XNAS:SIGI Selective Insurance Group Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XNAS:SIGI Fair Value Estimate
Premium
XNAS:SIGI Consider Buying
Premium
XNAS:SIGI Consider Selling
Premium
XNAS:SIGI Fair Value Uncertainty
Premium
XNAS:SIGI Economic Moat
Premium
XNAS:SIGI Stewardship
Premium
 
SIGI-6/30/2012-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
(Mark One)
 
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: June 30, 2012
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.
Yesx           No ¨
 
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).
Yesx           No ¨

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 ¨
Non-accelerated filer ¨
 
Smaller reporting company ¨
(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 ¨          No x 
As of June 30, 2012, there were 54,950,993 shares of common stock, par value $2.00 per share, outstanding. 



 
SELECTIVE INSURANCE GROUP, INC.
 
 
Table of Contents
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
58
 



PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
SELECTIVE INSURANCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
 
Unaudited
 
 
($ in thousands, except share amounts)
 
June 30,
2012
 
December 31,
2011
ASSETS
 
 

 
 

Investments:
 
 

 
 

Fixed maturity securities, held-to-maturity – at carrying value (fair value:  $687,981 – 2012; $758,043 – 2011)
 
$
643,501

 
712,348

Fixed maturity securities, available-for-sale – at fair value (amortized cost: $2,974,819 – 2012; $2,766,856 – 2011)
 
3,123,006

 
2,897,373

Equity securities, available-for-sale – at fair value (cost:  $130,257 – 2012; $143,826 – 2011)
 
148,117

 
157,355

Short-term investments (at cost which approximates fair value)
 
135,823

 
217,044

Other investments
 
125,540

 
128,301

Total investments
 
4,175,987

 
4,112,421

Cash
 
141

 
762

Interest and dividends due or accrued
 
36,110

 
35,842

Premiums receivable, net of allowance for uncollectible accounts of:  $3,470 – 2012; $3,768 – 2011
 
523,588

 
466,294

Reinsurance recoverables, net
 
441,492

 
561,855

Prepaid reinsurance premiums
 
136,808

 
147,686

Current federal income tax
 
1,230

 
731

Deferred federal income tax
 
113,925

 
120,094

Property and equipment – at cost, net of accumulated depreciation and amortization of:
$164,835 – 2012; $160,294 – 2011
 
45,689

 
43,947

Deferred policy acquisition costs
 
152,399

 
135,761

Goodwill
 
7,849

 
7,849

Other assets
 
52,190

 
52,227

Total assets
 
$
5,687,408

 
5,685,469

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Liabilities:
 
 

 
 

Reserve for losses and loss expenses
 
$
3,044,363

 
3,144,924

Unearned premiums
 
970,806

 
906,991

Notes payable
 
307,373

 
307,360

Accrued salaries and benefits
 
113,598

 
119,297

Other liabilities
 
166,222

 
148,569

Total liabilities
 
$
4,602,362

 
4,627,141

 
 
 
 
 
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: 97,960,814 – 2012; 97,246,711 – 2011
 
195,921

 
194,494

Additional paid-in capital
 
265,729

 
257,370

Retained earnings
 
1,120,143

 
1,116,319

Accumulated other comprehensive income
 
58,504

 
42,294

Treasury stock – at cost
(shares:  43,009,821 – 2012; 42,836,201 – 2011)
 
(555,251
)
 
(552,149
)
Total stockholders’ equity
 
1,085,046

 
1,058,328

Commitments and contingencies
 


 


Total liabilities and stockholders’ equity
 
$
5,687,408

 
5,685,469


The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

1


SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
 
Quarter ended June 30,
 
Six Months ended
June 30,
($ in thousands, except per share amounts)
 
2012
 
2011
 
2012
 
2011
Revenues:
 
 

 
 

 
 

 
 

Net premiums earned
 
$
392,212

 
355,580

 
$
771,041

 
706,923

Net investment income earned
 
34,006

 
39,345

 
66,634

 
82,818

Net realized gains (losses):
 
 

 
 

 


 
 

Net realized investment gains
 
272

 
2,315

 
5,051

 
8,705

Other-than-temporary impairments
 
(40
)
 
163

 
(297
)
 
(369
)
Other-than-temporary impairments on fixed maturity securities recognized in other comprehensive income
 
(54
)
 
(332
)
 
(218
)
 
(430
)
Total net realized gains (losses)
 
178

 
2,146

 
4,536

 
7,906

Other income
 
2,511

 
2,499

 
6,044

 
5,379

Total revenues
 
428,907

 
399,570

 
848,255

 
803,026

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Losses and loss expenses incurred
 
287,903

 
274,555

 
540,809

 
523,761

Policy acquisition costs
 
131,219

 
115,163

 
259,177

 
230,207

Interest expense
 
4,723

 
4,559

 
9,423

 
9,116

Other expenses
 
5,754

 
5,392

 
16,347

 
13,883

Total expenses
 
429,599

 
399,669

 
825,756

 
776,967

(Loss) income before federal income tax
 
(692
)
 
(99
)
 
22,499

 
26,059

Federal income tax expense (benefit):
 
 

 
 

 
 

 
 

Current
 
(500
)
 
3,111

 
6,678

 
7,387

Deferred
 
(480
)
 
(4,677
)
 
(2,560
)
 
(3,295
)
Total federal income tax expense (benefit)
 
(980
)
 
(1,566
)
 
4,118

 
4,092

Net income
 
$
288

 
1,467

 
$
18,381

 
21,967

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 

 
 

Basic net income
 
$
0.01

 
0.03

 
$
0.34

 
0.41

Diluted net income
 
$
0.01

 
0.03

 
$
0.33

 
0.40

Dividends to stockholders
 
$
0.13

 
0.13

 
$
0.26

 
0.26

 
The accompanying notes are an integral part of these unaudited interim consolidated financial statements. 
 


2


SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
 
 
 
Quarter ended June 30,
 
Six Months ended
June 30,
($ in thousands)
 
2012
 
2011
 
2012
 
2011
Net income
 
$
288

 
1,467

 
$
18,381

 
21,967

 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 

 
 

 
 
 
 
Unrealized gains on investment securities:
 
 

 
 

 
 
 
 
Unrealized holding gains arising during period
 
5,101

 
19,563

 
17,974

 
18,957

Non-credit portion of other-than-temporary impairments
recognized in other comprehensive income
 
75

 
272

 
313

 
389

Amortization of net unrealized gains on held-to-maturity securities
 
(443
)
 
(817
)
 
(959
)
 
(1,581
)
Less: reclassification adjustment for gains included in net income
 
(142
)
 
(1,393
)
 
(2,975
)
 
(5,130
)
Total unrealized gains on investment securities
 
4,591

 
17,625

 
14,353

 
12,635

 
 
 
 
 
 
 
 
 
Defined benefit pension plans:
 
 

 
 

 
 
 
 
Amortization of net actuarial loss included in net income
 
905

 
718

 
1,808

 
1,436

Amortization of prior service cost included in net income
 
24

 
25

 
49

 
49

Total defined benefit pension plans
 
929

 
743

 
1,857

 
1,485

Other comprehensive income
 
5,520

 
18,368

 
16,210

 
14,120

Comprehensive income
 
$
5,808

 
19,835

 
$
34,591

 
36,087

 
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
 


3


SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
 
 
 
Six Months ended June 30,
($ in thousands)
 
2012
 
2011
Common stock:
 
 

 
 

Beginning of year
 
$
194,494

 
192,725

Dividend reinvestment plan (shares:  46,603 – 2012; 47,488 – 2011)
 
93

 
95

Stock purchase and compensation plans (shares:  667,500 – 2012; 577,745 – 2011)
 
1,334

 
1,156

End of period
 
195,921

 
193,976

 
 
 
 
 
Additional paid-in capital:
 
 

 
 

Beginning of year
 
257,370

 
244,613

Dividend reinvestment plan
 
712

 
716

Stock purchase and compensation plans
 
7,647

 
6,860

End of period
 
265,729

 
252,189

 
 
 
 
 
Retained earnings:
 
 

 
 

Beginning of year, as previously reported
 
1,116,319

 
1,176,155

Add: Adjustment for the cumulative effect on prior years of applying retroactively the new method of accounting for deferred policy acquisition costs (Note 4)
 

 
(53,068
)
Balance at beginning of year, as adjusted
 
1,116,319

 
1,123,087

Net income
 
18,381

 
21,967

Dividends to stockholders ($0.26 per share – 2012 and 2011)
 
(14,557
)
 
(14,370
)
End of period
 
1,120,143

 
1,130,684

 
 
 
 
 
Accumulated other comprehensive income:
 
 

 
 

Beginning of year
 
42,294

 
7,024

Other comprehensive income
 
16,210

 
14,120

End of period
 
58,504

 
21,144

 
 
 
 
 
Treasury stock:
 
 

 
 

Beginning of year
 
(552,149
)
 
(549,408
)
Acquisition of treasury stock (shares:  173,620 – 2012; 136,904 – 2011)
 
(3,102
)
 
(2,526
)
End of period
 
(555,251
)
 
(551,934
)
Total stockholders’ equity
 
$
1,085,046

 
1,046,059

 
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.
 


4


SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
 
Six Months ended
June 30,
($ in thousands)
 
2012
 
2011
Operating Activities
 
 

 
 

Net income
 
$
18,381

 
21,967

 
 
 
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
19,550

 
16,261

Stock-based compensation expense
 
5,160

 
5,286

Undistributed losses (income) of equity method investments
 
496

 
(726
)
Net realized gains
 
(4,536
)
 
(7,906
)
 
 
 
 
 
Changes in assets and liabilities:
 
 

 
 

Increase in reserves for losses and loss expenses, net of reinsurance recoverables
 
19,802

 
49,164

Increase in unearned premiums, net of prepaid reinsurance and advance premiums
 
75,172

 
30,183

(Decrease) increase in net federal income taxes
 
(3,058
)
 
601

Increase in premiums receivable
 
(57,294
)
 
(53,017
)
Increase in deferred policy acquisition costs
 
(16,638
)
 
(3,624
)
(Increase) decrease in interest and dividends due or accrued
 
(500
)
 
514

Decrease in accrued salaries and benefits
 
(5,699
)
 
(555
)
Decrease in accrued insurance expenses
 
(4,500
)
 
(7,045
)
Other-net
 
5,823

 
8,694

Net adjustments
 
33,778

 
37,830

Net cash provided by operating activities
 
52,159

 
59,797

 
 
 
 
 
Investing Activities
 
 

 
 

Purchase of fixed maturity securities, available-for-sale
 
(426,346
)
 
(252,529
)
Purchase of equity securities, available-for-sale
 
(40,430
)
 
(123,141
)
Purchase of other investments
 
(6,355
)
 
(7,715
)
Purchase of short-term investments
 
(795,707
)
 
(694,764
)
Purchase of subsidiary
 
255

 

Sale of subsidiary
 
445

 
670

Sale of fixed maturity securities, available-for-sale
 
37,699

 
64,104

Sale of short-term investments
 
876,928

 
713,111

Redemption and maturities of fixed maturity securities, held-to-maturity
 
57,152

 
99,560

Redemption and maturities of fixed maturity securities, available-for-sale
 
197,199

 
66,805

Sale of equity securities, available-for-sale
 
58,176

 
59,663

Distributions from other investments
 
8,442

 
14,046

Sale of other investments
 
1

 
16,357

Purchase of property and equipment
 
(6,793
)
 
(2,843
)
Net cash used in investing activities
 
(39,334
)
 
(46,676
)
 
 
 
 
 
Financing Activities
 
 

 
 

Dividends to stockholders
 
(13,442
)
 
(13,225
)
Acquisition of treasury stock
 
(3,102
)
 
(2,526
)
Net proceeds from stock purchase and compensation plans
 
2,225

 
2,355

Excess tax benefits from share-based payment arrangements
 
873

 
(185
)
Net cash used in financing activities
 
(13,446
)
 
(13,581
)
Net decrease in cash
 
(621
)
 
(460
)
Cash, beginning of year
 
762

 
645

Cash, end of period
 
$
141

 
185

 
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

5


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Organization
Selective Insurance Group, Inc., through its subsidiaries, (collectively referred to as “we,” “us,” or “our”) offers standard and excess and surplus lines (“E&S”) property and casualty insurance products. Selective Insurance Group, Inc. (referred to as the “Parent”) was incorporated in New Jersey in 1977 and its main offices are located in Branchville, New Jersey. The Parent’s common stock is publicly traded on the NASDAQ Global Select Market under the symbol “SIGI.”
 
We classify our business into two operating segments:
Insurance Operations, which sells property and casualty insurance products and services in both the standard and E&S markets; and
Investments, which invests the premiums collected by our insurance operations.

NOTE 2. Basis of Presentation
These interim unaudited consolidated financial statements (“Financial Statements”) include the accounts of the Parent and its subsidiaries, and have been prepared in conformity with: (i) U.S. generally accepted accounting principles (“GAAP”); and (ii) 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.
 
These 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. The Financial Statements cover the second quarters ended June 30, 2012 (“Second Quarter 2012”) and June 30, 2011 (“Second Quarter 2011”) and the six-month periods ended June 30, 2012 ("Six Months 2012") and June 30, 2011 ("Six Months 2011"). The Financial Statements do not include all of the information and disclosures required by GAAP and the SEC for audited financial statements. Results of operations for any interim period are not necessarily indicative of results for a full year. Consequently, the 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, 2011 (“2011 Annual Report”).
 
NOTE 3. Reclassification 
Certain prior year amounts in these Financial Statements and related footnotes have been reclassified to conform to the current year presentation. Such reclassifications had no effect on our net income, stockholders’ equity, or cash flows.
 
NOTE 4. Adoption of Accounting Pronouncements 
In October 2010, the FASB issued ASU 2010-26, Financial Services-Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (“ASU 2010-26”). ASU 2010-26 requires that only costs that are incremental or directly related to the successful acquisition of new or renewal insurance contracts are to be capitalized as a deferred acquisition cost. This includes, among other items, sales commissions paid to agents, premium taxes, and the portion of employee salaries and benefits directly related to time spent on acquired contracts. We adopted this guidance on January 1, 2012, with retrospective application and, as such, all historical data in this Form 10-Q has been restated to reflect the revised guidance.


6


The following tables provide select restated financial information:
Balance Sheet Information
December 31, 2011
 
 
 
 
 
 
($ in thousands)
 
As Originally
Reported
 
Effect of
Change
 
As Adopted
Deferred policy acquisition costs
 
$
214,069

 
(78,308
)
 
135,761

Deferred federal income tax recoverable
 
92,686

 
27,408

 
120,094

Retained earnings
 
1,167,219

 
(50,900
)
 
1,116,319

  
Income Statement Information
Quarter ended June 30, 2011
 
 
 
 
 
 
($ in thousands, except per share amounts)
 
As Originally
Reported
 
Effect of
Change
 
As Adopted
Policy acquisition costs
 
$
113,843

 
1,320

 
115,163

Deferred federal income tax expense
 
(4,215
)
 
(462
)
 
(4,677
)
Net income
 
2,325

 
(858
)
 
1,467

Net income per share:
 
 

 
 

 
 

Basic
 
$
0.04

 
(0.01
)
 
0.03

Diluted
 
0.04

 
(0.01
)
 
0.03

 
Income Statement Information
Six months ended June 30, 2011
 
 
 
 
 
 
($ in thousands, except per share amounts)
 
As Originally
Reported
 
Effect of
Change
 
As Adopted
Policy acquisition costs
 
$
227,273

 
2,934

 
230,207

Deferred federal income tax expense
 
(2,268
)
 
(1,027
)
 
(3,295
)
Net income
 
$
23,874

 
(1,907
)
 
21,967

Net income per share:
 
 
 
 
 
 
Basic
 
$
0.44

 
(0.03
)
 
0.41

Diluted
 
0.43

 
(0.03
)
 
0.40

  
Cash Flow Information
Six months ended June 30, 2011
 
 
 
 
 
 
($ in thousands, except per share amounts)
 
As Originally
Reported
 
Effect of
Change
 
As Adopted
(Increase) decrease in deferred policy acquisition costs
 
$
(6,558
)
 
2,934

 
(3,624
)
Decrease in net federal income taxes recoverable
 
1,628

 
(1,027
)
 
601

  
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). This guidance changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and disclosing information about fair value measurements to improve consistency in the application and description of fair value between GAAP and International Financial Reporting Standards. ASU 2011-04 clarifies that the concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets, and are not relevant when measuring the fair value of financial assets or liabilities. In addition, ASU 2011-04 expands the disclosures for unobservable inputs for Level 3 fair value measurements, requiring quantitative and qualitative information to be disclosed related to: (i) the valuation processes used; (ii) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs; and (iii) the use of a nonfinancial asset in a way that differs from the asset’s highest and best use. ASU 2011-04 was effective prospectively for interim and annual periods beginning after December 15, 2011. We have included the disclosures required by this guidance in our notes to the Financial Statements, where appropriate.
 

7



In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The standard eliminates the option to report other comprehensive income and its components in the statement of stockholders’ equity. Based on an amendment issued in December 2011, companies are not required to present separate line items on the income statement for reclassification adjustments out of accumulated other comprehensive income into net income, as would have been required under the initial ASU. This guidance, which is ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, is effective concurrently with ASU 2011-05. We have retroactively restated our financial statements in this Form 10-Q to comply with the presentation required under this accounting guidance.
 
In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which simplifies the requirements to test goodwill for impairment.  This guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If, after assessing events and circumstances, an entity determines that it is not more likely than not that the fair value of the reporting unit is less than the carrying amount, then performing the two-step impairment test is unnecessary.  However, if the entity concludes otherwise, then it is required to perform the quantitative impairment test.  This guidance was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, and early adoption was permitted. The adoption of this guidance did not impact our financial condition or results of operation.
  
NOTE 5. Statements of Cash Flow
Cash paid during the six month periods ended June 30, 2012 and June 30, 2011 for interest and federal income taxes was as follows:
 
 
Six Months ended June 30,
($ in thousands)
 
2012
 
2011
Cash paid during the period for:
 
 

 
 

Interest
 
$
9,389

 
9,103

Federal income tax
 
6,300

 
3,673

 
NOTE 6. Investments
(a) The amortized cost, carrying value, unrealized and unrecognized holding gains and losses, and fair values of held-to-maturity (“HTM”) fixed maturity securities were as follows:
 
June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Amortized Cost
 
Net
 Unrealized Gains
 (Losses)
 
Carrying
Value
 
Unrecognized
 Holding
Gains
 
Unrecognized Holding
 Losses
 
Fair
Value
Foreign government
 
$
5,292

 
252

 
5,544

 

 
(105
)
 
5,439

Obligations of state and political subdivisions
 
557,338

 
9,310

 
566,648

 
32,642

 
(4
)
 
599,286

Corporate securities
 
57,947

 
(1,299
)
 
56,648

 
5,329

 

 
61,977

Asset-backed securities (“ABS”)
 
7,579

 
(1,265
)
 
6,314

 
1,223

 

 
7,537

Commercial mortgage-backed securities (“CMBS”)
 
9,699

 
(1,352
)
 
8,347

 
5,395

 

 
13,742

Total HTM fixed maturity securities
 
$
637,855

 
5,646

 
643,501

 
44,589

 
(109
)
 
687,981



8


December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Amortized Cost
 
Net
 Unrealized Gains
 (Losses)
 
Carrying
Value
 
Unrecognized
 Holding
Gains
 
Unrecognized Holding
 Losses
 
Fair
Value
Foreign government
 
$
5,292

 
292

 
5,584

 

 
(88
)
 
5,496

Obligations of state and political subdivisions
 
614,118

 
11,894

 
626,012

 
31,529

 
(156
)
 
657,385

Corporate securities
 
64,840

 
(2,189
)
 
62,651

 
6,887

 

 
69,538

ABS
 
8,077

 
(1,469
)
 
6,608

 
1,353

 
(7
)
 
7,954

CMBS
 
14,455

 
(2,962
)
 
11,493

 
6,177

 

 
17,670

Total HTM fixed maturity securities
 
$
706,782

 
5,566

 
712,348

 
45,946

 
(251
)
 
758,043

 
Unrecognized holding gains/losses of HTM securities are not reflected in the Financial Statements, as they represent fair value fluctuations from the later of: (i) the date a security is designated as HTM; or (ii) the date that an other-than-temporary impairment (“OTTI”) charge is recognized on an HTM security, through the date of the balance sheet. Our HTM securities had an average duration of 2.8 years as of June 30, 2012.
 
During Six Months 2012, five securities with a carrying value of $7.9 million and a net unrecognized gain position of $1.0 million were reclassified from an HTM designation to an available-for-sale (“AFS”) designation due to credit rating downgrades by Moody’s Investors Services ("Moody's") and Standard and Poor’s ("S&P") Financial Services. These unexpected rating downgrades raised significant concerns about the issuers’ credit worthiness, which changed our intention to hold these securities to maturity.


9


(b) The cost/amortized cost, unrealized gains (losses), and fair value of AFS securities were as follows:
 
June 30, 2012
 
 
 
 
 
 
 
 
($ in thousands)
 
Cost/
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
U.S. government and government agencies1
 
$
268,949

 
19,050

 
(3
)
 
287,996

Foreign government
 
41,557

 
1,537

 
(312
)
 
42,782

Obligations of states and political subdivisions
 
695,158

 
42,307

 
(964
)
 
736,501

Corporate securities
 
1,283,114

 
66,588

 
(955
)
 
1,348,747

ABS
 
93,031

 
1,785

 
(7
)
 
94,809

CMBS2
 
115,965

 
4,882

 
(2,804
)
 
118,043

Residential mortgage-backed
securities (“RMBS”)3
 
477,045

 
17,636

 
(553
)
 
494,128

AFS fixed maturity securities
 
2,974,819

 
153,785

 
(5,598
)
 
3,123,006

AFS equity securities
 
130,257

 
20,647

 
(2,787
)
 
148,117

Total AFS securities
 
$
3,105,076

 
174,432

 
(8,385
)
 
3,271,123

 
December 31, 2011
 
 
 
 
 
 
 
 
($ in thousands)
 
Cost/
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
U.S. government and government agencies1
 
$
333,504

 
20,292

 

 
353,796

Foreign government
 
33,687

 
1,042

 
(556
)
 
34,173

Obligations of states and political subdivisions
 
578,214

 
44,491

 
(46
)
 
622,659

Corporate securities
 
1,168,439

 
50,167

 
(5,296
)
 
1,213,310

ABS
 
77,706

 
1,289

 
(46
)
 
78,949

CMBS2
 
107,838

 
6,427

 
(1,667
)
 
112,598

RMBS3
 
467,468

 
16,187

 
(1,767
)
 
481,888

AFS fixed maturity securities
 
2,766,856

 
139,895

 
(9,378
)
 
2,897,373

AFS equity securities
 
143,826

 
13,617

 
(88
)
 
157,355

Total AFS securities
 
$
2,910,682

 
153,512

 
(9,466
)
 
3,054,728

 
1 U.S. government includes corporate securities fully guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) with a fair value of $14.2 million at June 30, 2012 and $76.5 million at December 31, 2011.
2 CMBS includes government guaranteed agency securities with a fair value of $67.0 million at June 30, 2012 and $72.9 million at December 31, 2011.
3 RMBS includes government guaranteed agency securities with a fair value of $102.6 million at June 30, 2012 and $98.2 million at December 31, 2011.
 
Unrealized gains/losses of AFS securities represent fair value fluctuations from the later of: (i) the date a security is designated as AFS; or (ii) the date that an OTTI charge is recognized on an AFS security, through the date of the balance sheet. These unrealized gains and losses are recorded in accumulated other comprehensive income (“AOCI”) on the Consolidated Balance Sheets.
 

10



(c) The following tables summarize, for all securities in a net unrealized/unrecognized loss position at June 30, 2012 and December 31, 2011, the fair value and gross pre-tax net unrealized/unrecognized loss by asset class and by length of time those securities have been in a net loss position:

June 30, 2012
 
Less than 12 months
 
12 months or longer
($ in thousands)
 
Fair Value
 
Unrealized
Losses1
 
Fair Value
 
Unrealized
Losses1
AFS securities
 
 

 
 

 
 

 
 

U.S. government and government agencies
 
$
8,158

 
(3
)
 

 

Foreign government
 
4,758

 
(312
)
 

 

Obligations of states and political subdivisions
 
78,115

 
(958
)
 
511

 
(6
)
Corporate securities
 
46,939

 
(434
)
 
13,924

 
(521
)
ABS
 
2,000

 
(2
)
 
630

 
(5
)
CMBS
 
9,353

 
(39
)
 
13,427

 
(2,765
)
RMBS
 
3,183

 
(9
)
 
14,109

 
(544
)
Total fixed maturity securities
 
152,506

 
(1,757
)
 
42,601

 
(3,841
)
Equity securities
 
32,036

 
(2,787
)
 

 

Subtotal
 
$
184,542

 
(4,544
)
 
42,601

 
(3,841
)
 
 
 
Less than 12 months
 
12 months or longer
($ in thousands)
 
Fair
Value
 
Unrealized
Losses1
 
Unrecognized
Gains2
 
Fair
Value
 
Unrealized
Losses1
 
Unrecognized
Gains2
HTM securities
 
 

 
 

 
 

 
 

 
 

 
 

Obligations of states and political subdivisions
 
$
1,820

 
(70
)
 
63

 
4,033

 
(283
)
 
165

Corporate securities
 
5,995

 
(129
)
 
120

 

 

 

ABS
 

 

 

 
2,800

 
(927
)
 
707

Subtotal
 
$
7,815

 
(199
)
 
183

 
6,833

 
(1,210
)
 
872

Total AFS and HTM
 
$
192,357

 
(4,743
)
 
183

 
49,434

 
(5,051
)
 
872


December 31, 2011
 
Less than 12 months
 
12 months or longer
($ in thousands)
 
Fair
Value
 
Unrealized
Losses1
 
Fair Value
 
Unrealized
Losses1
AFS securities:
 
 

 
 

 
 

 
 

Foreign government
 
$
8,299

 
(556
)
 

 

Obligations of states and political subdivisions
 
517

 
(1
)
 
1,740

 
(45
)
Corporate securities
 
157,510

 
(4,415
)
 
14,084

 
(881
)
ABS
 
15,808

 
(14
)
 
702

 
(32
)
CMBS
 
4,822

 
(48
)
 
14,564

 
(1,619
)
RMBS
 
29,803

 
(625
)
 
15,007

 
(1,142
)
Total fixed maturity securities
 
216,759

 
(5,659
)
 
46,097

 
(3,719
)
Equity securities
 
743

 
(88
)
 

 

Subtotal
 
$
217,502

 
(5,747
)
 
46,097

 
(3,719
)
 

11



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

 
 

 
 

 
 

 
 

 
 

Obligations of states and political subdivisions
 
$
7,244

 
(94
)
 
78

 
9,419

 
(519
)
 
324

ABS
 

 

 

 
2,816

 
(1,009
)
 
737

CMBS
 

 

 

 
2,794

 
(1,447
)
 
761

Subtotal
 
$
7,244

 
(94
)
 
78

 
15,029

 
(2,975
)
 
1,822

Total AFS and HTM
 
$
224,746

 
(5,841
)
 
78

 
61,126

 
(6,694
)
 
1,822

 
1 
Gross unrealized losses include non-OTTI unrealized amounts and OTTI losses recognized in AOCI.  In addition, this column includes remaining unrealized gain or loss amounts on securities that were transferred to an HTM designation in the first quarter of 2009 for those securities that are in a net unrealized/unrecognized loss position.
2 
Unrecognized gains represent fair value fluctuations from the later of:  (i) the date a security is designated as HTM; or (ii) the date that an OTTI charge is recognized on an HTM security.

As evidenced by the table below, our unrealized/unrecognized loss positions improved by $1.9 million as of June 30, 2012 compared to December 31, 2011 as follows:

($ in thousands)
 
 
June 30, 2012
 
December 31, 2011
Number of
Issues
% of Market/Book
Unrealized
Unrecognized Loss
 
Number of
Issues
% of
Market/Book
Unrealized
Unrecognized
Loss
141

80% - 99%
$
6,817

 
140

80% - 99%
$
10,166

4

60% - 79%
1,580

 

60% - 79%

1

40% - 59%
342

 
1

40% - 59%
469


20% - 39%

 

20% - 39%


0% - 19%

 

0% - 19%

 

 
$
8,739

 
 

 
$
10,635

 
We have reviewed the securities in the tables above in accordance with our OTTI policy, as described in Note 2. “Summary of Significant Accounting Policies” in Item 8. “Financial Statements and Supplementary Data.” of our 2011 Annual Report.
  
At June 30, 2012, we had 146 securities in an aggregate unrealized/unrecognized loss position of $8.7 million, $4.2 million of which have been in a loss position for more than 12 months. Securities with non-credit OTTI impairments comprised $2.6 million of the $4.2 million balance, with the remainder related to securities that were, on average, 4% impaired compared to their amortized cost. Three of these securities are experiencing immaterial principal and interest shortfalls.
  
At December 31, 2011, we had 141 securities in an aggregate unrealized/unrecognized loss position of $10.6 million, $4.9 million of which had been in a loss position for more than 12 months. Non-credit OTTI impairments comprised $2.1 million of the $4.9 million balance, with the remainder related to securities that were, on average, 6% impaired compared to their amortized cost.
 
We do not have the intent to sell any securities in an unrealized/unrecognized loss position nor do we believe we will be required to sell these securities, and therefore we have concluded that they are temporarily impaired as of June 30, 2012. This conclusion reflects our current judgment as to the financial position and future prospects of the entity that issued the investment security and underlying collateral. If our judgment about an individual security changes in the future, we may ultimately record a credit loss after having originally concluded that one did not exist, which could have a material impact on our net income and financial position in future periods.
 
(d) Fixed maturity securities at June 30, 2012, by contractual maturity, are shown below. Mortgage-backed securities 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.
 

12


Listed below are HTM fixed maturity securities at June 30, 2012:
($ in thousands)
 
Carrying Value
 
Fair Value
Due in one year or less
 
$
98,022

 
103,123

Due after one year through five years
 
464,672

 
494,584

Due after five years through 10 years
 
73,941

 
82,051

Due after 10 years
 
6,866

 
8,223

Total HTM fixed maturity securities
 
$
643,501

 
687,981

 
Listed below are AFS fixed maturity securities at June 30, 2012:
($ in thousands)
 
Fair Value
Due in one year or less
 
$
352,423

Due after one year through five years
 
1,861,652

Due after five years through 10 years
 
841,420

Due after 10 years
 
67,511

Total AFS fixed maturity securities
 
$
3,123,006

  
(e) The following table outlines a summary of our other investment portfolio by strategy and the remaining commitment amount associated with each strategy:
Other Investments
 
Carrying Value
 
June 30,
2012
($ in thousands)
 
June 30,
2012
 
December 31,
2011
 
Remaining Commitment
Alternative Investments
 
 

 
 

 
 

Secondary private equity
 
$
29,596

 
30,114

 
8,651

Private equity
 
23,739

 
21,736

 
3,984

Energy/power generation
 
21,578

 
25,913

 
10,383

Distressed debt
 
14,702

 
16,953

 
2,986

Real estate
 
12,961

 
13,767

 
10,473

Mezzanine financing
 
11,146

 
8,817

 
23,435

Venture capital
 
7,856

 
7,248

 
800

Total alternative investments
 
121,578

 
124,548

 
60,712

Other securities
 
3,962

 
3,753

 
1,494

Total other investments
 
$
125,540

 
128,301

 
62,206

 
The carrying value of our other investments decreased by $2.8 million compared to year end 2011. The carrying value was impacted by distributions of $13.9 million, partially offset by income of $5.0 million and additional contributions of $6.4 million. These contributions included $4.6 million under our previously existing commitments and $1.8 million under one of two new alternative investment limited partnerships that we entered into during Second Quarter 2012. The remaining commitment on these two new mezzanine financing limited partnerships amounted to $8.2 million at June 30, 2012. The two new investments contain redemption restrictions and fund liquidation characteristics that are consistent with our other alternative investments. For a description of our seven alternative investment strategies, as well as information regarding redemption, restrictions, and fund liquidations, refer to Note 5. “Investments” in Item 8. “Financial Statements and Supplementary Data.” of our 2011 Annual Report.
 
The following table sets forth aggregated summarized financial information for the partnerships in our alternative investment portfolio. 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 quarter lag, the summarized financial statement information for the three and six-month periods ended March 31 is as follows:


13


Income Statement Information
 
 
 
 
 
 
 
 
 
 
Quarter ended
March 31,
 
Six Months ended
March 31,
($ in millions)
 
2012
 
2011
 
2012
 
2011
Net investment income
 
$
54.0

 
132.6

 
90.1

 
286.8

Realized gains (losses)
 
234.6

 
355.3

 
985.3

 
163.0

Net change in unrealized (depreciation) appreciation
 
53.4

 
608.3

 
(434.0
)
 
2,072.5

Net income
 
$
342.0

 
1,096.2

 
641.4

 
2,522.3

Selective’s insurance subsidiaries’ other investments net income
 
$
3.0

 
7.9

 
5.0

 
19.5

 
(f) At June 30, 2012, we had 29 fixed maturity securities, with a carrying value of $63.4 million, pledged as collateral for our outstanding borrowing with the Federal Home Loan Bank of Indianapolis (“FHLBI”).  This borrowing, which has an outstanding principal balance of $58.0 million, is included in “Notes payable” on our Consolidated Balance Sheets.  In accordance with the terms of our agreement with the FHLBI, we retain all rights regarding the collateral securities, which are included in the “U.S. government and government agencies,” “RMBS,” and “CMBS” classifications of our AFS fixed maturity securities portfolio.
 
(g) The components of net investment income earned were as follows:
 
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in thousands)
 
2012
 
2011
 
2012
 
2011
Fixed maturity securities
 
$
31,759


32,752


63,109


65,875

Equity securities
 
1,280


785


2,517


1,102

Short-term investments
 
29


33


67


95

Other investments
 
2,963


7,900


4,963


19,541

Miscellaneous income
 
25


22


64


47

Investment expenses
 
(2,050
)

(2,147
)

(4,086
)

(3,842
)
Net investment income earned
 
$
34,006

 
39,345

 
66,634

 
82,818

  
Net investment income earned, before tax, decreased by $5.3 million for Second Quarter 2012 compared to Second Quarter 2011, and decreased by $16.2 million for Six Months 2012 compared to Six Months 2011. These decreases were primarily driven by lower income from alternative investments within our other investment portfolio of $4.7 million and $14.1 million in Second Quarter 2012 and Six Months 2012, respectively. Our alternative investments, which are accounted for under the equity method, primarily consist of investments in limited partnerships, the majority of which report results to us on a one quarter lag.

(h) The following tables summarize OTTI by asset type for the periods indicated:
Second Quarter 2012
 
 
 
 
 
 
($ in thousands) 
 
Gross 
 
Included in Other
Comprehensive
Income (“OCI”)
 
Recognized in
Earnings
Fixed maturity securities
 
 

 
 

 
 

ABS
 
$
30

 

 
30

RMBS
 
10

 
(54
)
 
64

OTTI losses
 
$
40

 
(54
)
 
94

 
Second Quarter 2011
 
 
 
 
 
 
($ in thousands)
 
Gross
 
Included in OCI
 
Recognized in Earnings
Fixed maturity securities
 
 

 
 

 
 

CMBS
 
$
(260
)
 
(402
)
 
142

RMBS
 
97

 
70

 
27

OTTI losses
 
$
(163
)
 
(332
)
 
169



14


Six Months 2012
 
 
 
 
 
 
($ in thousands)
 
Gross
 
Included in OCI
 
Recognized in Earnings
Fixed maturity securities
 
 

 
 

 
 

ABS
 
$
62

 

 
62

CMBS
 
108

 

 
108

RMBS
 
(44
)
 
(218
)
 
174

Total fixed maturity securities
 
126

 
(218
)
 
344

Equity securities
 
171

 

 
171

OTTI losses
 
$
297

 
(218
)
 
515

Six Months 2011
 
 
 
 
 
 
($ in thousands)
 
Gross
 
Included in OCI
 
Recognized in Earnings
Fixed maturity securities
 
 

 
 

 
 

Obligations of state and political subdivisions
 
$
17

 

 
17

Corporate securities
 
244

 

 
244

CMBS
 
(186
)
 
(658
)
 
472

RMBS
 
294

 
228

 
66

OTTI losses
 
$
369

 
(430
)
 
799


The following tables set forth, for the periods indicated, credit loss impairments on fixed maturity securities for which a portion of the OTTI charge was recognized in OCI, and the corresponding changes in such amounts:
 
 
Quarter ended June 30,
($ in thousands)
 
2012
 
2011
Balance, beginning of period
 
$
6,711

 
14,368

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

 

Reductions for securities sold during the period
 

 

Reductions for securities for which the amount previously recognized in OCI was recognized in earnings because of intention or potential requirement to sell before recovery of amortized cost
 

 

Reductions for securities for which the entire amount previously recognized in OCI was recognized in earnings due to a decrease in cash flows expected
 

 
(372
)
Additional increases to the amount related to credit loss for which an OTTI was previously recognized
 
64

 
28

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

 

Balance, end of period
 
$
6,775

 
14,024


 
 
Six Months ended
June 30,
($ in thousands)
 
2012
 
2011
Balance, beginning of period
 
$
6,602

 
17,723

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

 

Reductions for securities sold during the period
 

 

Reductions for securities for which the amount previously recognized in OCI was recognized in earnings because of intention or potential requirement to sell before recovery of amortized cost
 

 

Reductions for securities for which the entire amount previously recognized in OCI was recognized in earnings due to a decrease in cash flows expected
 

 
(3,954
)
Additional increases to the amount related to credit loss for which an OTTI was previously recognized
 
173

 
255