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Selective Insurance Group 10-Q 2010
Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:  June 30, 2010
or


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 report), and (2) has been subject to such filing requirements for the past 90 days.

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
    Large accelerated filer x
 
 Accelerated filer ¨
    Non-accelerated filer   ¨
 
 Smaller reporting company ¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨                      No x
As of June 30, 2010, there were 53,418,161 shares of common stock, par value $2.00 per share, outstanding.

 

 

SELECTIVE INSURANCE GROUP, INC.
Table of Contents
     
Page
No.
PART I.
FINANCIAL INFORMATION
   
       
Item 1.
Financial Statements
   
       
 
Consolidated Balance Sheets as of June 30, 2010 (Unaudited)
   
 
and December 31, 2009
 
1
       
 
Unaudited Consolidated Statements of Income for the
   
 
Quarter and Six Months Ended June 30, 2010 and 2009
 
2
       
 
Unaudited Consolidated Statements of Stockholders’ Equity for the
   
 
Six Months Ended June 30, 2010 and 2009
 
3
       
 
Unaudited Consolidated Statements of Cash Flow for the
   
 
Six Months Ended June 30, 2010 and 2009
 
4
       
 
Notes to Unaudited Interim Consolidated Financial Statements
 
5
       
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
       
 
Forward-Looking Statements
 
25
       
 
Introduction
 
25
       
 
Critical Accounting Policies and Estimates
 
25
       
 
Financial Highlights of Results for Second Quarter 2010 and Six Months 2010
 
26
       
 
Results of Operations and Related Information by Segment
 
28
       
 
Federal Income Taxes
 
50
       
 
Financial Condition, Liquidity, and Capital Resources
 
50
       
 
Ratings
 
52
       
 
Off-Balance Sheet Arrangements
 
53
       
 
Contractual Obligations and Contingent Liabilities and Commitments
 
53
       
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
54
       
Item 4.
Controls and Procedures
 
54
       
PART II.
OTHER INFORMATION
 
 
       
Item 1.
Legal Proceedings
 
54
       
Item 1A.
Risk Factors
 
55
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
58
       
Item 6.
Exhibits
 
59

 

 
 
PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
SELECTIVE INSURANCE GROUP, INC.
 
Unaudited
       
CONSOLIDATED BALANCE SHEETS
 
June 30,
   
December 31,
 
($ in thousands, except share amounts)
 
2010
   
2009
 
ASSETS
           
Investments:
           
Fixed maturity securities, held-to-maturity – at carry value
           
    (fair value:  $1,510,871 – 2010; $1,740,211 – 2009)
  $ 1,461,882       1,710,403  
Fixed maturity securities, available-for-sale – at fair value
               
    (amortized cost:  $1,798,996 – 2010; $1,616,456 – 2009)
    1,870,383       1,635,869  
Equity securities, available-for-sale – at fair value
               
    (cost of:  $59,859– 2010; $64,390 – 2009)
    60,988       80,264  
Short-term investments (at cost which approximates fair value)
    343,900       213,848  
Other investments
    153,475       140,667  
Total investments
    3,890,628       3,781,051  
Cash
    591       811  
Interest and dividends due or accrued
    34,865       34,651  
Premiums receivable, net of allowance for uncollectible
               
    accounts of:  $5,327 – 2010; $5,880 – 2009
    469,096       446,577  
Reinsurance recoverables, net
    287,191       276,018  
Prepaid reinsurance premiums
    104,383       105,522  
Current federal income tax
    21,826       17,662  
Deferred federal income tax
    101,085       111,038  
Property and equipment – at cost, net of accumulated
               
    depreciation and amortization of:  $146,998 – 2010; $141,251 – 2009
    43,014       46,287  
Deferred policy acquisition costs
    218,200       218,601  
Goodwill
    7,849       7,849  
Other assets
    48,206       68,760  
    Total assets
  $ 5,226,934       5,114,827  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Liabilities:
               
Reserve for losses and loss expenses
  $ 2,805,841       2,745,799  
Unearned premiums
    856,931       844,847  
Notes payable
    262,319       274,606  
Accrued salaries and benefits
    101,908       103,802  
Other liabilities
    150,431       143,398  
   Total liabilities
  $ 4,177,430       4,112,452  
                 
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:  96,094,756 – 2010; 95,822,959 – 2009
    192,190       191,646  
Additional paid-in capital
    239,341       231,933  
Retained earnings
    1,149,387       1,138,978  
Accumulated other comprehensive income (loss)
    17,826       (12,460 )
Treasury stock – at cost (shares:  42,676,595 – 2010; 42,578,779 – 2009)
    (549,240 )     (547,722 )
   Total stockholders’ equity
    1,049,504       1,002,375  
    Commitments and contingencies
               
    Total liabilities and stockholders’ equity
  $ 5,226,934       5,114,827  
 
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

 
1

 
 

SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
   
Quarter ended
   
Six Months ended
 
   
June 30,
   
June 30,
 
($ in thousands, except per share amounts)
 
2010
   
2009
   
2010
   
2009
 
Revenues:
                       
Net premiums earned
  $ 352,190       358,311       708,392       722,184  
Net investment income earned
    36,545       26,368       71,251       42,085  
Net realized (losses) gains:
                               
Net realized investment gains
    2,920       1,181       11,096       4,256  
Other-than-temporary impairments
    (6,162 )     (12,534 )     (12,235 )     (39,634 )
Other-than-temporary impairments on fixed maturity securities recognized in other comprehensive income
    (22 )     59       (2,189 )     59  
Total net realized losses
    (3,264 )     (11,294 )     (3,328 )     (35,319 )
Other income
    2,247       3,810       4,515       5,091  
Total revenues
    387,718       377,195       780,830       734,041  
                                 
Expenses:
                               
Losses and loss expenses incurred
    239,980       239,049       494,123       491,243  
Policy acquisition costs
    116,099       114,522       232,101       227,628  
Interest expense
    4,655       4,843       9,497       9,867  
Other expenses
    4,136       6,533       14,614       14,038  
Total expenses
    364,870       364,947       750,335       742,776  
                                 
Income (loss) from continuing operations, before federal income tax
    22,848       12,248       30,495       (8,735 )
                                 
Federal income tax expense (benefit):
                               
Current
    1,322       (1,631 )     10,166       4,244  
Deferred
    1,435       (1,479 )     (6,355 )     (15,387 )
Total federal income tax expense (benefit)
    2,757       (3,110 )     3,811       (11,143 )
                                 
Net income from continuing operations
    20,091       15,358       26,684       2,408  
                                 
Income from discontinued operations, net of tax of $53 for Second Quarter 2009 and $41 for Six Months 2009
    -       330       -       403  
Loss on disposal of discontinued operations, net of tax of $(713) for Second Quarter 2010 and $(1,139) for Six Months 2010
    (1,325 )     -       (2,115 )     -  
Total discontinued operations, net of tax
    (1,325 )     330       (2,115 )     403  
                                 
Net income
  $ 18,766       15,688       24,569       2,811  
                                 
Earnings per share:
                               
Basic net income from continuing operations
    0.37       0.29       0.50       0.04  
Basic net (loss) income from disposal of discontinued operations
    (0.02 )     0.01       (0.04 )     0.01  
Basic net income
  $ 0.35       0.30       0.46       0.05  
                                 
Diluted net income from continuing operations
    0.37       0.28       0.49       0.04  
Diluted net (loss) income from disposal of discontinued operations
    (0.02 )     0.01       (0.04 )     0.01  
Diluted net income
  $ 0.35       0.29       0.45       0.05  
                                 
Dividends to stockholders
  $ 0.13       0.13       0.26       0.26  

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

 
2

 
 

SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY
   
Six Months ended June 30,
 
($ in thousands, except per share amounts)
 
2010
   
2009
 
Common stock:
                       
Beginning of year
  $ 191,646             190,527        
Dividend reinvestment plan
                           
(shares:  53,272 – 2010; 70,839 – 2009)
    107             141        
Stock purchase and compensation plans
                           
(shares:  218,525 – 2010; 233,878 – 2009)
    437             468        
End of period
    192,190             191,136        
                             
Additional paid-in capital:
                           
Beginning of year
    231,933             217,195        
Dividend reinvestment plan
    733             751        
Stock purchase and compensation plans
    6,675             7,447        
End of period
    239,341             225,393        
                             
Retained earnings:
                           
Beginning of year
    1,138,978             1,128,149        
Cumulative effect adjustment due to adoption of other-than-temporary impairment guidance under ASC 320, net of deferred income tax
    -             2,380        
Net income
    24,569       24,569       2,811       2,811  
Cash dividends to stockholders ($0.26 per share – 2010; $0.26 per share – 2009)
    (14,160 )             (13,924 )        
End of period
    1,149,387               1,119,416          
                                 
Accumulated other comprehensive income (loss):
                               
Beginning of year
    (12,460 )             (100,666        
Cumulative-effect adjustment due to adoption of other-than-temporary impairment guidance under ASC 320, net of deferred income tax
    -               (2,380 )        
Other comprehensive income (loss), increase (decrease) in:
                               
Unrealized gains on investment securities:
                               
Non-credit portion of other-than-temporary impairment losses recognized in other comprehensive income, net of deferred income tax
    3,830               (18 )        
Other net unrealized gains on investment securities, net of deferred income tax
    25,044               60,306          
Total unrealized gains on investment securities
    28,874       28,874       60,288       60,288  
Defined benefit pension plans, net of deferred income tax
    1,412       1,412       571       571  
End of period
    17,826               (42,187 )        
Comprehensive income
            54,855               63,670  
                                 
Treasury stock:
                               
Beginning of year
    (547,722 )             (544,712 )        
Acquisition of treasury stock
                               
(shares:  97,816 – 2010; 170,540 – 2009)
    (1,518 )             (2,671 )        
End of period
    (549,240 )             (547,383 )        
Total stockholders’ equity
  $ 1,049,504               946,375          

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.

 
3

 


SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
   
Six Months ended
 
   
June 30,
 
($ in thousands)
 
2010
   
2009
 
Operating Activities
           
Net Income
  $ 24,569       2,811  
                 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    14,805       13,910  
Loss on disposal of discontinued operations
    2,115       -  
Stock-based compensation expense
    7,964       5,599  
Undistributed (income) losses of equity method investments
    (4,841 )     29,404  
Net realized losses
    3,328       35,319  
Postretirement life curtailment benefit
    -       (4,217 )
Unrealized gain on trading securities
    -       (262 )
Deferred tax benefit
    (6,355 )     (15,093 )
                 
Changes in assets and liabilities:
               
Increase in reserves for losses and loss expenses, net of reinsurance recoverables
    48,870       21,742  
Increase in unearned premiums, net of prepaid reinsurance and advance premiums
    13,252       18,894  
(Increase) decrease in net federal income tax recoverable
    (3,025 )     15,639  
Increase in premiums receivable
    (22,519 )     (17,697 )
Decrease (increase) in deferred policy acquisition costs
    401       (5,697 )
(Increase) decrease in interest and dividends due or accrued
    (206 )     1,086  
Decrease in accrued salaries and benefits
    (2,282 )     (14,573 )
Decrease in accrued insurance expenses
    (10,003 )     (7,703 )
Sale of trading securities
    -       2,831  
Other-net
    (7,862 )     (8,002 )
Net adjustments
    33,642       71,180  
Net cash provided by operating activities
    58,211       73,991  
                 
Investing Activities
               
Purchase of fixed maturity securities, held-to-maturity
    -       (157,752 )
Purchase of fixed maturity securities, available-for-sale
    (396,076 )     (512,726 )
Purchase of equity securities, available-for-sale
    (30,974 )     (75,609 )
Purchase of other investments
    (11,150 )     (10,595 )
Purchase of short-term investments
    (956,904 )     (1,160,667 )
Sale of subsidiary
    788       -  
Sale of fixed maturity securities, held-to-maturity
    -       5,622  
Sale of fixed maturity securities, available-for-sale
    128,110       371,667  
Sale of short-term investments
    826,853       1,163,746  
Redemption and maturities of fixed maturity securities, held-to-maturity
    171,900       123,213  
Redemption and maturities of fixed maturity securities, available-for-sale
    165,513       63,897  
Sale of equity securities, available-for-sale
    56,247       123,269  
Proceeds from other investments
    15,152       15,498  
Purchase of property and equipment
    (2,570 )     (2,986 )
Net cash used in investment activities
    (33,111 )     (53,423 )
                 
Financing Activities
               
Dividends to stockholders
    (12,999 )     (13,378 )
Acquisition of treasury stock
    (1,518 )     (2,671 )
Principal payment of notes payable
    (12,300 )     (12,300 )
Net proceeds from stock purchase and compensation plans
    2,310       2,402  
Excess tax benefits from share-based payment arrangements
    (813 )     (1,158 )
Net cash used in financing activities
    (25,320 )     (27,105 )
Net decrease in cash and cash equivalents
    (220 )     (6,537 )
Net decrease in cash and cash equivalents from discontinued operations
    -       (3,654 )
Net decrease in cash from continuing operations
    (220 )     (2,883 )
Cash from continuing operations, beginning of year
    811       3,606  
Cash from continuing operations, end of period
  $ 591       723  

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

 
4

 

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 property and casualty insurance products.  Selective Insurance Group, Inc. (referred to as the “Parent”) was incorporated in New Jersey in 1977 and its main offices are located in Branchville, New Jersey.  The Parent’s common stock is publicly traded on the NASDAQ Global Select Market under the symbol “SIGI.”

We classify our business into two operating segments:
 
·
Insurance Operations, which sells property and casualty insurance products and services primarily in 22 states in the Eastern and Midwestern U.S.; and
 
·
Investments.

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 Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported financial statement balances, as well as the disclosure of contingent assets and liabilities.  Actual results could differ from those estimates.  All significant intercompany accounts and transactions between the Parent and its subsidiaries are eliminated in consolidation.

These Financial Statements reflect all adjustments that, in our opinion, are normal, recurring, and necessary for a fair presentation of our results of operations and financial condition.  The Financial Statements cover the second quarters ended June 30, 2010 (“Second Quarter 2010”) and June 30, 2009 (“Second Quarter 2009”) and the six-month periods ended June 30, 2010 (“Six Months 2010”) and June 30, 2009 (“Six Months 2009”).  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, 2009 (“2009 Annual Report”).
 
NOTE 3.
Reclassification
Certain prior year amounts in these Financial Statements and related footnotes have been reclassified to conform to the current year presentation.  Such reclassifications had no effect on our net income, stockholders’ equity, or cash flows.
 
NOTE 4.
Adoption of Accounting Pronouncements
In December 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Update 2009-16, Transfers and Servicing (Topic 860) – Accounting for Transfers of Financial Assets.  This guidance:  (i) eliminates the concept of a qualifying “special-purpose entity”; (ii) alters the requirements for transferring assets off of the reporting company’s balance sheet; (iii) requires additional disclosure about a transferor’s involvement in transferred assets; and (iv) eliminates special treatment of guaranteed mortgage securitizations.  The adoption of this guidance, which was effective for fiscal years beginning after November 15, 2009, did not impact our financial condition or results of operations.
 
In December 2009, the FASB issued ASC Update 2009-17, Consolidations (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.  This guidance requires the reporting entity to perform a qualitative analysis that results in a variable interest entity (“VIE”) being consolidated if the reporting entity:  (i) has the power to direct activities of the VIE that significantly impact the VIE’s financial performance; and (ii) has an obligation to absorb losses or receive benefits that may be significant to the VIE.  This guidance further requires enhanced disclosures, including disclosure of significant judgments and assumptions as to whether a VIE must be consolidated, and how involvement with a VIE affects the company’s financial statements.  The adoption of this guidance, which was effective for fiscal years beginning after November 15, 2009, did not impact our financial condition or results of operations.

 
5

 

In January 2010, the FASB issued ASC Update 2010-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements.  This guidance requires:  (i) separate disclosure of significant transfers between Level 1 and Level 2 and reasons for the transfers; (ii) disclosure, on a gross basis, of purchases, sales, issuances, and net settlements within Level 3; (iii) disclosures by class of assets and liabilities; and (iv) a description of the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.  This guidance is effective for reporting periods beginning after December 15, 2009, except for the Level 3 disclosure requirements, which will be effective for fiscal years beginning after December 15, 2010 and interim periods within those fiscal years.  We have included the disclosures required by this guidance in our notes to the consolidated financial statements, where appropriate.

NOTE 5.
Statements of Cash Flow
Our cash paid (received) during the period for interest and federal income tax was as follows:
 
   
Six Months ended June 30,
 
($ in thousands)
 
2010
   
2009
 
Cash paid (received) during the period for:
           
Interest
  $ 9,649       10,004  
Federal income tax
    14,000       (10,500 )

NOTE 6.
Investments
(a) The carrying value, unrecognized holding gains and losses, and fair values of held-to-maturity (“HTM”) fixed maturity securities were as follows:
 
June 30, 2010
       
Net
                         
         
Unrealized
         
Unrecognized
   
Unrecognized
       
   
Amortized
   
Gains
   
Carrying
   
Holding
   
Holding
   
Fair
 
($ in thousands)
 
Cost
   
(Losses)
   
Value
   
Gains
   
Losses
   
Value
 
U.S. government and government agencies
  $ 96,554       5,101       101,655       4,978       -       106,633  
Obligations of state and political subdivisions
    1,045,033       27,185       1,072,218       23,952       (896 )     1,095,274  
Corporate securities
    94,400       (4,575 )     89,825       10,063       (427 )     99,461  
Asset-backed securities (“ABS”)
    19,855       (2,976 )     16,879       2,496       (16 )     19,359  
Commercial mortgage-backed securities (“CMBS”)1
    71,404       (9,362 )     62,042       6,866       (1,175 )     67,733  
Residential mortgage-backed securities (“RMBS”)2
    117,593       1,670       119,263       3,252       (104 )     122,411  
Total HTM fixed maturity securities
  $ 1,444,839       17,043       1,461,882       51,607       (2,618 )     1,510,871  
 
December 31, 2009
       
Net
                         
         
Unrealized
         
Unrecognized
   
Unrecognized
       
   
Amortized
   
Gains
   
Carrying
   
Holding
   
Holding
   
Fair
 
($ in thousands)
 
Cost
   
(Losses)
   
Value
   
Gains
   
Losses
   
Value
 
U.S. government and government agencies
  $ 139,278       5,555       144,833       1,694       (549 )     145,978  
Obligations of state and political
                                               
subdivisions
    1,167,461       33,951       1,201,412       14,833       (5,450 )     1,210,795  
Corporate securities
    104,854       (6,028 )     98,826       9,665       (913 )     107,578  
ABS
    35,025       (6,042 )     28,983       4,195       (82 )     33,096  
CMBS1
    107,812       (18,836 )     88,976       7,132       (3,658 )     92,450  
RMBS2
    146,124       1,249       147,373       3,153       (212 )     150,314  
Total HTM fixed maturity securities
  $ 1,700,554       9,849       1,710,403       40,672       (10,864 )     1,740,211  

1 CMBS includes government guaranteed agency securities with a carrying value of $10.3 million at June 30, 2010 and $10.8 million at December 31, 2009.
2 RMBS includes government guaranteed agency securities with a carrying value of $4.0 million at June 30, 2010 and $3.9 million at December 31, 2009.

 
6

 

Unrecognized holding gains/losses of HTM securities are not reflected in the consolidated financial statements, as they represent market 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 3.5 years as of June 30, 2010 and December 31, 2009.

(b) The cost/amortized cost, fair value, and unrealized gains (losses) of available-for-sale (“AFS”) securities were as follows:
 
June 30, 2010
                       
   
Cost/
                   
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
($ in thousands)
 
Cost
   
Gains
   
Losses
   
Value
 
U.S. government and government agencies1
  $ 383,161       9,454       -       392,615  
Obligations of states and political subdivisions
    441,307       24,285       (20 )     465,572  
Corporate securities
    616,030       33,358       (1,666 )     647,722  
ABS
    31,781       1,261       (331 )     32,711  
CMBS2
    83,088       3,978       (4,161 )     82,905  
RMBS3
    243,629       8,505       (3,276 )     248,858  
AFS fixed maturity securities
    1,798,996       80,841       (9,454 )     1,870,383  
AFS equity securities
    59,859       5,416       (4,287 )     60,988  
Total AFS securities
  $ 1,858,855       86,257       (13,741 )     1,931,371  
 
December 31, 2009
                       
   
Cost/
                   
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
($ in thousands)
 
Cost
   
Gains
   
Losses
   
Value
 
U.S. government and government agencies1
  $ 473,750       2,994       (1,210 )     475,534  
Obligations of states and political subdivisions
    359,517       20,419       (137 )     379,799  
Corporate securities
    365,500       15,330       (1,246 )     379,584  
ABS
    26,638       466       (57 )     27,047  
CMBS2
    93,514       1,746       (637 )     94,623  
RMBS3
    297,537       2,457       (20,712 )     279,282  
AFS fixed maturity securities
    1,616,456       43,412       (23,999 )     1,635,869  
AFS equity securities
    64,390       16,484       (610 )     80,264  
Total AFS securities
  $ 1,680,846       59,896       (24,609 )     1,716,133  

1 U.S. government includes corporate securities fully guaranteed by the Federal Depositary Insurance Corporation (“FDIC”) with a fair value of $121.7 million at June 30, 2010 and $136.2 million at December 31, 2009.
2 CMBS includes government guaranteed agency securities with a fair value of $73.7 million at June 30, 2010 and $94.6 million at December 31, 2009.
3 RMBS includes government guaranteed agency securities with a fair value of $95.6 million at June 30, 2010 and $105.2 million at December 31, 2009.

Unrealized gains/losses represent market value fluctuations from the later of:  (i) the date of security is designated as AFS; or (ii) the date that an OTTI charge is recognized on an AFS security, through the date of the balance sheet.  These unrealized gains and losses are recorded in accumulated other comprehensive income (“AOCI”) on the Consolidated Balance Sheets.
 
During Second Quarter 2010, 23 securities with a carrying value of $66.0 million in a net unrecognized gain position of $3.4 million were reclassified from the HTM category to AFS due to recent credit rating downgrades by either Moody’s Investors Service (“Moody’s”) or Standard and Poor’s Financial Services (“S&P”).  These rating downgrades raised significant concerns about the issuers’ credit worthiness, which changed our intention to hold these securities to maturity.

 
7

 

(c) The following tables summarize, for all securities in a net unrealized/unrecognized loss position at June 30, 2010 and December 31, 2009, the fair value and gross pre-tax net unrealized/unrecognized loss by asset class, and by length of time those securities have been in a net loss position:
 
June 30, 2010
 
Less than 12 months
   
12 months or longer1
 
($ in thousands)
 
Fair Value
   
Unrealized
Losses2
   
Fair Value
   
Unrealized
Losses2
 
AFS securities