Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds

(a) Statutory Financial Information

The Insurance Subsidiaries prepare their statutory financial statements in accordance with accounting principles prescribed or permitted by the various state insurance departments of domicile. Prescribed statutory accounting principles include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (“NAIC"). Permitted statutory accounting principles encompass all accounting principles that are not prescribed; such principles differ from state to state, may differ from company to company within a state and may change in the future. The Insurance Subsidiaries do not utilize any permitted statutory accounting principles that materially affect the determination of statutory surplus, statutory net income, or risk-based capital (“RBC”). As of December 31, 2016, the various state insurance departments of domicile have adopted the March 2016 version of the NAIC Accounting Practices and Procedures manual in its entirety, as a component of prescribed or permitted practices.

The following table provides statutory data for each of our Insurance Subsidiaries:



	State of Domicile	Unassigned Surplus			Statutory Surplus		Statutory Net Income
($ in millions)		2016		2015	2016	2015	2016	2015	2014
SICA	New Jersey	$	414.4	366.6	568.6	520.8	72.2	69.6	83.9
Selective Way Insurance Company ("SWIC")	New Jersey	260.5		223.6	309.5	272.6	41.2	42.3	37.0
SICSC	Indiana	110.6		96.6	141.9	127.9	17.4	15.9	14.0
SICSE	Indiana	83.5		70.7	109.1	96.2	13.4	12.1	10.5
SICNY	New York	74.1		65.3	101.8	93.0	12.9	12.7	10.3
Selective Insurance Company of New England ("SICNE")	New Jersey	13.6		9.2	43.7	39.4	5.9	5.5	4.4
Selective Auto Insurance Company of New Jersey ("SAICNJ")	New Jersey	36.9		26.4	79.8	69.2	11.5	10.8	9.1
MUSIC	New Jersey	16.7		7.0	85.2	75.5	9.7	9.5	7.3
Selective Casualty Insurance Company ("SCIC")	New Jersey	26.6		17.8	101.0	92.3	12.6	12.1	9.6
Selective Fire and Casualty Insurance Company ("SFCIC")	New Jersey	11.3		7.5	43.2	39.4	5.5	5.3	4.2
Total		$	1,048.2	890.7	1,583.8	1,426.3	202.3	195.8	190.3

(b) Capital Requirements

The Insurance Subsidiaries are required to maintain certain minimum amounts of statutory surplus to satisfy the requirements of their various state insurance departments of domicile. RBC requirements for property and casualty insurance companies are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. The Insurance Subsidiaries' combined total adjusted capital exceeded the authorized control level RBC, as defined by the NAIC based on their 2016 statutory financial statements. In addition to statutory capital requirements, we are impacted by various rating agency requirements related to certain rating levels. These required capital levels may be more than statutory requirements.

Our ability to declare and pay dividends on the Parent's common stock is dependent on liquidity at the Parent coupled with the ability of the Insurance Subsidiaries to declare and pay dividends, if necessary, and/or the availability of other sources of liquidity to the Parent. As of December 31, 2016, the Parent had an aggregate of $91.7 million in investments and cash available to fund future dividends and interest payments. These amounts are not subject to any regulatory restrictions other than standard state insolvency restrictions, whereas our consolidated retained earnings of $1.5 billion is predominately restricted due to the regulation associated with our Insurance Subsidiaries. In 2017, the Insurance Subsidiaries have the ability to provide for $192.7 million in annual dividends to the Parent; however, as regulated entities, these dividends are subject to certain restrictions, which are further discussed below. The Parent also has available to it other potential sources of liquidity, such as: (i) borrowings from our Indiana Subsidiaries; (ii) debt issuances; (iii) common stock issuances; and (iv) borrowings under our Line of Credit. Borrowings from our Indiana Subsidiaries are governed by approved intercompany lending agreements with the Parent that provide for additional capacity of $68.6 million as of December 31, 2016, after considering that borrowings under these lending agreements are restricted to 10% of the admitted assets of these respective subsidiaries. For additional information regarding the Parent's Line of Credit, refer to "Financial Condition, Liquidity, and Capital Resources" in Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations.” of this Form 10-K. For additional restrictions on the Parent's debt, see Note 10. "Indebtedness" in this Form 10-K.

Insurance Subsidiaries Dividend Restrictions

As noted above, the restriction on our net assets and retained earnings is predominantly driven by our Insurance Subsidiaries' ability to pay dividends to the Parent under applicable law and regulations. Under the insurance laws of the domiciliary states of the Insurance Subsidiaries, New Jersey, Indiana, and New York, an insurer can potentially make an ordinary dividend payment if its statutory surplus following such dividend is reasonable in relation to its outstanding liabilities, is adequate to its financial needs, and the dividend does not exceed the insurer's unassigned surplus. In general, New Jersey defines an ordinary dividend as a dividend whose fair market value, together with other dividends made within the preceding 12 months, is less than the greater of 10% of the insurer's statutory surplus as of the preceding December 31, or the insurer's net income (excluding capital gains) for the 12-month period ending on the preceding December 31. Indiana's ordinary dividend calculation differs from New Jersey's, in that it is the lessor of 10% of the insurer's statutory surplus, or the insurer's net income. Indiana's net income is computed by subtracting the amount of dividends paid in the first and second preceding calendar years from the aggregate net income (excluding capital gains), of the second and third preceding calendar years.

In general, New York defines an ordinary dividend as a dividend whose fair market value, together with other dividends made within the preceding 12 months, is less than the lesser of 10% of the insurer's statutory surplus, or 100% of adjusted net investment income. New Jersey and Indiana require notice of the declaration of any ordinary dividend distribution. During the notice period, the relevant state regulatory authority may disallow all or part of the proposed dividend if it determines that the dividend is not appropriate given the above considerations. New York does not require notice of ordinary dividends. Dividend payments exceeding ordinary dividends are referred to as extraordinary dividends and require review and approval by the applicable domiciliary insurance regulatory authority prior to payment.

The following table provides quantitative data regarding all Insurance Subsidiaries' dividends paid to the Parent in 2016 for debt service, shareholder dividends, and general operating purposes:



Dividends		Twelve Months ended December 31, 2016
($ in millions)	State of Domicile	Ordinary Dividends Paid
SICA	New Jersey	$	26.0
SWIC	New Jersey	12.0
SICSC	Indiana	5.0
SICSE	Indiana	2.0
SICNY	New York	5.0
SICNE	New Jersey	2.0
SAICNJ	New Jersey	1.5
SCIC	New Jersey	5.5
SFCIC	New Jersey	2.0
Total		$	61.0

Based on the 2016 statutory financial statements, the maximum ordinary dividends that can be paid to the Parent by the Insurance Subsidiaries in 2017 are as follows:



		2017
($ in millions)	State of Domicile	Maximum Ordinary Dividends
SICA	New Jersey	$	72.2
SWIC	New Jersey	40.4
SICSC	Indiana	13.8
SICSE	Indiana	10.9
SICNY	New York	10.2
SICNE	New Jersey	5.9
SAICNJ	New Jersey	11.5
MUSIC	New Jersey	9.7
SCIC	New Jersey	12.6
SFCIC	New Jersey	5.5
Total		$	192.7