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Selective Insurance Group 10-Q 2013
SIGI-9/30/2013-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
(Mark One)
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: September 30, 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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yesx           No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                                              Yeso          Nox
As of September 30, 2013, there were 55,774,851 shares of common stock, par value $2.00 per share, outstanding. 



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



PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
SELECTIVE INSURANCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
 
Unaudited
 
 
($ in thousands, except share amounts)
 
September 30,
2013
 
December 31,
2012
ASSETS
 
 

 
 

Investments:
 
 

 
 

Fixed maturity securities, held-to-maturity – at carrying value (fair value:  $448,529 – 2013; $594,661 – 2012)
 
$
421,962

 
554,069

Fixed maturity securities, available-for-sale – at fair value (amortized cost: $3,573,751 – 2013;
$3,130,683 – 2012)
 
3,633,432

 
3,296,013

Equity securities, available-for-sale – at fair value (cost:  $158,323 – 2013; $132,441 – 2012)
 
180,506

 
151,382

Short-term investments (at cost which approximates fair value)
 
172,087

 
214,479

Other investments
 
108,073

 
114,076

Total investments (Note 5)
 
4,516,060

 
4,330,019

Cash
 
177

 
210

Interest and dividends due or accrued
 
36,044

 
35,984

Premiums receivable, net of allowance for uncollectible accounts of:  $4,513 – 2013; $3,906 – 2012
 
569,214

 
484,388

Reinsurance recoverables, net
 
555,579

 
1,421,109

Prepaid reinsurance premiums
 
149,182

 
132,637

Current federal income tax
 
1,551

 
2,569

Deferred federal income tax
 
131,603

 
119,136

Property and equipment – at cost, net of accumulated depreciation and amortization of:
$176,718 – 2013; $169,428 – 2012
 
50,020

 
47,131

Deferred policy acquisition costs
 
177,211

 
155,523

Goodwill
 
7,849

 
7,849

Other assets
 
71,855

 
57,661

Total assets
 
$
6,266,345

 
6,794,216

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Liabilities:
 
 

 
 

Reserve for loss and loss expenses
 
$
3,316,291

 
4,068,941

Unearned premiums
 
1,111,539

 
974,706

Notes payable (Note 9)
 
392,407

 
307,387

Accrued salaries and benefits
 
116,682

 
152,396

Other liabilities
 
205,217

 
200,194

Total liabilities
 
$
5,142,136

 
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: 98,957,182 – 2013; 98,194,224 – 2012
 
197,914

 
196,388

Additional paid-in capital
 
284,067

 
270,654

Retained earnings
 
1,184,084

 
1,125,154

Accumulated other comprehensive income (Note 11)
 
17,083

 
54,040

Treasury stock – at cost
(shares:  43,182,331 – 2013; 43,030,776 – 2012)
 
(558,939
)
 
(555,644
)
Total stockholders’ equity
 
1,124,209

 
1,090,592

Commitments and contingencies (Note 14)
 


 


Total liabilities and stockholders’ equity
 
$
6,266,345

 
6,794,216


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 September 30,
 
Nine Months ended September 30,
($ in thousands, except per share amounts)
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 

 
 

 
 
 
 
Net premiums earned
 
$
437,568

 
406,225

 
1,284,760

 
1,177,266

Net investment income earned
 
32,457

 
30,650

 
99,330

 
97,284

Net realized gains (losses):
 
 

 
 

 


 


Net realized investment gains
 
14,111

 
1,856

 
25,124

 
6,907

Other-than-temporary impairments
 
(680
)
 
(921
)
 
(3,107
)
 
(1,218
)
Other-than-temporary impairments on fixed maturity securities recognized in other comprehensive income
 

 
(2,023
)
 
(77
)
 
(2,241
)
Total net realized gains (losses)
 
13,431

 
(1,088
)
 
21,940

 
3,448

Other income
 
3,357

 
1,085

 
9,677

 
7,129

Total revenues
 
486,813

 
436,872

 
1,415,707

 
1,285,127

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 
 
 
Loss and loss expense incurred
 
283,317

 
272,251

 
832,760

 
813,060

Policy acquisition costs
 
145,314

 
131,849

 
428,570

 
391,026

Interest expense
 
5,570

 
4,725

 
16,971

 
14,148

Other expenses
 
8,127

 
7,733

 
27,852

 
24,080

Total expenses
 
442,328

 
416,558

 
1,306,153

 
1,242,314

 
 
 
 
 
 
 
 
 
Income from continuing operations, before federal income tax
 
44,485

 
20,314

 
109,554

 
42,813

 
 
 
 
 
 


 
 
Federal income tax expense (benefit):
 
 

 
 

 


 
 
Current
 
6,367

 
(5,088
)
 
20,041

 
1,590

Deferred
 
5,465

 
7,128

 
7,433

 
4,568

Total federal income tax expense
 
11,832

 
2,040

 
27,474

 
6,158

 
 
 
 
 
 
 
 
 
Net income from continuing operations
 
32,653

 
18,274

 
82,080

 
36,655

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

 

 
(997
)
 

 
 
 
 
 
 
 
 
 
Net income
 
$
32,653

 
18,274

 
81,083

 
36,655

 
 
 
 
 
 


 
 
Earnings per share:
 
 

 
 

 
 
 
 
Basic net income from continuing operations
 
$
0.59

 
0.33

 
1.48

 
0.67

Basic net loss from discontinued operations
 

 

 
(0.02
)
 

Basic net income
 
$
0.59

 
0.33

 
1.46

 
0.67

 
 
 
 
 
 


 
 
Diluted net income from continuing operations
 
$
0.57

 
0.33

 
1.45

 
0.66

Diluted net loss from discontinued operations
 

 

 
(0.02
)
 

Diluted net income
 
$
0.57

 
0.33

 
1.43

 
0.66

 
 
 
 
 
 
 
 
 
Dividends to stockholders
 
$
0.13

 
0.13

 
0.39

 
0.39

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


2


SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Quarter ended
September 30,
 
Nine Months ended September 30,
($ in thousands)
 
2013
 
2012
 
2013
 
2012
Net income
 
$
32,653

 
18,274

 
81,083

 
36,655

 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 

 
 

 
 
 
 
Unrealized gains (losses) on investment securities:
 
 

 
 

 
 
 
 
Unrealized holding gains (losses) arising during period
 
6,383

 
23,803

 
(50,576
)
 
41,777

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

 
1,315

 
50

 
1,457

  Amount reclassified into net income:
 
 
 
 
 
 
 
 
Held-to-maturity securities
 
(307
)
 
(219
)
 
(1,172
)
 
(1,236
)
Non-credit other-than-temporary impairment
 
1

 
6

 
9

 
177

Realized (gains) losses on available for sale securities
 
(8,785
)
 
674

 
(16,107
)
 
(2,243
)
Total unrealized (losses) gains on investment securities
 
(2,708
)
 
25,579

 
(67,796
)
 
39,932

 
 
 
 
 
 
 
 
 
Defined benefit pension and post-retirement plans:
 
 

 
 

 
 
 
 
Net actuarial gain
 

 

 
28,600

 

Amounts reclassified into net income:
 
 
 
 
 
 
 
 
Net actuarial loss
 
513

 
904

 
2,222

 
2,712

Prior service cost
 

 
24

 
6

 
73

Curtailment expense
 

 

 
11

 

  Total defined benefit pension and post-retirement plans
 
513

 
928

 
30,839

 
2,785

Other comprehensive (loss) income
 
(2,195
)
 
26,507

 
(36,957
)
 
42,717

Comprehensive income
 
$
30,458

 
44,781

 
44,126

 
79,372

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


3


SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
Nine Months ended September 30,
($ in thousands)
 
2013
 
2012
Common stock:
 
 

 
 

Beginning of year
 
$
196,388

 
194,494

Dividend reinvestment plan (shares:  49,964 – 2013; 68,640 – 2012)
 
100

 
137

Stock purchase and compensation plans (shares:  712,994 – 2013; 698,723 – 2012)
 
1,426

 
1,397

End of period
 
197,914

 
196,028

 
 
 
 
 
Additional paid-in capital:
 
 

 
 

Beginning of year
 
270,654

 
257,370

Dividend reinvestment plan
 
1,052

 
1,064

Stock purchase and compensation plans
 
12,361

 
9,093

End of period
 
284,067

 
267,527

 
 
 
 
 
Retained earnings:
 
 

 
 

Beginning of year
 
1,125,154

 
1,116,319

Net income
 
81,083

 
36,655

Dividends to stockholders ($0.39 per share – 2013 and 2012)
 
(22,153
)
 
(21,859
)
End of period
 
1,184,084

 
1,131,115

 
 
 
 
 
Accumulated other comprehensive income:
 
 

 
 

Beginning of year
 
54,040

 
42,294

Other comprehensive (loss) income
 
(36,957
)
 
42,717

End of period
 
17,083

 
85,011

 
 
 
 
 
Treasury stock:
 
 

 
 

Beginning of year
 
(555,644
)
 
(552,149
)
Acquisition of treasury stock (shares:  151,555 – 2013; 176,513 – 2012)
 
(3,295
)
 
(3,154
)
End of period
 
(558,939
)
 
(555,303
)
Total stockholders’ equity
 
$
1,124,209

 
1,124,378

 
Selective Insurance Group, Inc. also has authorized, but not issued, 5,000,000 shares of preferred stock, without par value, of which 300,000 shares have been
designated Series A junior preferred stock, without par value.
  
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
 


4


SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
 
Nine Months ended September 30,
($ in thousands)
 
2013
 
2012
Operating Activities
 
 

 
 

Net income
 
$
81,083

 
36,655

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

 
 

Depreciation and amortization
 
32,861

 
29,386

Loss on disposal of discontinued operations
 
997

 

Stock-based compensation expense
 
7,428

 
6,263

Undistributed losses of equity method investments
 
248

 
1,090

Net realized gains
 
(21,940
)
 
(3,448
)
Retirement income plan curtailment expense
 
16

 

 
 
 
 
 
Changes in assets and liabilities:
 
 

 
 

Increase in reserve for loss and loss expenses, net of reinsurance recoverables
 
112,876

 
37,463

Increase in unearned premiums, net of prepaid reinsurance and advance premiums
 
120,667

 
119,269

Decrease (increase) in net federal income taxes
 
8,990

 
(1,050
)
Increase in premiums receivable
 
(84,826
)
 
(53,659
)
Increase in deferred policy acquisition costs
 
(21,688
)
 
(25,744
)
(Decrease) increase in interest and dividends due or accrued
 
(45
)
 
721

Increase in accrued salaries and benefits
 
8,286

 
5,365

Increase in accrued insurance expenses
 
6,895

 
299

Other-net
 
(13,859
)
 
15,144

Net adjustments
 
156,906

 
131,099

Net cash provided by operating activities
 
237,989

 
167,754

 
 
 
 
 
Investing Activities
 
 

 
 

Purchase of fixed maturity securities, available-for-sale
 
(838,634
)
 
(676,408
)
Purchase of equity securities, available-for-sale
 
(112,742
)
 
(41,004
)
Purchase of other investments
 
(7,864
)
 
(9,050
)
Purchase of short-term investments
 
(1,619,948
)
 
(1,231,519
)
Purchase of subsidiary
 

 
255

Sale of subsidiary
 
1,225

 
600

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

 
92,170

Sale of short-term investments
 
1,662,340

 
1,263,684

Redemption and maturities of fixed maturity securities, held-to-maturity
 
87,952

 
91,665

Redemption and maturities of fixed maturity securities, available-for-sale
 
413,722

 
297,980

Sale of equity securities, available-for-sale
 
109,399

 
58,749

Distributions from other investments
 
10,546

 
13,910

Sale of other investments
 

 
1

Purchase of property and equipment
 
(10,493
)
 
(9,382
)
Net cash used in investing activities
 
(297,646
)
 
(148,349
)
 
 
 
 
 
Financing Activities
 
 

 
 

Dividends to stockholders
 
(20,532
)
 
(20,188
)
Acquisition of treasury stock
 
(3,295
)
 
(3,154
)
Net proceeds from stock purchase and compensation plans
 
4,305

 
2,586

Proceeds from issuance of notes payable, net of debt issuance costs
 
178,435

 

Repayment of notes payable
 
(100,000
)
 

Excess tax benefits from share-based payment arrangements
 
1,479

 
904

Repayments of capital lease obligations
 
(768
)
 

Net cash provided by (used in) financing activities
 
59,624

 
(19,852
)
Net decrease in cash
 
(33
)
 
(447
)
Cash, beginning of year
 
210

 
762

Cash, end of period
 
$
177

 
315

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

5


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Organization
Selective Insurance Group, Inc., through its subsidiaries, (collectively referred to as “we,” “us,” or “our”) offers standard and excess and surplus lines (“E&S”) property and casualty insurance products. Selective Insurance Group, Inc. (referred to as the “Parent”) was incorporated in New Jersey in 1977 and its main offices are located in Branchville, New Jersey. The Parent’s common stock is publicly traded on the NASDAQ Global Select Market under the symbol “SIGI.”

We classify our business into 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, which 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 third quarters ended September 30, 2013 (“Third Quarter 2013”) and September 30, 2012 (“Third Quarter 2012”) and the nine-month periods ended September 30, 2013 ("Nine Months 2013") and September 30, 2012 ("Nine Months 2012"). The Financial Statements do not include all of the information and disclosures required by GAAP and the SEC for audited annual financial statements. Results of operations for any interim period are not necessarily indicative of results for a full year. Consequently, 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.

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force) ("ASU 2013-11"). ASU 2013-11 applies to all entities with unrecognized tax benefits that also have tax loss or tax credit carryforwards in the same tax jurisdiction as of the reporting date. An unrecognized tax benefit is the difference between a tax position taken or expected to be taken in a tax return and the benefit that is more likely than not sustainable under examination. Under ASU 2013-11, an entity must net an unrecognized tax benefit, or a portion of an unrecognized tax benefit, against deferred tax assets for a net operating loss ("NOL") carryforward, a similar tax loss, or a tax credit carryforward except when:


6


An NOL carryforward, a similar tax loss, or a tax credit carryfoward is not available as of the reporting date under the governing tax law to settle taxes that would result from the disallowance of the tax position; or
The entity does not intend to use the deferred tax asset for this purpose.

If either of these conditions exists, an entity should present an unrecognized tax benefit in the financial statements as a liability and should not net the unrecognized tax benefit with a deferred tax asset.

ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance will not impact our financial condition or results of operation.

NOTE 4. Statements of Cash Flow
Cash paid during Nine Months 2013 and 2012 for interest and federal income taxes was as follows:
 
 
Nine Months ended September 30,
($ in thousands)
 
2013
 
2012
Cash paid during the period for:
 
 

 
 

Interest
 
$
13,325

 
11,504

Federal income tax
 
17,000

 
6,300


At September 30, 2013, included in "Other assets" on the Consolidated Balance Sheets was $7.0 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 gains and losses, carrying value, unrecognized holding gains and losses, and fair value of held-to-maturity (“HTM”) fixed maturity securities as of September 30, 2013 and December 31, 2012 were as follows:
 
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Amortized Cost
 
Net
 Unrealized Gains
 (Losses)
 
Carrying
Value
 
Unrecognized
 Holding
Gains
 
Unrecognized Holding
 Losses
 
Fair
Value
Foreign government
 
$
5,292

 
151

 
5,443

 
122

 

 
5,565

Obligations of state and political subdivisions
 
372,281

 
4,065

 
376,346

 
19,297

 

 
395,643

Corporate securities
 
29,228

 
(466
)
 
28,762

 
3,015

 

 
31,777

Asset-backed securities (“ABS”)
 
5,890

 
(755
)
 
5,135

 
776

 

 
5,911

Commercial mortgage-backed securities (“CMBS”)
 
7,241

 
(965
)
 
6,276

 
3,357

 

 
9,633

Total HTM fixed maturity securities
 
$
419,932

 
2,030

 
421,962

 
26,567

 

 
448,529


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 2.3 years as of September 30, 2013.


7


During Nine Months 2013, 16 securities with a carrying value of $39.6 million and a net unrecognized gain position of $1.4 million, were reclassified from an HTM designation to an available-for-sale (“AFS”) designation due to credit rating downgrades by Moody’s Investors Services ("Moody's") and/or Standard and Poor's Financial Services (“S&P”). These unexpected rating downgrades raised concerns about the issuers’ credit worthiness, which changed our intention to hold these securities to maturity.

(b) The cost/amortized cost, unrealized gains and losses, and fair value of AFS securities as of September 30, 2013 and December 31, 2012 were as follows:
 
September 30, 2013
 
 
 
 
 
 
 
 
($ in thousands)
 
Cost/
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
U.S. government and government agencies
 
$
169,163

 
11,953

 
(330
)
 
180,786

Foreign government
 
28,797

 
996

 
(84
)
 
29,709

Obligations of states and political subdivisions
 
918,403

 
27,705

 
(16,610
)
 
929,498

Corporate securities
 
1,629,698

 
47,932

 
(14,479
)
 
1,663,151

ABS
 
150,179

 
1,063

 
(476
)
 
150,766

CMBS1
 
152,464

 
2,747

 
(3,263
)
 
151,948

Residential mortgage-backed
securities (“RMBS”)2
 
525,047

 
8,932

 
(6,405
)
 
527,574

AFS fixed maturity securities
 
3,573,751

 
101,328

 
(41,647
)
 
3,633,432

AFS equity securities
 
158,323

 
24,061

 
(1,878
)
 
180,506

Total AFS securities
 
$
3,732,074

 
125,389

 
(43,525
)
 
3,813,938

 
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 $35.5 million at September 30, 2013 and $48.9 million at December 31, 2012.
2 RMBS includes government guaranteed agency securities with a fair value of $61.4 million at September 30, 2013 and $91.0 million at December 31, 2012.
 

8


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.

(c) The following tables summarize, for all securities in a net unrealized/unrecognized loss position at September 30, 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:

September 30, 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
 
$
13,173

 
(327
)
 
510

 
(3
)
Foreign government
 
1,056

 
(12
)
 
2,925

 
(72
)
Obligations of states and political subdivisions
 
417,866

 
(16,610
)
 

 

Corporate securities
 
422,816

 
(14,200
)
 
3,837

 
(279
)
ABS
 
87,786

 
(471
)
 
302

 
(5
)
CMBS
 
69,322

 
(2,771
)
 
2,030

 
(492
)
RMBS
 
202,428

 
(6,231
)
 
1,579

 
(174
)
Total fixed maturity securities
 
1,214,447

 
(40,622
)
 
11,183

 
(1,025
)
Equity securities
 
35,275

 
(1,878
)
 

 

Subtotal
 
$
1,249,722

 
(42,500
)
 
11,183

 
(1,025
)
 
 
 
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
 
$
492

 
(20
)
 
19

 
571

 
(24
)
 
17

ABS
 

 

 

 
2,476

 
(690
)
 
642

Subtotal
 
$
492

 
(20
)
 
19

 
3,047

 
(714
)
 
659

Total AFS and HTM
 
$
1,250,214

 
(42,520
)
 
19

 
14,230

 
(1,739
)
 
659


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



 
 
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

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

As evidenced by the table below, our net unrealized/unrecognized loss positions increased by $40.6 million as of September 30, 2013 compared to December 31, 2012 as follows:

($ in thousands)
 
 
September 30, 2013
 
December 31, 2012
Number of
Issues
% of Market/Book
Unrealized/
Unrecognized Loss
 
Number of
Issues
% of
Market/Book
Unrealized/
Unrecognized
Loss
501

80% - 99%
$
43,295

 
100

80% - 99%
$
2,701


60% - 79%

 
1

60% - 79%
233

1

40% - 59%
286

 

40% - 59%


20% - 39%

 

20% - 39%


0% - 19%

 

0% - 19%

 

 
$
43,581

 
 

 
$
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 September 30, 2013, we had 502 securities in an aggregate unrealized/unrecognized loss position of $43.6 million, $1.1 million of which have been in a loss position for more than 12 months. 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. During Nine Months 2013, interest rates on the 10-year U.S. Treasury Note rose by 85 basis points. This interest rate movement has negatively impacted our fixed maturity securities portfolio's valuation, thus increasing the number of securities in a loss position and the corresponding dollar amount of unrealized losses. The increase in the unrealized losses does not correspond to any issuer specific credit concerns; however, it does reflect an expected reduction in market value due to higher market interest rates. For a discussion regarding the sensitivity of interest rate movements and the related impacts on the fixed maturity securities portfolio, refer to Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" in our 2012 Annual Report.
  
We do not intend 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 September 30, 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.
 

10


(d) Fixed maturity securities at September 30, 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 September 30, 2013:
($ in thousands)
 
Carrying Value
 
Fair Value
Due in one year or less
 
$
72,099

 
74,953

Due after one year through five years
 
312,318

 
331,927

Due after five years through 10 years
 
34,747

 
38,176

Due after 10 years
 
2,798

 
3,473

Total HTM fixed maturity securities
 
$
421,962

 
448,529

 
Listed below are AFS fixed maturity securities at September 30, 2013:
($ in thousands)
 
Fair Value
Due in one year or less
 
$
324,743

Due after one year through five years
 
1,951,770

Due after five years through 10 years
 
1,329,795

Due after 10 years
 
27,124

Total AFS fixed maturity securities
 
$
3,633,432

  
(e) The following table summarizes our other investment portfolio by strategy and the remaining commitment amount associated with each strategy:
Other Investments
 
Carrying Value
 
September 30,
2013
($ in thousands)
 
September 30,
2013
 
December 31,
2012
 
Remaining Commitment
Alternative Investments
 
 

 
 

 
 

  Secondary private equity
 
$
25,954

 
28,032

 
7,703

  Private equity
 
18,951

 
18,344

 
10,502

  Energy/power generation
 
17,049

 
18,640

 
7,076

  Mezzanine financing
 
12,921

 
12,692

 
18,796

  Real estate
 
12,385

 
11,751

 
10,205

  Distressed debt
 
11,911

 
12,728

 
2,964

  Venture capital
 
7,018

 
7,477

 
400

Total alternative investments
 
106,189

 
109,664

 
57,646