Annual Reports

 
Quarterly Reports

  • 10-Q (Oct 26, 2017)
  • 10-Q (Jul 27, 2017)
  • 10-Q (Apr 27, 2017)
  • 10-Q (Oct 27, 2016)
  • 10-Q (Jul 28, 2016)
  • 10-Q (May 5, 2016)

 
8-K

 
Other

Selective Insurance Group 10-Q 2016

Documents found in this filing:

  1. 10-Q
  2. Ex-11
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. Ex-32.2
Document

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, 2016
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 October 14, 2016, there were 57,856,321 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.
 
SELECTIVE INSURANCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
 
Unaudited
 
 
($ in thousands, except share amounts)
 
September 30,
2016
 
December 31,
2015
ASSETS
 
 

 
 

Investments:
 
 

 
 

Fixed income securities, held-to-maturity – at carrying value (fair value:  $136,094 – 2016; $209,544 – 2015)
 
$
130,472

 
201,354

Fixed income securities, available-for-sale – at fair value (amortized cost: $4,682,267 – 2016; $4,352,514 – 2015)
 
4,832,532

 
4,408,203

Equity securities, available-for-sale – at fair value (cost:  $122,981 – 2016; $193,816 – 2015)
 
147,304

 
207,051

Short-term investments (at cost which approximates fair value)
 
169,604

 
194,819

Other investments
 
88,512

 
77,842

Total investments (Note 4)
 
5,368,424


5,089,269

Cash
 
1,493

 
898

Interest and dividends due or accrued
 
39,901

 
38,501

Premiums receivable, net of allowance for uncollectible accounts of:  $5,907 – 2016; $4,422 – 2015
 
711,589

 
615,164

Reinsurance recoverables, net of allowance for uncollectible accounts of: $5,500 – 2016; $5,700 – 2015
 
640,012

 
561,968

Prepaid reinsurance premiums
 
151,981

 
140,889

Deferred federal income tax
 
41,656

 
92,696

Property and equipment – at cost, net of accumulated depreciation and amortization of:
$198,171 – 2016; $188,548 – 2015
 
69,812

 
65,701

Deferred policy acquisition costs
 
235,934

 
213,159

Goodwill
 
7,849

 
7,849

Other assets
 
94,582

 
78,339

Total assets
 
$
7,363,233

 
6,904,433

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Liabilities:
 
 

 
 

Reserve for loss and loss expenses
 
$
3,686,586

 
3,517,728

Unearned premiums
 
1,306,255

 
1,169,710

Short-term debt
 
45,000

 
60,000

Long-term debt
 
378,551

 
328,192

Current federal income tax
 
6,509

 
7,442

Accrued salaries and benefits
 
103,583

 
167,336

Other liabilities
 
261,845

 
255,984

Total liabilities
 
$
5,788,329

 
5,506,392

 
 
 
 
 
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: 101,505,201 – 2016; 100,861,372 – 2015
 
203,011

 
201,723

Additional paid-in capital
 
342,846

 
326,656

Retained earnings
 
1,538,928

 
1,446,192

Accumulated other comprehensive income (loss) (Note 10)
 
62,209

 
(9,425
)
Treasury stock – at cost
(shares:  43,653,034 – 2016; 43,500,642 – 2015)
 
(572,090
)
 
(567,105
)
Total stockholders’ equity
 
$
1,574,904

 
1,398,041

Commitments and contingencies
 


 


Total liabilities and stockholders’ equity
 
$
7,363,233

 
6,904,433


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)
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 

 
 

 
 
 
 
Net premiums earned
 
$
542,429

 
507,390

 
1,596,819

 
1,473,822

Net investment income earned
 
33,375

 
32,061

 
95,326

 
91,208

Net realized gains:
 
 

 
 

 
 
 
 
Net realized investment gains
 
4,030

 
1,590

 
7,233

 
23,598

Other-than-temporary impairments
 
(342
)
 
(1,282
)
 
(4,494
)
 
(7,827
)
Other-than-temporary impairments on fixed income securities recognized in other comprehensive income
 

 

 
10

 

Total net realized gains
 
3,688

 
308

 
2,749

 
15,771

Other income
 
2,199

 
698

 
7,018

 
5,521

Total revenues
 
581,691

 
540,457

 
1,701,912

 
1,586,322

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 
 
 
Loss and loss expense incurred
 
316,258

 
285,161

 
911,881

 
861,721

Policy acquisition costs
 
193,835

 
174,802

 
567,793

 
509,295

Interest expense
 
5,714

 
5,610

 
16,940

 
16,826

Other expenses
 
10,441

 
9,045

 
35,669

 
29,586

Total expenses
 
526,248

 
474,618

 
1,532,283

 
1,417,428

 
 
 
 
 
 
 
 
 
Income before federal income tax
 
55,443

 
65,839

 
169,629

 
168,894

 
 
 
 
 
 
 
 
 
Federal income tax expense:
 
 

 
 

 
 
 
 
Current
 
5,625

 
9,141

 
38,027

 
29,128

Deferred
 
11,316

 
9,702

 
12,467

 
19,294

Total federal income tax expense
 
16,941

 
18,843

 
50,494

 
48,422

 
 
 
 
 
 
 
 
 
Net income
 
$
38,502

 
46,996

 
119,135

 
120,472

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 
 
 
Basic net income
 
$
0.66

 
0.82

 
2.06

 
2.11

 
 
 
 
 
 
 
 
 
Diluted net income
 
$
0.66

 
0.81

 
2.03

 
2.08

 
 
 
 
 
 
 
 
 
Dividends to stockholders
 
$
0.15

 
0.14

 
0.45

 
0.42

 
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)
 
2016
 
2015
 
2016
 
2015
Net income
 
$
38,502

 
46,996

 
119,135

 
120,472

 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax:
 
 

 
 

 
 
 
 
Unrealized (losses) gains on investment securities:
 
 

 
 

 
 
 
 
Unrealized holding (losses) gains arising during period
 
(8,444
)
 
5,442

 
70,473

 
(18,132
)
Non-credit portion of other-than-temporary impairments recognized in other comprehensive income
 

 

 
(6
)
 

  Amounts reclassified into net income:
 
 
 
 
 
 
 
 
Held-to-maturity securities
 
(9
)
 
(63
)
 
(68
)
 
(353
)
Non-credit other-than-temporary impairments
 

 

 

 
232

Realized gains on available-for-sale securities
 
(2,395
)
 
(199
)
 
(1,786
)
 
(10,906
)
Total unrealized (losses) gains on investment securities
 
(10,848
)
 
5,180

 
68,613

 
(29,159
)
 
 
 
 
 
 
 
 
 
Defined benefit pension and post-retirement plans:
 
 

 
 

 
 
 
 
Amounts reclassified into net income:
 
 
 
 
 
 
 
 
Net actuarial loss
 
1,050

 
1,110

 
3,021

 
3,332

  Total defined benefit pension and post-retirement plans
 
1,050

 
1,110

 
3,021

 
3,332

Other comprehensive (loss) income
 
(9,798
)
 
6,290

 
71,634

 
(25,827
)
Comprehensive income
 
$
28,704

 
53,286

 
190,769

 
94,645

 
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, except per share amounts)
 
2016
 
2015
Common stock:
 
 

 
 

Beginning of year
 
$
201,723

 
199,896

Dividend reinvestment plan (shares:  29,865 – 2016; 38,947 – 2015)
 
60

 
78

Stock purchase and compensation plans (shares:  613,964 – 2016; 686,984 – 2015)
 
1,228

 
1,374

End of period
 
203,011

 
201,348

 
 
 
 
 
Additional paid-in capital:
 
 

 
 

Beginning of year
 
326,656

 
305,385

Dividend reinvestment plan
 
1,035

 
1,014

Stock purchase and compensation plans
 
15,155

 
14,588

End of period
 
342,846

 
320,987

 
 
 
 
 
Retained earnings:
 
 

 
 

Beginning of year
 
1,446,192

 
1,313,440

Net income
 
119,135

 
120,472

Dividends to stockholders ($0.45 per share – 2016; $0.42 per share – 2015)
 
(26,399
)
 
(24,376
)
End of period
 
1,538,928

 
1,409,536

 
 
 
 
 
Accumulated other comprehensive income (loss):
 
 

 
 

Beginning of year
 
(9,425
)
 
19,788

Other comprehensive income (loss)
 
71,634

 
(25,827
)
End of period
 
62,209

 
(6,039
)
 
 
 
 
 
Treasury stock:
 
 

 
 

Beginning of year
 
(567,105
)
 
(562,923
)
Acquisition of treasury stock (shares: 152,392 – 2016; 139,031 – 2015)
 
(4,985
)
 
(3,887
)
End of period
 
(572,090
)
 
(566,810
)
Total stockholders’ equity
 
$
1,574,904

 
1,359,022

 
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)
 
2016
 
2015
Operating Activities
 
 

 
 

Net income
 
$
119,135

 
120,472

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

 
 

Depreciation and amortization
 
45,563

 
43,868

Stock-based compensation expense
 
8,950

 
7,626

Undistributed losses of equity method investments
 
49

 
781

Net realized gains
 
(2,749
)
 
(15,771
)
 
 
 
 
 
Changes in assets and liabilities:
 
 

 
 

Increase in reserve for loss and loss expenses, net of reinsurance recoverables
 
90,814

 
60,065

Increase in unearned premiums, net of prepaid reinsurance
 
125,453

 
121,424

Decrease in net federal income taxes
 
11,534

 
27,980

Increase in premiums receivable
 
(96,425
)
 
(95,188
)
Increase in deferred policy acquisition costs
 
(22,775
)
 
(28,058
)
(Increase) decrease in interest and dividends due or accrued
 
(1,356
)
 
979

Decrease in accrued salaries and benefits
 
(63,753
)
 
(338
)
Increase in other assets
 
(16,280
)
 
(13,888
)
(Decrease) increase in other liabilities
 
(20,686
)
 
29,081

Net adjustments
 
58,339

 
138,561

Net cash provided by operating activities
 
177,474

 
259,033

 
 
 
 
 
Investing Activities
 
 

 
 

Purchase of fixed income securities, available-for-sale
 
(842,253
)
 
(731,154
)
Purchase of fixed income securities, held-to-maturity
 
(4,235
)
 

Purchase of equity securities, available-for-sale
 
(24,747
)
 
(192,717
)
Purchase of other investments
 
(34,994
)
 
(6,589
)
Purchase of short-term investments
 
(1,307,024
)
 
(1,084,794
)
Sale of fixed income securities, available-for-sale
 
33,448

 
22,323

Sale of short-term investments
 
1,332,239

 
1,090,911

Redemption and maturities of fixed income securities, held-to-maturity
 
74,186

 
79,972

Redemption and maturities of fixed income securities, available-for-sale
 
483,877

 
403,510

Sale of equity securities, available-for-sale
 
99,420

 
148,228

Distributions from other investments
 
18,512

 
22,038

Purchase of property and equipment
 
(13,421
)
 
(11,869
)
Net cash used in investing activities
 
(184,992
)
 
(260,141
)
 
 
 
 
 
Financing Activities
 
 

 
 

Dividends to stockholders
 
(24,885
)
 
(22,848
)
Acquisition of treasury stock
 
(4,985
)
 
(3,887
)
Net proceeds from stock purchase and compensation plans
 
4,906

 
6,016

Proceeds from borrowings
 
105,000

 
15,000

Repayments of borrowings
 
(70,000
)
 

Excess tax benefits from share-based payment arrangements
 
1,917

 
1,498

Repayments of capital lease obligations
 
(3,840
)
 
(3,517
)
Net cash provided by (used in) financing activities
 
8,113

 
(7,738
)
Net increase (decrease) in cash
 
595

 
(8,846
)
Cash, beginning of year
 
898

 
23,959

Cash, end of period
 
$
1,493

 
15,113

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

5


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Basis of Presentation
As used herein, the "Company,” “we,” “us,” or “our” refers to Selective Insurance Group, Inc. (the "Parent"), and its subsidiaries, except as expressly indicated or unless the context otherwise requires. Our interim unaudited consolidated financial statements (“Financial Statements”) have been prepared by us in conformity with U.S. generally accepted accounting principles (“GAAP”) and 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 2016 presentation. Such reclassifications had no effect on our net income, stockholders' equity, or cash flows.

Our 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. Our Financial Statements cover the third quarters ended September 30, 2016 (“Third Quarter 2016”) and September 30, 2015 (“Third Quarter 2015”) and the nine-month periods ended September 30, 2016 ("Nine Months 2016") and September 30, 2015 ("Nine Months 2015"). 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, our 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, 2015 (“2015 Annual Report”) filed with the SEC.

NOTE 2. Accounting Pronouncements 
In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). ASU 2014-12 requires that performance targets that affect vesting and could be achieved after the requisite service period be treated as performance conditions. The adoption of ASU 2014-12 in the first quarter of 2016 did not affect us, as we record expense consistent with the requirements of this accounting update.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 affects the following areas: (i) limited partnerships and similar legal entities; (ii) the evaluation of fees paid to a decision maker or a service provider as a variable interest; (iii) the effect of fee arrangements on the primary beneficiary determination; (iv) the effect of related parties on the primary beneficiary determination; and (v) certain investment funds. We adopted this guidance in the first quarter of 2016. Under the new guidance, our limited partnership and tax credit investments are variable interest entities ("VIEs"); however, we are not the primary beneficiary of any of these investments. As such, the adoption had no impact on our financial condition or results of operations. The required disclosures related to our VIEs are included in Note 4. “Investments” below.

In April 2015, the FASB issued ASU 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”). ASU 2015-05 provides guidance to customers with cloud computing arrangements that include a software license. If a cloud computing arrangement includes a software license, the customer's accounting for the software license element of the arrangement is consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer accounts for the arrangement as a service contract. We adopted this guidance in the first quarter of 2016, with prospective application. The impact of this adoption did not have a material effect on our financial condition or results of operations.

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (“ASU 2015-07”). ASU 2015-07 provides that investments for which the practical expedient is used to measure fair value at net asset value per share ("NAV") must be removed from the fair value hierarchy. Instead, those investments must be included as a reconciling line item so that the total fair value amount of investments in the disclosure is consistent with the amount on the balance sheet. ASU 2015-07 also includes disclosure requirements for investments for which the NAV practical expedient was used to determine fair value. The adoption of this guidance in the first quarter of 2016 did not impact our financial condition or results of operations.


6


Pronouncements to be effective in the future
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and provide related footnote disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted. As the requirements of this literature are disclosure only, ASU 2014-15 will not impact our financial condition or results of operations.

In May 2015, the FASB issued ASU 2015-09, Disclosures about Short-Duration Contracts (“ASU 2015-09”). ASU 2015-09 requires companies that issue short duration contracts to disclose additional information, including: (i) incurred and paid claims development tables; (ii) frequency and severity of claims; and (iii) information about material changes in judgments made in calculating the liability for unpaid claim adjustment expenses, including reasons for the change and the effects on the financial statements. ASU 2015-09 is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. ASU 2015-09 is to be applied retrospectively by providing comparative disclosures for each period presented, except for those requirements that apply only to the current period. As the requirements of this literature are disclosure only, the application of this guidance will not impact our financial condition or results of operations.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Sub-topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 provides guidance to improve certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Specifically the guidance: (i) requires equity investments to be measured at fair value with changes in fair value recognized in earnings; (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost; (iv) requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and (v) clarifies that the need for a valuation allowance on a deferred tax asset related to an available-for-sale ("AFS") security should be evaluated with other deferred tax assets.

ASU 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early application to financial statements of annual or interim periods that have not yet been issued are permitted as of the beginning of the year of adoption, otherwise early adoption of ASU 2016-01 is not permitted. We are currently evaluating the impact of this guidance on our financial condition and results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires all lessees to recognize a lease liability and a right-of-use asset, measured at the present value of the future minimum lease payments, at the lease commencement date. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that fiscal year, with early adoption permitted. ASU 2016-02 requires the application of a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. While we are currently evaluating ASU 2016-02, we do not expect a material impact on our financial condition or results of operations from the adoption of this guidance.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions including: (i) income tax consequences; (ii) classification of awards as either equity or liabilities; (iii) forfeitures assumptions; and (iv) cash flow classification. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. While we are currently evaluating ASU 2016-09, we do not expect a material impact on our financial condition or results of operations.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”).  ASU 2016-13 will change the way entities recognize impairment of financial assets by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, including, among others, held-to-maturity debt securities, trade receivables, and reinsurance receivables. ASU 2016-13 requires a valuation allowance to be calculated on these financial assets and that they be presented on the financial statements net of the valuation allowance. The valuation allowance is a measurement of expected losses that is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.  This methodology is referred to as the current expected credit loss model. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted, but no earlier than fiscal years

7


beginning after December 15, 2018. We are currently evaluating the impact of this guidance on our financial condition and results of operations.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (“ASU 2016-15”). ASU 2016-15 adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows including, but not limited to: (i) debt prepayment or debt extinguishment costs; (ii) proceeds from the settlement of corporate-owned life insurance policies including bank-owned life insurance policies; (iii) distributions received from equity method investees; and (iv) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of this guidance on our statement of cash flows.

NOTE 3. Statements of Cash Flow
Supplemental cash flow information is as follows:
 
 
Nine Months ended September 30,
($ in thousands)
 
2016
 
2015
Cash paid during the period for:
 
 

 
 

Interest
 
$
13,874

 
13,843

Federal income tax
 
36,405

 
18,500

 
 
 
 
 
Non-cash items:
 
 
 
 
Exchange of fixed income securities, AFS
 
21,775

 
35,425

Tax-free exchange of fixed income securities, held-to-maturity ("HTM")
 

 
10,045

Corporate actions related to equity securities, AFS1
 
3,032

 
4,239

Assets acquired under capital lease arrangements
 
3,108

 
6,933

Non-cash purchase of property and equipment
 
648

 

1Examples of such corporate actions include non-cash acquisitions and stock splits.

Included in "Other assets" on the Consolidated Balance Sheet was $20.9 million at September 30, 2016 and $9.9 million at September 30, 2015 of cash received from the National Flood Insurance Program ("NFIP"), which is restricted to pay flood claims under the Write Your Own ("WYO") program. 

NOTE 4. Investments
(a) Information regarding our HTM fixed income securities as of September 30, 2016 and December 31, 2015 was as follows:
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Amortized
Cost
 
Net
 Unrealized Gains
 (Losses)
 
Carrying
Value
 
Unrecognized
 Holding
Gains
 
Unrecognized Holding
 Losses
 
Fair
Value
Obligations of states and political subdivisions
 
$
104,159

 
414

 
104,573

 
3,256

 

 
107,829

Corporate securities
 
23,722

 
(165
)
 
23,557

 
2,294

 

 
25,851

Asset-backed securities (“ABS”)
 
51

 

 
51

 

 

 
51

Commercial mortgage-backed securities (“CMBS”)
 
2,346

 
(55
)
 
2,291

 
72

 

 
2,363

Total HTM fixed income securities
 
$
130,278

 
194

 
130,472

 
5,622

 

 
136,094

December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Amortized
Cost
 
Net
 Unrealized Gains
 (Losses)
 
Carrying
Value
 
Unrecognized
 Holding
Gains
 
Unrecognized Holding
 Losses
 
Fair
Value
Obligations of states and political subdivisions
 
$
175,269

 
848

 
176,117

 
5,763

 

 
181,880

Corporate securities
 
20,228

 
(185
)
 
20,043

 
1,972

 

 
22,015

ABS
 
1,030

 
(120
)
 
910

 
118

 

 
1,028

CMBS
 
4,527

 
(243
)
 
4,284

 
337

 

 
4,621

Total HTM fixed income securities
 
$
201,054

 
300

 
201,354

 
8,190

 

 
209,544


8


 
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 1.6 years as of September 30, 2016.

(b) Information regarding our AFS securities as of September 30, 2016 and December 31, 2015 was as follows:
September 30, 2016
 
 
 
 
 
 
 
 
($ in thousands)
 
Cost/
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
AFS fixed income securities:
 
 
 
 
 
 
 
 
U.S. government and government agencies
 
$
86,491

 
3,400

 

 
89,891

Foreign government
 
9,041

 
443

 

 
9,484

Obligations of states and political subdivisions
 
1,376,245

 
70,984

 
(333
)
 
1,446,896

Corporate securities
 
2,136,761

 
60,784

 
(1,427
)
 
2,196,118

ABS
 
282,558

 
1,964

 
(69
)
 
284,453

CMBS
 
261,233

 
5,634

 
(93
)
 
266,774

Residential mortgage-backed
securities (“RMBS”)
 
529,938

 
9,294

 
(316
)
 
538,916

Total AFS fixed income securities
 
4,682,267

 
152,503

 
(2,238
)
 
4,832,532

AFS equity securities:
 
 
 
 
 
 
 
 
Common stock
 
111,746

 
24,832

 
(1,089
)
 
135,489

Preferred stock
 
11,235

 
580

 

 
11,815

Total AFS equity securities
 
122,981

 
25,412

 
(1,089
)
 
147,304

Total AFS securities
 
$
4,805,248

 
177,915

 
(3,327
)
 
4,979,836

 
 
December 31, 2015
 
 
 
 
 
 
 
 
($ in thousands)
 
Cost/
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
AFS fixed income securities:
 
 
 
 
 
 
 
 
U.S. government and government agencies
 
$
99,485

 
4,721

 
(91
)
 
104,115

Foreign government
 
14,885

 
298

 
(2
)
 
15,181

Obligations of states and political subdivisions
 
1,314,779

 
44,523

 
(160
)
 
1,359,142

Corporate securities
 
1,892,296

 
23,407

 
(15,521
)
 
1,900,182

ABS
 
244,541

 
531

 
(918
)
 
244,154

CMBS
 
245,252

 
750

 
(2,410
)
 
243,592

RMBS
 
541,276

 
4,274

 
(3,713
)
 
541,837

Total AFS fixed income securities
 
4,352,514

 
78,504

 
(22,815
)
 
4,408,203

AFS equity securities:
 
 
 
 
 
 
 
 
Common stock
 
181,991

 
14,796

 
(1,998
)
 
194,789

Preferred stock
 
11,825

 
477

 
(40
)
 
12,262

Total AFS equity securities
 
193,816

 
15,273

 
(2,038
)
 
207,051

Total AFS securities
 
$
4,546,330

 
93,777

 
(24,853
)
 
4,615,254


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 "Accumulated other comprehensive income (loss)" ("AOCI") on the Consolidated Balance Sheets.
  

9


(c) The following tables provide information regarding our AFS securities in a net unrealized loss position at September 30, 2016 and December 31, 2015:
September 30, 2016
 
Less than 12 months
 
12 months or longer
($ in thousands)
 
Fair Value
 
Unrealized
Losses1
 
Fair Value
 
Unrealized
Losses1
AFS fixed income securities:
 
 

 
 

 
 

 
 

Obligations of states and political subdivisions
 
$
74,989

 
(333
)
 

 

Corporate securities
 
155,880

 
(1,139
)
 
30,469

 
(288
)
ABS
 
21,766

 
(66
)
 
2,450

 
(3
)
CMBS
 
24,633

 
(59
)
 
8,709

 
(34
)
RMBS
 
13,674

 
(40
)
 
37,677

 
(276
)
Total AFS fixed income securities
 
290,942

 
(1,637
)
 
79,305

 
(601
)
AFS equity securities:
 
 
 
 
 
 
 
 
Common stock
 
12,528

 
(1,089
)
 

 

Total AFS equity securities
 
12,528

 
(1,089
)
 

 

Total AFS
 
$
303,470

 
(2,726
)
 
79,305

 
(601
)

December 31, 2015
 
Less than 12 months
 
12 months or longer
($ in thousands)
 
Fair
Value
 
Unrealized
Losses1
 
Fair Value
 
Unrealized
Losses1
AFS fixed income securities:
 
 

 
 

 
 

 
 

U.S. government and government agencies
 
$
16,006

 
(87
)
 
396

 
(4
)
Foreign government
 
1,067

 
(2
)
 

 

Obligations of states and political subdivisions
 
28,617

 
(160
)
 

 

Corporate securities
 
761,479

 
(12,671
)
 
50,382

 
(2,850
)
ABS
 
197,477

 
(807
)
 
12,022

 
(111
)
CMBS
 
146,944

 
(2,196
)
 
15,385

 
(214
)
RMBS
 
264,914

 
(1,992
)
 
63,395

 
(1,721
)
Total AFS fixed income securities
 
1,416,504

 
(17,915
)
 
141,580

 
(4,900
)
AFS equity securities:
 
 
 
 
 
 
 
 
Common stock
 
31,148

 
(1,998
)
 

 

Preferred stock
 
1,531

 
(40
)
 

 

Total AFS equity securities
 
32,679

 
(2,038
)
 

 

Total AFS
 
$
1,449,183

 
(19,953
)
 
141,580

 
(4,900
)
  1 Gross unrealized losses include non-OTTI unrealized amounts and OTTI losses recognized in AOCI. 

There were no net unrealized/unrecognized losses on our HTM portfolio as of September 30, 2016. The table below provides our net unrealized/unrecognized loss positions by impairment severity for AFS securities as of September 30, 2016 and for both AFS and HTM securities as of December 31, 2015:
($ in thousands)
 
 
September 30, 2016
 
December 31, 2015
Number of
Issues
% of Market/Book
Unrealized Loss
 
Number of
Issues
% of Market/Book
Unrealized/
Unrecognized Loss
180

80% - 99%
$
3,327

 
606

80% - 99%
$
22,971


60% - 79%

 
3

60% - 79%
1,888


40% - 59%

 

40% - 59%


20% - 39%

 

20% - 39%


0% - 19%

 

0% - 19%

 

 
$
3,327

 
 

 
$
24,859

 

10


We do not intend to sell any of the securities in the tables above, nor do we believe we will be required to sell any of these securities. We have also reviewed these securities under our OTTI policy, as described in Note 2. “Summary of Significant Accounting Policies” within Item 8. “Financial Statements and Supplementary Data.” of our 2015 Annual Report, and have concluded that they are temporarily impaired. 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. Additionally, changes in market value due to interest rate fluctuations are considered temporary. If our judgment about an individual security changes in the future, we may ultimately record a credit loss after having originally concluded that one did not exist, which could have a material impact on our net income and financial position in future periods.
 
(d) Fixed income securities at September 30, 2016, 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 the contractual maturities of HTM fixed income securities at September 30, 2016:
($ in thousands)
 
Carrying Value
 
Fair Value
Due in one year or less
 
$
59,074

 
59,671

Due after one year through five years
 
62,778

 
66,622

Due after five years through 10 years
 
8,620

 
9,801

Total HTM fixed income securities
 
$
130,472

 
136,094

 
Listed below are the contractual maturities of AFS fixed income securities at September 30, 2016:
($ in thousands)
 
Fair Value
Due in one year or less
 
$
491,206

Due after one year through five years
 
2,403,246

Due after five years through 10 years
 
1,823,028

Due after 10 years
 
115,052

Total AFS fixed income securities
 
$
4,832,532

  
(e) We evaluate the alternative investments and tax credit investments included in our other investments portfolio to determine whether those investments are VIEs and if so, whether consolidation is required. A VIE is an entity that either has equity investors that lack certain essential characteristics of a controlling financial interest or lacks sufficient funds to finance its own activities without financial support provided by other entities. We consider several significant factors in determining if our investments are VIEs and if we are the primary beneficiary, including whether we have: (i) the power to direct activities of the VIE; (ii) the ability to remove the decision maker of the VIE; (iii) the ability to participate in making decisions that are significant to the VIE; and (iv) the obligation to absorb losses and the right to receive benefits that could potentially be significant to the VIE. We have determined that the investments in our other investment portfolio are VIEs, but that we are not the primary beneficiary and therefore, consolidation is not required.

The following table summarizes our other investment portfolio by strategy:
Other Investments
 
September 30, 2016
 
December 31, 2015
($ in thousands)
 
Carrying Value
 
Remaining Commitment
 
Maximum Exposure to Loss1
 
Carrying Value
 
Remaining Commitment
 
Maximum Exposure to Loss1
Alternative Investments
 
 

 
 

 
 
 
 
 
 
 
 
   Private equity
 
$
35,444

 
57,793

 
93,237

 
35,088

 
30,204

 
65,292

   Private credit
 
27,709

 
30,763

 
58,472

 
13,246

 
15,129

 
28,375

   Real assets
 
15,329

 
22,922

 
38,251

 
19,500

 
25,820

 
45,320

Total alternative investments
 
78,482

 
111,478

 
189,960

 
67,834

 
71,153

 
138,987

Other securities
 
10,030

 
22,611

 
32,641

 
10,008

 
3,200

 
13,208

Total other investments
 
$
88,512

 
134,089

 
222,601

 
77,842

 
74,353

 
152,195

1The maximum exposure to loss includes both the carry value of these investments and the related unfunded commitments. In addition, tax credits that have been previously recognized in Other securities are subject to the risk of recapture, which we do not consider significant. 


11


We do not have a future obligation to fund losses or debts on behalf of the investments above; however, we are contractually committed to make additional investments up to the remaining commitment outlined above. We have not provided any non-contractual financial support at any time during 2016 or 2015.

In addition to the strategy descriptions included in Note 5. “Investments” in Item 8. “Financial Statements and Supplementary Data.” of our 2015 Annual Report, our private credit strategy now includes middle market lending, which is a strategy that provides privately negotiated loans to U.S. middle market companies.  Typically, these are floating rate, senior secured loans diversified across industries.  Loans can be made to private equity sponsor-backed companies or non-sponsored companies to finance leveraged buyouts, recapitalizations, and acquisitions.
 
The following table sets forth gross summarized financial information for our other investments portfolio, including the portion not owned by us. The majority of these investments are carried under the equity method of accounting. The last line of the table below reflects our share of the aggregate income or loss, which is the portion included in our Financial Statements. As the majority of these investments report results to us on a one quarter lag, the summarized financial statement information for the three and nine-month periods ended June 30 is as follows:
Income Statement Information
 
Quarter ended June 30,
 
Nine months ended June 30,
($ in millions)
 
2016

2015
 
2016
 
2015
Net investment (loss) income
 
$
(55.4
)

44.1

 
26.1

 
139.6

Realized gains
 
245.6


385.2

 
1,186.8

 
977.7

Net change in unrealized depreciation
 
117.8


(222.2
)
 
(1,132.8
)
 
(1,089.0
)
Net gain
 
$
308.0


207.1

 
80.1

 
28.3

Selective’s insurance subsidiaries’ other investments gain (loss)
 
$
1.6


1.3

 

 
(0.8
)
 
(f) We have pledged certain AFS fixed income securities as collateral related to our relationships with the Federal Home Loan Bank of Indianapolis ("FHLBI") and the Federal Home Loan Bank of New York ("FHLBNY"). In addition, certain securities were on deposit with various state and regulatory agencies at September 30, 2016 to comply with insurance laws. We retain all rights regarding all securities pledged as collateral.

The following table summarizes the market value of these securities at September 30, 2016:
($ in millions)
 
FHLBI Collateral
 
FHLBNY Collateral
 
State and Regulatory Deposits
 
Total
U.S. government and government agencies
 
$
7.4

 

 
23.1

 
30.5

CMBS
 
1.0

 

 

 
1.0

RMBS
 
53.1

 
64.4

 

 
117.5

Total pledged as collateral
 
$
61.5

 
64.4

 
23.1


149.0

 
(g) The Company did not have exposure to any credit concentration risk of a single issuer greater than 10% of the Company's stockholders' equity, other than certain U.S. government-backed investments, as of September 30, 2016 or December 31, 2015.

(h) The components of pre-tax net investment income earned for the periods indicated were as follows:
 
 
Quarter ended September 30,
 
Nine Months ended September 30,
($ in thousands)
 
2016
 
2015
 
2016
 
2015
Fixed income securities
 
$
32,453


30,601

 
$
95,850

 
92,227

Equity securities
 
1,506


2,370

 
5,940

 
6,546

Short-term investments
 
192


24