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SELECTIVE INSURANCE GROUP INC - Quarter Report: 2013 March (Form 10-Q)

Table of Contents

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: March 31, 2013
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 March 31, 2013, there were 55,530,973 shares of common stock, par value $2.00 per share, outstanding. 


Table of Contents

 
SELECTIVE INSURANCE GROUP, INC.
 
 
Table of Contents
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal Income Taxes
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Information
 
 
 
 
 
 


Table of Contents

PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
SELECTIVE INSURANCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
 
Unaudited
 
 
($ in thousands, except share amounts)
 
March 31,
2013
 
December 31,
2012
ASSETS
 
 

 
 

Investments:
 
 

 
 

Fixed maturity securities, held-to-maturity – at carrying value (fair value:  $543,553 – 2013; $594,661 – 2012)
 
$
507,771

 
554,069

Fixed maturity securities, available-for-sale – at fair value (amortized cost: $3,314,989 – 2013;
$3,130,683 – 2012)
 
3,465,981

 
3,296,013

Equity securities, available-for-sale – at fair value (cost:  $143,564 – 2013; $132,441 – 2012)
 
174,745

 
151,382

Short-term investments (at cost which approximates fair value)
 
163,440

 
214,479

Other investments
 
109,855

 
114,076

Total investments (Note 5)
 
4,421,792

 
4,330,019

Cash
 
296

 
210

Interest and dividends due or accrued
 
35,254

 
35,984

Premiums receivable, net of allowance for uncollectible accounts of:  $4,152 – 2013; $3,906 – 2012
 
520,590

 
484,388

Reinsurance recoverables, net
 
788,000

 
1,421,109

Prepaid reinsurance premiums
 
134,222

 
132,637

Current federal income tax
 

 
2,569

Deferred federal income tax
 
105,014

 
119,136

Property and equipment – at cost, net of accumulated depreciation and amortization of:
$171,715 – 2013; $169,428 – 2012
 
48,327

 
47,131

Deferred policy acquisition costs
 
158,486

 
155,523

Goodwill
 
7,849

 
7,849

Other assets
 
124,197

 
57,661

Total assets
 
$
6,344,027

 
6,794,216

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Liabilities:
 
 

 
 

Reserve for loss and loss expenses
 
$
3,474,392

 
4,068,941

Unearned premiums
 
1,005,475

 
974,706

Notes payable (Note 9)
 
392,393

 
307,387

Current federal income tax
 
3,075

 

Accrued salaries and benefits
 
103,868

 
152,396

Other liabilities
 
228,479

 
200,194

Total liabilities
 
$
5,207,682

 
5,703,624

 
 
 
 
 
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: 98,708,185 – 2013; 98,194,224 – 2012
 
197,416

 
196,388

Additional paid-in capital
 
276,717

 
270,654

Retained earnings
 
1,139,111

 
1,125,154

Accumulated other comprehensive income (Note 11)
 
81,921

 
54,040

Treasury stock – at cost
(shares:  43,177,212 – 2013; 43,030,776 – 2012)
 
(558,820
)
 
(555,644
)
Total stockholders’ equity
 
1,136,345

 
1,090,592

Commitments and contingencies (Note 14)
 


 


Total liabilities and stockholders’ equity
 
$
6,344,027

 
6,794,216


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

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Table of Contents

SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
 
Quarter ended March 31,
($ in thousands, except per share amounts)
 
2013
 
2012
Revenues:
 
 

 
 

Net premiums earned
 
$
420,940

 
378,829

Net investment income earned
 
32,870

 
32,628

Net realized gains:
 
 

 
 

Net realized investment gains
 
5,304

 
4,779

Other-than-temporary impairments
 
(1,919
)
 
(257
)
Other-than-temporary impairments on fixed maturity securities recognized in other comprehensive income
 
(30
)
 
(164
)
Total net realized gains
 
3,355

 
4,358

Other income
 
2,784

 
3,533

Total revenues
 
459,949

 
419,348

 
 
 
 
 
Expenses:
 
 

 
 

Loss and loss expense incurred
 
269,849

 
252,906

Policy acquisition costs
 
139,528

 
127,958

Interest expense
 
5,831

 
4,700

Other expenses
 
15,873

 
10,593

Total expenses
 
431,081

 
396,157

 
 
 
 
 
Income from continuing operations, before federal income tax
 
28,868

 
23,191

 
 
 
 
 
Federal income tax expense (benefit):
 
 

 
 

Current
 
7,453

 
7,178

Deferred
 
(890
)
 
(2,080
)
Total federal income tax expense
 
6,563

 
5,098

 
 
 
 
 
Net income from continuing operations
 
22,305

 
18,093

 
 
 
 
 
Loss on disposal of discontinued operations, net of tax of $(538)
 
(997
)
 

 
 
 
 
 
Net income
 
$
21,308

 
18,093

 
 
 
 
 
Earnings per share:
 
 

 
 

Basic net income from continuing operations
 
$
0.40

 
0.33

Basic net loss from discontinued operations
 
(0.02
)
 

Basic net income
 
$
0.38

 
0.33

 
 
 
 
 
Diluted net income from continuing operations
 
$
0.40

 
0.33

Diluted net loss from discontinued operations
 
(0.02
)
 

Diluted net income
 
$
0.38

 
0.33

 
 
 
 
 
Dividends to stockholders
 
$
0.13

 
0.13

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


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Table of Contents

SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Quarter ended March 31,
($ in thousands)
 
2013
 
2012
Net income
 
$
21,308

 
18,093

 
 
 
 
 
Other comprehensive income, net of tax:
 
 

 
 

Unrealized gains on investment securities:
 
 

 
 

Unrealized holding gains arising during period
 
2,394

 
12,873

Non-credit portion of other-than-temporary impairment losses
recognized in other comprehensive income
 
24

 
238

Amortization of net unrealized gains on held-to-maturity securities
 
(413
)
 
(516
)
Less: reclassification adjustment for gains included in net income
 
(3,937
)
 
(2,833
)
  Total unrealized gains on investment securities
 
(1,932
)
 
9,762

 
 
 
 
 
Defined benefit pension and post-retirement plans:
 
 

 
 

Net actuarial gain
 
28,600

 

Reversal of amortization items:
 
 
 
 
Net actuarial loss included in net income
 
1,196

 
903

Prior service cost included in net income
 
6

 
25

Curtailment expense included in net income
 
11

 

  Total defined benefit pension and post-retirement plans
 
29,813

 
928

Other comprehensive income
 
27,881

 
10,690

Comprehensive income
 
$
49,189

 
28,783

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


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Table of Contents

SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
Quarter ended March 31,
($ in thousands)
 
2013
 
2012
Common stock:
 
 

 
 

Beginning of year
 
$
196,388

 
194,494

Dividend reinvestment plan (shares:  17,314 – 2013; 22,916 – 2012)
 
35

 
46

Stock purchase and compensation plans (shares:  496,647 – 2013; 540,322 – 2012)
 
993

 
1,080

End of period
 
197,416

 
195,620

 
 
 
 
 
Additional paid-in capital:
 
 

 
 

Beginning of year
 
270,654

 
257,370

Dividend reinvestment plan
 
349

 
358

Stock purchase and compensation plans
 
5,714

 
4,608

End of period
 
276,717

 
262,336

 
 
 
 
 
Retained earnings:
 
 

 
 

Beginning of year
 
1,125,154

 
1,116,319

Net income
 
21,308

 
18,093

Dividends to stockholders ($0.13 per share – 2013 and 2012)
 
(7,351
)
 
(7,270
)
End of period
 
1,139,111

 
1,127,142

 
 
 
 
 
Accumulated other comprehensive income:
 
 

 
 

Beginning of year
 
54,040

 
42,294

Other comprehensive income
 
27,881

 
10,690

End of period
 
81,921

 
52,984

 
 
 
 
 
Treasury stock:
 
 

 
 

Beginning of year
 
(555,644
)
 
(552,149
)
Acquisition of treasury stock (shares:  146,436 – 2013; 168,614 – 2012)
 
(3,176
)
 
(3,015
)
End of period
 
(558,820
)
 
(555,164
)
Total stockholders’ equity
 
$
1,136,345

 
1,082,918

 
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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Table of Contents

SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
 
Quarter ended March 31,
($ in thousands)
 
2013
 
2012
Operating Activities
 
 

 
 

Net income
 
$
21,308

 
18,093

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

 
 

Depreciation and amortization
 
13,148

 
9,748

Loss on disposal of discontinued operations
 
997

 

Stock-based compensation expense
 
3,692

 
3,329

Undistributed losses of equity method investments
 
426

 
764

Net realized gains
 
(3,355
)
 
(4,358
)
Retirement income plan curtailment expense
 
16

 

 
 
 
 
 
Changes in assets and liabilities:
 
 

 
 

Increase in reserves for loss and loss expense, net of reinsurance recoverables
 
38,556

 
6,311

Increase in unearned premiums, net of prepaid reinsurance and advance premiums
 
30,106

 
41,769

Decrease in net federal income taxes
 
5,290

 
4,227

Increase in premiums receivable
 
(36,202
)
 
(25,107
)
Increase in deferred policy acquisition costs
 
(2,963
)
 
(8,570
)
Decrease in interest and dividends due or accrued
 
384

 
1,108

Decrease in accrued salaries and benefits
 
(4,528
)
 
(5,356
)
Decrease in accrued insurance expenses
 
(12,378
)
 
(13,476
)
Other-net
 
(26,357
)
 
7,373

Net adjustments
 
6,832

 
17,762

Net cash provided by operating activities
 
28,140

 
35,855

 
 
 
 
 
Investing Activities
 
 

 
 

Purchase of fixed maturity securities, available-for-sale
 
(308,289
)
 
(226,525
)
Purchase of equity securities, available-for-sale
 
(2
)
 
(39,724
)
Purchase of other investments
 
(2,329
)
 
(2,990
)
Purchase of short-term investments
 
(644,274
)
 
(368,210
)
Purchase of subsidiary
 

 
255

Sale of subsidiary
 
225

 
287

Sale of fixed maturity securities, available-for-sale
 
6,851

 
14,308

Sale of short-term investments
 
695,313

 
410,780

Redemption and maturities of fixed maturity securities, held-to-maturity
 
28,644

 
38,879

Redemption and maturities of fixed maturity securities, available-for-sale
 
124,975

 
84,124

Sale of equity securities, available-for-sale
 

 
57,513

Distributions from other investments
 
3,447

 
5,299

Purchase of property and equipment
 
(3,673
)
 
(2,263
)
Net cash used in investing activities
 
(99,112
)
 
(28,267
)
 
 
 
 
 
Financing Activities
 
 

 
 

Dividends to stockholders
 
(6,824
)
 
(6,713
)
Acquisition of treasury stock
 
(3,176
)
 
(3,015
)
Net proceeds from stock purchase and compensation plans
 
1,164

 
769

Proceeds from issuance of notes payable, net of debt issuance costs
 
178,623

 

Repayment of notes payable
 
(100,000
)
 

Excess tax benefits from share-based payment arrangements
 
1,271

 
870

Net cash provided by (used in) financing activities
 
71,058

 
(8,089
)
Net increase (decrease) in cash
 
86

 
(501
)
Cash, beginning of year
 
210

 
762

Cash, end of period
 
$
296

 
261

 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. 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 three operating segments:
Our Standard Insurance Operations segment, which is comprised of both commercial lines ("Commercial Lines") and personal lines ("Personal Lines") business, sells property and casualty insurance products and services in the standard market, including flood insurance through the National Flood Insurance Program's ("NFIP") write-your-own ("WYO") program;
Our E&S Insurance Operations segment, which is comprised of Commercial Lines property and casualty insurance products and services that are unavailable in the standard market due to market conditions or characteristics of the insured that are caused by the insured's claim history or the characteristics of their business; and
Our Investments segment - invests the premiums collected by our Standard and E&S Insurance Operations, as well as amounts generated through our capital management strategies, which may include the issuance of debt and equity securities.

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.

Certain amounts in our prior years' Financial Statements and related notes have been reclassified to conform to the 2013 presentation. Such reclassifications had no effect on our net income, stockholders' equity, or cash flows.
 
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 first quarters ended March 31, 2013 (“First Quarter 2013”) and March 31, 2012 (“First Quarter 2012”). 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, 2012 (“2012 Annual Report”).
 
NOTE 3. Adoption of Accounting Pronouncements 
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"), which adds new disclosure requirements for items reclassified out of Accumulated Other Comprehensive Income ("AOCI"). ASU 2013-02 requires entities to disclose additional information about reclassification adjustments, including: (i) changes in AOCI balances by component; and (ii) significant items reclassified out of AOCI. Prospective application of ASU 2013-02 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. We have included the disclosures required by ASU 2013-02 in the notes to our Financial Statements, as required.

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NOTE 4. Statements of Cash Flow
Cash paid during the period for interest and federal income taxes was as follows:
 
 
Quarter ended March 31,
($ in thousands)
 
2013
 
2012
Cash paid during the period for:
 
 

 
 

Interest
 
$
1,964

 
2,111

Federal income tax
 

 

 
At March 31, 2013, included in 'Other Assets' on the Consolidated Balance Sheets, was $33.5 million of cash received from the NFIP which is restricted to pay flood claims under the WYO program.

NOTE 5. Investments
(a) The amortized cost, net unrealized gain and losses, carrying value, unrecognized holding gains and losses, and fair values of held-to-maturity (“HTM”) fixed maturity securities were as follows:
 
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Amortized Cost
 
Net
 Unrealized Gains
 (Losses)
 
Carrying
Value
 
Unrecognized
 Holding
Gains
 
Unrecognized Holding
 Losses
 
Fair
Value
Foreign government
 
$
5,292

 
192

 
5,484

 
190

 

 
5,674

Obligations of state and political subdivisions
 
448,591

 
5,664

 
454,255

 
26,909

 
(27
)
 
481,137

Corporate securities
 
35,986

 
(726
)
 
35,260

 
4,374

 

 
39,634

Asset-backed securities (“ABS”)
 
6,819

 
(964
)
 
5,855

 
1,065

 

 
6,920

Commercial mortgage-backed securities (“CMBS”)
 
8,031

 
(1,114
)
 
6,917

 
3,271

 

 
10,188

Total HTM fixed maturity securities
 
$
504,719

 
3,052

 
507,771

 
35,809

 
(27
)
 
543,553


December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Amortized Cost
 
Net
 Unrealized Gains
 (Losses)
 
Carrying
Value
 
Unrecognized
 Holding
Gains
 
Unrecognized Holding
 Losses
 
Fair
Value
Foreign government
 
$
5,292

 
212

 
5,504

 
367

 

 
5,871

Obligations of state and political subdivisions
 
491,180

 
6,769

 
497,949

 
28,996

 
(23
)
 
526,922

Corporate securities
 
38,285

 
(812
)
 
37,473

 
4,648

 

 
42,121

ABS
 
6,980

 
(1,052
)
 
5,928

 
1,170

 

 
7,098

CMBS
 
8,406

 
(1,191
)
 
7,215

 
5,434

 

 
12,649

Total HTM fixed maturity securities
 
$
550,143

 
3,926

 
554,069

 
40,615

 
(23
)
 
594,661

 
Unrecognized holding gains and losses of HTM securities are not reflected in the Financial Statements, as they represent fair value fluctuations from the later of: (i) the date a security is designated as HTM; or (ii) the date that an other-than-temporary impairment (“OTTI”) charge is recognized on an HTM security, through the date of the balance sheet. Our HTM securities had an average duration of 2.4 years as of March 31, 2013.
 
During First Quarter 2013, seven securities with a carrying value of $15.8 million and a net unrecognized gain position of $0.9 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"). These unexpected rating downgrades raised significant concerns about the issuers’ credit worthiness, which changed our intention to hold these securities to maturity.


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(b) The cost/amortized cost, unrealized gains and losses, and fair value of AFS securities were as follows:
 
March 31, 2013
 
 
 
 
 
 
 
 
($ in thousands)
 
Cost/
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
U.S. government and government agencies
 
$
229,718

 
15,950

 
(4
)
 
245,664

Foreign government
 
28,808

 
1,472

 
(116
)
 
30,164

Obligations of states and political subdivisions
 
810,375

 
40,630

 
(1,059
)
 
849,946

Corporate securities
 
1,456,347

 
77,266

 
(860
)
 
1,532,753

ABS
 
170,026

 
1,971

 
(55
)
 
171,942

CMBS1
 
144,120

 
3,523

 
(1,103
)
 
146,540

Residential mortgage-backed
securities (“RMBS”)2
 
475,595

 
13,832

 
(455
)
 
488,972

AFS fixed maturity securities
 
3,314,989

 
154,644

 
(3,652
)
 
3,465,981

AFS equity securities
 
143,564

 
31,622

 
(441
)
 
174,745

Total AFS securities
 
$
3,458,553

 
186,266

 
(4,093
)
 
3,640,726

 
December 31, 2012
 
 
 
 
 
 
 
 
($ in thousands)
 
Cost/
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
U.S. government and government agencies
 
$
241,874

 
17,219

 
(1
)
 
259,092

Foreign government
 
28,813

 
1,540

 
(124
)
 
30,229

Obligations of states and political subdivisions
 
773,953

 
44,398

 
(327
)
 
818,024

Corporate securities
 
1,368,954

 
81,696

 
(402
)
 
1,450,248

ABS
 
126,330

 
2,319

 
(9
)
 
128,640

CMBS1
 
133,763

 
4,572

 
(1,216
)
 
137,119

RMBS2
 
456,996

 
15,961

 
(296
)
 
472,661

AFS fixed maturity securities
 
3,130,683

 
167,705

 
(2,375
)
 
3,296,013

AFS equity securities
 
132,441

 
19,400

 
(459
)
 
151,382

Total AFS securities
 
$
3,263,124

 
187,105

 
(2,834
)
 
3,447,395


1 CMBS includes government guaranteed agency securities with a fair value of $42.3 million at March 31, 2013 and $48.9 million at December 31, 2012.
2 RMBS includes government guaranteed agency securities with a fair value of $85.0 million at March 31, 2013 and $91.0 million at December 31, 2012.
 
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 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 March 31, 2013 and December 31, 2012, 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:

March 31, 2013
 
Less than 12 months
 
12 months or longer
($ in thousands)
 
Fair Value
 
Unrealized
Losses1
 
Fair Value
 
Unrealized
Losses1
AFS securities
 
 

 
 

 
 

 
 

U.S. government and government agencies
 
$
3,502

 
(4
)
 

 

Foreign government
 

 

 
2,880

 
(116
)
Obligations of states and political subdivisions
 
133,593

 
(1,059
)
 

 

Corporate securities
 
73,175

 
(812
)
 
3,059

 
(48
)
ABS
 
46,519

 
(55
)
 

 

CMBS
 
45,901

 
(395
)
 
11,269

 
(708
)
RMBS
 
49,313

 
(267
)
 
2,982

 
(188
)
Total fixed maturity securities
 
352,003

 
(2,592
)
 
20,190

 
(1,060
)
Equity securities
 
24,871

 
(441
)
 

 

Subtotal
 
$
376,874

 
(3,033
)
 
20,190

 
(1,060
)
 
 
 
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
 
$
358

 
(32
)
 
30

 
896

 
(35
)
 
27

ABS
 

 

 

 
2,855

 
(798
)
 
739

Subtotal
 
$
358


(32
)
 
30

 
3,751

 
(833
)
 
766

Total AFS and HTM
 
$
377,232

 
(3,065
)
 
30

 
23,941

 
(1,893
)
 
766


December 31, 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
 
$
518

 
(1
)
 

 

Foreign government
 

 

 
2,871

 
(124
)
Obligations of states and political subdivisions
 
32,383

 
(327
)
 

 

Corporate securities
 
50,880

 
(402
)
 

 

ABS
 
9,137

 
(9
)
 

 

CMBS
 
7,637

 
(19
)
 
11,830

 
(1,197
)
RMBS
 
8,710

 
(59
)
 
5,035

 
(237
)
Total fixed maturity securities
 
109,265

 
(817
)
 
19,736

 
(1,558
)
Equity securities
 
15,901

 
(459
)
 

 

Subtotal
 
$
125,166

 
(1,276
)
 
19,736

 
(1,558
)
 

9

Table of Contents


 
 
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
 
$
1,218

 
(33
)
 
29

 
1,108

 
(47
)
 
38

ABS
 

 

 

 
2,860

 
(840
)
 
753

Subtotal
 
$
1,218

 
(33
)
 
29

 
3,968

 
(887
)
 
791

Total AFS and HTM
 
$
126,384

 
(1,309
)
 
29

 
23,704

 
(2,445
)
 
791

 1Gross 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.
2Unrecognized gains represent fair value fluctuations from the later of:  (i) the date a security is designated as HTM; or (ii) the date that an OTTI charge is recognized on an HTM security.

As evidenced by the table below, our net unrealized/unrecognized loss positions increased by $1.2 million as of March 31, 2013 compared to December 31, 2012 as follows:

($ in thousands)
 
 
March 31, 2013
 
December 31, 2012
Number of
Issues
% of Market/Book
Unrealized
Unrecognized Loss
 
Number of
Issues
% of
Market/Book
Unrealized
Unrecognized
Loss
174

80% - 99%
$
3,918

 
100

80% - 99%
$
2,701

1

60% - 79%
244

 
1

60% - 79%
233


40% - 59%

 

40% - 59%


20% - 39%

 

20% - 39%


0% - 19%

 

0% - 19%

 

 
$
4,162

 
 

 
$
2,934

 
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 2012 Annual Report.
  
At March 31, 2013, we had 175 securities in an aggregate unrealized/unrecognized loss position of $4.2 million, $1.1 million of which have been in a loss position for more than 12 months. Securities that have had non-credit OTTI impairments comprised $0.6 million of the $1.1 million balance. The remainder of the $1.1 million balance is related to securities that were, on average, 3% impaired compared to their amortized cost.
  
At December 31, 2012, we had 101 securities in an aggregate unrealized/unrecognized loss position of $2.9 million, $1.7 million of which had been in a loss position for more than 12 months. Securities that have had non-credit OTTI impairments comprised $0.9 million of the $1.7 million balance. The remainder of the $1.7 million balance is related to securities that were, on average, 5% 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 March 31, 2013. 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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Table of Contents

(d) Fixed maturity securities at March 31, 2013, by contractual maturity, are shown below. Mortgage-backed securities ("MBS") are included in the maturity tables using the estimated average life of each security. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations, with or without call or prepayment penalties.
 
Listed below are HTM fixed maturity securities at March 31, 2013:
($ in thousands)
 
Carrying Value
 
Fair Value
Due in one year or less
 
$
100,082

 
103,261

Due after one year through five years
 
363,382

 
389,774

Due after five years through 10 years
 
41,427

 
46,831

Due after 10 years
 
2,880

 
3,687

Total HTM fixed maturity securities
 
$
507,771

 
543,553

 
Listed below are AFS fixed maturity securities at March 31, 2013:
($ in thousands)
 
Fair Value
Due in one year or less
 
$
348,176

Due after one year through five years
 
2,041,329

Due after five years through 10 years
 
1,046,526

Due after 10 years
 
29,950

Total AFS fixed maturity securities
 
$
3,465,981

  
(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
 
March 31,
2013
($ in thousands)
 
March 31,
2013
 
December 31,
2012
 
Remaining Commitment
Alternative Investments
 
 

 
 

 
 

Secondary private equity
 
$
27,780

 
28,032

 
7,466

Energy/power generation
 
18,218

 
18,640

 
7,825

Private equity
 
17,732

 
18,344

 
4,697

Distressed debt
 
12,406

 
12,728

 
2,922

Real Estate
 
12,214

 
11,751

 
10,292

Mezzanine financing
 
12,179

 
12,692

 
21,337

Venture capital
 
7,370

 
7,477

 
400

Total alternative investments
 
107,899

 
109,664

 
54,939

Other securities
 
1,956

 
4,412

 
1,412

Total other investments
 
$
109,855

 
114,076

 
56,351

 
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 2012 Annual Report.
 

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Table of Contents

The following table sets forth aggregated summarized financial information for the partnerships in our alternative and other investments 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 quarter lag, the summarized financial statement information for the three-month periods ended December 31 is as follows:

Income Statement Information
 
 
 
 
Quarter ended December 31,
 
 
($ in millions)
 
2012
 
2011
Net investment income
 
$
204.8

 
36.1

Realized gains
 
593.4

 
750.7

Net change in unrealized depreciation
 
(417.5
)
 
(487.4
)
Net income
 
$
380.7

 
299.4

Selective’s insurance subsidiaries’ other investments income
 
$
3.6

 
2.0

 
(f) At March 31, 2013, we had 31 fixed maturity securities, with a carrying value of $62.1 million, that were pledged as collateral for our outstanding borrowing of $58.0 million with the Federal Home Loan Bank of Indianapolis (“FHLBI”).  This outstanding borrowing is included in “Notes payable” on the Consolidated Balance Sheets.  In accordance with the terms of our agreement with the FHLBI, we retain all rights regarding these securities, which are included in the “U.S. government and government agencies,” “RMBS,” and “CMBS” classifications of our AFS fixed maturity securities portfolio.

In addition, certain bonds with a carrying value of $27.2 million were on deposit with various state and regulatory agencies to comply with insurance laws. We retain all rights regarding these securities, which are primarily included in the "U.S. government and government agencies" classification of our AFS fixed maturity securities portfolio.
 
(g) The components of net investment income earned were as follows:
 
 
Quarter ended March 31,
($ in thousands)
 
2013
 
2012
Fixed maturity securities
 
$
30,089


31,350

Equity securities
 
1,207


1,237

Short-term investments
 
52


38

Other investments
 
3,602


2,000

Miscellaneous income
 


39

Investment expenses
 
(2,080
)

(2,036
)
Net investment income earned
 
$
32,870

 
32,628


(h) The following tables summarize OTTI by asset type for the periods indicated:
First Quarter 2013
 
 
 
 
 
 
($ in thousands) 
 
Gross 
 
Included in Other
Comprehensive
Income (“OCI”)
 
Recognized in
Earnings
AFS fixed maturity securities
 
 

 
 

 
 

RMBS
 
$
(22
)
 
(30
)
 
8

Total AFS fixed maturity securities
 
(22
)
 
(30
)
 
8

Equity securities
 
217

 

 
217

Other investments
 
1,724

 

 
1,724

OTTI losses
 
$
1,919

 
(30
)
 
1,949

 

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Table of Contents

First Quarter 2012
 
 
 
 
 
 
($ in thousands)
 
Gross
 
Included in OCI
 
Recognized in Earnings
AFS fixed maturity securities
 
 

 
 

 
 

ABS
 
$
32

 

 
32

CMBS
 
108

 

 
108

RMBS
 
(54
)
 
(164
)
 
110

Total AFS fixed maturities
 
86

 
(164
)
 
250

Equity securities
 
171

 

 
171

OTTI losses
 
$
257

 
(164
)
 
421


The majority of the OTTI charges in First Quarter 2013 relate to an investment in a limited liability company within our other investments portfolio that has sustained significant losses for which we do not anticipate recovery. For a discussion of our evaluation for OTTI of fixed maturity 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 2012 Annual Report.

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 March 31,
($ in thousands)
 
2013
 
2012
Balance, beginning of period
 
$
7,477

 
6,602

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
 

 

Additional increases to the amount related to credit loss for which an OTTI was previously recognized
 
9

 
109

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

 

Balance, end of period
 
$
7,486

 
6,711


(i) The components of net realized gains, excluding OTTI charges, were as follows:
 
 
Quarter ended March 31,
($ in thousands)
 
2013
 
2012
HTM fixed maturity securities
 
 
 
 
Gains
 
$

 
153

Losses
 
(37
)
 
(81
)
AFS fixed maturity securities
 
 

 
 
Gains
 
951

 
405

Losses
 
(253
)
 
(43
)
AFS equity securities
 
 

 
 
Gains
 
5,671

 
4,775

Losses
 
(168
)
 
(428
)
Short-term investments
 
 

 
 
Losses
 

 
(2
)
Other Investments
 
 
 
 
     Losses
 
(860
)


Total other net realized investment gains
 
5,304


4,779

Total OTTI charges recognized in earnings
 
(1,949
)

(421
)
Total net realized gains
 
$
3,355


4,358

 

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Table of Contents

Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold. Of the $5.3 million in net realized gains in First Quarter 2013, $5.5 million were related to the sale of AFS equity securities due to a rebalancing of our equity portfolio. Net realized investment gains in First Quarter 2012 of $4.8 million reflected the impact of rebalancing securities within the equity securities portfolio, which resulted in net realized gains of $4.3 million.

Proceeds from the sale of AFS securities were $6.9 million in First Quarter 2013 as $35.6 million in proceeds remained unsettled at March 31, 2013 for the rebalancing of the equity portfolio. Proceeds from the sale of AFS securities were $71.8 million in First Quarter 2012.

NOTE 6. Fair Value Measurements
The following table presents the carrying amounts and estimated fair values of our financial instruments as of March 31, 2013 and December 31, 2012:
 
 
March 31, 2013
 
December 31, 2012
($ in thousands)
 
Carrying Amount
 
Fair
Value
 
Carrying Amount
 
Fair
Value
Financial Assets
 
 

 
 

 
 

 
 

Fixed maturity securities:
 
 

 
 

 
 

 
 

HTM
 
$
507,771

 
543,553

 
554,069

 
594,661

AFS
 
3,465,981

 
3,465,981

 
3,296,013

 
3,296,013

Equity securities, AFS
 
174,745

 
174,745

 
151,382

 
151,382

Short-term investments
 
163,440

 
163,440

 
214,479

 
214,479

Receivable for proceeds related to sale of Selective HR Solutions (“Selective HR”)
 

 

 
2,705

 
2,705

Financial Liabilities
 
 

 
 

 
 

 
 

Notes payable:
 
 

 
 

 
 

 
 

2.90% borrowings from FHLBI
 
13,000

 
13,539

 
13,000

 
13,595

1.25% borrowings from FHLBI
 
45,000

 
45,649

 
45,000

 
45,590

7.50% Junior Notes
 

 

 
100,000

 
101,480

6.70% Senior Notes
 
99,481

 
110,815

 
99,475

 
107,707

7.25% Senior Notes
 
49,912

 
52,641

 
49,912

 
52,689

5.875% Senior Notes
 
185,000

 
184,630

 

 

Total notes payable
 
$
392,393

 
407,274

 
307,387

 
321,061

 
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 the majority of our financial assets and liabilities, refer to Note 2. "Summary of Significant Accounting Policies" in Item 8. "Financial Statements and Supplementary Data." of our 2012 Annual Report. The 5.875% Senior Notes were valued based on a quoted market price (Level 1).


14

Table of Contents

The following tables provide quantitative disclosures of our financial assets that were measured at fair value at March 31, 2013 and December 31, 2012:
 
March 31, 2013
 
 
 
Fair Value Measurements Using
($ in thousands)
 
Assets
 Measured at
 Fair Value
 at 3/31/13
 
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:
 
 
 
 
 
 
 
 
U.S. government and government agencies
 
$
245,664

 
104,507

 
122,185

 
18,972

Foreign government
 
30,163

 

 
30,163

 

Obligations of states and political subdivisions
 
849,946

 

 
849,946

 

Corporate securities
 
1,532,753

 

 
1,529,851

 
2,902

ABS
 
171,943

 

 
165,887

 
6,056

CMBS
 
146,540

 

 
140,179

 
6,361

RMBS
 
488,972

 

 
488,972

 

Total AFS fixed maturity securities
 
3,465,981

 
104,507

 
3,327,183

 
34,291

Equity securities
 
174,745

 
167,203

 
4,642

 
2,900

Short-term investments
 
163,440

 
163,440

 

 

Total assets
 
$
3,804,166

 
435,150

 
3,331,825

 
37,191

 
December 31, 2012
 
 
 
Fair Value Measurements Using
($ in thousands)
 
Assets
 Measured at
Fair Value
at 12/31/12
 
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:
 
 
 
 
 
 
 
 
U.S. government and government agencies
 
$
259,092

 
115,861

 
123,442

 
19,789

Foreign government
 
30,229

 

 
30,229

 

Obligations of states and political subdivisions
 
818,024

 

 
818,024

 

Corporate securities
 
1,450,247

 

 
1,447,301

 
2,946

ABS
 
128,640

 

 
122,572

 
6,068

CMBS
 
137,119

 

 
129,957

 
7,162

RMBS
 
472,662

 

 
472,662

 

Total AFS fixed maturity securities
 
3,296,013

 
115,861

 
3,144,187

 
35,965

Equity securities
 
151,382

 
147,775

 

 
3,607

Short-term investments
 
214,479

 
214,479

 

 

Receivable for proceeds related to sale of Selective HR
 
2,705

 

 

 
2,705

Total assets
 
$
3,664,579

 
478,115

 
3,144,187

 
42,277

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

 

15

Table of Contents

The following tables provide a summary of the changes in the fair value of securities measured using Level 3 inputs and related quantitative information for March 31, 2013 and December 31, 2012:

March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Government
 
Corporate
 
ABS
 
CMBS
 
Equity
 
Receivable for
Proceeds
Related to Sale
of Selective HR
 
Total
Fair value, December 31, 2012
 
$
19,789

 
2,946

 
6,068

 
7,162

 
3,607

 
2,705

 
42,277

Total net (losses) gains for the period included in:
 
 

 
 

 
 
 
 

 
 
 
 

 
 
OCI1
 
(153
)
 
16

 
(12
)
 
248

 
3,935

 

 
4,034

Net income2,3
 
(43
)
 

 

 
134

 

 
(1,480
)
 
(1,389
)
Purchases
 

 

 

 

 

 

 

Sales
 

 

 

 

 

 

 

Issuances
 

 

 

 

 

 

 

Settlements
 
(621
)
 
(60
)
 

 
(1,183
)
 

 
(225
)
 
(2,089
)
Transfers into Level 3
 

 

 

 

 

 

 

Transfers out of Level 3
 

 

 

 

 
(4,642
)
 
(1,000
)
 
(5,642
)
Fair value, March 31, 2013
 
$
18,972

 
2,902

 
6,056

 
6,361

 
2,900

 

 
37,191

1 Amounts are reported in “Unrealized holding gains arising during period” on the Consolidated Statements of Comprehensive Income.
2 Amounts are reported in “Net realized gains ” for realized gains and “Net investment income earned” for amortization of securities on the Consolidated Statements of Income.
3 For the receivable related to the sale of Selective HR, amounts in “Loss on disposal of discontinued operations, net of tax” relate to an impairment charge and amounts in “Other income” relate to interest accretion on the Consolidated Statements of Income.

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Government
 
Corporate
 
ABS
 
CMBS
 
Equity
 
Receivable for
 Proceeds
Related to Sale
 of Selective HR
 
Total
Fair value, December 31, 2011
 
$
21,741

 
2,603

 

 
354

 

 
3,212

 
27,910

Total net (losses) gains for the period included in:
 
 

 
 

 
 
 
 

 
 
 
 

 
 

OCI1
 
(22
)
 
185

 
68

 
858

 

 

 
1,089

Net income2,3
 
(193
)
 

 

 
(51
)
 

 
244

 

Purchases
 

 

 
7,300

 
5,611

 

 

 
12,911

Sales
 

 

 

 

 

 

 

Issuances
 

 

 

 

 

 

 

Settlements
 
(1,737
)
 
(630
)
 

 
(624
)
 

 
(751
)
 
(3,742
)
Transfers into Level 3
 

 
788

 

 
8,247

 
3,607

 

 
12,642

Transfers out of Level 3
 

 

 
(1,300
)
 
(7,233
)
 

 

 
(8,533
)
Fair value, December 31, 2012
 
$
19,789

 
2,946

 
6,068

 
7,162

 
3,607

 
2,705

 
42,277

1 Amounts are reported in “Unrealized holding gains arising during period” on the Consolidated Statements of Comprehensive Income in our 2012 Annual Report.
2 Amounts are reported in “Net realized gains (losses)” for realized gains and losses and “Net investment income earned” for amortization for the CMBS securities on the Consolidated Statements of Income in our 2012 Annual Report.
3 Amounts are reported in “Other income” for the receivable related to the sale of Selective HR on the Consolidated Statements of Income in our 2012 Annual Report and are related to interest accretion on the receivable.

As discussed in Note 2. "Summary of Significant Accounting Policies," in Item 8. "Financial Statements and Supplementary Data." in our 2012 Annual Report, the fair value of our Level 3 fixed maturity securities are typically obtained through non-binding broker quotes based on unobservable inputs, which we review for reasonableness. At March 31, 2013 and December 31, 2012, fixed maturity securities with aggregate fair values of $34.3 million and $36.0 million, respectively, were measured using Level 3 inputs primarily due to the availability and nature of the pricing used at the valuation dates.


16

Table of Contents

In 2012, fixed maturity securities with a fair value of $9.0 million were transferred into Level 3 during the year. These transfers were primarily related to securities that had been previously priced using Level 2 inputs, but due to the availability and nature of the pricing used at the valuation dates, were priced using Level 3 inputs at December 31, 2012. In addition, certain of these transfers related to securities that had previously been classified as HTM, and therefore not measured at fair value, for which available pricing at December 31, 2012 used Level 3 inputs. Securities with a fair value of $8.5 million were transferred out of Level 3 due to the current availability of Level 2 pricing at December 31, 2012 that was not available previously.
  
Equity securities with fair values of $2.9 million and $3.6 million, respectively, were measured using Level 3 inputs at March 31, 2013 and December 31, 2012, respectively. During 2012, two non-publicly traded equity securities were transferred into Level 3 due to the nature of the quotes used at the valuation date. At March 31, 2013, one of the securities was transferred out of Level 3 and into Level 2, as the pricing as of that date was based on a quoted price in an inactive market. At each reporting date, we review the fair values received on these securities for reasonableness.

At December 31, 2012, the receivable related to the sale of Selective HR was contingent on the purchaser's ability to retain business subsequent to the sale. At that time, the fair value of this receivable was measured using unobservable inputs, the most significant of which was our assumption regarding the retention of business. If that assumption were to have changed by +/- 10%, the value of the receivable would have been increased/decreased by approximately $0.1 million. Based on discussions with the purchaser to settle this recoverable in the near term, we currently estimate the recoverable amount to be $1.0 million. As a result, this receivable was transferred out of Level 3 at March 31, 2013. See Note 12. "Discontinued Operations" of this Form 10-Q for a discussion of the First Quarter 2013 impairment charge recorded on this receivable.

   



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The following tables provide quantitative information regarding our financial assets and liabilities that were disclosed at fair value at March 31, 2013 and December 31, 2012:
March 31, 2013
 
 
 
Fair Value Measurements Using
($ in thousands)
 
Assets/
Liabilities
Disclosed at
Fair Value at 3/31/2013
 
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
 
$
5,674

 

 
5,674

 

Obligations of states and political subdivisions
 
481,137

 

 
481,137

 

Corporate securities
 
39,634

 

 
34,802

 
4,832

ABS
 
6,920

 

 
6,920

 

CMBS
 
10,188

 

 
10,188

 

Total HTM fixed maturity securities
 
$
543,553

 

 
538,721

 
4,832

Financial Liabilities
 
 

 
 

 
 

 
 

Notes payable:
 
 

 
 

 
 

 
 

2.90% borrowings from FHLBI
 
$
13,539

 

 
13,539

 

1.25% borrowings from FHLBI
 
45,649

 

 
45,649

 

6.70% Senior Notes
 
110,815

 
110,815

 

 

7.25% Senior Notes
 
52,641

 

 
52,641

 

5.875% Senior Notes
 
184,630

 
184,630

 

 

Total notes payable
 
$
407,274

 
295,445

 
111,829

 

December 31, 2012
 
 
 
Fair Value Measurements Using
($ in thousands)
 
Assets/
Liabilities
Disclosed at
Fair Value at 12/31/2012
 
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
 
$
5,871

 

 
5,871

 

Obligations of states and political subdivisions
 
526,922

 

 
526,922

 

Corporate securities
 
42,121

 

 
37,289

 
4,832

ABS
 
7,097

 

 
5,698

 
1,399

CMBS
 
12,650

 

 
12,650

 

Total HTM fixed maturity securities
 
$
594,661

 

 
588,430

 
6,231

Financial Liabilities
 
 

 
 
 
 
 
 
Notes payable:
 
 

 
 
 
 
 
 
2.90% borrowings from FHLBI
 
$
13,595

 

 
13,595

 

1.25% borrowings from FHLBI
 
45,590

 

 
45,590

 

7.50% Junior Notes
 
101,480

 
101,480

 

 

6.70% Senior Notes
 
107,707

 
107,707

 

 

7.25% Senior Notes
 
52,689

 

 
52,689

 

Total notes payable
 
$
321,061

 
209,187

 
111,874

 


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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 more information concerning reinsurance, refer to Note 8. “Reinsurance” in Item 8. “Financial Statements and Supplementary Data.” of our 2012 Annual Report.
 
 
 
Quarter ended March 31,
($ in thousands)
 
2013
 
2012
Premiums written:
 
 

 
 

Direct
 
$
528,816

 
475,966

Assumed
 
8,482

 
21,989

Ceded
 
(87,174
)
 
(77,783
)
Net
 
$
450,124

 
420,172

Premiums earned:
 
 

 
 

Direct
 
$
494,066

 
451,988

Assumed
 
12,463

 
15,049

Ceded
 
(85,589
)
 
(88,208
)
Net
 
$
420,940

 
378,829

Loss and loss expense incurred:
 
 

 
 

Direct
 
$
365,646

 
252,203

Assumed
 
9,074

 
10,599

Ceded
 
(104,871
)
 
(9,896
)
Net
 
$
269,849

 
252,906

 
The growth in direct premium written ("DPW") for our ten insurance subsidiaries ("Insurance Subsidiaries") in First Quarter 2013 compared to First Quarter 2012 reflects: (i) pure price increases that we have achieved in our Standard Insurance Operations; and (ii) strong retention in our Standard Insurance Operations.
 
Direct premium earned increases in First Quarter 2013 were consistent with the fluctuation in DPW for the twelve-month period ended March 31, 2013 as compared to the twelve-month period ended March 31, 2012.

Assumed premiums written for First Quarter 2013 decreased compared to the same period last year as E&S business, which was previously written through a reinsurance agreement, is now written by our Insurance Subsidiaries. Decreases in assumed premiums earned in First Quarter 2013 compared to First Quarter 2012 were driven by the E&S premiums.
Direct loss and loss expense incurred in First Quarter 2013 included approximately $55 million of loss reserve increases for flood coverage under the NFIP related to Hurricane Sandy, which occurred in October 2012. Estimated gross flood losses related to Hurricane Sandy were $1,094 million at March 31, 2013 and $1,039 million at December 31, 2012. As all flood losses are fully ceded under the NFIP, the increase in the direct loss and loss expenses drive the corresponding increase in our ceded losses. The 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:
NFIP
 
Quarter ended March 31,
($ in thousands)
 
2013
 
2012
Ceded premiums written
 
$
(56,707
)
 
(51,724
)
Ceded premiums earned
 
(55,327
)
 
(51,905
)
Ceded loss and loss expense incurred
 
(76,176
)
 
14,922


In addition to the direct and ceded losses being higher in First Quarter 2013, 2012 reflects the fact that Hurricane Irene and Tropical Storm Lee claims were settled for less than their original estimates.
 

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NOTE 8. Segment Information
The results of our three operating segments are used by senior management to manage our operations. These segments are evaluated based on the following:
Our Standard Insurance Operations segment and our E&S Insurance Operations segment are evaluated based on statutory underwriting results (net premiums earned, incurred loss and loss expenses, policyholders dividends, policy acquisition costs, and other underwriting expenses), and statutory combined ratios; and
Our Investments segment is evaluated based on net investment income and net realized gains and losses.

In computing the results of each segment, we do not make adjustments for interest expense, net general corporate expenses, or federal income taxes. We do not maintain separate investment portfolios for the segments and therefore, do not allocate assets to the segments.

The following summaries present revenues from continuing operations (net investment income and net realized gains on investments in the case of the Investments segment) and pre-tax income from continuing operations for the individual segments:
Revenue by Segment
 
Quarter ended March 31,
($ in thousands)
 
2013
 
2012
Standard Insurance Operations:
 
 

 
 

Net premiums earned:
 
 

 
 

Commercial automobile
 
$
74,347

 
70,484

Workers compensation
 
66,084

 
65,811

General liability
 
97,703

 
90,143

Commercial property
 
53,415

 
49,371

Businessowners’ policies
 
18,540

 
16,857

Bonds
 
4,764

 
4,663

Other
 
2,992

 
3,168

Total standard Commercial Lines
 
317,845

 
300,497

Personal automobile
 
38,393

 
37,456

Homeowners
 
31,135

 
27,958

Other
 
3,508

 
3,195

Total standard Personal Lines
 
73,036

 
68,609

Total Standard Insurance Operations net premiums earned
 
390,881

 
369,106

Miscellaneous income
 
2,720

 
3,457

Total Standard Insurance Operations revenue
 
393,601

 
372,563

E&S Insurance Operations:
 
 
 
 
Net premiums earned
 
30,059

 
9,723

Investments:
 
 

 
 

Net investment income
 
32,870

 
32,628

Net realized investment gains
 
3,355

 
4,358

Total investment revenues
 
36,225

 
36,986

Total all segments
 
459,885

 
419,272

Other income
 
64

 
76

Total revenues from continuing operations
 
$
459,949

 
419,348

 

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Table of Contents

Income from Continuing Operations before Federal Income Tax
 
Quarter ended March 31,
($ in thousands)
 
2013
 
2012
Standard Insurance Operations:
 
 

 
 

Commercial Lines underwriting gain
 
$
6,102

 
409

Personal Lines underwriting gain
 
5,973

 
3,121

Total Standard Insurance Operations underwriting gain, before federal income tax
 
12,075

 
3,530

GAAP combined ratio
 
96.9
%
 
99.0

Statutory combined ratio
 
96.8
%
 
98.0

 
 
 
 
 
E&S Insurance Operations:
 
 
 
 
Underwriting gain (loss)
 
86

 
(4,893
)
GAAP combined ratio
 
99.7
%
 
150.3

Statutory combined ratio
 
98.2
%
 
120.3

 
 
 
 
 
Investments:
 
 

 
 

Net investment income
 
32,870

 
32,628

Net realized investment gains
 
3,355

 
4,358

Total investment income, before federal income tax
 
36,225

 
36,986

 
 
 
 
 
Total all segments
 
48,386

 
35,623

Interest expense
 
(5,831
)
 
(4,700
)
General corporate and other expenses
 
(13,687
)
 
(7,732
)
Income from continuing operations before federal income tax
 
$
28,868

 
23,191

 
NOTE 9. Indebtedness
In First Quarter 2013, we issued $185 million of 5.875% Senior Notes due 2043. The Senior Notes will pay interest on February 15, May 15, August 15, and November 15 of each year, beginning on May 15, 2013, and at maturity. The notes are callable by us on or after February 8, 2018, at a price equal to 100% of their principal outstanding amount, plus accrued and unpaid interest to, but excluding, the date of redemption. A portion of the proceeds from this debt issuance was used to fully redeem the $100 million aggregate principal amount of our 7.5% Junior Subordinated Notes due 2066, which had an associated $3.3 million pre-tax write-off for the remaining capitalized debt issuance costs on these notes. Of the remaining net proceeds, $57.1 million was used to make capital contributions to the Insurance Subsidiaries, while the balance was used for general corporate purposes. For additional information related to all our outstanding debt, refer to Note 10. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data" of our 2012 Annual Report.

NOTE 10. Retirement Plans
The Retirement Income Plan for Selective Insurance Company of America and the Supplemental Excess Retirement Plan (jointly referred to as the "Retirement Income Plan") were amended in First Quarter 2013 to curtail the accrual of additional benefits for all employees eligible to participate in the plans after March 31, 2016. The curtailment of the plans resulted in a net actuarial gain recognized in OCI of $44.0 million on a pre-tax basis.

As a result of the curtailment, the Retirement Income Plan was re-measured as of March 31, 2013. When determining the most appropriate discount rate to be used in the valuation, we consider, among other factors, our expected payout patterns of the Retirement Income Plan's obligations, as well as our investment strategy. We ultimately select the rate that we believe best represents our estimate of the inherent interest rate at which the Retirement Income Plan's liabilities can be effectively settled. The expected rate of return on plan assets at March 31, 2013 remained at 7.40%, consistent with our December 31, 2012 assumption. For re-measurement, we determined that the most appropriate discount rate was 4.66%, up slightly from 4.42% determined as of December 31, 2012.

Eligible employees impacted by the curtailment of the Retirement Income Plan, began receiving on April 5, 2013, an enhanced company contribution to the Selective Insurance Retirement Savings Plan of 4% of base salary, which is the enhanced company contribution currently provided to all employees not eligible to participate in the Retirement Income Plan.


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The funded status of the Retirement Income Plan recognized in the Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012, was as follows:

 
Retirement Income Plan
($ in thousands)
 
March 31, 2013
 
December 31, 2012
Change in Benefit Obligation:
 
 
 
 
Benefit obligation, beginning of year
 
$
302,647

 
254,009

Service cost
 
2,449

 
8,091

Interest cost
 
3,303

 
12,981

Actuarial (gain) losses
 
(11,485
)
 
33,596

Benefits paid
 
(1,598
)
 
(6,030
)
Impact of curtailment
 
(29,603
)
 

Benefit obligation, end of period
 
$
265,713

 
302,647

 
 
 
 
 
Change in Fair Value of Assets:
 
 
 
 
Fair value of assets, beginning of year
 
$
207,150

 
182,614

Actual return on plan assets, net of expenses
 
6,760

 
21,896

Contribution by employer to funded plans
 
2,650

 
8,550

Contribution by employer to unfunded plans
 
30

 
120

Benefits paid
 
(1,598
)
 
(6,030
)
Fair value of assets, end of period
 
$
214,992

 
207,150

 
 
 
 
 
Funded status
 
$
(50,721
)
 
(95,497
)
Amount Recognized in Consolidated Balance Sheet:
 
 
 
 
Liabilities
 
$
(50,721
)
 
(95,497
)
Net pension liability, end of period
 
$
(50,721
)
 
(95,497
)
Amount Recognized in AOCI:
 
 
 
 
Prior service cost
 
$

 
26

Net actuarial loss
 
57,543

 
103,365

Total
 
$
57,543

 
103,391

Other Information:
 
 
 
 
Accumulated benefit obligation
 
$
257,412

 
265,899

Weighted-Average Liability Assumptions:
 
 
 
 
Discount Rate
 
4.66
%
 
4.42
Rate of compensation increase
 
4.00
%
 
4.00


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The following table shows the cost of the Retirement Income Plan and the life insurance benefit ("Retirement Life Plan") for the quarterly periods ended March 31, 2013 and March 31, 2012:

 
 
Retirement Income Plan
Quarter ended March 31,
 
Retirement Life Plan
Quarter ended March 31,
($ in thousands)
 
2013
 
2012
 
2013
 
2012
Components of Net Periodic Benefit Cost and Other Amounts Recognized in OCI:
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
Net Periodic Benefit Cost:
 
 
 
 
 
 
 
 
Service cost
 
$
2,449

 
2,154

 

 

Interest cost
 
3,303

 
3,230

 
70

 
74

Expected return on plan assets
 
(3,848
)
 
(3,547
)
 

 

Amortization of unrecognized prior service cost
 
10

 
38

 

 

Amortization of unrecognized net actuarial loss
 
1,822

 
1,383

 
18

 
7

Curtailment expense
 
16

 

 

 

Total net periodic cost
 
$
3,752

 
3,258

 
88

 
81

 
 
 
 
 
 
 
 
 
Other Changes in Plan Assets and Benefit Obligations Recognized in OCI:
 
 
 
 
 
 
 
 
Net actuarial gain due to curtailment
 
$
(44,000
)
 

 

 

Reversal of amortization of net actuarial loss
 
(1,822
)
 
(1,383
)
 
(18
)
 
(7
)
Reversal of amortization of prior service cost
 
(10
)
 
(38
)
 

 

Curtailment expense
 
(16
)
 

 

 

Total recognized in OCI
 
$
(45,848
)
 
(1,421
)
 
(18
)
 
(7
)
 
 
 
 
 
 
 
 
 
Total recognized in net periodic benefit cost and OCI
 
$
(42,096
)
 
1,837

 
70

 
74


The amortization of prior service cost related to the Retirement Income Plan is determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the Retirement Income Plan.

The estimated net actuarial loss for the Retirement Income Plan that will be amortized from AOCI into net periodic benefit cost during the 2013 fiscal year is $4.1 million.
 
 
Retirement Income Plan
Quarter ended March 31,
 
Retirement Life Plan
Quarter ended March 31,
 
 
2013
 
2012
 
2013
 
2012
Weighted-Average Expense Assumptions:
 
 
 
 
 
 
 
 
Discount rate
 
4.42
%
 
5.16
 
4.42
 
5.16
Expected return on plan assets
 
7.40
%
 
7.75
 
 
Rate of compensation increase
 
4.00
%
 
4.00
 
 

The following table presents future benefit payments expected under the Retirement Income Plan:
($ in thousands)
 
Retirement Income Plan
Benefits Expected to be Paid in Future Years
 
 

Fiscal Years:
 
 

2013
 
$
7,586

2014
 
8,384

2015
 
9,148

2016
 
9,942

2017
 
10,810

2018-2022
 
67,447



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For additional information regarding our retirement plans, refer to Note 15. "Retirement Plans" included in Item 8. "Financial Statements and Supplementary Data" of our 2012 Annual Report.

NOTE 11. Comprehensive Income
The components of comprehensive income, both gross and net of tax, for First Quarter 2013 and 2012 are as follows:
 
First Quarter 2013
 
 
 
 
 
 
($ in thousands)
 
Gross
 
Tax
 
Net
Net income
 
$
27,333

 
6,025

 
21,308

Components of OCI:
 
 

 
 

 
 

Unrealized gains on securities:
 
 

 
 

 
 

Unrealized holding gains during the period
 
3,684

 
1,290

 
2,394

Portion of OTTI recognized in OCI
 
37

 
13

 
24

Amortization of net unrealized gains on HTM securities
 
(636
)
 
(223
)
 
(413
)
Reclassification adjustment for gains included in net income
 
(6,057
)
 
(2,120
)
 
(3,937
)
Net unrealized gains
 
(2,972
)
 
(1,040
)
 
(1,932
)
Defined benefit pension and post-retirement plans:
 
 

 
 

 
 

Net actuarial gain
 
44,000

 
15,400

 
28,600

Reversal of amortization items:
 
 

 
 

 
 

Net actuarial loss
 
1,840

 
644

 
1,196

Prior service cost
 
10

 
4

 
6

Curtailment expense
 
16

 
5

 
11

Defined benefit pension and post-retirement plans
 
45,866

 
16,053

 
29,813

Comprehensive income
 
$
70,227

 
21,038

 
49,189

 
First Quarter 2012
 
 
 
 
 
 
($ in thousands)
 
Gross
 
Tax
 
Net
Net income
 
$
23,191

 
5,098

 
18,093

Components of OCI:
 
 

 
 

 
 

Unrealized gains on securities:
 
 

 
 

 
 

Unrealized holding gains during the period
 
19,804

 
6,931

 
12,873

Portion of OTTI recognized in OCI
 
367

 
129

 
238

Amortization of net unrealized gains on HTM securities
 
(794
)
 
(278
)
 
(516
)
Reclassification adjustment for gains included in net income
 
(4,359
)
 
(1,526
)
 
(2,833
)
Net unrealized gains
 
15,018

 
5,256

 
9,762

Defined benefit pension and post-retirement plans:
 
 

 
 

 
 

Reversal of amortization items:
 
 

 
 

 
 

Net actuarial loss
 
1,390

 
487

 
903

Prior service cost
 
38

 
13

 
25

Defined benefit pension and post-retirement plans
 
1,428

 
500

 
928

Comprehensive income
 
$
39,637

 
10,854

 
28,783

 
The balances of, and changes in, each component of AOCI (net of taxes) as of March 31, 2013 are as follows:

March 31, 2013
 
Net Unrealized (Loss) Gain
 
 
 
 
($ in thousands)
 
OTTI
Related
 
HTM
Related
 
All
Other
 
Defined Benefit
Pension and Post-Retirement Plans
 
Total AOCI
Balance, December 31, 2012
 
$
(1,658
)
 
2,594

 
121,391

 
(68,287
)
 
54,040

OCI before reclassifications
 
19

 
(106
)
 
2,500

 
28,600

 
31,013

Amounts reclassified from AOCI
 
5

 
(466
)
 
(3,884
)
 
1,213

 
(3,132
)
Net current period OCI
 
24

 
(572
)
 
(1,384
)
 
29,813

 
27,881

Balance, March 31, 2013
 
$
(1,634
)
 
2,022

 
120,007

 
(38,474
)
 
81,921


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The reclassifications out of AOCI for the quarterly period ended March 31, 2013 are as follows:

2013
Amount Reclassified from AOCI
 
Affected Line Item in the Unaudited Consolidated Statement of Income
($ in thousands)
 
OTTI related


 
 
Amortization of non-credit OTTI losses on HTM securities
$
7

 
Net investment income earned
 
7

 
Income from continuing operations before federal income tax
 
(2
)
 
Total federal income tax expense
 
5

 
Net income
HTM related
 
 
 
Unrealized gains and losses on HTM disposals
(81
)
 
Net realized investment gains
Amortization of net unrealized gains on HTM securities
(636
)
 
Net investment income earned
 
(717
)
 
Income from continuing operations before federal income tax
 
251

 
Total federal income tax expense
 
(466
)
 
Net income
Unrealized gains and losses on AFS
 
 
 
Unrealized gains and losses on AFS disposals
(5,976
)
 
Net realized investments gains
 
(5,976
)
 
Income from continuing operations before federal income tax
 
2,092

 
Total federal income tax expense
 
(3,884
)
 
Net income
Defined benefit pension and post-retirement life plans
 
 
 
Net actuarial loss
400

 
Loss and loss expense incurred
 
1,440

 
Policy acquisition costs
 
1,840

 
Income from continuing operations before federal income tax
 
 
 
 
Prior service cost
7

 
Loss and loss expense incurred
 
3

 
Policy acquisition costs
 
10

 
Income from continuing operations before federal income tax
 
 
 
 
Curtailment expense

 
Loss and loss expense incurred
 
16

 
Policy acquisition costs
 
16

 
Income from continuing operations before federal income tax
 
 
 
 
Total defined benefit pension and post-retirement life
1,866

 
Income from continuing operations before federal income tax
 
(653
)
 
Total federal income tax expense
 
1,213

 
Net income
 
 
 
 
Total reclassifications for the period
$
(3,132
)
 
Net income

Note 12. Discontinued Operations
In the fourth quarter of 2009, we sold 100% of our interest in Selective HR for proceeds to be received over a 10-year period. These proceeds were based on the ability of the purchaser to retain and generate new worksite lives though the independent agents who currently distribute the products. Based on discussions with the purchaser, we currently estimate the recoverable amount to be $1.0 million. This impairment, which amounted to $1.5 million, is included in "Loss on disposal of discontinued operations, net of tax" in the Consolidated Statements of Income.
    


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Note 13. 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: (a) liability insurers defending or providing indemnity for third-party claims brought against insureds; or (b) 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.

Note 14. Commitments and Contingencies
At March 31, 2013, we had contractual obligations that expire at various dates through 2022 to invest up to an additional $56.4 million in alternative and other investments. There is no certainty that any such additional investment will be required.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements
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
We classify our business into three operating segments:
Standard Insurance Operations - comprised of both commercial lines ("Commercial Lines") and personal lines ("Personal Lines") insurance products and services that are sold in the standard marketplace;
Excess and Surplus ("E&S") Insurance Operations - comprised of Commercial Lines insurance products and services that are unavailable in the standard market due to market conditions or characteristics of the insured that are caused by the insured's claim history or the characteristics of their business; and
Investments - invests the premiums collected by our Standard and E&S Insurance Operations, as well as amounts generated through our capital management strategies, which may include the issuance of debt and equity securities.
Our Standard Insurance Operations products and services are sold through nine subsidiaries that write Commercial Lines and Personal Lines business, some of which write flood business through the National Flood Insurance Program's ("NFIP") write-your-own ("WYO") program. Two of these subsidiaries, Selective Casualty Insurance Company ("SCIC") and Selective Fire and Casualty Insurance Company ("SFCIC"), were created in 2012. These subsidiaries began writing direct premium in 2013 and have been included in our reinsurance pooling agreement as of July 1, 2012.
Our E&S Insurance Operations products and services are sold through a subsidiary that was acquired in December 2011. This subsidiary, Mesa Underwriters Specialty Insurance Company ("MUSIC"), provides us with a nationally-authorized non-admitted platform to write commercial and personal E&S lines business. For additional information regarding our E&S acquisitions, refer to Note 12. “Business Combinations” in Item 8. “Financial Statements and Supplementary Data.” contained in our Annual Report on Form 10-K for the year ended December 31, 2012 ("2012 Annual Report").
Our ten insurance subsidiaries are collectively referred to as the "Insurance Subsidiaries".
The purpose of the Management’s Discussion and Analysis (“MD&A”) is to provide an understanding of the consolidated results of operations and financial condition and 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 2012 Annual Report.
In the MD&A, we will discuss and analyze the following:
Critical Accounting Policies and Estimates;
Financial Highlights of Results for First Quarter 2013 and 2012;
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.

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Critical Accounting Policies and Estimates
These 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) deferred policy acquisition costs; (iii) pension and post-retirement benefit plan actuarial assumptions; (iv) other-than-temporary investment impairments; and (v) 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 our 2012 Annual Report, pages 44 through 53. However, for changes related to actuarial assumptions used in the measurement of our Retirement Income Plan for Selective Insurance Company of America and the Supplemental Excess Retirement Plan (jointly referred to as the "Retirement Income Plan"), see Note 10. "Retirement Plans" of this Form 10-Q.
 
Financial Highlights of Results for First Quarter 2013 and 20121 
 
 
Quarter ended March 31,
 
 
 
 
($ and Shares in thousands, except per share amounts)
 
2013
 
2012
 
Change
% or Points
 
 
Generally Accepted Accounting Principles ("GAAP") measures:
 
 
 
 
 
 
 
 
Revenues
 
$
459,949

 
419,348

 
10

 
%
Pre-tax net investment income
 
32,870

 
32,628

 
1

 
 
   Pre-tax net income
 
27,333

 
23,191

 
18

 
 
Net income
 
21,308

 
18,093

 
18

 
 
Diluted net income per share
 
0.38

 
0.33

 
15

 
 
Diluted weighted-average outstanding shares
 
56,455

 
55,605

 
2

 
 
GAAP combined ratio
 
97.1
%
 
100.4

 
(3.3
)
 
pts 
   Statutory combined ratio2
 
96.8
%
 
99.1

 
(2.3
)
 
 
Return on average equity
 
7.7
%
 
6.8

 
0.9

 
 
Non-GAAP measures:
 


 


 
 
 
 
Operating income2
 
$
20,124

 
15,260

 
32

 
%
Diluted operating income per share3
 
0.36

 
0.28

 
29

 
 
Operating return on average equity3
 
7.2
%
 
5.7

 
1.5

 
pts 
1 
Refer to the Glossary of Terms attached to our 2012 Annual Report as Exhibit 99.1 for definitions of terms used in this Form 10-Q.
2 
Includes 1.3 points related to the Retirement Income Plan amendments that curtail the accrual of additional benefits for all eligible employees participating in the plans after March 31, 2016.
3 
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 other-than-temporary impairments (“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 return on average equity is calculated by dividing annualized operating income by average stockholders’ equity.

 The following table reconciles operating income and net income for the periods presented above:
 
 
Quarter ended March 31,
($ in thousands, except per share amounts)
 
2013
 
2012
Operating income
 
$
20,124

 
15,260

Net realized gains, net of tax
 
2,181

 
2,833

Loss on disposal of discontinued operations, net of tax
 
(997
)
 

Net income
 
$
21,308

 
18,093

 
 
 
 
 
Diluted operating income per share
 
$
0.36

 
0.28

Diluted net realized gains per share
 
0.04

 
0.05

Diluted net loss on disposal of discontinued operations per share
 
(0.02
)
 

Diluted net income per share
 
$
0.38

 
0.33


Over the long term, we target a return on average equity that is three points higher than our cost of capital, currently 8%, excluding the impact of realized gains and losses, which is referred to as operating return on equity. Our operating return on

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average equity was 7.2% in the First Quarter 2013 and 5.7% in the First Quarter 2012. Our operating return on average equity contribution by component is as follows:

Operating Return on Average Equity
 
Quarter ended March 31,

 
2013
 
2012
Insurance Operations
 
2.8
 %
 
(0.3
)%
Investments
 
8.9
 %
 
9.3
 %
Other
 
(4.5
)%
 
(3.3
)%
Total
 
7.2
 %
 
5.7
 %

The improvement in the operating return on average equity generated from our insurance operations reflects a $13.5 million increase in underwriting profitability, driven primarily by: (i) an $8.5 million improvement in our Standard Insurance Operations, reflecting the impact of earning renewal pure price increases that have been exceeding loss costs trends over the past year; and (ii) underwriting improvement in our E&S Insurance Operations of $5.0 million. The $5.0 million improvement is largely driven by: (i) earned premiums that now reflect the full operations of this business; (ii) a decrease in the initial start-up expenditures of $1.0 million; and (iii) lower than anticipated supplemental commissions payments to our wholesale agents of $1.1 million for the year 2012.

Our investments segment's contribution to operating return on equity was relatively consistent in First Quarter 2013 compared to First Quarter 2012. Net investment income continues to be negatively impacted by the low interest rate environment, which has lowered returns within our fixed maturity securities portfolio when comparing periods. However, higher returns in our other investments portfolio, which were driven by the alternative investments within that portfolio, have partially offset the impact of low interest rates.

In February 2013, we issued $185 million of 5.875% Senior Notes due 2043. A portion of the proceeds was used in March 2013 to redeem the $100 million outstanding 7.50% Junior Notes. Concurrent with the redemption of the 7.5% Junior Notes, we expensed the remaining capitalized debt issue costs related to these notes of $3.3 million, pre tax. This expense, as well as a $3.2 million pre-tax increase in our long-term employee compensation expense associated with the increase of our stock price, drove the 1.2% decline in the operating return of average equity from "Other" in the table above.

The following table provides a quantitative foundation for analyzing our overall Insurance Subsidiaries underwriting results:
All Lines
 
Quarter ended March 31,
 
 
 
 
($ in thousands)
 
2013
 
2012
 
Change % or Points
 
 
GAAP Insurance Operations Results:
 
 
 
 
 
 
Net premiums written ("NPW")
 
$
450,124

 
420,172

 
7

 
%
Net premiums earned (“NPE”)
 
420,940

 
378,829

 
11

 
 
Less:
 
 
 
 

 
 
 
 
Loss and loss expense incurred
 
269,849

 
252,906

 
7

 
 
Net underwriting expenses incurred
 
137,844

 
126,372

 
9

 
 
Dividends to policyholders
 
1,086

 
914

 
19

 
 
Underwriting gain (loss)
 
$
12,161

 
(1,363
)
 
992

 
%
GAAP Ratios:
 
 
 
 

 
 
 
 
Loss and loss expense ratio
 
64.1

%
66.8

 
(2.7
)
 
pts 
Underwriting expense ratio
 
32.7

 
33.4

 
(0.7
)
 
 
Dividends to policyholders ratio
 
0.3

 
0.2

 
0.1

 
 
Combined ratio
 
97.1

 
100.4

 
(3.3
)
 
 
Statutory Ratios:
 
 
 
 

 
 
 
 
Loss and loss expense ratio
 
64.1

 
66.7

 
(2.6
)
 
 
Underwriting expense ratio
 
32.4

 
32.2

 
0.2

 
 
Dividends to policyholders ratio
 
0.3

 
0.2

 
0.1

 
 
Combined ratio
 
96.8

%
99.1

 
(2.3
)
 
pts 

The growth in NPW for our Insurance Subsidiaries in First Quarter 2013 compared to First Quarter 2012 reflects the following in our Standard Insurance Operations: (i) pure price increases that we have achieved; and (ii) strong retention.

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NPE increases in First Quarter 2013 were consistent with the fluctuations in NPW for the twelve-month period ended March 31, 2013 as compared to the twelve-month period ended March 31, 2012.

The combined ratio improved by 3.3 points to 97.1%, compared to First Quarter 2012. This improvement reflects the earning of renewal pure price increases that averaged 6.3% in our Standard Insurance Operations in 2012 and exceeded loss trends by approximately 3.0 points.

Outlook
In their 2012 year-end review, A.M. Best and Company ("A.M. Best") projected an industry combined ratio of 101.2% for 2013. This projection reflects a more normal level of catastrophe losses as well as the impact of pricing improvements that were achieved in 2012 and are expected to continue in 2013. However, A.M. Best expects that the industry's performance will remain challenged by the continuing sluggish macroeconomic environment, which includes persisting low investment yields, a reduced level of loss reserve redundancies, and the lingering effects of the soft market conditions that have prevailed in recent years.

For 2013, we expect to achieve a statutory combined ratio of 96% excluding catastrophes and any favorable or unfavorable prior year development. Our estimate for catastrophe losses in 2013 is three points. In addition, we expect our E&S Insurance Operations to produce a combined ratio between 100% and 102% for 2013 and be at profitability levels similar to our Standard Insurance Operations in 2014. We also expect to achieve a three-year overall statutory combined ratio of 92% by year-end 2014 excluding three points of expected catastrophe losses. Our Insurance Subsidiaries reported a statutory combined ratio of 96.4%, excluding catastrophe losses, for First Quarter 2013, reflecting 1.3 points for the Retirement Income Plan curtailment.
 
A key component of meeting our combined ratio targets is our ability to generate Commercial Lines renewal pure price increases in excess of our predicted loss trends. Although A.M. Best is maintaining its negative outlook for the commercial lines market, it does anticipate that sustained pricing momentum will continue in 2013. We achieved renewal pure price increases of 7.5% for standard Commercial Lines and 8.5% for standard Personal Lines in First Quarter 2013. These increases demonstrate the overall strength of the relationships that we have with our independent retail agents, even in difficult economic and competitive times. As the marketplace continues to drive price, we will continue to capitalize on our relationships with our agents to generate on-going renewal price increases through the use of our granular pricing capabilities.

In maintaining their negative outlook for the commercial lines marketplace, A.M. Best cited an expectation that the continuing sluggish macroeconomic environment, including low investment yields, reduced levels of loss reserve redundancies, and the lingering effects of the soft market conditions will lead to more negative rating actions than positive actions in 2013. The continued low interest rate environment has several significant impacts on our business, some of which are beneficial and some of which present a challenge to us. The benefits include lower inflation rates that suppress loss trends, as well as reduce our cost of capital. However, the low interest rate environment presents a significant challenge in generating after-tax returns on our investment portfolio as fixed income securities mature and money is re-invested at lower rates. As a result, for 2013, we anticipate after-tax investment income of approximately $90 to $95 million, lower than the $100 million we earned on an after-tax basis in 2012. Through First Quarter 2013, we achieved after-tax investment income of approximately $25 million, which was flat with First Quarter 2012.

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Results of Operations and Related Information by Segment
 
Insurance Operations
 
Standard Insurance Operations
Our Standard Insurance Operations segment, which represents 93% of our combined insurance operations NPW, sells insurance products and services primarily in 22 states in the Eastern and Midwestern U.S. and the District of Columbia, through approximately 1,100 independent retail insurance agencies. This segment consists of two components: (i) Commercial Lines, which markets primarily to businesses and represents approximately 81% of the segment's NPW; and (ii) Personal Lines, including our flood business, which markets primarily to individuals and represents approximately 19% of the segment's NPW.
 
 
Quarter ended March 31,
 
 
 
 
($ in thousands)
 
2013
 
2012
 
Change % or Points
 
 
GAAP Insurance Operations Results:
 
 
 
 
 
 
NPW
 
$
421,744

 
394,377

 
7

 
%
NPE
 
390,881

 
369,106

 
6

 
 
Less:
 
 
 
 

 
 
 
 
Loss and loss expense incurred
 
250,731

 
245,439

 
2

 
 
Net underwriting expenses incurred
 
126,989

 
119,223

 
7

 
 
Dividends to policyholders
 
1,086

 
914

 
19

 
 
Underwriting gain
 
$
12,075

 
3,530

 
242

 
%
GAAP Ratios:
 
 
 
 

 
 
 
 
Loss and loss expense ratio
 
64.1

%
66.5

 
(2.4
)
 
pts 
Underwriting expense ratio
 
32.5

 
32.3

 
0.2

 
 
Dividends to policyholders ratio
 
0.3

 
0.2

 
0.1

 
 
Combined ratio
 
96.9

 
99.0

 
(2.1
)
 
 
Statutory Ratios:
 
 
 
 

 
 
 
 
Loss and loss expense ratio1
 
64.2

 
66.5

 
(2.3
)
 
 
Underwriting expense ratio1
 
32.3

 
31.3

 
1.0

 
 
Dividends to policyholders ratio
 
0.3

 
0.2

 
0.1

 
 
Combined ratio1
 
96.8

%
98.0

 
(1.2
)
 
pts 
1 
Includes 0.3 points in the loss and loss expense ratio, 1.1 points in the underwriting ratio and 1.4 points in the combined ratio related to the Retirement Income Plan amendments that curtail the accrual of additional benefits for all eligible employees participating in the plans after March 31, 2016.

The improvements in NPW from First Quarter 2012 to First Quarter 2013 are primarily the result of the following:
 
 
Quarter ended March 31, 2013
 
 
Quarter ended March 31, 2012
 
($ in millions)
 
Renewal Pure Price Increase
 
Retention
 
 
Renewal Pure Price Increase
 
Retention
 
Standard Commercial Lines
 
7.5
%
83
%
 
5.1
%
83
%
Standard Personal Lines
 
8.5
 
87
 
 
5.9
 
87
 

NPE increases in First Quarter 2013 were consistent with the fluctuations in NPW for the twelve-month period ended March 31, 2013 as compared to the twelve-month period ended March 31, 2012.


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The GAAP loss and loss expense ratio improved in First Quarter 2013 by 2.4 points compared to First Quarter 2012. The improvement in the ratio reflects the earning of renewal pure price increases that averaged 6.3% in our Standard Insurance Operations in 2012 and exceeded loss trends by approximately 3 points. The following variances are included in the GAAP loss and loss expense ratio despite not having a material impact on the loss and loss expense ratio:

 
First Quarter 2013
 
 
First Quarter 2012
 
 
($ 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
$
1.3

0.3

pts
 
6.9

1.9

pts
(1.6
)
Non-catastrophe property losses
60.7

15.5

 
 
50.6

13.7

 
1.8

Favorable prior year casualty development
2

0.6

 
 
3

0.8

 
(0.2
)

The breakdown of favorable prior year casualty development by line of business is as follows:
Favorable/(Unfavorable) Prior Year Casualty Development
 
Quarter ended March 31,
 
($ in millions)
 
2013
 
2012
 
General liability
 
$
4

 

 
Commercial automobile
 

 
1

 
Workers compensation
 
(8
)
 

 
Businessowners' policies
 
3

 
1

 
Homeowners
 
2

 
1

 
Personal automobile
 
1

 

 
Total favorable impact on loss ratio
 
$
2

 
$
3

 
 
 
 
 
 
 
Favorable impact on loss ratio
 
0.6

pts
0.8

pts.
 
 
 
 
 
 

While the GAAP underwriting expense ratio remained relatively flat compared to last year, the statutory underwriting ratio increased by 1.0 points. This increase was driven by the amendments to the Retirement Income Plan that curtail the accrual of additional benefits for all employees eligible to participate in the plans after March 31, 2016. On a statutory basis, this curtailment resulted in expense of $5.8 million, or 1.4 points, of which $4.5 million, or 1.1 points, is classified as underwriting expense. The curtailment had no impact to expense on a GAAP basis during First Quarter 2013. For additional information regarding the curtailment, refer to Note 10. "Retirement Plans" in Item 1. "Financial Statements" of this Form 10-Q.


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Table of Contents

Review of Underwriting Results by Line of Business
 
Standard Commercial Lines
 
 
 
 
 
 
 
 
 
Quarter ended March 31,
 
Change % or
 
($ in thousands)
 
2013
 
2012
 
Points
 
GAAP Insurance Operations Results:
 
 

 
 

 
 

 
NPW
 
$
353,189

 
328,831

 
7

%
NPE
 
317,845

 
300,497

 
6

 
Less:
 
 
 
  

 
 

 
Loss and loss expense incurred
 
203,139

 
197,806

 
3

 
Net underwriting expenses incurred
 
107,518

 
101,368

 
6

 
Dividends to policyholders
 
1,086

 
914

 
19

 
Underwriting income
 
$
6,102

 
409

 
1,392

%
GAAP Ratios:
 
 

 
 

 
 

 
Loss and loss expense ratio
 
63.9

%
65.8

 
(1.9
)
pts
Underwriting expense ratio
 
33.9

 
33.8

 
0.1

 
Dividends to policyholders ratio
 
0.3

 
0.3

 

 
Combined ratio
 
98.1

 
99.9

 
(1.8
)
 
Statutory Ratios:
 
 

 
 

 
 

 
Loss and loss expense ratio1
 
63.9

 
65.8

 
(1.9
)
 
Underwriting expense ratio1
 
33.4

 
31.9

 
1.5

 
Dividends to policyholders ratio1
 
0.3

 
0.3

 

 
Combined ratio
 
97.6

%
98.0

 
(0.4
)
pts
1
Includes 0.4 points in the loss and loss expense ratio, 1.0 points in the underwriting ratio, and 1.4 points in the combined ratio related to the Retirement Income Plan amendments that curtail the accrual of additional benefits for all employees eligible to participate in the plans after March 31, 2016.

The increase in NPW in First Quarter 2013 compared to First Quarter 2012 is primarily the result of the following:
 
 
Quarter ended March 31,

 
2013
 
2012
Retention
 
83

%
83

Renewal pure price increases
 
7.5

 
5.1


NPE increases in First Quarter 2013 were consistent with the fluctuations in NPW for the twelve-month period ended March 31, 2013 compared to the twelve-month period ended March 31, 2012.

The GAAP loss and loss expense ratio improved in First Quarter 2013 by 1.9 points compared to First Quarter 2012. The improvement in the ratio reflects the earning of renewal pure price increases that averaged 6.2% in our standard Commercial Lines in 2012 and exceeded loss trends by approximately 3 points. The following variances also impacted the GAAP loss and loss expense ratio as follows:
 
First Quarter 2013
 
 
First Quarter 2012
 
 
 
($ in millions)
Losses Incurred
Impact on
Loss Ratio
 
 
Losses Incurred
Impact on
 Loss Ratio
 
Change in Ratio
 
Catastrophe losses
$
0.7

0.2

pts
 
3.9

1.3

pts
(1.1
)
pts
Non-catastrophe property losses
37.0

11.6

 
 
32.3

10.7

 
0.9

 
Favorable/(unfavorable) prior year casualty development
-

0.1

 
 
2

0.6

 
(0.5
)
 

The increase in the statutory underwriting expense ratio in First Quarter 2013 compared to First Quarter 2012 was driven by the Retirement Income Plan amendments that resulted in an increase to the ratio of 1.0 points.


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Table of Contents

The following is a discussion of our most significant standard Commercial Lines of business:
General Liability
 
 
Quarter ended March 31,
 
 
 
($ in thousands)
 
2013
 
2012
 
Change
% or
Points
 
Statutory NPW
 
109,405

 
100,628

 
9

%
  Direct new business
 
19,781

 
19,087

 
4

 
  Retention
 
83

%
83

 

pts
  Renewal pure price increases
 
8.5

%
5.8

 
2.7

 
Statutory NPE
 
97,703

 
90,143

 
8

%
Statutory combined ratio
 
95.9

%
100.2

 
(4.3
)
pts
% of total statutory standard commercial NPW
 
31

%
31

 
 

 
The growth in NPW and NPE for our general liability business in First Quarter 2013 and First Quarter 2012 reflect: (i) renewal pure price increases; (ii) strong retention; and (iii) higher new business.

The statutory combined ratio improvement was due to: (i) the impact of favorable prior year casualty development in First Quarter 2013 of 4.1 points compared to no prior year development in First Quarter 2012; and (ii) the impact of earned renewal pure price increases that have exceeded loss cost trends. Partially offsetting these items was the impact of the Retirement Income Plan curtailment, which increased the overall combined ratio by 1.3 points.

Commercial Automobile
 
 
Quarter ended March 31,
 
 
 
($ in thousands)
 
2013
 
2012
 
Change
% or
Points
 
Statutory NPW
 
$
81,872

 
75,838

 
8

%
  Direct new business
 
14,904

 
14,691

 
1

 
  Retention
 
83

%
83

 

pts
  Renewal pure price increases
 
7.0

%
4.0

 
3.0

 
Statutory NPE
 
74,347

 
70,484

 
5

%
Statutory combined ratio
 
98.0

%
96.6

 
1.4

pts
% of total statutory standard commercial NPW
 
23

%
23

 
 

 

Renewal pure price increases coupled with strong retention drove the improvement in NPW and NPE in First Quarter 2013 compared to First Quarter 2012. The increase in the statutory combined ratio was driven by: (i) the impact of having no prior year casualty development in First Quarter 2013, while First Quarter 2012 had 1.4 points of favorable development; and (ii) 1.3 points related to the Retirement Income Plan curtailment in First Quarter 2013.

Workers Compensation
 
 
Quarter ended March 31,
 
 
 
($ in thousands)
 
2013
 
2012
 
Change
% or
Points
 
Statutory NPW
 
$
75,405

 
73,188

 
3

%
  Direct new business
 
13,879

 
15,402

 
(10
)
 
  Retention
 
82

%
80

 
2

pts
  Renewal pure price increases
 
8.1

%
6.9

 
1.2

 
Statutory NPE
 
66,084

 
65,811

 

%
Statutory combined ratio
 
118.9

%
110.9

 
8.0

pts
% of total statutory standard commercial NPW
 
21

%
22

 
 

 

NPW increased 3% in First Quarter 2013 compared to First Quarter 2012, driven by renewal pure price increases and an increase in retention.

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Table of Contents

 
The increase in the statutory combined ratio was primarily attributable to the impact of prior year casualty development as follows:
First Quarter 2013 was unfavorable by 11.1 points, driven primarily by development on the 2012 accident yearand a single large claim prior to 2003; and
First Quarter 2012 reflects no prior year casualty development.

In addition, the Retirement Income Plan curtailment increased the workers compensation statutory combined ratio by 1.7 points.

Commercial Property
 
 
 
 
 
 
 
 
 
Quarter ended March 31,
 
 
 
($ in thousands)
 
2013
 
2012
 
Change
% or
Points
 
Statutory NPW
 
$
57,760

 
53,027

 
9

%
  Direct new business
 
14,385

 
14,183

 
1

 
  Retention
 
82

%
82

 

pts
  Renewal pure price increases
 
5.6

%
3.9

 
1.7

 
Statutory NPE
 
53,415

 
49,371

 
8

%
Statutory combined ratio
 
86.6

%
83.9

 
2.7

pts
% of total statutory standard commercial NPW
 
16

%
16

 
 

 

NPW increased in First Quarter 2013 compared to First Quarter 2012, primarily due to: (i) new business; (ii) renewal pure price increases; and (iii) retention.

The increase in the statutory combined ratio in First Quarter 2013 compared to First Quarter 2012 was due to: (i) an increase in non-catastrophe property losses of $2.1 million, or 1.1 points; (ii) the Retirement Income Plan curtailment expense, which added 1.5 points; and (iii) an increase in catastrophe losses of $0.5 million, or 0.6 points.

Standard Personal Lines
 
 
 
 
 
 
 
 
 
 
Quarter ended March 31,
 
 
 
 
($ in thousands)
 
2013
 
2012
 
Change % or Points
 
 
GAAP Insurance Operations Results:
 
 

 
 

 
 

 
 
NPW
 
$
68,555

 
65,546

 
5

 
%
NPE
 
73,036

 
68,609

 
6

 
 
Less:
 
 
 
 

 
 
 
 
Loss and loss expense incurred
 
47,592

 
47,633

 

 
 
Net underwriting expenses incurred
 
19,471

 
17,855

 
9

 
 
Underwriting gain
 
$
5,973

 
3,121

 
91

 
%
GAAP Ratios:
 
 
 
 

 
 
 
 
Loss and loss expense ratio
 
65.2

%
69.4

 
(4.2
)
 
pts
Underwriting expense ratio
 
26.6

 
26.1

 
0.5

 
 
Combined ratio
 
91.8

 
95.5

 
(3.7
)
 
 
Statutory Ratios:
 
 
 
 

 
 
 
 
Loss and loss expense ratio1
 
65.3

 
69.4

 
(4.1
)
 
 
Underwriting expense ratio1
 
27.1

 
28.3

 
(1.2
)
 
 
Combined ratio1
 
92.4

%
97.7

 
(5.3
)
 
pts
1 
Includes 0.1 points in the loss and loss expense ratio, 1.2 points in the underwriting ratio and 1.3 points in the combined ratio related to the Retirement Income Plan amendments that curtail the accrual of additional benefits for all employees eligible to participate in the plans after March 31, 2016.

The improvements in NPW in First Quarter 2013 compared to First Quarter 2012 are primarily the result of the following:

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Table of Contents

 
 
Quarter ended March 31,
 
($ in millions)
 
2013
 
2012
 
Retention
 
87
%
87
%
Renewal pure price increase
 
8.5
 
5.9
 

NPE increases in First Quarter 2013 were consistent with the fluctuations in NPW for the twelve-month period ended March 31, 2013 as compared to the twelve-month period ended March 31, 2012.

The variance in the loss and loss expense ratio was driven by premiums outpacing loss costs in First Quarter 2013 compared to First Quarter 2012 and the following:
 
First Quarter 2013
 
 
First Quarter 2012
 
 
($ 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
$
0.5

0.7

pts
 
3.0

4.4

pts
(3.7
)
Non-catastrophe property losses
23.8

32.5

 
 
18.4

26.8

 
5.7

Flood claims handling fees
(1.5
)
(2.1
)
 
 
(0.3
)
(0.4
)
 
(1.7
)
Favorable prior year casualty development
3

3.5

 
 
1

1.4

 
2.1


The decrease in the statutory underwriting expense ratio of 1.2 points was driven by: (i) higher direct premiums written in our flood business that, coupled with an increase in the flood expense allowance, increased our expense allowance earned by 1.4 points compared to First Quarter 2012; and (ii) the impact of renewal pure price increases that we have achieved over the last several years. Partially offsetting these items is the impact of the Retirement Income Plan curtailment, which increased the statutory underwriting expense ratio by 1.2 points.

E&S Insurance Operations
Our E&S Insurance Operations segment, which represents 7% of our combined insurance operations NPW, sells Commercial Lines insurance products and services in all 50 states and the District of Columbia through approximately 95 wholesale general agents. Insurance policies in this segment typically cover business risks with unique characteristics, such as the nature of the business or its claim history, that are difficult to profitably insure in the standard commercial lines market. 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 customized for specific risks.

 
 
Quarter ended March 31,
 
 
 
($ in thousands)
 
2013
 
2012
 
Change
% or
Points
 
GAAP Insurance Operations Results:
 
 

 
 

 
 

 
NPW
 
$
28,380

 
25,795

 
10

%
NPE
 
30,059

 
9,723

 
209

 
Less:
 
 

 
 

 
 

 
Loss and loss expense incurred
 
19,118

 
7,467

 
156

 
Net underwriting expenses incurred
 
10,855

 
7,149

 
52

 
Underwriting gain (loss)
 
$
86

 
(4,893
)
 
102

%
GAAP Ratios:
 
 

 
 

 
 

 
Loss and loss expense ratio
 
63.6

%
76.8

 
(13.2
)
pts
Underwriting expense ratio
 
36.1

 
73.5

 
(37.4
)
 
Combined ratio
 
99.7

 
150.3

 
(50.6
)
 
Statutory Ratios:
 
 

 
 

 
 

 
Loss and loss expense ratio
 
63.6

 
76.8

 
(13.2
)
 
Underwriting expense ratio
 
34.6

 
43.5

 
(8.9
)
 
Combined ratio
 
98.2

%
120.3

 
(22.1
)
pts

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Table of Contents


Our E&S business is a small operation whose combined ratios are significantly impacted by premium growth as well as volatility in loss and loss expenses and underwriting expenses. The improvement in the combined ratios in First Quarter 2013 was driven by: (i) earned premiums that now reflect the full operations of this business, which was not the case in First Quarter 2012, (ii) underwriting improvements, including renewal pure price increases of 8.5%, (iii) a decrease in initial start-up expenditures; and (iv) lower than anticipated supplemental commissions payment to our wholesale general agents of $1.1 million. The initial start-up expenses amounted to $1.1 million, or 11.2 points in First Quarter 2012 compared to $0.1 million, or 0.4 points in First Quarter 2013.

Investments
Our investment philosophy includes certain return and risk objectives for the fixed maturity, 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” approach. The primary fixed maturity 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, the high dividend yield strategy is designed to generate consistent dividend income while maintaining an expected tracking error to the Standard & Poor's Rating 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)
 
March 31, 2013
 
December 31, 2012
 
Change %
Total invested assets
 
$
4,421,792

 
4,330,019

 
2
 %
Unrealized gain – before tax
 
185,225

 
188,197

 
(2
)
Unrealized gain – after tax
 
120,396

 
122,328

 
(2
)
 
The increase in our investment portfolio compared to year-end 2012 was driven primarily by: (i) operating cash flows generated from our insurance operations; (ii) net proceeds from the issuance of 5.875% Senior Notes in February 2013 and the redemption of our 7.5% Junior Subordinated Notes due 2066 in March 2013; and (iii) interest income generated by the portfolio. The cash generated from our insurance operations segments, as well as net amounts generated from our capital management strategies executed in First Quarter 2013, were used to invest primarily in structured securities, as well as corporate and municipal bonds within our fixed maturity securities portfolio.

We 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:

 
 
March 31, 2013
 
December 31, 2012
U.S. government obligations
 
6
%
6
Foreign government obligations
 
1
 
1
State and municipal obligations
 
29
 
31
Corporate securities
 
35
 
34
Mortgage-backed securities (“MBS”)
 
15
 
14
Asset-backed securities (“ABS”)
 
4
 
3
Total fixed maturity securities
 
90
 
89
Equity securities
 
4
 
3
Short-term investments
 
4
 
5
Other investments
 
2
 
3
Total
 
100
%
100


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Table of Contents

Fixed Maturity Securities 
The average duration of the fixed maturity securities portfolio as of March 31, 2013 was 3.6 years, excluding short-term investments, compared to the Insurance Subsidiaries’ liability duration of approximately 3.9 years. The current duration of the fixed maturity 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 are experiencing continued pressure on the yields within our fixed maturity securities portfolio, as higher yielding bonds that are either maturing or have been sold are being replaced with lower yielding bonds that are currently available in the marketplace. We manage liquidity with a laddered maturity structure and an appropriate level of short-term investments to avoid liquidation of available-for-sale ("AFS") fixed maturity securities in the ordinary course of business. 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 maturity securities portfolio had a weighted average credit rating of “AA-” as of March 31, 2013. The following table presents the credit ratings of our fixed maturity securities portfolio:
 
Fixed Maturity Security Rating
 
March 31, 2013
 
December 31, 2012
Aaa/AAA
 
16
%
16
Aa/AA
 
46
 
47
A/A
 
26
 
25
Baa/BBB
 
11
 
10
Ba/BB or below
 
1
 
2
Total
 
100
%
100


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Table of Contents

The following table summarizes the fair value, unrealized gain (loss) balances, and the weighted average credit qualities of our AFS fixed maturity securities at March 31, 2013 and December 31, 2012:
 
 
March 31, 2013
 
December 31, 2012
($ in millions)
 
Fair
Value
 
Unrealized
Gain (Loss)
 
Weighted Average Credit Quality
 
Fair
Value
 
Unrealized
Gain (Loss)
 
Weighted Average Credit Quality
AFS Fixed Maturity Portfolio:
 
 

 
 

 
 
 
 

 
 

 
 
U.S. government obligations
 
$
245.7

 
15.9

 
 AA+
 
259.1

 
17.2

 
AA+
Foreign government obligations
 
30.2

 
1.4

 
 AA-
 
30.2

 
1.4

 
AA-
State and municipal obligations
 
849.9

 
39.6

 
 AA
 
818.0

 
44.1

 
AA
Corporate securities
 
1,532.8

 
76.4

 
 A
 
1,450.3

 
81.3

 
A
MBS
 
635.5

 
15.8

 
 AA
 
609.8

 
19.0

 
AA
ABS
 
171.9

 
1.9

 
 AAA
 
128.6

 
2.3

 
AAA
Total AFS fixed maturity portfolio
 
$
3,466.0

 
151.0

 
 AA-
 
3,296.0

 
165.3

 
AA-
State and Municipal Obligations:
 
 

 
 

 
 
 
 

 
 

 
 
General obligations
 
$
380.9

 
18.3

 
 AA+
 
352.3

 
20.5

 
AA+
Special revenue obligations
 
469.0

 
21.3

 
 AA
 
465.7

 
23.6

 
AA
Total state and municipal obligations
 
$
849.9

 
39.6

 
AA
 
818.0

 
44.1

 
AA
Corporate Securities:
 
 

 
 

 
 
 
 

 
 

 
 
Financial
 
$
422.3

 
21.1

 
 A
 
438.0

 
23.2

 
A
Industrials
 
125.5

 
8.0

 
 A-
 
104.2

 
7.4

 
A-
Utilities
 
134.2

 
6.6

 
 A-
 
124.2

 
6.6

 
BBB+
Consumer discretionary
 
173.6

 
8.1

 
 A-
 
134.7

 
8.3

 
BBB+
Consumer staples
 
168.1

 
8.0

 
 A
 
163.6

 
8.6

 
A
Healthcare
 
182.5

 
10.0

 
 A+
 
178.2

 
11.0

 
A+
Materials
 
87.1

 
4.8

 
 A-
 
71.9

 
4.6

 
A-
Energy
 
80.5

 
3.6

 
 A-
 
77.4

 
4.3

 
A-
Information technology
 
94.9

 
3.1

 
 A
 
100.1

 
3.2

 
A
Telecommunications services
 
56.1

 
2.3

 
 BBB+
 
46.7

 
2.8

 
BBB+
Other
 
8.0

 
0.8

 
 AA+
 
11.3

 
1.3

 
AA+
Total corporate securities
 
$
1,532.8

 
76.4

 
A
 
1,450.3

 
81.3

 
A
MBS:
 
 

 
 

 
 
 
 

 
 

 
 
Government guaranteed agency commercial mortgage-backed securities ("CMBS")
 
$
42.3

 
1.8

 
 AA+
 
48.9

 
2.3

 
AA+
Other agency CMBS
 
9.5

 

 
 AA+
 
1.2

 

 
AA+
Non-agency CMBS
 
94.8

 
0.6

 
 AA
 
87.1

 
1.1

 
AA-
Government guaranteed agency residential MBS ("RMBS")
 
85.0

 
2.9

 
 AA+
 
91.0

 
3.3

 
AA+
Non-agency RMBS
 
44.9

 
0.9

 
 A-
 
44.3

 
0.9

 
A-
Other agency RMBS
 
353.1

 
9.4

 
 AA+
 
331.3

 
11.3

 
AA+
Alternative-A (“Alt-A”) RMBS
 
5.9

 
0.2

 
 A+
 
6.0

 
0.1

 
AA-
Total MBS
 
$
635.5

 
15.8

 
AA
 
609.8

 
19.0

 
AA
ABS:
 
 

 
 

 
 
 
 

 
 

 
 
ABS
 
$
170.6

 
1.7

 
 AAA
 
127.2

 
2.0

 
AAA
Alt-A ABS2
 
0.8

 
0.1

 
 D
 
0.8

 
0.2

 
D
Sub-prime ABS1, 2
 
0.5

 
0.1

 
 D
 
0.6

 
0.1

 
D
Total ABS
 
$
171.9

 
1.9

 
AAA
 
128.6

 
2.3

 
AAA
1 
We define sub-prime exposure as exposure to direct and indirect investments in non-agency residential mortgages with average FICO® scores below 650. 
2 
Alt-A ABS and subprime ABS each consist of one security whose issuer is currently expected by rating agencies to default on its obligations.


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Table of Contents

The following tables provide information regarding our held-to-maturity (“HTM”) fixed maturity securities and their credit qualities at March 31, 2013 and December 31, 2012:
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
($ in millions)
 
Fair
Value
 
Carry
Value
 
Unrecognized Holding Gain (Loss)
 
Unrealized Gain (Loss) in Accumulated Other Comprehensive Income ("AOCI")
 
Total Unrealized/ Unrecognized Gain (Loss)
 
Weighted Average Credit Quality
HTM Portfolio:
 
 

 
 

 
 

 
 

 
 

 
 
Foreign government obligations
 
$
5.7

 
5.5

 
0.2

 
0.2

 
0.4

 
AA+
State and municipal obligations
 
481.2

 
454.3

 
26.9

 
5.6

 
32.5

 
AA
Corporate securities
 
39.6

 
35.3

 
4.3

 
(0.7
)
 
3.6

 
A
MBS
 
10.2

 
6.9

 
3.3

 
(1.1
)
 
2.2

 
AA
ABS
 
6.9

 
5.8

 
1.1

 
(1.0
)
 
0.1

 
A
Total HTM portfolio
 
$
543.6

 
507.8

 
35.8

 
3.0

 
38.8

 
AA
State and Municipal Obligations:
 
 

 
 

 
 

 
 

 
 

 
 
General obligations
 
$
160.1

 
152.1

 
8.0

 
3.1

 
11.1

 
AA
Special revenue obligations
 
321.1

 
302.2

 
18.9

 
2.5

 
21.4

 
AA
Total state and municipal obligations
 
$
481.2

 
454.3

 
26.9

 
5.6

 
32.5

 
AA
Corporate Securities:
 
 

 
 

 
 

 
 

 
 

 
 
Financial
 
$
9.6

 
8.5

 
1.1

 
(0.5
)
 
0.6

 
BBB+
Industrials
 
11.8

 
10.3

 
1.5

 
(0.2
)
 
1.3

 
A+
Utilities
 
15.1

 
13.4

 
1.7

 
(0.1
)
 
1.6

 
A+
Consumer discretionary
 
3.1

 
3.1

 

 
0.1

 
0.1

 
AA
Total corporate securities
 
$
39.6

 
35.3

 
4.3

 
(0.7
)
 
3.6

 
A
MBS:
 
 

 
 

 
 

 
 

 
 

 
 
Non-agency CMBS
 
$
10.2

 
6.9

 
3.3

 
(1.1
)
 
2.2

 
AA
Total MBS
 
$
10.2

 
6.9

 
3.3

 
(1.1
)
 
2.2

 
AA
ABS:
 
 

 
 

 
 

 
 

 
 

 
 
ABS
 
$
4.4

 
4.0

 
0.4

 
(0.2
)
 
0.2

 
BBB+
Alt-A ABS
 
2.5

 
1.8

 
0.7

 
(0.8
)
 
(0.1
)
 
AAA
Total ABS
 
$
6.9

 
5.8

 
1.1

 
(1.0
)
 
0.1

 
A
 



40

Table of Contents

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 

 
($ in millions)
 
Fair
Value
 
Carry
Value
 
Unrecognized Holding Gain (Loss)
 
Unrealized Gain (Loss) in AOCI
 
Total Unrealized/ Unrecognized Gain (Loss)
 
Weighted Average Credit Quality
HTM Portfolio:
 
 

 
 

 
 

 
 

 
 

 
 
Foreign government obligations
 
$
5.9

 
5.5

 
0.4

 
0.2

 
0.6

 
AA+
State and municipal obligations
 
526.9

 
498.0

 
28.9

 
6.8

 
35.7

 
AA
Corporate securities
 
42.1

 
37.5

 
4.6

 
(0.8
)
 
3.8

 
A
MBS
 
12.7

 
7.2

 
5.5

 
(1.2
)
 
4.3

 
AA-
ABS
 
7.1

 
5.9

 
1.2

 
(1.1
)
 
0.1

 
A
Total HTM portfolio
 
$
594.7

 
554.1

 
40.6

 
3.9

 
44.5

 
AA
State and Municipal Obligations:
 
 

 
 

 
 

 
 

 
 

 
 
General obligations
 
$
174.4

 
166.0

 
8.4

 
3.8

 
12.2

 
AA
Special revenue obligations
 
352.5

 
332.0

 
20.5

 
3.0

 
23.5

 
AA
Total state and municipal obligations
 
$
526.9

 
498.0

 
28.9

 
6.8

 
35.7

 
AA
Corporate Securities:
 
 

 
 

 
 

 
 

 
 

 
 
Financial
 
$
9.6

 
8.3

 
1.3

 
(0.7
)
 
0.6

 
BBB+
Industrials
 
11.9

 
10.4

 
1.5

 
(0.2
)
 
1.3

 
A+
Utilities
 
15.1

 
13.4

 
1.7

 

 
1.7

 
A+
Consumer discretionary
 
3.5

 
3.4

 
0.1

 
0.1

 
0.2

 
AA
Materials
 
2.0

 
2.0

 

 

 

 
BBB
Total corporate securities
 
$
42.1

 
37.5

 
4.6

 
(0.8
)
 
3.8

 
A
MBS:
 
 

 
 

 
 

 
 

 
 

 
 
Non-agency CMBS
 
$
12.7

 
7.2

 
5.5

 
(1.2
)
 
4.3

 
AA-
Total MBS
 
$
12.7

 
7.2

 
5.5

 
(1.2
)
 
4.3

 
AA-
ABS:
 
 

 
 

 
 

 
 

 
 

 
 
ABS
 
$
4.7

 
4.2

 
0.5

 
(0.3
)
 
0.2

 
BBB+
Alt-A ABS
 
2.4

 
1.7

 
0.7

 
(0.8
)
 
(0.1
)
 
AAA
Total ABS
 
$
7.1

 
5.9

 
1.2

 
(1.1
)
 
0.1

 
A
 
A portion of our AFS and HTM municipal bonds contain insurance enhancements. The following table provides information regarding these insurance-enhanced securities as of March 31, 2013:

Insurers of Municipal Bond Securities
 
 
 
 
 
 
($ in thousands)
 
Fair Value
 
Ratings
 with
Insurance
 
Ratings
without
Insurance
National Public Finance Guarantee Corporation, a subsidiary of MBIA, Inc.
 
$
290,390

 
AA-
 
AA-
Assured Guaranty
 
173,229

 
AA
 
AA-
Ambac Financial Group, Inc.
 
83,812

 
AA-
 
AA-
Other
 
8,852

 
AA
 
A+
Total
 
$
556,283

 
AA-
 
AA-
 
To manage and mitigate exposure, we perform analysis on MBS both at the time of purchase and as part of the ongoing portfolio evaluation. This analysis includes review of average FICO® scores, loan-to-value ratios, geographic spread of the assets securing the bond, delinquencies in payments for the underlying mortgages, gains/losses on sales, evaluations of projected cash flows, as well as other information that aids in determining the health of the underlying assets. We also consider the overall credit environment, economic conditions, total projected return on the investment, and overall asset allocation of the portfolio in our decisions to purchase or sell structured securities.



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Table of Contents

The following table details the top 10 state exposures of the municipal bond portion of our fixed maturity securities portfolio at March 31, 2013:
State Exposures of Municipal Bonds 
 
 
 
 
 
 
 
 
 
 
General Obligation
 
Special
Revenue
 
Fair
Value
 
Weighted Average Credit Quality
($ in thousands)
 
Local
 
State
 
 
 
Texas
 
$
70,631

 
1,113

 
43,245

 
114,989

 
AA+
Washington
 
43,178

 
7,114

 
51,270

 
101,562

 
AA
New York
 
7,281

 

 
71,276

 
78,557

 
AA+
Arizona
 
8,320

 

 
58,799

 
67,119

 
AA
Florida
 

 
9,885

 
52,441

 
62,326

 
AA-
Colorado
 
33,168

 

 
21,680

 
54,848

 
AA-
Ohio
 
13,050

 
13,893

 
20,459

 
47,402

 
AA+
North Carolina
 
13,651

 
6,166

 
24,015

 
43,832

 
AA
California
 
3,445

 

 
34,528

 
37,973

 
AA-
Missouri
 
16,725

 

 
20,233

 
36,958

 
AA+
Other
 
122,776

 
118,220

 
335,551

 
576,547

 
AA
 
 
332,225

 
156,391

 
733,497

 
1,222,113

 
AA
Pre-refunded/escrowed to maturity bonds
 
46,996

 
7,816

 
54,158

 
108,970

 
AA+
Total
 
$
379,221

 
164,207

 
787,655

 
1,331,083

 
AA
 
There has been concern regarding the stress on state and local governments emanating from declining revenues, large unfunded liabilities, and entrenched cost structures. We are comfortable with the quality, composition, and diversification of our $1.3 billion municipal bond portfolio.  Our municipal bond portfolio is very high quality with an average AA rating and is well laddered with 44% maturing within three years, and another 23% maturing between three and five years. The weightings of the municipal bond portfolio are: (i) 59% of high-quality revenue bonds that have dedicated revenue streams; (ii) 29% of local general obligation bonds; and (iii) 12% of state general obligation bonds. In addition, approximately 8% of the municipal bond portfolio has been pre-refunded, meaning assets have been placed in trust to fund the debt service and maturity of the bonds. Our largest state exposure is to Texas, at 9% excluding the impact of pre-refunded bonds.  Of the $71 million in local Texas general obligation bonds, $26 million represents investments in Texas Permanent School Fund bonds, which are considered to have lower risk.
 
The sector composition and credit quality of our special revenue bonds did not significantly change from December 31, 2012. For details regarding our special revenue bond sectors and additional information regarding credit risk associated with our portfolio, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.” of our 2012 Annual Report.

Our top Eurozone exposures as of March 31, 2013 were as follows:
 
March 31, 2013
 
 
 
 
 
 
 
 
($ in millions)
 
Corporate Securities
 
Government Securities
 
Equity Securities
 
Total Exposure
Country:
 
 

 
 

 
 

 
 

Netherlands
 
$
9.2

 

 
1.3

 
10.5

Luxembourg
 
8.6

 

 

 
8.6

Germany
 

 
5.7

 

 
5.7

Ireland
 

 

 
4.7

 
4.7

France
 
2.7

 

 

 
2.7

Total
 
$
20.5

 
5.7

 
6.0

 
32.2


Uncertainty about the ability of certain sovereign issuers to fully repay their debt triggered significant turbulence in global financial markets in 2012 and continues to cause market volatility in 2013.  The sovereign debt crisis has been particularly concentrated in the Eurozone, and a number of member countries have been repeatedly downgraded by the major ratings agencies.  The crisis has placed strains on the stability of the Euro currency, as the European Central Bank struggles to supply liquidity to member nations and their banks.  As of March 31, 2013, we had no direct exposure to issuers domiciled in Italy, Greece, Portugal, or Spain, four of the more economically troubled nations in the Eurozone. We do not own any derivative exposures such as credit default swaps.  Outside of the effect foreign economies have on the underlying investments, we have minimal exposure to Euro depreciation or appreciation.

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Equity Securities
Our equity securities portfolio was 4% of invested assets as of March 31, 2013, up slightly from year-end 2012, while dividend income remained flat in First Quarter 2013 compared to First Quarter 2012. In First Quarter 2013, we rebalanced our holdings within this portfolio, generating purchases of $41.4 million and sales of $35.6 million, with resulting net realized gains of $5.5 million.

Other Investments
As of March 31, 2013, other investments represented 2% of our total invested assets.  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
 
Remaining Commitment
($ in thousands)
 
March 31, 2013
 
December 31, 2012
 
March 31, 2013
Alternative Investments:
 
 
 
 
 
 
Secondary private equity
 
$
27,780

 
28,032

 
7,466

Energy/power generation
 
18,218

 
18,640

 
7,825

Private equity
 
17,732

 
18,344

 
4,697

Distressed debt
 
12,406

 
12,728

 
2,922

Real Estate
 
12,214

 
11,751

 
10,292

Mezzanine financing
 
12,179

 
12,692

 
21,337

Venture capital
 
7,370

 
7,477

 
400

Total alternative investments
 
107,899

 
109,664

 
54,939

Other securities
 
1,956

 
4,412

 
1,412

Total other investments
 
$
109,855

 
114,076

 
56,351


In addition to the capital that we have already invested to date, we are contractually obligated to invest up to an additional $56.4 million in our other investments portfolio through commitments that currently expire at various dates through 2022. For a description of our seven alternative investment strategies outlined above, as well as redemption, restrictions, and fund liquidations, refer to Note 5. “Investments” in Item 8. “Financial Statements and Supplementary Data.” of our 2012 Annual Report. In addition, for information on current year activity, refer to Note 5. "Investments" in Item 1. "Financial Statements" of this Form 10-Q.

Net Investment Income
The components of net investment income earned were as follows:
 
 
Quarter ended March 31,
($ in thousands)
 
2013
 
2012
Fixed maturity securities
 
$
30,089

 
31,350

Equity securities
 
1,207

 
1,237

Short-term investments
 
52

 
38

Other investments
 
3,602

 
2,000

Miscellaneous income
 

 
39

Investment expenses
 
(2,080
)
 
(2,036
)
Net investment income earned – before tax
 
32,870

 
32,628

Net investment income tax expense
 
(8,031
)
 
(7,853
)
Net investment income earned – after tax
 
$
24,839

 
24,775

Effective tax rate
 
24.4

%
24.1

Annual after-tax yield on fixed maturity securities
 
2.3

 
2.6

Annual after-tax yield on investment portfolio
 
2.3

 
2.4


Net investment income earned, before tax, remained consistent with First Quarter 2012. Higher income from our alternative investments within our other investment portfolio was primarily offset by the impact of lower reinvestment yields on our fixed maturity securities.


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Realized Gains and Losses
Realized Gains and Losses (excluding OTTI)
Realized gains and losses, by type of security excluding OTTI charges, are determined on the basis of the cost of specific investments sold and are credited or charged to income. The components of net realized gains were as follows:

 
 
Quarter ended March 31,
($ in thousands)
 
2013
 
2012
HTM fixed maturity securities
 
 
 
 
Gains
 
$

 
153

Losses
 
(37
)
 
(81
)
AFS fixed maturity securities
 


 
 

Gains
 
951

 
405

Losses
 
(253
)
 
(43
)
AFS equity securities
 


 
 

Gains
 
5,671

 
4,775

Losses
 
(168
)
 
(428
)
Short-term investments
 


 
 

Gains
 

 

Losses
 

 
(2
)
Other Investments
 
 
 
 
     Gains
 

 

     Losses
 
(860
)
 

Total other net realized investment gains
 
5,304

 
4,779

Total OTTI charges recognized in earnings
 
(1,949
)
 
(421
)
Total net realized gains
 
$
3,355

 
4,358


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.

In First Quarter 2013 and 2012, certain equity securities were sold at a loss that were in a continuous loss position for three months or less prior to their sale. The fair value of these securities as of their sale date was $2.2 million and $3.2 million in First Quarter 2013 and First Quarter 2012, respectively, with related net realized losses of $0.2 million and $0.3 million, respectively.

For additional discussion regarding realized gains and losses, see Note 5. “Investments” in Item 1. “Financial Statements” of this Form 10-Q.
 
Other-than-Temporary Impairments
The following table provides information regarding our OTTI charges recognized in earnings:
 
 
Quarter ended March 31,
($ in thousands)
 
2013
 
2012
AFS securities:
 
 
 
 

ABS
 
$

 
32

CMBS
 

 
108

RMBS
 
8

 
110

Total fixed maturity AFS securities
 
8

 
250

Equity securities
 
217

 
171

Total AFS securities
 
225

 
421

Other investments
 
1,724

 

Total OTTI charges recognized in earnings
 
$
2,174

 
842



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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. 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 discussion of our OTTI methodology, see Note 2. “Summary of Significant Accounting Policies” in Item 8. “Financial Statements and Supplementary Data.” of our 2012 Annual Report.

Unrealized/Unrecognized Losses
As evidenced by the table below, our unrealized/unrecognized loss positions increased by $1.2 million as of March 31, 2013 compared to December 31, 2012 as follows:
($ in thousands)
 
 
March 31, 2013
 
December 31, 2012
Number of Issues
% of Market/Book
Unrealized Unrecognized Loss
 
Number of
Issues
% of Market/Book
Unrealized Unrecognized Loss
174
80% - 99%
$
3,918

 
100
80% - 99%
2,701

1
60% - 79%
244

 
1
60% - 79%
233

40% - 59%

 
40% - 59%

20% - 39%

 
20% - 39%

0% - 19%

 
0% - 19%

 
 
$
4,162

 
 
 
2,934


We have reviewed the securities in the table above in accordance with our OTTI policy, which is discussed in Note 2. “Summary of Significant Accounting Policies” in Item 8. “Financial Statements and Supplementary Data.” of our 2012 Annual Report. We have concluded that these securities are temporarily impaired as of March 31, 2013. For additional information regarding the unrealized/unrecognized losses between our AFS and HTM portfolios, see Note 5. “Investments,” in Item 1. “Financial Statements” of this Form 10-Q.

Contractual Maturities
The following table presents amortized cost and fair value information for our AFS fixed maturity securities that were in an unrealized loss position at March 31, 2013 by contractual maturity:
($ in thousands)
 
Amortized
Cost
 
Fair
Value
One year or less
 
$
8,603

 
8,091

Due after one year through five years
 
132,199

 
131,379

Due after five years through ten years
 
228,779

 
226,496

Due after ten years
 
6,264

 
6,227

Total
 
$
375,845

 
372,193

 
The following table presents amortized cost and fair value information for our HTM fixed maturity securities that were in an unrealized/unrecognized loss position at March 31, 2013 by contractual maturity:
 
($ in thousands)
 
Amortized
Cost
 
Fair
Value
One year or less
 
$
901

 
888

Due after one year through five years
 
3,277

 
3,221

Total
 
$
4,178

 
4,109


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Federal Income Taxes
The following table provides information regarding federal income taxes from continuing operations:

 
Quarter ended
March 31,
($ in million)
2013
 
2012
Federal income tax expense from continuing operations
$
6.6

 
5.1

Effective tax rate
23
%
 
22


The increase in federal income tax expense in First Quarter 2013 compared to First Quarter 2012 was primarily due to an improvement in underwriting results as compared to last year. For a discussion of our underwriting results, see the "Results of Operations and Related Information by Segment" section above.

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 at March 31, 2013 was comprised of $43 million at Selective Insurance Group, Inc. (the “Parent”) and $121 million at the Insurance Subsidiaries. This amount was lower than our $215 million cash and short-term investment position at December 31, 2012, as we were previously maintaining higher liquid assets to fund claim payments related to Hurricane Sandy. As those claims continue to be paid, cash and short-term assets have declined. Short-term investments are generally maintained in AAA rated money market funds approved by the National Association of Insurance Commissioners. During First Quarter 2013, the Parent continued to build a fixed maturity security investment portfolio containing high-quality, highly-liquid government and corporate fixed maturity investments to generate additional yield. This portfolio amounted to $45 million at March 31, 2013 compared to $41 million at December 31, 2012.
 
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.

We currently anticipate the Insurance Subsidiaries will pay approximately $32 million in total dividends to the Parent in 2013, of which $12 million was paid through First Quarter 2013, including approximately $8 million of cash dividends that are deemed extraordinary under New Jersey insurance regulations. The determination of whether a dividend is considered ordinary or extraordinary is calculated over the most recent fiscal twelve-month period and is based on a regulatory threshold. One of our Insurance Subsidiaries, Selective Insurance Company of America ("SICA"), in the third quarter of 2012, paid an extraordinary dividend of $134 million that was used by the Parent to provide capitalization for other Insurance Subsidiaries, including two newly-formed New Jersey domiciled companies. Accordingly, SICA paid dividends above the ordinary dividend threshold over the past twelve months, and its First Quarter 2013 dividend is considered extraordinary. As of March 31, 2013, our allowable ordinary maximum dividend is approximately $107 million for 2013.
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 2012 Annual Report.
In First Quarter 2013, we issued $185 million of 5.875% Senior Notes due 2043. The Senior Notes pay interest on February 15, May 15, August 15, and November 15 of each year beginning on May 15, 2013, and on the date of maturity. The notes are callable by us on or after February 8, 2018, at a price equal to 100% of their principal amount, plus accrued and unpaid interest. A portion of the proceeds from this debt issuance was used to fully redeem the $100 million aggregate principal amount of our 7.5% Junior Subordinated Notes due 2066. Of the remaining net proceeds, $57.1 million was used to make capital contributions to the Insurance Subsidiaries while the balance was used for general corporate purposes. For additional information related to our outstanding debt, refer to Note 10. "Indebtedness" in Item 8. "Financial Statements and Supplementary Data" of our 2012 Annual Report.

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The Parent had no private or public issuances of stock during First Quarter 2013 or 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 Federal Home Loan Bank of Indianapolis ("FHLBI"), 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 $2.9 million provides them with the ability to borrow up to 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 5. "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 $496.7 million for SICSC and $380.5 million for SICSE as of December 31, 2012, for a borrowing capacity of approximately $88 million. As our outstanding borrowing with the FHLBI is currently $58 million, the Indiana Subsidiaries have the ability to borrow approximately $30 million more until the Line of Credit borrowing limit is met, of which $22 million could be loaned to the Parent 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 are laddered to continually provide a source of cash flows for claims payments in the ordinary course of business. The duration of the fixed maturity portfolio, excluding short-term investments, was 3.6 years as of March 31, 2013, while the liabilities of the Insurance Subsidiaries have a duration of 3.9 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.
 
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. Upcoming principal payments include $13 million in 2014 and $45 million in 2016. Subsequent to 2016, 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.

Short-term Borrowings
Our Line of Credit with Wells Fargo Bank, National Association, as administrative agent, and Branch Banking and Trust Company (BB&T), has 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 June 13, 2014. There were no balances outstanding under this credit facility at March 31, 2013 or at any time during First Quarter 2013.
 
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, minimum combined statutory surplus, and 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 investments and acquisitions; and (v) engage in transactions with affiliates. The Line of Credit 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. 
 

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The table below outlines information regarding certain of the covenants in the Line of Credit:

 
Required as of
March 31, 2013
Actual as of
March 31, 2013
Consolidated net worth
$838 million
$1.1 billion
Statutory surplus
Not less than $750 million
$1.2 billion
Debt-to-capitalization ratio1
Not to exceed 35%
25.8%
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 March 31, 2013, we had statutory surplus of $1.2 billion, GAAP stockholders’ equity of $1.1 billion, and total debt of $392.4 million, which equates to a debt-to-capital ratio of approximately 25.7%.
 
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 agents’ commissions, 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 $20.46 as of March 31, 2013 from $19.77 as of December 31, 2012, primarily driven by: (i) an after-tax increase in equity of $29.8 million, or $0.54 per share, which included $28.6 million from the curtailment and re-measurement of the Retirement Income Plan; and (ii) net income of $0.38 per share. Partially offsetting these increases was dividends paid to shareholders of $0.13 per share.

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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 2012, A.M. Best lowered our rating to “A (Excellent),” their third highest of 13 financial strength ratings, with a “stable” outlook. The change resulted from their assessment of our operating performance over the most recent five-year period relative to the commercial casualty composite index despite recognizing that recent performance has been negatively impacted by record catastrophic and weather-related losses. They cited our solid risk-adjusted capitalization, disciplined underwriting focus, increasing use of predictive modeling technology, and strong independent retail agency relationships in support of the “A (Excellent)” rating. We have been rated “A” or higher by A.M. Best for the past 82 years. A downgrade from A.M. Best to a rating below “A-” could: (i) affect our ability to write new business with customers and/or agents, 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; or (ii) be an event of default under our Line of Credit.

Ratings by other major rating agencies are as follows:

S&P - Our “A” financial strength rating was reaffirmed in the third quarter of 2012 by S&P, which cited our strong competitive position in Mid-Atlantic markets, financial flexibility, and relationships with independent agents. Our outlook was revised to “negative” reflecting a modest decline in available capital and increased charges for underwriting risk, asset risk, and property catastrophe exposure as measured by S&P's capital adequacy model.

Moody's Investor Service (“Moody's”) - Our "A2" financial strength rating was reaffirmed on February 4, 2013 by Moody's, which cited our strong regional franchise with established independent agency support, along with solid risk adjusted capitalization and strong invested asset quality. Our outlook was revised to negative, citing that our underwriting results have lagged similarly rated peers. 

Fitch Ratings ("Fitch") - Our “A+” rating and outlook of stable was reaffirmed in the fourth quarter of 2012, citing our conservative balance sheet with solid capitalization and reserve strength, strong independent agency relationships, and improved diversification through our continued efforts to reduce our concentration in New Jersey.  

Our S&P, Moody's, and Fitch financial strength and associated credit ratings affect our ability to access capital markets.  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 March 31, 2013 and December 31, 2012, we did not have any material relationships with unconsolidated entities or financial partnerships, such entities often 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.

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Contractual Obligations, Contingent Liabilities, and Commitments
Our future cash payments associated with loss and loss expense reserves, as well as contractual obligations pursuant to operating leases for office space and equipment, have not materially changed since December 31, 2012. Our future cash payments associated with contractual obligations pursuant to our notes payable as of March 31, 2013 are summarized below:
 
Contractual Obligations
Payment Due by Period
 
 
 
Less than
 
1-3
 
3-5
 
More than
($ in millions)
Total
 
1 year
 
Years
 
years
 
5 years
Notes payable
$
393.0

 

 
13.0

 
45.0

 
335.0

Interest on debt obligations
562.6

 
22.3

 
43.9

 
42.8

 
453.6

Total
$
955.6

 
22.3

 
56.9

 
87.8

 
788.6


We expect to have the capacity to repay and/or refinance all of our contractual obligations as they come due.

At March 31, 2013, we had contractual obligations that expire at various dates through 2022 that may require us to invest up to an additional $56.4 million in alternative and other investments. There is no certainty that any such additional investment will be required. 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 2012 Annual Report.

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 2012 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. Based on such 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 First Quarter 2013 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Table of Contents

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: (a) liability insurers defending or providing indemnity for third-party claims brought against insureds; or (b) 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.

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 could also 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 impact, if any, they might have on our business in the future. There have been no material changes from the risk factors disclosed in Item 1A. “Risk Factors.” in our 2012 Annual Report.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information regarding our purchases of our common stock in First Quarter 2013:

Period
 
Total Number of
Shares Purchased1
 
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
January 1 – 31, 2013
 
326

 
$
19.76

 

 

February 1 – 28, 2013
 
140,811

 
21.62

 

 

March 1 – 31, 2013
 
5,299

 
23.53

 

 

Total
 
146,436

 
$
21.68

 

 

1During First Quarter 2013, 146,436 shares were purchased from employees in connection with the vesting of restricted stock units. These repurchases were made to satisfy tax withholding obligations 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.

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Table of Contents

ITEM 5. OTHER INFORMATION
Our 2013 Annual Meeting of Stockholders was held on April 24, 2013. Voting was conducted in person and by proxy as follows:

(a) Stockholders voted to elect the following eleven nominees for a term of one year as follows:

 
For
Against
Abstain
Paul D. Bauer
44,547,623
1,487,310
73,009
Annabelle G. Bexiga
44,793,184
1,287,108
27,650
A. David Brown
44,196,759
1,759,632
151,551
John C. Burville
44,682,223
1,342,586
83,133
Joan M. Lamm-Tennant
44,432,051
1,626,321
49,570
Michael J. Morrissey
44,787,580
1,234,279
86,083
Gregory E. Murphy
44,103,469
1,924,296
80,177
Cynthia S. Nicholson
44,802,794
1,260,910
44,238
Ronald L. O'Kelly
44,763,541
1,261,009
83,392
William M. Rue
40,366,899
5,695,521
45,522
J. Brian Thebault
44,535,946
1,486,060
85,936

There were 3,494,731 broker non-votes for each nominee.

(b) Stockholders voted to approve a non-binding advisory resolution on the compensation of our named executive officers as disclosed in our Proxy Statement for the 2013 Annual Meeting of Stockholders. The votes were as follows: 43,413,593 shares voted for this proposal; 2,559,534 shares voted against it; and 134,815 shares abstained. There were 3,494,731 broker non-votes.

(c) Stockholders voted to ratify the appointment of KPMG LLP as our registered public accounting firm for the fiscal year ended December 31, 2013. The votes were as follows: 48,300,352 shares voted for this proposal; 546,708 shares voted against it; and 755,613 shares abstained.

 

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Item 6. EXHIBITS

(a) 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
April 25, 2013
Gregory E. Murphy
 
Chairman of the Board, President and Chief Executive Officer
 
 
 
By: /s/ Dale A. Thatcher
April 25, 2013
Dale A. Thatcher
 
Executive Vice President and Chief Financial Officer
 
(principal accounting officer and principal financial officer)
 
 



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