transactions with related parties other than those disclosed in Note 17. "Related Party Transactions" included in Item 8. "Financial Statements and Supplementary Data." of our 2014 Annual Report.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in the information about market risk set forth in our 2014 Annual Report.
ITEM 4. CONTROLS AND PROCEDURES.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)), as of the end of the period covered by this report. In performing this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework ("COSO Framework") in 2013. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are: (i) effective in recording, processing, summarizing, and reporting information on a timely basis that we are required to disclose in the reports that we file or submit under the Exchange Act; and (ii) effective in ensuring that information that we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. No changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) of the Exchange Act) occurred during Nine Months 2015 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In the ordinary course of conducting business, we are named as defendants in various legal proceedings. Most of these proceedings are claims litigation involving our Insurance Subsidiaries as either: (i) liability insurers defending or providing indemnity for third-party claims brought against our customers; or (ii) insurers defending first-party coverage claims brought against them. We account for such activity through the establishment of unpaid loss and loss expense reserves. We expect that the ultimate liability, if any, with respect to such ordinary course claims litigation, after consideration of provisions made for potential losses and costs of defense, will not be material to our consolidated financial condition, results of operations, or cash flows.
Our Insurance Subsidiaries are also from time to time involved in other legal actions, some of which assert claims for substantial amounts. These actions include, among others, putative class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, improper reimbursement of medical providers paid under workers compensation and personal and commercial automobile insurance policies. Our Insurance Subsidiaries are also involved from time to time in individual actions in which extra-contractual damages, punitive damages, or penalties are sought, such as claims alleging bad faith in the handling of insurance claims. We believe that we have valid defenses to these cases. We expect that the ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for estimated losses, will not be material to our consolidated financial condition. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation, an adverse outcome in certain matters could, from time to time, have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods. As of September 30, 2015, we do not believe the Company was involved in any legal action that could have a material adverse effect on our consolidated financial condition, results of operations, or cash flows.
ITEM 1A. RISK FACTORS.
Certain risk factors exist that can have a significant impact on our business, liquidity, capital resources, results of operations, financial condition, and debt ratings. The impact of these risk factors also could impact certain actions that we take as part of our long-term capital strategy, including but not limited to, contributing capital to any or all of the Insurance Subsidiaries, issuing additional debt and/or equity securities, repurchasing our equity securities, redeeming our fixed income securities, or increasing or decreasing stockholders dividends. We operate in a continually changing business environment and new risk factors emerge from time to time. Consequently, we can neither predict such new risk factors nor assess the potential future impact, if any, they might have on our business. There have been no material changes from the risk factors disclosed in Item 1A. “Risk Factors.” in our 2014 Annual Report other than as discussed below.
We face risks regarding our flood business because of uncertainties regarding the NFIP.
We are the sixth largest insurance group participating in the WYO arrangement of the NFIP, which is managed by the Mitigation Division of Federal Emergency Management Agency (“FEMA”) in the U.S. Department of Homeland Security. For WYO participation, we receive an expense allowance for policies written and a servicing fee for claims administered. Under the program, all losses are 100% reinsured by the Federal Government. During Nine Months 2015, the expense allowance was 30.8% of direct premiums written ("DPW") and the servicing fee was the combination of 0.9% of DPW and 1.5% of incurred losses.
The NFIP is funded by U.S Congress and in 2012, U.S. Congress passed, and the President signed, the Biggert-Waters Flood Insurance Reform Act of 2012 (“Biggert-Waters Act”). The Biggert-Waters Act: (i) extended NFIP funding to September 30, 2017; and (ii) moved the program to more market based rates for certain flood policyholders. FEMA implemented these rates throughout 2013, which created significant public discontent and Congressional concern over the impact of the new rates on NFIP customers.
Consequently, U.S Congress passed and, on March 21, 2014, the President signed into law, the Homeowner Flood Insurance Affordability Act of 2014 (“Flood Affordability Act”). The Flood Affordability Act substantially modifies certain provisions of the Biggert-Waters Act, including the reversal of certain rate increases resulting in premium refunds for many NFIP policyholders that began after October 1, 2014. Effective April 2015, the Flood Affordability Act effectuated certain changes to the NFIP, including: (i) an increase in the Reserve Fund Assessment; (ii) implementation of an annual surcharge on all new and renewal policies; (iii) an additional deductible option; and (iv) increases in the federal policy fee and basic rates.
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As a WYO carrier, we are required to follow certain NFIP procedures when administering flood policies and claims. Some of these requirements may differ from our normal business practices and may present a reputational risk to our brand. Insurance companies are regulated by states; however, the NFIP is a federal program. Consequently, we have the risk that regulatory positions taken by the NFIP and a state regulator on the same issue may conflict.
Despite the passage of the Flood Affordability Act, the role of the NFIP remains under scrutiny by policymakers. The uncertainty behind the public policy debate and politics of flood insurance reform make it difficult for us to predict the future of the NFIP and our continued participation in the program.
Changes in tax legislation initiatives could adversely affect our results of operations and financial condition.
We are subject to the tax laws and regulations of U.S. federal, state, and local governments, which may change in ways that adversely impact us. For example, federal tax legislation could be enacted that reduces the existing statutory U.S. federal corporate income tax rate from 35%, thereby reducing any deferred tax assets. This would require that we recognize, in full, a reduction of a previously-recognized federal tax benefit in the period when enacted, and, along with other changes in the tax rules that may increase our actual tax expense, could materially and adversely affect our results of operations.
In addition, our investment portfolio has benefited from tax exemptions and certain other tax laws, including, but not limited to, those governing dividends received deductions and tax-advantaged municipal bond interest. Federal and/or state tax legislation could be enacted that would lessen or eliminate some or all of the tax advantages currently benefiting us. This could negatively impact the value of our investment portfolio and, in turn, materially and adversely impact our results of operations.
We are subject to the risk that legislation will be passed that significantly changes insurance regulation and adversely
impacts our business, financial condition, and/or the results of operations.
In 2013, the Department of Housing and Urban Development ("HUD") finalized a new "disparate impact" regulation that may adversely impact insurers' ability to differentiate pricing for homeowners policies using traditional risk selection analysis. Various legal challenges to this regulation continue to be pursued in courts, including the applicability of the regulation to the business of insurance. It is uncertain to what extent the application of this regulation will impact the property and casualty industry and underwriting practices, but it could increase litigation costs, force changes in underwriting practices, and impair our ability to write homeowners business profitably. The outcome of the pending legal challenges and potential rulemaking cannot be predicted at this time.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following table provides information regarding our purchases of our common stock in Third Quarter 2015:

Period |  | Total Number of Shares Purchased 1 |  | Average Price Paid per Share |  | Total Number of Shares Purchased as Part of Publicly Announced Programs |  | Maximum Number of Shares that May Yet Be Purchased Under the Announced Programs
July 1 – 31, 2015 |  | — |  |  | $ | — |  |  | — |  |  | — |
August 1 - 31, 2015 |  | 9,371 |  |  | 31.54 |  |  | — |  |  | — |
September 1 - 30, 2015 |  | 308 |  |  | 30.89 |  |  | — |  |  | — |
Total |  | 9,679 |  |  | $ | 31.52 |  |  | — |  |  | — |

1 During Third Quarter 2015, 308 shares were purchased from employees in connection with the vesting of restricted stock units and 9,371 shares were purchased from employees in connection with option exercises. These repurchases were made to satisfy tax withholding obligations and/or option costs with respect to those employees. These shares were not purchased as part of any publicly announced program. The shares that were purchased in connection with the vesting of restricted stock units were purchased at fair market value as defined in the Selective Insurance Group, Inc. 2005 Omnibus Stock Plan As Amended and Restated Effective as of May 1, 2010. The shares purchased in connection with the option exercises were purchased at the current market prices of our common stock on the dates the options were exercised.
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Item 6. EXHIBITS.

Exhibit No. |  |
* 11 |  | Statement Re: Computation of Per Share Earnings.
* 31.1 |  | Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.
* 31.2 |  | Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.
* 32.1 |  | Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.
* 32.2 |  | Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.
** 101.INS |  | XBRL Instance Document.
** 101.SCH |  | XBRL Taxonomy Extension Schema Document.
** 101.CAL |  | XBRL Taxonomy Extension Calculation Linkbase Document.
** 101.LAB |  | XBRL Taxonomy Extension Label Linkbase Document.
** 101.PRE |  | XBRL Taxonomy Extension Presentation Linkbase Document.
** 101.DEF |  | XBRL Taxonomy Extension Definition Linkbase Document.

* Filed herewith.
** Furnished and not filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
SELECTIVE INSURANCE GROUP, INC.
Registrant

By: /s/ Gregory E. Murphy | October 29, 2015
Gregory E. Murphy |
Chairman of the Board and Chief Executive Officer |
By: /s/ Dale A. Thatcher | October 29, 2015
Dale A. Thatcher |
Executive Vice President and Chief Financial Officer |
(principal accounting officer and principal financial officer) |

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