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 2017

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: June 30, 2017
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o   (Do not check if a smaller reporting company)
 
Emerging growth company o
 
Smaller reporting company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o

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 July 14, 2017, there were 58,364,187 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)
 
June 30,
2017
 
December 31,
2016
ASSETS
 
 

 
 

Investments:
 
 

 
 

Fixed income securities, held-to-maturity – at carrying value (fair value:  $75,540 – 2017; $105,211 – 2016)
 
$
72,514

 
101,556

Fixed income securities, available-for-sale – at fair value (amortized cost: $4,923,005 – 2017; $4,753,759 – 2016)
 
5,018,722

 
4,792,540

Equity securities, available-for-sale – at fair value (cost:  $131,463 – 2017; $120,889 – 2016)
 
161,694

 
146,753

Short-term investments (at cost which approximates fair value)
 
133,706

 
221,701

Other investments
 
116,411

 
102,397

Total investments (Note 4 and 6)
 
5,503,047


5,364,947

Cash
 
8,628

 
458

Interest and dividends due or accrued
 
40,231

 
40,164

Premiums receivable, net of allowance for uncollectible accounts of:  $6,627 – 2017; $5,980 – 2016
 
764,340

 
681,611

Reinsurance recoverable, net of allowance for uncollectible accounts of: $5,200 – 2017; $5,500 – 2016
 
601,887

 
621,537

Prepaid reinsurance premiums
 
151,898

 
146,282

Current federal income tax
 

 
2,486

Deferred federal income tax
 
60,388

 
84,840

Property and equipment – at cost, net of accumulated depreciation and amortization of:
$206,847 – 2017; $198,729 – 2016
 
66,255

 
69,576

Deferred policy acquisition costs
 
234,903

 
222,564

Goodwill
 
7,849

 
7,849

Other assets
 
88,778

 
113,534

Total assets
 
$
7,528,204

 
7,355,848

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Liabilities:
 
 

 
 

Reserve for losses and loss expenses (Note 8)
 
$
3,731,221

 
3,691,719

Unearned premiums
 
1,352,068

 
1,262,819

Long-term debt
 
438,894

 
438,667

Current federal income tax
 
2,104

 

Accrued salaries and benefits
 
103,177

 
132,880

Other liabilities
 
248,184

 
298,393

Total liabilities
 
$
5,875,648

 
5,824,478

 
 
 
 
 
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: 102,150,866 – 2017; 101,620,436 – 2016
 
204,302

 
203,241

Additional paid-in capital
 
359,982

 
347,295

Retained earnings
 
1,641,820

 
1,568,881

Accumulated other comprehensive income (loss) (Note 11)
 
24,497

 
(15,950
)
Treasury stock – at cost
(shares:  43,788,147 – 2017; 43,653,237 – 2016)
 
(578,045
)
 
(572,097
)
Total stockholders’ equity
 
$
1,652,556

 
1,531,370

Commitments and contingencies
 


 


Total liabilities and stockholders’ equity
 
$
7,528,204

 
7,355,848


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

1


SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in thousands, except per share amounts)
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 

 
 

 
 
 
 
Net premiums earned
 
$
568,030

 
531,932

 
1,128,884

 
1,054,390

Net investment income earned
 
41,430

 
31,182

 
78,849

 
61,951

Net realized gains (losses):
 
 

 
 

 
 
 
 
Net realized investment gains
 
2,951

 
2,314

 
5,381

 
3,203

Other-than-temporary impairments
 
(1,211
)
 
(559
)
 
(4,686
)
 
(4,152
)
Other-than-temporary impairments on fixed income securities recognized in other comprehensive income
 
(6
)
 
10

 
(6
)
 
10

Total net realized gains (losses)
 
1,734

 
1,765

 
689

 
(939
)
Other income
 
3,291

 
3,868

 
6,532

 
4,819

Total revenues
 
614,485

 
568,747

 
1,214,954

 
1,120,221

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 
 
 
Losses and loss expenses incurred
 
341,559

 
298,479

 
659,031

 
595,623

Policy acquisition costs
 
196,824

 
190,731

 
393,052

 
373,958

Interest expense
 
6,081

 
5,620

 
12,187

 
11,226

Other expenses
 
11,092

 
11,606

 
24,181

 
25,228

Total expenses
 
555,556

 
506,436

 
1,088,451

 
1,006,035

 
 
 
 
 
 
 
 
 
Income before federal income tax
 
58,929

 
62,311

 
126,503

 
114,186

 
 
 
 
 
 
 
 
 
Federal income tax expense:
 
 

 
 

 
 
 
 
Current
 
17,785

 
18,318

 
32,058

 
32,402

Deferred
 
(282
)
 
392

 
2,579

 
1,151

Total federal income tax expense
 
17,503

 
18,710

 
34,637

 
33,553

 
 
 
 
 
 
 
 
 
Net income
 
$
41,426

 
43,601

 
91,866

 
80,633

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 

 
 

 
 
 
 
Basic net income
 
$
0.71

 
0.75

 
1.57

 
1.40

 
 
 
 
 
 
 
 
 
Diluted net income
 
$
0.70

 
0.74

 
1.55

 
1.38

 
 
 
 
 
 
 
 
 
Dividends to stockholders
 
$
0.16

 
0.15

 
0.32

 
0.30

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


2


SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in thousands)
 
2017
 
2016
 
2017
 
2016
Net income
 
$
41,426

 
43,601

 
91,866

 
80,633

 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 

 
 

 
 
 
 
Unrealized gains on investment securities:
 
 

 
 

 
 
 
 
Unrealized holding gains arising during period
 
23,326

 
36,188

 
40,087

 
78,917

Non-credit portion of other-than-temporary impairments recognized in other comprehensive income
 
4

 
(6
)
 
4

 
(6
)
  Amounts reclassified into net income:
 
 
 
 
 
 
 
 
Held-to-maturity securities
 
(28
)
 
(12
)
 
(60
)
 
(59
)
Realized (gains) losses on available-for-sale securities
 
(1,225
)
 
(1,145
)
 
(244
)
 
609

Total unrealized gains on investment securities
 
22,077

 
35,025

 
39,787

 
79,461

 
 
 
 
 
 
 
 
 
Defined benefit pension and post-retirement plans:
 
 

 
 

 
 
 
 
Amounts reclassified into net income:
 
 
 
 
 
 
 
 
Net actuarial loss
 
330

 
985

 
660

 
1,971

  Total defined benefit pension and post-retirement plans
 
330

 
985

 
660

 
1,971

Other comprehensive income
 
22,407

 
36,010

 
40,447

 
81,432

Comprehensive income
 
$
63,833

 
79,611

 
132,313

 
162,065

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


3


SELECTIVE INSURANCE GROUP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
Six Months ended June 30,
($ in thousands, except per share amounts)
 
2017
 
2016
Common stock:
 
 

 
 

Beginning of year
 
$
203,241

 
201,723

Dividend reinvestment plan (shares:  15,419 – 2017; 20,808 – 2016)
 
31

 
42

Stock purchase and compensation plans (shares:  515,011 – 2017; 569,034 – 2016)
 
1,030

 
1,138

End of period
 
204,302

 
202,903

 
 
 
 
 
Additional paid-in capital:
 
 

 
 

Beginning of year
 
347,295

 
326,656

Dividend reinvestment plan
 
693

 
696

Stock purchase and compensation plans
 
11,994

 
12,757

End of period
 
359,982

 
340,109

 
 
 
 
 
Retained earnings:
 
 

 
 

Beginning of year
 
1,568,881

 
1,446,192

Net income
 
91,866

 
80,633

Dividends to stockholders ($0.32 per share – 2017; $0.30 per share – 2016)
 
(18,927
)
 
(17,583
)
End of period
 
1,641,820

 
1,509,242

 
 
 
 
 
Accumulated other comprehensive income:
 
 

 
 

Beginning of year
 
(15,950
)
 
(9,425
)
Other comprehensive income
 
40,447

 
81,432

End of period
 
24,497

 
72,007

 
 
 
 
 
Treasury stock:
 
 

 
 

Beginning of year
 
(572,097
)
 
(567,105
)
Acquisition of treasury stock (shares: 134,910 – 2017; 138,007 – 2016)
 
(5,948
)
 
(4,419
)
End of period
 
(578,045
)
 
(571,524
)
Total stockholders’ equity
 
$
1,652,556

 
1,552,737

 
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 FLOWS
 
Six Months ended June 30,
($ in thousands)
 
2017
 
2016
Operating Activities
 
 

 
 

Net income
 
$
91,866

 
80,633

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

 
 

Depreciation and amortization
 
25,409

 
30,155

Stock-based compensation expense
 
8,372

 
7,203

Undistributed (gains) losses of equity method investments
 
(3,575
)
 
1,677

Loss on disposal of fixed assets
 
998

 

Net realized (gains) losses
 
(689
)
 
939

 
 
 
 
 
Changes in assets and liabilities:
 
 

 
 

Increase in reserve for losses and loss expenses, net of reinsurance recoverable
 
59,152

 
41,986

Increase in unearned premiums, net of prepaid reinsurance
 
83,633

 
89,109

Decrease in net federal income taxes
 
7,263

 
2,380

Increase in premiums receivable
 
(82,729
)
 
(91,391
)
Increase in deferred policy acquisition costs
 
(12,339
)
 
(15,395
)
Increase in interest and dividends due or accrued
 
(204
)
 
(1,030
)
Decrease in accrued salaries and benefits
 
(29,703
)
 
(48,603
)
Decrease (increase) in other assets
 
24,953

 
(3,877
)
Decrease in other liabilities
 
(48,684
)
 
(34,659
)
Net cash provided by operating activities
 
123,723

 
59,127

 
 
 
 
 
Investing Activities
 
 

 
 

Purchase of fixed income securities, held-to-maturity
 

 
(4,235
)
Purchase of fixed income securities, available-for-sale
 
(1,194,142
)
 
(411,538
)
Purchase of equity securities, available-for-sale
 
(22,115
)
 
(16,796
)
Purchase of other investments
 
(22,121
)
 
(17,734
)
Purchase of short-term investments
 
(2,259,305
)
 
(691,496
)
Sale of fixed income securities, available-for-sale
 
717,072

 
22,114

Sale of short-term investments
 
2,348,892

 
680,865

Redemption and maturities of fixed income securities, held-to-maturity
 
28,730

 
44,615

Redemption and maturities of fixed income securities, available-for-sale
 
300,430

 
264,244

Sale of equity securities, available-for-sale
 
6,289

 
83,793

Distributions from other investments
 
9,843

 
13,380

Purchase of property and equipment
 
(7,047
)
 
(8,187
)
Net cash used in investing activities
 
(93,474
)
 
(40,975
)
 
 
 
 
 
Financing Activities
 
 

 
 

Dividends to stockholders
 
(17,922
)
 
(16,569
)
Acquisition of treasury stock
 
(5,948
)
 
(4,419
)
Net proceeds from stock purchase and compensation plans
 
4,045

 
4,368

Proceeds from borrowings
 
64,000

 
55,000

Repayments of borrowings
 
(64,000
)
 
(55,000
)
Excess tax benefits from share-based payment arrangements
 

 
1,761

Repayments of capital lease obligations
 
(2,254
)
 
(2,661
)
Net cash used in financing activities
 
(22,079
)
 
(17,520
)
Net increase in cash
 
8,170

 
632

Cash, beginning of year
 
458

 
898

Cash, end of period
 
$
8,628

 
1,530

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.

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 second quarters ended June 30, 2017 (“Second Quarter 2017”) and June 30, 2016 (“Second Quarter 2016”) and the six-month periods ended June 30, 2017 ("Six Months 2017") and June 30, 2016 ("Six Months 2016"). 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, 2016 (“2016 Annual Report”) filed with the SEC.

NOTE 2. Adoption of Accounting Pronouncements 
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions. We adopted this guidance on January 1, 2017, which resulted in the following impacts on our consolidated financial statements:
Consolidated Statements of Income
The new standard requires that the tax effects of share-based compensation be recognized in the income tax provision as discrete items outside of the annual estimated expected tax rate. In addition, all excess tax benefits and tax deficiencies should be recognized as income tax benefit or expense in the income statement. Previously, these amounts were recorded in additional paid-in capital. In addition, in calculating potential common shares used to determine diluted earnings per share, GAAP requires us to use the treasury stock method. The new standard requires that assumed proceeds under the treasury stock method be modified to exclude the amount of excess tax benefits that would have been recognized in additional paid-in capital. These changes were adopted on a prospective basis. As a result of adoption, we recognized an income tax benefit in the Consolidated Statements of Income of $0.4 million in Second Quarter 2017 and $3.3 million in Six Months 2017 related to stock grants that have vested this year.

In recording share-based compensation expense, ASU 2016-09 allows companies to make a policy election as to whether they will include an estimate of awards expected to be forfeited or whether they will account for forfeitures as they occur. We have elected to include an estimate of forfeitures in the computation of our share-based compensation expense. As this treatment is consistent with previous guidance, this election had no impact on our consolidated financial statements.
Consolidated Statements of Cash Flows
ASU 2016-09 requires that excess tax benefits from share-based awards be reported as operating activities in the consolidated statement of cash flows. Previously, these cash flows were included in financing activities. We elected to apply this change on a prospective basis; therefore, no changes have been made to the prior periods disclosed in this report.

The standard also requires that employee taxes paid when an employer withholds shares for tax-withholding purposes be reported as financing activities in the consolidated statement of cash flows. This requirement has no impact to us as we have historically reported these cash flows as part of financing activities.
In October 2016, the FASB issued ASU 2016-17, Consolidation: Interests Held through Related Parties That Are Under Common Control ("ASU 2016-17"). ASU 2016-17 changes how a decision maker considers indirect interests in a variable interest entity ("VIE") held under common control in making the primary beneficiary determination. ASU 2016-17 was effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. The adoption of ASU 2016-17 did not impact us, as we are not the decision maker in any of the VIEs in which we are invested.

6



Pronouncements to be effective in the future
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall: 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. Our adoption of this guidance will require a cumulative-effect adjustment to the balance sheet as of January 1, 2018 in an amount equal to the after-tax net unrealized gain or loss on our equity portfolio as of year-end 2017. If this guidance had been adopted as of the beginning of 2017, the cumulative-effect adjustment would have been approximately $17 million and we would have recognized additional after-tax net income of approximately $3 million or $0.05 per diluted share, reflecting the change in fair value during Six Months 2017.

In February 2016, the FASB issued ASU 2016-02, Leases (“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 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 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.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash ("ASU 2016-18"). ASU 2016-18, requires that restricted cash and restricted cash equivalents be included with cash and cash equivalents in the reconciliation of beginning and ending cash on the statements of cash flows. This update also requires a reconciliation of the statement of the cash flows to the balance sheet if the balance sheet includes more than one line item of cash, cash equivalents, and restricted cash. ASU 2016-18 is effective, with retrospective adoption, for annual periods beginning after December 15, 2017, and interim periods within those annual periods. We currently have restricted cash associated with the National Flood Insurance Program ("NFIP") in "Other assets." This literature will impact the presentation of this item in both the Consolidated Balance Sheets and the Statements of Cash Flows.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 eliminates the second step of the two part goodwill impairment test, which

7


required entities to determine the fair value of individual assets and liabilities of a reporting unit to measure the goodwill impairment. Under the new guidance, a goodwill impairment is calculated as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments in this update should be applied on a prospective basis for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect a material impact on our financial condition or results of operations from the adoption of this guidance.
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ("ASU 2017-07"). ASU 2017-07 requires that an employer report a pension plan's service cost in the same line item or line items as other compensation costs arising from services rendered by pertinent employees during the period. ASU 2017-07 also requires that other components of net benefit cost be presented in the income statement separately from the service cost component. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted at the beginning of an annual period. As our pension plan was frozen as of March 2016, we ceased accruing additional service fee costs at that time. Therefore, the application of this guidance is not anticipated to impact our financial condition, results of operations, or disclosures.
In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities ("ASU 2017-08"). ASU 2017-08 revises the amortization period for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. ASU 2017-08 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018, with early adoption permitted. This ASU does not impact us, as we amortize premium on these callable debt securities to the earliest call date.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting ("ASU 2017-09"). ASU 2017-09 provides clarification about which changes to the terms or conditions of a share-based payment award would require the application of modification accounting. ASU 2017-09 is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. The adoption of this guidance is not anticipated to impact us, as we currently record modifications in accordance with this ASU.

NOTE 3. Statements of Cash Flows
Supplemental cash flow information was as follows:
 
 
Six Months ended June 30,
($ in thousands)
 
2017
 
2016
Cash paid during the period for:
 
 

 
 

Interest
 
$
11,963

 
10,986

Federal income tax
 
27,000

 
29,000

 
 
 
 
 
Non-cash items:
 
 
 
 
Exchange of fixed income securities, AFS
 
1,029

 
17,702

Corporate actions related to equity securities, AFS1
 

 
3,032

Assets acquired under capital lease arrangements
 
278

 
2,999

Non-cash purchase of property and equipment
 

 
577

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

Included in "Other assets" on the Consolidated Balance Sheets was $8.1 million at June 30, 2017 and $8.9 million at June 30, 2016 of cash received from the NFIP, which is restricted to pay flood claims under the Write Your Own ("WYO") program. 

8



NOTE 4. Investments
(a) Information regarding our held-to-maturity ("HTM") fixed income securities as of June 30, 2017 and December 31, 2016 was as follows:
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
($ in thousands)
 
Amortized
Cost
 
Net
 Unrealized Gains
 (Losses)
 
Carrying
Value
 
Unrecognized
 Holding
Gains
 
Unrecognized Holding
 Losses
 
Fair
Value
Obligations of states and political subdivisions
 
$
53,734

 
185

 
53,919

 
1,703

 

 
55,622

Corporate securities
 
18,714

 
(119
)
 
18,595

 
1,323

 

 
19,918

Total HTM fixed income securities
 
$
72,448

 
66

 
72,514

 
3,026

 

 
75,540

December 31, 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
 
$
77,466

 
317

 
77,783

 
2,133

 

 
79,916

Corporate securities
 
22,711

 
(143
)
 
22,568

 
1,665

 
(158
)
 
24,075

Commercial mortgage-backed securities ("CMBS")
 
1,220

 
(15
)
 
1,205

 
15

 

 
1,220

Total HTM fixed income securities
 
$
101,397

 
159

 
101,556

 
3,813

 
(158
)
 
105,211

 
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.

(b) Information regarding our AFS securities as of June 30, 2017 and December 31, 2016 was as follows:
June 30, 2017
 
 
 
 
 
 
 
 
($ in thousands)
 
Cost/
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
AFS fixed income securities:
 
 
 
 
 
 
 
 
U.S. government and government agencies
 
$
66,932

 
1,103

 
(32
)
 
68,003

Foreign government
 
18,157

 
557

 

 
18,714

Obligations of states and political subdivisions
 
1,360,211

 
45,641

 
(1,086
)
 
1,404,766

Corporate securities
 
1,782,993

 
39,041

 
(524
)
 
1,821,510

Collateralized loan obligations and other asset-backed securities ("CLO and other ABS")
 
698,594

 
4,108

 
(178
)
 
702,524

CMBS
 
277,320

 
2,128

 
(243
)
 
279,205

Residential mortgage-backed
securities (“RMBS”)
 
718,798

 
6,068

 
(866
)
 
724,000

Total AFS fixed income securities
 
4,923,005

 
98,646

 
(2,929
)
 
5,018,722

AFS equity securities:
 
 
 
 
 
 
 
 
Common stock
 
115,315

 
30,108

 
(987
)
 
144,436

Preferred stock
 
16,148

 
1,110

 

 
17,258

Total AFS equity securities
 
131,463

 
31,218

 
(987
)
 
161,694

Total AFS securities
 
$
5,054,468

 
129,864

 
(3,916
)
 
5,180,416


9


 
December 31, 2016
 
 
 
 
 
 
 
 
($ in thousands)
 
Cost/
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
AFS fixed income securities:
 
 
 
 
 
 
 
 
U.S. government and government agencies
 
$
75,139

 
2,230

 
(36
)
 
77,333

Foreign government
 
26,559

 
322

 
(16
)
 
26,865

Obligations of states and political subdivisions
 
1,366,287

 
18,610

 
(5,304
)
 
1,379,593

Corporate securities
 
1,976,556

 
27,057

 
(5,860
)
 
1,997,753

CLO and other ABS
 
527,876

 
1,439

 
(355
)
 
528,960

CMBS
 
256,356

 
1,514

 
(1,028
)
 
256,842

RMBS
 
524,986

 
3,006

 
(2,798
)
 
525,194

Total AFS fixed income securities
 
4,753,759

 
54,178

 
(15,397
)
 
4,792,540

AFS equity securities:
 
 
 
 
 
 
 
 
Common stock
 
104,663

 
26,250

 
(305
)
 
130,608

Preferred stock
 
16,226

 
274

 
(355
)
 
16,145

Total AFS equity securities
 
120,889

 
26,524

 
(660
)
 
146,753

Total AFS securities
 
$
4,874,648

 
80,702

 
(16,057
)
 
4,939,293


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.
  
(c) The severity of impairment on securities in an unrealized/unrecognized loss position averaged 1% of amortized cost at both June 30, 2017 and December 31, 2016. Quantitative information regarding unrealized losses on our AFS portfolio is provided below.
June 30, 2017
 
Less than 12 months
 
12 months or longer
 
Total
($ in thousands)
 
Fair Value
 
Unrealized
Losses1
 
Fair Value
 
Unrealized
Losses1
 
Fair Value
 
Unrealized
Losses
1
AFS fixed income securities:
 
 

 
 

 
 

 
 

 
 
 
 
U.S. government and government agencies
 
$
12,670

 
(32
)
 

 

 
12,670

 
(32
)
Obligations of states and political subdivisions
 
107,387

 
(1,086
)
 

 

 
107,387

 
(1,086
)
Corporate securities
 
72,991

 
(517
)
 
2,531

 
(7
)
 
75,522

 
(524
)
CLO and other ABS
 
156,406

 
(178
)
 

 

 
156,406

 
(178
)
CMBS
 
42,671

 
(243
)
 

 

 
42,671

 
(243
)
RMBS
 
179,293

 
(860
)
 
449

 
(6
)
 
179,742

 
(866
)
Total AFS fixed income securities
 
571,418

 
(2,916
)
 
2,980

 
(13
)
 
574,398

 
(2,929
)
AFS equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
 
18,423

 
(987
)
 

 

 
18,423

 
(987
)
Total AFS equity securities
 
18,423

 
(987
)
 

 

 
18,423

 
(987
)
Total AFS
 
$
589,841

 
(3,903
)
 
2,980

 
(13
)
 
592,821

 
(3,916
)


10


December 31, 2016
 
Less than 12 months
 
12 months or longer
 
Total
($ in thousands)
 
Fair
Value
 
Unrealized
Losses1
 
Fair Value
 
Unrealized
Losses1
 
Fair Value
 
Unrealized
Losses
1
AFS fixed income securities:
 
 

 
 

 
 

 
 

 
 
 
 
U.S. government and government agencies
 
$
6,419

 
(36
)
 

 

 
6,419

 
(36
)
Foreign government
 
13,075

 
(16
)
 

 

 
13,075

 
(16
)
Obligations of states and political subdivisions
 
306,509

 
(5,304
)
 

 

 
306,509

 
(5,304
)
Corporate securities
 
462,902

 
(5,771
)
 
4,913

 
(89
)
 
467,815

 
(5,860
)
CLO and other ABS
 
189,795

 
(354
)
 
319

 
(1
)
 
190,114

 
(355
)
CMBS
 
82,492

 
(1,021
)
 
1,645

 
(7
)
 
84,137

 
(1,028
)
RMBS
 
279,480

 
(2,489
)
 
8,749

 
(309
)
 
288,229

 
(2,798
)
Total AFS fixed income securities
 
1,340,672

 
(14,991
)
 
15,626

 
(406
)
 
1,356,298

 
(15,397
)
AFS equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
 
11,271

 
(305
)
 

 

 
11,271

 
(305
)
Preferred stock
 
6,168

 
(355
)
 

 

 
6,168

 
(355
)
Total AFS equity securities
 
17,439

 
(660
)
 

 

 
17,439

 
(660
)
Total AFS
 
$
1,358,111

 
(15,651
)
 
15,626

 
(406
)
 
1,373,737

 
(16,057
)
  1 Gross unrealized losses include non-OTTI unrealized amounts and OTTI losses recognized in AOCI. 

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 2016 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.
 
(d) Fixed income securities at June 30, 2017, 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 fixed income securities at June 30, 2017:
 
 
AFS
 
HTM
($ in thousands)
 
Fair Value
 
Carrying Value
 
Fair Value
Due in one year or less
 
$
306,493

 
34,521

 
34,898

Due after one year through five years
 
2,095,055

 
29,648

 
31,498

Due after five years through 10 years
 
2,379,624

 
8,345

 
9,144

Due after 10 years
 
237,550

 

 

Total fixed income securities
 
$
5,018,722

 
72,514

 
75,540

 
(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.


11


The following table summarizes our other investment portfolio by strategy:
Other Investments
 
June 30, 2017
 
December 31, 2016
($ in thousands)
 
Carrying Value
 
Remaining Commitment
 
Maximum Exposure to Loss1
 
Carrying Value
 
Remaining Commitment
 
Maximum Exposure to Loss1
Alternative Investments
 
 

 
 

 
 
 
 
 
 
 
 
   Private equity
 
$
46,945

 
76,027

 
122,972

 
41,135

 
76,774

 
117,909

   Private credit
 
29,942

 
57,391

 
87,333

 
28,193

 
40,613

 
68,806

   Real assets
 
20,783

 
31,237

 
52,020

 
14,486

 
22,899

 
37,385

Total alternative investments
 
97,670

 
164,655

 
262,325

 
83,814

 
140,286

 
224,100

Other securities
 
18,741

 

 
18,741

 
18,583

 
3,400

 
21,983

Total other investments
 
$
116,411

 
164,655

 
281,066

 
102,397

 
143,686

 
246,083

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. 

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 2017 or 2016.

For a description of our alternative investment strategies, as well as information regarding redemption, restrictions, and fund liquidations, refer to Note 5. “Investments” in Item 8. “Financial Statements and Supplementary Data.” of our 2016 Annual Report.
 
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 six-month periods ended March 31 is included in our Second Quarter and Six Months results. This information is as follows:
Income Statement Information
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in millions)
 
2017

2016
 
2017
 
2016
Net investment (loss) income
 
$
(9.9
)

(4.6
)
 
(62.4
)
 
37.0

Realized gains
 
(70.2
)

193.2

 
(304.3
)
 
981.1

Net change in unrealized depreciation
 
1,418.5


(253.9
)
 
1,890.0

 
(1,236.5
)
Net gain
 
$
1,338.4


(65.3
)
 
1,523.3

 
(218.4
)
Selective’s insurance subsidiaries’ other investments gain (loss)
 
$
5.2


(0.6
)
 
6.8

 
(1.7
)
 
(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 June 30, 2017 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 June 30, 2017:
($ in millions)
 
FHLBI Collateral
 
FHLBNY Collateral
 
State and Regulatory Deposits
 
Total
U.S. government and government agencies
 
$
3.1

 

 
23.9

 
27.0

Obligations of states and political subdivisions
 

 

 
2.0

 
2.0

CMBS
 
3.6

 
4.8

 

 
8.4

RMBS
 
60.6

 
51.9

 

 
112.5

Total pledged as collateral
 
$
67.3

 
56.7

 
25.9


149.9

 
(g) We did not have exposure to any credit concentration risk of a single issuer greater than 10% of our stockholders' equity, other than certain U.S. government-backed investments, as of June 30, 2017 or December 31, 2016.


12


(h) The components of pre-tax net investment income earned were as follows:
 
 
Quarter ended June 30,
 
Six Months ended June 30,
($ in thousands)
 
2017
 
2016
 
2017