Selective Insurance Group
Annual Report 2015

Plain-text annual report

2015 Annual Report S e l e c t i v e 2 0 1 5 A n n u a l R e p o r t Selective Insurance Group, Inc. is a holding company for ten property and casualty (P&C) insurance companies rated “A” (Excellent) by A.M. Best. Through independent agents, the company offers standard and specialty insurance to business professionals and consumers to meet their risk management needs. Selective is guided by a vision to deliver high-tech, high-touch insurance solutions to our distribution partners and customers, while delivering a superior customer service experience. So valuable is the human element that I will not let this company lose the human touch which has been largely responsible for its success. – D.L.B. Smith, Founder 2015 GAAP Financial Highlights ($ in millions, except per share data) Insurance Operations Net premiums written Net premiums earned Underwriting gain before tax GAAP combined ratio Statutory combined ratio Investments Net investment income before tax Net realized gains before tax Invested assets per dollar of stockholders’ equity Summary Data Total revenues Net income Return on average equity Operating income (non-GAAP) Operating return on average equity (non-GAAP) Total assets Stockholders’ equity Per Share Data Diluted net income Operating income (non-GAAP) Dividends Stockholders’ equity 2015 2014 % or Point Change Better (Worse) $2,069.9 $1,989.9 $149.0 92.5% 92.4% $121.3 $13.2 $3.64 $1,885.3 $1,852.6 $78.1 95.8% 95.7% $138.7 $26.6 $3.77 $2,131.9 $2,034.9 $165.9 12.4% $157.3 11.8% $6,904.4 $1,398.0 $2.85 $2.70 $0.57 $24.37 $141.8 11.7% $124.5 10.3% $6,574.9 $1,275.6 $2.47 $2.17 $0.53 $22.54 10% 7% 91% 3.3 pts 3.3 pts (13)% (50)% (3)% 5% 17% 0.7 pts 26% 1.5 pts 5% 10% 15% 24% 8% 8% Refer to Glossary of Terms attached to the Company’s Form 10-K Exhibit 99.1 for definition of specific measures. / GAAP: U.S. Generally Accepted Accounting Principles / Operating income is reconciled to net income in the Company’s Form 10-K. Key Selective Highlights 92.4% Overall Statutory Combined Ratio 22% Growth in New Business 12.4% Total Return on Average Equity 8% Year over Year Growth in Book Value Per Share Selective S&P 500 Index S&P Property & Casualty Index Average Annual Return Growth of a $10,000 investment (year-end 2010-15) $25,000 $20,000 $15,000 $10,000 $5,000 $0 2010 2011 2012 2013 2014 2015 Selective 2015 Annual Report 1 To Our Shareholders Selective has a long history of creating value for shareholders by delivering on our strategic business objectives, but 2015 stands out. It was Selective’s most profitable year since we began trading on Nasdaq, achieving a record statutory combined ratio of 92.4%, or 89.4% excluding catastrophe losses. In addition, our 11.8% operating return on equity exceeded our target of 300 basis points over our weighted average cost of capital. Our success this year generating profitable growth reflects what we consider our sustainable competitive advantages: • True franchise value with “ivy league” distribution partners; • Our unique field model coupled with sophisticated underwriting and claims capabilities; and • Superior customer experience delivered by best-in-class employees. In our opinion, Selective is a special company that is highly successful through the powerful combination of best-in-class employees and distribution partners. We are very proud of our success and continued outperformance, which the following 2015 metrics demonstrate: • Growth in net premiums written of 10%, 2.5 times the 2015 expected industry growth rate; • Overall renewal pure price increases of 3.4%; • Increased standard lines new business production of 22%; • Underwriting and claims improvements that reduced our combined ratio by 2.2 points; and • Agent survey satisfaction scores that have averaged 8.6 out of 10 over the past three years. True Franchise Value Insurance is a relationship business, and Selective has true franchise value with our distribution partners who are committed to driving profitable growth, as well as providing 2 best-in-class service to customers. We are the 42nd largest property and casualty company in the U.S., and in 2015 wrote $2.1 billion of net premiums written through 1,100 retail and 80 wholesale distribution partners. Our partner relationships have been built on trust and many years of working together. In 2015, we wrote $1.9 billion of standard lines premiums, or $1.7 million of premium per agent, and $189 million of excess and surplus (E&S) lines premium, or $2.4 million per wholesale general agent. As we focus on the future, Selective will continue to leverage its competitive advantages to maintain its profitable growth trajectory by increasing our share of wallet with existing distribution partners while strategically adding distribution partners in areas with strong new business opportunities. Unique Field Model Coupled with Sophisticated Underwriting and Claims Capabilities We have a highly responsive, field-based model with: • 100 Agency Management Specialists; • 15 Personal Lines Marketing Specialists; • 100 Claim Management Specialists; and • 80 Safety Management Specialists. All of our field employees are armed with sophisticated underwriting and claims tools to better serve our distribution partners and customers. Our distribution partners cite our field employees as the number one reason they place their best business with us. Superior Customer Experience Delivered by Best-in-Class Employees People are the cornerstone of every successful organization, and we have best-in-class employees focused on making us a more customer-centric company. In 2015, we made key strategic investments in technology as part of our efforts to deliver a superior customer experience across all channels, commonly referred to as omni-channel. These investments have enabled us to provide our customers with 24/7 access to information and transactional capabilities. Customers are coming to expect this level of service and access from every company with which they conduct business, and we view omni-channel as a game changer. Over the last few years, Selective has rolled out self-servicing capabilities via mobile app, mobile web, and desktop, and we relaunched our public website with simplified navigation, richer content, and responsive capabilities. Alignment for Profitable Growth Our three insurance segments — standard commercial lines, standard personal lines and E&S lines — are as follows: Growth in our standard commercial lines business, which represents 77% of total net premiums written, was very strong this year at 11%, driven by new business growth of 26% to $340 million, and solid pure price increases. Retention was strong at 83%, and renewal pure price was 3.0% on a written basis. Commercial lines price increases met or exceeded claims inflation for 25 consecutive quarters. The standard commercial lines statutory combined ratio was 89.2%, an improvement of 6.3 points from 2014. Our standard personal lines business represents 14% of total net premiums written. We consider it complementary to commercial lines, and it plays a significant role in building our share of wallet with our distribution partners. This year, renewal pure price was strong at 5.8%, with homeowners achieving a 7.5% rate increase. The launch of The Selective Edge®product in 2015 was well-received by our distribution partners, and we expect it to gain additional traction in 2016. In 2015, The Selective Edge®product accounted for 15% of our automobile new business and 22% of our homeowners new business. We saw continued top-line pressure in 2015 as we focused our resources on delivering our target returns for this segment. Our E&S business, which represents 9% of net premiums written, experienced tremendous growth in the year. Net premiums written grew 24% to $189 million, and we generated robust new business growth of 23% in 2015. That said, we remain focused on improving E&S profitability. Accordingly, we are employing a number of initiatives, including a mix of business shift, targeted price increases, claims management improvements, and more robust monitoring tools. Leveraging Our Financial Strength We remain highly focused on pricing discipline to improve our underwriting performance in order to mitigate lower after-tax portfolio yields and consistently achieve our return on equity target. Selective is uniquely positioned to thrive in this environment because low investment yields force companies to generate underwriting profits, and many commercial lines companies have not invested in sophisticated underwriting and claims tools. In addition, we have a leverage advantage because we write premium at twice the industry premium to surplus level — every one point of combined ratio generates one point of operating return on equity. Because our leverage is twice the industry average, the competition must price its product higher to generate an equivalent return. We have a conservative and well-diversified investment portfolio. In 2015, our invested assets increased to $5 billion and operating cash flow, at 18% of net premiums written, increased by 64%. Our fixed income investments have an average credit quality of AA- and a 3.7 year duration, including short-term investments. Since our fixed income securities duration is shorter than the industry, we will be able to more quickly take advantage of a rising interest rate environment. We closed the year with a book value per share up 8% to $24.37. In addition, we have maintained a financial strength rating of “A” (Excellent) or better by A.M. Best Company for more than 85 years. Strong Board Leadership We have twelve Board members of diverse backgrounds who help shape our strategy and contribute to our success. In 2015, we welcomed Robert Kelly Doherty as an independent director. Kelly has significant private and public company investment experience and serves as Managing Partner of Caymen Advisors and Caymen Partners, which he founded in 1999. He already has made meaningful contributions to Selective and our investment and overall strategies. Committed to Our Communities Our employees and distribution partners are committed to giving back to the communities where they live and work. The Selective Insurance Group Foundation made significant financial contributions in 2015 to not-for-profit organizations that make a difference in people’s lives. The Foundation also continued its policy of providing grants to match employees’ donations of time to philanthropic efforts. Our Focus Forward We want to express our sincere appreciation and gratitude to everyone who helped drive our success this year. We are always grateful for the incredible dedication and commitment of our employees and distribution partners to being the best, and we greatly appreciate the leadership and guidance of our Board of Directors. As Selective celebrates its 90th year of business in 2016, we continue to focus on our competitive advantages; however, our goal of Focus Forward is to build off of our solid foundation for future growth and profit sustainability. We believe Selective remains a highly attractive investment opportunity and is well-positioned to stay on the path to deliver sustainable, profitable growth while driving value for all shareholders. Selective — strong today, stronger tomorrow. Sincerely, Gregory E. Murphy Chairman and CEO John J. Marchioni President and COO Selective 2015 Annual Report 3 Company Overview Our Lines of Business Where We Do Business Selective provides value-added products and services to businesses, public entities and individuals through the following lines of business: Standard Commercial 77% of business Selective provides commercial insurance to more than 80 industry segments, from retail operations, contractors and not-for-profit groups, to governmental entities, manufacturers and more, across 22 states and the District of Columbia. Standard Personal 14% of business Selective offers a number of customized insurance solutions for drivers, renters and homeowners in 13 states. In addition, Selective is the 6th largest Write Your Own (WYO) carrier in the National Flood Insurance Program, providing flood building and contents coverage to homeowners and businesses nationwide. Excess & Surplus 9% of business Selective offers excess and surplus lines property, general liability, liquor liability, and inland marine coverage through wholesale agents to customers in more than 1,000 classes of business across the U.S. Investments Selective is a super-regional insurance carrier operating in the following states: STANDARD COMMERCIAL STANDARD PERSONAL * Flood insurance available in all 50 states. EXCESS & SURPLUS Our Competitive Advantages Selective’s long history of financial strength, superior execution and disciplined growth can be attributed to our sustainable competitive advantages: • True franchise value with “ivy league” distribution partners; • Our unique field model coupled with sophisticated underwriting and claims capabilities; and • Superior customer experience delivered by best-in-class employees. Selective invests the premiums collected by our insurance segments, as well as amounts generated through our capital management strategies. The primary objective of the investment portfolio is to maximize after-tax investment income while balancing risk and generating long-term growth in shareholder value. 2,200 dedicated Selective employees who are committed to making a difference in the lives of agents and customers 90 Years Founded in 1926, 2016 marks Selective’s 90th year in business. “A” (Excellent) or higher rating by A.M. Best for 85 consecutive years 42nd largest U.S. property and casualty group* 4 4 *A.M. Best, based on 2014 net premiums written Personal Insurance Consultative buyers seeking personal risk solutions choose The Selective Edge®for the broadest home and automobile packaged coverages and optional features. Excess & Surplus For businesses that have difficulty finding coverage in the standard market, we have extensive knowledge in more than 1,000 classes of business, including general and artisan contractors, restaurants and bars, lessors risk, habitational, and mercantile risks. Commercial Insurance Unique risk management solutions, safety management expertise, superior claims service, and a commitment to an extraordinary customer experience position Selective as the carrier of choice for business insurance. Flood Insurance Selective provides flood 2015 Annual Report building and contents coverage for homeowners and businessowners nationwide. Selective 2015 Annual Report 5 Management Team Selective’s seasoned leadership team drives the organization’s strategies for success. Kimberly J. Burnett George A. Neale Executive Vice President Chief Human Resources Officer Executive Vice President Chief Claims Officer Gregory E. Murphy Chairman and Chief Executive Officer Gordon J. Gaudet Dale A. Thatcher Executive Vice President Chief Information Officer Executive Vice President Chief Financial Officer and Treasurer Michael H. Lanza Ronald J. Zaleski, Sr. Executive Vice President General Counsel and Chief Compliance Officer Executive Vice President Chief Actuary John J. Marchioni President and Chief Operating Officer 6 2015 FINANCIALS FORM 10-K 2015 ANNUAL REPORT  UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) (cid:2) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934(cid:3) For the fiscal year ended: December 31, 2015 or (cid:4) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934(cid:3) For the transition period from_______________________to_______________________ Commission file number 001-33067 SELECTIVE INSURANCE GROUP, INC. (Exact Name of Registrant as Specified in Its Charter) (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) New Jersey 22-2168890 40 Wantage Avenue, Branchville, New Jersey (Address of Principal Executive Offices) 07890 (Zip Code) Registrant’s telephone number, including area code: (973) 948-3000 Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $2 per share Title of each class Name of each exchange on which registered NASDAQ Global Select Market 5.875% Senior Notes due February 9, 2043 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. (cid:2) Yes (cid:4) No(cid:3) Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. (cid:4) Yes (cid:2) No(cid:3) 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. (cid:2) Yes (cid:4) No(cid:3) Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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). (cid:2) Yes (cid:4) No(cid:3) 1 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:2) 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 (cid:5) Non-accelerated filer(cid:3)(cid:4) (Do not check if a smaller reporting company) Accelerated filer (cid:4) Smaller reporting company (cid:4) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). (cid:4) Yes (cid:2) No(cid:3) The aggregate market value of the voting company common stock held by non-affiliates of the registrant, based on the closing price on the NASDAQ Global Select Market, was $1,565,753,304 on June 30, 2015. As of February 12, 2016, the registrant had outstanding 57,587,942 shares of common stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s definitive Proxy Statement for the 2016 Annual Meeting of Stockholders to be held on May 4, 2016 are incorporated by reference into Part III of this report. 2 SELECTIVE INSURANCE GROUP, INC. Table of Contents Page No. PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. PART II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. PART III Item 10. Item 11. Item 12. Item 13. Item 14. Part IV Item 15. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-looking Statements Introduction Critical Accounting Policies and Estimates Financial Highlights of Results for Years Ended December 31, 2015, 2014, and 2013 Results of Operations and Related Information by Segment Federal Income Taxes Financial Condition, Liquidity, Short-term Borrowings, and Capital Resources Off-Balance Sheet Arrangements Contractual Obligations, Contingent Liabilities, and Commitments Ratings Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Consolidated Balance Sheets as of December 31, 2015 and 2014 Consolidated Statements of Income for the Years Ended December 31, 2015, 2014, and 2013 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2015, 2014, and 2013 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2015, 2014, and 2013 Consolidated Statements of Cash Flow for the Years Ended December 31, 2015, 2014, and 2013 Notes to Consolidated Financial Statements Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services Exhibits, Financial Statement Schedules 3 4 18 30 30 30 31 34 35 35 35 36 47 51 66 66 70 70 71 72 77 78 79 80 81 82 83 129 129 131 131 131 131 131 131 132 PART I Item 1. Business. Overview Selective Insurance Group, Inc. (referred to as the “Parent”) is a New Jersey holding company that was incorporated in 1977. Our main office is located in Branchville, New Jersey and the Parent’s common stock is publicly traded on the NASDAQ Global Select Market under the symbol “SIGI.” The Parent has ten insurance subsidiaries, nine of which are licensed by various state departments of insurance to write specific lines of property and casualty insurance business in the standard market. The remaining subsidiary is authorized by various state insurance departments to write property and casualty insurance in the excess and surplus lines ("E&S Lines") market. Our ten insurance subsidiaries are collectively referred to as the “Insurance Subsidiaries.” The Parent and its subsidiaries are collectively referred to as "we," “us,” or “our” in this document. In 2015, we were ranked as the 42nd largest property and casualty group in the United States based on 2014 net premiums written (“NPW”) in A.M. Best Company’s (“A.M. Best”) annual list of “Top 200 U.S. Property/Casualty Writers.” Our Insurance Subsidiaries’ ratings by major rating agency are as follows: Rating Agency A.M. Best Standard & Poor’s Ratings Services (“S&P”) Moody’s Investors Service (“Moody’s”) Fitch Ratings (“Fitch”) Financial Strength Rating A A- A2 A+ Outlook Stable Positive Stable Stable For further discussion on our ratings, please see the “Ratings” section of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” of this Form 10-K. We have provided a glossary of terms as Exhibit 99.1 to this Form 10-K, which defines certain industry-specific and other terms that are used in this Form 10-K. Segments We classify our business into four reportable segments: • Standard Commercial Lines - comprised of insurance products and services provided in the standard marketplace to our commercial customers, who are typically businesses, non-profit organizations, and local government agencies. This business represents 77% of our total insurance segments’ NPW. • Standard Personal Lines - comprised of insurance products and services provided primarily to individuals acquiring coverage in the standard marketplace. This business represents 14% of our total insurance segments’ NPW and includes flood insurance coverage that we write through the National Flood Insurance Program (“NFIP”). • E&S Lines - comprised of insurance products and services provided to customers who have not obtained coverage in the standard marketplace. We currently only write commercial lines E&S coverages and this business represents 9% of our total insurance segments’ NPW. • Investments - invests the premiums collected by our insurance segments, as well as amounts generated through our capital management strategies, which may include the issuance of debt and equity securities. 4 We derive substantially all of our income in three ways: • Underwriting income from our insurance segments. Underwriting income is comprised of revenues, which are the premiums earned on our insurance products and services, less expenses. Gross premiums are direct premium written (“DPW”) plus premiums assumed from other insurers. Gross premiums less premium ceded to reinsurers, is NPW. NPW is recognized as revenue ratably over a policy’s term as net premiums earned (“NPE”). Expenses related to our insurance segments fall into three main categories: (i) losses associated with claims and various loss expenses incurred for adjusting claims (referred to as “loss and loss expenses”); (ii) expenses related to insurance policy issuance, such as commissions to our distribution partners, premium taxes, and other expenses incurred in issuing and maintaining policies, including employee compensation and benefits (referred to as “underwriting expenses”); and (iii) policyholder dividends. • Net investment income from the investment segment. We generate income from investing insurance premiums and amounts generated through our capital management strategies. Net investment income consists primarily of interest earned on fixed income investments, dividends earned on equity securities, and other income primarily generated from our alternative investment portfolio. • Net realized gains and losses on investment securities from the investments segment. Realized gains and losses from the investment portfolios of the Insurance Subsidiaries and the Parent are typically the result of sales, calls, and redemptions. They also include write downs from other-than-temporary impairments (“OTTI”). Our income is partially offset by: (i) expenses at the Parent that include general corporate expenses, as well as interest on our debt obligations; and (ii) federal income taxes. We use the combined ratio as the key measure in assessing the performance of our insurance segments. Under U.S. generally accepted accounting principles (“GAAP”), the combined ratio is calculated by adding: (i) the loss and loss expense ratio, which is the ratio of incurred loss and loss expense to NPE; (ii) the expense ratio, which is the ratio of underwriting expenses to NPE; and (iii) the dividend ratio, which is the ratio of policyholder dividends to NPE. Statutory accounting principles ("SAP") provides a calculation of the combined ratio that differs from GAAP in that the statutory expense ratio is the ratio of underwriting expenses to NPW, not NPE. A combined ratio under 100% generally indicates an underwriting profit and a combined ratio over 100% generally indicates an underwriting loss. The combined ratio does not reflect investment income, federal income taxes, or Parent company income or expense. We use after-tax investment income and net realized gains or losses as the key measure in assessing the performance of our investments segment. Our investment philosophy includes setting certain risk and return objectives for the fixed income, equity, and other investment portfolios. We generally review our performance by comparing our returns for each of these components of our portfolio to a weighted-average benchmark of comparable indices. Our operations are heavily regulated by the state insurance regulators in the states in which our Insurance Subsidiaries are organized and licensed or authorized to do business. In these states, the Insurance Subsidiaries are required to file financial statements prepared in accordance with SAP, which are promulgated by the National Association of Insurance Commissioners (“NAIC”) and adopted by the various states. Because of these state insurance regulatory requirements, we use SAP to manage our insurance operations. The purpose of these state insurance regulations is to protect policyholders, so SAP focuses on solvency and liquidation value unlike GAAP, which focuses on shareholder returns as a going concern. Consequently, significant differences exist between SAP and GAAP as discussed below: • With regard to the underwriting expense ratio: As noted above, NPE is the denominator for GAAP; whereas NPW is the denominator for SAP. 5 • With regard to income or expense recognition: • Underwriting expenses that are incremental and directly related to the successful acquisition of insurance policies are deferred and amortized to expense over the life of an insurance policy under GAAP; whereas they are recognized when incurred under SAP. • Deferred taxes are recognized as either a deferred tax expense or a deferred tax benefit in income under GAAP; whereas they are recorded directly to surplus under SAP. • Changes in the value of our alternative investments, which are part of our other investment portfolio on our Consolidated Balance Sheets, are recognized in income under GAAP; whereas they are recorded directly to surplus under SAP and only recognized in income when cash is received. • With regard to loss and loss expense reserves: • Under GAAP, reinsurance recoverables, net of a provision for uncollectible reinsurance, are presented as an asset on the Consolidated Balance Sheet, whereas under SAP, this amount is netted within the liability for loss and loss expense reserves. • Under GAAP, for those structured settlements for which we did not obtain a release, a deposit asset and the related loss reserve are included on the Consolidated Balance Sheet, whereas under SAP, the structured settlement transaction is recorded as a paid loss. The following table reconciles losses and loss expense reserves under SAP and GAAP at December 31 as follows: ($ in thousands) Statutory losses and loss expense reserves Statutory reinsurance recoverable on unpaid losses and loss expenses Structured settlements GAAP losses and loss expense reserves – net 2015 2014 $ $ 2,951,905 556,719 9,104 3,517,728 2,892,041 578,878 6,951 3,477,870 The following table reconciles reinsurance recoverables under SAP and GAAP at December 31: ($ in thousands) Statutory reinsurance recoverable on unpaid losses and loss expenses Provision for uncollectible reinsurance GAAP reinsurance recoverable on unpaid losses and loss expenses Reinsurance recoverable on paid losses and loss expenses GAAP reinsurance recoverable – net 2015 2014 $ $ 556,719 (5,700 ) 551,019 10,949 561,968 578,878 (6,900) 571,978 9,570 581,548 • With regard to equity under GAAP and statutory surplus under SAP: • The timing difference in income due to the GAAP/SAP differences in expense recognition creates a difference between GAAP equity and SAP statutory surplus. • Regarding unrealized gains and losses on fixed income securities: • Under GAAP, unrealized gains and losses on available-for-sale (“AFS”) fixed income securities are recognized in equity; but they are not recognized in equity on purchased held-to-maturity (“HTM”) securities. Unrealized gains and losses on HTM securities transferred from an AFS designation are amortized from equity as a yield adjustment. • Under SAP, unrealized gains and losses on fixed income securities assigned certain NAIC Securities Valuation Office ratings (specifically designations of one or two, which generally equate to investment grade bonds) are not recognized in statutory surplus. However, unrealized losses on fixed income securities that have a designation of three or higher are recognized in statutory surplus. 6 • Certain assets are designated under insurance regulations as “non-admitted,” including, but not limited to, certain deferred tax assets, overdue premium receivables, furniture and equipment, and prepaid expenses. These assets are excluded from statutory surplus under SAP, but are recorded in the Consolidated Balance Sheets net of applicable allowances under GAAP. • Regarding the recognition of the liability for our defined benefit plans, under both GAAP and SAP, the liability is recognized in an amount equal to the excess of the projected benefit obligation over the fair value of the plan assets. However, changes in this balance not otherwise recognized in income are recognized in equity as a component of other comprehensive income (“OCI”) under GAAP and in statutory surplus under SAP. Our combined insurance segments' GAAP results for the last three completed fiscal years are shown on the following table: ($ in thousands) Combined Insurance Segments Results NPW NPE Losses and loss expenses incurred Net underwriting expenses incurred Policyholder dividends Underwriting income Ratios: Loss and loss expense ratio Underwriting expense ratio Policyholder dividends ratio GAAP combined ratio Statutory combined ratio 2015 Year Ended December 31, 2014 2013 $ $ $ 2,069,904 1,989,909 1,148,541 686,120 6,219 149,029 57.7 % 34.5 0.3 92.5 % 92.4 % 1,885,280 1,852,609 1,157,501 610,783 6,182 78,143 62.5 33.0 0.3 95.8 95.7 1,810,159 1,736,072 1,121,738 571,294 4,274 38,766 64.6 33.0 0.2 97.8 97.5 For revenue and profitability measures for each of our three insurance segments, see Note 11. "Segment Information" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. We do not allocate assets to individual segments. In addition, for analysis of our insurance segments' results, see "Results of Operations and Related Information by Segment" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." of this Form 10-K. Insurance Segments Overview We derive all of our insurance operations revenue from selling insurance products and services to businesses and individuals for premium. The majority of our sales are annual insurance policies. Our most significant cost associated with the sale of insurance policies is our loss and loss expenses. To that end, we establish loss and loss expense reserves that are estimates of the amounts that we will need to pay in the future for claims and related expenses for insured losses that have already occurred. Estimating reserves as of any given date involves a considerable degree of judgment and is inherently uncertain. We regularly review our reserving techniques and our overall amount of reserves. For disclosures concerning our unpaid loss and loss expenses, as well as a full discussion regarding our loss reserving process, see "Critical Accounting Policies and Estimates" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." of this Form 10-K. Additionally, for an analysis of changes in our loss reserves over the most recent three-year period, see Note 9. "Reserves for Losses and Loss Expenses" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. As part of our risk management efforts associated with the sale of our products and services, we use reinsurance to protect our capital resources and insure us against losses on the risks that we underwrite. We use two main reinsurance vehicles: (i) a reinsurance pooling agreement among our Insurance Subsidiaries in which each company agrees to share in premiums and losses based on certain specified percentages; and (ii) reinsurance contracts and arrangements with third parties that cover various policies that we issue to our customers. For information regarding reinsurance treaties and agreements, see "Reinsurance" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." of this Form 10-K. 7 Insurance Segments Products and Services The types of insurance we sell in our insurance segments fall into three broad categories: • Property insurance, which generally covers the financial consequences of accidental loss of an insured’s real and/or personal property. Property claims are generally reported and settled in a relatively short period of time. • Casualty insurance, which generally covers the financial consequences of employee injuries in the course of employment and bodily injury and/or property damage to a third party as a result of an insured’s negligent acts, omissions, or legal liabilities. Casualty claims may take several years to be reported and settled. • Flood insurance, which generally covers property losses under the Federal Government's Write Your Own ("WYO") Program of the NFIP. Flood insurance premiums and losses are 100% ceded to the NFIP. We underwrite our business primarily through traditional insurance. The following table shows the principal types of policies we write: Types of Policies Commercial Property (including Inland Marine) Commercial Automobile General Liability (including Excess Liability/Umbrella) Workers Compensation Businessowners' Policy Bonds (Fidelity and Surety) Homeowners Personal Automobile Category of Insurance Property Property/Casualty Casualty Casualty Property/Casualty Casualty Property/Casualty Property/Casualty Standard Commercial Lines X Standard Personal Lines X X X X X X X E&S Lines X X X Personal Umbrella Flood1 1Flood insurance premiums and losses are 100% ceded to the federal government’s WYO Program. Certain other policies contain minimal flood or flood related coverages. Flood/Property Casualty X X X Product Development and Pricing Our insurance policies are contracts that specify our coverages - what we will pay to or for an insured upon a specified loss. We develop our coverages internally and by adopting and modifying forms and statistical data licensed from third party aggregators, notably Insurance Services Office, Inc. (“ISO”), American Association of Insurance Services, Inc. ("AAIS"), and the National Council on Compensation Insurance, Inc. ("NCCI"). Determining the price to charge for our coverages involves consideration of many variables. At the time we underwrite and issue a policy, we do not know what our actual costs for the policy will be in the future. To calculate and project future costs, we examine and analyze historical statistical data and factor in expected changes in loss trends. Additionally, we have developed predictive models for certain of our Standard Commercial and Standard Personal Lines. Predictive models analyze historical statistical data regarding our customers and their loss experience, rank our policies, or potential policies, based on this analysis, and apply this risk data to current and future customers to predict the likely profitability of an account. A model’s predictive capabilities are limited by the amount and quality of the statistical data available. As a regional insurance group, our loss experience is not always statistically large enough to analyze and project future costs. Consequently, we use ISO, AAIS, and NCCI data to supplement our proprietary data. 8 Customers and Customer Markets We categorize our Standard Commercial Lines customers into the following strategic business units ("SBUs"): Contractors Mercantile and Services Community and Public Services Manufacturing and Wholesale Bonds Total Standard Commercial Lines Percentage of Standard Commercial Lines 35% 26% 20% 18% 1% 100% Description General contractors and trade contractors Focuses on retail, office, service businesses, restaurants, and hotels Focuses on public entities, social services, golf courses, and religious institutions Includes manufacturers, wholesalers, and distributors Includes fidelity and surety We do not categorize our Standard Personal Line customers or our E&S Line customers by SBU. The following are general guidelines that can be used as indicators of the approximate size of our customers: • The average Standard Commercial Lines account size is $10,500. • The average Standard Personal Lines account size is $2,000. • The average E&S Lines policy is $3,000. No one customer accounts for 10% or more of our insurance segments in the aggregate. Geographic Markets We principally sell in the following geographic markets: • Standard Commercial Lines products and services are primarily sold in 22 states located in the Eastern and Midwestern regions of the United States and the District of Columbia. • Standard Personal Lines products and services are primarily sold in 13 states located in the Eastern and Midwestern regions of the United States, except for the flood portion of this segment, which is sold in all 50 states and the District of Columbia. • E&S Lines are sold in all 50 states and the District of Columbia. We believe this geographic diversification lessens our exposure to regulatory, competitive, and catastrophic risk. The following table lists the principal states in which we write business and the percentage of total NPW each represents for the last three fiscal years: % of NPW New Jersey Pennsylvania New York Maryland Virginia Indiana Georgia Illinois North Carolina Michigan South Carolina Ohio Other states Total Year Ended December 31, 2014 2015 2013 21.2% 11.7 7.2 5.4 4.6 4.3 4.1 3.7 3.7 3.5 3.0 2.4 25.2 100.0% 22.6 11.4 7.1 5.6 4.6 4.5 3.8 4.0 3.4 3.3 3.1 2.4 24.2 100.0 23.1 11.5 6.9 5.7 4.7 4.8 3.5 4.5 3.2 3.4 3.0 2.5 23.2 100.0 9 We support geographically diversified business from our corporate headquarters in Branchville, New Jersey, and our six regional branches (referred to as our “Regions”). The table below lists our Regions and where they have office locations: Region Heartland New Jersey Northeast Mid-Atlantic Southern E&S Office Location Carmel, Indiana Hamilton, New Jersey Branchville, New Jersey Allentown, Pennsylvania and Hunt Valley, Maryland Charlotte, North Carolina Horsham, Pennsylvania and Scottsdale, Arizona Distribution Channel We sell our insurance products and services through the following types of distribution partners: • Standard Commercial Lines: independent retail agents; • Standard Personal Lines: independent retail agents; and • E&S Lines: wholesale general agents. We pay these distribution partners commissions and other consideration for business placed with us. We seek to compensate them fairly and in a manner consistent with market practices. No one distribution partner is responsible for 10% or more of our combined insurance segments' premium. As our customers rely heavily on our distribution partners, it is sometimes difficult to develop brand recognition as these customers cannot always differentiate between their insurance agents and their insurance carriers. We continue to evolve our service model, post policy-acquisition, with an increasing focus on the customer. Our goal is to provide our customers with 24/7 access to transactional capabilities and account information. Customers expect this level of access from every business and, while many insurers offer such solutions in the personal lines space, we want to be a leader in this area for the small commercial lines market. When combined with our digital strategy, we believe this level of access will significantly improve the customer experience. Within our digital strategy, we provide self-servicing capabilities via a mobile application and a web- based portal where our customers have access to basic account information on demand. These efforts will allow us to continue to offer customers a shared experience with our distribution partners, while positioning us to more directly demonstrate our value proposition. Independent Retail Agents According to a study released in 2015 by the Independent Insurance Agents & Brokers of America, independent retail insurance agents and brokers write approximately 80% of standard commercial lines insurance and 35% of standard personal lines insurance in the United States. We believe that independent retail insurance agents will remain a significant force in overall insurance industry premium production because they represent more than one insurance carrier and therefore are able to provide a wider choice of commercial and personal lines insurance products and risk-based consultation to customers. We currently have approximately 1,100 independent retail agents selling our Standard Commercial Lines business, 700 of which also sell our Standard Personal Lines business (excluding flood). In total, these 1,100 distribution partners have approximately 2,100 office locations selling our business. In addition, we have approximately 6,000 distribution partners selling our flood insurance products. In a survey that we conducted in 2015, we received an overall satisfaction score of 8.6 out of 10 from our standard market distribution partners, which, we believe, highlighted their satisfaction with our products, the ease of reporting claims, and the professionalism and effectiveness of our employees. Wholesale General Agents E&S Lines are written almost exclusively through approximately 80 wholesale general agents, who are our distribution partners in the E&S market. We have granted contract binding authority to these partners for business that meets our prescribed underwriting and pricing guidelines. 10 Marketing Our primary marketing strategy is to: • Use an empowered field underwriting model to provide our retail distribution partners with resources within close geographic proximity to their businesses and our customers. For further discussion on this, see the “Field Model and Technology” section below. • Develop close relationships with each distribution partner, as well as their principals and producers: (i) by soliciting their feedback on products and services; (ii) by advising them concerning our product developments; and (iii) through education and development focusing on producer recruitment, sales training, enhancing customer experience, online marketing, and distribution operations. • Develop with each distribution partner, and then carefully monitor, annual goals regarding: (i) types and mix of risks placed with us; (ii) amount of premium or number of policies placed with us; (iii) customer service and retention levels; and (iv) profitability of business placed with us. • Develop brand recognition with our customers through our marketing efforts, which include radio and television advertising, as well as advertising at certain national and local sporting events. Field Model and Technology We use the service mark “High-tech x High-touch = HT2 SM” to describe our business strategy. “High-tech” refers to our technology that we use to make it easy for our distribution partners and customers to do business with us. “High-touch” refers to the close relationships that we have with our distribution partners and customers through our field business model. High Tech We leverage the use of technology in our business. We have made significant investments in information technology platforms, integrated systems, internet-based applications, and predictive modeling initiatives. We do this to provide: • Our distribution partners and our customers with access to accurate business information and the ability to process certain transactions from their locations, seamlessly integrating those transactions into our systems; • Our underwriters with targeted underwriting and pricing tools to enhance profitability while growing the business; • Our Special Investigations Unit ("SIU") investigators access to our business intelligence systems to better identify claims with potential fraudulent activities; • Our claims recovery and subrogation departments with the ability to expand and enhance their models through the use of our business intelligence systems; and • Our customers with 24/7 access to transactional capabilities and information through a web-based customer portal and a customer mobile application. We manage our information technology projects through an Enterprise Project Management Office (“EPMO”) governance model. The EPMO is supported by certified project managers who apply methodologies to: (i) communicate project management standards; (ii) provide project management training and tools; (iii) manage projects; (iv) review project status and cost; and (v) provide non-technology project management consulting services to the rest of the organization. The EPMO, which includes senior management representatives from all major business areas, corporate functions, and information technology, meets regularly to review all major initiatives and receives reports on the status of other projects. We believe the EPMO is an important factor in the success of our technology implementation. Our primary technology operations are located in Branchville, New Jersey and Glastonbury, Connecticut. We have agreements with multiple consulting, information technology, and service providers for supplemental staffing services. Collectively, these providers supply approximately 46% of our skilled technology capacity. We retain management oversight of all projects and ongoing information technology production operations. We believe we would be able to manage an efficient transition to new vendors without significant impact to our operations if we terminated an existing vendor. 11 High Touch To support our distribution partners, we employ a field model for both underwriting and claims, with various employees in the field, usually working from home offices near our distribution partners. We believe that we build better and stronger relationships with our distribution partners because of the close proximity of our field employees, and the resulting direct interaction with our distribution partners and our customers. At December 31, 2015, we had approximately 2,200 employees, of which 320 worked in the field, and 850 worked in one of our regional offices. Underwriting Process Our underwriting process requires communication and interaction among: • Our Agency Management Specialists (“AMSs”), who: (i) manage the growth and profitability of business that their assigned distribution partners write with us; and (ii) perform field underwriting for new Standard Commercial Lines business; • Our Standard Commercial Lines small business teams are responsible for handling: (i) new business in need of review that was submitted by our distribution partners through our automated underwriting platform, One & Done®; and (ii) other new small accounts and middle market accounts with low underwriting complexity; • Our Standard Personal Lines Marketing Specialists (“PLMSs”) have primary responsibility for identifying new opportunities to grow our Standard Personal Lines; • Our E&S territory managers have primary responsibility for identifying new opportunities to grow our E&S Lines; • Our corporate underwriting department develops our underwriting appetite, products, policy forms, pricing, and underwriting guidelines for our standard market and E&S market business; • Our corporate actuaries assist in the determination of rate and pricing levels, while monitoring pricing and profitability along with the Regions, corporate underwriting and business intelligence staff for our standard market and E&S market business; • Our Regions establish and execute upon: (i) annual premium and pricing goals; (ii) specific new business targets by distribution partner; and (iii) profit improvement plans as needed across lines, states, and/or distribution partners; • Our distribution partners, which include independent retail agents for our standard market business and wholesale general agents for our E&S market business, provide front-line underwriting within our prescribed guidelines; • Our regional underwriters manage the inforce policies for their assigned distribution partners, including but not limited to, managing profitability and pricing levels within their portfolios by developing policy-specific pricing; • Our Safety Management Specialists (“SMSs”) provide a wide range of front-line safety management services to our Standard Commercial Lines customers as discussed more fully below; • Our premium auditors supplement the underwriting process by working with insureds to accurately audit exposures for certain policies that we write; and • Our field technical coordinators are responsible for technology assistance and training to aid our employees and our distribution partners. We have an underwriting service center (“USC”) located in Richmond, Virginia. The USC assists our distribution partners by servicing certain Standard Personal Lines and smaller Standard Commercial Lines accounts. At the USC, many of our employees are licensed agents who respond to customer inquiries about insurance coverage, billing transactions, and other matters. For the convenience of using the USC and our handling of certain transactions, our distribution partners agree to receive a slightly lower than standard commission for the premium associated with the USC. As of December 31, 2015, our USC was servicing Standard Commercial Lines NPW of $50.0 million and Standard Personal Lines NPW of $31.9 million. The $81.9 million total serviced by the USC represents 4% of our total NPW. As mentioned above, our field model provides a wide range of front-line safety management services focused on improving a Standard Commercial Lines insured’s safety and risk management programs. Our service mark “Safety Management: Solutions for a safer workplace”SM includes: (i) risk evaluation and improvement surveys intended to evaluate potential 12 exposures and provide solutions for mitigation; (ii) internet-based safety management educational resources, including a large library of coverage-specific safety materials, videos and online courses, such as defensive driving and employee educational safety courses; (iii) thermographic infrared surveys aimed at identifying electrical hazards; and (iv) Occupational Safety and Health Administration construction and general industry certification training. Risk improvement efforts for existing customers are designed to improve loss experience and policyholder retention through valuable ongoing consultative service. Our safety management goal is to work with our customers to identify and eliminate potential loss exposures. Claims Management Effective, fair, and timely claims management is one of the most important services that we provide to our customers and distribution partners. It is also one of the critical factors in achieving underwriting profitability. We have structured our claims organization to emphasize: (i) cost-effective delivery of claims services and control of loss and loss expenses; and (ii) maintenance of timely and adequate claims reserves. In connection with our Standard Commercial Lines and Standard Personal Lines, we achieve better claim outcomes through a field model that locates claim representatives in close proximity to our customers and distribution partners. We have a claims service center (“CSC”), co-located with the USC, in Richmond, Virginia. The CSC receives first notices of loss from our customers and claimants related to our Standard Commercial Lines and Standard Personal Lines and manages routine automobile and property claims with no injuries. The CSC is designed to help: (i) reduce the claims settlement time on first- and third-party automobile property damage claims; (ii) increase the use of body shops, glass repair shops, and car rental agencies that have contracted with us at discounted rates and specified service levels; (iii) handle and settle small property claims; and (iv) investigate and negotiate auto liability claims. The CSC, as appropriate, will assign claims to the appropriate regional claims office or other specialized area within our claims organization. Claims Management Specialists (“CMSs”) are responsible for investigating and resolving the majority of our standard marketplace commercial automobile bodily injury, general liability, and property losses with low to moderate severities. Strategically located throughout our footprint, CMSs are able to provide highly responsive customer and distribution partner service to quickly resolve claims within their authority. Over the course of 2015, we made changes to our E&S claims processing, which is now aligned with the processes used for our Standard Commercial Lines and Standard Personal Lines. E&S claims are handled in our E&S regional offices in Scottsdale, Arizona, and Horsham, Pennsylvania, and are segregated by line of business (property and liability). In the first quarter of 2015, our Quality Assurance Unit began conducting monthly file reviews on all of our operations to validate compliance with our quality claim handling standards. In addition, during the second half of the year, we further segregated our claims handling by litigation and complexity. Complex claims oversight is handled by the Complex Claims Unit ("CCU"). We have implemented specialized claims handling as follows: • Liability claims with high severity or technically complex losses are handled by the CCU. The CCU specialists are primarily field based and handle losses based on injury type or with severities greater than $250,000. • Litigated matters not meeting the CCU criteria are handled within our regional offices by our litigation claim units. These teams are aligned based upon jurisdictional knowledge and technical experience. In addition, they are supervised by litigation managers within the regional claim offices. These claims are segregated from the CMSs to allow for focused management. • Workers compensation claim handling is centralized in Charlotte, North Carolina. Jurisdictionally trained and aligned medical only and lost-time adjusters manage non-complex workers compensation claims within our footprint. Claims with high exposure and/or significant escalation risk are referred to the workers compensation strategic case management unit. • Property claims with high severity potential or technically complex losses are handled by either the Property Flex Unit or the Large Loss Unit. Both of these groups specifically handle only higher exposure property claims. The Large Loss Unit handles claims above $100,000 and the Property Flex Unit handles claims between $25,000 to $100,000. The Property Flex Unit also forms the core of our catastrophe team. • All asbestos and environmental claims are referred to our specialized corporate Environmental Unit, which also handles latent claims. This structure allows us to provide experienced adjusting to each claim category. 13 Our insurance segments have an SIU that investigates potential insurance fraud and abuse, and supports efforts by regulatory bodies and trade associations to curtail the cost of fraud. The SIU adheres to uniform internal procedures to improve detection and take action on potentially fraudulent claims. It is our practice to notify the proper authorities of SIU findings, which we believe sends a clear message that we will not tolerate fraud against us or our customers. The SIU supervises anti-fraud training for all claims adjusters and AMSs. Insurance Operations Competition Our insurance segments face competition from public, private, and mutual insurance companies, which may have lower operating costs and/or lower cost of capital than we do. Some, like us, rely on partners for the distribution of their products and services and have competition within their distribution channel, making growth in market share difficult. Other insurance carriers either employ their own agents who only represent them or use a combination of distribution partners, captive agents, and direct marketing. The following provides information on the competition facing our insurance segments: Standard Commercial Lines The Standard Commercial Lines property and casualty insurance market is highly competitive and market share is fragmented among many companies. We compete with two types of companies, primarily on the basis of price, coverage terms, claims service, customer experience, safety management services, ease of technology usage, and financial ratings: • Regional insurers, such as Cincinnati Financial Corporation, Erie Indemnity Company, The Hanover Insurance Group, Inc., and United Fire Group, Inc.; and • National insurers, such as The Hartford Financial Services Group, Inc., Liberty Mutual Holding Company Inc., Nationwide Mutual Insurance Company, The Travelers Companies, Inc., and Zurich Insurance Group, Ltd. Standard Personal Lines Our Standard Personal Lines face competition primarily from the regional and national carriers noted above, as well as companies such as State Farm Mutual Automobile Insurance Company and Allstate Corporation. In addition, we face competition from direct insurers such as The Government Employees Insurance Company and The Progressive Corporation, which primarily offer personal auto coverage and market through a direct-to-consumer model. E&S Lines Our E&S Lines face competition from the E&S subsidiaries of the regional and national carriers named above, as well as the following companies: • Nautilus Insurance Group, a member of W. R. Berkley Company; • Colony Specialty, a member of the Argo Group International Holding Ltd; • Western World Insurance Group, a member of the Validus Group; • Century Insurance Group, a member of the Meadowbrook Insurance Group; • The Burlington Insurance Company, a member of IFG Companies; • United States Liability Insurance Group, a member of Berkshire Hathaway, Inc.; • Scottsdale Insurance Company, a member of Nationwide Mutual Insurance Company; and • Markel Corporation. 14 Industry Comparison A comparison of certain statutory ratios for our combined insurance segments and our industry are shown in the following table: Insurance Operations Ratios:1 Loss and loss expense Underwriting expense Policyholder dividends Statutory combined ratio Growth in NPW Industry Ratios:1, 2 Loss and loss expense Underwriting expense Policyholder dividends Statutory combined ratio Growth in NPW Favorable (Unfavorable) to Industry: Statutory combined ratio Growth in NPW Note: Some amounts may not foot due to rounding. Simple Average of All Periods Presented 66.0 % 32.9 0.3 99.2 8.4 71.8 27.7 0.6 100.2 3.8 1.0 4.6 2015 2014 2013 2012 2011 57.7 34.4 0.3 92.4 9.8 70.4 27.0 0.6 98.0 2.7 5.6 7.1 62.4 33.0 0.3 95.7 4.1 69.3 27.4 0.7 97.4 4.3 1.7 (0.2) 64.5 32.8 0.2 97.5 8.7 67.7 28.0 0.7 96.4 4.4 (1.1) 4.3 70.7 32.6 0.2 103.5 12.2 73.7 28.2 0.6 102.5 4.4 74.6 31.7 0.4 106.7 7.0 77.9 28.0 0.6 106.5 3.3 (1.0) 7.8 (0.2) 3.7 1The ratios and percentages are based on SAP prescribed or permitted by state insurance departments in the states in which the Insurance Subsidiaries are domiciled. 2Source: A.M. Best. The industry ratios for 2015 have been estimated by A.M. Best. Insurance Regulation Primary Oversight by the States in Which We Operate Our insurance segments are heavily regulated. The primary public policy behind insurance regulation is the protection of policyholders and claimants over all other constituencies, including shareholders. By virtue of the McCarran-Ferguson Act, Congress has largely delegated insurance regulation to the various states. The primary market conduct and financial regulators of our Insurance Subsidiaries are the departments of insurance in the states in which they are organized and are licensed. For a discussion of the broad regulatory, administrative, and supervisory powers of the various departments of insurance, refer to the risk factor that discusses regulation in Item 1A. “Risk Factors.” of this Form 10-K. Our various state insurance regulators are members of the NAIC. The NAIC has codified SAP and other accounting reporting formats and drafts model insurance laws and regulations governing insurance companies. An NAIC model only becomes law when it is enacted in the various state legislatures or promulgated as a regulation by the state insurance department. The adoption of certain NAIC model laws and regulations, however, is a key aspect of the NAIC Financial Regulations Standards and Accreditation Program. 15 NAIC Monitoring Tools Among the NAIC's various financial monitoring tools that are material to the regulators in states in which our Insurance Subsidiaries are organized are the following: • The Insurance Regulatory Information System (“IRIS”). IRIS identifies 13 industry financial ratios and specifies “usual values” for each ratio. Departure from the usual values on four or more of the financial ratios can lead to inquiries from individual state insurance departments about certain aspects of the insurer's business. Our Insurance Subsidiaries have consistently met the majority of the IRIS ratio tests. • Risk-Based Capital. Risk-based capital is measured by four major areas of risk to which property and casualty insurers are exposed: (i) asset risk; (ii) credit risk; (iii) underwriting risk; and (iv) off-balance sheet risk. Insurers face a steadily increasing amount of regulatory scrutiny and potential intervention as their total adjusted capital declines below two times their "Authorized Control Level". Based on our 2015 statutory financial statements, which have been prepared in accordance with SAP, the total adjusted capital for each of our Insurance Subsidiaries substantially exceeded two times their Authorized Control Level. • Annual Financial Reporting Regulation (referred to as the "Model Audit Rule"). The Model Audit Rule, which is modeled closely on the Sarbanes-Oxley Act of 2002, as amended, regulates: (i) auditor independence; (ii) corporate governance; and (iii) internal control over financial reporting. As permitted under the Model Audit Rule, the Audit Committee of the Board of Directors (the “Board”) of the Parent also serves as the audit committee of each of our Insurance Subsidiaries. • Own Risk and Solvency Assessment ("ORSA"). ORSA requires insurers to maintain a framework for identifying, assessing, monitoring, managing, and reporting on the “material and relevant risks” associated with the insurers' (or insurance groups') current and future business plans. ORSA, which has been adopted by the state insurance regulators of our Insurance Subsidiaries, requires companies to file an internal assessment of their solvency with insurance regulators annually, the first filing of which occurred in 2015. Although no specific capital adequacy standard is currently articulated in ORSA, it is possible that such standard will be developed over time and may increase insurers' minimum capital requirements, which could adversely impact our growth and return on equity. Federal Regulation Notable federal legislation and administrative policies that affect the insurance industry are: • The Terrorism Risk Insurance Program Reauthorization Act ("TRIPRA"); • The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”); and • Various privacy laws that apply to us because we have personal non-public information, including the: ◦ Gramm-Leach-Bliley Act; ◦ Fair Credit Reporting Act; ◦ Drivers Privacy Protection Act; and ◦ Health Insurance Portability and Accountability Act. Like all businesses, we are required to enforce the economic and trade sanctions of the Office of Foreign Assets Control (“OFAC”). FEMA oversees the WYO Program enacted by Congress. Congress sets the WYO Program's budgeting, rules, and rating parameters. Two significant pieces of legislation that impact the WYO Program are the Biggert-Waters Flood Insurance Reform Act of 2012 ("Bigger-Waters Act") and the Homeowner Flood Insurance Affordability Act of 2014 ("Flood Affordability Act"). The Biggert-Waters Act: (i) extended the NFIP funding to September 30, 2017; and (ii) moved the program to more market based rates for certain flood policies. The Flood Affordability Act repealed and modified certain provisions in the Biggert-Waters Act regarding premium adjustments. In response to the financial markets crises in 2008 and 2009, the Dodd-Frank Act was enacted in 2010. This law provided for, among other things, the following: • The establishment of the Federal Insurance Office (“FIO”) under the United States Department of the Treasury; • Federal Reserve oversight of financial services firms designated as systemically important; and • Corporate governance reforms for publicly traded companies. 16 The FIO continues to establish itself on national and international insurance issues after having issued its initial report regarding the modernization of insurance regulation in the United States. The report concluded that insurance regulation in the United States is best viewed in terms of a hybrid model, in which state and federal oversight play complementary roles defined by the strengths each brings to improving solvency and market conduct regulation. The FIO, Federal Reserve, and the NAIC are currently looking at oversight and solvency standards as they coordinate with international regulators regarding the future regulation of financial entities. For additional information on the potential impact of the Dodd-Frank Act, refer to the risk factor related to legislation within Item 1A. “Risk Factors.” of this Form 10-K. International Regulation We believe that development of global capital standards will influence the development of similar standards by domestic regulators. Notable international developments include the following: • In 2014, the International Association of Insurance Supervisors proposed Basic Capital Standards for Global Systemically Important Insurers as well as a uniform capital framework for internationally active insurers; and • The European Union has enacted Solvency II, which sets out new requirements on capital adequacy and risk management for insurers operating in Europe, which was implemented in 2016. For additional information on the potential impact of international regulation on our business, refer to the risk factor related to regulation within Item 1A. “Risk Factors.” of this Form 10-K. Investment Segment Our Investment segment invests insurance premiums, as well as amounts generated through our capital management strategies, which may include the issuance of debt and equity securities, to generate investment income and to satisfy obligations to our customers, our shareholders, and our debt holders, among others. At December 31, 2015, our investment portfolio consisted of the following: Category of Investment ($ in millions) Fixed income securities Equity securities Short-term investments Other investments, including alternatives Total Carrying Value $ % of Investment Portfolio 91 4 4 1 100 4,609.6 207.1 194.8 77.8 5,089.3 $ The primary objective of the investment portfolio is to maximize after-tax investment income while balancing risk and generating long-term growth in shareholder value. Our investment philosophy is predicated on investing with a long-term horizon, with significant emphasis on risk control, capital preservation, taxes, liquidity, and diversification. Our investments include high-quality fixed maturity securities, common stocks and preferred securities designed to generate stable dividend income and long-term capital appreciation, and alternative investments that seek to diversify the sources of risk and return of the overall portfolio. For further information regarding our risks associated with the overall investment portfolio, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.” and Item 1A. “Risk Factors.” of this Form 10-K. For additional information about investments, see the section entitled, “Investments,” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” and Item 8. “Financial Statements and Supplementary Data.” Note 5. of this Form 10-K. Reports to Security Holders We file with the SEC all required disclosures, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements, and other required information under Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”). We provide access to these filed materials on our Internet website, www.selective.com. 17 Item 1A. Risk Factors. Any of the following risk factors could cause our actual results to differ materially from historical or anticipated results. They could have a significant impact on our business, liquidity, capital resources, results of operations, financial condition, and debt ratings. These risk factors might affect, alter, or change actions that we might take in executing our long-term capital strategy, including but not limited to, contributing capital to any or all of the Insurance Subsidiaries, issuing additional debt and/or equity securities, repurchasing our equity securities, redeeming our fixed income securities, or increasing or decreasing stockholders’ dividends. The following list of risk factors is not exhaustive, and others may exist. Risks Related to Insurance Segments Our loss and loss expense reserves may not be adequate to cover actual losses and expenses. We are required to maintain loss and loss expense reserves for our estimated liability for losses and loss expenses associated with reported and unreported insurance claims. Our estimates of reserve amounts are based on facts and circumstances that we know, including our expectations of the ultimate settlement and claim administration expenses, including inflationary trends particularly regarding medical costs, predictions of future events, trends in claims severity and frequency, and other subjective factors relating to our insurance policies in force. There is no method for precisely estimating the ultimate liability for settlement of claims. We cannot be certain that the reserves we establish are adequate or will be adequate in the future. From time-to-time, we increase reserves if they are inadequate or reduce them if they are redundant. An increase in reserves: (i) reduces net income and stockholders’ equity for the period in which the reserves are increased; and (ii) could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. We are subject to losses from catastrophic events. Our results are subject to losses from natural and man-made catastrophes, including, but not limited to: hurricanes, tornadoes, windstorms, earthquakes, hail, terrorism, explosions, severe winter weather, floods, and fires, some of which may be related to climate changes. The frequency and severity of these catastrophes are inherently unpredictable. One year may be relatively free of such events while another may have multiple events. For further discussion regarding man-made catastrophes that relate to terrorism, see the risk factor directly below regarding the potential for significant losses from acts of terrorism. There is widespread interest among scientists, legislators, regulators, and the public regarding the effect that greenhouse gas emissions may have on our environment, including climate change. If greenhouse gases continue to impact our climate, it is possible that more devastating catastrophic events could occur. The magnitude of catastrophe losses is determined by the severity of the event and the total amount of insured exposures in the area affected by the event as determined by ISO's Property Claim Services unit. Most of the risks underwritten by our insurance segments are concentrated geographically in the Eastern and Midwestern regions of the United States, particularly in New Jersey, which represented approximately 21% of our total NPW during 2015. Catastrophes in the Eastern and Midwestern regions of the United States could adversely impact our financial results, as was the case in 2010, 2011, and 2012. Although catastrophes can cause losses in a variety of property and casualty insurance lines, most of our historical catastrophe- related claims have been from commercial property and homeowners coverages. In an effort to limit our exposure to catastrophe losses, we purchase catastrophe reinsurance. Catastrophe reinsurance could prove inadequate if: (i) the various modeling software programs that we use to analyze the Insurance Subsidiaries’ risk result in an inadequate purchase of reinsurance by us; (ii) a major catastrophe loss exceeds the reinsurance limit or the reinsurers’ financial capacity; or (iii) the frequency of catastrophe losses results in our Insurance Subsidiaries exceeding the aggregate limits provided by the catastrophe reinsurance treaty. Even after considering our reinsurance protection, our exposure to catastrophe risks could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. 18 We are subject to potential significant losses from acts of terrorism. As a Standard Commercial Lines and E&S Lines writer, we are required to participate in TRIPRA, which was extended by Congress to December 31, 2020. TRIPRA requires private insurers and the United States government to share the risk of loss on future acts of terrorism certified by the U.S. Secretary of the Treasury. Under TRIPRA, insureds with non-workers compensation commercial policies have the option to accept or decline our terrorism coverage or negotiate with us for other terms. In 2015, 87% of our Standard Commercial Lines non-workers compensation policyholders purchased terrorism coverage that included nuclear, biological, chemical, and radioactive ("NBCR") events. Terrorism coverage is mandatory for all primary workers compensation policies, so the TRIPRA back-stop applies to these policies. A risk exists that, if the U.S. Secretary of Treasury does not certify certain future terrorist events, we would be required to pay related covered losses without TRIPRA's risk sharing benefits. Examples of this potential risk are the 2013 Boston Marathon bombing and the shootings in San Bernardino, California in 2015, neither of which were certified as terrorism events. Under TRIPRA, each participating insurer is responsible for paying a deductible of specified losses before federal assistance is available. This deductible is based on a percentage of the prior year’s applicable Standard Commercial Lines and E&S Lines premiums. In 2016, our deductible is approximately $280 million. For losses above the deductible, the federal government will pay 84% of losses to an industry limit of $100 billion, and the insurer retains 16%. The federal share of losses will be reduced by 1% each year to 80% by 2020. Although TRIPRA’s provisions will mitigate our loss exposure to a large-scale terrorist attack, our deductible is substantial and could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. TRIPRA rescinded all previously approved coverage exclusions for terrorism. Many of the states in which we write commercial property insurance mandate that we cover fire following an act of terrorism regardless of whether the insured specifically purchased terrorism coverage. Likewise, terrorism coverage cannot be excluded from workers compensation policies in any state in which we write. Personal lines of business have never been covered under TRIPRA. Homeowners policies within our Standard Personal Lines exclude nuclear losses, but do not exclude biological or chemical losses. Our ability to reduce our risk exposure depends on the availability and cost of reinsurance. We transfer a portion of our underwriting risk exposure to reinsurance companies. Through our reinsurance arrangements, a specified portion of our losses and loss expenses are assumed by the reinsurer in exchange for a specified portion of premiums. The availability, amount, and cost of reinsurance depend on market conditions, which may vary significantly. Most of our reinsurance contracts renew annually and may be impacted by the market conditions at the time of the renewal that are unrelated to our specific book of business or experience. Any decrease in the amount of our reinsurance will increase our risk of loss. Any increase in the cost of reinsurance that cannot be included in renewal price increases will reduce our earnings. Accordingly, we may be forced to incur additional expenses for reinsurance or may not be able to obtain sufficient reinsurance on acceptable terms. Either could adversely affect our ability to write future business or result in the assumption of more risk with respect to those policies we issue. We are exposed to credit risk. We are exposed to credit risk in several areas of our insurance segments, including from: • Our reinsurers, who are obligated to us under our reinsurance agreements. The relatively small size of the reinsurance market and our objective to maintain an average weighted rating of “A” by A.M. Best on our current reinsurance programs constrains our ability to diversify this credit risk. However, some of our reinsurance credit risk is collateralized. • Certain life insurance companies that are obligated to our customers, as we have purchased annuities from them under structured settlement agreements. • Some of our distribution partners, who collect premiums from our customers and are required to remit the collected premium to us. • Some of our customers, who are responsible for payment of premiums and/or deductibles directly to us. • The invested assets in our defined benefit plan, which partially serve to fund our liability associated with this plan. To the extent that credit risk adversely impacts the valuation and performance of the invested assets within our defined benefit plan, the funded status of the defined benefit plan could be adversely impacted and, as result, could increase the cost of the plan to us. 19 Our exposure to credit risk could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. Difficult conditions in global capital markets and the economy may adversely affect our revenue and profitability and harm our business, and these conditions may not improve in the near future. General economic conditions in the United States and throughout the world and volatility in financial and insurance markets may materially affect our results of operations. Factors such as business and consumer confidence, unemployment levels, consumer spending, business investment, government spending, the volatility and strength of the capital markets, and inflation all affect the business and economic environment and, indirectly, the amount and profitability of our business. During 2015, 34% of DPW in our Standard Commercial Lines business were based on payroll/sales of our underlying customers. An economic downturn in which our customers decline in revenue or employee count can adversely affect our audit and endorsement premium in our Standard Commercial Lines. Unfavorable economic developments could adversely affect our earnings if our customers have less need for insurance coverage, cancel existing insurance policies, modify coverage, or choose not to renew with us. Challenging economic conditions may impair the ability of our customers to pay premiums as they come due. Although economic conditions have consistently improved over the last several years, many fundamental concerns still exist, which may have a material effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. A downgrade or a potential downgrade in our financial strength or credit ratings could result in a loss of business and could have a material adverse effect on our financial condition and results of operations. Our financial strength ratings, as issued by the following Nationally Recognized Statistical Rating Organizations ("NRSROs"), are as follows: NRSRO A.M. Best S&P Moody’s Fitch Financial Strength Rating A A- A2 A+ Outlook Stable Positive Stable Stable A significant rating downgrade, particularly from A.M. Best, would affect our ability to write new or renewal business with customers, some of whom are required under various third party agreements to maintain insurance with a carrier that maintains a specified minimum rating. In addition, our $30 million line of credit ("Line of Credit") requires our Insurance Subsidiaries to maintain an A.M. Best rating of at least “A-” (one level below our current rating) and a default could lead to acceleration of any outstanding principal. Such an event could trigger default provisions under certain of our other debt instruments and negatively impact our ability to borrow in the future. As a result, any significant downgrade in our financial strength ratings could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. NRSROs also rate our long-term debt creditworthiness. Credit ratings indicate the ability of debt issuers to meet debt obligations in a timely manner and are important factors in our overall funding profile and ability to access certain types of liquidity. Our current senior credit ratings are as follows: NRSRO Credit Rating Long Term Credit Outlook A.M. Best S&P Moody’s Fitch bbb+ BBB- Baa2 BBB+ Stable Positive Stable Stable Downgrades in our credit ratings could have a material adverse effect on our financial condition and results of operations in many ways, including making it more expensive for us to access capital markets. We cannot predict possible actions NRSROs may take regarding our ratings that could adversely affect our business or the possible actions we may take in response to any such actions. We have many competitors and potential competitors. Demand for insurance is influenced by prevailing general economic conditions. The supply of insurance is related to prevailing prices, the levels of insured losses and the levels of industry capital which, in turn, may fluctuate in response to changes in rates of return on investments being earned in the insurance industry. In addition, pricing is influenced by the operating performance 20 of insurers as increased pricing may be necessary to meet return on equity objectives. As a result, the insurance industry historically has been through cycles characterized by periods of intense price competition due to excessive underwriting capacity and periods when shortages of capacity and poor operating performance by insurers drives favorable premium levels. If competitors price business below technical levels, we might reduce our profit margin in order to retain our best business. Pricing and loss trends impact our profitability. For example, assuming retention and all other factors remain constant: • A pure price decline of approximately 1% would increase our statutory combined ratio by approximately 0.75 points; • A 3% increase in our expected claim costs for the year would cause our loss and loss expense ratio to increase by approximately 1.75 points; and • A combination of the two could raise the combined ratio by approximately 2.5 points. We compete with regional, national, and direct-writer property and casualty insurance companies for customers, distribution partners, and employees. Some competitors are public companies and some are mutual companies. Many competitors are larger and may have lower operating costs and/or lower cost of capital. They may have the ability to absorb greater risk while maintaining their financial strength ratings. Consequently, some competitors may be able to price their products more competitively. These competitive pressures could result in increased pricing pressures on a number of our products and services, particularly as competitors seek to win market share, and may impair our ability to maintain or increase our profitability. Because of its relatively low cost of entry, the Internet has emerged as a significant place of new competition, both from existing competitors and new competitors. Additionally, reinsurers have entered certain primary property casualty insurance markets to diversify their operations and compete with us. Further new competition could cause changes in the supply or demand for insurance and adversely affect our business. We have less loss experience data than our larger competitors. We believe that insurance companies are competing and will continue to compete on their ability to use reliable data about their customers and loss experience in complex analytics and predictive models to assess profitability of the risk, as well as the potential for adverse claim development, recovery opportunities, fraudulent activities, and customer buying habits. With the consistent expansion of computing power and the decline in its cost, we believe that data and analytics use will continue to increase and become more complex and accurate. As a regional insurance group, the loss experience from our insurance operations is not large enough in all circumstances to analyze and project our future costs. In addition, we have limited data regarding our E&S business, which we assumed in 2011 and began writing directly in 2012. We use data from ISO, NCCI, and AAIS to obtain sufficient industry loss experience data. While statistically relevant, that data is not specific to the performance of risks we have underwritten. Larger competitors, particularly national carriers, have significantly more data regarding the performance of risks that they have underwritten. The analytics of their loss experience data may be more predictive of profitability of their risks than our analysis using, in part, general industry loss experience. For the same reason, should Congress repeal the McCarran-Ferguson Act, which provides an anti-trust exemption for the aggregation of loss data, and we are unable to access data from ISO, NCCI, and AAIS, we will be at a competitive disadvantage to larger insurers who have more sufficient loss experience data on their own customers. We depend on distribution partners. We market and sell our insurance products through distribution partners who are not our employees. We believe that these partners will remain a significant force in overall insurance industry premium production because they can provide customers with a wider choice of insurance products than if they represented only one insurer. That, however, creates competition in our distribution channel and we must market our products and services to our distribution partners before they sell them to our mutual customers. Additionally, there has been a trend towards increased levels of consolidation of these distribution partners in the marketplace, which increases competition among fewer distributors. Our Standard Personal Lines production is further limited by the fact that independent retail insurance agencies only write approximately 35% of this business in the United States. Our financial condition and results of operations are tied to the successful marketing and sales efforts of our products by our distribution partners. In addition, under insurance laws and regulations and common law, we potentially can be held liable for business practices or actions taken by our distribution partners. We face risks regarding our flood business because of uncertainties regarding the NFIP. We are the sixth largest insurance group participating in the WYO arrangement of the NFIP, which is managed by the Mitigation Division of the Federal Emergency Management Agency (“FEMA”) in the U.S. Department of Homeland Security. For WYO participation, we receive an expense allowance for policies written and a servicing fee for claims administered. Under the program, all losses are 100% reinsured by the Federal Government. Currently, the expense allowance is 30.9% of direct premiums written. The servicing fee is the combination of 0.9% of DPW and 1.5% of incurred losses. 21 The NFIP is funded by Congress and in 2012, Congress passed, and the President signed, the Biggert-Waters Flood Insurance Reform Act of 2012 (“Biggert-Waters Act”). The Biggert-Waters Act: (i) extended NFIP funding to September 30, 2017; and (ii) moved the program to more market based rates for certain flood policyholders. FEMA implemented these rates throughout 2013, which created significant public discontent and Congressional concern over the impact of the new rates on NFIP customers. Consequently, Congress passed and, on March 21, 2014, the President signed into law, the Homeowner Flood Insurance Affordability Act of 2014 (“Flood Affordability Act”). The Flood Affordability Act substantially modifies certain provisions of the Biggert-Waters Act, including the reversal of certain rate increases resulting in premium refunds for many NFIP policyholders that began after October 1, 2014. Effective April 2015, the Flood Affordability Act effectuated certain changes to the NFIP, including: (i) an increase in the Reserve Fund Assessment; (ii) implementation of an annual surcharge on all new and renewal policies; (iii) an additional deductible option; and (iv) increases in the federal policy fee and basic rates. As a WYO carrier, we are required to follow certain NFIP procedures when administering flood policies and claims. Some of these requirements may differ from our normal business practices and may present a reputational risk to our brand. Insurance companies are regulated by states; however, the NFIP is a federal program. Consequently, we have the risk that regulatory positions taken by the NFIP and a state regulator on the same issue may conflict. Despite the passage of the Flood Affordability Act, the role of the NFIP program remains under scrutiny by policymakers. Additionally, our flood business could be impacted by: (i) a mandate for primary insurance carriers to provide flood insurance; or (ii) private writers becoming more prevalent in the marketplace. The uncertainty behind the public policy debate and politics of flood insurance reform make it difficult for us to predict the future of the NFIP and our continued participation in the program. We are heavily regulated and changes in regulation may reduce our profitability, increase our capital requirements, and/or limit our growth. Our Insurance Subsidiaries are heavily regulated by extensive laws and regulations that may change on short notice. The primary public policy behind insurance regulation is the protection of policyholders and claimants over all other constituencies, including shareholders. Historically, and by virtue of the McCarran-Ferguson Act, our Insurance Subsidiaries are primarily regulated by the states in which they are domiciled and licensed. State insurance regulation is generally uniform throughout the U.S. by virtue of similar laws and regulations required by the NAIC to accredit state insurance departments so their examinations can be given full faith and credit by other state regulators. Despite their general similarity, various provisions of these laws and regulations vary from state to state. At any given time, there may be various legislative and regulatory proposals in each of the 50 states and District of Columbia that, if enacted, may affect our Insurance Subsidiaries. The broad regulatory, administrative, and supervisory powers of the various state departments of insurance include the following: • Related to our financial condition, review and approval of such matters as minimum capital and surplus requirements, standards of solvency, security deposits, methods of accounting, form and content of statutory financial statements, reserves for unpaid loss and loss adjustment expenses, reinsurance, payment of dividends and other distributions to shareholders, periodic financial examinations, and annual and other report filings. • Related to our general business, review and approval of such matters as certificates of authority and other insurance company licenses, licensing and compensation of distribution partners, premium rates (which may not be excessive, inadequate, or unfairly discriminatory), policy forms, policy terminations, reporting of statistical information regarding our premiums and losses, periodic market conduct examinations, unfair trade practices, participation in mandatory shared market mechanisms, such as assigned risk pools and reinsurance pools, participation in mandatory state guaranty funds, and mandated continuing workers compensation coverage post-termination of employment. • Related to our ownership of the Insurance Subsidiaries, we are required to register as an insurance holding company system in each state where an insurance subsidiary is domiciled and report information concerning all of our operations that may materially affect the operations, management, or financial condition of the insurers. As an insurance holding company, the appropriate state regulatory authority may: (i) examine us or our Insurance Subsidiaries at any time; (ii) require disclosure or prior approval of material transactions of any of the Insurance Subsidiaries with its affiliates; and (iii) require prior approval or notice of certain transactions, such as payment of dividends or distributions to us. 22 Although Congress has largely delegated insurance regulation to the various states by virtue of the McCarran-Ferguson Act, we are also subject to federal legislation and administrative policies, such as disclosure under the securities laws, including the Sarbanes-Oxley Act and the Dodd-Frank Act, TRIPRA, OFAC, and various privacy laws, including the Gramm-Leach-Bliley Act, the Fair Credit Reporting Act, the Drivers Privacy Protection Act, the Health Insurance Portability and Accountability Act, and the policies of the Federal Trade Commission. As a result of issuing workers compensation policies, we are subject to Mandatory Medicare Secondary Payer Reporting under the Medicare, Medicaid, and SCHIP Extension Act of 2007. The European Union has enacted Solvency II, which sets out new requirements on capital adequacy and risk management for insurers operating in Europe, which was implemented in 2016. The strengthened regime is intended to reduce the possibility of consumer loss or market disruption in insurance. In addition, in 2014, the International Association of Insurance Supervisors proposed Basic Capital Standards for Global Systemically Important Insurers as well as a uniform capital framework for internationally active insurers. Although Solvency II does not govern domestic American insurers and we do not have international operations, we believe that development of global capital standards will influence the development of similar standards by domestic regulators. The NAIC has recently adopted ORSA, which requires insurers to maintain a framework for identifying, assessing, monitoring, managing, and reporting on the “material and relevant risks” associated with the insurer's (or insurance group's) current and future business plans. ORSA, which has been adopted by the state insurance regulators of our Insurance Subsidiaries, requires companies to file an internal assessment of their solvency with insurance regulators annually. Although no specific capital adequacy standard is currently articulated in ORSA, it is possible that such a standard will be developed over time and may increase insurers' minimum capital requirements, which could adversely impact our growth and return on equity. We are subject to non-governmental regulators, such as the NASDAQ Stock Market and the New York Stock Exchange where we list our securities. Many of these regulators, to some degree, overlap with each other on various matters. They have different regulations on the same legal issues that are subject to their individual interpretative discretion. Consequently, we have the risk that one regulator’s position may conflict with another regulator’s position on the same issue. As compliance is generally reviewed in hindsight, we are subject to the risk that interpretations will change over time. We believe we are in compliance with all laws and regulations that have a material effect on our results of operations, but the cost of complying with various, potentially conflicting laws and regulations, and changes in those laws and regulations could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. We are subject to the risk that legislation will be passed that significantly changes insurance regulation and adversely impacts our business, financial condition, and/or the results of operations. In 2009, the Dodd-Frank Act was enacted to address the financial markets crises in 2008 and 2009 and issues regarding American International Group, Inc. The Dodd-Frank Act created the FIO as part of the U.S. Department of Treasury to advise the federal government regarding insurance issues. The Dodd-Frank Act also requires the Federal Reserve through the Financial Services Oversight Council (“FSOC”) to supervise financial services firms designated as systemically important financial institutions ("SIFI"). The FSOC has not designated Selective as a SIFI. The Dodd-Frank Act also included a number of corporate governance reforms for publicly traded companies, including proxy access, say-on-pay, and other compensation and governance issues. We anticipate that there will continue to be legislative proposals in Congress that could result in the federal government becoming directly involved in the regulation of insurance. There are also legislative and regulatory proposals in the various states that seek to limit the ability of carriers to properly assess insurance risk. • Repeal of the McCarran-Ferguson Act. While recent proposals for McCarran-Ferguson Act repeal have been directed primarily at health insurers, if enacted and applicable to property and casualty insurers, such repeal would significantly reduce our ability to compete and materially affect our results of operations because we rely on the anti-trust exemptions the law provides to obtain loss data from third party aggregators, such as ISO and NCCI, to predict future losses. Our inability to access data from ISO and NCCI would put us at a competitive disadvantage compared to larger insurers who have more sufficient loss experience data with their own customers. • Healthcare reform. The enactment of the Patient Protection and Affordable Care Act of 2010 (the “Healthcare Act”) may have an impact on various aspects of our business, including our insurance segments. The Healthcare Act reduces the reimbursement to healthcare providers, which may result in healthcare providers charging more to insurers not covered under the Healthcare Act. This could increase our cost to provide workers compensation, automobile Personal Injury Protection and general liability coverages, among others. In addition, we will continue to be impacted as a business enterprise by potential tax issues and changes in employee benefits. The Healthcare Act has been adopted, its implementation is ongoing, and we continue to monitor and assess its impact. 23 • Changes in rules for Department of Housing and Urban Development ("HUD"). In 2013, HUD finalized a new "disparate impact" regulation that may adversely impact insurers' ability to differentiate pricing for homeowners policies using traditional risk selection analysis. Various legal challenges to this regulation continue to be pursued in courts, including the applicability of the regulation to the business of insurance. It is uncertain to what extent the application of this regulation will impact the property and casualty industry and underwriting practices, but it could increase litigation costs, force changes in underwriting practices, and impair our ability to write homeowners business profitably. The outcome of the pending legal challenges and potential rulemaking cannot be predicted at this time. • State Regulatory and Legislative Limits to Underwriting. From time-to-time, there are proposals in various states seeking to limit the ability of insurers to use certain factors or predictive measures in the underwriting of property and casualty risks. Among the proposed legislation and regulation have been limits on the use of insurance scores and marketplace considerations. These proposals, if enacted, could impact underwriting pricing and results. We expect the debate about the role of the federal government in regulating insurance to continue. We cannot predict whether any of the above discussed proposed rules or legislation will be adopted, or what impact, if any, such proposals or the cost of compliance with such proposals, could have on our results of operations, liquidity, financial condition, financial strength, and debt ratings if enacted. Class action litigation could affect our business practices and financial results. Our industry has been the target of class action litigation, including the following areas: • After-market parts; • Urban homeowner insurance underwriting practices, including those related to architectural or structural features and attempts by federal regulators to expand the Federal Housing Administration's guidelines to determine unfair discrimination; • Credit scoring and predictive modeling pricing; • Cybersecurity breaches; • Investment disclosure; • Managed care practices; • Timing and discounting of personal injury protection claims payments; • Direct repair shop utilization practices; • Flood insurance claim practices; and • Shareholder class action suits. If we were to be named in such class action litigation, we could suffer reputational harm with purchasers of insurance and have increased litigation expenses that could have a materially adverse effect on our operations or results. Changes in tax legislation initiatives could adversely affect our results of operations and financial condition. We are subject to the tax laws and regulations of U.S. federal, state, and local governments, which may change in ways that adversely impact us. For example, federal tax legislation could be enacted that reduces the existing statutory U.S. federal corporate income tax rate from 35%, thereby reducing any deferred tax assets. This would require that we recognize, in full, a reduction of a previously-recognized federal tax benefit in the period when enacted, and, along with other changes in the tax rules that may increase our actual tax expense, could materially and adversely affect our results of operations. Risks Related to Our Investment Segment We are exposed to interest rate and credit risk in our investment portfolio. We are exposed to interest rate risk primarily related to the market price, and cash flow variability, associated with changes in interest rates. A rise in interest rates may decrease the fair value of our existing fixed income investments and declines in interest rates may result in an increase in the fair value of our existing fixed income investments. Our fixed income investment portfolio, which currently has a duration of 3.8 years excluding short term investments, contains interest rate sensitive instruments that may be adversely affected by changes in interest rates resulting from governmental monetary policies, domestic and international economic and political conditions, and other factors beyond our control. A rise in interest rates would decrease the net unrealized gain position of the investment portfolio, partially offset by our ability to earn higher rates of return on funds reinvested in new investments. Conversely, a decline in interest rates would increase the net unrealized gain position of the investment portfolio, partially offset by lower rates of return on new and reinvested cash in the portfolio. Changes in interest rates have an effect on the calculated duration of certain securities in the portfolio. We seek to mitigate our 24 interest rate risk associated with holding fixed income investments by monitoring and maintaining the average duration of our portfolio with a view toward achieving an adequate after-tax return without subjecting the portfolio to an unreasonable level of interest rate risk. Although we take measures to manage the economic risks of investing in a changing interest rate environment, we may not be able to mitigate the interest rate risk of our assets relative to our liabilities, particularly our loss reserves. In addition, our pension and post-retirement benefit obligations include a discount rate assumption, which is an important element of expense and/or liability measurement. Changes in the discount rate assumption could materially impact our pension and post-retirement life valuation. The value of our investment portfolio is subject to credit risk from the issuers and/or guarantors of the securities in the portfolio, other counterparties in certain transactions and, for certain securities, insurers that guarantee specific issuer’s obligations. Defaults by the issuer or an issuer’s guarantor, insurer, or other counterparties regarding any of our investments, could reduce our net investment income and net realized investment gains or result in investment losses. We are subject to the risk that the issuers, or guarantors, of fixed income securities we own may default on principal and interest payments due under the terms of the securities. At December 31, 2015, our fixed income securities portfolio represented approximately 91% of our total invested assets. The occurrence of a major economic downturn, acts of corporate malfeasance, widening credit spreads, budgetary deficits, municipal bankruptcies spurred by, among other things, pension funding issues, or other events that adversely affect the issuers or guarantors of these securities could cause the value of our fixed income securities portfolio and our net income to decline and the default rate of our fixed income securities portfolio to increase. With economic uncertainty, credit quality of issuers or guarantors could be adversely affected and a ratings downgrade of the issuers or guarantors of the securities in our portfolio could cause the value of our fixed income securities portfolio and our net income to decrease. As our stockholders' equity is leveraged at 3.6:1 to our investment portfolio, a reduction in the value of our investment portfolio could have a material adverse effect on our business, results of operations, financial condition, and debt ratings. Levels of write downs are impacted by our assessment of the impairment, including a review of the underlying collateral of structured securities, and our intent and ability to hold securities that have declined in value until recovery. If we reposition or realign portions of the portfolio so that we determine not to hold certain securities in an unrealized loss position to recovery, we will incur an OTTI charge. For further information regarding credit and interest rate risk, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.” of this Form 10-K. Our statutory surplus may be materially affected by rating downgrades on investments held in our portfolio. We are exposed to significant financial and capital markets risks, primarily relating to interest rates, credit spreads, equity prices, and the change in market value of our alternative investment portfolio. A decline in both income and our investment portfolio asset values could occur as a result of, among other things, a decrease in market liquidity, fluctuations in interest rates, decreased dividend payment rates, negative market perception of credit risk with respect to types of securities in our portfolio, a decline in the performance of the underlying collateral of our structured securities, reduced returns on our alternative investment portfolio, or general market conditions. A global decline in asset values will be more amplified in our financial condition, as our statutory surplus is leveraged at a 3.5:1 ratio to our investment portfolio. With economic uncertainty, the credit quality and ratings of securities in our portfolio could be adversely affected. The NAIC could potentially apply a more adverse class code on a security than was originally assigned, which could adversely affect statutory surplus because securities with NAIC class codes three through six require securities to be marked-to-market for statutory accounting purposes, as compared to securities with NAIC class codes of one or two that are carried at amortized cost. Deterioration in the public debt and equity markets, the private investment marketplace, and the economy could lead to investment losses, which may adversely affect our results of operations, financial condition, liquidity, and debt ratings. Like most property and casualty insurance companies, we depend on income from our investment portfolio for a significant portion of our revenue and earnings. Our investment portfolio is exposed to significant financial and capital market risks, both in the U.S. and abroad, and volatile changes in general market or economic conditions could lead to a decline in the market value of our portfolio as well as the performance of the underlying collateral of our structured securities. Concerns over weak economic growth globally, elevated unemployment, volatile energy and commodity prices, and geopolitical issues, among other factors, contribute to increased volatility in the financial markets, increased potential for credit downgrades, and decreased liquidity in certain investment segments. Our notes payable and Line of Credit are subject to certain debt-to-capitalization restrictions and net worth covenants, which could be impacted by a significant decline in investment value. Further OTTI charges could be necessary if there is a future significant decline in investment values. Depending on market conditions going forward, and in the event of extreme prolonged market events, such as the global credit crisis, we could incur additional realized and unrealized losses in future periods, which could have an adverse impact on our results of operations, financial condition, debt and financial strength ratings, and our ability to access capital markets as a result of realized losses, impairments, and changes in unrealized positions. 25 For more information regarding market interest rate, credit, and equity price risk, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.” of this Form 10-K. There can be no assurance that the actions of the U.S. Government, Federal Reserve, and other governmental and regulatory bodies will achieve their intended effect. Over the past several years, the Federal Reserve has taken a number of actions related to interest rates and purchasing of financial instruments intended to spur economic recovery. The Federal Reserve's policy of quantitative easing and low interest rates since the financial crisis of 2008 have had an adverse effect on our investment income, as higher yielding securities mature and we reinvest the proceeds at lower yields. In December 2015, the Federal Reserve increased the Federal Fund Rate by 25 basis points. If this rate were to continue to be systematically increased, we are uncertain of what the effect would be on the broad financial markets. Increased pressure on the price of our fixed income and equity portfolios may occur if these economic stimulus actions by the Federal Reserve are not as effective as originally intended. These results could materially and adversely affect our financial condition and the trading price of our common stock. In the event of future material deterioration in business conditions, we may need to raise additional capital or consider other transactions to manage our capital position. In addition, our investment activities are subject to extensive laws and regulations that are administered and enforced by a number of different governmental authorities and non-governmental self-regulatory agencies. In light of the current economic conditions, some of these authorities have implemented, or may in the future implement, new or enhanced regulatory requirements, such as those included in the Dodd-Frank Act, intended to restore confidence in financial institutions and reduce the likelihood of similar economic events in the future. These authorities may seek to exercise their supervisory and enforcement authority in new or more robust ways. Such events could affect the way we conduct our business and manage our capital, and may require us to satisfy increased capital requirements. These developments, if they occurred, could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. We are subject to the types of risks inherent in investing in private limited partnerships. Our other investments include investments in private limited partnerships that invest in various strategies, such as private equity, private credit, and real assets. Since these partnerships’ underlying investments consist primarily of assets or liabilities for which there are no quoted prices in active markets for the same or similar assets, the valuation of interests in these partnerships is subject to a higher level of subjectivity and unobservable inputs than substantially all of our other investments and as such, is subject to greater scrutiny and reconsideration from one reporting period to the next. As these investments are recorded under the equity method of accounting, any decreases in the valuation of these investments would negatively impact our results of operations. We value our investments using methodologies, estimations, and assumptions that are subject to differing interpretations. Changes in these interpretations could result in fluctuations in the valuations of our investments that may adversely affect our results of operations or financial condition. Fixed income, equity, and short-term investments, which are reported at fair value on our Consolidated Balance Sheet, represented the majority of our total cash and invested assets as of December 31, 2015. As required under accounting rules, we have categorized these securities into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1). The next priority is to quoted prices in markets that are not active or inputs that are observable either directly or indirectly, including quoted prices for similar assets or liabilities or in markets that are not active and other inputs that can be derived principally from, or corroborated by, observable market data for substantially the full term of the assets or liabilities (Level 2). The lowest priority in the fair value hierarchy is to unobservable inputs supported by little or no market activity and that reflect the reporting entity’s own assumptions about the exit price, including assumptions that market participants would use in pricing the asset or liability (Level 3). An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. We generally use an independent pricing service and broker quotes to price our investment securities. At December 31, 2015, approximately 9% and 91% of these securities represented Level 1 and Level 2, respectively. However, prices provided by independent pricing services and brokers can vary widely even for the same security. Rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported within our consolidated financial statements (“Financial Statements”) and the period-to-period changes in value could vary significantly. Decreases in value may result in an increase in non-cash OTTI charges, which could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. 26 The determination of the amount of impairments taken on our investments is highly subjective and could materially impact our results of operations or our financial position. The determination of the amount of impairments taken on our investments is based on our periodic evaluation and assessment of our investments and known and inherent risks associated with the various asset classes. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates its evaluations regularly and reflects changes in impairments as such evaluations are revised. There can be no assurance that management has accurately assessed the level of impairments taken as reflected in our Financial Statements. Furthermore, additional impairments may need to be taken in the future. Historical trends may not be indicative of future impairments. For further information regarding our evaluation and considerations for determining whether a security is other-than-temporarily impaired, please refer to “Critical Accounting Policies and Estimates” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” of this Form 10-K. Changes in tax legislation initiatives could adversely affect our investments results. We are subject to the tax laws and regulations of U.S. federal, state, and local governments, which may change in ways that adversely impact us. Our investment portfolio has benefited from tax exemptions and certain other tax laws, including, but not limited to, those governing dividends received deductions and tax-advantaged municipal bond interest. Federal and/or state tax legislation could be enacted that would lessen or eliminate some or all of the tax advantages currently benefiting us. This could negatively impact the value of our investment portfolio and, in turn, materially and adversely impact our results of operations. Risks Related to Our Corporate Structure and Governance We are a holding company and our ability to declare dividends to our shareholders, pay indebtedness, and enter into affiliate transactions may be limited because our Insurance Subsidiaries are regulated. Restrictions on the ability of the Insurance Subsidiaries to pay dividends, make loans or advances to us, or enter into transactions with affiliates may materially affect our ability to pay dividends on our common stock or repay our indebtedness. As of December 31, 2015, the Parent had stand-alone retained earnings of $1.4 billion. Of this amount, $1.3 billion is related to investments in our Insurance Subsidiaries. The Insurance Subsidiaries have the ability to provide for $178 million in annual ordinary dividends to us under applicable state regulation; however, as they are regulated entities, their ability to pay dividends or make loans or advances to us is subject to the approval or review of the insurance regulators in the states where they are domiciled. The standards for review of such transactions are whether: (i) the terms and charges are fair and reasonable; and (ii) after the transaction, the Insurance Subsidiary's surplus for policyholders is reasonable in relation to its outstanding liabilities and financial needs. Although dividends and loans to us from our Insurance Subsidiaries historically have been approved, we can make no assurance that future dividends and loans will be approved. For additional details regarding dividend restrictions, see Note 19. “Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds” in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Because we are an insurance holding company and a New Jersey corporation, we may be less attractive to potential acquirers and the value of our common stock could be adversely affected. Because we are an insurance holding company that owns insurance subsidiaries, anyone who seeks to acquire 10% or more of our stock must seek prior approval from the insurance regulators in the states in which the subsidiaries are organized and file extensive information regarding their business operations and finances. Provisions in our Amended and Restated Certificate of Incorporation may discourage, delay, or prevent us from being acquired, including: • Supermajority shareholder voting requirements to approve certain business combinations with interested shareholders (as defined in the Amended and Restated Certificate of Incorporation) unless certain other conditions are satisfied; and • Supermajority shareholder voting requirements to amend the foregoing provisions in our Amended and Restated Certificate of Incorporation. In addition to the requirements in our Amended and Restated Certificate of Incorporation, the New Jersey Shareholders’ Protection Act also prohibits us from engaging in certain business combinations with interested stockholders (as defined in the statute), in certain instances for a five-year period, and in other instances indefinitely, unless certain conditions are satisfied. These conditions may relate to, among other things, the interested stockholder’s acquisition of stock, the approval of the business combination by disinterested members of our Board of Directors and disinterested stockholders, and the price and payment of the consideration proposed in the business combination. Such conditions are in addition to those requirements set forth in our Amended and Restated Certificate of Incorporation. 27 These provisions of our Amended and Restated Certificate of Incorporation and New Jersey law could have the effect of depriving our stockholders of an opportunity to receive a premium over our common stock’s prevailing market price in the event of a hostile takeover and may adversely affect the value of our common stock. Risks Related to Our General Operations The failure of our risk management strategies could have a material adverse effect on our financial condition or results of operations. As an insurance provider, it is our business to take on risk from our customers. Our long-term strategy includes use of above average operational leverage, which can be measured as the ratio of NPW to our equity or policyholders surplus. We balance operational leverage risk with a number of risk management strategies within our insurance operations to achieve a balance of growth and profit and to reduce our exposure. These strategies include, but are not limited to, the following: • Being disciplined in our underwriting practices; • Being prudent in our claims management practices, establishing adequate loss and loss expense reserves, and placing appropriate reliance on our claims analytics; • Continuing to develop and implement various underwriting tools and automated analytics to examine historical statistical data regarding our customers and their loss experience to: (i) classify such policies based on that information; (ii) apply that information to current and prospective accounts; and (iii) better predict account profitability; • Continuing to develop our customer experience platform as we grow in our understanding of customer segmentation; • Purchasing reinsurance and using catastrophe modeling; and • Being prudent in our financial planning process, which supports our underwriting strategies. We also maintain a conservative approach to our investment portfolio management and employ risk management strategic that include, but are not limited to: • Being prudent in establishing our investment policy and appropriately diversifying our investments, which supports our liabilities and underwriting strategies; • Using complex financial and investment models to analyze historic investment performance and predict future investment performance under a variety of scenarios using asset concentration, asset volatility, asset correlation, and systematic risk; and • Closely monitoring investment performance, general economic and financial conditions, and other relevant factors. All of these strategies have inherent limitations. We cannot be certain that an event or series of unanticipated events will not occur and result in losses greater than we expect and have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. Operational risks, including human or systems failures, are inherent in our business. Operational risks and losses can result from, among other things, fraud, errors, failure to document transactions properly or to obtain proper internal authorization, failure to comply with regulatory requirements, information technology failures, or external events. We believe that our underwriting, claims, predictive, and catastrophe modeling, as well as our business analytics and our information technology and application systems are critical to our business. We expect our information technology and application systems to remain an important part of our underwriting process and our ability to compete successfully. A major defect or failure in our internal controls or information technology and application systems could: (i) result in management distraction; (ii) harm our reputation; or (iii) increase our expenses. We believe appropriate controls and mitigation procedures are in place to prevent significant risk of a defect in our internal controls around our information technology and application systems, but internal controls provide only a reasonable, not absolute, assurance as to the absence of errors or irregularities and any ineffectiveness of such controls and procedures could have a significant and negative effect on our business. 28 Rapid development of new technologies may result in an unexpected impact on our business and insurance industry overall. Development of new technologies continues to impact all aspects of business and individuals’ lives at rapid speed. Often such developments are positive and gradually improve standards of living and speed of communications, and allow for the development of more efficient processes. However, rapid development of new technologies also presents challenges and risks. Examples of such emerging risks include but are not limited to: • Change in exposures and claims frequency and/or severity due to unanticipated consequences of new technologies and their use. For example, technologies have been developed and are being tested for autonomous self-driving automobiles. It is unclear and we cannot predict the corresponding severity or cost of automobile claims. It is possible that these technological developments will affect the profitability and demand for automobile insurance. • Changes in how insurance products are marketed and purchased due to availability of new technologies and changes in customer expectations. For example, comparative rating technologies which are widely used in personal lines insurance, facilitate the process of efficiently generating quotes from multiple insurance companies. This technology makes differentiation other than on pricing more difficult and has increased price comparison and resulted in a higher level of quote activity with a lower percentage of quotes becoming new business written. These trends may continue to accelerate and may affect other lines of business, which could put pressure on our future profitability. • New technologies may require development of new insurance products without support of sufficient historical claims data for us to continue to effectively compete for our distribution partners' business and customers. We are subject to attempted cyber-attacks and other cybersecurity risks. The nature of our business requires that we store and use significant amounts of personally identifiable information in electronic format that may be targeted in an attempted cybersecurity breach. In addition, our business is heavily reliant on various information technology and application systems that may be impacted by a malicious cyber-attack. These cyber incidents may cause lost revenues or increased expenses stemming from reputational damage and fines related to the breach of personally identifiable information, inability to use certain systems for a period of time, loss of financial assets, remediation and litigation costs, and increased cybersecurity protection costs. We have developed and continue to invest in a variety of controls to prevent, detect, and appropriately react to such cyber-attacks, including frequently testing our systems' security and access controls. However, cybersecurity risks continue to become more complex and broad ranging and our internal controls provide only a reasonable, not absolute, assurance that we will be able to protect ourselves from significant cyber-attack incidents. By outsourcing certain business and administrative functions to third parties, we may be exposed to enhanced risk of data security breaches. Any breach of data security could damage our reputation and/or result in monetary damages, which, in turn, could have a material adverse effect on our results of operations, liquidity, financial condition, financial strength, and debt ratings. Although we have not experienced a material cyber-attack, we purchase insurance coverage to specifically address cybersecurity risks. The coverage provides protection up to $20 million above a deductible of $250,000 for various cybersecurity risks, including privacy breach related incidents. We depend on key personnel. To a large extent, our business' success depends on our ability to attract and retain key employees. Competition to attract and retain key personnel is intense. While we have employment agreements with certain key managers, all of our employees are at- will employees and we cannot ensure that we will be able to attract and retain key personnel. As of December 31, 2015, our workforce had an average age of approximately 47 and approximately 25% of our workforce was retirement eligible under our retirement and benefit plans. If we experience difficulties with outsourcing relationships, our ability to conduct our business might be negatively impacted. We outsource certain business and administrative functions to third parties for efficiencies and cost savings, and may do so increasingly in the future. If we fail to develop and implement our outsourcing strategies or our third-party providers fail to perform as anticipated, we may experience operational difficulties, increased costs, and a loss of business that may have a material adverse effect on our results of operations or financial condition. Currently, we have agreements with multiple consulting, information technology, and service providers for supplemental staffing services. Collectively, these providers supply approximately 46% of our skilled technology capacity. 29 We are subject to a variety of modeling risks, which could have a material adverse impact on our business results. We rely on complex financial models, such as predictive modeling, a claims fraud model, third party catastrophe models, an enterprise risk management capital model, and modeling tools used by our investment managers, which have been developed internally or by third parties to analyze historical loss costs and pricing, trends in claims severity and frequency, the occurrence of catastrophe losses, investment performance, and portfolio risk. Flaws in these financial models, or faulty assumptions used by these financial models, could lead to increased losses. We believe that statistical models alone do not provide a reliable method of monitoring and controlling risk. Therefore, such models are tools and do not substitute for the experience or judgment of senior management. Item 1B. Unresolved Staff Comments. None. Item 2. Properties. Our main office is located in Branchville, New Jersey on a site owned by a subsidiary with approximately 114 acres and 315,000 square feet of operational space. We lease all of our other facilities. The principal office locations related to our insurance segments are described in the “Geographic Markets” section of Item 1. “Business.” of this Form 10-K. We believe our facilities provide adequate space for our present needs and that additional space, if needed, would be available on reasonable terms. Item 3. Legal Proceedings. In the ordinary course of conducting business, we are named as defendants in various legal proceedings. Most of these proceedings are claims litigation involving our Insurance Subsidiaries as either: (i) liability insurers defending or providing indemnity for third-party claims brought against our customers; or (ii) insurers defending first-party coverage claims brought against them. We account for such activity through the establishment of unpaid loss and loss expense reserves. We expect that the ultimate liability, if any, with respect to such ordinary course claims litigation, after consideration of provisions made for potential losses and costs of defense, will not be material to our consolidated financial condition, results of operations, or cash flows. Our Insurance Subsidiaries are also from time-to-time involved in other legal actions, some of which assert claims for substantial amounts. These actions include, among others, putative class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, improper reimbursement of medical providers paid under workers compensation and personal and commercial automobile insurance policies. Our Insurance Subsidiaries are also involved from time-to-time in individual actions in which extra-contractual damages, punitive damages, or penalties are sought, such as claims alleging bad faith in the handling of insurance claims. We believe that we have valid defenses to these cases. We expect that the ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for estimated losses, will not be material to our consolidated financial condition. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation, an adverse outcome in certain matters could, from time-to-time, have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods. As of December 31, 2015, we do not believe the Company was involved in any legal action that could have a material adverse effect on our consolidated financial condition, results of operations, or cash flows. 30 PART II Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. (a) Market Information Our common stock is traded on the NASDAQ Global Select Market under the symbol “SIGI.” The following table sets forth the high and low sales prices, as reported on the NASDAQ Global Select Market, for our common stock for each full quarterly period within the two most recent fiscal years: First quarter Second quarter Third quarter Fourth quarter 2015 2014 High Low High Low $ 30.10 29.60 32.50 37.91 25.49 26.28 28.10 30.36 26.99 25.42 25.46 27.65 21.38 22.14 21.97 22.01 On February 12, 2016, the closing price of our common stock as reported on the NASDAQ Global Select Market was $33.48. (b) Holders We had 3,490 stockholders of record as of February 12, 2016 according to the records maintained by our transfer agent. (c) Dividends Dividends on shares of our common stock are declared and paid at the discretion of the Board based on our results of operations, financial condition, capital requirements, contractual restrictions, and other relevant factors. Considering our improving profitability, in the fourth quarter of 2015, our Board of Directors approved a 7% increase in our dividend to $0.15 per share. The following table provides information on the dividends declared for each quarterly period within our two most recent fiscal years: Dividend Per Share First quarter Second quarter Third quarter Fourth quarter 2015 2014 $ 0.14 0.14 0.14 0.15 0.13 0.13 0.13 0.14 Our ability to receive dividends, loans, or advances from our Insurance Subsidiaries is subject to the approval or review of the insurance regulators in the respective domiciliary states of our Insurance Subsidiaries. Such approval and review is made under the respective domiciliary states’ insurance holding company acts, which generally require that any transaction between related companies be fair and equitable to the insurance company and its policyholders. Although our dividends have historically been met with regulatory approval, there is no assurance that future dividends will be approved given current market conditions. We currently expect to continue to pay quarterly cash dividends on shares of our common stock in the future. For additional information, see Note 19. "Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. 31 (d) Securities Authorized for Issuance under Equity Compensation Plans The following table provides information about our common stock authorized for issuance under equity compensation plans as of December 31, 2015: (a) (b) Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) Equity compensation plans approved by security holders 493,428 1 $ 17.84 5,738,581 2 1 Weighted average remaining contractual life of options is 2.90 years. 2 Includes 663,154 shares available for issuance under our Employee Stock Purchase Plan (2009); 1,937,154 shares available for issuance under the Stock Purchase Plan for Independent Insurance Agencies; and 3,138,273 shares for issuance under the Selective Insurance Group, Inc. 2014 Omnibus Stock Plan ("Stock Plan"). Future grants under the Stock Plan can be made, among other things, as stock options, restricted stock units, or restricted stock. (e) Performance Graph The following chart, produced by Research Data Group, Inc., depicts our performance for the period beginning December 31, 2010 and ending December 31, 2015, as measured by total stockholder return on our common stock compared with the total return of the NASDAQ Composite Index and a select group of peer companies comprised of NASDAQ-listed companies in SIC Code 6330-6339, Fire, Marine, and Casualty Insurance. This performance graph is not incorporated into any other filing we have made with the U.S. Securities and Exchange Commission ("SEC") and will not be incorporated into any future filing we may make with the SEC unless we so specifically incorporate it by reference. This performance graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC unless we specifically request so or specifically incorporate it by reference in any filing we make with the SEC. 32 (f) Purchases of Equity Securities by the Issuer and Affiliated Purchasers The following table provides information regarding our purchases of our common stock in the fourth quarter of 2015: Period October 1 – 31, 2015 November 1 – 30, 2015 December 1 – 31, 2015 Total $ $ Total Number of Shares Purchased1 Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Programs Maximum Number of Shares that May Yet Be Purchased Under the Announced Programs 7,016 $ 1,414 — 8,430 $ 34.84 35.97 — 35.03 — — — — — — — — 1During the fourth quarter of 2015, 955 shares were purchased from employees in connection with the vesting of restricted stock units and 7,475 shares were purchased from employees in connection with stock option exercises. These repurchases were made to satisfy tax withholding obligations and/or option costs with respect to those employees. These shares were not purchased as part of any publicly announced program. The shares that were purchased in connection with the vesting of restricted stock units were purchased at fair market value as defined in the Stock Plan and the Selective Insurance Group, Inc. 2005 Omnibus Stock Plan as Amended and Restated Effective as of May 1, 2010. The shares purchased in connection with the option exercises were purchased at the current market prices of our common stock on the dates the options were exercised. 33 Item 6. Selected Financial Data. Five-Year Financial Highlights1 (All presentations are in accordance with GAAP unless noted otherwise, number of weighted average shares and dollars in thousands, except per share amounts) Net premiums written Net premiums earned Net investment income earned Net realized gains Total revenues Catastrophe losses Underwriting income (loss) Net income from continuing operations2 Total discontinued operations, net of tax2 Net income Comprehensive income Total assets3 Notes payable3 Stockholders’ equity Statutory premiums to surplus ratio Statutory combined ratio Impact of catastrophe losses on statutory combined ratio4 GAAP combined ratio Invested assets per dollar of stockholders' equity Yield on investments, before tax Debt to capitalization ratio3 Return on average equity Non-GAAP measures5: Operating income Operating return on average equity Per share data: Net income from continuing operations2: Basic Diluted Net income: Basic Diluted Dividends to stockholders Stockholders’ equity Price range of common stock: High Low Close $ $ $ $ $ $ 2015 2,069,904 1,989,909 121,316 13,171 2,131,852 59,055 149,029 165,861 — 165,861 136,648 6,904,433 388,192 1,398,041 1.5 92.4 % pts 3.0 92.5 % 3.64 2.5 % 21.7 12.4 2014 1,885,280 1,852,609 138,708 26,599 2,034,861 59,971 78,143 141,827 — 141,827 136,764 6,574,942 372,689 1,275,586 1.4 95.7 3.2 95.8 3.77 3.0 22.6 11.7 2013 1,810,159 1,736,072 134,643 20,732 1,903,741 47,415 38,766 107,415 (997 ) 106,418 77,229 6,262,585 384,829 1,153,928 1.4 97.5 2.7 97.8 3.97 3.0 25.0 9.5 2012 1,666,883 1,584,119 131,877 8,988 1,734,102 98,608 (64,007 ) 37,963 — 37,963 49,709 6,789,373 302,544 1,090,592 1.6 103.5 6.2 104.0 3.97 3.1 21.7 3.5 157,300 11.8 % 124,538 10.3 93,939 8.4 32,121 3.0 2.90 2.85 2.90 2.85 0.57 24.37 37.91 25.49 33.58 2.52 2.47 2.52 2.47 0.53 22.54 27.65 21.38 27.17 1.93 1.89 1.91 1.87 0.52 20.63 28.31 19.53 27.06 0.69 0.68 0.69 0.68 0.52 19.77 20.31 16.22 19.27 2011 1,485,349 1,439,313 147,443 2,240 1,597,475 118,769 (103,584) 22,683 (650) 22,033 57,303 5,680,497 302,388 1,058,328 1.4 106.7 8.3 107.2 3.89 3.7 22.2 2.1 21,227 2.0 0.42 0.41 0.41 0.40 0.52 19.45 18.97 12.10 17.73 57,212 58,156 Number of weighted average shares: 54,095 Basic 55,221 Diluted 1 Data for 2011 has been restated to reflect the implementation of ASU 2010-26, Financial Services-Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, which was adopted on January 1, 2012. 2 In 2009, we sold our Selective HR Solutions operations. 3 Data for 2011 through 2014 has been restated to reflect the implementation of ASU 2015-03, Interest-Imputation of Interest (Topic 835-30): Simplifying the Presentation of Debt Issue Costs, which was adopted in the fourth quarter of 2015. 4 The impact of catastrophe losses on the 2012 statutory combined ratio including flood claims handling fees related to Superstorm Sandy was 5.8 points. 5 Operating income and operating return on average equity are non-GAAP measures. See the Glossary of Terms attached to this Form 10-K as Exhibit 99.1 for definitions of these items and see the “Financial Highlights of Results for Years Ended December 31, 2015, 2014, and 2013” section in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” of this Form 10-K for a reconciliation of operating income to net income. 56,310 57,351 54,880 55,933 55,638 56,810 34 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking Statements Certain statements in this report, including information incorporated by reference, are “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995 (“PSLRA”). The PSLRA provides a safe harbor under the Securities Act of 1933, as amended, and the Exchange Act for forward-looking statements. These statements relate to our intentions, beliefs, projections, estimations or forecasts of future events or future financial performance and involve known and unknown risks, uncertainties and other factors that may cause us or the industry’s actual results, levels of activity, or performance to be materially different from those expressed or implied by the forward-looking statements. In some cases, forward-looking statements may be identified by use of the words such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “target,” “project,” “intend,” “believe,” “estimate,” “predict,” “potential,” “pro forma,” “seek,” “likely,” or “continue” or other comparable terminology. These statements are only predictions, and we can give no assurance that such expectations will prove to be correct. We undertake no obligation, other than as may be required under the federal securities laws, to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Factors that could cause our actual results to differ materially from those we have projected, forecasted or estimated in forward- looking statements are discussed in further detail in Item 1A. “Risk Factors.” of this Form 10-K. These risk factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time-to-time. We can neither predict such new risk factors nor can we assess the impact, if any, of such new risk factors on our businesses or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied in any forward-looking statements in this report. In light of these risks, uncertainties and assumptions, the forward- looking events discussed in this report might not occur. Introduction We classify our business into four reportable segments: • Standard Commercial Lines - comprised of insurance products and services provided in the standard marketplace to our commercial customers, who are typically businesses, non-profit organizations, and local government agencies. • Standard Personal Lines - comprised of insurance products and services, including flood insurance coverage, provided primarily to individuals acquiring coverage in the standard marketplace. • Excess and surplus line ("E&S") Lines - comprised of insurance products and services provided to customers who have not obtained coverage in the standard marketplace. • Investments - invests the premiums collected by our insurance operations, as well as amounts generated through our capital management strategies, which may include the issuance of debt and equity securities. Our Standard Commercial Lines and Standard Personal Lines products and services are sold through nine subsidiaries that write commercial and personal insurance coverages, some of which write flood business through the National Flood Insurance Program's ("NFIP") Write Your Own ("WYO") Program. Our E&S Lines products and services are sold through one subsidiary, Mesa Underwriters Specialty Insurance Company ("MUSIC"), that provides a nationally-authorized non-admitted platform to write commercial and personal E&S business, of which we currently only write commercial coverages. Our ten insurance subsidiaries are collectively referred to as the "Insurance Subsidiaries." The purpose of the Management’s Discussion and Analysis (“MD&A”) is to provide an understanding of the consolidated results of operations and financial condition and known trends and uncertainties that may have a material impact in future periods. In the MD&A, we will discuss and analyze the following: • Critical Accounting Policies and Estimates; • Financial Highlights of Results for Years Ended December 31, 2015, 2014, and 2013; • Results of Operations and Related Information by Segment; • Federal Income Taxes; • Financial Condition, Liquidity, Short-term Borrowings, and Capital Resources; • Off-Balance Sheet Arrangements; • Contractual Obligations, Contingent Liabilities, and Commitments; and • Ratings. 35 Critical Accounting Policies and Estimates We have identified the policies and estimates described below as critical to our business operations and the understanding of the results of our operations. Our preparation of the Financial Statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our Financial Statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. Those estimates that were most critical to the preparation of the Financial Statements involved the following: (i) reserves for losses and loss expenses; (ii) pension and post-retirement benefit plan actuarial assumptions; (iii) other-than-temporary-impairment (“OTTI”); and (iv) reinsurance. Reserves for Losses and Loss Expenses Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the loss to the insurer, and the insurer’s payment of that loss. To recognize liabilities for unpaid losses and loss expenses, insurers establish reserves as balance sheet liabilities representing an estimate of amounts needed to pay reported and unreported net losses and loss expenses. We had accrued $3.5 billion of gross loss and loss expense reserves and $3.0 billion of net loss and loss expense reserves at December 31, 2015. At December 31, 2014, these gross and net reserves were $3.5 billion and $2.9 billion, respectively. The following tables provide case and incurred but not reported (“IBNR”) reserves for losses and loss expenses, and reinsurance recoverable on unpaid losses and loss expenses as of December 31, 2015 and 2014: As of December 31, 2015 Losses and Loss Expense Reserves $ ($ in thousands) General liability Workers compensation Commercial auto Businessowners' policies Commercial property Other Total Standard Commercial Lines Personal automobile Homeowners Other Total Standard Personal Lines E&S Lines Total Case Reserves IBNR Reserves Total Reinsurance Recoverable on Unpaid Losses and Loss Expenses Net Reserves 247,162 479,789 166,606 40,496 41,455 4,126 979,634 87,589 29,072 27,149 143,810 58,664 970,541 750,238 227,159 54,937 6,560 9,680 2,019,115 79,136 20,364 21,744 121,244 195,261 1,217,703 1,230,027 393,765 95,433 48,015 13,806 2,998,749 166,725 49,436 48,893 265,054 253,925 148,113 225,948 18,983 5,459 8,390 2,275 409,168 64,258 2,129 40,338 106,725 35,126 1,069,590 1,004,079 374,782 89,974 39,625 11,531 2,589,581 102,467 47,307 8,555 158,329 218,799 $ 1,182,108 2,335,620 3,517,728 551,019 2,966,709 36 December 31, 2014 $ ($ in thousands) General liability Workers compensation Commercial auto Businessowners' policies Commercial property Other Total Standard Commercial Lines Personal automobile Homeowners Other Total Standard Personal Lines E&S Lines Total Losses and Loss Expense Reserves Case Reserves IBNR Reserves Total Reinsurance Recoverable on Unpaid Losses and Loss Expenses Net Reserves 252,294 513,069 156,538 42,249 55,519 5,969 1,025,638 99,595 23,195 26,756 149,546 31,341 960,372 727,167 221,605 51,918 7,611 6,484 1,975,157 84,348 22,987 22,881 130,216 165,972 1,212,666 1,240,236 378,143 94,167 63,130 12,453 3,000,795 183,943 46,182 49,637 279,762 197,313 138,366 232,676 19,699 7,990 16,856 2,007 417,594 68,150 5,205 43,317 116,672 37,712 1,074,300 1,007,560 358,444 86,177 46,274 10,446 2,583,201 115,793 40,977 6,320 163,090 159,601 $ 1,206,525 2,271,345 3,477,870 571,978 2,905,892 How reserves are established When a claim is reported to an Insurance Subsidiary, claims personnel establish a “case reserve” for the estimated amount of the ultimate payment. The amount of the reserve is primarily based on a case-by-case evaluation of the type of claim involved, the circumstances surrounding each claim, and the policy provisions relating to the type of losses. The estimate reflects the informed judgment of such personnel based on their knowledge, experience, and general insurance reserving practices. Until the claim is resolved, these estimates are revised as deemed appropriate by the responsible claims personnel based on subsequent developments and periodic reviews of the case. Using generally accepted actuarial reserving techniques, we project our estimate of ultimate losses and loss expenses at each reporting date. Our IBNR reserve is the difference between the projected ultimate loss and loss expense incurred and the sum of: (i) case loss and loss expense reserves; and (ii) paid loss and loss expense reserves. The actuarial techniques used are part of a comprehensive reserving process that includes two primary components. The first component is a detailed quarterly reserve analysis performed by our internal actuarial staff. In completing this analysis, the actuaries must gather substantially similar data in sufficient volume to ensure statistical credibility of the data, while maintaining appropriate differentiation. This process defines the reserving segments, to which various actuarial projection methods are applied. When applying these methods, the actuaries are required to make numerous assumptions including, for example, the selection of loss and loss expense development factors and the weight to be applied to each individual projection method. These methods include paid and incurred versions for the following: loss and loss expense development, Bornhuetter-Ferguson, Berquist-Sherman, and frequency/severity modeling (chain-ladder approach). The second component of the analysis is the projection of the expected ultimate loss and loss expense ratio for each line of business for the current accident year. This projection is part of our planning process wherein we review and update expected loss and loss expense ratios each quarter. This review includes actual versus expected pricing changes, loss and loss expense trend assumptions, and updated prior period loss and loss expense ratios from the most recent quarterly reserve analysis. In addition to the quarterly reserve analysis, a range of possible IBNR reserves is estimated annually and continually considered, among other factors, in establishing IBNR for each reporting period. Loss and loss expense trends are also considered, which include, but are not limited to, large loss activity, asbestos and environmental claim activity, large case reserve additions or reductions for prior accident years, and reinsurance recoverable issues. We also consider factors such as: (i) per claim information; (ii) company and industry historical loss experience; (iii) legislative enactments, judicial decisions, legal developments in the imposition of damages, and changes in political attitudes; and (iv) trends in general economic conditions, including the effects of inflation. Based on the consideration of the range of possible IBNR reserves, recent loss and loss expense trends, uncertainty associated with actuarial assumptions and other factors, IBNR is established and the ultimate net liability for losses and loss expenses is determined. Such an assessment requires considerable judgment given that 37 it is frequently not possible to determine whether a change in the data is an anomaly until sometime after the event. Even if a change is determined to be permanent, it is not always possible to reliably determine the extent of the change until sometime later. There is no precise method for subsequently evaluating the impact of any specific factor on the adequacy of reserves because the eventual deficiency or redundancy is affected by many factors. The changes in these estimates, resulting from the continuous review process and the differences between estimates and ultimate payments, are reflected in the Consolidated Statements of Income for the period in which such estimates are changed. Any changes in the liability estimate may be material to the results of operations in future periods. In addition to our internal review, statutory regulation requires us to have a Statement of Actuarial Opinion issued annually on our statutory reserve adequacy. We engage an independent actuary to issue this opinion based on their independent review. Range of reasonable reserves We have estimated a range of reasonably possible reserves for net loss and loss expense claims to be $2,694 million to $3,136 million at December 31, 2015, which compares to $2,645 million to $3,061 million at December 31, 2014. These ranges reflect low and high reasonable reserve estimates, which were selected primarily by considering the range of indications calculated using generally accepted actuarial techniques. Such techniques assume that past experience, adjusted for the effects of current developments and anticipated trends, are an appropriate basis for predicting future events. Although these ranges reflect likely scenarios, it is possible that the final outcomes may fall above or below these amounts. The ranges do not include a provision for potential increases or decreases associated with asbestos, environmental, and other continuous exposure claims, as traditional actuarial techniques cannot be effectively applied to these exposures. Our loss and loss expense reserve development over the preceding 10 years is shown on the following table, which has five parts: • Section I shows the estimated liability recorded at the end of each indicated year for all current and prior accident year’s unpaid loss and loss expenses. The liability represents the estimated amount of loss and loss expenses for unpaid claims, including IBNR reserves. In accordance with GAAP, the liability for unpaid loss and loss expenses is recorded gross of the effects of reinsurance. An estimate of reinsurance recoverables is reported separately as an asset. The net balance represents the estimated amount of unpaid loss and loss expenses outstanding reduced by estimates of amounts recoverable under reinsurance contracts. • Section II shows the re-estimated amount of the previously recorded net liability as of the end of each succeeding year. Estimates of the liability of unpaid loss and loss expenses are increased or decreased as payments are made and more information regarding individual claims and trends, such as overall frequency and severity patterns, becomes known. • Section III shows the cumulative amount of net loss and loss expenses paid relating to recorded liabilities as of the end of each succeeding year. • Section IV shows the re-estimated gross liability and re-estimated reinsurance recoverables through December 31, 2015. • Section V shows the cumulative gross and net (deficiency)/redundancy representing the aggregate change in the liability from the original balance sheet dates and the re-estimated liability through December 31, 2015. This table does not present accident or policy year development data. Conditions and trends that have affected past reserve development may not necessarily occur in the future. As a result, extrapolating redundancies or deficiencies based on this table is inherently uncertain. 38 ($ in millions) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 I. Gross reserves for unpaid losses and loss expenses at December 31 Reinsurance recoverables on unpaid losses and loss expenses at December 31 Net reserves for unpaid losses and loss expenses at December 31 2,084.0 2,288.8 2,542.5 2,641.0 2,745.8 2,830.1 3,144.9 4,068.9 3,349.8 3,477.9 3,517.7 (218.2 ) (199.7) (227.8 ) (224.2 ) (271.6) (313.7 ) (549.5 ) (1,409.7 ) (540.9 ) (572.0 ) (551.0) 1,865.8 2,089.1 2,314.7 2,416.8 2,474.2 2,516.4 2,595.4 2,659.2 2,808.9 2,905.9 2,966.7 II. Net reserves estimate as of: One year later Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine years later Ten years later 1,858.5 2,070.2 2,295.4 2,387.4 2,430.6 2,477.6 2,569.8 1,845.1 2,024.0 2,237.8 2,324.6 2,368.1 2,428.6 2,531.4 1,825.2 1,982.4 2,169.7 2,286.0 2,315.0 2,388.8 2,502.2 1,808.9 1,931.1 2,155.8 2,264.9 2,295.3 2,363.3 2,450.8 1,780.7 1,916.0 2,151.5 2,258.1 2,282.3 2,334.5 1,777.3 1,924.4 2,154.6 2,243.6 2,273.0 1,789.3 1,939.5 2,147.7 2,246.0 1,810.9 1,936.5 2,145.6 1,806.4 1,939.8 1,815.8 2,633.7 2,554.9 2,481.0 2,749.6 2,836.9 2,660.0 Cumulative net redundancy (deficiency) 50.0 149.3 169.1 170.8 201.2 181.9 144.6 178.2 148.9 69.0 III. Cumulative amount of net reserves paid through: One year later Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine years later Ten years later IV. Re-estimated gross liability Re-estimated reinsurance recoverables 572.4 964.0 1,247.9 592.1 1,007.9 641.2 468.6 775.0 561.3 936.7 469.4 841.3 579.4 945.5 569.9 632.7 584.5 990.8 1,003.8 966.8 1,026.9 1,080.0 1,201.6 1,238.3 1,235.8 1,248.2 1,293.6 1,174.2 1,235.2 1,388.7 1,439.5 1,409.5 1,443.4 1,481.7 1,267.1 1,347.0 1,513.0 1,550.3 1,533.4 1,559.4 1,341.8 1,426.8 1,587.7 1,631.7 1,617.7 1,399.6 1,481.9 1,648.1 1,690.7 1,438.2 1,525.5 1,686.4 1,469.4 1,555.0 1,492.7 2,196.7 2,273.6 2,476.7 2,596.9 2,638.3 2,721.5 3,054.1 4,161.7 3,285.0 3,436.2 (380.8 ) (333.8) (331.1 ) (350.9 ) (365.3) (387.1 ) (603.3 ) (1,680.7 ) (625.0 ) (599.3 ) Re-estimated net liability 1,815.8 1,939.8 2,145.6 2,246.0 2,273.0 2,334.5 2,450.8 2,481.0 2,660.0 2,836.9 V. Cumulative gross redundancy (deficiency) Cumulative net redundancy (deficiency) (112.7 ) 15.2 65.8 44.1 107.5 108.6 90.8 (92.8 ) 64.7 41.6 50.0 149.3 169.1 170.8 201.2 181.9 144.6 178.2 148.9 69.0 Note: Some amounts may not foot due to rounding. 39 In 2015, we experienced overall favorable loss development of $69.0 million, compared to $59.3 million in 2014, and $25.5 million in 2013. The following table summarizes prior year development by line of business: (Favorable)/Unfavorable Prior Year Loss and Loss Expense Development ($ in millions) General Liability Workers Compensation Commercial Automobile Businessowners' Policies Commercial Property Personal Automobile Homeowners E&S Total 2015 2014 2013 (51.0 ) (37.0 ) 2.4 2.2 (3.0 ) 0.4 1.5 15.5 (69.0 ) (43.9 ) — (4.1 ) 1.9 (2.1 ) (10.8 ) (4.0 ) 3.7 (59.3 ) (20.0) 23.5 (4.5) (9.5) (7.5) (3.0) (2.5) (2.0) (25.5) Major developments related to loss and loss expense reserve estimates and uncertainty The Insurance Subsidiaries are multi-state, multi-line property and casualty insurance companies and, as such, are subject to reserve uncertainty stemming from a variety of sources. These uncertainties are considered at each step in the process of establishing loss and loss expense reserves. As market conditions change, certain developments may occur that increase or decrease the amount of uncertainty. These developments include impacts within our own paid and reported loss and loss expense experience, as well as other internal and external factors that have not yet manifested within our data, but may do so in the future. All of these developments are considered when establishing loss and loss expense reserves, and in estimating the range of reasonable reserves. For the past ten years, the Insurance Subsidiaries have experienced favorable prior accident year loss and loss expense development. Over the past three years, contributions to the favorable emergence have come from different lines of business at different points in time. The greater contributions have generally come from the longer tailed casualty lines, primarily due to their associated volume of reserves and the inherent uncertainty of the longer claims settlement process. A more detailed discussion of recent developments, by line of business, follows. Standard Market General Liability Line of Business At December 31, 2015, our general liability line of business had recorded reserves, net of reinsurance, of $1.1 billion, which represented 36% of our total net reserves. In 2015, this line experienced favorable development of $51.0 million, attributable mainly to accident years 2013 and prior. This was primarily driven by severities that continued to develop lower than expected, within both the premises and operations and products liability coverages. In addition, the reduction in frequencies exhibited in recent accident years continued into accident year 2015. During 2014, this line experienced favorable development of $43.9 million, which was partially driven by lower severities in the 2010 through 2012 accident years, within both the premises and operations and products liability coverages. In addition, accident years 2011 and 2012 continued to show lower than expected claim counts. Standard Market Workers Compensation Line of Business At December 31, 2015, our workers compensation line of business recorded reserves, net of reinsurance, of $1.0 billion, which represented 34% of our total net reserves. During 2015, this line experienced favorable development of $37.0 million driven by virtually all prior accident years. During 2014, this line experienced no development on prior accident years. The results over the past two years represent a significant change compared to 2013, during which this line experienced unfavorable development of $23.5 million driven mainly by assisted living facility-type claims. During 2015, this line showed a significant reduction in paid and reported loss amounts, due, in part, to: (i) lower medical inflation than originally anticipated; (ii) our proactive underwriting actions in recent years; and (iii) various significant claims initiatives that we implemented, including the centralization of our workers compensation claim handling in Charlotte, North Carolina, more favorable Preferred Provider Organizations ("PPO") contracts, greater PPO penetration, and more proactive case management in the areas of medical, pharmaceutical, and physical therapy treatments. Jurisdictionally trained and aligned medical only and lost-time adjusters manage non-complex workers compensation claims within our footprint. Claims with high exposure and/or significant escalation risk are referred to the workers compensation strategic case management unit. 40 While we believe these changes are significant drivers of our improved loss experience, there is always risk associated with change. Most notably, these changes in operations may inherently change paid and reported development patterns. While our reserve analyses incorporate methods that adjust for these changes, there nevertheless remains a greater risk in the estimated reserves. In addition to the uncertainties associated with actuarial assumptions and methodologies described above, the workers compensation line of business can be impacted by a variety of issues, such as the following: Unexpected changes in medical cost inflation - The industry is currently experiencing a period of lower claim cost inflation. Variability in our historical workers compensation medical costs, along with uncertainty regarding future medical inflation, creates the potential for additional volatility in our reserves; Changes in statutory workers compensation benefits - Benefit changes may be enacted that affect all outstanding claims, regardless of having occurred in the past. Depending upon the social and political climate, these changes may either increase or decrease associated claim costs; Changes in utilization of the workers compensation system - These changes may be driven by economic, legislative, or other changes. For example, higher levels of unemployment could ultimately impact both the severity and frequency of workers compensation claims. In particular, during more difficult economic times, workers may be more likely to use the system, and less likely to return to work. Another example is the potential impact of federal healthcare reform, for which there are opposing views regarding the impact on workers compensation costs. In addition, changes in the economy could impact reserves in other ways. For example, in 2015, audit and endorsement activity resulted in additional premium of $22.5 million, and in 2014, audit and endorsement activity resulted in additional premium of $15.7 million. As premiums earned are used as a basis for setting initial reserves on the current accident year, our reserves could be impacted. While audit and endorsement premiums are modeled within our annual budgeting process, they remain uncertain, and therefore provide additional variability to the resulting loss and loss expense ratio estimates. Standard Market Commercial Automobile Line of Business At December 31, 2015, our commercial automobile line of business had recorded reserves, net of reinsurance, of $375 million, which represented 13% of our total net reserves. In 2015, this line experienced unfavorable development of $2.2 million, which was driven by bodily injury liability for accident years 2013 and 2014. This was partially offset by favorable development in accident years 2010 and 2011. We experienced some modest unfavorable development in accident years 2013 and 2014, which we believe to be similar to more significant trends seen in the industry. We continue to analyze our portfolio to identify less profitable segments which require enhanced underwriting and pricing actions. In 2014, this line experienced favorable development of $4.1 million, driven by bodily injury liability for accident years 2012 and prior. Standard Market Personal Automobile Line of Business At December 31, 2015, our personal automobile line of business had recorded reserves, net of reinsurance, of $102 million, which represented 3.4% of our total net reserves. In 2015, this line experienced unfavorable development of $0.4 million. While this development is relatively neutral overall, it results from an increase in accident year 2014, largely offset by a decrease in accident year 2013. The overall development is a significant change compared to 2014, during which this line experienced favorable development of $10.8 million, which was driven by the liability coverages for accident years 2012 and prior. We continue to recalibrate our predictive models, as well as refine our underwriting and pricing approaches. While we believe these changes will ultimately lead to improved profitability and greater stability, they may impact paid and reported development patterns, thereby increasing the uncertainty in the reserves in the near-term. E&S Lines At December 31, 2015, our E&S Lines had recorded reserves, net of reinsurance, of $219 million, which represented 7% of our total net reserves. In 2015, these lines experienced unfavorable development of $15.5 million, associated with accident years 2012 through 2014. In 2014, these lines experienced unfavorable development of $3.7 million, associated with accident years 2011 through 2013. As we have limited historical loss experience in this segment, our reserve estimates are partially based on development patterns of companies that have similar operations. Therefore, these estimates are subject to somewhat greater uncertainty than the comparable traditional lines of business. As our own experience matures, we will continue to place greater weight upon it, and less weight upon the surrogate patterns. 41 Some of the development seen during 2015 was attributable to late emerging claims. In order to better assess this potential, and mitigate its impact on future results, we have taken the following actions within the E&S Claims operations: • Effective January 1, 2015, the E&S Claims operation began reporting through our Corporate Claims division in Charlotte, North Carolina. • During the second half of 2015, a review of all complex liability claims was performed by our corporate CCU. • Potential complex liability claims are now systematically identified and referred to our CCU. In cases where the CCU agrees these claims are complex in nature, all future handling of the claims is assumed by the CCU. • The balance of the liability claims have been segregated into “litigated” versus “non-litigated.” Separate claim • handling teams have been created, with the required skill sets, to appropriately handle these two types of claims. Implemented actions to reduce the amount spent on outside adjusters and legal counsel, including increasing the use of the staff counsel that we use in standard lines claims defense. • For property claims, similar corporate oversight and referrals are being implemented via our corporate Large Loss Unit. We believe that the actions above will not only lead to earlier identification of severe claims, but also earlier claims resolutions with improved outcomes. Other impacts creating additional loss and loss expense reserve uncertainty Claims Initiative Impacts In addition to the line of business specific issues mentioned above, our lines of business have been impacted by a number of initiatives undertaken by our Claims Department that have resulted in variability, or shifts, in the average level of case reserves. Some of these initiatives have also impacted claims settlement rates. These changes affect the data upon which the ultimate loss and loss expense projections are made. While these changes in case reserve levels and settlement rates increase the uncertainty in the short run, we expect the longer-term benefit will be a more refined management of the claims process. Some of the specific actions implemented over the past several years, other than those regarding E&S as discussed above, are as follows: • Increased focus on reducing workers compensation medical costs through more favorable PPO contracts and greater PPO penetration. • A more comprehensive approach for handling workers compensation claims, with an emphasis towards improving recovery times, allowing for earlier “return-to-work.” This involves elevated and proactive case management in the areas of medical, pharmaceutical, and physical therapy treatments. • The continued use of our CCU, to which all significant and complex liability claims are assigned. This unit has been staffed with personnel that have significant experience in handling and settling these types of claims. • The continued use of our Property Flex Unit and our Large Loss Unit. The Property Flex Unit handles claims between $25,000 to $100,000 and the Large Loss Unit handles claims above $100,000. • Continued efforts in the areas of fraud investigation and salvage/subrogation recoveries. These efforts have been supported by the introduction of predictive models that allow us to better focus our efforts. Our internal reserve analyses incorporate actuarial projection methods, which make adjustments for changes in case reserve adequacy and claims settlement rates. These methods adjust our historical loss experience to the current level of case adequacy or settlement rate, which provides a more consistent basis for projecting future development patterns. These methods have their own assumptions and judgments associated with them, so as with any projection method, they are not definitive in and of themselves. Furthermore, given that the expected benefits from our claims initiatives take time to fully manifest, we do not take full credit for the anticipated benefit in establishing our loss and loss expense reserves. These initiatives may prove more or less beneficial than currently reflected, which will affect development in future years. Our various projection methods provide an indication of these potential future impacts. These impacts would be greatest within our larger reserve lines of workers compensation, general liability, and commercial automobile liability, within the more recent accident years. Economic Inflationary Impacts Although inflationary volatility is expected to be low in the near term, current United States monetary policy and global economic conditions bring additional uncertainty in the long-term given the length of time required for claim settlement and the impact of medical cost trends relating to longer-tail liability and workers compensation claims. Uncertainty regarding future inflation or deflation creates the potential for additional volatility in our reserves for these lines of business. 42 Sensitivity analysis: Potential impact on reserve uncertainty due to changes in key assumptions Our process to establish reserves includes a variety of key assumptions, including, but not limited to, the following: • The selection of loss and loss expense development factors; • The weight to be applied to each individual actuarial projection method; • Projected future loss trends; and • Expected ultimate loss and loss expense ratios for the current accident year. The importance of any single assumption depends on several considerations, such as the line of business and the accident year. If the actual experience emerges differently than the assumptions used in the process to establish reserves, changes in our reserve estimate are possible and may be material to the results of operations in future periods. Set forth below are sensitivity tests which highlight potential impacts to loss and loss expense reserves under different scenarios, for the major casualty lines of business. These tests consider each assumption and line of business individually, without any consideration of correlation between lines of business and accident years. Therefore, the results in the tables below do not constitute an actuarial range. While the figures represent possible impacts from variations in key assumptions as identified by management, there is no assurance that the future emergence of our loss and loss expense experience will be consistent with either our current or alternative sets of assumptions. While the sources of variability discussed above are generated by different underlying trends and operational changes, they ultimately manifest themselves as changes in the expected loss and loss expense development patterns. These patterns are a key assumption in the reserving process. In addition to the expected development patterns, the expected loss and loss expense ratios are another key assumption in the reserving process. These expected ratios are developed via a rigorous process of projecting recent accident years' experience to an ultimate settlement basis, and then adjusting it to the current accident year's pricing and loss cost levels. Impact from changes in the underwriting portfolio and changes in claims handling practices are also quantified and reflected, where appropriate. As is the case with all estimates, the ultimate loss and loss expense ratios may differ from those currently estimated. The sensitivities of loss and loss expense reserves to these key assumptions are illustrated below for the major casualty lines. The first table shows the estimated impacts from changes in expected reported loss and loss expense development patterns. It shows reserve impacts by line of business if the actual calendar year incurred amounts are greater or less than current expectations by the selected percentages. The second table shows the estimated impacts from changes to the expected loss and loss expense ratios for the current accident year. It shows reserve impacts by line of business if the expected loss and loss expense ratios for the current accident year are greater or less than current expectations by the selected percentages. While the selected percentages by line are judgmentally based, they reflect the relative contribution of the specific line of business to the overall reserve range. Reserve Impacts of Changes to Prior Years Expected Loss and Loss Expense Reporting Patterns ($ in millions) General liability Workers compensation Commercial automobile liability Personal automobile liability E&S lines Percentage Decrease/ Increase $ 7 % 10 10 15 15 (Decrease) to Future Calendar Year Reported Increase to Future Calendar Year Reported (75 ) $ (70 ) (30 ) (10 ) (30 ) 75 70 30 10 30 Reserve Impacts of Changes to Current Year Expected Ultimate Loss and Loss Expense Ratios ($ in millions) General liability Workers compensation Commercial automobile liability Personal automobile liability E&S lines Percentage Decrease/ Increase (Decrease) to Current Accident Year Expected Loss and Loss Expense Ratio Increase to Current Accident Year Expected Loss and Loss Expense Ratio (35 ) $ (30 ) (20 ) (7 ) (15 ) 35 30 20 7 15 7 pts $ 10 7 7 10 43 Note that there is some overlap between the impacts in the two tables. For example, increases in the calendar year development would ultimately impact our view of the current accident year's loss and loss expense ratios. Nevertheless, these tables provide perspective into the sensitivity of each of these key assumptions. Asbestos and Environmental Reserves Our general liability, excess liability, and homeowners reserves include exposure to asbestos and environmental claims. Our exposure to environmental liability is primarily due to: (i) landfill exposures from policies written prior to the absolute pollution endorsement in the mid 1980s; and (ii) underground storage tank leaks mainly from New Jersey homeowners policies. These environmental claims stem primarily from insured exposures in municipal government, small non-manufacturing commercial risks, and homeowners policies. The total carried net losses and loss expense reserves for these claims were $23.2 million as of December 31, 2015 and $23.0 million at December 31, 2014. The emergence of these claims occurs over an extended period and is highly unpredictable. For example, within our Standard Commercial Lines book, certain landfill sites are included on the National Priorities List (“NPL”) by the United States Environmental Protection Agency (“USEPA”). Once on the NPL, the USEPA determines an appropriate remediation plan for these sites. A landfill can remain on the NPL for many years until final approval for the removal of the site is granted from the USEPA. The USEPA has the authority to re-open previously closed sites and return them to the NPL. We currently have reserves for nine customers related to six sites on the NPL. “Asbestos claims” are claims for bodily injury alleged to have occurred from exposure to asbestos-containing products. Our primary exposure arises from insuring various distributors of asbestos-containing products, such as electrical and plumbing materials. At December 31, 2015, asbestos claims constituted 29% of our $23.2 million net asbestos and environmental reserves, compared to 32% of our $23.0 million net asbestos and environmental reserves at December 31, 2014. “Environmental claims” are claims alleging bodily injury or property damage from pollution or other environmental contaminants other than asbestos. These claims include landfills and leaking underground storage tanks. Our landfill exposure lies largely in policies written for municipal governments, in their operation or maintenance of certain public lands. In addition to landfill exposures, in recent years, we have experienced a relatively consistent level of reported losses in the homeowners line of business related to claims for groundwater contamination from leaking underground heating oil storage tanks in New Jersey. In 2007, we instituted a fuel oil system exclusion on our New Jersey homeowners policies that limits our exposure to leaking underground storage tanks for certain customers. At that time, existing customers were offered a one-time opportunity to buy back oil tank liability coverage. The exclusion applies to all new homeowners policies in New Jersey. These customers are eligible for the buy-back option only if the tank meets specific eligibility criteria. Our asbestos and environmental claims are handled in our centralized and specialized asbestos and environmental claim unit. Case reserves for these exposures are evaluated on a claim-by-claim basis. The ability to assess potential exposure often improves as a claim develops, including judicial determinations of coverage issues. As a result, reserves are adjusted accordingly. Estimating IBNR reserves for asbestos and environmental claims is difficult because of the delayed and inconsistent reporting patterns associated with these claims. In addition, there are significant uncertainties associated with estimating critical assumptions, such as average clean-up costs, third-party costs, potentially responsible party shares, allocation of damages, litigation and coverage costs, and potential state and federal legislative changes. Normal historically-based actuarial approaches cannot be applied to asbestos and environmental claims because past loss history is not indicative of future potential loss emergence. In addition, while certain alternative models can be applied, such models can produce significantly different results with small changes in assumptions. As a result, we do not calculate an asbestos and environmental loss range. Historically, our asbestos and environmental claims have been significantly lower in volume, with less volatility and uncertainty than many of our competitors in the commercial lines industry. Prior to the introduction of the absolute pollution exclusion endorsement in the mid-1980's, we were primarily a personal lines carrier and therefore do not have broad exposure to asbestos and environmental claims. Additionally, we are the primary insurance carrier on the majority of these exposures, which provides more certainty in our reserve position compared to others in the insurance marketplace. Pension and Post-retirement Benefit Plan Actuarial Assumptions Our pension and post-retirement benefit obligations and related costs are calculated using actuarial methods, within the framework of U.S. GAAP. Two key assumptions, the discount rate and the expected return on plan assets, are important elements of expense and/or liability measurement. We evaluate these key assumptions annually. Other assumptions involve demographic factors, such as retirement age, mortality, turnover, and rate of compensation increases. 44 The discount rate enables us to state expected future cash flows at their present value on the measurement date. The purpose of the discount rate is to determine the interest rates inherent in the price at which pension benefits could be effectively settled. Our discount rate selection is based on high-quality, long-term corporate bonds. A higher discount rate reduces the present value of benefit obligations and reduces pension expense. Conversely, a lower discount rate increases the present value of benefit obligations and increases pension expense. For additional information regarding our discount rate selection, refer to Note 14. “Retirement Plans” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. The expected long-term rate of return on the plan assets is determined by considering the current and expected asset allocation, as well as historical and expected returns on each plan asset class. A lower expected rate of return on pension plan assets would increase pension expense. Our long-term expected return on the plan assets was increased 10 basis points to 6.37% in 2015 as compared to 6.27% in 2014, reflecting the current interest rate environment. At December 31, 2015, our pension and post-retirement benefit plan obligation was $324.8 million compared to $337.4 million at December 31, 2014. Plan assets were $249.7 million and $253.5 million at December 31, 2015 and December 31, 2014, respectively. Volatility in the marketplace, coupled with changes in the discount rate assumption, could materially impact our pension and post-retirement life valuation in the future. For additional information regarding our pension and post-retirement benefit plan obligations, see Note 14. “Retirement Plans” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. Other-Than-Temporary Investment Impairments When the fair value of any investment is lower than its cost/amortized cost, an assessment is made to determine if the decline is other than temporary. We regularly review our entire investment portfolio for declines in fair value. If we believe that a decline in the value of an available-for-sale (“AFS”) security is temporary, we record the decline as an unrealized loss in Accumulated Other Comprehensive Income (“AOCI”). Temporary declines in the value of a held-to-maturity (“HTM”) security are not recognized in the Financial Statements. Our assessment of a decline in fair value includes judgment as to the financial position and future prospects of the entity that issued the investment security, as well as a review of the security’s underlying collateral for fixed income investments. Broad changes in the overall market or interest rate environment generally will not lead to a write-down. Fixed Income Securities and Short-Term Investments Our evaluation for OTTI of a fixed income security or a short-term investment may include, but is not limited to, the evaluation of the following factors: • Whether the decline appears to be issuer or industry specific; • The degree to which the issuer is current or in arrears in making principal and interest payments on the fixed income security; • The issuer’s current financial condition and ability to make future scheduled principal and interest payments on a timely basis; • Evaluation of projected cash flows; • Buy/hold/sell recommendations published by outside investment advisors and analysts; and • Relevant rating history, analysis, and guidance provided by rating agencies and analysts. OTTI charges are recognized as a realized loss to the extent that they are credit related, unless we have the intent to sell the security or it is more-likely-than not that we will be required to sell the security. In those circumstances, the security is written down to fair value with the entire amount of the writedown charged to earnings as a component of realized losses. To determine if an impairment is other than temporary, we compare the present value of cash flows expected to be collected with the amortized cost of fixed income securities meeting certain criteria. In addition, this analysis is performed on all previously-impaired debt securities that continue to be held by us and all structured securities that were not of high-credit quality at the date of purchase. These impairment assessments may include, but are not limited to, discounted cash flow analyses (“DCFs”). For structured securities, including commercial mortgage-backed securities (“CMBS”), residential mortgage-backed securities (“RMBS”), asset-backed securities (“ABS”), and collateralized debt obligations (“CDOs”), we also consider variables such as expected default, severity, and prepayment assumptions based on security type and vintage, taking into consideration information from credit agencies, historical performance, and other relevant economic and performance factors. In making our assessment, we perform a DCF to determine the present value of future cash flows to be generated by the underlying collateral of the security. Any shortfall in the expected present value of the future cash flows, based on the DCF, from the amortized cost basis of a security is considered a “credit impairment,” with the remaining decline in fair value of a 45 security considered as a “non-credit impairment.” As mentioned above, credit impairments are charged to earnings as a component of realized losses, while non-credit impairments are recorded to Other Comprehensive Income (“OCI”) as a component of unrealized losses. Discounted Cash Flow Assumptions The discount rate we use in a DCF is the effective interest rate implicit in the security at the date of acquisition for those structured securities that were not of high-credit quality at acquisition. For all other securities, we use a discount rate that equals the current yield, excluding the impact of previous OTTI charges, used to accrete the beneficial interest. If applicable, we use a conditional default rate assumption in the DCF to estimate future defaults. The conditional default rate is the proportion of all loans outstanding in a security at the beginning of a time period that are expected to default during that period. Our assumption of this rate takes into consideration the uncertainty of future defaults as well as whether or not these securities have experienced significant cumulative losses or delinquencies to date. If applicable, conditional default rate assumptions apply at the total collateral pool level held in the securitization trust. Generally, collateral conditional default rates will “ramp-up” over time as the collateral seasons, because the performance begins to weaken and losses begin to surface. As time passes, depending on the collateral type and vintage, losses will peak and performance will begin to improve as weaker borrowers are removed from the pool through delinquency resolutions. In the later years of a collateral pool’s life, performance is generally materially better as the resulting favorable selection of the portfolio improves the overall quality and performance. For CMBS, we also consider the net operating income (“NOI”) generated by the underlying properties. Our assumptions of the properties’ ultimate cash flows take into consideration both an immediate reduction to the reported NOIs and decreases to projected NOIs. If applicable, we use a loan loss severity assumption in our DCF that is applied at the loan level of the collateral pool. The loan loss severity assumptions represent the estimated percentage loss on the loan-to-value exposure for a particular security. For CMBS, the loan loss severities applied are based on property type. Losses generated from the evaluations are then applied to the entire underlying deal structure in accordance with the original service agreements. Equity Securities Evaluation for OTTI of an equity security may include, but is not limited to, an evaluation of the following factors: • Whether the decline appears to be issuer or industry specific; • The relationship of market prices per share to book value per share at the date of acquisition and date of evaluation; • The price-earnings ratio at the time of acquisition and date of evaluation; • The financial condition and near-term prospects of the issuer, including any specific events that may influence the issuer’s operations, coupled with our intention to hold the securities in the near term; • The recent income or loss of the issuer; • The independent auditors’ report on the issuer’s recent financial statements; • The dividend policy of the issuer at the date of acquisition and the date of evaluation; • Buy/hold/sell recommendations or price projections published by outside investment advisors; • Rating agency announcements; • The length of time and the extent to which the fair value has been, or is expected to be, less than its cost in the near term; and • Our expectation of when the cost of the security will be recovered. If there is a decline in the fair value on an equity security that we do not intend to hold, or if we determine the decline is other- than-temporary, including declines driven by market volatility for which we cannot assert will recover in the near term, we will write down the carrying value of the investment and record the charge through earnings as a component of realized losses. Other Investments Our evaluation for OTTI of an other investment (i.e., an alternative investment) may include, but is not limited to, conversations with the management of the alternative investment concerning the following: • The current investment strategy; • Changes made or future changes to be made to the investment strategy; • Emerging issues that may affect the success of the strategy; and • The appropriateness of the valuation methodology used regarding the underlying investments. 46 If there is a decline in the fair market value of an other investment that we do not intend to hold, or if we determine the decline is other than temporary, we write down the carry value of the investment and record the charge through earnings as a component of realized losses. Reinsurance Reinsurance recoverables on paid and unpaid losses and loss expenses represent estimates of the portion of such liabilities that will be recovered from reinsurers. Each reinsurance contract is analyzed to ensure that the transfer of risk exists to properly record the transactions in the Financial Statements. Amounts recovered from reinsurers are recognized as assets at the same time and in a manner consistent with the paid and unpaid losses associated with the reinsured policies. An allowance for estimated uncollectible reinsurance is recorded based on an evaluation of balances due from reinsurers and other available information. This allowance totaled $5.7 million at December 31, 2015 and $6.9 million at December 31, 2014. We continually monitor developments that may impact recoverability from our reinsurers and have available to us contractually provided remedies if necessary. For further information regarding reinsurance, see the “Reinsurance” section below and Note 8. “Reinsurance” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. Financial Highlights of Results for Years Ended December 31, 2015, 2014, and 20131 ($ in thousands, except per share amounts) 2015 2014 2015 vs. 2014 GAAP measures: Revenues Pre-tax net investment income Pre-tax net income Net income Diluted net income per share Diluted weighted-average outstanding shares GAAP combined ratio Statutory combined ratio Return on average equity ("ROE") Non-GAAP measures: Operating income Diluted operating income per share Operating ROE $ $ $ 2,131,852 121,316 232,692 165,861 2.85 58,156 92.5 % 92.4 % 12.4 % $ 157,300 2.70 11.8 % 2,034,861 138,708 197,131 141,827 2.47 57,351 95.8 95.7 11.7 124,538 2.17 10.3 5 % (13 ) 18 17 15 1 (3.3 ) pts (3.3 ) 0.7 26 % 24 1.5 pts 2013 1,903,741 134,643 142,267 106,418 1.87 56,810 97.8 97.5 9.5 93,939 1.65 8.4 2014 vs. 2013 7 % 3 39 33 32 1 (2.0 ) pts (1.8 ) 2.2 33 % 32 1.9 pts 1Refer to the Glossary of Terms attached to this Form 10-K as Exhibit 99.1 for definitions of terms used in this financial review. The following table reconciles operating income and net income for the periods presented above: ($ in thousands, except per share amounts) Operating income Net realized gains, net of tax Loss on discontinued operations, net of tax Net income Diluted operating income per share Diluted net realized gains per share Diluted net loss on discontinued operations per share Diluted net income per share 2015 2014 2013 $ $ $ $ 157,300 8,561 — 165,861 2.70 0.15 — 2.85 124,538 17,289 — 141,827 2.17 0.30 — 2.47 93,939 13,476 (997 ) 106,418 1.65 0.24 (0.02 ) 1.87 It is our goal to average an operating ROE that is at least three points higher than our weighted-average cost of capital. At December 31, 2015, our weighted-average cost of capital was 8.7%. Our operating ROE and contribution by component for the following years are as follows: Operating Return on Average Equity Insurance Segments Investment Segment Other Total 2015 2014 2013 7.3 % 7.0 % (2.5)% 11.8 % 4.2 % 8.6 % (2.5 )% 10.3 % 2.3 % 9.0 % (2.9)% 8.4 % 47 Insurance Segments The key metric in understanding our insurance segments’ contribution to operating ROE is the GAAP combined ratio. The following table provides a quantitative foundation for analyzing this ratio: All Lines ($ in thousands) GAAP Insurance Operations Results: Net Premiums Written ("NPW") Net Premiums Earned ("NPE") Less: Losses and loss expenses incurred Net underwriting expenses incurred Dividends to policyholders Underwriting income GAAP Ratios: Loss and loss expense ratio Underwriting expense ratio Dividends to policyholders ratio Combined ratio Statutory Ratios: Loss and loss expense ratio Underwriting expense ratio Dividends to policyholders ratio Combined ratio 2015 2014 2015 vs. 2014 $ $ 2,069,904 1,989,909 1,148,541 686,120 6,219 149,029 57.7 % 34.5 0.3 92.5 57.7 34.4 0.3 92.4 % 1,885,280 1,852,609 1,157,501 610,783 6,182 78,143 62.5 33.0 0.3 95.8 62.4 33.0 0.3 95.7 10 % 7 (1 ) 12 1 91 % (4.8 ) pts 1.5 — (3.3 ) (4.7 ) 1.4 — (3.3 ) pts 2013 1,810,159 1,736,072 1,121,738 571,294 4,274 38,766 64.6 33.0 0.2 97.8 64.5 32.8 0.2 97.5 2014 vs. 2013 4 % 7 3 7 45 102 % (2.1) pts — 0.1 (2.0) (2.1) 0.2 0.1 (1.8) pts Fluctuations in our GAAP combined ratio were driven by the following: • Earned rate in excess of expected loss inflation. Renewal pure price increases on NPW of 3.4% in 2015, 5.6% in 2014, and 7.6% in 2013 provided earned rate of approximately 4% in 2015 and 6.5% in 2014, both of which were above our expected claim inflation. After taking into account the incremental expenses associated with the additional premium, the net benefit to the combined ratio was approximately 1 point in 2015 and 2.5 points in 2014. • Favorable prior year casualty reserve development, the details of which are below: (Favorable)/Unfavorable Prior Year Casualty Reserve Development ($ in millions) 2015 2014 2013 General liability Commercial automobile Workers compensation Businessowners' policies Other Total Standard Commercial Lines Homeowners Personal automobile Total Standard Personal Lines E&S $ (51.0 ) 3.0 (37.0 ) 4.0 — (81.0 ) (2.0 ) — (2.0 ) 16.0 (43.9) (4.0) — 2.5 — (45.4) (0.7) (8.0) (8.7) 5.8 (20.0 ) (5.0 ) 23.5 (9.5 ) — (11.0 ) (4.0 ) (2.0 ) (6.0 ) 2.5 Total favorable prior year casualty reserve development $ (67.0 ) (48.3) (14.5 ) (Favorable) impact on loss ratio (3.4 ) pts (2.6) pts (0.8 ) pts For a qualitative discussion of this reserve development, please see the related insurance segment discussions below. 48 • Catastrophe losses, the details of which are below: Catastrophe Losses ($ in millions) For the Year ended December 31, Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio 2015 2014 2013 $ 59.1 60.0 47.4 3.0 pts 3.2 2.7 (Favorable)/Unfavorable Year-Over-Year Change (0.2 ) 0.5 N/A • Non-catastrophe property losses, the details of which are below: Non-Catastrophe Property Losses ($ in millions) For the Year ended December 31, 2015 2014 2013 Loss and Loss Expense Incurred Impact on Loss and Loss Expense Ratio (Favorable)/Unfavorable Year-Over-Year Change $ 265.4 287.5 226.6 13.3 pts 15.5 13.1 (2.2 ) 2.4 N/A Partially offsetting the improvements in the loss and loss expense ratios above were increases in the underwriting expense ratio of 1.5 points in 2015 that included the following: • • Improved underwriting profitability that resulted in higher supplemental commission expense to our distribution partners and increased the ratio by 0.3 points; Improved underwriting profitability that also resulted in higher annual incentive compensation expense to employees and increased the ratio by 0.3 points; • Pension expense increases due to the accrual of service costs for eligible employees and the negative impact of declining interest rates last year that increased the ratio by 0.3 points; and • The March 2014 sale of the renewal rights to our $37 million Self Insured Group ("SIG") book of business that contributed $8 million to other income and reduced the combined ratio by 0.4 points. Although we did not solicit buyers, we decided to sell this small and specialized book of business when the opportunity presented itself because it had significant production outside of our standard lines footprint, and proved difficult to grow. We however, have retained our substantial individual risk public entity book of business and continue to look for opportunities to grow it. Investments Segment Operating ROE in 2015 and 2014 was negatively impacted by a decline in investment leverage as a result of overall stockholders' equity growth outpacing investment income growth. This was, in part, due to strong growth in our underwriting operations coupled with declining portfolio yields. In 2015, the lower yields were driven by the fixed income securities portfolio, and lower returns on our energy-related limited partnerships within our other investments portfolio due to declining oil prices. Net realized gains, which is another component of our investment segment's results, were $8.6 million, $17.3 million, and $13.5 million on an after-tax basis in 2015, 2014, and 2013, respectively. Included in these amounts were after-tax OTTI charges of $11.9 million in 2015, $7.2 million in 2014, and $3.6 million in 2013. The majority of the OTTI charges related to our equity securities portfolio and were primarily comprised of charges on securities for which we had the intent to sell reflecting changes in our strategy on this portfolio. 49 Outlook We have a long history of delivering on our objectives and creating value for shareholders, but 2015 was our best statutory combined ratio since becoming listed on Nasdaq. We delivered a 92.4% statutory combined ratio, including 3.0 points of catastrophe losses and overall favorable prior year reserve development of 3.5 points. This compares to A.M. Best’s industry expectation of 98.0%, including 3.1 points of catastrophe losses and 1.7 points of overall favorable prior year reserve development, as reported in their February 2016 Review and Preview report. In addition, A.M. Best also expects the industry’s investment income to decline in 2015 due to lower yields, partially offset by growth in invested assets. During 2015, we experienced positive impacts from strong cash flows and an increasing asset base; however, these positives were more than offset by: (i) the impact of lower reinvestment rates as fixed income securities that were purchased had an after-tax yield of 1.7% and fixed income securities that were disposed of had an after-tax yield of 2.5%; and (ii) lower than expected returns on our alternative investment portfolio due to energy sector performance. As we turn to the future, we plan to leverage our competitive advantages by increasing our share of wallet with existing agents while adding agents in areas with strong new business opportunities. We celebrate our 90th year of business in 2016 and our pillars of success continue to be: (i) our unique field model combined with sophisticated underwriting and claims capabilities; (ii) true franchise value with our distribution partners; and (iii) delivering a superior customer experience with our “best in class” employees. To that end, we remain focused on becoming a more customer-centric company in 2016. In 2015, we made key strategic investments in technology as part of our efforts to deliver a superior customer experience across all channels, commonly referred to as omni-channel. Over the last year we have rolled out self-servicing capabilities via our mobile application, mobile web, and on the desktop, and relaunched our public website with simplified navigation, richer content, and responsive capabilities. These investments have enabled us to provide our customers with 24/7 access to transactional capabilities and information. Customers expect this level of service and access from every company with which they conduct business. We view omni-channel as a key to future success in our industry and we will continue to focus our efforts in this area in 2016. Based on our view of the market and our strategies to outperform, we are providing the following guidance for 2016: • An ex-catastrophe combined ratio of approximately 91%, which assumes no prior year casualty reserve development; • 3.5 points of catastrophe losses for the year; • After-tax investment income of approximately $100 million; and • Weighted average shares of approximately 58.5 million. Our goal is to generate an operating ROE that is 300 basis points in excess of our weighted average cost of capital. Based upon our expected after-tax return on investments, a statutory combined ratio of approximately 93% would be required to meet that target. 50 Results of Operations and Related Information by Segment Standard Commercial Lines Our Standard Commercial Lines segment, which represents 77% of our combined insurance segments' NPW, sells commercial lines insurance products and services to businesses, non-profit organizations, and local government agencies located primarily in 22 states in the Eastern and Midwestern U.S. and the District of Columbia through approximately 1,100 distribution partners in the standard marketplace. ($ in thousands) GAAP Insurance Segments Results: NPW NPE Less: Loss and loss expense incurred Net underwriting expenses incurred Dividends to policyholders Underwriting income GAAP Ratios: Loss and loss expense ratio Underwriting expense ratio Dividends to policyholders ratio Combined ratio Statutory Ratios: Loss and loss expense ratio Underwriting expense ratio Dividends to policyholders ratio Combined ratio 2015 2014 2015 vs. 2014 2013 2014 vs. 2013 $ $ 1,596,965 1,529,442 819,573 539,154 6,219 164,496 53.6 % 35.2 0.4 89.2 53.6 35.2 0.4 89.2 % 1,441,047 1,415,712 870,018 478,291 6,182 61,221 61.5 33.8 0.4 95.7 61.3 33.8 0.4 95.5 11 % $ 8 1,380,740 1,316,619 (6 ) 13 1 169 % $ 831,261 447,228 4,274 33,856 (7.9 ) pts 1.4 — (6.5 ) (7.7 ) 1.4 — (6.3 ) pts 63.1 % 34.0 0.3 97.4 63.1 33.7 0.3 97.1 % 4 % 8 5 7 45 81 % (1.6) (0.2) 0.1 (1.7) (1.8) 0.1 0.1 (1.6) pts pts The growth in NPW and NPE from 2013 through 2015 is primarily the result of the following: ($ in millions) Retention Renewal pure price increases on NPW Direct new business For the Year Ended December 31, 2015 2014 2013 83 % 3.0 339.6 82 5.6 268.7 $ 82 7.6 277.5 In 2015, we saw strong improvements in new business, which increased 26% over last year, whereas in 2014, new business was slightly down from 2013. In addition, renewal pure price increases and strong retention contributed to NPW growth in both periods. In 2014, our growth rate of 4% would have been 7% excluding the impact of the SIG renewal rights sale in the first quarter of 2014. NPE increases in 2015 and 2014 were consistent with the increases in NPW for their respective twelve-month periods ended December 31. 51 The GAAP loss and loss expense ratio improved 7.9 points in 2015 compared to 2014 and 1.6 points in 2014 compared to 2013 due to the following: • Earned rate above our expected claim inflation, which improved profitability by approximately 0.5 and 2.5 points for 2015 and 2014, respectively. • Favorable prior year casualty reserve development of 5.3 points in 2015, 3.2 points in 2014, and 0.8 points in 2013. For quantitative information on this development by line of business, see "Financial Highlights of Results for Years Ended December 2015, 2014, and 2013" above and for qualitative information about the significant drivers of this development, see the line of business discussions below. • Current year loss costs in 2015 that were 1.8 points lower than last year on our workers' compensation line of business reflecting our ongoing focus on improving this line of business. Additionally, non-catastrophe property losses and catastrophe losses contributed to results as follows: ($ in millions) Non-Catastrophe Property Losses Catastrophe Losses For the year ended December 31, Losses and Loss Expense Incurred Impact on Losses and Loss Expense Ratio Losses and Loss Expense Incurred Impact on Losses and Loss Expense Ratio $ 2015 2014 2013 154.7 180.4 126.8 10.1 pts $ 12.7 9.6 34.1 37.9 23.0 2.2 pts 2.7 1.7 Total Impact on Losses and Loss Expense Ratio 12.3 15.4 11.3 (Favorable)/ Unfavorable Year-Over-Year Change (3.1) 4.1 N/A Partially offsetting the improvement in the loss and loss expense ratio in 2015 was an increase of 1.4 points in the GAAP underwriting expense ratio in 2015 compared to 2014. This increase is primarily attributable to: (i) higher supplemental commission expense to our distribution partners of 0.4 points; (ii) increases in annual incentive compensation expense to employees of 0.2 points; and (iii) pension expense increases of 0.3 points, which are discussed further in "Financial Highlights of Results for Years Ended December 31, 2015, 2014, and 2013" above. Additionally, the prior year underwriting ratio included $8.0 million, or 0.6 points, of non-recurring benefit related to the sale of the renewal rights to our SIG book of business in March 2014. The following is a discussion of our most significant Standard Commercial Lines of business: General Liability ($ in thousands) Statutory NPW Direct new business Retention Renewal pure price increases Statutory NPE Statutory combined ratio % of total statutory standard commercial NPW 2015 2014 2015 vs. 2014 2013 2014 vs. 2013 $ $ 505,891 99,938 83 % 2.7 483,291 82.1 % 32 453,594 78,124 82 6.7 444,938 83.9 31 12 % $ 28 1 pts (4.0 ) 9 % $ (1.8 ) pts 426,244 78,294 81 % 8.9 405,322 96.2 % 31 6 % — 1 pts (2.2) 10 % (12.3) pts Growth in 2015 premium is primarily due to direct new business increases as outlined in the table above. Both reporting periods also reflect positive improvements in NPW and NPE from improving retention and renewal pure price increases. However, in 2014, the renewal pure price increases and strong retention outlined above were more than offset by a reduction in premiums that resulted from the sale of the SIG renewal rights. SIG NPW was approximately $17 million for the general liability line of business in 2013. Excluding the impact of this sale, NPW growth in 2014 compared to 2013 would have been 11%. The fluctuations in the statutory combined ratios reflect: (i) earned rate above our expected claim inflation, which improved profitability by approximately 1 point in 2015 and 3 points in 2014; and (ii) changes in prior year development. 52 Prior year development can be volatile year to year, requiring a longer period of time before true trends are fully recognized. The impact of the prior year casualty reserve development on this line is as follows: • 2015: favorable prior year development of 10.6 points attributable to accident years 2013 and prior. This was primarily driven by severities that continued to develop lower than expected, within both the premises and operations and products liability coverages. In addition, the reduction in frequencies exhibited in recent accident years continued into accident year 2015. • 2014: favorable prior year development of 9.9 points driven by lower severities in the 2010 through 2012 accident years, within both the premises and operations and products liability coverages. In addition, accident years 2011 and 2012 continued to show lower claim counts, even as they matured. • 2013: favorable prior year development of 4.9 points driven by lower severities in 2010 and prior accident years, partially offset by unfavorable development in accident years 2011 and 2012, which showed higher average severities in premises and operations coverage. Commercial Automobile ($ in thousands) Statutory NPW Direct new business Retention Renewal pure price increases Statutory NPE Statutory combined ratio % of total statutory standard commercial NPW 2015 2014 2015 vs. 2014 $ $ 376,064 70,556 83 % 3.8 358,909 101.9 % 24 341,926 57,280 82 5.5 333,310 96.2 24 10 % $ 23 1 pts (1.7 ) 8 % $ 5.7 pts 2014 vs. 2013 5 % (3) — pts (1.8) 7 % (0.2) pts 2013 325,895 59,110 82 % 7.3 310,994 96.4 % 24 In 2015, new business was up 23% over last year, while in 2014, new business was slightly down from 2013. In addition, renewal pure price increases and strong retention have contributed to NPW growth in both periods. NPE increases in 2015 and 2014 were consistent with the fluctuations in NPW for their respective twelve-month periods ended December 31. The 5.7-point increase in the statutory combined ratio in 2015 compared to 2014 was driven by: (i) higher property losses of 1.2 points; (ii) higher current year loss costs of 3.2 points driven by a modest increase in loss severities; and (iii) prior year casualty reserve development that increased the combined ratio by 2.0 points compared to last year. The combined ratio was stable in 2014 compared to 2013 with lower non-catastrophe property losses being offset by higher catastrophe losses and lower prior year casualty reserve development. In all three years, the combined ratio was positively impacted by earned rate that has exceeded our expected claim inflation. Property losses and prior year casualty reserve development are outlined below: ($ in millions) Non-Catastrophe Property Losses Catastrophe Losses For the year ended December 31, Losses and Loss Expense Incurred Impact on Losses and Loss Expense Ratio Losses and Loss Expense Incurred Impact on Losses and Loss Expense Ratio $ 2015 2014 2013 54.7 45.6 46.4 15.2 pts $ 13.7 14.9 0.9 1.6 (0.5 ) 0.2 pts 0.5 (0.2 ) Total Impact on Losses and Loss Expense Ratio 15.4 14.2 14.7 (Favorable)/ Unfavorable Year-Over-Year Change 1.2 (0.5) N/A 53 Prior year casualty reserve development was as follows: • 2015: Unfavorable development of 0.8 points, which was driven by bodily injury liability for accident years 2013 and 2014. This was partially offset by favorable development in accident years 2010 and 2011. The unfavorable development in accident years 2013 and 2014 was driven by severities that were greater than expected. • 2014: Favorable development of 1.2 points driven by bodily injury liability for accident years 2012 and prior, partially offset by accident year 2013 due to higher frequency of claims. • 2013: Favorable development of 1.6 points driven by accident years 2006 through 2010 representing a continued trend of better than expected reported emergence, partially offset by increased severity in accident year 2012. Workers Compensation ($ in thousands) Statutory NPW Direct new business Retention Renewal pure price increases Statutory NPE Statutory combined ratio % of total statutory standard commercial NPW 2015 2014 2015 vs. 2014 $ $ 299,686 68,971 83 % 2.6 290,075 88.2 % 19 269,130 48,613 81 4.8 274,585 110.1 19 11 % $ 42 2 pts (2.2 ) 6 % $ (21.9 ) pts 2014 vs. 2013 (3) % (12) (1) pts (2.7) 3 % (10.5) pts 2013 277,135 55,063 82 % 7.5 267,612 120.6 % 20 NPW increased in 2015 compared to 2014 due to: (i) an increase in direct new business; (ii) renewal pure price increases; and (iii) increased retention. NPW was lower in 2014 compared to 2013 due to: (i) reductions in new business; (ii) a focused effort to improve our hazard mix and reduce exposures on this line; and (iii) the impact of the sale of the SIG renewal rights. This business accounted for $4 million of NPW in 2013. NPE increases in 2015 and 2014 were consistent with the fluctuations in NPW for their respective twelve-month periods ended December 31. The 21.9-point decrease in the statutory combined ratio in 2015 compared to 2014 was due to the following: • Favorable prior year casualty reserve development of $37.0 million, or 12.8 points, attributable to virtually all prior accident years, compared to no development in 2014. • Lower expected loss costs for the current accident year that resulted in an improvement of 9.3-points in 2015, reflecting our ongoing focus on improving this competitive line of business through pricing and claims initiatives, as further discussed below. Reductions in current and prior year loss costs in this line of business were primarily driven by continued lower frequencies and severities. We believe those trends are evidence of the significant claims and underwriting initiatives that we have undertaken on this line of business over the past two years. These initiatives include: • Centralizing all workers compensation claim handling in Charlotte, North Carolina providing us with: (i) focused management around workers compensation; (ii) units of scale and greater specialization; (iii) high levels of quality and consistency; (iv) better talent attraction and retention; (v) improved usage of nurse case managers; and (vi) increased network penetration; • Managing non-complex workers compensation claims within our footprint by leveraging the expertise of jurisdictionally-trained and aligned medical only and lost-time adjusters; • Referring claims with high exposure and/or significant escalation risk to our workers compensation Strategic Case Management Unit; • Reducing workers compensation medical costs through more favorable PPO contracts and greater PPO penetration; 54 • Using a more comprehensive approach for handling workers compensation claims, with an emphasis towards improving recovery times, allowing for earlier “return-to-work.” This involves elevated and proactive case management in the areas of medical, pharmaceutical, and physical therapy treatments; and • Working on improving the mix of business in this line with a focus on hazard grades A through D. In addition, the industry has experienced a period of lower medical cost inflation, which has favorably impacted our estimate of ultimate losses on this line of business. The decrease in the statutory combined ratio from 2013 to 2014 was driven by no prior year casualty reserve development in 2014 compared to unfavorable prior year development of 8.6 points in 2013 driven by the 2008 and prior accident years reflecting increases in severities for medical costs. These increases largely related to case reserve adjustments to assisted living facility claims, and our review of medical cost development over many years. Additionally, earned rate above our expected claim inflation improved profitability by approximately 2.5 points. Commercial Property ($ in thousands) Statutory NPW Direct new business Retention Renewal pure price increases Statutory NPE Statutory combined ratio % of total statutory standard commercial NPW 2015 2014 2015 vs. 2014 $ $ 282,731 72,118 82 % 2.8 269,022 82.6 % 18 253,625 58,436 81 4.4 244,792 97.3 18 11 % $ 23 1 pts (1.6 ) 10 % $ (14.7 ) pts 2014 vs. 2013 7 % 9 — pts (1.3) 9 % 18.4 pts 2013 237,556 53,678 81 % 5.7 224,412 78.9 % 17 NPW and NPE increased in 2015 compared to 2014, as well as in 2014 compared to 2013, primarily due to: (i) growth in direct new business; (ii) renewal pure price increases; and (iii) strong retention. The fluctuation in the statutory combined ratios over the three-year period for this line are best understood by reviewing the fluctuations in non-catastrophe property losses and catastrophe losses. Quantitative information regarding these items is as follows: ($ in millions) Non-Catastrophe Property Losses Catastrophe Losses For the year ended December 31, Losses and Loss Expense Incurred Impact on Losses and Loss Expense Ratio Losses and Loss Expense Incurred Impact on Losses and Loss Expense Ratio $ 2015 2014 2013 78.4 107.3 63.0 29.1 pts $ 43.8 28.1 25.8 27.3 17.8 9.6 pts 11.2 8.0 Total Impact on Losses and Loss Expense Ratio 38.7 55.0 36.1 (Favorable)/ Unfavorable Year-Over-Year Change (16.3) 18.9 N/A 55 Standard Personal Lines Our Standard Personal Lines segment, which includes our flood business, represents approximately 14% of our combined insurance segments' NPW. We sell personal lines insurance products and services to individuals located primarily in 13 states through approximately 700 distribution partners. In addition, we have approximately 6,000 distribution partners selling our flood business. ($ in thousands) GAAP Insurance Segments Results: NPW NPE Less: Losses and loss expenses incurred Net underwriting expenses incurred Underwriting income (loss) GAAP Ratios: Loss and loss expense ratio Underwriting expense ratio Combined ratio Statutory Ratios: Loss and loss expense ratio Underwriting expense ratio Combined ratio 2015 2014 2015 vs. 2014 2013 2014 vs. 2013 $ $ 283,926 288,134 200,237 86,561 1,336 69.5 % 30.0 99.5 69.6 30.3 99.9 % 292,061 296,747 197,182 83,029 16,536 66.4 28.0 94.4 66.3 28.2 94.5 (3 ) % $ (3 ) 2 4 (92 ) % $ 3.1 pts 2.0 5.1 3.3 2.1 5.4 pts 297,757 294,332 206,450 79,237 8,645 70.1 % 27.0 97.1 69.9 27.0 96.9 % (2) % 1 (4) 5 91 % (3.7) pts 1.0 (2.7) (3.6) 1.2 (2.4) pts NPW in this segment decreased over the three-year period as shown in the table above. As illustrated in the table below, these decreases were driven by lower new business and retention in 2015 and 2014 due to competition in this segment. The decrease in retention in 2014 was also impacted by targeted non-renewals of less profitable accounts. These strategic non-renewals impacted our dwelling fire business, underperforming accounts within our personal automobile business, and our mono-line homeowners business. ($ in millions) Retention Renewal pure price increases on NPW Direct new business premiums 2015 2014 2013 82 % 5.8 32.9 $ 81 6.5 36.1 85 7.8 39.5 NPE decreases over the three-year period were consistent with the NPW fluctuations for their respective twelve-month periods ended December 31. The GAAP loss and loss expense ratio increased 3.1 points in 2015 compared to 2014, primarily driven by: (i) favorable prior year casualty reserve development that was lower than last year by 2.2 points; and (ii) property losses that were higher than last year by 0.9 points. The GAAP loss and loss expense ratio decreased 3.7 points in 2014 compared to 2013 driven by: (i) earned rate in excess of our expected claims inflation, which improved profitability by approximately 2.6 points; and (ii) favorable prior year casualty reserve development that was higher than 2013 by 0.9 points. 56 Quantitative information over the three-year period related to these items is as follows: ($ in millions) Non-Catastrophe Property Losses Catastrophe Losses For the year ended December 31, Losses and Loss Expense Incurred Impact on Losses and Loss Expense Ratio Losses and Loss Expense Incurred Impact on Losses and Loss Expense Ratio $ 2015 2014 2013 87.2 90.1 87.8 30.3 pts $ 30.4 29.8 21.7 19.3 19.8 7.5 pts 6.5 6.7 Total Impact on Losses and Loss Expense Ratio 37.8 36.9 36.5 (Favorable)/ Unfavorable Year-Over-Year Change 0.9 0.4 N/A ($ in millions) For the year ended December 31, 2015 2014 2013 (Favorable)/Unfavorable Prior Year Casualty Reserve Development Losses and Loss Expense Incurred Impact on Losses and Loss Expense Ratio (Favorable)/ Unfavorable Year-Over-Year Change $ (2.0 ) (8.7 ) (6.0 ) (0.7 ) pts (2.9 ) (2.0 ) 2.2 (0.9) N/A The increase in the GAAP underwriting expense ratio in 2015 compared to 2014 was primarily due to the following factors: • Staffing additions, such as Standard Personal Lines Marketing Specialists, to support our growth initiatives; • Increases in annual incentive compensation expense to employees through our corporate-wide incentive plan; • Pension expense increases, which are discussed further in "Financial Highlights of Results for Years Ended December 2015, 2014, and 2013" above; and • Increased costs associated with capital improvements. The increase in the underwriting expense ratio in 2014 compared to 2013 was driven by higher supplemental commissions to our distribution partners. In addition, declining premiums in this segment, which are driven by lower new business and targeted non-renewal actions we have taken on this book of business, have put pressure on the components of our combined ratio. 57 E&S Lines Our E&S Lines segment, which represents 9% of our combined insurance segments' NPW, sells commercial lines insurance products and services in all 50 states and the District of Columbia through approximately 80 distribution partners. Insurance policies in this segment are sold to customers that typically have business risks with unique characteristics, such as the nature of the business or its claim history, that have not obtained coverage in the standard marketplace. E&S insurers have more flexibility in coverage terms and rates compared to standard market insurers, generally resulting in policies with higher rates and terms and conditions that are customized for specific risks. $ $ ($ in thousands) GAAP Insurance Segments Results: NPW NPE Less: Losses and loss expenses incurred Net underwriting expenses incurred Underwriting income (loss) GAAP Ratios: Loss and loss expense ratio Underwriting expense ratio Combined ratio Statutory Ratios: Loss and loss expense ratio Underwriting expense ratio Combined ratio 2015 2014 2015 vs. 2014 2013 2014 vs. 2013 189,013 172,333 128,731 60,405 (16,803 ) 74.7 % 35.1 109.8 74.7 33.7 108.4 % 152,172 140,150 90,301 49,463 386 64.4 35.3 99.7 64.5 34.7 99.2 24 % $ 23 43 22 (4,453 ) % $ 10.3 pts (0.2 ) 10.1 10.2 (1.0 ) 9.2 pts 131,662 125,121 84,027 44,829 (3,735 ) 67.2 % 35.8 103.0 67.2 35.7 102.9 % 16 % 12 7 10 110 % (2.8) pts (0.5) (3.3) (2.7) (1.0) (3.7) pts NPW increases in 2015 and 2014 reflect the following: ($ in millions) Renewal pure price increases Direct new business premiums 2015 2014 2013 $ 1.5 % 99.6 3.4 80.9 6.2 71.4 NPE increases in 2015 and 2014 were consistent with the increases in NPW for their respective twelve-month periods ended December 31, 2015. The significant increase in the combined ratio in 2015 compared to 2014 was driven by: (i) unfavorable prior year casualty reserve development that was higher than last year by 5.2 points; (ii) a 2.9-point increase in the current year loss costs; and (iii) a 1.5-point increase in property losses. The improvement that we saw in the combined ratio in 2014 compared to 2013 was driven by a change in the mix of business, coupled with lower catastrophe losses. Partially offsetting these items were non-catastrophe property losses and unfavorable prior year casualty reserve development. 58 These amounts are quantified in the tables below: ($ in millions) Non-Catastrophe Property Losses Catastrophe Losses For the year ended December 31, Losses and Loss Expense Incurred $ 2015 2014 2013 23.6 17.0 12.0 ($ in millions) For the year ended December 31, 2015 2014 2013 Impact on Losses and Loss Expense Ratio 13.7 12.1 9.6 pts $ Losses and Loss Expense Incurred Impact on Losses and Loss Expense Ratio 1.9 2.0 3.7 pts Total Impact on Losses and Loss Expense Ratio 15.6 14.1 13.3 Unfavorable Year-Over-Year Change 1.5 0.8 N/A 3.2 2.8 4.6 Unfavorable Prior Year Casualty Reserve Development Losses and Loss Expense Incurred Impact on Losses and Loss Expense Ratio Unfavorable Year-Over-Year Change $ 16.0 5.8 2.5 9.3 pts 4.1 1.9 5.2 2.2 N/A As part of the consolidation of this segment into our overall operations, we integrated the E&S claims operation with our corporate claims operation during 2015. As part of that effort, we completed a review of all complex claims. As a result, we recorded adverse prior year casualty reserve development of $10 million in the fourth quarter of 2015, bringing the full year adverse prior year development to $16 million. We also recorded a $5 million adjustment to the 2015 current accident year. Our E&S business is comprised of risks that are similar in nature to our Standard Commercial Lines, with smaller-sized insureds and lower policy limits. Approximately 90% of the business that we write in this segment have policy limits of less than $1 million. We will continue to deploy our corporate claims practices into the E&S operation in 2016, including the use of more robust monitoring tools. We believe these actions will allow us to better assess the associated liability for these claims and will ultimately result in improved outcomes. For more information, refer to the E&S Lines discussion within the Reserves for Losses and Loss Expenses section of "Critical Accounting Policies and Estimates" in this MD&A. Reinsurance We use reinsurance to protect our capital resources and insure us against losses on property and casualty risks that we underwrite. We use two main reinsurance vehicles: (i) a reinsurance pooling agreement among our Insurance Subsidiaries in which each company agrees to share in premiums and losses based on certain specified percentages; and (ii) reinsurance contracts and arrangements with third parties that cover various policies that we issue to our customers. Reinsurance Pooling Agreement The primary purposes of the reinsurance pooling agreement among our Insurance Subsidiaries are the following: • Pool or share proportionately the underwriting profit and loss results of property and casualty insurance underwriting operations through reinsurance; • Prevent any of our Insurance Subsidiaries from suffering undue loss; • Reduce administration expenses; and • Permit all of the Insurance Subsidiaries to obtain a uniform rating from A.M. Best. 59 The following illustrates the pooling percentages by company as of December 31, 2015: Insurance Subsidiary SICA Selective Way Insurance Company ("SWIC") Selective Insurance Company of South Carolina ("SICSC") Selective Insurance Company of the Southeast ("SICSE") Selective Insurance Company of New York ("SICNY") Selective Casualty Insurance Company ("SCIC") Selective Auto Insurance Company of New Jersey ("SAICNJ") Mesa Underwriters Specialty Insurance Company ("MUSIC") Selective Insurance Company of New England ("SICNE") Selective Fire and Casualty Insurance Company ("SFCIC") Pooling Percentage 32.0% 21.0% 9.0% 7.0% 7.0% 7.0% 6.0% 5.0% 3.0% 3.0% Reinsurance Treaties and Arrangements By entering into reinsurance treaties and arrangements, we are able to increase underwriting capacity and accept larger risks and a larger number of risks without directly increasing capital or surplus. Our reinsurance consists of traditional reinsurance and we do not purchase finite reinsurance. Under our reinsurance treaties, the reinsurer generally assumes a portion of the losses we cede to them in exchange for a portion of the premium. Amounts not reinsured are known as retention. Reinsurance does not legally discharge us from liability under the terms and limits of our policies, but it does make our reinsurer liable to us for the amount of liability we cede to them. Accordingly, we have counterparty credit risk from our reinsurers. We attempt to mitigate this credit risk by: (i) pursuing relationships with reinsurers rated “A-” or higher; or (ii) obtaining collateral to secure reinsurance obligations. Some of our reinsurance contracts include provisions that permit us to terminate or commute the reinsurance treaty if the reinsurer's financial condition or rating deteriorates. We monitor the financial condition of our reinsurers and we review the quality of reinsurance recoverables and reserves for uncollectible reinsurance. For additional information regarding our counterparty credit risk with our reinsurers, see Note 8. "Reinsurance" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. We have reinsurance contracts that separately cover our property and casualty insurance business. Available reinsurance can be segregated into the following key categories: • Property Reinsurance - includes our property excess of loss treaties purchased for protection against large individual property losses and our property catastrophe treaties purchased to provide protection for the overall property portfolio against severe catastrophic events. Facultative reinsurance is used for property risks that are in excess of our treaty capacity. • Casualty Reinsurance - purchased to provide protection for both individual large casualty losses and catastrophic casualty losses involving multiple claimants or customers. Facultative reinsurance is also used for casualty risks that are in excess of our treaty capacity. • Terrorism Reinsurance - in addition to protection built into our property and casualty reinsurance treaties, terrorism protection is available as a federal backstop related to terrorism losses as provided under the Terrorism Risk Insurance Program Reauthorization Act (“TRIPRA”). For further information regarding this legislation, see Item 1A. “Risk Factors.” of this Form 10-K. • Flood Reinsurance - as a servicing carrier in the WYO Program, we receive a fee for writing flood business, for which the related premiums and losses are 100% ceded to the federal government. In addition to the above categories, we have entered into several reinsurance agreements with Montpelier Re Insurance Ltd. as part of the acquisition of MUSIC. Together, these agreements provide protection for losses on policies written prior to the December 2011 acquisition and any development on reserves established by MUSIC as of the date of acquisition. The reinsurance recoverables under these treaties are collateralized. 60 Property Reinsurance The property catastrophe treaty, which covers both our standard market and E&S business, was renewed effective January 1, 2016. The current treaty structure remains the same, providing total coverage of $685 million in excess of $40 million. The annual aggregate limit net of our co-participation is approximately $1.0 billion for 2016. We also renewed the separate catastrophe treaty of $35 million in excess of $5 million that covers events outside of our standard lines footprint, in support of our growing E&S property book. We expect the overall catastrophe ceded premium for 2016 to be slightly lower than 2015. As our need for catastrophe reinsurance increases, we seek ways to minimize credit risk inherent in a reinsurance transaction by dealing with highly-rated reinsurance partners and purchasing collateralized reinsurance products, particularly for high severity, low-probability events. The current reinsurance program includes $201 million in collateralized limit, primarily in the top layer of the catastrophe program. We continue to assess our property catastrophe exposure aggregations, modeled results, and effects of growth on our property portfolio, and strive to manage our exposure to individual large events balanced against the cost of reinsurance protections. Although we model various catastrophic perils, due to our geographic spread, the risk of hurricane continues to be the most significant natural catastrophe peril to which our portfolio is exposed. Below is a summary of the largest five actual hurricane losses that we experienced in the past 25 years: Hurricane Name Superstorm Sandy Hurricane Irene Hurricane Hugo Hurricane Isabel Hurricane Floyd Actual Gross Loss ($ in millions) 127.4 1 44.8 26.4 25.1 14.5 Accident Year 2012 2011 1989 2003 1999 1 This amount represents reported and unreported gross losses estimated as of December 31, 2015. We use the results of the Risk Management Solutions and AIR Worldwide models in our review of exposure to hurricane risk. Each of these third party vendors provide two views of the modeled results as follows: (i) a long-term view that closely relates modeled event frequency to historical hurricane activity; and (ii) a medium-term view that adjusts historical frequencies to reflect higher expectations of hurricane activity in the North Atlantic Basin. We believe that modeled estimates provide a range of potential outcomes and we review multiple estimates for purposes of understanding our catastrophic risk. The following table provides modeled hurricane results based on a blended view of the four models for the Insurance Subsidiaries' combined property book as of July 2015: Occurrence Exceedence Probability Four-Model Blend ($ in thousands) 4.0% (1 in 25 year event) 2.0% (1 in 50 year event) 1.0% (1 in 100 year event) 0.67% (1 in 150 year event) 0.5% (1 in 200 year event) 0.4% (1 in 250 year event) 1 Losses are after tax and include applicable reinstatement premium. 2 Equity as of December 31, 2015. Gross Losses $120,919 217,188 375,355 498,915 612,028 691,732 Net Losses1 29,268 32,499 36,964 42,137 46,849 53,322 Net Losses as a Percent of Equity2 2% 2 3 3 3 4 Our current catastrophe reinsurance program exhausts at a 1 in 274 year return period, or events with 0.36% probability, based on a multi-model view of hurricane risk. 61 The property excess of loss treaty, which covers both our standard market and E&S business, was renewed on July 1, 2015 with an additional layer placed on January 1, 2016. The major terms of this treaty are consistent with the prior year. The details of the current year treaty are included in the table below. The following is a summary of our property reinsurance treaties and arrangements covering our Insurance Subsidiaries: PROPERTY REINSURANCE ON INSURANCE PRODUCTS Treaty Name Property Catastrophe Excess of Loss (covers all insurance segments) Reinsurance Coverage $685 million above $40 million retention in four layers: - 80% of losses in excess of $40 million up to $100 million; - 95% of losses in excess of $100 million up to $225 million; - 95% of losses in excess of $225 million up to $475 million; and - 90% of losses in excess of $475 million up to $725 million. - The treaty provides one reinstatement per layer for the first three layers and no reinstatements on the fourth layer. The annual aggregate limit is $1.03 billion, net of the Insurance Subsidiaries' co-participation. Property Excess of Loss (covers all insurance segments) $58 million above $2 million retention covering 100% in three layers. Losses other than TRIPRA certified losses are subject to the following reinstatements and annual aggregate limits: - $8 million in excess of $2 million layer provides unlimited reinstatements; - $30 million in excess of $10 million layer provides three reinstatements, $120 million in aggregate limits; and - $20 million in excess of $40 million layer provides approximately $70 million in aggregate limits. Terrorism Coverage All nuclear, biological, chemical, and radioactive ("NBCR") losses are excluded regardless of whether or not they are certified under TRIPRA. Non-NBCR losses are covered to the same extent as non-terrorism losses. Please see Item 1A. “Risk Factors.” of this Form 10-K for discussion regarding TRIPRA. All NBCR losses are excluded regardless of whether or not they are certified under TRIPRA. For non-NBCR losses, the treaty distinguishes between acts committed on behalf of foreign persons or foreign interests ("Foreign Terrorism") and those that are not. The treaty provides annual aggregate limits for Foreign Terrorism (other than NBCR) acts of $24 million for the first layer and $60 million for the second layer and for the third layer approximately $30 million in annual aggregate limits. Non-foreign terrorism losses (other than NBCR) are covered to the same extent as non-terrorism losses. Flood 100% reinsurance by the federal government’s WYO Program. None Casualty Reinsurance The casualty excess of loss treaty, which covers both our standard market and E&S business, was renewed on July 1, 2015 and is effective through June 30, 2016, with substantially the same terms as the expiring treaty. The details of the current year treaty are included in the table below. The following is a summary of our casualty reinsurance treaties and arrangements covering our Insurance Subsidiaries: CASUALTY REINSURANCE ON INSURANCE PRODUCTS Treaty Name Casualty Excess of Loss (covers all insurance segments) Reinsurance Coverage There are six layers covering 100% of $88 million in excess of $2 million. Losses other than terrorism losses are subject to the following reinstatements and annual aggregate limits: - $3 million in excess of $2 million layer with $72 million annual aggregate limit; - $7 million in excess of $5 million layer with $35 million annual aggregate limit; - $9 million in excess of $12 million layer with $27 million annual aggregate limit; - $9 million in excess of $21 million layer with $18 million annual aggregate limit; - $20 million in excess of $30 million layer with $40 million annual aggregate limit; - $40 million in excess of $50 million layer with $80 million annual aggregate limit; Montpelier Re Quota Share and Loss Development Cover (covers E&S Lines) As part of the acquisition of MUSIC we entered into several reinsurance agreements that together provide protection for losses on policies written prior to the acquisition and any development on reserves established by MUSIC as of the date of acquisition. The reinsurance recoverables under these treaties are 100% collateralized. 62 Terrorism Coverage All NBCR losses are excluded. All other losses stemming from the acts of terrorism are subject to the following reinstatements and annual aggregate limits: - $3 million in excess of $2 million layer with $15 million net annual terrorism aggregate limit; - $7 million in excess of $5 million layer with $28 million net annual terrorism aggregate limit; - $9 million in excess of $12 million layer with $27 million net annual terrorism aggregate limit; - $9 million in excess of $21 million layer with $18 million net annual terrorism aggregate limit; - $20 million in excess of $30 million layer with $40 million net annual terrorism aggregate limit; - $40 million in excess of $50 million layer with $80 million net annual terrorism aggregate limit; Provides full terrorism coverage including NBCR. We have other reinsurance treaties that we do not consider core to our reinsurance program, such as our Surety and Fidelity Excess of Loss Reinsurance Treaty, National Workers Compensation Reinsurance Pool Quota Share, which covers business assumed from the involuntary workers compensation pool, a property catastrophe excess of loss treaty covering losses outside of our standard lines footprint states, and our Equipment Breakdown Coverage Reinsurance Treaty. We regularly reevaluate our overall reinsurance program and try to develop effective ways to manage transfer of risk. Our analysis is based on a comprehensive process that includes periodic analysis of modeling results, aggregation of exposures, exposure growth, diversification of risks, limits written, projected reinsurance costs, financial strength of reinsurers, and projected impact on earnings, equity, and statutory surplus. We strive to balance sometimes opposing considerations of reinsurer credit quality, price, terms, and our appetite for retaining a certain level of risk. Investments The primary objective of the investment portfolio is to maximize after-tax investment income while balancing risk and generating long-term growth in shareholder value. Our investment philosophy is predicated on investing with a long-term horizon, with significant emphasis on risk control, capital preservation, taxes, liquidity, and diversification. Our investments include high-quality fixed income securities, common stocks, and preferred securities designed to generate stable interest and dividend income and long-term capital appreciation, and alternative investments that seek to diversify the sources of risk and return of the overall portfolio. Total Invested Assets ($ in thousands) Total invested assets Invested assets per dollar of stockholders' equity Unrealized gain – before tax Unrealized gain – after tax 2015 2014 Change $ 5,089,269 3.64 69,224 44,996 4,806,834 3.77 123,682 80,394 6 % (3 ) (44 ) (44 ) The increase in our investment portfolio at December 31, 2015 compared with year-end 2014 was primarily driven by operating cash flow of $381.6 million, which resulted in investable cash flow of $352.3 million, partially offset by a decrease in unrealized gains of $54.5 million. Of this $54.5 million, $19.2 million was in our equity portfolio, which was impacted by the volatility in the stock market during the year. In addition, unrealized gains in our fixed income securities portfolio decreased by $35.3 million due to widening credit spreads as well as the impact of slightly higher interest rates. Although interest rates on the 10-year U.S. Treasury Note rose by 10 basis points in 2015, the low interest rate environment continues to present a challenge to us in generating after-tax return, as new purchase yields are below the average yield on bonds that are currently maturing. We structure our portfolio conservatively with a focus on: (i) asset diversification; (ii) investment quality; (iii) liquidity, particularly to meet the cash obligations of our three insurance segments; (iv) consideration of taxes; and (v) preservation of capital. We believe that we have a high quality and liquid investment portfolio. The breakdown of our investment portfolio is as follows: As of December 31, Fixed income securities: U.S. government obligations Foreign government obligations State and municipal obligations Corporate securities Mortgage-backed securities (“MBS”) Asset-backed securities ("ABS") Total fixed income securities Equity securities: Common stock Preferred stock1 Total equity securities Short-term investments Other investments Total 2015 2014 2 % — 30 38 16 5 91 4 — 4 4 1 100 % 2 1 32 38 14 4 91 4 — 4 3 2 100 1 Preferred stock represented less than 1% of our portfolio at December 31, 2015. We did not hold any of these securities at December 31, 2014. 63 Fixed Income Securities The average duration of the fixed income securities portfolio as of December 31, 2015 was 3.7 years, including short-term investments, compared to the Insurance Subsidiaries’ liability duration of approximately 4.3 years. The current duration of the fixed income securities portfolio is within our historical range, and is monitored and managed to maximize yield while managing interest rate risk at an acceptable level. We maintain a well-diversified portfolio across sectors, credit quality, and maturities that affords us ample liquidity. We typically have a long investment time horizon, and every purchase or sale is made with the intent of maximizing risk-adjusted investment returns in the current market environment while balancing capital preservation. Our fixed income securities portfolio maintained a weighted average credit rating of AA- as of December 31, 2015. The following table presents the credit ratings of our fixed income securities portfolio: Fixed Income Security Rating Aaa/AAA Aa/AA A/A Baa/BBB Ba/BB or below Total December 31, 2015 December 31, 2014 18 % 42 24 15 1 100 % 17 44 25 13 1 100 For further details on how we manage overall credit quality and the various risks to which our portfolio is subject, see Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.” of this Form 10-K. Equity Securities Our equities portfolio was 4% of invested assets at both December 31, 2015 and December 31, 2014. During 2015, this portfolio recorded purchases of $195.7 million and sales of securities that had an original cost of $184.2 million, primarily as a result of a change in our dividend equity strategy earlier this year from a quantitative, model-driven stock selection strategy to a fundamentally-based stock selection approach that incorporates an assessment of the sustainability and growth rate of a company's dividend based on expected future cash flows. Unrealized/Unrecognized Losses Fixed income securities that were in an unrealized loss position at December 31, 2015 by contractual maturity are shown below. MBS are included in the maturity tables using the estimated average life of each security. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Contractual Maturities ($ in thousands) Available-for-sale ("AFS") fixed income securities: One year or less Due after one year through five years Due after five years through ten years Due after ten years Total Contractual Maturities ($ in thousands) Held-to-maturity ("HTM") fixed income securities: Due after one year through five years Total Amortized Cost $ 115,766 954,166 509,133 1,834 1,580,899 $ Fair Value Unrealized Loss 115,349 943,587 497,336 1,812 1,558,084 417 10,579 11,797 22 22,815 Amortized Cost $ $ 811 811 Fair Value Unrecognized/Unrealized Loss 6 6 805 805 64 We have reviewed the securities in the tables above in accordance with our OTTI policy as discussed previously in “Critical Accounting Policies and Estimates” of this MD&A. For qualitative information regarding our conclusions as to why these impairments are deemed temporary, see Note 5. “Investments” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. Other Investments As of December 31, 2015, other investments of $77.8 million represented 1% of our total invested assets. In addition to the capital that we already invested to date, we are contractually obligated to invest up to an additional $74.4 million in our other investments portfolio through commitments that currently expire at various dates through 2028. For descriptions of our seven alternative investment strategies, as well as redemption, restrictions, and fund liquidations, refer to Note 5. "Investments" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Net Investment Income The components of net investment income earned were as follows: ($ in thousands) Fixed income securities Equity securities, dividend income Short-term investments Other investments Investment expenses Net investment income earned – before tax Net investment income tax expense Net investment income earned – after tax Effective tax rate Annual after-tax yield on fixed income securities Annual after-tax yield on investment portfolio 2015 2014 2013 $ $ 123,230 9,161 112 (1,890 ) (9,297 ) 121,316 27,480 93,836 22.7 % 2.1 1.9 126,489 7,449 66 13,580 (8,876 ) 138,708 34,501 104,207 24.9 2.2 2.2 121,582 6,140 117 15,208 (8,404 ) 134,643 33,233 101,410 24.7 2.3 2.3 The $17.4 million decrease in investment income before tax in 2015, compared to 2014, was primarily attributable to a decrease in other investment income of $15.5 million due to lower returns on the alternative investments within that portfolio. In particular, our energy-related limited partnerships have been negatively impacted by declining oil prices. Additionally, lower reinvestment yields on our fixed income securities portfolio continue to put pressure on investment income. In 2015, bonds that matured or were sold, valued at $735.6 million, had yields that averaged 3.3% pre-tax, while new purchases of $1.0 billion had an average pre-tax yield of 2.4%. The $4.1 million increase in investment income before tax in 2014 compared to 2013 was primarily attributable to an increase in income of $4.9 million from fixed income securities driven by an increase in the size of the portfolio, which offset the lower yield earned in 2014 compared to 2013. In 2014, bonds that matured or were sold, valued at $607.2 million, had yields that averaged 2.3%, after tax, while new purchases of $860.4 million had an average after-tax yield of 2.0%. Realized Gains and Losses Our general philosophy for sales of securities is to reduce our exposure to securities and sectors based on economic evaluations and when the fundamentals for that security or sector have deteriorated, or to opportunistically trade out of securities to other securities with better economic return characteristics. We typically have a long investment time horizon, and every purchase or sale is made with the intent of maximizing risk-adjusted investment returns in the current market environment while balancing capital preservation. Total net realized gains amounted to $13.2 million in 2015, compared to $26.6 million in 2014 and $20.7 million in 2013. These amounts included OTTI charges of $18.4 million in 2015, $11.1 million in 2014, and $5.6 million in 2013. We regularly review our entire investment portfolio for declines in fair value. If we believe that a decline in the value of a particular investment is other than temporary, we record it as an OTTI through realized losses in earnings for the credit-related portion and through unrealized losses in OCI for the non-credit related portion for fixed income securities. If there is a decline in fair value of an equity security that we do not intend to hold or if we determine the decline is other than temporary, we write down the cost of the investment to fair value and record the charge through earnings as a component of realized losses. 65 For a discussion of our realized gains and losses as well as our OTTI methodology, see Note 2. “Summary of Significant Accounting Policies” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. In addition, for qualitative information regarding these charges, see Note 5. “Investments” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. Federal Income Taxes The following table provides information regarding federal income taxes from continuing operations: ($ in millions) Federal income tax expense from continuing operations Effective tax rate 2015 2014 2013 $ 66.8 29% 55.3 28 36.4 25 The fluctuations in federal income taxes and the effective tax rates in 2015 compared to 2014 and 2013 were primarily due to the contribution of underwriting income to total company income, as the majority of our differences from the statutory rate are from recurring nontaxable items, such as tax-advantaged interest and dividends received deductions. Underwriting results for 2015, 2014, and 2013 were $149.0 million, $78.1 million, and $38.8 million, respectively. We believe that our future effective tax rate will continue to be impacted by similar items, assuming no significant changes to tax laws. For a reconciliation of our effective tax rate to the statutory rate of 35%, see Note 13. “Federal Income Taxes” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. Financial Condition, Liquidity, Short-term Borrowings, and Capital Resources Capital resources and liquidity reflect our ability to generate cash flows from business operations, borrow funds at competitive rates, and raise new capital to meet operating and growth needs. Liquidity We manage liquidity with a focus on generating sufficient cash flows to meet the short-term and long-term cash requirements of our business operations. Our cash and short-term investment position of $196 million at December 31, 2015 was comprised of $30 million at Selective Insurance Group, Inc. (the “Parent”) and $166 million at the Insurance Subsidiaries. Short-term investments are generally maintained in "AAA" rated money market funds approved by the National Association of Insurance Commissioners ("NAIC"). The Parent continues to maintain a fixed income security investment portfolio containing high- quality, highly-liquid government and corporate fixed income investments to generate additional yield. This portfolio amounted to $62 million at December 31, 2015 compared to $50 million at December 31, 2014. Sources of cash for the Parent have historically consisted of dividends from the Insurance Subsidiaries, borrowings under lines of credit and loan agreements with certain Insurance Subsidiaries, and the issuance of stock and debt securities. We continue to monitor these sources, giving consideration to our long-term liquidity and capital preservation strategies. The following table provides quantitative data regarding all Insurance Subsidiaries' ordinary dividends paid to the Parent in 2015 for debt service, shareholder dividends, and general operating purposes. There were no extraordinary dividends paid in 2015: 2015 Dividends ($ in millions) SICA SWIC SICSC SICSE SICNY SICNE SAICNJ SCIC SFCIC Total State of Domicile Ordinary Dividends Paid $ $ New Jersey New Jersey Indiana Indiana New York New Jersey New Jersey New Jersey New Jersey 66 26.0 16.0 3.3 2.0 2.5 1.5 2.5 2.5 1.5 57.8 Based on the 2015 statutory financial statements, the maximum ordinary dividends that can be paid to the Parent by the Insurance Subsidiaries in 2016 are as follows: Dividends ($ in millions) SICA SWIC SICSC SICSE SICNY SICNE SAICNJ MUSIC SCIC SFCIC Total State of Domicile New Jersey New Jersey Indiana Indiana New York New Jersey New Jersey New Jersey New Jersey New Jersey $ $ 2016 Maximum Ordinary Dividends 61.2 37.0 15.9 12.1 9.3 5.5 10.6 9.4 12.1 5.2 178.3 Any dividends to the Parent are subject to the approval and/or review of the insurance regulators in the respective domiciliary states of the insurance subsidiaries and are generally payable only from earned surplus as reported in the statutory annual statements of those subsidiaries as of the preceding December 31. Although past dividends have historically been met with regulatory approval, there is no assurance that future dividends that may be declared will be approved. For additional information regarding dividend restrictions, refer to Note 10. “Indebtedness” and Note 19. “Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. The Parent had no private or public issuances of stock during 2015, and there were no borrowings under its $30 million line of credit ("Line of Credit"). We have two Insurance Subsidiaries domiciled in Indiana ("Indiana Subsidiaries") that are members of the Federal Home Loan Bank of Indianapolis ("FHLBI"). Membership in the FHLBI by SICSC and SICSE provides these subsidiaries with access to additional liquidity. The Indiana Subsidiaries' aggregate investment of $2.8 million provides them with the ability to borrow approximately 20 times the total amount of the FHLBI common stock purchased, at comparatively low borrowing rates. All borrowings from the FHLBI are required to be secured by certain investments. For additional information regarding the required collateral, refer to Note 5. "Investments" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. In December 2015, SICA and SICNY joined the Federal Home Loan Bank of New York (“FHLBNY”). The membership provides these subsidiaries additional access to liquidity at comparatively low borrowing rates. While membership stock of $0.5 million in the aggregate was purchased upon FHLBNY's approval of our membership, no borrowings occurred in 2015. Future borrowings are limited to approximately 20 times the value of any additional FHLBNY stock purchased. As with FHLBI, borrowings from the FHLBNY are required to be secured by certain investments. 67 Restrictions related to borrowings include the following: • The Parent’s Line of Credit permits aggregate borrowings from the FHLBI and the FHLBNY up to 10% of the respective member company’s admitted assets for the previous year. Additionally, FHLBNY limits borrowings by SICA and SICNY to 5% of admitted assets for the previous year. The following table provides information on the remaining capacity for Federal Home Loan Bank borrowings under these restrictions, as well as the amount of additional stock that would need to be purchased to allow us to borrow our remaining capacity: ($ in millions) As of December 31, 2015 SICSC SICSE SICA SICNY Total Admitted Assets as of December 31, 2015 Borrowing Limitation Amount Borrowed Remaining Capacity $ 594.3 $ 461.8 2,140.7 403.4 $ 59.4 46.2 107.0 20.2 232.8 32.0 28.0 — — 60.0 27.4 18.2 107.0 20.2 172.8 Additional Stock Requirements 1.2 0.8 4.8 0.9 7.7 For additional information regarding the Parent’s Line of Credit, refer to the section below entitled “Short-term Borrowings.” • The Parent has lending agreements with the Indiana Subsidiaries that have been approved by the Indiana Department of Insurance. Similar to the Line of Credit agreement, these lending agreements limit borrowings by the Parent from the Indiana Subsidiaries to 10% of the admitted assets of the respective Indiana Subsidiary. The following table provides information on the Parent’s remaining borrowing capacity with the Indiana Subsidiaries: ($ in millions) As of December 31, 2015 SICSC SICSE Total Admitted Assets as of December 31, 2015 Borrowing Limitation Amount Borrowed Remaining Capacity $ 594.3 $ 461.8 $ 59.4 46.2 105.6 32.3 18.7 51.0 27.1 27.5 54.6 The Insurance Subsidiaries also generate liquidity through insurance float, which is created by collecting premiums and earning investment income before losses are paid. The period of the float can extend over many years. Our investment portfolio consists of maturity dates that are laddered to continually provide a source of cash flows for claims payments in the ordinary course of business. The duration of the fixed income securities portfolio including short-term investments was 3.7 years as of December 31, 2015, while the liabilities of the Insurance Subsidiaries have a duration of 4.3 years. In addition, the Insurance Subsidiaries purchase reinsurance coverage for protection against any significantly large claims or catastrophes that may occur during the year. The liquidity generated from the sources discussed above is used, among other things, to pay dividends to our shareholders. Dividends on shares of the Parent's common stock are declared and paid at the discretion of the Board of Directors based on our operating results, financial condition, capital requirements, contractual restrictions, and other relevant factors. In October 2015, the Board of Directors approved an increase in the quarterly cash dividend, to $0.15 from $0.14 per share. Our ability to meet our interest and principal repayment obligations on our debt, as well as our ability to continue to pay dividends to our stockholders is dependent on liquidity at the Parent coupled with the ability of the Insurance Subsidiaries to pay dividends, if necessary, and/or the availability of other sources of liquidity to the Parent. Our next principal repayments of $15 million and $45 million are due in 2016, with the next following principal payment due in 2034. Restrictions on the ability of the Insurance Subsidiaries to declare and pay dividends, without alternative liquidity options, could materially affect our ability to service debt and pay dividends on common stock. 68 Short-term Borrowings Our Line of Credit with Wells Fargo Bank, National Association, as administrative agent, and Branch Banking and Trust Company, was renewed effective December 1, 2015 with a borrowing capacity of $30 million, which can be increased to $50 million with the approval of both lending partners. This Line of Credit replaced our previous Line of Credit, which had the same banking partners and similar terms and conditions. The Line of Credit provides the Parent with an additional source of short-term liquidity. The interest rate on our Line of Credit varies and is based on, among other factors, the Parent’s debt ratings. The Line of Credit expires on December 1, 2020. There have been no balances outstanding under this Line of Credit or the previous credit facility at December 31, 2015 or at any time during 2015. The Line of Credit agreement contains representations, warranties, and covenants that are customary for credit facilities of this type, including, without limitation, financial covenants under which we are obligated to maintain a minimum consolidated net worth, minimum combined statutory surplus, and maximum ratio of consolidated debt to total capitalization, as well as covenants limiting our ability to: (i) merge or liquidate; (ii) incur debt or liens; (iii) dispose of assets; (iv) make certain investments and acquisitions; and (v) engage in transactions with affiliates. As mentioned above, the Line of Credit permits collateralized borrowings from the FHLBI and FHLBNY by our Insurance Subsidiaries that are members of those banks so long as the aggregate amount borrowed does not exceed 10% of the respective member's admitted assets from the preceding calendar year. The table below outlines information regarding certain of the covenants in the Line of Credit: Consolidated net worth Statutory surplus Debt-to-capitalization ratio1 A.M. Best financial strength rating 1Calculated in accordance with Line of Credit agreement. Required as of December 31, 2015 $960 million Actual as of December 31, 2015 $1.4 billion Not less than $750 million Not to exceed 35% Minimum of A- $1.4 billion 22.1% A Capital Resources Capital resources provide protection for policyholders, furnish the financial strength to support the business of underwriting insurance risks, and facilitate continued business growth. At December 31, 2015, we had statutory surplus of $1.4 billion, GAAP stockholders’ equity of $1.4 billion, and total debt of $388.2 million, which equates to a debt-to-capital ratio of 21.7%. We balance our debt and equity capital to prudently minimize our overall cost of capital. Our cash requirements include, but are not limited to, principal and interest payments on various notes payable, dividends to stockholders, payment of claims, capital expenditures, and the payment of commitments under limited partnership and tax credit purchase agreements, as well as other operating expenses, which include commissions to our distribution partners, labor costs, premium taxes, general and administrative expenses, and income taxes. For further details regarding our cash requirements, refer to the section below entitled, “Contractual Obligations, Contingent Liabilities, and Commitments.” We continually monitor our cash requirements and the amount of capital resources that we maintain at the holding company and operating subsidiary levels. As part of our long-term capital strategy, we strive to maintain capital metrics, relative to the macroeconomic environment, that support our targeted financial strength. Based on our analysis and market conditions, we may take a variety of actions, including, but not limited to, contributing capital to the Insurance Subsidiaries in our insurance segments, issuing additional debt and/or equity securities, repurchasing shares of the Parent’s common stock, and increasing stockholders’ dividends. Our capital management strategy is intended to protect the interests of the policyholders of the Insurance Subsidiaries and our stockholders, while enhancing our financial strength and underwriting capacity. Book value per share increased to $24.37 as of December 31, 2015, from $22.54 as of December 31, 2014, due to $2.85 in net income, partially offset by $0.62 in unrealized losses on our investment portfolio, and $0.57 paid in dividends to our shareholders. 69 Off-Balance Sheet Arrangements At December 31, 2015 and December 31, 2014, we did not have any material relationships with unconsolidated entities or financial partnerships, such entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, we are not exposed to any material financing, liquidity, market, or credit risk that could arise if we had engaged in such relationships. Contractual Obligations, Contingent Liabilities, and Commitments As discussed in the “Reserves for Losses and Loss Expenses” section in the "Critical Accounting Policies and Estimates" section of this MD&A, we maintain case reserves and estimates of reserves for losses and loss expense IBNR, in accordance with industry practice. Using generally accepted actuarial reserving techniques, we project our estimate of ultimate losses and loss expenses at each reporting date. Included within the estimate of ultimate losses and loss expenses are case reserves, which are analyzed on a case-by-case basis by the type of claim involved, the circumstances surrounding each claim, and the policy provisions relating to the type of losses. The difference between the projected ultimate loss and loss expense incurred and the sum of: (i) case loss and loss expense reserves; and (ii) paid loss and loss expense reserves is the IBNR reserve. A range of possible reserves is determined annually and considered in addition to the most recent loss trends and other factors in establishing reserves for each reporting period. Based on the consideration of the range of possible reserves, recent loss trends and other factors, IBNR is established and the ultimate net liability for losses and loss expenses is determined. Such an assessment requires considerable judgment given that it is frequently not possible to determine whether a change in the data is an anomaly until sometime after the event. Even if a change is determined to be permanent, it is not always possible to reliably determine the extent of the change until sometime later. As a result, there is no precise method for subsequently evaluating the impact of any specific factor on the adequacy of reserves because the eventual deficiency or redundancy is affected by many factors. Given that the loss and loss expense reserves are estimates, as described above and in more detail under the “Critical Accounting Policies and Estimates” section of this MD&A, the payment of actual losses and loss expenses is generally not fixed as to amount or timing. Due to this uncertainty, financial accounting standards prohibit us from discounting these reserves to their present value. Additionally, estimated losses as of the financial statement date do not consider the impact of estimated losses from future business. Therefore, the projected settlement of the reserves for net loss and loss expenses will differ, perhaps significantly, from actual future payments. The projected paid amounts in the table below by year are estimates based on past experience, adjusted for the effects of current developments and anticipated trends, and include considerable judgment. There is no precise method for evaluating the impact of any specific factor on the projected timing of when loss and loss expense reserves will be paid and as a result, the timing and amounts of the actual payments will be affected by many factors. Care must be taken to avoid misinterpretation by those unfamiliar with this information or familiar with other data commonly reported by the insurance industry. Our future cash payments associated with contractual obligations pursuant to operating leases for office space and equipment, capital leases for computer hardware and software, notes payable, interest on debt obligations, and loss and loss expenses as of December 31, 2015 are summarized below: Contractual Obligations ($ in millions) Operating leases Capital leases Notes payable Interest on debt obligations Subtotal Gross loss and loss expense payments Ceded loss and loss expense payments Net loss and loss expense payments $ Total 30.1 7.9 395.0 500.0 933.0 3,517.7 551.0 2,966.7 Total $ 3,899.7 70 Less than 1 year Payment Due by Period 1-3 years 3-5 years More than 5 years 6.7 3.9 60.0 21.8 92.4 866.9 129.8 737.1 829.5 10.4 4.0 — 42.4 56.8 1,055.7 130.8 924.9 981.7 7.2 — — 42.4 49.6 554.2 80.6 473.6 523.2 5.8 — 335.0 393.4 734.2 1,040.9 209.8 831.1 1,565.3 See the “Short-term Borrowings” section above for a discussion of our syndicated Line of Credit agreement. At December 31, 2015, we had contractual obligations that expire at various dates through 2028 that may require us to invest up to an additional $74.4 million in alternative and other investments. There is no certainty that any such additional investment will be required. We have issued no material guarantees on behalf of others and have no trading activities involving non- exchange traded contracts accounted for at fair value. We have no material transactions with related parties other than those disclosed in Note 16. “Related Party Transactions” included in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. Ratings We are rated by major rating agencies that issue opinions on our financial strength, operating performance, strategic position, and ability to meet policyholder obligations. We believe that our ability to write insurance business is most influenced by our rating from A.M. Best. In the second quarter of 2015, A.M. Best reaffirmed our rating of "A (Excellent)," their third highest of 13 financial strength ratings, with a “stable” outlook. The rating reflects A.M. Best's view that we have an excellent level of risk-adjusted capitalization, disciplined underwriting focus, targeted regional markets with strong distribution partner relationships, and consistently profitable operating performance. We have been rated “A” or higher by A.M. Best for the past 85 years. A downgrade from A.M. Best to a rating below “A-” is an event of default under our Line of Credit and could affect our ability to write new business with customers and/or distribution partners, some of whom are required (under various third- party agreements) to maintain insurance with a carrier that maintains a specified A.M. Best minimum rating. Ratings by other major rating agencies are as follows: • Fitch Ratings ("Fitch") – Our “A+” rating was reaffirmed in the fourth quarter of 2015 with a stable outlook by Fitch. In taking this action, Fitch cited our strong underwriting results, solid capitalization with growth in stockholders' equity, stable leverage metrics, and improved interest coverage metrics. • S&P's Ratings Services ("S&P") – During the fourth quarter of 2015, S&P issued a report citing our financial strength rating as “A-” with a positive outlook. The rating reflects S&P's view of our strong business risk profile, strong competitive position, and very strong capital and earnings. The positive outlook for the rating reflects S&P's view of our ongoing efforts to improve geographic and product diversification and reduce risk concentrations in catastrophe prone areas. In addition, the positive outlook reflects S&P's expectation that we will steadily improve our operating performance and that our capital adequacy will remain redundant at a very strong level. • Moody's Investor Service ("Moody's") – Our "A2" financial strength rating was reaffirmed in the second quarter of 2015 by Moody's. In taking this action, Moody's cited our solid regional franchise with established independent agency support, solid risk adjusted capitalization, strong invested asset quality, and good underwriting profitability. The outlook was revised to stable from negative, reflecting Moody's view of our improved profitability as a result of our stronger price adequacy in commercial lines, re-underwriting initiatives, and claims processing improvements. Our S&P, Moody's, and Fitch financial strength and associated credit ratings affect our ability to access capital markets. The interest rate on our Line of Credit varies and is based on, among other factors, the Parent's debt ratings. There can be no assurance that our ratings will continue for any given period or that they will not be changed. It is possible that positive or negative ratings actions by one or more of the rating agencies may occur in the future. 71 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Market Risk The fair value of our assets and liabilities are subject to market risk, primarily interest rate, credit risk, and equity price risk related to our investment portfolio as well as fluctuations in the value of our alternative investment portfolio. The allocation of our portfolio was 91% fixed income securities, 4% equity securities, 4% short-term investments, and 1% other investments as of December 31, 2015. We do not hold derivative or commodity investments. Foreign investments are made on a limited basis, and all fixed income transactions are denominated in U.S. currency. We have minimal foreign currency fluctuation risk on certain equity securities. For a discussion of our investment objective and philosophy, see the "Investments" section of Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." of this Form 10-K. We manage our investment portfolio to mitigate risks associated with various financial market scenarios. We will, however, take prudent risk to enhance our overall long-term results while managing a conservative, well-diversified investment portfolio to support our underwriting activities. Interest Rate Risk Investment Portfolio We invest in interest rate-sensitive securities, mainly fixed income securities. Our fixed income securities portfolio is comprised of primarily investment grade (investments receiving S&P or an equivalent rating of BBB- or above) corporate securities, U.S. government and agency securities, municipal obligations, and MBS. Our strategy to manage interest rate risk is to purchase intermediate-term fixed income investments that are attractively priced in relation to perceived credit risks. Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates. As our fixed income securities portfolio contains interest rate-sensitive instruments, it may be adversely affected by changes in interest rates resulting from governmental monetary policies, domestic and international economic and political conditions, and other factors beyond our control. A rise in interest rates will decrease the fair value of our existing fixed income investments and a decline in interest rates will result in an increase in the fair value of our existing fixed income investments. However, new and reinvested money used to purchase fixed income securities would benefit from rising interest rates and would be negatively impacted by falling interest rates. During 2015, interest rates on the 10-year U.S. Treasury Note rose by 10 basis points. This increase in interest rates contributed to the decrease in the unrealized gain position on our fixed income securities portfolio. The reduction in the unrealized gain 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. If interest rates continue to rise further, it is reasonable to expect continued downward pressure on the fair market values within our fixed income securities portfolio. We seek to mitigate our interest rate risk associated with holding fixed income investments by monitoring and maintaining the average duration of our portfolio with a view toward achieving an adequate after-tax return without subjecting the portfolio to an unreasonable level of interest rate risk. The fixed income securities portfolio duration at December 31, 2015 remained stable at 3.7 years, including short-term investments, compared to a year ago. The current duration is within our historical range, and is monitored and managed to maximize yield while managing interest rate risk at an acceptable level. The Insurance Subsidiaries’ liability duration is approximately 4.3 years. We use an interest rate sensitivity analysis to measure the potential loss or gain in future earnings, fair values, or cash flows of market sensitive fixed income securities. The sensitivity analysis hypothetically assumes an instant parallel 200 basis point shift in interest rates up and down in 100 basis point increments from the date of the Financial Statements. We use fair values to measure the potential loss. This analysis is not intended to provide a precise forecast of the effect of changes in market interest rates and equity prices on our income or stockholders’ equity. Further, the calculations do not take into account any actions we may take in response to market fluctuations. 72 The following table presents the sensitivity analysis of interest rate risk as of December 31, 2015: ($ in thousands) HTM fixed income securities Fair value of HTM fixed income securities portfolio Fair value change Fair value change from base (%) AFS fixed income securities Fair value of AFS fixed income securities portfolio Fair value change $ $ 2015 Interest Rate Shift in Basis Points 1-200 -100 0 100 200 n/m n/m n/m 211,985 2,441 1.16 % 209,544 206,672 (2,872 ) (1.37 )% 203,836 (5,708) (2.72)% n/m n/m n/m 4,574,590 166,387 3.77 % 4,408,203 4,244,495 (163,708 ) 4,090,755 (317,448) Fair value change from base (%) 1 Given the low interest rate environment, an interest rate decline of 200 basis points is deemed unreasonable for certain securities in our portfolio, as the decline would generate a zero or negative yield, therefore this interest rate decline for purposes of the sensitivity analysis is not meaningful ("n/m"). (3.71 )% (7.20)% Pension and Post-Retirement Benefit Plan Obligation Our pension and post-retirement benefit obligations and related costs are calculated using actuarial methods within the framework of U.S. GAAP. The discount rate assumption is an important element of expense and/or liability measurement. Changes in the discount rate assumption could materially impact our pension and post-retirement life valuation in the future. For additional information regarding our discount rate selection, refer to Note 14. "Retirement Plans" in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. Credit Risk Our most significant credit risk is within our fixed income security portfolio, which had an overall credit quality of “AA-” as of December 31, 2015 and December 31, 2014. Exposure to non-investment grade bonds represented approximately 1% of the total fixed income securities portfolio at both dates. The following table summarizes the fair value, carry value, net unrealized/unrecognized gain (loss) balances, and the weighted average credit qualities of our fixed income securities at December 31, 2015 and December 31, 2014: December 31, 2015 ($ in thousands) U.S. government obligations Foreign government obligations State and municipal obligations Corporate securities ABS CMBS RMBS Total fixed income portfolio December 31, 2014 ($ in thousands) U.S. government obligations Foreign government obligations State and municipal obligations Corporate securities ABS CMBS RMBS Total fixed income portfolio Fair Value Carry Value Unrealized/ Unrecognized Gain (Loss) 104.1 15.2 1,541.0 1,922.2 245.2 248.2 541.8 4,617.7 104.1 15.2 1,535.3 1,920.2 245.1 247.9 541.8 4,609.6 4.6 0.3 51.0 9.7 (0.4 ) (1.6 ) 0.6 64.2 Fair Value Carry Value Unrealized/ Unrecognized Gain (Loss) 124.1 33.2 1,545.4 1,821.2 180.1 184.8 511.3 4,400.1 124.1 33.1 1,533.7 1,818.4 179.6 184.0 511.3 4,384.2 7.4 0.9 51.3 38.9 0.4 2.0 6.2 107.1 $ $ $ $ Weighted Average Credit Quality AA+ AA- AA A- AAA AAA AA+ AA- Weighted Average Credit Quality AA+ AA- AA A- AAA AA+ AA+ AA- 73 State and Municipal Obligations The following table details the top 10 state exposures of the municipal bond portion of our fixed income portfolio at December 31, 2015: State Exposures of Municipal Bonds ($ in thousands) New York Washington Texas1 California Florida Virginia Arizona Ohio Massachusetts Colorado Other Pre-refunded/escrowed to maturity bonds Total Special Revenue % of Total $ General Obligation Local State 15,796 35,434 41,495 14,749 — 31,509 11,723 8,344 — 25,402 151,900 336,352 40,151 $ 376,503 — 13,319 5,860 12,946 15,212 10,188 1,002 16,249 9,123 4,756 143,852 232,507 10,865 243,372 Fair Value 131,387 115,591 98,834 50,081 92,536 45,181 91,131 63,436 77,847 62,635 61,898 20,201 55,626 42,901 48,214 23,621 48,126 39,003 45,621 15,463 632,669 336,917 815,030 1,383,889 106,117 157,133 921,147 1,541,022 Weighted Average Credit Quality AA+ AA+ AA+ AA AA AA+ AA+ AA+ AA+ AA- AA AA AA AA 9% 6% 6% 6% 5% 4% 4% 3% 3% 3% 41% 90% 10% 100% % of Total Municipal Portfolio 1 Of the $41 million in local Texas general obligation bonds, $16 million represents investments in Texas Permanent School Fund bonds, which are considered to have lower risk as a result of the bond guarantees program that supports these bonds. 100 % 16 % 24 % 60 % Special revenue fixed income securities of municipalities (referred to as “special revenue bonds”) generally do not have the “full faith and credit” backing of the municipal or state governments, as do general obligation bonds, but special revenue bonds have a dedicated revenue stream for repayment. For our special revenue bonds, 95% of the dedicated revenue stream is comprised of the following: (i) essential services (63%), which is comprised of transportation, water and sewer, and electric; (ii) education (20%), which includes school districts and higher education, including state-wide university systems; and (iii) special tax (12%), which are backed by a dedicated lien on a tax or other revenue repayment source. As such, we believe our special revenue bond portfolio is appropriate for the current environment. A portion of our municipal bonds also contain insurance enhancements. The following table provides information regarding these insurance-enhanced securities as of December 31, 2015: Insurers of Municipal Bond Securities ($ in thousands) National Public Finance Guarantee Corporation, a subsidiary of MBIA, Inc. Assured Guaranty Ambac Financial Group, Inc. Other Total Fair Value 107,094 70,630 22,155 6,384 206,263 $ $ Ratings with Insurance AA- AA AA- AA+ AA- Ratings without Insurance AA- AA- AA- AA- AA- Corporate Securities For investment-grade corporate bonds, we address the risk of an individual issuers' default by maintaining a diverse portfolio of holdings. The primary risk related to non-investment grade corporate bonds is credit risk. A weak financial profile can lead to rating downgrades from the credit rating agencies, which can put further downward pressure on bond prices. Valuations on these bonds are related more directly to underlying operating performance than to general interest rates. Our holdings of non- investment grade corporate bonds represent less than 1% of our overall investment portfolio. 74 The tables below provide details on our corporate bond holdings at December 31, 2015 and December 31, 2014: December 31, 2015 ($ in thousands) Investment grade Non-Investment grade Total corporate securities December 31, 2014 ($ in thousands) Investment grade Non-Investment grade Total corporate securities Fair Value Carry Value 1,901.6 20.6 1,922.2 1,899.6 20.6 1,920.2 Unrealized/ Unrecognized Gain (Loss) 9.8 (0.2) 9.6 Fair Value Carry Value 1,793.8 27.5 1,821.3 1,791.0 27.5 1,818.5 Unrealized/ Unrecognized Gain (Loss) 39.6 (0.7) 38.9 $ $ $ $ Weighted Average Credit Quality A- BB A- Weighted Average Credit Quality A- BB A- Structured Securities To manage and mitigate exposure on our MBS portfolio (CMBS and RMBS), we perform analysis both at the time of purchase and as part of the ongoing portfolio evaluation. This analysis includes review of loan-to-value ratios, geographic spread of the assets securing the bond, delinquencies in payments for the underlying mortgages, gains/losses on sales, evaluations of projected cash flows, as well as other information that aids in determination of the health of the underlying assets. We consider the overall credit environment, economic conditions, total projected return on the investment, and overall asset allocation of the portfolio in our decisions to purchase or sell structured securities. Equity Price Risk Our equity securities portfolio is exposed to risk arising from potential volatility in equity market prices. We attempt to minimize the exposure to equity price risk by maintaining a diversified portfolio and limiting concentrations in any one company or industry. The following table presents the hypothetical increases and decreases in 10% increments in market value of the equity portfolio as of December 31, 2015: ($ in thousands) Fair value of AFS equity portfolio $ Fair value change (30)% 144,936 (62,115 ) (20)% 165,641 (41,410 ) Change in Equity Values in Percent 10% 0% (10)% 227,756 186,346 207,051 20,705 (20,705 ) 20% 248,461 41,410 30% 269,166 62,115 In addition to our equity securities, we invest in certain other investments that are also subject to price risk. Our other investments primarily include alternative investments in private limited partnerships that invest in various strategies such as private equity, energy/power generation, mezzanine debt, distressed debt, and real estate. As of December 31, 2015, other investments represented 1% of our total invested assets and 6% of our stockholders’ equity. These investments are subject to the risks arising from the fact that their valuation is inherently subjective. The general partner of each of these partnerships usually reports the change in the value of the interests in the partnership on a one quarter lag because of the nature of the underlying assets or liabilities. Since these partnerships' underlying investments consist primarily of assets or liabilities for which there are no quoted prices in active markets for the same or similar assets, the valuation of interests in these partnerships are subject to a higher level of subjectivity and unobservable inputs than substantially all of our other investments. Each of these general partners is required to determine the partnerships' value by the price obtainable for the sale of the interest at the time of determination. Valuations based on unobservable inputs are subject to greater scrutiny and reconsideration from one reporting period to the next and therefore, may be subject to significant fluctuations, which could lead to significant decreases from one reporting period to the next. As we record our investments in these various partnerships under the equity method of accounting, any decreases in the valuation of these investments would negatively impact our results of operations. For additional information regarding these alternative investment strategies, see Note 5. “Investments” in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. 75 Indebtedness (a) Long-Term Debt As of December 31, 2015, we had outstanding long-term debt of $388.2 million that matures as shown in the following table: ($ in thousands) Financial liabilities Notes payable 0.63% borrowings from FHLBI 1.25% borrowings from FHLBI 7.25% Senior Notes 6.70% Senior Notes 5.875% Senior Notes Subtotal Unamortized debt issuance costs Total notes payable Year of Maturity Carrying Amount Fair Value 2015 2016 2016 2034 2035 2043 $ $ 15,000 45,000 49,898 99,415 185,000 394,313 (6,121 ) 388,192 14,977 45,083 56,929 110,363 192,474 419,826 The weighted average effective interest rate for our outstanding long-term debt is 5.5%. Our debt is not exposed to material changes in interest rates because the interest rates are fixed. Certain of the debt instruments listed above contain debt covenant provisions as outlined in Note 10. "Indebtedness", within Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. In addition, the 6.70% and 7.25% Senior Notes contain standard default cross-acceleration provisions. In the event that any other debt experiences default of $10 million or more, it would be considered an event of default under these notes. (b) Short-Term Debt Our Line of Credit with Wells Fargo Bank, National Association, as administrative agent, and Branch Banking and Trust Company (BB&T), was renewed effective December 1, 2015 with a borrowing capacity of $30 million, which can be increased to $50 million with the approval of both lending partners. Our previous Line of Credit, which was in place from September 26, 2013 until December 1, 2015 had the same banking partners and similar terms and conditions as our current facility. The Line of Credit provides the Parent with an additional source of short-term liquidity. The interest rate on our Line of Credit varies and is based on, among other factors, the Parent’s debt ratings. The Line of Credit expires on December 1, 2020. There were no balances outstanding under this Line of Credit or the previous credit facility at December 31, 2015 or at any time during 2015. 76 Item 8. Financial Statements and Supplementary Data. Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Selective Insurance Group, Inc.: We have audited the accompanying consolidated balance sheets of Selective Insurance Group, Inc. and its subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flow for each of the years in the three-year period ended December 31, 2015. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedules I to V. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Selective Insurance Group, Inc. and its subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Selective Insurance Group, Inc. and its subsidiaries' internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 24, 2016, expressed an unqualified opinion of the Company’s internal controls over financial reporting. /s/ KPMG LLP New York, New York February 24, 2016 77 Consolidated Balance Sheets December 31, ($ in thousands, except share amounts) ASSETS Investments: Fixed income securities, held-to-maturity – at carrying value (fair value: $209,544 – 2015; $333,961 – 2014) Fixed income securities, available-for-sale – at fair value (amortized cost: $4,352,514 – 2015; $3,975,786 – 2014) Equity securities, available-for-sale – at fair value (cost: $193,816 – 2015; $159,011 – 2014) Short-term investments (at cost which approximates fair value) Other investments Total investments (Note 5) Cash Interest and dividends due or accrued Premiums receivable, net of allowance for uncollectible accounts of: $4,422 – 2015; $4,137 – 2014 Reinsurance recoverable, net (Note 8) Prepaid reinsurance premiums (Note 8) Deferred federal income tax (Note 13) Property and equipment – at cost, net of accumulated depreciation and amortization of: $188,548 – 2015; $172,183 – 2014 Deferred policy acquisition costs (Note 2) Goodwill (Note 11) Other assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities: Reserve for losses and loss expenses (Note 9) Unearned premiums Notes payable (Note 10) Current federal income tax (Note 13) Accrued salaries and benefits Other liabilities Total liabilities 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: 100,861,372 – 2015; 99,947,933 – 2014 Additional paid-in capital Retained earnings Accumulated other comprehensive (loss) income (Note 6) Treasury stock – at cost (shares: 43,500,642 – 2015; 43,353,181 – 2014) Total stockholders’ equity Commitments and contingencies (Notes 17 and 18) Total liabilities and stockholders’ equity See accompanying Notes to Consolidated Financial Statements. 78 2015 2014 $ 201,354 318,137 4,408,203 4,066,122 207,051 194,819 77,842 5,089,269 898 38,501 615,164 561,968 140,889 92,696 65,701 213,159 7,849 78,339 6,904,433 3,517,728 1,169,710 388,192 7,442 167,336 255,984 5,506,392 191,400 131,972 99,203 4,806,834 23,959 38,901 558,778 581,548 146,993 98,449 59,416 185,608 7,849 66,607 6,574,942 3,477,870 1,095,819 372,689 3,921 158,382 190,675 5,299,356 — — 201,723 326,656 1,446,192 (9,425 ) (567,105 ) 1,398,041 199,896 305,385 1,313,440 19,788 (562,923) 1,275,586 $ $ $ $ $ 6,904,433 6,574,942 Consolidated Statements of Income December 31, ($ in thousands, except per share amounts) Revenues: Net premiums earned Net investment income earned Net realized gains: Net realized investment gains Other-than-temporary impairments Other-than-temporary impairments on fixed income securities recognized in other comprehensive income Total net realized gains Other income Total revenues Expenses: Losses and loss expenses incurred Policy acquisition costs Interest expense Other expenses Total expenses 2015 2014 2013 $ 1,989,909 121,316 31,537 (18,366 ) — 13,171 7,456 2,131,852 1,148,541 689,820 22,428 38,371 1,899,160 1,852,609 138,708 37,703 (11,104 ) — 26,599 16,945 2,034,861 1,157,501 624,470 23,063 32,696 1,837,730 1,736,072 134,643 26,375 (5,566 ) (77 ) 20,732 12,294 1,903,741 1,121,738 579,977 26,361 31,863 1,759,939 Income from continuing operations, before federal income tax 232,692 197,131 143,802 Federal income tax expense: Current Deferred Total federal income tax expense Net income from continuing operations 45,347 21,484 66,831 28,415 26,889 55,304 24,147 12,240 36,387 165,861 141,827 107,415 Loss on disposal of discontinued operations, net of tax of $(538) – 2013 — — (997 ) Net income Earnings per share: Basic net income from continuing operations Basic net loss from discontinued operations Basic net income Diluted net income from continuing operations Diluted net loss from discontinued operations Diluted net income Dividends to stockholders See accompanying Notes to Consolidated Financial Statements. $ $ $ $ $ $ 165,861 141,827 106,418 2.90 — 2.90 2.85 — 2.85 0.57 2.52 — 2.52 2.47 — 2.47 0.53 1.93 (0.02 ) 1.91 1.89 (0.02 ) 1.87 0.52 79 Consolidated Statements of Comprehensive Income December 31, ($ in thousands) Net income Other comprehensive loss, net of tax: Unrealized (losses) gains on investment securities: Unrealized holding (losses) gains arising during year Non-credit portion of other-than-temporary impairments recognized in other comprehensive income Amount reclassified into net income: Held-to-maturity securities Non-credit other-than-temporary impairment Realized gains on available for sale securities Total unrealized (losses) gains on investment securities Defined benefit pension and post-retirement plans: Net actuarial gain (loss) Amounts reclassified into net income: Net actuarial loss Prior service cost Curtailment expense Total defined benefit pension and post-retirement plans Other comprehensive loss Comprehensive income See accompanying Notes to Consolidated Financial Statements. 2015 165,861 $ 2014 141,827 2013 106,418 (26,143 ) — 47,411 — (54,557 ) 50 (377 ) 232 (9,110 ) (35,398 ) (844 ) 1,085 (18,762 ) 28,890 (1,025 ) 9 (15,301 ) (70,824 ) 1,585 (35,189 ) 38,775 4,600 — — 6,185 (29,213 ) 136,648 1,236 — — (33,953 ) (5,063 ) 136,764 $ 2,843 6 11 41,635 (29,189 ) 77,229 80 Consolidated Statements of Stockholders’ Equity December 31, ($ in thousands, except share amounts) Common stock: Beginning of year Dividend reinvestment plan (shares: 50,013 – 2015; 58,309 – 2014; 63,349 – 2013) Stock purchase and compensation plans (shares: 863,426 – 2015; 769,389 – 2014; 862,662 – 2013) End of year Additional paid-in capital: Beginning of year Dividend reinvestment plan Stock purchase and compensation plans End of year Retained earnings: Beginning of year Net income Dividends to stockholders ($0.57 per share – 2015; $0.53 per share – 2014; $0.52 per share – 2013) End of year Accumulated other comprehensive (loss) income: Beginning of year Other comprehensive loss End of year Treasury stock: Beginning of year Acquisition of treasury stock (shares: 147,461 – 2015; 154,559 – 2014; 167,846 – 2013) End of year Total stockholders’ equity 2015 2014 2013 $ 199,896 198,240 196,388 100 117 127 1,727 201,723 1,539 199,896 1,725 198,240 305,385 1,374 19,897 326,656 288,182 1,306 15,897 305,385 270,654 1,396 16,132 288,182 1,313,440 165,861 (33,109 ) 1,446,192 1,202,015 141,827 (30,402 ) 1,313,440 1,125,154 106,418 (29,557) 1,202,015 19,788 (29,213 ) (9,425 ) 24,851 (5,063 ) 19,788 54,040 (29,189) 24,851 (562,923 ) (559,360 ) (555,644) (4,182 ) (567,105 ) 1,398,041 $ (3,563 ) (562,923 ) 1,275,586 (3,716) (559,360) 1,153,928 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. See accompanying Notes to Consolidated Financial Statements. 81 Consolidated Statements of Cash Flow December 31, ($ in thousands) Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Sale of renewal rights Loss on disposal of discontinued operations Stock-based compensation expense Undistributed losses (gains) of equity method investments Net realized gains Net gain on disposal of property and equipment Retirement income plan curtailment expense Changes in assets and liabilities: Increase in reserves for losses and loss expenses, net of reinsurance recoverables Increase in unearned premiums, net of prepaid reinsurance Decrease in net federal income taxes Increase in premiums receivable Increase in deferred policy acquisition costs Decrease (increase) in interest and dividends due or accrued Increase (decrease) in accrued salaries and benefits Increase (decrease) in accrued insurance expenses Increase (decrease) in other assets and other liabilities Net adjustments Net cash provided by operating activities Investing Activities Purchase of fixed income securities, held-to-maturity Purchase of fixed income securities, available-for-sale Purchase of equity securities, available-for-sale Purchase of other investments Purchase of short-term investments Sale of subsidiary Sale of fixed income securities, available-for-sale Sale of short-term investments Redemption and maturities of fixed income securities, held-to-maturity Redemption and maturities of fixed income securities, available-for-sale Sale of equity securities, available-for-sale Distributions from other investments Purchase of property and equipment Sale of renewal rights Net cash used in investing activities Financing Activities Dividends to stockholders Acquisition of treasury stock Net proceeds from stock purchase and compensation plans Proceeds from issuance of notes payable, net of debt issuance costs Proceeds from borrowings Repayment of borrowings Repayment of notes payable Excess tax benefits from share-based payment arrangements Repayment of capital lease obligations Net cash (used in) provided by financing activities Net (decrease) increase in cash Cash, beginning of year Cash, end of year See accompanying Notes to Consolidated Financial Statements. $ 82 2015 2014 2013 $ 165,861 141,827 106,418 59,688 — — 8,973 1,889 (13,171 ) — — 59,438 79,995 25,004 (56,386 ) (27,551 ) 407 11,392 23,342 42,699 215,719 381,580 (3,316 ) (1,041,916 ) (195,720 ) (12,170 ) (1,602,327 ) — 61,571 1,539,480 106,621 567,445 172,561 32,457 (16,229 ) — (391,543 ) (31,052 ) (4,182 ) 10,089 — 15,000 — — 1,736 (4,689 ) (13,098 ) (23,061 ) 23,959 898 45,346 (8,000 ) — 8,702 (153 ) (26,599 ) (104 ) — 97,449 32,671 31,323 (33,908 ) (12,627 ) (1,536 ) (7,182 ) (956 ) (33,490 ) 90,936 232,763 — (843,616 ) (186,019 ) (10,617 ) (1,410,123 ) — 51,002 1,452,402 73,415 482,816 208,008 20,774 (15,510 ) 8,000 (169,468 ) (28,428 ) (3,563 ) 7,283 — — (13,000 ) — 1,020 (2,841 ) (39,529 ) 23,766 193 23,959 43,461 — 997 8,630 202 (20,732) — 16 151,037 74,086 14,834 (40,482) (17,458) (1,372) 18,685 14,444 (16,642) 229,706 336,124 — (1,069,387) (118,072) (9,332) (2,056,576) 1,225 20,126 2,096,805 116,584 513,804 115,782 12,039 (14,023) — (391,025) (27,416) (3,716) 7,119 178,435 — — (100,000) 1,545 (1,083) 54,884 (17) 210 193 Notes to Consolidated Financial Statements Note 1. Organization Selective Insurance Group, Inc., through its subsidiaries, (collectively referred to as “we,” “us,” or “our”) offers standard commercial, standard personal, 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 have provided a glossary of terms as Exhibit 99.1 to this Form 10-K, which defines certain industry- specific and other terms that are used in this Form 10-K. We classify our business into four reportable segments: • Standard Commercial Lines - comprised of insurance products and services provided in the standard marketplace to our commercial customers, who are typically businesses, non-profit organizations, and local government agencies. • Standard Personal Lines - comprised of insurance products and services, including flood insurance coverage, provided primarily to individuals acquiring coverage in the standard marketplace. • E&S Lines - comprised of insurance products and services provided to customers who have not obtained coverage in the standard marketplace. • Investments - invests the premiums collected by our insurance operations, as well as amounts generated through our capital management strategies, which may include the issuance of debt and equity securities. Note 2. Summary of Significant Accounting Policies (a) Principles of Consolidation The accompanying 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”). All significant intercompany accounts and transactions are eliminated in consolidation. (b) Use of Estimates The preparation of our Financial Statements in conformity with GAAP requires management 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. (c) Reclassifications Certain amounts in our prior years' Financial Statements and related notes have been reclassified to conform to the 2015 presentation. Such reclassifications had no effect on our net income, stockholders' equity, or cash flows. (d) Investments Fixed income securities may include bonds, redeemable preferred stocks, mortgage-backed securities (“MBS”) and asset- backed securities (“ABS”). MBS and ABS are jointly referred to as structured securities. Fixed income securities classified as available-for-sale (“AFS”) are reported at fair value. Those fixed income securities that we have the ability and positive intent to hold to maturity are classified as held-to-maturity (“HTM”) and are carried at either: (i) amortized cost; or (ii) market value at the date of transfer into the HTM category, adjusted for subsequent amortization. The amortized cost of fixed income securities is adjusted for the amortization of premiums and the accretion of discounts over the expected life of the security using the effective yield method. Premiums and discounts arising from the purchase of structured securities are amortized over the expected life of the security based on future principal payments, and considering prepayments. These prepayments are estimated based on historical and projected cash flows. Prepayment assumptions are reviewed quarterly and adjusted to reflect actual prepayments and changes in expectations. Future amortization of any premium and/or discount is adjusted to reflect the revised assumptions. Interest income, as well as amortization and accretion, is included in "Net investment income earned" on our Consolidated Statements of Income. The amortized cost of fixed income securities is written down to fair value when a decline in value is considered to be other than temporary. See the discussion below on realized investment gains and losses for a description of the accounting for impairments. After-tax unrealized gains and losses on: (i) fixed income securities classified as AFS; and (ii) fixed income securities that were transferred into an HTM designation from an AFS designation, are included in accumulated other comprehensive income (loss) ("AOCI"). 83 Equity securities, which are classified as AFS, may include common stocks and non-redeemable preferred stocks, and are carried at fair value. Dividend income on these securities is included in "Net investment income earned" on our Consolidated Statements of Income. The associated unrealized gains and losses, net of tax, are included in AOCI. The cost of equity securities is written down to fair value when a decline in value is considered to be other than temporary. See the discussion below on realized investment gains and losses for a description of the accounting for impairments. Short-term investments may include certain money market instruments, savings accounts, commercial paper, and other debt issues purchased with a maturity of less than one year. These investments are carried at cost, which approximates fair value. The associated income is included in "Net investment income earned" on our Consolidated Statement of Income. Other investments may include alternative investments and other securities. Alternative investments are accounted for using the equity method. Our share of distributed and undistributed net income from alternative investments is included in "Net investment income earned" on our Consolidated Statement of Income. Other securities are primarily comprised of tax credit investments. Low income housing tax credits are accounted for under the proportional amortization method and all other tax credits are accounted for using the equity method. Under the proportional amortization method, our share of the investment’s performance is recorded in our Consolidated Statement of Income as a component of “Federal income tax expense.” Under the equity method, our share of distributed and undistributed net income is included in "Net investment income earned" on our Consolidated Statement of Income. Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold and are credited or charged to income. Included in realized gains and losses are the other-than-temporary impairment ("OTTI") charges recognized in earnings, which are discussed below. When the fair value of any investment is lower than its cost/amortized cost, an assessment is made to determine if the decline is other than temporary. We regularly review our entire investment portfolio for declines in fair value. If we believe that a decline in the value of an AFS security is temporary, we record the decline as an unrealized loss in AOCI. Temporary declines in the value of an HTM security are not recognized in the Financial Statements. Our assessment of a decline in fair value includes judgment as to the financial position and future prospects of the entity that issued the investment security, as well as a review of the security’s underlying collateral for fixed income investments. Broad changes in the overall market or interest rate environment generally will not lead to a write-down. Fixed Income Securities and Short-Term Investments Our evaluation for OTTI of a fixed income security or a short-term investment may include, but is not limited to, the evaluation of the following factors: • Whether the decline appears to be issuer or industry specific; • The degree to which the issuer is current or in arrears in making principal and interest payments on the fixed income security; • The issuer’s current financial condition and ability to make future scheduled principal and interest payments on a timely basis; • Evaluation of projected cash flows; • Buy/hold/sell recommendations published by outside investment advisors and analysts; and • Relevant rating history, analysis, and guidance provided by rating agencies and analysts. OTTI charges are recognized as a realized loss to the extent that they are credit related, unless we have the intent to sell the security or it is more-likely-than not that we will be required to sell the security. In those circumstances, the security is written down to fair value with the entire amount of the writedown charged to earnings as a component of realized losses. To determine if an impairment is other than temporary, we compare the present value of cash flows expected to be collected with the amortized cost of fixed income securities meeting certain criteria. In addition, this analysis is performed on all previously-impaired debt securities that continue to be held by us and all structured securities that were not of high-credit quality at the date of purchase. These impairment assessments may include, but are not limited to, discounted cash flow analyses ("DCFs"). For structured securities, including commercial mortgage-backed securities ("CMBS"), residential mortgage-backed securities ("RMBS"), ABS, and collateralized debt obligations ("CDOs"), we also consider variables such as expected default, severity, and prepayment assumptions based on security type and vintage, taking into consideration information from credit agencies, historical performance, and other relevant economic and performance factors. 84 In making our assessment, we perform a DCF to determine the present value of future cash flows to be generated by the underlying collateral of the security. Any shortfall in the expected present value of the future cash flows, based on the DCF, from the amortized cost basis of a security is considered a “credit impairment,” with the remaining decline in fair value of a security considered as a “non-credit impairment.” As mentioned above, credit impairments are charged to earnings as a component of realized losses, while non-credit impairments are recorded to Other Comprehensive Income ("OCI") as a component of unrealized losses. Discounted Cash Flow Assumptions The discount rate we use in a DCF is the effective interest rate implicit in the security at the date of acquisition for those structured securities that were not of high-credit quality at acquisition. For all other securities, we use a discount rate that equals the current yield, excluding the impact of previous OTTI charges, used to accrete the beneficial interest. If applicable, we use a conditional default rate assumption in the DCF to estimate future defaults. The conditional default rate is the proportion of all loans outstanding in a security at the beginning of a time period that are expected to default during that period. Our assumption of this rate takes into consideration the uncertainty of future defaults as well as whether or not these securities have experienced significant cumulative losses or delinquencies to date. If applicable, conditional default rate assumptions apply at the total collateral pool level held in the securitization trust. Generally, collateral conditional default rates will “ramp-up” over time as the collateral seasons, because the performance begins to weaken and losses begin to surface. As time passes, depending on the collateral type and vintage, losses will peak and performance will begin to improve as weaker borrowers are removed from the pool through delinquency resolutions. In the later years of a collateral pool’s life, performance is generally materially better as the resulting favorable selection of the portfolio improves the overall quality and performance. For CMBS, we also consider the net operating income (“NOI”) generated by the underlying properties. Our assumptions of the properties’ ultimate cash flows take into consideration both an immediate reduction to the reported NOIs and decreases to projected NOIs. If applicable, we use a loan loss severity assumption in our DCF that is applied at the loan level of the collateral pool. The loan loss severity assumptions represent the estimated percentage loss on the loan-to-value exposure for a particular security. For CMBS, the loan loss severities applied are based on property type. Losses generated from the evaluations are then applied to the entire underlying deal structure in accordance with the original service agreements. Equity Securities Evaluation for OTTI of an equity security may include, but is not limited to, an evaluation of the following factors: • Whether the decline appears to be issuer or industry specific; • The relationship of market prices per share to book value per share at the date of acquisition and date of evaluation; • The price-earnings ratio at the time of acquisition and date of evaluation; • The financial condition and near-term prospects of the issuer, including any specific events that may influence the issuer's operations, coupled with our intention to hold the securities in the near-term; • The recent income or loss of the issuer; • The independent auditors' report on the issuer's recent financial statements; • The dividend policy of the issuer at the date of acquisition and the date of evaluation; • Buy/hold/sell recommendations or price projections published by outside investment advisors; • Rating agency announcements; • The length of time and the extent to which the fair value has been, or is expected to be, less than its cost in the near term; and • Our expectation of when the cost of the security will be recovered. If there is a decline in the fair value on an equity security that we do not intend to hold, or if we determine the decline is other- than-temporary, including declines driven by market volatility for which we cannot assert will recover in the near term, we will write down the carrying value of the investment and record the charge through earnings as a component of realized losses. 85 Other Investments Our evaluation for OTTI of an other investment (i.e., an alternative investment) may include, but is not limited to, conversations with the management of the alternative investment concerning the following: • The current investment strategy; • Changes made or future changes to be made to the investment strategy; • Emerging issues that may affect the success of the strategy; and • The appropriateness of the valuation methodology used regarding the underlying investments. If there is a decline in the fair market value of an other investment that we do not intend to hold, or if we determine the decline is other than temporary, we write down the carry value of the investment and record the charge through earnings as a component of realized losses. (e) Fair Values of Financial Instruments Assets The fair values of our investments are generated using various valuation techniques and are placed into the fair value hierarchy considering the following: (i) the highest priority is given to quoted prices in active markets for identical assets (Level 1); (ii) the next highest priority is given to quoted prices in markets that are not active or inputs that are observable either directly or indirectly, including quoted prices for similar assets in markets that are not active and other inputs that can be derived principally from, or corroborated by, observable market data for substantially the full term of the assets (Level 2); and (iii) the lowest priority is given to unobservable inputs supported by little or no market activity and that reflect our assumptions about the exit price, including assumptions that market participants would use in pricing the asset (Level 3). An asset’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. Transfers between levels in the fair value hierarchy are recognized at the end of the reporting period. The techniques used to value our financial assets are as follows: Level 1 Pricing Security Type Equity Securities; U.S. Treasury Notes Short-Term Investments Methodology Equity and U.S. Treasury Note prices are received from an independent pricing service that are based on observable market transactions. We validate these prices against a second external pricing service, and if established market value comparison thresholds are breached, further analysis is performed, in conjunction with our external investment managers, to determine the price to be used. Short-term investments are carried at cost, which approximates fair value. Given the liquid nature of our short-term investments, we generally validate their fair value by way of active trades within approximately one week of the financial statement close. Level 2 Pricing We utilize a market approach for our Level 2 securities, using primarily matrix pricing models prepared by external pricing services. Matrix pricing models use mathematical techniques to value debt securities by relying on the securities relationship to other benchmark quoted securities, and not relying exclusively on quoted prices for specific securities, as the specific securities are not always frequently traded. As a matter of policy, we consistently use one pricing service as our primary source and secondary pricing services if prices are not available from the primary pricing service. In conjunction with our external investment portfolio managers, fixed income securities portfolio pricing is reviewed for reasonableness in the following ways: (i) comparing our pricing to other third-party pricing services as well as benchmark indexed pricing; (ii) comparing positions traded directly by the external investment portfolio managers to prices received from the third-party pricing services; (iii) comparing market value fluctuations between months for reasonableness; and (iv) reviewing stale prices. If further analysis is needed, a challenge is sent to the pricing service for review and confirmation of the price. 86 Further information on our Level 2 asset pricing is included in the following table: Security Type Methodology Corporate Securities; U.S. Government and Government Agencies Obligations of States and Political Subdivisions Evaluations include obtaining relevant trade data, benchmark quotes and spreads and incorporating this information into either spread-based or price-based evaluations as determined by the observed market data. Spread-based evaluations include: (i) creating a range of spreads for relevant maturities of each issuer based on the new issue market, secondary trading, and dealer quotes; and (ii) incorporating option adjusted spreads for issues that have early redemption features. Based on the findings in (i) and (ii) above, final spreads are derived and added to benchmark curves. Price-based evaluations include matching each issue to its best-known market maker and contacting firms that transact in these securities. Evaluations are based on yield curves that are developed based on factors such as: (i) benchmarks to issues with interest rates near prevailing market rates; (ii) established trading spreads over widely-accepted market benchmarks; (iii) yields on new issues; and (iv) market information from third-party sources such as reportable trades, broker- dealers, or issuers. Structured Securities (including ABS, CMBS, RMBS) Evaluations are based on a discounted cash flow model, including: (i) generating cash flows for each tranche considering tranche-specific data, market data, and other pertinent information such as historical performance of the underlying collateral, including net operating income generated by the underlying properties, conditional default rate assumptions, loan loss severity assumptions, consensus projections, prepayment projections, and actual pool and loan level collateral information; (ii) identifying applicable benchmark yields; and (iii) applying market-based tranche-specific spreads to determine an appropriate yield by incorporating collateral performance, tranche-level attributes, trades, bids, and offers. Foreign Government Evaluations are performed using a discounted cash flow model and incorporating observed market yields of benchmarks as inputs, adjusting for varied maturities. Level 3 Pricing Less than 1% of our portfolio cannot be priced using our primary or secondary pricing service. At times, we may use non- binding broker quotes to value some of these securities. These prices are from various broker/dealers that use bid or ask prices, or benchmarks to indices, in measuring the fair value of a security. In conjunction with our external investment portfolio managers, these fair value measurements are reviewed for reasonableness. This review typically includes an analysis of price fluctuations between months with variances over established thresholds being analyzed further. Further information on our current Level 3 asset pricing is included in the following table: Security Type Corporate Securities Equity Securities Liabilities Methodology This tax credit investment is priced internally using spread-based evaluations. This non-publicly traded stock of the Federal Home Loan Bank is valued by the issuer. The techniques used to value our notes payable are as follows: Level 1 Pricing Security Type 5.875% Senior Notes Level 2 Pricing Security Type 7.25% Senior Notes; 6.70% Senior Notes Borrowings from Federal Home Loan Bank Based on the quoted market prices. Methodology Methodology Based on matrix pricing models prepared by external pricing services. Evaluations are performed using a DCF model based on a current borrowing rate provided by the Federal Home Loan Bank that is consistent with the remaining term of the borrowing. See Note 7. “Fair Value Measurements” for a summary table of the fair value and related carrying amounts of financial instruments. 87 (f) Allowance for Doubtful Accounts We estimate an allowance for doubtful accounts on our premiums receivable. This allowance is based on historical write-off percentages adjusted for the effects of current and anticipated trends. An account is charged off when we believe it is probable that we will not collect a receivable. In making this determination, we consider information obtained from our efforts to collect amounts due directly and/or through collection agencies. (g) Share-Based Compensation Share-based compensation consists of all share-based payment transactions in which an entity acquires goods or services by issuing (or offering to issue) its shares, share units, share options, or other equity instruments. The cost resulting from all share-based payment transactions are recognized in the Financial Statements based on the fair value of both equity and liability awards. The fair value is measured at grant date for equity awards, whereas the fair value for liability awards are remeasured at each reporting period. Both the fair value of equity and liability awards is recognized over the requisite service period. The requisite service period is typically the lesser of the vesting period or the period of time from the grant date to the date of retirement eligibility. The expense recognized for share-based awards, which, in some cases, contain performance criteria, is based on the number of shares or units expected to be issued at the end of the performance period. We repurchase the Parent’s stock from our employees in connections with, and as permitted under, our stock-based compensation plans. This activity is disclosed in our Consolidated Statements of Stockholders' Equity. (h) Reinsurance Reinsurance recoverables represent estimates of amounts that will be recovered from reinsurers under our various treaties. Generally, amounts recoverable from reinsurers are recognized as assets at the same time and in a manner consistent with the paid and unpaid losses associated with the reinsured policies. We require collateral to secure reinsurance recoverables primarily from our reinsurance carriers that are not authorized, otherwise approved, or certified to do business in our Insurance Subsidiaries’ domiciliary states. This collateral is typically in the form of a letter of credit or cash. An allowance for estimated uncollectible reinsurance is recorded based on an evaluation of balances due from reinsurers and other available information, such as each reinsurers' credit rating from A.M. Best Company ("A.M. Best") or Standard & Poor's Rating Services ("S&P"). We charge off reinsurance recoverables on paid losses when it becomes probable that we will not collect the balance. (i) Property and Equipment Property and equipment used in operations, including certain costs incurred to develop or obtain computer software for internal use, are capitalized and carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The following estimated useful lives can be considered as general guidelines: Asset Category Computer hardware Computer software Internally developed software Furniture and fixtures Buildings and improvements Years 3 3 to 5 5 to 10 10 5 to 40 We recorded depreciation expense of $16.4 million, $12.6 million, and $10.2 million for 2015, 2014 and 2013, respectively. (j) Deferred Policy Acquisition Costs Deferred policy acquisition costs are limited to costs directly related to the successful acquisition of insurance contracts. Costs meeting this definition typically include, among other things, sales commissions paid to our distribution partners, premium taxes, and the portion of employee salaries and benefits directly related to time spent on acquired contracts. These costs are deferred and amortized over the life of the contracts. Accounting guidance requires a premium deficiency analysis to be performed at the level an entity acquires, services, and measures the profitability of its insurance contracts. We currently perform three premium deficiency analyses for our insurance segments, consistent with our reportable segments of Standard Commercial Lines, Standard Personal Lines, and E&S Lines. A combined ratio of over 100% does not necessarily indicate a premium deficiency, as any year's combined ratio includes a portion of underwriting expenses that are expensed at policy inception and therefore are not covered by the remaining unearned premium. In addition, investment income is not contemplated in the combined ratio calculation. 88 There were no premium deficiencies for any of the reported years, as the sum of the anticipated losses and loss expenses, unamortized acquisition costs, policyholder dividends, and other expenses for each segment did not exceed that segment’s related unearned premium and anticipated investment income. The investment yields assumed in the premium deficiency assessment for each reporting period, which are based on our actual average investment yield before tax as of the September 30 calculation date, were 2.5% for 2015 and 3.0% for both 2014 and 2013. Deferred policy acquisition costs amortized to expense were $399.4 million for 2015, $364.3 million for 2014, and $331.8 million for 2013. (k) Goodwill Goodwill results from business acquisitions where the cost of assets and liabilities acquired exceeds the fair value of those assets and liabilities. A quantitative goodwill impairment analysis is performed if our quarterly qualitative analysis indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Goodwill is allocated to the reporting units for purposes of these analyses. (l) Reserves for Losses and Loss Expenses Reserves for losses and loss expenses are comprised of both case reserves on individual claims, and reserves for claims incurred but not reported ("IBNR"). Case reserves result from claims that have been reported to one or more of our ten insurance subsidiaries, which are collectively referred to as the "Insurance Subsidiaries," and are estimated at the amount of the expected ultimate payment. IBNR reserves are established at more aggregated levels than case basis reserves, and in addition to reserves on claims that have been incurred but not reported, they include provisions for future emergence on known claims, and as well as reopened claims. IBNR reserves are established based on the results of the Insurance Subsidiaries’ internal reserve analysis, supplemented with other internal and external information. The internal reserve analysis is performed quarterly, and relies upon generally accepted actuarial techniques. Such techniques assume that past experience, adjusted for the effects of current developments and anticipated trends, are an appropriate basis for predicting future events. While the reserve analysis is the primary basis for determining IBNR reserves, other internal and external factors are considered. Internal factors include: (i) supplemental data regarding claim reporting and settlement trends; (ii) exposure estimates for reported claims, along with recent development on those estimates with respect to individual large claims and the aggregate of all claims; (iii) the rate at which new large or complex claims are being reported; and (iv) additional trends observed by claims personnel or reported to them by defense counsel. External factors considered include: (i) legislative enactments; (ii) judicial decisions; (iii) legal developments in the determination of liability and the imposition of damages; and (iv) trends in general economic conditions, including the effects of inflation. Loss reserves are estimates, and as such, we also consider a range of possible loss and loss expense reserve estimates. This range is determined at the beginning of each year, and reflects the fact that there is no single precise method for estimating the required reserves, due to the many factors which may influence the amounts ultimately paid. Considering the reserve range along with all of the items described above, IBNR estimates are then established and recorded. The combination of the IBNR estimates along with the case reserve estimates on individual claims results in our total reserves for losses and loss expenses. These reserves are expected to be sufficient for settling all loss and loss reserve liabilities on unpaid claims, reflecting changes in the volume of business written, claims frequency and severity, the mix of business, claims processing, and other items that management expects to affect our ultimate settlement of losses and loss expenses. However, the ultimate claim settlements may be higher or lower than reserves established. As our experience emerges and other information develops, we revise our reserve estimates accordingly. The changes in these estimates, resulting from the continuous review process and the differences between estimates and ultimate payments, are reflected in the consolidated statements of income for the period in which such estimates are changed. The associated impacts may be material to the results of operations in future periods. We do not discount to present value that portion of our losses and loss expense reserves expected to be paid in future periods. Our loss and loss expense reserves implicitly include anticipated recoveries for salvage and subrogation claims. 89 (m) Revenue Recognition The Insurance Subsidiaries' net premiums written (“NPW”) include direct insurance policy writings, plus reinsurance assumed and estimates of premiums earned but unbilled on the workers compensation and general liability lines of insurance, less reinsurance ceded. The estimated premium on the workers compensation and general liability lines is referred to as audit premium. We estimate this premium, as it is anticipated to be either billed or returned on policies subsequent to expiration based on exposure levels (i.e. payroll or sales). Audit premium is based on historical trends adjusted for the uncertainty of future economic conditions. Economic instability could ultimately impact our estimates and assumptions, and changes in our estimate may be material to the results of operations in future periods. Premiums written are recognized as revenue over the period that coverage is provided using the semi-monthly pro-rata method. Unearned premiums and prepaid reinsurance premiums represent that portion of premiums written that are applicable to the unexpired terms of policies in force. (n) Dividends to Policyholders We establish reserves for dividends to policyholders on certain policies, most significantly workers compensation policies. These dividends are based on the policyholders' loss experience. The dividend reserves are established based on past experience, adjusted for the effects of current developments and anticipated trends. The expense for these dividends is recognized over a period that begins at policy inception and ends with the payment of the dividend. We do not issue policies that entitle the policyholder to participate in the earnings or surplus of our Insurance Subsidiaries. (o) Federal Income Tax We use the asset and liability method of accounting for income taxes. Current federal income taxes are recognized for the estimated taxes payable or refundable on tax returns for the current year. Deferred federal income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities. We consider all evidence, both positive and negative, with respect to our federal tax loss carryback availability, expected levels of pre-tax financial statement income, and federal taxable income, when evaluating whether the temporary differences will be realized. In projecting future taxable income, we begin with budgeted pre-tax income adjusted for estimated non-taxable items. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we use to manage our businesses. A valuation allowance is established when it is more likely than not that some portion of the deferred tax asset will not be realized. A liability for uncertain tax positions is recorded when it is more likely than not that a tax position will not be sustained upon examination by taxing authorities. The effect of a change in tax rates is recognized in the period of enactment. If we were to be levied interest and penalties by the Internal Revenue Service (“IRS”) the interest would be recognized as “Interest expense” and the penalties would be recognized as “Other expense” on the Consolidated Statements of Income. (p) Leases We have various operating leases for office space and equipment. Rental expense for such leases is recorded on a straight-line basis over the lease term. If a lease has a fixed and determinable escalation clause, or periods of rent holidays, the difference between rental expense and rent paid is included in "Other liabilities" as deferred rent in the Consolidated Balance Sheets. In addition, we have various capital leases for computer hardware and software. These leases are accounted for as an acquisition of an asset and an incurrence of an obligation. Depreciation is calculated using the straight-line method over the shorter of the estimated useful life of the asset or the lease term. (q) Pension Our pension and post-retirement life benefit obligations and related costs are calculated using actuarial methods, within the framework of GAAP. Our pension benefit obligation is determined as the actuarial present value of the vested benefits to which the employee is currently entitled, but based on the employee's expected date of separation or retirement. Our funding policy provides that payments to our pension trust shall be equal to the minimum funding requirements of the Employee Retirement Income Security Act, plus additional amounts that the Board of Directors of Selective Insurance Company of America (“SICA”) may approve from time to time. Two key assumptions, the discount rate and the expected return on plan assets, are important elements of expense and/or liability measurement. We evaluate these key assumptions annually unless facts indicate that a more frequent review is required. The discount rate enables us to state expected future cash flows at their present value on the measurement date. The purpose of the discount rate is to determine the interest rates inherent in the price at which pension benefits could be effectively settled. Our discount rate selection is based on high-quality, long-term corporate bonds. To determine the expected long-term rate of return on the plan assets, we consider the current and expected asset allocation, as well as historical and expected returns on each plan asset class. Other assumptions involve demographic factors such as retirement age, mortality, turnover, and rate of compensation increases. 90 Note 3. Adoption of Accounting Pronouncements In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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: • 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 exist, 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 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance did not impact our financial condition or results of operation. In January 2014, the FASB issued ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects (“ASU 2014-01”). ASU 2014-01 applies to all reporting entities that invest in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for a low-income housing tax credit. ASU 2014-01 permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using a newly defined "proportional amortization method" if certain conditions are met. This policy election is required to be applied consistently to all qualifying investments, rather than a decision to be applied to individual investments. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received, and recognizes the net investment performance in the income statement as components of income tax expense (benefit). ASU 2014-01 is effective for public business entities for annual periods and interim periods within those annual periods, beginning after December 15, 2014, with early adoption being permitted. During the third quarter of 2014, we adopted this guidance and have made a policy election to use the proportional amortization method. The adoption of this guidance did not materially impact our financial condition or results of operation. In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires debt issuance costs to be netted against the related debt liability in the balance sheet rather than presented as a separate asset. However, ASU 2015-03 does not address the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Therefore, in August 2015, the FASB issued ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (“ASU 2015-15”). ASU 2015-15 clarifies that, in the absence of authoritative guidance on line-of-credit arrangements within ASU 2015-03, the SEC would not object to the deferral and presentation of debt issuance costs as an asset and the subsequent amortization of the deferred costs over the term of the line-of-credit arrangement. We adopted this guidance retrospectively, effective in the fourth quarter of 2015. As such, all historical data in this Form 10-K has been restated to reflect the revised guidance, as follows: Balance Sheet Information Year ended December 31, 2014 ($ in thousands) Other Assets Total Assets Notes Payable Total Liabilities Total Liabilities and Stockholders' Equity As Originally Reported As Restated 73,215 6,581,550 379,297 5,305,964 6,581,550 66,607 6,574,942 372,689 5,299,356 6,574,942 $ 91 Income Statement Information Year ended December 31, ($ in thousands) Interest Expense Other Expense 2014 2013 As Originally Reported 22,086 33,673 $ As Restated As Originally Reported 22,538 35,686 23,063 $ 32,696 As Restated 26,361 31,863 Pronouncements to be effective in the future In June 2014, the FASB issued 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 effective date for ASU 2014-12 is for interim and annual periods beginning after December 15, 2015. The amendments in ASU 2014-12 may be applied either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented and all modified awards thereafter. The adoption of ASU 2014-12 will not affect us, as we are currently recording expense consistent with the requirements of this accounting update. 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 the our financial condition or results of operations. 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. ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. The amendments in ASU 2015-02 may be applied either retrospectively or by applying a modified retrospective approach, which would include recording a cumulative- effect adjustment to equity as of the beginning of the fiscal year of adoption. While we anticipate that our limited partnership and tax credit investments will be variable interest entities under the new guidance, we do not anticipate being the primary beneficiary of any of these investments. As such, we do not expect a material impact on our financial condition or results of operations from the adoption of this guidance. 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 should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The amendments in ASU 2015-05 can be adopted either prospectively, to all arrangements entered into or materially modified after the effective date, or retrospectively. We do not expect a material impact on our financial condition or results of operations from the adoption of this guidance. 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 guidance 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. ASU 2015-07 is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The amendments in ASU 2015-07 should be applied retrospectively to all periods presented. As the requirements of this literature are disclosure only, the application of this guidance will not impact our financial condition or results of operations. 92 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. The amendments in ASU 2015-09 should 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. Note 4. Statements of Cash Flow Supplemental cash flow information for the years ended December 31, 2015, 2014, and 2013 is as follows: ($ in thousands) Cash paid during the period for: Interest Federal income tax Non-cash items: Tax-free exchange of fixed income securities, AFS Tax-free exchange of fixed income securities, HTM Stock split related to equity securities, AFS Assets acquired under capital lease arrangements Non-cash purchase of property and equipment 2015 2014 2013 $ 21,892 39,500 36,792 15,257 4,239 6,760 — 22,221 22,699 20,781 4,289 334 5,642 338 21,465 20,000 37,965 15,820 — 2,583 20 Included in "Other assets" on the Consolidated Balance Sheet was $11.9 million at December 31, 2015 and $6.0 million at December 31, 2014 of cash received from the National Flood Insurance Program ("NFIP") which is restricted to pay flood claims under the Write Your Own ("WYO") Program. Note 5. Investments (a) Net unrealized gains on investments included in OCI by asset class were as follows for the years ended December 31, 2015, 2014, and 2013: ($ in thousands) AFS securities: Fixed income securities Equity securities Total AFS securities HTM securities: Fixed income securities Total HTM securities Total net unrealized gains Deferred income tax expense Net unrealized gains, net of deferred income tax 2015 2014 2013 $ 55,689 13,235 68,924 300 300 69,224 (24,228 ) 44,996 90,336 32,389 122,725 958 958 123,683 (43,289 ) 80,394 39,559 37,421 76,980 2,257 2,257 79,237 (27,733) 51,504 (Decrease) increase in net unrealized gains in OCI, net of deferred income tax $ (35,398) 28,890 (70,824) 93 (b) The amortized cost, net unrealized gains and losses, carrying value, unrecognized holding gains and losses, and fair value of HTM fixed income securities were as follows: December 31, 2015 ($ in thousands) Obligations of state and political subdivisions $ Corporate securities ABS CMBS Total HTM fixed income securities Amortized Cost 175,269 20,228 1,030 4,527 201,054 $ Net Unrealized Gains (Losses) Unrecognized Unrecognized Carrying Value Holding Gains Holding Losses 848 (185 ) (120 ) (243 ) 300 176,117 20,043 910 4,284 201,354 5,763 1,972 118 337 8,190 — — — — — Fair Value 181,880 22,015 1,028 4,621 209,544 December 31, 2014 ($ in thousands) Foreign government Amortized Cost $ 5,292 Obligations of state and political subdivisions Corporate securities ABS CMBS Total HTM fixed income securities $ 285,301 18,899 2,818 4,869 317,179 Net Unrealized Gains (Losses) Unrecognized Unrecognized Carrying Value Holding Gains Holding Losses Fair Value 47 2,071 (273 ) (455 ) (432 ) 958 5,339 287,372 18,626 2,363 4,437 318,137 55 11,760 2,796 460 753 15,824 — — — — — — 5,394 299,132 21,422 2,823 5,190 333,961 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 either through purchase or transfer from AFS; or (ii) the date that an OTTI charge is recognized on an HTM security, through the date of the balance sheet. Our HTM securities had an average duration of 1.5 years as of December 31, 2015. (c) The cost/amortized cost, unrealized gains and losses, and fair value of AFS securities were as follows: December 31, 2015 ($ in thousands) AFS fixed income securities: U.S. government and government agencies Foreign government Obligations of states and political subdivisions Corporate securities ABS CMBS1 RMBS2 Total AFS fixed income securities AFS equity securities: Common stock Preferred stock Total AFS equity securities Total AFS securities Cost/ Amortized Cost Unrealized Gains Unrealized Losses Fair Value 99,485 14,885 1,314,779 1,892,296 244,541 245,252 541,276 4,352,514 181,991 11,825 193,816 4,546,330 4,721 298 44,523 23,407 531 750 4,274 78,504 14,796 477 15,273 93,777 (91 ) (2 ) (160 ) (15,521 ) (918 ) (2,410 ) (3,713 ) (22,815 ) (1,998 ) (40 ) (2,038 ) (24,853 ) 104,115 15,181 1,359,142 1,900,182 244,154 243,592 541,837 4,408,203 194,789 12,262 207,051 4,615,254 $ $ 94 December 31, 2014 ($ in thousands) AFS fixed income securities: U.S. government and government agencies Foreign government Obligations of states and political subdivisions Corporate securities ABS CMBS1 RMBS2 Total AFS fixed income securities AFS equity securities: Common stock Total AFS equity securities Total AFS securities Cost/ Amortized Cost Unrealized Gains Unrealized Losses Fair Value $ $ 116,666 27,035 1,208,776 1,763,427 176,837 177,932 505,113 3,975,786 159,011 159,011 4,134,797 7,592 796 38,217 42,188 760 2,438 8,587 100,578 32,721 32,721 133,299 (128 ) — (729 ) (5,809 ) (373 ) (777 ) (2,426 ) (10,242 ) (332 ) (332 ) (10,574 ) 124,130 27,831 1,246,264 1,799,806 177,224 179,593 511,274 4,066,122 191,400 191,400 4,257,522 1 CMBS includes government guaranteed agency securities with a fair value of $4.5 million at December 31, 2015 and $13.2 million at December 31, 2014. 2 RMBS includes government guaranteed agency securities with a fair value of $19.7 million at December 31, 2015 and $32.4 million at December 31, 2014. Unrealized gains and losses of AFS securities represent fair value fluctuations from the later of: (i) the date a security is designated as AFS; or (ii) the date that an OTTI charge is recognized on an AFS security, through the date of the balance sheet. These unrealized gains and losses are recorded in AOCI on the Consolidated Balance Sheets. (d) The following tables summarize, for all securities in a net unrealized/unrecognized loss position at December 31, 2015 and December 31, 2014, the fair value and pre-tax net unrealized/unrecognized loss by asset class and by length of time those securities have been in a net loss position: December 31, 2015 Less than 12 months 12 months or longer ($ in thousands) AFS fixed income securities: U.S. government and government agencies $ Foreign government Obligations of states and political subdivisions Corporate securities ABS CMBS RMBS Total AFS fixed income securities AFS equity securities: Common stock Preferred stock Total AFS equity securities Subtotal $ Fair Value Unrealized Losses1 Fair Value Unrealized Losses1 16,006 1,067 28,617 761,479 197,477 146,944 264,914 1,416,504 31,148 1,531 32,679 1,449,183 (87 ) (2 ) (160 ) (12,671 ) (807 ) (2,196 ) (1,992 ) (17,915 ) (1,998 ) (40 ) (2,038 ) (19,953 ) 396 — — 50,382 12,022 15,385 63,395 141,580 — — — 141,580 (4 ) — — (2,850 ) (111 ) (214 ) (1,721 ) (4,900 ) — — — (4,900 ) ($ in thousands) HTM securities: ABS Subtotal Total AFS and HTM Less than 12 months 12 months or longer Fair Value Unrealized Losses1 Unrecognized Gains2 Fair Value Unrealized Losses1 Unrecognized Gains2 $ $ — — 1,449,183 — — (19,953 ) — — — 805 805 142,385 (122 ) (122 ) (5,022 ) 116 116 116 95 December 31, 2014 Less than 12 months 12 months or longer ($ in thousands) AFS fixed income securities: U.S. government and government agencies $ Obligations of states and political subdivisions Corporate securities ABS CMBS RMBS Total AFS fixed income securities AFS equity securities: Common stock Total AFS equity securities Subtotal $ Fair Value Unrealized Losses1 Fair Value Unrealized Losses1 7,567 47,510 276,648 113,202 12,799 3,399 461,125 5,262 5,262 466,387 (13 ) (105 ) (1,734 ) (178 ) (34 ) (8 ) (2,072 ) (336 ) (336 ) (2,408 ) 10,866 64,018 153,613 15,618 59,219 138,724 442,058 — — 442,058 (115 ) (624 ) (4,075 ) (195 ) (743 ) (2,418 ) (8,170 ) — — (8,170 ) ($ in thousands) HTM securities: Obligations of states and political subdivisions ABS Subtotal Total AFS and HTM Less than 12 months 12 months or longer Fair Value Unrealized Losses1 Unrecognized Gains2 Fair Value Unrealized Losses1 Unrecognized Gains2 $ $ 196 — 196 466,583 (3 ) — (3 ) (2,411 ) 1 — 1 1 — 2,235 2,235 444,293 — (455 ) (455 ) (8,625 ) — 439 439 439 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 holding 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. The table below provides our net unrealized/unrecognized loss positions by impairment severity as of December 31, 2015 compared to the prior year: ($ in thousands) December 31, 2015 December 31, 2014 Number of Issues % of Market/Book Unrealized/ Unrecognized Loss Number of Issues % of Market/Book Unrealized/ Unrecognized Loss 606 3 — — — 80% - 99% $ 60% - 79% 40% - 59% 20% - 39% 0% - 19% $ 22,971 1,888 — — — 24,859 350 — — — — 80% - 99% $ 60% - 79% 40% - 59% 20% - 39% 0% - 19% $ 10,596 — — — — 10,596 At December 31, 2015, we had 609 securities in an aggregate unrealized/unrecognized loss position of $24.9 million, compared to 350 securities in an aggregate unrealized/unrecognized loss position of $10.6 million at December 31, 2014. Although the number of issues increased, the severity of impairment on these securities remained consistent at an average of 2% of amortized cost at December 31, 2015 and December 31, 2014. The primary driver behind the increase in the unrealized/unrecognized loss balance was our corporate fixed income securities portfolio, which was impacted by widening credit spreads. 96 We do not intend to sell any of the securities in the table above, nor do we believe we will be required to sell any of these securities. Additionally, we have reviewed these securities in accordance with our OTTI policy, as described in Note 2. “Summary of Significant Accounting Policies” of this Form 10-K and have concluded that they are temporarily impaired as of December 31, 2015. This conclusion reflects our current judgment as to the financial position and future prospects of the entity that issued the security and underlying collateral. If our judgment about an individual security changes in the future, we may ultimately record a credit loss after having originally concluded that one did not exist, which could have a material impact on our net income and financial position in future periods. (e) Fixed income securities at December 31, 2015, by contractual maturity are shown below. MBS are included in the maturity tables using the estimated average life of each security. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Listed below are HTM fixed income securities at December 31, 2015: ($ in thousands) Due in one year or less Due after one year through five years Due after five years through 10 years Total HTM fixed income securities Listed below are AFS fixed income securities at December 31, 2015: ($ in thousands) Due in one year or less Due after one year through five years Due after five years through 10 years Due after 10 years Total AFS fixed income securities Carrying Value Fair Value $ $ 98,601 89,231 13,522 201,354 Fair Value $ $ 99,872 94,358 15,314 209,544 472,331 2,135,301 1,733,858 66,713 4,408,203 (f) The following table summarizes our other investment portfolio by strategy and the remaining commitment amount associated with each strategy: Other Investments ($ in thousands) Alternative Investments Private equity Private credit Real assets Total alternative investments Other securities Total other investments Carrying Value December 31, 2015 December 31, 2014 2015 Remaining Commitment $ $ 35,088 13,246 19,500 67,834 10,008 77,842 48,538 18,533 25,897 92,968 6,235 99,203 30,204 15,129 25,820 71,153 3,200 74,353 97 The following is a description of our alternative investment strategies: Our private equity strategy includes the following: • Secondary Private Equity: This strategy purchases seasoned private equity funds from investors desiring liquidity prior to normal fund termination. Investments are made across all sectors of the private equity market, including leveraged buyouts ("LBO"), venture capital, distressed securities, mezzanine financing, real estate, and infrastructure. • Primary Private Equity: This strategy makes private equity investments, primarily in established large and middle market companies across diverse industries globally. • Venture Capital: In general, these investments are made principally by investing in equity securities of privately-held corporations, for long-term capital appreciation. This strategy makes private equity investments in growth equity and buyout partnerships. Our private credit strategy includes the following: • Mezzanine Financing: This strategy provides privately negotiated fixed income securities, generally with an equity component, to LBO firms and private and publicly traded large, mid and small-cap companies to finance LBOs, recapitalizations, and acquisitions. • Distressed Debt: This strategy makes direct and indirect investments in debt and equity securities of companies that are experiencing financial and/or operational distress. Investments include buying indebtedness of bankrupt or financially troubled companies, small balance loan portfolios, special situations and capital structure arbitrage trades, commercial real estate mortgages and similar non-U.S. securities and debt obligations. Our real assets strategy includes the following: • Energy & Power Generation: This strategy makes energy and power generation investments in cash flow generating infrastructure assets. Energy investments are made in a variety of industries including oil, natural gas, and coal. These investments are diversified across the energy supply chain and include assets in the exploration and production, pipeline, and refining sectors. Power generation includes investments in: (i) conventional power, such as natural gas and oil; (ii) renewable power, such as wind and solar; and (iii) electric transmission and distribution. • Real Estate: This strategy invests opportunistically in real estate in North America, Europe, and Asia via direct property ownership, joint ventures, mortgages, and investments in equity and debt instruments. Our alternative investment strategies employ low or moderate levels of leverage and generally use hedging only to reduce foreign exchange or interest rate volatility. At this time, our alternative investment strategies do not include hedge funds. We cannot redeem our investments with the general partners of these investments; however, occasionally these partnerships can be traded on the secondary market. Once liquidation is triggered by clauses within the limited partnership agreements or at the funds’ stated end date, we will receive our final allocation of capital and any earned appreciation of the underlying investments, assuming we have not divested ourselves of our partnership interests prior to that time. We currently receive distributions from these alternative investments through the realization of the underlying investments in the limited partnerships. We anticipate that the general partners of these alternative investments will liquidate their underlying investment portfolios through 2028. 98 The following tables set forth summarized financial information for our other investments portfolio, including the portion not owned by us. The investments are carried under the equity method of accounting. The last line in the income statement information table below reflects our share of the aggregate income, which is the portion included in our Financial Statements. As the majority of these investments report results to us on a one quarter lag, the summarized financial statement information is as of, and for the 12-month period ended, September 30: Balance Sheet Information September 30, ($ in millions) Investments Total assets Total liabilities Total partners’ capital Income Statement Information 12 months ended September 30, ($ in millions) Net investment income Realized gains Net change in unrealized (depreciation) appreciation Net income Insurance Subsidiaries' other investments income $ $ $ 2015 2014 7,527 8,515 316 8,199 2015 2014 2013 129 1,187 (1,364 ) (48 ) (1.9 ) 226 581 1,098 1,905 13.6 10,096 10,695 545 10,150 406 913 382 1,701 15.2 (g) We did not have exposure to any credit concentration risk of a single issuer greater than 10% of our stockholder's equity, other than certain U.S. government agencies, as of December 31, 2015 or December 31, 2014. (h) We have pledged certain AFS fixed income securities as collateral related to: (i) our outstanding borrowing of $$60 million with the Federal Home Loan Bank of Indianapolis ("FHLBI"); (ii) our reinsurance obligations related to our 2011 acquisition of our E&S book of business; and (iii) our compliance with insurance laws by placing certain securities on deposit with various state and regulatory agencies. We retain all rights regarding all securities pledged as collateral. The following table summarizes the market value of these securities at December 31, 2015: ($ in millions) U.S. government and government agencies Obligations of states and political subdivisions Corporate securities CMBS RMBS Total pledged as collateral FHLBI Collateral 7.5 $ — — 1.2 55.0 63.7 $ Reinsurance Collateral State and Regulatory Deposits Total — 5.0 4.7 — 1.8 11.5 24.0 — — — — 24.0 31.5 5.0 4.7 1.2 56.8 99.2 (i) The components of pre-tax net investment income earned were as follows: ($ in thousands) Fixed income securities Equity securities, dividend income Short-term investments Other investments Investment expenses Net investment income earned 2015 2014 2013 $ $ 123,230 9,161 112 (1,890) (9,297) 121,316 126,489 7,449 66 13,580 (8,876 ) 138,708 121,582 6,140 117 15,208 (8,404) 134,643 99 (j) The following tables summarize OTTI by asset type for the periods indicated: 2015 ($ in thousands) AFS fixed income securities: Corporate securities RMBS Total AFS fixed income securities AFS equity securities: Common stock Preferred stock Total AFS equity securities Total OTTI losses 2014 ($ in thousands) AFS fixed income securities: RMBS Total AFS fixed income securities AFS equity securities: Common stock Total AFS equity securities Other investments Total OTTI losses 2013 ($ in thousands) HTM fixed income securities: ABS Total HTM fixed income securities AFS fixed income securities: RMBS Total AFS fixed income securities AFS equity securities: Common stock Total AFS equity securities Other investments Total OTTI losses Gross Included in OCI Recognized in Earnings 2,188 1 2,189 15,996 181 16,177 18,366 — — — — — — — 2,188 1 2,189 15,996 181 16,177 18,366 Gross Included in OCI Earnings Recognized in 7 7 10,517 10,517 580 11,104 — — — — — — 7 7 10,517 10,517 580 11,104 Gross Included in OCI Earnings Recognized in (44 ) (44 ) 16 16 3,747 3,747 1,847 5,566 (47 ) (47 ) (30 ) (30 ) — — — (77 ) 3 3 46 46 3,747 3,747 1,847 5,643 $ $ $ $ $ $ The majority of the OTTI charges in 2015, 2014, and 2013 were comprised of charges on our equity portfolio. A significant portion of these charges relate to securities for which we had the intent to sell in relation to a change in our high dividend yield strategy and the remaining equity charges relate to securities that we did not believe would recover in the near term. 100 (k) The components of net realized gains, excluding OTTI charges, were as follows: ($ in thousands) HTM fixed income securities Gains Losses AFS fixed income securities Gains Losses AFS equity securities Gains Losses Other investments Gains Losses Total other net realized investment gains $ $ 2015 2014 2013 5 (1) 4,515 (312) 29,168 (1,347) 162 (653) 31,537 2 (20) 1,945 (392) 36,871 (704) 1 — 37,703 195 (95) 3,340 (373) 24,776 (408) — (1,060) 26,375 Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold. Proceeds from the sale of AFS securities were $234.1 million in 2015, $259.0 million in 2014, and $135.9 million in 2013. Net realized gains in 2015, excluding OTTI charges, were driven by the sale of AFS securities due to a change in our dividend equity strategy from a quantitative, model-driven stock selection strategy to a fundamentally-based stock selection approach that incorporates an assessment of the sustainability and growth rate of a company's dividends and future cash flow. Net realized gains in 2014 and 2013, excluding OTTI charges, were driven by the sale of AFS equity securities due to the quantitative rebalancing of our dividend yield strategy holdings within our equity portfolio. Note 6. Comprehensive Income (a) The components of comprehensive income, both gross and net of tax, for 2015, 2014, and 2013 were as follows: 2015 ($ in thousands) Net income Components of OCI: Unrealized gains on investment securities: Unrealized holding losses during the year Amounts reclassified into net income: HTM securities Non-credit OTTI Realized gains on AFS securities Net unrealized losses Defined benefit pension and post-retirement plans: Net actuarial gain Amounts reclassified into net income: Net actuarial loss Defined benefit pension and post-retirement plans Other comprehensive loss Comprehensive income Gross Tax $ 232,692 66,831 Net 165,861 (40,221 ) (14,078) (26,143) (580 ) 357 (14,016 ) (54,460 ) 2,438 7,077 9,515 (44,945 ) 187,747 (203) 125 (4,906) (19,062) 853 2,477 3,330 (15,732) 51,099 (377) 232 (9,110) (35,398) 1,585 4,600 6,185 (29,213) 136,648 $ 101 2014 ($ in thousands) Net income Components of OCI: Unrealized gains on investment securities: Unrealized holding gains during the year Amounts reclassified into net income: HTM securities Non-credit OTTI Realized gains on AFS securities Net unrealized gains Defined benefit pension and post-retirement plans: Net actuarial loss Amounts reclassified into net income: Net actuarial loss Defined benefit pension and post-retirement plans Other comprehensive loss Comprehensive income 2013 ($ in thousands) Net income Components of OCI: Unrealized losses on investment securities: Unrealized holding losses during the period Non-credit OTTI recognized in OCI Amounts reclassified into net income: HTM securities Non-credit OTTI Realized gains on AFS securities Net unrealized losses Defined benefit pension and post-retirement plans: Net actuarial gain Amounts reclassified into net income: Net actuarial loss Prior service cost Curtailment expense Defined benefit pension and post-retirement plans Other comprehensive loss Comprehensive income Gross Tax $ 197,131 55,304 Net 141,827 72,940 (1,299 ) 1,669 (28,864 ) 44,446 (54,136 ) 1,902 (52,234 ) (7,788 ) 189,343 25,529 (455) 584 (10,102) 15,556 (18,947) 666 (18,281) (2,725) 52,579 47,411 (844) 1,085 (18,762) 28,890 (35,189) 1,236 (33,953) (5,063) 136,764 Gross Tax 142,267 35,849 Net 106,418 (83,934 ) 77 (1,577 ) 14 (23,540 ) (108,960 ) 59,654 4,374 10 16 64,054 (44,906 ) 97,361 (29,377) 27 (552) 5 (8,239) (38,136) 20,879 1,531 4 5 22,419 (15,717) 20,132 (54,557) 50 (1,025) 9 (15,301) (70,824) 38,775 2,843 6 11 41,635 (29,189) 77,229 $ $ $ 102 (b) The balances of, and changes in, each component of AOCI (net of taxes) as of December 31, 2015 and 2014 were as follows: Net Unrealized (Loss) Gain on Investment Securities ($ in thousands) Balance, December 31, 2013 OCI before reclassifications Amounts reclassified from AOCI Net current period OCI Balance, December 31, 2014 OCI before reclassifications Amounts reclassified from AOCI Net current period OCI Balance, December 31, 2015 OTTI Related HTM Related 1,467 $ — (844 ) (844 ) 623 — (377 ) (377 ) 246 (1,599 ) — 1,085 1,085 (514) — 232 232 (282 ) $ All Other Investments Subtotal 51,635 47,411 (18,762 ) 28,649 80,284 (26,143 ) (9,110 ) (35,253 ) 45,031 51,503 47,411 (18,521) 28,890 80,393 (26,143) (9,255) (35,398) 44,995 Defined Benefit Pension and Post- retirement Plans (26,652 ) (35,189 ) 1,236 (33,953 ) (60,605 ) 1,585 4,600 6,185 (54,420 ) Total AOCI 24,851 12,222 (17,285) (5,063) 19,788 (24,558) (4,655) (29,213) (9,425) The reclassifications out of AOCI are as follows: ($ in thousands) OTTI related Non-credit OTTI on disposed securities $ HTM related Unrealized gains and losses on HTM disposals Amortization of net unrealized gains on HTM securities Realized gains and losses on AFS Realized gains and losses on AFS disposals Defined benefit pension and post-retirement life plans Net actuarial loss Total defined benefit pension and post-retirement life Total reclassifications for the period $ Year ended December 31, 2015 Year ended December 31, 2014 Affected Line Item in the Consolidated Statement of Income 1,669 Net realized gains Income from continuing operations, before federal income tax 1,669 (584 ) Total federal income tax expense 1,085 Net income 157 Net realized investment gains (1,456 ) Net investment income earned (1,299 ) Income from continuing operations, before federal income tax 455 Total federal income tax expense (844 ) Net income (28,864 ) Net realized investment gains Income from continuing operations, before federal income tax (28,864 ) 10,102 Total federal income tax expense (18,762 ) Net income 331 Losses and loss expenses incurred 1,571 Policy acquisition costs 1,902 Income from continuing operations, before federal income tax Income from continuing operations, before federal income tax 1,902 (666 ) Total federal income tax expense 1,236 Net income (17,285 ) Net income 357 357 (125 ) 232 308 (888 ) (580 ) 203 (377 ) (14,016 ) (14,016 ) 4,906 (9,110 ) 1,538 5,539 7,077 7,077 (2,477 ) 4,600 (4,655) 103 Note 7. Fair Value Measurements The following table presents the carrying amounts and estimated fair values of our financial instruments as of December 31, 2015 and 2014: ($ in thousands) Financial Assets Fixed income securities: HTM AFS Equity securities, AFS Short-term investments Financial Liabilities Notes payable: 0.63% borrowings from FHLBI 1.25% borrowings from FHLBI 7.25% Senior Notes 6.70% Senior Notes 5.875% Senior Notes Subtotal Unamortized debt issuance costs Total notes payable December 31, 2015 December 31, 2014 Carrying Amount Fair Value Carrying Amount Fair Value 201,354 4,408,203 207,051 194,819 209,544 4,408,203 207,051 194,819 318,137 4,066,122 191,400 131,972 333,961 4,066,122 191,400 131,972 14,977 45,083 56,929 110,363 192,474 419,826 15,000 45,000 49,898 99,415 185,000 394,313 (6,121 ) 388,192 — 45,244 59,181 114,845 185,000 404,270 — 45,000 49,896 99,401 185,000 379,297 (6,608 ) 372,689 $ $ For discussion regarding the fair value techniques of our financial instruments, refer to Note 2. "Summary of Significant Accounting Policies" in this Form 10-K. The following tables provide quantitative disclosures of our financial assets that were measured at fair value at December 31, 2015 and 2014: December 31, 2015 Fair Value Measurements Using ($ in thousands) Description Measured on a recurring basis: AFS fixed income securities: U.S. government and government agencies $ Foreign government Obligations of states and political subdivisions Corporate securities ABS CMBS RMBS Total AFS fixed income securities AFS equity securities: Common stock Preferred stock Total AFS equity securities Total AFS securities Short-term investments Total assets $ Assets Measured at Fair Value 12/31/15 Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1)1 Significant Other Observable Inputs (Level 2)1 Significant Unobservable Inputs (Level 3) 42,702 — — — — — — 42,702 191,517 12,262 203,779 246,481 194,819 441,300 61,413 15,181 1,359,142 1,900,182 244,154 243,592 541,837 4,365,501 — — — 4,365,501 — 4,365,501 — — — — — — — — 3,272 — 3,272 3,272 — 3,272 104,115 15,181 1,359,142 1,900,182 244,154 243,592 541,837 4,408,203 194,789 12,262 207,051 4,615,254 194,819 4,810,073 104 December 31, 2014 Fair Value Measurements Using ($ in thousands) Description Measured on a recurring basis: AFS fixed income securities: Assets Measured at Fair Value 12/31/14 Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1)1 Significant Other Observable Inputs (Level 2)1 Significant Unobservable Inputs (Level 3) U.S. government and government agencies $ Foreign government Obligations of states and political subdivisions Corporate securities ABS CMBS RMBS Total AFS fixed income securities AFS equity securities: Common stock Total AFS equity securities Total AFS securities Short-term investments Total assets $ 124,130 27,831 1,246,264 1,799,806 177,224 179,593 511,274 4,066,122 191,400 191,400 4,257,522 131,972 4,389,494 53,199 — — — — — — 53,199 188,500 188,500 241,699 131,972 373,671 70,931 27,831 1,246,264 1,799,806 177,224 179,593 511,274 4,012,923 — — 4,012,923 — 4,012,923 — — — — — — — — 2,900 2,900 2,900 — 2,900 1 There were no transfers of securities between Level 1 and Level 2. There were no changes in the fair value of securities measured using Level 3 prices during 2014. The following table provides a summary of these changes during 2015: 2015 ($ in thousands) Fair value, December 31, 2014 Total net (losses) gains for the period included in: OCI Net income Purchases Sales Issuances Settlements Transfers into Level 3 Transfers out of Level 3 Fair value, December 31, 2015 Common Stock $ 2,900 — — 487 (115) — — — — 3,272 $ 105 The following tables provide quantitative information regarding our financial assets and liabilities that were disclosed at fair value at December 31, 2015 and 2014: December 31, 2015 ($ in thousands) Financial Assets HTM: Obligations of states and political subdivisions Corporate securities ABS CMBS Total HTM fixed income securities Financial Liabilities Notes payable: 0.63% borrowings from FHLBI 1.25% borrowings from FHLBI 7.25% Senior Notes 6.70% Senior Notes 5.875% Senior Notes Total notes payable December 31, 2014 ($ in thousands) Financial Assets HTM: Foreign government Obligations of states and political subdivisions Corporate securities ABS CMBS Total HTM fixed income securities Financial Liabilities Notes payable: 1.25% borrowings from FHLBI 7.25% Senior Notes 6.70% Senior Notes 5.875% Senior Notes Total notes payable Fair Value Measurements Using Assets/Liabilities Disclosed at Fair Value 12/31/2015 Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $ $ $ $ $ $ $ $ 181,880 22,015 1,028 4,621 209,544 14,977 45,083 56,929 110,363 192,474 419,826 — — — — — — — — — 192,474 192,474 181,880 18,679 1,028 4,621 206,208 14,977 45,083 56,929 110,363 — 227,352 — 3,336 — — 3,336 — — — — — — Fair Value Measurements Using Assets/Liabilities Disclosed at Fair Value 12/31/2014 Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) 5,394 299,132 21,422 2,823 5,190 333,961 45,244 59,181 114,845 185,000 404,270 — — — — — — — — — 185,000 185,000 5,394 299,132 21,422 2,823 5,190 333,961 45,244 59,181 114,845 — 219,270 — — — — — — — — — — — 106 Note 8. Reinsurance Our Financial Statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to the acceptance of certain insurance risks that other insurance entities have underwritten. Ceded reinsurance involves transferring certain insurance risks (along with the related written and earned premiums) that we have underwritten to other insurance companies that agree to share these risks. The primary purpose of ceded reinsurance is to protect the Insurance Subsidiaries from potential losses in excess of the amount that we are prepared to accept. Our major treaties covering property, property catastrophe, and casualty business are excess of loss contracts. In addition, we have an intercompany quota share pooling arrangement and other minor quota share treaties. As a Standard Commercial Lines and E&S Lines writer, we are required to participate in Terrorism Risk Insurance Program Reauthorization Act ("TRIPRA"), which was extended by Congress to December 31, 2020. TRIPRA requires private insurers and the United States government to share the risk of loss on future acts of terrorism certified by the U.S. Secretary of the Treasury. Under TRIPRA, each participating insurer is responsible for paying a deductible of specified losses before federal assistance is available. This deductible is based on a percentage of the prior year’s applicable Standard Commercial Lines and E&S Lines premiums. In 2016, our deductible is approximately $280 million. For losses above the deductible, the federal government will pay 84% of losses to an industry limit of $100 billion, and the insurer retains 16%. The federal share of losses will be reduced by 1% each year to 80% by 2020. The Insurance Subsidiaries remain liable to policyholders to the extent that any reinsurer becomes unable to meet their contractual obligations. We evaluate and monitor the financial condition of our reinsurers under voluntary reinsurance arrangements to minimize our exposure to significant losses from reinsurer insolvencies. On an ongoing basis, we review amounts outstanding, length of collection period, changes in reinsurer credit ratings, and other relevant factors to determine collectability of reinsurance recoverables. The allowance for uncollectible reinsurance recoverables was $5.7 million at December 31, 2015 and $6.9 million at December 31, 2014. The following table represents our total reinsurance balances segregated by reinsurer to depict our concentration of risk throughout our reinsurance portfolio: ($ in thousands) Total reinsurance recoverables Total prepaid reinsurance premiums Total reinsurance balance Federal and state pools1: NFIP NJ Unsatisfied Claim Judgment Fund Other Total federal and state pools Remaining reinsurance balance Munich Re Group (A.M. Best rated "A+") Hannover Ruckversicherungs AG (A.M. Best rated "A+") AXIS Reinsurance Company (A.M. Best rated "A+") Swiss Re Group (A.M. Best rated "A+") Partner Reinsurance Company of the U.S. (A.M. Best rated “Au”) All other reinsurers Total reinsurers Less: collateral2 Reinsurers, net of collateral As of December 31, 2015 % of Reinsurance Balance Reinsurance Balances As of December 31, 2014 % of Reinsurance Balance Reinsurance Balances $ $ $ $ 561,968 140,889 702,857 164,130 71,884 3,136 239,150 463,707 112,889 99,535 53,374 51,340 20,748 125,821 463,707 (106,449 ) 357,258 $ 24 % 10 — 34 66 $ $ 16 14 8 7 3 18 66 % $ 581,548 146,993 728,541 172,547 76,342 2,557 251,446 477,095 110,270 100,959 51,014 55,026 25,424 134,402 477,095 (114,843 ) 362,252 24% 11 — 35 65 15 14 7 8 3 18 65% 1 Considered to have minimal risk of default. 2 Includes letters of credit, trust funds, and funds held against reinsurance recoverables. Note: Some amounts may not foot due to rounding. 107 Under our reinsurance arrangements, which are prospective in nature, reinsurance premiums ceded are recorded as prepaid reinsurance and amortized over the remaining contract period in proportion to the reinsurance protection provided, or recorded periodically, as per the terms of the contract, in a direct relationship to the gross premium recording. Reinsurance recoveries are recognized as gross losses are incurred. The following table contains a listing of direct, assumed, and ceded reinsurance amounts for premiums written, premiums earned, and losses and loss expenses incurred: ($ in thousands) Premiums written: Direct Assumed Ceded Net Premiums earned: Direct Assumed Ceded Net Losses and loss expenses incurred: Direct Assumed Ceded Net 2015 2014 2013 $ $ $ $ $ $ 2,403,519 23,848 (357,463 ) 2,069,904 2,330,267 23,209 (363,567 ) 1,989,909 1,274,872 16,996 (143,327 ) 1,148,541 2,228,270 26,306 (369,296 ) 1,885,280 2,183,258 34,653 (365,302 ) 1,852,609 1,314,864 26,187 (183,550 ) 1,157,501 2,133,793 43,650 (367,284) 1,810,159 2,048,530 44,464 (356,922) 1,736,072 1,370,293 32,678 (281,233) 1,121,738 The ceded premiums and losses related to our participation in the NFIP, under which 100% of our flood premiums, losses and loss expenses are ceded to the NFIP, are as follows: Ceded to NFIP ($ in thousands) Ceded premiums written Ceded premiums earned Ceded losses and loss expenses incurred $ 2015 (228,907) (233,940 ) (62,078 ) 2014 2013 (237,718 ) (234,224 ) (57,323 ) (236,309) (228,650) (183,142) Note 9. Reserves for Losses and Loss Expenses The table below provides a roll forward of reserves for losses and loss expenses for beginning and ending reserve balances: ($ in thousands) Gross reserves for losses and loss expenses, at beginning of year Less: reinsurance recoverable on unpaid losses and loss expenses, at beginning of year $ Net reserves for losses and loss expenses, at beginning of year Incurred losses and loss expenses for claims occurring in the: Current year Prior years Total incurred losses and loss expenses Paid losses and loss expenses for claims occurring in the: Current year Prior years Total paid losses and loss expenses Net reserves for losses and loss expenses, at end of year Add: Reinsurance recoverable on unpaid losses and loss expenses, at end of year Gross reserves for losses and loss expenses at end of year $ 2015 3,477,870 571,978 2,905,892 1,217,550 (69,009 ) 1,148,541 446,550 641,174 1,087,724 2,966,709 551,019 3,517,728 2014 3,349,770 540,839 2,808,931 1,216,770 (59,269 ) 1,157,501 468,478 592,062 1,060,540 2,905,892 571,978 3,477,870 2013 4,068,941 1,409,755 2,659,186 1,147,263 (25,525) 1,121,738 399,559 572,434 971,993 2,808,931 540,839 3,349,770 108 Our net losses and loss expense reserves increased by $60.8 million in 2015, $97.0 million in 2014, and $149.7 million in 2013. The losses and loss expense reserves are net of anticipated recoveries for salvage and subrogation claims, which amounted to $62.1 million for 2015, $65.1 million for 2014, and $61.0 million for 2013. The changes in the net losses and loss expense reserves were the result of growth in exposures, particularly associated with our E&S Lines of business, anticipated loss trends, and normal reserve changes inherent in the uncertainty in establishing reserves for losses and loss expenses. As additional information is collected in the loss settlement process, reserves are adjusted accordingly. These adjustments are reflected in the Consolidated Statements of Income in the period in which such adjustments are recognized. These changes could have a material impact on the results of operations of future periods when the adjustments are made. In 2015, we experienced overall favorable loss development of $69.0 million, compared to $59.3 million in 2014, and $25.5 million in 2013. The following table summarizes the prior year development by line of business: (Favorable)/Unfavorable Prior Year Development ($ in millions) General Liability Commercial Automobile Workers Compensation Businessowners' Policies Commercial Property Homeowners Personal Automobile E&S Total 2015 2014 2013 $ $ (51.0 ) 2.4 (37.0 ) 2.2 (3.0 ) 1.5 0.4 15.5 (69.0 ) (43.9 ) (4.1 ) — 1.9 (2.1 ) (4.0 ) (10.8 ) 3.7 (59.3 ) (20.0) (4.5) 23.5 (9.5) (7.5) (2.5) (3.0) (2.0) (25.5) The prior accident year development during 2015 was favorable by $69.0 million, which included $67.0 million of favorable casualty development and $2.0 million of favorable property development. The favorable casualty reserve development was largely driven by the general liability and workers compensation lines of business. For workers compensation, this was a significant change from 2014, during which period this line experienced no development. Our E&S Lines experienced unfavorable development of $15.5 million. By accident year, the majority of the favorable development was attributable to accident years 2009 through 2013, driven by general liability and workers compensation. This favorable development was partially offset by unfavorable development in accident years 2012 through 2014, which was attributable to our E&S Lines. The prior accident year development during 2014 was favorable by $59.3 million, which included $48.2 million of favorable casualty development and $11.1 million of favorable property development. The property development was primarily related to a prior year reinsurance recoverable. The favorable casualty reserve development was largely driven by the general liability and personal automobile lines of business. These lines both experienced increasingly favorable development in recent years. Conversely, businessowners' policies and our E&S Lines experienced unfavorable emergence in 2014, which was a reversal from 2013. By accident year, the majority of the favorable development was attributable to accident years 2010 through 2012, although earlier accident years also developed favorably. General liability, commercial automobile, and personal automobile all contributed to this development, partially offset by businessowners’ liability. The general liability line of business was the primary driver of this favorable development, which was partially driven by lower severities in the 2010 through 2012 accident years, within both the premises and operations and products liability coverages. In addition, accident years 2011 and 2012 continue to show lower than expected claim counts. The overall favorable development for accident years 2012 and prior was partially offset by unfavorable development in accident year 2013, which was largely attributable to commercial automobile liability, and partially E&S casualty. The prior accident year development during 2013 was favorable by $25.5 million, which included $14.5 million of favorable casualty development and $11.0 million of property development. The property development was primarily related to favorable non-catastrophe loss activity, mostly in the 2012 accident year. 109 The casualty lines were driven largely by favorable development in accident years 2006 through 2010, with lower than expected severities in general liability and commercial automobile. Partially offsetting this favorable development was: (i) unfavorable development in our workers compensation line driven by assisted living claims; and (ii) unfavorable development in accident year 2012 in our commercial automobile lines of business driven by higher than expected severities. Reserves established for liability insurance include exposure to asbestos and environmental claims. These claims have arisen primarily from insured exposures in municipal government, small non-manufacturing commercial risk, and homeowners policies. The emergence of these claims is slow and highly unpredictable. There are significant uncertainties in estimating our exposure to asbestos and environmental claims (for both case and IBNR reserves) resulting from lack of relevant historical data, the delayed and inconsistent reporting patterns associated with these claims, and uncertainty as to the number and identity of claimants and complex legal and coverage issues. Legal issues that arise in asbestos and environmental cases include federal or state venue, choice of law, causation, admissibility of evidence, allocation of damages and contribution among joint defendants, successor and predecessor liability, and whether direct action against insurers can be maintained. Coverage issues that arise in asbestos and environmental cases include the interpretation and application of policy exclusions, the determination and calculation of policy limits, the determination of the ultimate amount of a loss, the extent to which a loss is covered by a policy, if at all, the obligation of an insurer to defend a claim, and the extent to which a party can prove the existence of coverage. Courts have reached different and sometimes inconsistent conclusions on these legal and coverage issues. We do not discount to present value that portion of our losses and loss expense reserves expected to be paid in future periods. The following table details our losses and loss expense reserves for various asbestos and environmental claims: ($ in millions) Asbestos Landfill sites Leaking underground storage tanks Total 2015 Gross Net $ $ 8.0 13.1 9.3 30.4 6.8 8.3 8.1 23.2 Estimating IBNR reserves for asbestos and environmental claims is difficult because of the delayed and inconsistent reporting patterns associated with these claims. In addition, there are significant uncertainties associated with estimating critical assumptions, such as average clean-up costs, third-party costs, potentially responsible party shares, allocation of damages, litigation and coverage costs, and potential state and federal legislative changes. Normal historically based actuarial approaches cannot be applied to asbestos and environmental claims because past loss history is not indicative of future potential asbestos and environmental losses. In addition, while certain alternative models can be applied, such models can produce significantly different results with small changes in assumptions. The following table provides a roll forward of gross and net asbestos and environmental incurred losses and loss expenses and related reserves thereon: ($ in thousands) Asbestos Reserves for losses and loss expenses at beginning of year Incurred losses and loss expenses Less: losses and loss expenses paid Reserves for losses and loss expenses at the end of year Environmental Reserves for losses and loss expenses at beginning of year Incurred losses and loss expenses Less: losses and loss expenses paid Reserves for losses and loss expenses at the end of year Total Asbestos and Environmental Claims Reserves for losses and loss expenses at beginning of year Incurred losses and loss expenses Less: losses and loss expenses paid Reserves for losses and loss expenses at the end of year 2015 Gross Net 2014 2013 Gross Net Gross Net 7,314 (77 ) (444 ) 6,793 15,680 3,397 (2,709 ) 16,368 22,994 3,320 (3,153 ) 23,161 8,897 60 (206 ) 8,751 23,867 107 (2,072 ) 21,902 32,764 167 (2,278 ) 30,653 7,518 — (204 ) 7,314 17,649 — (1,969 ) 15,680 25,167 — (2,173 ) 22,994 9,170 — (273 ) 8,897 26,405 347 (2,885 ) 23,867 35,575 347 (3,158 ) 32,764 7,791 — (273) 7,518 19,978 68 (2,397) 17,649 27,769 68 (2,670) 25,167 $ $ $ $ $ $ 8,751 (428 ) (299 ) 8,024 21,902 3,396 (2,911 ) 22,387 30,653 2,968 (3,210 ) 30,411 110 Note 10. Indebtedness (a) Notes Payable (1) In the first quarter of 2013, we issued $185 million of 5.875% Senior Notes due 2043. These notes pay interest on February 15, May 15, August 15, and November 15 of each year, beginning on May 15, 2013, and at maturity. The notes are callable by us on or after February 8, 2018, at a price equal to 100% of their principal outstanding amount, plus accrued and unpaid interest to, but excluding, the date of redemption. A portion of the proceeds from this debt issuance was used to fully redeem the $100 million aggregate principal amount of our 7.5% Junior Subordinated Notes due 2066, which had an associated $3.3 million pre- tax write-off for the remaining capitalized debt issuance costs on these notes. Of the remaining net proceeds, $57.1 million was used to make capital contributions to the Insurance Subsidiaries, while the balance was used for general corporate purposes. There are no financial debt covenants to which we are required to comply in regards to these Senior Notes. (2) In the first quarter of 2009, Selective Insurance Company of the Southeast and Selective Insurance Company of South Carolina (“Indiana Subsidiaries”) joined, and invested in, the FHLBI, which provides them with access to additional liquidity. The Indiana Subsidiaries’ aggregate investment was $2.8 million at December 31, 2015 and $2.9 million at December 31, 2014. Our investment provides us the ability to borrow approximately 20 times the total amount of the FHLBI common stock purchased with additional collateral, at comparatively low borrowing rates. The following is a summary of the Indiana Subsidiaries’ borrowings from the FHLBI: • In 2011, the Indiana Subsidiaries borrowed $45 million in the aggregate from the FHLBI. The unpaid principal amount accrues interest of 1.25%, which is paid on the 15th of every month. The principal amount is due on December 16, 2016. These funds were loaned to the Parent for use in the acquisition of Mesa Underwriters Specialty Insurance Company ("MUSIC") on December 31, 2011. • In January 2015, the Indiana Subsidiaries borrowed $15 million in the aggregate from the FHLBI for general corporate purposes. The unpaid principal amount accrues interest of 0.63%, which is paid on the 15th of every month. The principal amount is due on July 22, 2016. All borrowings from the FHLBI require security. For information on investments that are pledged as collateral for these borrowings, see Note 5. "Investments" above. (3) In the fourth quarter of 2005, we issued $100 million of 6.70% Senior Notes due 2035. These notes were issued at a discount of $0.7 million resulting in an effective yield of 6.754% and pay interest on May 1 and November 1 each year commencing on May 1, 2006. Net proceeds of approximately $50 million were used to fund an irrevocable trust to provide for certain payment obligations in respect of our outstanding debt. The remainder of the proceeds was used for general corporate purposes. The agreements covering these notes contain a standard default cross-acceleration provision that provides the 6.70% Senior Notes will enter a state of default upon the failure to pay principal when due or upon any event or condition that results in an acceleration of principal of any other debt instrument in excess of $10 million that we have outstanding concurrently with the 6.70% Senior Notes. There are no financial debt covenants to which we are required to comply in regards to these notes. (4) In the fourth quarter of 2004, we issued $50 million of 7.25% Senior Notes due 2034. These notes were issued at a discount of $0.1 million, resulting in an effective yield of 7.27% and pay interest on May 15 and November 15 each year. We contributed $25 million of the bond proceeds to the Insurance Subsidiaries as capital. The remainder of the proceeds was used for general corporate purposes. The agreements covering these notes contain a standard default cross-acceleration provision that provides the 7.25% Senior Notes will enter a state of default upon the failure to pay principal when due or upon any event or condition that results in an acceleration of principal of any other debt instrument in excess of $10 million that we have outstanding concurrently with the 7.25% Senior Notes. There are no financial debt covenants to which we are required to comply in regards to these notes. (b) Short-Term Debt Our Line of Credit was renewed effective December 1, 2015, with Wells Fargo Bank, National Association, as administrative agent, and Branch Banking and Trust Company, with a borrowing capacity of $30 million, which can be increased to $50 million with the approval of both lending partners. The Line of Credit provides the Parent with an additional source of short- term liquidity. The interest rate on our Line of Credit varies and is based on, among other factors, the Parent’s debt ratings. The Line of Credit expires on December 1, 2020. There have been no balances outstanding under this Line of Credit or the previous credit facility at December 31, 2015 or at any time during 2015. Our previous Line of Credit, which was in place from September 26, 2013 until December 1, 2015 had the same banking partners and similar terms and conditions as our current facility. 111 The Line of Credit agreement contains representations, warranties, and covenants that are customary for credit facilities of this type, including, without limitation, financial covenants under which we are obligated to maintain a minimum consolidated net worth, minimum combined statutory surplus, and maximum ratio of consolidated debt to total capitalization, and covenants limiting our ability to: (i) merge or liquidate; (ii) incur debt or liens; (iii) dispose of assets; (iv) make investments and acquisitions; and (v) engage in transactions with affiliates. The Line of Credit permits collateralized borrowings from the Federal Home Loan Banks by our Insurance Subsidiaries that are members of those banks so long as the aggregate amount borrowed does not exceed 10% of the respective member's admitted assets from the preceding calendar year. The table below outlines information regarding certain of the covenants in the Line of Credit: Consolidated net worth Statutory surplus Debt-to-capitalization ratio1 A.M. Best financial strength rating 1 Calculated in accordance with Line of Credit agreement. Required as of December 31, 2015 $960 million Not less than $750 million Not to exceed 35% Minimum of A- Actual as of December 31, 2015 $1.4 billion $1.4 billion 22.1% A In addition to the above requirements, the Line of Credit agreement contains a cross-default provision that provides that the Line of Credit will be in default if we fail to comply with any condition, covenant, or agreement (including payment of principal and interest when due on any debt with an aggregate principal amount of at least $20 million), which causes or permits the acceleration of principal. Note 11. Segment Information We classify our business into four reportable segments: • Standard Commercial Lines - comprised of insurance products and services provided in the standard marketplace to our commercial customers, who are typically businesses, non-profit organizations, and local government agencies. • Standard Personal Lines - comprised of insurance products and services, including flood insurance coverage, provided primarily to individuals acquiring coverage in the standard marketplace. • E&S Lines - comprised of insurance products and services provided to customers who have not obtained coverage in the standard marketplace. • Investments - invests the premiums collected by our insurance operations, as well as amounts generated through our capital management strategies, which may include the issuance of debt and equity securities. The disaggregated results of our four segments are used by senior management to manage our operations. These segments are evaluated as follows: • Standard Commercial Lines, Standard Personal Lines, and our E&S Lines are evaluated based on statutory underwriting results (net premiums earned, incurred losses and loss expenses, policyholders dividends, policy acquisition costs, and other underwriting expenses), and statutory combined ratios; and • Our Investments segment is evaluated based on after-tax net investment income and net realized gains and losses. In computing the results of each segment, we do not make adjustments for interest expense or net general corporate expenses. While we do not fully allocate taxes to all segments, we do allocate taxes to our investments segment as we manage that segment on after-tax results. We do not maintain separate investment portfolios for the segments and therefore, do not allocate assets to the segments. Our combined insurance segments are subject to certain geographic concentrations, particularly in the Northeast and Mid- Atlantic regions of the country. In 2015, approximately 21% of NPW were related to insurance policies written in New Jersey. The goodwill balance of $7.8 million at both December 31, 2015 and 2014 relates to our Standard Commercial Lines reporting unit. 112 The following summaries present revenues from continuing operations (net investment income and net realized gains on investments in the case of the Investments segment) and pre-tax income from continuing operations for the individual segments: Revenue by Segment Years ended December 31, ($ in thousands) Standard Commercial Lines: Net premiums earned: Commercial automobile Workers compensation General liability Commercial property Businessowners’ policies Bonds Other Miscellaneous income Total Standard Commercial Lines revenue Standard Personal Lines: Net premiums earned: Personal automobile Homeowners Other Miscellaneous income Total Standard Personal Lines revenue E&S Lines: Net premiums earned: General liability Commercial property Commercial automobile Miscellaneous income Total E&S Lines revenue Investments: Net investment income Net realized investment gains Total investment revenues Total all segments Other income Total revenues 2015 2014 2013 $ $ 358,909 290,075 483,291 269,022 93,428 20,350 14,367 6,343 1,535,785 146,784 134,382 6,968 1,113 289,247 121,802 42,736 7,795 — 172,333 121,316 13,171 134,487 2,131,852 — 2,131,852 333,310 274,585 444,938 244,792 85,788 19,288 13,011 14,747 1,430,459 151,317 134,273 11,157 1,834 298,581 96,142 38,572 5,436 17 140,167 138,708 26,599 165,307 2,034,514 347 2,034,861 310,994 267,612 405,322 224,412 77,097 19,000 12,182 10,253 1,326,872 152,005 127,991 14,336 1,948 296,280 88,761 32,054 4,306 — 125,121 134,643 20,732 155,375 1,903,648 93 1,903,741 113 Income from Continuing Operations before Federal Income Tax Years ended December 31, ($ in thousands) Standard Commercial Lines: 2015 2014 2013 $ 164,496 89.2 % 89.2 % 1,336 99.5 % 99.9 % (16,803 ) 109.8 % 108.4 % 121,316 13,171 134,487 32,090 102,397 61,221 95.7% 95.5% 16,536 94.4% 94.5% 386 99.7% 99.2% 138,708 26,599 165,307 43,811 121,496 33,856 97.4% 97.1% 8,645 97.1% 96.9% (3,735) 103.0% 102.9% 134,643 20,732 155,375 40,489 114,886 2015 2014 2013 164,496 1,336 (16,803 ) 134,487 283,516 (22,428 ) (28,396 ) 232,692 61,221 16,536 386 165,307 243,450 (23,063 ) (23,256 ) 197,131 33,856 8,645 (3,735) 155,375 194,141 (26,361) (23,978) 143,802 $ $ $ $ Underwriting gain, before federal income tax GAAP combined ratio Statutory combined ratio Standard Personal Lines: Underwriting gain, before federal income tax GAAP combined ratio Statutory combined ratio E&S Lines: Underwriting (loss) gain, before federal income tax GAAP combined ratio Statutory combined ratio Investments: Net investment income Net realized investment gains Total investment income, before federal income tax Tax on investment income Total investment income, after federal income tax Reconciliation of Segment Results to Income from Continuing Operations, before Federal Income Tax Years ended December 31, ($ in thousands) Underwriting gain (loss), before federal income tax Standard Commercial Lines Standard Personal Lines E&S Lines Investment income, before federal income tax Total all segments Interest expense General corporate and other expenses Income from continuing operations, before federal income tax 114 Note 12. Earnings per Share The following table provides a reconciliation of the numerators and denominators of basic and diluted earnings per share ("EPS"): 2015 ($ in thousands, except per share amounts) Basic EPS: Net income available to common stockholders Effect of dilutive securities: Stock compensation plans Diluted EPS: Net income available to common stockholders 2014 ($ in thousands, except per share amounts) Basic EPS: Net income available to common stockholders Effect of dilutive securities: Stock compensation plans Diluted EPS: Net income available to common stockholders 2013 ($ in thousands, except per share amounts) Basic EPS: Net income from continuing operations Net loss from discontinued operations Net income available to common stockholders Effect of dilutive securities: Stock compensation plans Diluted EPS: Net income from continuing operations Net loss from discontinued operations Net income available to common stockholders Income (Numerator) Shares (Denominator) Per Share Amount $ 165,861 57,212 $ 2.90 — 944 $ 165,861 58,156 $ 2.85 Income (Numerator) Shares (Denominator) Per Share Amount $ 141,827 56,310 $ 2.52 — 1,041 $ 141,827 57,351 $ 2.47 Income (Numerator) Shares (Denominator) Per Share Amount 107,415 (997 ) 106,418 55,638 $ 55,638 55,638 $ 1.93 (0.02) 1.91 — 1,172 107,415 (997 ) 106,418 56,810 $ 56,810 56,810 $ 1.89 (0.02) 1.87 $ $ $ $ Note 13. Federal Income Taxes (a) A reconciliation of federal income tax on income at the corporate rate to the effective tax rate is as follows: ($ in thousands) Tax at statutory rate of 35% Tax-advantaged interest Dividends received deduction Other Federal income tax expense from continuing operations 2015 2014 2013 $ $ 81,442 (13,164 ) (1,817 ) 370 66,831 68,996 (12,926 ) (1,121 ) 355 55,304 50,331 (12,718) (1,174) (52) 36,387 115 (b) The tax effects of the significant temporary differences that give rise to deferred tax assets and liabilities are as follows: ($ in thousands) Deferred tax assets: Net loss reserve discounting Net unearned premiums Employee benefits Long-term incentive compensation plans Temporary investment write-downs Net operating loss Alternative minimum tax credits Other Total deferred tax assets Deferred tax liabilities: Deferred policy acquisition costs Unrealized gains on investment securities Other investment-related items, net Accelerated depreciation and amortization Total deferred tax liabilities Net deferred federal income tax asset 2015 2014 $ $ 74,436 72,057 30,432 15,551 5,419 1,454 — 8,132 207,481 72,481 24,228 5,566 12,510 114,785 92,696 84,502 66,470 33,721 13,625 3,939 2,136 7,400 9,237 221,030 63,242 43,289 5,088 10,962 122,581 98,449 After considering all evidence, both positive and negative, with respect to our federal tax loss carryback availability, expected levels of pre-tax financial statement income, and federal taxable income, we believe it is more likely than not that the existing deductible temporary differences will reverse during periods in which we generate net federal taxable income or have adequate federal carryback availability. As a result, we have no valuation allowance recognized for federal deferred tax assets at December 31, 2015 or 2014. As of December 31, 2015, we had federal tax NOL carryforwards of $4.2 million. These NOLs, which are subject to an annual limitation of $1.9 million, will expire between 2029 and 2031 as follows: ($ in thousands) 2029 2030 2031 Total NOL carryforwards Gross NOL Tax Effected NOL $ $ 75 3,999 79 4,153 26 1,400 28 1,454 Stockholders' equity reflects tax benefits related to compensation expense deductions for share-based compensation awards of $22.0 million at December 31, 2015, $20.2 million at December 31, 2014, and $19.2 million at December 31, 2013. We have analyzed our tax positions in all open tax years, which as of December 31, 2015 were 2012 through 2014. The 2013 tax year is currently under audit. We do not have unrecognized tax expense or benefit as of December 31, 2015. We believe our tax positions will more likely than not be sustained upon examination, including related appeals or litigation. In the event we had a tax position that did not meet the more likely than not criteria, any tax, interest, and penalties incurred related to such a position would be reflected in "Total federal income tax expense" on our Consolidated Statements of Income. Note 14. Retirement Plans (a) Selective Insurance Retirement Savings Plan (“Retirement Savings Plan”) SICA offers a voluntary defined contribution 401(k) plan, which is available to most of our employees and is a tax-qualified retirement plan subject to the Employee Retirement Income Security Act of 1974 ("ERISA"). Expense recorded for this plan was $14.1 million in 2015, $13.4 million in 2014, and $12.2 million in 2013. 116 (b) Deferred Compensation Plan SICA offers a nonqualified deferred compensation plan ("Deferred Compensation Plan") to a group of management or highly compensated employees as a method of recognizing and retaining such employees. The Deferred Compensation Plan provides these employees the opportunity to elect to defer receipt of specified portions of compensation and to have such deferred amounts deemed to be invested in specified investment options. In addition to the employee deferrals, SICA may choose to make matching contributions to some or all of the participants in this plan to the extent the participant did not receive the maximum matching or non-elective contributions permissible under the Retirement Savings Plan due to limitations under the Internal Revenue Code or the Retirement Savings Plan. Expense recorded for these contributions was $0.2 million in 2015, 2014, and 2013. (c) Retirement Income Plan and Retirement Life Plan SICA's primary pension plan is The Retirement Income Plan for Selective Insurance Company of America (the "Pension Plan"). This qualified, noncontributory defined benefit plan is closed to new entrants and existing participants will cease accruing benefits after March 31, 2016. In addition to the Pension Plan, SICA also sponsors the Supplemental Excess Retirement Plan (the "Excess Plan") and a life insurance benefit plan (the "Retirement Life Plan"). Both of these plans are closed to new entrants and participants in the Excess Plan will cease accruing benefits after March 31, 2016. The Retirement Life Plan does not accrue benefits and this plan applies only to retirees who terminated employment with SICA on or before March 31, 2009. These are both unfunded plans with benefit obligations as of December 31, 2015 and December 31, 2014 of $8.5 million and $8.8 million, respectively, for the Excess Plan and $6.0 million and $6.4 million, respectively, for the Retiree Life Plan. Expense recorded for the Excess Plan was $0.8 million in 2015, $0.6 million in 2014, and $0.5 million in 2013. Expense recorded for the Retiree Life Plan was $0.3 million in 2015, $0.4 million in 2014, and $0.4 million in 2013. The following tables provide details on the Pension Plan for 2015 and 2014: December 31, ($ in thousands) Change in Benefit Obligation: Benefit obligation, beginning of year Service cost Interest cost Actuarial losses (gains) Benefits paid Benefit obligation, end of year Change in Fair Value of Assets: Fair value of assets, beginning of year Actual return on plan assets, net of expenses Contributions by the employer to funded plans Benefits paid Fair value of assets, end of year Funded status Amounts Recognized in the Consolidated Balance Sheet: Liabilities Net pension liability, end of year Amounts Recognized in AOCI: Net actuarial loss Total Other Information as of December 31: Accumulated benefit obligation Weighted-Average Liability Assumptions as of December 31: Discount rate Rate of compensation increase $ $ $ $ $ $ $ $ $ $ 117 Pension Plan 2015 2014 322,271 7,215 13,668 (24,994 ) (7,852 ) 310,308 253,452 (7,600 ) 11,700 (7,852 ) 249,700 (60,608 ) (60,608 ) (60,608 ) 80,828 80,828 310,307 4.69 % 4.00 249,422 5,763 12,776 61,534 (7,224) 322,271 225,817 24,649 10,210 (7,224) 253,452 (68,819) (68,819) (68,819) 89,085 89,085 318,018 4.29 4.00 ($ in thousands) Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income: 2015 Pension Plan 2014 2013 Net Periodic Benefit Cost: Service cost Interest cost Expected return on plan assets Amortization of unrecognized prior service cost Amortization of unrecognized actuarial loss Curtailment expense Total net periodic cost Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income: Net actuarial (gain) loss Reversal of amortization of net actuarial loss Reversal of amortization of prior service cost Curtailment expense Total recognized in other comprehensive income Total recognized in net periodic benefit cost and other comprehensive income $ $ $ $ $ 7,215 13,668 (15,969 ) — 6,831 — 11,745 (1,425 ) (6,831 ) — — (8,256 ) 3,489 5,763 12,776 (15,671 ) — 1,776 — 4,644 52,556 (1,776 ) — — 50,780 7,346 12,139 (15,755) 21 4,145 189 8,085 (58,001) (4,145) (21) (189) (62,356) 55,424 (54,271) The estimated net actuarial loss for the Pension Plan that will be amortized from AOCI into net periodic benefit cost during the 2016 fiscal year is $5.9 million. 2015 Pension Plan 2014 2013 Weighted-Average Expense Assumptions for the years ended December 31: Discount rate Expected return on plan assets Rate of compensation increase 4.29 % 6.27 % 4.00 % 5.16 6.92 4.00 4.66 7.40 4.00 Our latest measurement date was December 31, 2015 and we increased our expected return on plan assets to 6.37%, reflecting the current interest rate environment. When determining the most appropriate discount rate to be used in the valuation, we consider, among other factors, our expected payout patterns of the plans' obligations as well as our investment strategy and we ultimately select the rate that we believe best represents our estimate of the inherent interest rate at which our pension and post-retirement life benefits can be effectively settled. Effective January 1, 2016, the approach used to calculate the service and interest components of net periodic benefit cost for benefit plans was changed to provide a more precise measurement of service and interest costs. Historically, we calculated these service and interest components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Going forward, we have elected to utilize an approach that discounts the individual expected cash flows using the applicable spot rates derived from the yield curve over the projected cash flow period. We will account for this change prospectively as a change in accounting estimate. The weighted average discount rates used to determine 2016 service and interest costs are 4.52% and 4.02%, respectively. Plan Assets Assets of the Pension Plan are invested to ensure that principal is preserved and enhanced over time. Our return objective is to exceed the returns of the plan's policy benchmark, which is the return the plan would have earned if the assets were invested according to the target asset class weightings and earned index returns shown below. In 2016, we will continue to phase in adjustments to the asset allocation to steadily close the gap between the duration of the assets and the duration of the liabilities, provided certain improved funding targets are achieved. 118 The Pension Plan’s equity investments may not contain investments in any one security greater than 8% of the portfolio value without notification to our management investment committee, nor have more than 5% of the outstanding shares of any one corporation or other entity. The use of derivative instruments is permitted under certain circumstances, but shall not be used for unrelated speculative hedging or to apply leverage to portfolio positions. Within the alternative investments portfolio, some leverage is permitted as defined and limited by the partnership agreements. The plan’s target ranges, as well as the actual weighted average asset allocation by asset class, at December 31 were as follows: Long duration fixed income Global equity Global Asset Allocation1 Private equity1,2 Cash and short-term investments1 Total 2015 2014 Target Ranges Actual Percentage Actual Percentage 55%-100% 0%-45% — % — % — % — % 60 % 36 % — % 3 % 1 % 100 % 59 % 25 % 11 % 4 % 1 % 100 % 1 These asset classes do not have target ranges, as these exposures will be phased out over time as we opportunistically migrate to long duration fixed income security strategies. 2 Includes limited partnerships. The Pension Plan had no investments in the Parent’s common stock as of December 31, 2015 or 2014. The fair value of the Pension Plan's investments is generated using various valuation techniques. We follow the methodology discussed in Note 2. “Summary of Significant Accounting Policies,” regarding pricing and valuation techniques, as well as the fair value hierarchy, for equity and fixed income securities and short-term investments held in the Pension Plan. The techniques used to determine the fair value of the remaining invested assets are as follows: • Valuations for the majority of the investment funds utilize the market approach wherein the quoted prices in the active market for identical assets are used. These investment funds are traded in active markets at their net asset value per share. There are no restrictions on the redemption of these investments and we do not have any contractual obligations to further invest in any of the individual mutual funds. These investments are classified as Level 1 in the fair value hierarchy. Valuations of non-publicly traded investment funds are based upon the observable and verifiable market values of the underlying publicly traded securities and therefore are classified as Level 2 within the fair value hierarchy. • The deposit administration contract is carried at cost, which approximates fair value. Given the liquid nature of the underlying investments in overnight cash deposits and other short term duration products, we have determined that a correlation exists between the deposit administration contract and other short-term investments such as money market funds. As such, this investment is classified as Level 2 in the fair value hierarchy. • For valuations of the investments in limited partnerships, fair value is based on the Pension Plan’s ownership interest in the reported net asset values as a practical expedient. The majority of the net asset values are reported to us on a one quarter lag. We assess whether these reported net asset values are indicative of market activity that has occurred since the date of their valuation by the investees: (i) by reviewing the overall market fluctuation and whether a material impact to our investments' valuation could have occurred; and (ii) through routine conversations with the underlying funds' general partners/managers discussing, among other things, conditions or events having significant impacts to their portfolio assets that have occurred subsequent to the reported date, if any. Our limited partnership investments cannot be redeemed with the investees as our partnership agreements require our commitment for the duration of the underlying funds’ lives. There is no active plan to sell any of our remaining interests in the limited partnership investments; however, we may continue to entertain potential opportunities to limit our exposure to these investments through the use of the secondary market. These limited partnerships have been fair valued using Level 3 inputs. 119 The following tables provide quantitative disclosures of the Pension Plan’s invested assets that are measured at fair value on a recurring basis: December 31, 2015 Fair Value Measurements at 12/31/15 Using ($ in thousands) Description Long duration fixed income: Global asset allocation fund Extended duration fixed income Total long duration fixed income Global equity: Non-U.S. equity U.S. equity Total global equity Private equity (limited partnerships): Private equity Real estate Total private equity Cash and short-term investments: Short-term investments Deposit administration contracts Total cash and short-term investments Total invested assets Assets Measured at Fair Value At 12/31/15 Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $ $ 33,565 117,297 150,862 42,603 46,840 89,443 4,852 1,606 6,458 1,600 1,418 3,018 249,781 33,565 117,297 150,862 — — — — — — 1,600 — 1,600 152,462 — — — 42,603 46,840 89,443 — — — — 1,418 1,418 90,861 — — — — — — 4,852 1,606 6,458 — — — 6,458 December 31, 2014 Fair Value Measurements at 12/31/14 Using ($ in thousands) Description Long duration fixed income: Global asset allocation fund Extended duration fixed income Total long duration fixed income Global equity: Non-U.S. equity U.S. equity Total global equity Global asset allocation Private equity (limited partnerships): Equity long/short hedge Private equity Real estate Total private equity Cash and short-term investments: Short-term investments Deposit administration contracts Total cash and short-term investments Total invested assets Assets Measured at Fair Value At 12/31/14 Quoted Prices in Active Markets for Identical Assets/ Liabilities (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) 27,782 120,532 148,314 5,438 47,719 53,157 27,842 — — — — 1,222 — 1,222 230,535 — — — 11,414 — 11,414 — — — — — — 1,180 1,180 12,594 — — — — — — — 41 8,136 2,215 10,392 — — — 10,392 $ $ 27,782 120,532 148,314 16,852 47,719 64,571 27,842 41 8,136 2,215 10,392 1,222 1,180 2,402 253,521 120 The following tables provide a summary of the changes in fair value of securities using significant unobservable inputs (Level 3): Investments in Limited Partnerships ($ in thousands) Fair value, beginning of year Total gains (realized and unrealized) included in changes in net assets Purchases Sales Issuances Settlements Transfers into Level 3 Transfers out of Level 3 Fair value, end of year 2015 2014 $ $ 10,392 (410 ) 51 — — (3,575 ) — — 6,458 12,159 1,586 334 — — (3,687 ) — — 10,392 Contributions We presently anticipate contributing $11.7 million to the Pension Plan in 2016, none of which represents minimum required contribution amounts. Benefit Payments ($ in thousands) Benefits Expected to be Paid in Future Fiscal Years: 2016 2017 2018 2019 2020 2021-2025 Pension Plan $ 9,917 10,958 12,005 13,045 14,092 84,400 Note 15. Share-Based Payments Active Plans As of December 31, 2015, the following four plans are available for the issuance of share-based payment awards: • The 2014 Omnibus Stock Plan (the "Stock Plan"); • The Cash Incentive Plan, amended and restated effective as of May 1, 2014 (the "Cash Plan"); • The Employee Stock Purchase Plan (2009) ("ESPP"); and • The Amended and Restated Stock Purchase Plan for Independent Insurance Agencies (the "Agent Plan"). The following table provides information regarding the approval of these plans: Plan Approvals Stock Plan Approved effective as of May 1, 2014 by stockholders on April 23, 2014. Cash Plan Approved effective April 1, 2005 by stockholders on April 27, 2005. Most recently amended and restated plan was approved effective May 1, 2014 by stockholders on April 23, 2014. ESPP Approved by stockholders on April 29, 2009 effective July 1, 2009. Agent Plan Approved by stockholders on April 26, 2006. Most recently amended and restated plan (which made immaterial amendments to the original plan) was approved on July 27, 2010 by the Parent's Board of Directors' Salary and Employee Benefits Committee ("SEBC"). 121 The types of awards that can be issued under each of these plans are as follows: Plan Types of Share-Based Payments Issued Stock Plan Cash Plan ESPP Agent Plan Qualified and nonqualified stock options, stock appreciation rights ("SARs"), restricted stock, restricted stock units ("RSUs"), stock grants, and other awards valued in whole or in part by reference to the Parent's common stock. The maximum exercise period for an option grant under this plan is 10 years from the date of the grant. Dividend equivalent units ("DEUs") are earned during the vesting period on RSU grants. The DEUs are reinvested in the Parent's common stock at fair value on each dividend payment date. The requisite service period for grants to employees under this plan is the lesser of: (i) the stated vested date, which is typically three years from issuance; or (ii) the date the employee becomes eligible to retire. Cash incentive units (“CIUs”). The initial dollar value of each CIU will be adjusted to reflect the percentage increase or decrease in the total shareholder return on the Parent's common stock over a specified performance period. In addition, for certain grants, the number of CIUs granted will be increased or decreased to reflect our performance on specified performance indicators as compared to targeted peer companies. The requisite service period for grants under this plan is the lesser of: (i) the stated vested date, which is typically three years from issuance; or (ii) the date the employee becomes eligible to retire. Enables to employees to purchase shares of the Parent’s common stock. The purchase price is the lower of: (i) 85% of the closing market price at the time the option is granted; or (ii) 85% of the closing price at the time the option is exercised. Shares are generally issued on June 30 and December 31 of each year. Quarterly offerings to purchase the Parent's common stock at a 10% discount with a one year restricted period during which the shares purchased cannot be sold or transferred. Only our independent retail insurance agencies and wholesale general agencies, and certain eligible persons associated with the agencies, are eligible to participate in this plan. Shares authorized and available for issuance as of December 31, 2015 are as follows: As of December 31, 2015 Stock Plan ESPP Agent Plan Authorized 3,500,000 1,500,000 3,000,000 Available for Issuance Awards Outstanding 344,105 — — 3,138,273 663,154 1,937,154 Retired Plans The following plans are closed for the issuance of new awards, although awards outstanding continue in effect according to the terms of the applicable award agreements: Types of Share-Based Payments Issued Reserve Shares Awards Outstanding1 December 31, 2015 Plan 2005 Omnibus Stock Plan ("2005 Stock Plan") Qualified and nonqualified stock options, SARs, restricted stock, RSUs, phantom stock, stock bonuses, and other awards in such amounts and with such terms and conditions as it determined, subject to the provisions of the 2005 Stock Plan. The maximum exercise period for an option grant under this plan is 10 years from the date of the grant. DEUs are earned during the vesting period on RSU grants. The DEUs are reinvested in the Parent's common stock at fair value on each dividend payment date. Parent's Stock Compensation Plan for Non-employee Directors ("Directors Stock Compensation Plan") 1 Awards outstanding under the 2005 Stock Plan consisted of 732,058 RSUs and 493,428 stock options. Directors could elect to receive a portion of their annual compensation in shares of the Parent's common stock. RSU Transactions A summary of the RSU transactions under our share-based payment plans is as follows: Unvested RSU awards at December 31, 2014 Granted in 2015 Vested in 2015 Forfeited in 2015 Unvested RSU awards at December 31, 2015 3,182,006 1,225,486 67,978 67,978 Number of Shares 1,077,010 $ 342,409 371,930 28,959 1,018,530 $ Weighted Average Grant Date Fair Value 20.18 25.22 18.24 21.41 22.55 As of December 31, 2015, total unrecognized compensation expense related to unvested RSU awards granted under our stock plans was $5.0 million. That expense is expected to be recognized over a weighted-average period of 1.7 years. The total 122 intrinsic value of RSUs vested was $10.3 million for 2015, $8.5 million for 2014, and $9.1 million for 2013. In connection with vested RSUs, the total value of the DEU shares that vested was $0.7 million during both 2015 and 2014 and $0.9 million in 2013. Option Transactions A summary of the stock option transactions under our share-based payment plans is as follows: Outstanding at December 31, 2014 Granted in 2015 Exercised in 2015 Forfeited or expired in 2015 Outstanding at December 31, 2015 Exercisable at December 31, 2015 Weighted Average Exercise Price Weighted Average Remaining Contractual Life in Years Aggregate Intrinsic Value ($ in thousands) 19.52 — 22.97 — 17.84 17.84 2.90 $ 2.90 $ 7,767 7,767 Number of Shares 734,539 $ — 241,111 — 493,428 $ 493,428 $ The total intrinsic value of options exercised was $2.2 million during 2015, $0.8 million in 2014, and $1.3 million in 2013. CIU Transactions The liability recorded in connection with our Cash Plan was $26.5 million at December 31, 2015 and $21.9 million at December 31, 2014. The remaining cost associated with the CIUs is expected to be recognized over a weighted average period of 1.1 years. The CIU payments made were $10.2 million in 2015, $9.0 million in 2014, and $4.7 million in 2013. ESPP and Agent Plan Transactions A summary of ESPP and Agent Plan share issuances is as follows: ESPP Issuances Agent Plan Issuances 2015 100,944 82,142 2014 2013 106,832 78,724 122,951 86,388 Fair Value Measurements The grant date fair value of RSUs is based on the market price of our common stock on the grant date, adjusted for the present value of our expected dividend payments. The expense recognized for share-based awards is based on the number of shares or units expected to be issued at the end of the performance period and the grant date fair value. The grant date fair value of each option award is estimated using the Black Scholes option valuation model ("Black Scholes"). The following are the significant assumptions used in applying Black Scholes: (i) the risk-free interest rate, which is the implied yield currently available on U.S. Treasury zero-coupon issues with an equal remaining term; (ii) the expected term, which is based on historical experience of similar awards; (iii) the dividend yield, which is determined by dividing the expected per share dividend during the coming year by the grant date stock price; and (iv) the expected volatility, which is based on the volatility of the Parent's stock price over a historical period comparable to the expected term. In applying Black Scholes, we use the weighted average assumptions illustrated in the following table: Risk-free interest rate Expected term Dividend yield Expected volatility 2015 0.10 % 6 months 2.0 % 20 % ESPP 2014 0.07 6 months 2.0 21 2013 0.11 6 months 2.4 19 123 The weighted-average fair value of options and stock per share, including RSUs granted for the Parent's stock plans, during 2015, 2014, and 2013 is as follows: RSUs ESPP: Six month option Discount of grant date market value Total ESPP Agent Plan: Discount of grant date market value 2015 2014 2013 $ 25.22 21.58 21.03 1.26 4.16 5.42 2.94 1.24 3.87 5.11 2.42 0.97 3.24 4.21 2.40 The fair value of the CIU liability is remeasured at each reporting period through the settlement date of the awards, which is three years from the date of grant based on an amount expected to be paid. A Monte Carlo simulation is performed to approximate the projected fair value of the CIUs that, in accordance with the Cash Plan, is adjusted to reflect our performance on specified indicators as compared to targeted peer companies. Expense Recognition The following table provides share-based compensation expense in 2015, 2014, and 2013: ($ in millions) Share-based compensation expense, pre-tax Income tax benefit Share-based compensation expense, after-tax 2015 2014 2013 $ $ 23.8 (8.0 ) 15.8 18.6 (6.2 ) 12.4 19.9 (6.8) 13.1 Note 16. Related Party Transactions William M. Rue, a Director of the Parent, is Chairman of, and owns more than 10% of the equity of, Chas. E. Rue & Son, Inc., t/a Rue Insurance, a general independent retail insurance agency ("Rue Insurance"). Rue Insurance is an appointed distribution partner of the Insurance Subsidiaries on terms and conditions similar to those of our other distribution partners. Mr. Rue’s son is President, and an employee, of Rue Insurance and Mr. Rue’s daughter is an employee of Rue Insurance. Our relationship with Rue Insurance has existed since 1928. Rue Insurance placed insurance policies with the Insurance Subsidiaries. DPW associated with these policies were $9.6 million in 2015, $9.0 million in 2014, and $8.2 million in 2013. In return, the Insurance Subsidiaries paid standard market commissions to Rue Insurance of $1.7 million in 2015, $1.6 million in 2014, and $1.3 million in 2013 including supplemental commissions. In 2005, we established a private foundation, now named The Selective Insurance Group Foundation (the "Foundation"), under Section 501(c)(3) of the Internal Revenue Code. The Board of Directors of the Foundation is comprised of some of the Parent's officers. We made contributions to the Foundation in the amount of $1.0 million in 2015, $0.8 million in 2014, and $0.4 million in 2013. Note 17. Commitments and Contingencies (a) We purchase annuities from life insurance companies to fulfill obligations under claim settlements that provide for periodic future payments to claimants. As of December 31, 2015, we had purchased such annuities with a present value of $15.8 million for settlement of claims on a structured basis for which we are contingently liable. To our knowledge, there are no material defaults from any of the issuers of such annuities. (b) We have various operating leases for office space and equipment. Such lease agreements, which expire at various times, are generally renewed or replaced by similar leases. Rental expense under these leases amounted to $17.4 million in 2015, $15.6 million in 2014, and $13.2 million in 2013. We also lease computer hardware and software under capital lease agreements expiring at various dates through 2018. See Note 2(p) for information on our accounting policy regarding leases. 124 In addition, certain leases for rented premises and equipment are non-cancelable, and liability for payment will continue even though the space or equipment may no longer be in use. At December 31, 2015, the total future minimum rental commitments under non-cancelable leases were as follows: ($ in millions) 2016 2017 2018 2019 2020 After 2020 Total minimum payment required Capital Leases Operating Leases Total $ $ 3.9 2.8 1.2 — — — 7.9 6.7 5.5 4.9 4.1 3.1 5.8 30.1 10.6 8.3 6.1 4.1 3.1 5.8 38.0 (c) At December 31, 2015, we have contractual obligations that expire at various dates through 2028 to invest up to an additional $74.4 million in alternative and other investments. There is no certainty that any such additional investment will be required. For additional information regarding these investments, see item (f) of Note 5. "Investments" in this Form 10-K. Note 18. Litigation In the ordinary course of conducting business, we are named as defendants in various legal proceedings. Most of these proceedings are claims litigation involving our Insurance Subsidiaries as either: (i) liability insurers defending or providing indemnity for third-party claims brought against our customers; or (ii) insurers defending first-party coverage claims brought against them. We account for such activity through the establishment of unpaid loss and loss expense reserves. We expect that the ultimate liability, if any, with respect to such ordinary course claims litigation, after consideration of provisions made for potential losses and costs of defense, will not be material to our consolidated financial condition, results of operations, or cash flows. Our Insurance Subsidiaries are also from time to time involved in other legal actions, some of which assert claims for substantial amounts. These actions include, among others, putative class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, improper reimbursement of medical providers paid under workers compensation and personal and commercial automobile insurance policies. Our Insurance Subsidiaries also are involved from time to time in individual actions in which extra-contractual damages, punitive damages, or penalties are sought, such as claims alleging bad faith in the handling of insurance claims. We believe that we have valid defenses to these cases. We expect that the ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for estimated losses, will not be material to our consolidated financial condition. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation, an adverse outcome in certain matters could, from time to time, have a material adverse effect on our consolidated results of operations or cash flows in particular quarterly or annual periods. As of December 31, 2015, we do not believe the Company was involved in any legal action that could have a material adverse effect on our consolidated financial condition, results of operations, or cash flows. Note 19. Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds (a) Statutory Financial Information The Insurance Subsidiaries prepare their statutory financial statements in accordance with accounting principles prescribed or permitted by the various state insurance departments of domicile. Prescribed statutory accounting principles include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (“NAIC"). Permitted statutory accounting principles encompass all accounting principles that are not prescribed; such principles differ from state to state, may differ from company to company within a state and may change in the future. The Insurance Subsidiaries do not utilize any permitted statutory accounting principles that materially affect the determination of statutory surplus, statutory net income, or risk-based capital (“RBC”). As of December 31, 2015, the various state insurance departments of domicile have adopted the March 2015 version of the NAIC Accounting Practices and Procedures manual in its entirety, as a component of prescribed or permitted practices. 125 The following table provides statutory data for each of our Insurance Subsidiaries: State of Domicile Unassigned Surplus Statutory Surplus ($ in millions) SICA Selective Way Insurance Company ("SWIC") New Jersey New Jersey 2015 $ 366.6 223.6 2014 338.8 201.3 2015 520.8 272.6 2014 493.0 250.3 Selective Insurance Company of South Carolina ("SICSC") Selective Insurance Company of the Southeast ("SICSE") Indiana Indiana New York Selective Insurance Company of New York ("SICNY") Selective Insurance Company of New England ("SICNE") New Jersey Selective Auto Insurance Company of New Jersey ("SAICNJ") MUSIC Selective Casualty Insurance Company ("SCIC") Selective Fire and Casualty Insurance Company ("SFCIC") Total New Jersey New Jersey New Jersey New Jersey 96.6 70.7 65.3 9.2 26.4 7.0 17.8 7.5 $ 890.7 83.9 59.3 54.9 5.3 18.4 (1.7 ) 8.2 127.9 96.2 93.0 39.4 69.2 75.5 92.3 115.1 84.9 82.6 35.4 61.3 66.8 82.7 3.8 39.4 772.2 1,426.3 1,307.8 35.7 Statutory Net Income 2014 2013 2015 69.6 42.3 15.9 12.1 12.7 5.5 10.8 9.5 12.1 83.9 37.0 14.0 10.5 10.3 4.4 9.1 7.3 9.6 53.1 27.5 8.2 6.0 6.9 3.1 2.5 5.2 6.6 5.3 195.8 4.2 190.3 3.1 122.2 (b) Capital Requirements The Insurance Subsidiaries are required to maintain certain minimum amounts of statutory surplus to satisfy the requirements of their various state insurance departments of domicile. RBC requirements for property and casualty insurance companies are designed to assess capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. The Insurance Subsidiaries combined total adjusted capital exceeded the authorized control level RBC, as defined by the NAIC based on their 2015 statutory financial statements. In addition to statutory capital requirements, we are impacted by various rating agency requirements related to certain rating levels. These required capital levels may be more than statutory requirements. (c) Restrictions on Dividends and Transfers of Funds Our ability to declare and pay dividends on the Parent's common stock is dependent on liquidity at the Parent coupled with the ability of the Insurance Subsidiaries to declare and pay dividends, if necessary, and/or the availability of other sources of liquidity to the Parent. As of December 31, 2015, the Parent had an aggregate of $91.6 million in investments and cash available to fund future dividends and interest payments. These amounts are not subject to any regulatory restrictions other than standard state insolvency restrictions, whereas our consolidated retained earnings of $1.4 billion is predominately restricted due to the regulation associated with our Insurance Subsidiaries. In 2016, the Insurance Subsidiaries have the ability to provide for $178.3 million in annual dividends to the Parent; however, as regulated entities, these dividends are subject to certain restrictions as is further discussed below. The Parent also has available to it other potential sources of liquidity, such as: (i) borrowings from our Indiana Subsidiaries; (ii) debt issuances; (iii) common stock issuances; and (iv) borrowings under our Line of Credit. Borrowings from our Indiana Subsidiaries are governed by approved intercompany lending agreements with the Parent that provide for additional capacity of $54.6 million as of December 31, 2015, after considering that borrowings under these lending agreements are restricted to 10% of the admitted assets of these respective subsidiaries. For additional information regarding the Parent's Line of Credit, refer to "Financial Condition, Liquidity, Short-Term Borrowings, and Capital Resources" in Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations.” of this Form 10-K. For additional restrictions on the Parent's debt, see Note 10. "Indebtedness" in this Form 10-K. Insurance Subsidiaries Dividend Restrictions As noted above, the restriction on our net assets and retained earnings is predominantly driven by our Insurance Subsidiaries' ability to pay dividends to the Parent under applicable law and regulations. Under the insurance laws of the domiciliary states of the Insurance Subsidiaries, New Jersey, Indiana, and New York, an insurer can potentially make an ordinary dividend payment if its statutory surplus following such dividend is reasonable in relation to its outstanding liabilities, is adequate to its financial needs, and the dividend does not exceed the insurer's unassigned surplus. In general, New Jersey defines an ordinary dividend as a dividend whose fair market value, together with other dividends made within the preceding 12 months, is less than the greater of 10% of the insurer's statutory surplus as of the preceding December 31, or the insurer's net income (excluding capital gains) for the 12-month period ending on the preceding December 31. Indiana's ordinary dividend calculation is consistent with New Jersey's, except that it does not exclude capital gains from net income. In general, New York defines an ordinary dividend as a dividend whose fair market value, together with other dividends made within the preceding 12 months, is less than the lesser of 10% of the insurer's statutory surplus, or 100% of adjusted net investment income. New Jersey and Indiana require notice of the declaration of any ordinary dividend distribution. During the notice period, the 126 relevant state regulatory authority may disallow all or part of the proposed dividend if it determines that the dividend is not appropriate given the above considerations. New York does not require notice of ordinary dividends. Dividend payments exceeding ordinary dividends are referred to as extraordinary dividends and require review and approval by the applicable domiciliary insurance regulatory authority prior to payment. The following table provides quantitative data regarding all Insurance Subsidiaries' dividends paid to the Parent in 2015 for debt service, shareholder dividends, and general operating purposes: Twelve Months ended December 31, 2015 State of Domicile Ordinary Dividends Paid Dividends ($ in millions) SICA SWIC SICSC SICSE SICNY SICNE SAICNJ SCIC SFCIC Total New Jersey New Jersey Indiana Indiana New York New Jersey New Jersey New Jersey New Jersey $ $ Based on the 2015 statutory financial statements, the maximum ordinary dividends that can be paid to the Parent by the Insurance Subsidiaries in 2016 are as follows: ($ in millions) SICA SWIC SICSC SICSE SICNY SICNE SAICNJ MUSIC SCIC SFCIC Total State of Domicile 2016 Maximum Ordinary Dividends New Jersey New Jersey Indiana Indiana New York New Jersey New Jersey New Jersey New Jersey New Jersey $ $ 127 26.0 16.0 3.3 2.0 2.5 1.5 2.5 2.5 1.5 57.8 61.2 37.0 15.9 12.1 9.3 5.5 10.6 9.4 12.1 5.2 178.3 Note 20. Quarterly Financial Information (unaudited, $ in thousands, First Quarter Second Quarter Third Quarter Fourth Quarter except per share data) Net premiums earned Net investment income earned Net realized gains (losses) Underwriting income (loss) $ Net income Other comprehensive income (loss) Comprehensive income (loss) Net income per share: Basic Diluted Dividends to stockholders1 Price range of common stock:2 High Low 2015 476,123 26,917 18,883 26,021 39,708 3,827 43,535 0.70 0.69 0.14 30.10 25.49 2014 456,495 35,534 7,218 (5,015 ) 17,974 16,678 34,652 0.32 0.31 0.13 26.99 21.38 2015 490,309 32,230 (3,420 ) 29,124 33,768 (35,944 ) (2,176 ) 0.59 0.58 0.14 29.60 26.28 2014 463,625 36,774 4,539 10,084 29,341 26,483 55,824 0.52 0.51 0.13 25.42 22.14 2015 507,390 32,061 308 44,831 46,996 6,290 53,286 0.82 0.81 0.14 32.50 28.10 2014 462,639 34,292 15,231 34,437 53,162 (18,887 ) 34,275 0.94 0.93 0.13 25.46 21.97 2015 516,087 30,108 (2,600 ) 49,053 45,389 (3,386 ) 42,003 0.79 0.78 0.15 37.91 30.36 2014 469,850 32,108 (389 ) 38,637 41,350 (29,337 ) 12,013 0.73 0.72 0.14 27.65 22.01 The addition of all quarters may not agree to annual amounts on the Financial Statements due to rounding. 1 See Note 19. “Statutory Financial Information, Capital Requirements, and Restrictions on Dividends and Transfers of Funds” for a discussion of dividend restrictions. 2 These ranges of high and low prices of the Parent’s common stock, as reported by the NASDAQ Global Select Market, represent actual transactions. Price quotations do not include retail markups, markdowns, and commissions. The range of high and low prices for common stock for the period beginning January 4, 2016 and ending February 12, 2016 was $29.27 to $34.00. 128 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are: (i) effective in recording, processing, summarizing, and reporting information on a timely basis that we are required to disclose in the reports that we file or submit under the Exchange Act; and (ii) effective in ensuring that information that we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management's Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) is a process designed by, or under the supervision of, a company's principal executive and principal financial officers and effected by the Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: • Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; • Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and • Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2015. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework ("COSO Framework") in 2013. Based on its assessment, our management believes that, as of December 31, 2015, our internal control over financial reporting is effective. No changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) of the Exchange Act) occurred during the fourth quarter of 2015 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Attestation Report of the Independent Registered Public Accounting Firm Our independent registered public accounting firm, KPMG, LLP has issued their attestation report on our internal control over financial reporting which is set forth below. 129 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Selective Insurance Group, Inc.: We have audited Selective Insurance Group, Inc. and its subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Selective Insurance Group, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Selective Insurance Group, Inc. and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Selective Insurance Group, Inc. and subsidiaries as of December 31, 2015 and December 31, 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flow for each of the years in the three-year period ended December 31, 2015, and our report dated February 24, 2016 expressed an unqualified opinion on those consolidated financial statements. /s/ KPMG LLP New York, New York February 24, 2016 130 Item 9B. Other Information. There is no other information that was required to be disclosed in a report on Form 8-K during the fourth quarter of 2015 that we did not report. PART III Because we will file a Proxy Statement within 120 days after the end of the fiscal year ending December 31, 2015, this Annual Report on Form 10-K omits certain information required by Part III and incorporates by reference certain information included in the Proxy Statement. Item 10. Directors, Executive Officers and Corporate Governance. Information about our executive officers, Directors, and all other matters required to be disclosed in Item 10. "Directors, Executive Officers and Corporate Governance." appears under the "Executive Officers" and "Information About Proposal 1 - Election of Directors" sections of the Proxy Statement. These portions of the Proxy Statement are hereby incorporated by reference. Section 16(a) Beneficial Ownership Reporting Compliance Information about compliance with Section 16(a) of the Exchange Act appears under "Section 16(a) Beneficial Ownership Reporting Compliance" in the "Information About Proposal 1 - Election of Directors" section of the Proxy Statement and is hereby incorporated by reference. Item 11. Executive Compensation. Information about compensation of our named executive officers appears under "Executive Compensation" in the "Election of Directors" section of the Proxy Statement and is hereby incorporated by reference. Information about compensation of the Board appears under "Director Compensation" in the "Information About Proposal 1 - Election of Directors" section of the Proxy Statement and is hereby incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Information about security ownership of certain beneficial owners and management appears under "Security Ownership of Management and Certain Beneficial Owners" in the "Information About Proposal 1 - Election of Directors" section of the Proxy Statement and is hereby incorporated by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence. Information about certain relationships and related transactions, and director independence appears under “Transactions with Related Persons” in the "Information About Proposal 1 - Election of Directors" section of the Proxy Statement and is hereby incorporated by reference. Item 14. Principal Accounting Fees and Services. Information about the fees and services of our principal accountants appears under "Audit Committee Report" and "Fees of Independent Registered Public Accounting Firm" in the "Information About Proposal 3 - Ratification of Appointment of Independent Registered Public Accounting Firm" section of the Proxy Statement and is hereby incorporated by reference. 131 PART IV Item 15. Exhibits, Financial Statement Schedules (a) The following documents are filed as part of this report: (1) Financial Statements: The Financial Statements listed below are included in Item 8. "Financial Statements and Supplementary Data." Consolidated Balance Sheets as of December 31, 2015 and 2014 Consolidated Statements of Income for the Years Ended December 31, 2015, 2014, and 2013 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2015, 2014, and 2013 Consolidated Statements of Stockholder's Equity for the Years Ended December 31, 2015, 2014, and 2013 Consolidated Statements of Cash Flow for the Years Ended December 31, 2015, 2014, and 2013 Notes to Consolidated Financial Statements, December 31, 2015, 2014, and 2013 (2) Financial Statement Schedules: Form 10-K Page 78 79 80 81 82 83 The financial statement schedules, with Independent Auditors' Report thereon, required to be filed are listed below by page number as filed in this report. All other schedules are omitted as the information required is inapplicable, immaterial, or the information is presented in the Financial Statements or related notes. Schedule I Summary of Investments – Other than Investments in Related Parties at December 31, 2015 Schedule II Condensed Financial Information of Registrant at December 31, 2015 and 2014 and for the Years Ended December 31, 2015, 2014, and 2013 Schedule III Supplementary Insurance Information for the Years Ended December 31, 2015, 2014, and 2013 Schedule IV Reinsurance for the Years Ended December 31, 2015, 2014, and 2013 Schedule V Allowance for Uncollectible Premiums and Other Receivables for the Years Ended December 31, 2015, 2014, and 2013 (3) Exhibits: Form 10-K Page 135 136 139 141 141 The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index, which is incorporated by reference and immediately precedes the exhibits filed with or incorporated by reference in this Form 10-K. 132 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SELECTIVE INSURANCE GROUP, INC. By: /s/ Gregory E. Murphy Gregory E. Murphy Chairman of the Board and Chief Executive Officer By: /s/ Dale A. Thatcher Dale A. Thatcher Executive Vice President and Chief Financial Officer (principal accounting officer and principal financial officer) February 24, 2016 February 24, 2016 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. 133 By: /s/ Gregory E. Murphy Gregory E. Murphy Chairman of the Board and Chief Executive Officer * Paul D. Bauer Director * A. David Brown Director * John C. Burville Director * Robert Kelly Doherty Director * Michael J. Morrissey Director * Cynthia S. Nicholson Director * Ronald L. O’Kelley Director * William M. Rue Director * John S. Scheid Director * J. Brian Thebault Director * Philip H. Urban Director * By: /s/ Michael H. Lanza Michael H. Lanza Attorney-in-fact 134 February 24, 2016 February 24, 2016 February 24, 2016 February 24, 2016 February 24, 2016 February 24, 2016 February 24, 2016 February 24, 2016 February 24, 2016 February 24, 2016 February 24, 2016 February 24, 2016 February 24, 2016 SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 2015 SCHEDULE I Types of investment ($ in thousands) Fixed income securities: Held-to-maturity: Amortized Cost or Cost Fair Value Carrying Amount Obligations of states and political subdivisions $ Public utilities All other corporate securities Asset-backed securities Commercial mortgage-backed securities Total fixed income securities, held-to-maturity Available-for-sale: U.S. government and government agencies Foreign government Obligations of states and political subdivisions Public utilities All other corporate securities Asset-backed securities Commercial mortgage-backed securities Residential mortgage-backed securities Total fixed income securities, available-for-sale Equity securities: Common stock: Public utilities Banks, trust and insurance companies Industrial, miscellaneous and all other Total common stock, available-for-sale Preferred stock: Banks, trust and insurance companies Total preferred stock, available-for-sale Total equity securities, available-for-sale Short-term investments Other investments Total investments $ 181,880 10,662 11,353 1,028 4,621 209,544 104,115 15,181 1,359,142 157,270 1,742,912 244,154 243,592 541,837 4,408,203 10,080 23,696 161,013 194,789 12,262 12,262 207,051 194,819 175,269 9,637 10,591 1,030 4,527 201,054 99,485 14,885 1,314,779 156,786 1,735,510 244,541 245,252 541,276 4,352,514 9,106 23,622 149,263 181,991 11,825 11,825 193,816 194,819 77,842 5,020,045 176,117 9,647 10,396 910 4,284 201,354 104,115 15,181 1,359,142 157,270 1,742,912 244,154 243,592 541,837 4,408,203 10,080 23,696 161,013 194,789 12,262 12,262 207,051 194,819 77,842 5,089,269 See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. 135 SELECTIVE INSURANCE GROUP, INC. (Parent Corporation) Balance Sheets ($ in thousands, except share amounts) Assets: Fixed income securities, available-for-sale – at fair value (amortized cost: $61,794 – 2015; $49,890 – 2014) Short-term investments Cash Investment in subsidiaries Current federal income tax Deferred federal income tax Other assets Total assets Liabilities: Notes payable Intercompany notes payable Accrued long-term stock compensation Other liabilities Total liabilities Stockholders’ Equity: Preferred stock at $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: 100,861,372 – 2015; 99,947,933 – 2014 Additional paid-in capital Retained earnings Accumulated other comprehensive (loss) income Treasury stock – at cost (shares: 43,500,642 – 2015; 43,353,181 – 2014) Total stockholders’ equity Total liabilities and stockholders’ equity SCHEDULE II December 31, 2015 2014 61,567 29,116 898 1,716,681 18,297 17,513 670 1,844,742 328,192 86,163 26,465 5,881 446,701 50,028 16,605 16,367 1,604,162 16,848 15,781 660 1,720,451 327,689 88,961 21,890 6,325 444,865 — — 201,723 326,656 1,446,192 (9,425 ) (567,105 ) 1,398,041 1,844,742 199,896 305,385 1,313,440 19,788 (562,923) 1,275,586 1,720,451 $ $ $ $ $ $ See accompanying Report of Independent Registered Public Accounting Firm. Information should be read in conjunction with the Notes to Consolidated Financial Statements of Selective Insurance Group, Inc. and its subsidiaries. Both items are in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. 136 SELECTIVE INSURANCE GROUP, INC. (Parent Corporation) Statements of Income SCHEDULE II (continued) ($ in thousands) Revenues: Dividends from subsidiaries Net investment income earned Other income Total revenues Expenses: Interest expense Other expenses Total expenses Income (loss) from continuing operations, before federal income tax Federal income tax benefit: Current Deferred Total federal income tax benefit Year ended December 31, 2015 2014 2013 $ 57,752 852 — 58,604 24,057 28,393 52,450 6,154 57,511 620 342 58,473 24,817 23,598 48,415 10,058 (16,609 ) (1,603 ) (18,212 ) (15,920 ) (646 ) (16,566 ) 32,129 585 55 32,769 28,132 24,065 52,197 (19,428) (22,779) 4,835 (17,944) Net income (loss) from continuing operations before equity in undistributed income of subsidiaries 24,366 26,624 (1,484) Equity in undistributed income of continuing subsidiaries, net of tax Net income from continuing operations 141,495 115,203 108,899 165,861 141,827 107,415 Loss on disposal of discontinued operations, net of tax of $(538) – 2013 — — (997) Net income $ 165,861 141,827 106,418 See accompanying Report of Independent Registered Public Accounting Firm. Information should be read in conjunction with the Notes to Consolidated Financial Statements of Selective Insurance Group, Inc. and its subsidiaries. Both items are in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. 137 SELECTIVE INSURANCE GROUP, INC. (Parent Corporation) Statements of Cash Flows SCHEDULE II (continued) ($ in thousands) Operating Activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Year ended December 31, 2015 2014 2013 $ 165,861 141,827 106,418 Equity in undistributed income of subsidiaries, net of tax Stock-based compensation expense Loss on disposal of discontinued operations Net realized gains Amortization – other Changes in assets and liabilities: Increase in accrued long-term stock compensation (Increase) decrease in net federal income taxes (Decrease) increase in other assets and other liabilities Net adjustments Net cash provided by operating activities Purchase of fixed income securities, available-for-sale Redemption and maturities of fixed income securities, available-for-sale Sale of fixed income securities, available-for-sale Purchase of short-term investments Sale of short-term investments Capital contribution to subsidiaries Sale of subsidiary Net cash (used in) provided by investing activities Financing Activities: Dividends to stockholders Acquisition of treasury stock Proceeds from notes payable, net of debt issuance costs Net proceeds from stock purchase and compensation plans Excess tax benefits from share-based payment arrangements Repayment of notes payable Principal payment on borrowings from subsidiaries Net cash (used in) provided by financing activities Net (decrease) increase in cash Cash, beginning of year Cash, end of year (141,495 ) 8,973 — — 740 4,575 (3,052 ) (214 ) (130,473 ) 35,388 (33,717 ) 21,578 — (106,933 ) 94,422 — — (24,650 ) (31,052 ) (4,182 ) — 10,089 1,736 — (2,798 ) (26,207 ) (15,469 ) 16,367 898 (115,203 ) 8,702 — (2 ) 1,421 1,062 10,977 1,045 (91,998 ) 49,829 (18,511 ) 23,210 300 (102,717 ) 101,510 — — 3,792 (28,428 ) (3,563 ) — 7,283 1,020 — (13,759 ) (37,447 ) 16,174 193 16,367 $ (108,899) 8,630 997 — 4,353 6,791 (14,968) 1,204 (101,892) 4,526 (21,708) 6,432 — (241,748) 253,136 (57,125) 1,225 (59,788) (27,416) (3,716) 178,435 7,119 1,545 (100,000) (722) 55,245 (17) 210 193 See accompanying Report of Independent Registered Public Accounting Firm. Information should be read in conjunction with the Notes to Consolidated Financial Statements of Selective Insurance Group, Inc. and its subsidiaries. Both items are in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K. 138 SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION Year ended December 31, 2015 SCHEDULE III Deferred policy acquisition costs Reserve for loss and loss expenses Unearned premiums Net premiums earned Net investment income1 Losses and loss expenses incurred Amortization of deferred policy acquisition costs2 Other operating expenses3 Net premiums written $ 171,476 2,998,749 803,648 1,529,442 — 819,573 323,753 221,620 1,596,965 17,258 24,425 265,054 253,925 276,533 89,529 288,134 172,333 — — 200,237 128,731 33,638 42,044 52,923 18,361 283,926 189,013 ($ in thousands) Standard Commercial Lines Segment Standard Personal Lines Segment E&S Lines Segment Investments Segment — Total $ 213,159 — 3,517,728 — 1,169,710 — 1,989,909 134,487 134,487 — 1,148,541 — 399,435 — 292,904 — 2,069,904 1Includes “Net investment income earned” and “Net realized investment gains” on the Consolidated Statements of Income. 2The total of “Amortization of deferred policy acquisition costs” of $399,435 and “Other operating expenses” of $292,904 reconciles to the Consolidated Statements of Income as follows: Policy acquisition costs Other income3 Other expenses3 Total $ $ 689,820 (7,456 ) 9,975 692,339 3 In addition to amounts related to the Standard Commercial Lines, Standard Personal Lines, and E&S Lines, “Other income” and “Other expenses” on the Consolidated Statements of Income includes holding company income and expense amounts of $0 and $28,396, respectively. See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. Year ended December 31, 2014 Deferred policy acquisition costs Reserve for loss and loss expenses Unearned premiums Net premiums earned Net investment income1 Losses and loss expenses incurred Amortization of deferred policy acquisition costs2 Other operating expenses3 Net premiums written ($ in thousands) Standard Commercial Lines Segment $ 147,285 3,000,796 734,697 1,415,712 — 870,018 295,774 188,699 1,441,047 Standard Personal Lines Segment E&S Lines Segment Investments Segment Total 17,495 20,828 — $ 185,608 279,761 197,313 — 3,477,870 285,777 75,345 — 1,095,819 296,747 140,150 — 1,852,609 — — 165,307 165,307 197,182 90,301 — 1,157,501 34,851 33,670 — 364,295 48,178 15,793 — 252,670 292,061 152,172 — 1,885,280 1Includes “Net investment income earned” and “Net realized investment gains” on the Consolidated Statements of Income. 2 The total of “Amortization of deferred policy acquisition costs” of $364,295 and “Other operating expenses” of $252,670 reconciles to the Consolidated Statements of Income as follows: Policy acquisition costs Other income3 Other expenses3 Total $ $ 624,470 (16,598 ) 9,093 616,965 3 In addition to amounts related to the Standard Commercial Lines, Standard Personal Lines, and E&S Lines, “Other income” and “Other expenses” on the Consolidated Statements of Income includes holding company income and expense amounts of $347 and $23,603, respectively. See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. 139 SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION Year ended December 31, 2013 SCHEDULE III (continued) ($ in thousands) Deferred policy acquisition costs Reserve for loss and loss expenses Unearned premiums Net premiums earned Net investment income1 Losses and loss expenses incurred Amortization of deferred policy acquisition costs2 Other operating expenses3 Net premiums written Standard Commercial Lines Segment $ 138,397 2,877,087 708,861 1,316,619 — 831,261 270,443 181,059 1,380,740 Standard Personal Lines Segment E&S Lines Segment Investments Segment Total 18,149 16,435 — $ 172,981 312,411 160,272 — 3,349,770 286,969 63,325 — 1,059,155 294,332 125,121 — 1,736,072 — — 155,375 155,375 206,450 84,027 — 1,121,738 33,097 28,288 — 331,828 46,140 16,541 — 243,740 297,757 131,662 — 1,810,159 1 Includes “Net investment income earned” and “Net realized investment gains” on the Consolidated Statements of Income. 2 The total of “Amortization of deferred policy acquisition costs” of $331,828 and “Other operating expenses” of $243,740 reconciles to the Consolidated Statements of Income as follows: Policy acquisition costs Other income3 Other expenses3 Total $ $ 579,977 (12,201 ) 7,792 575,568 3 In addition to amounts related to the Standard Commercial Lines, Standard Personal Lines, and E&S Lines, “Other income” and “Other expenses” on the Consolidated Statements of Income includes holding company income and expense amounts of $93 and $24,071, respectively. See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. 140 SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES REINSURANCE Years ended December 31, 2015, 2014, and 2013 SCHEDULE IV ($ thousands) 2015 Premiums earned: Accident and health insurance Property and liability insurance Total premiums earned 2014 Premiums earned: Accident and health insurance Property and liability insurance Total premiums earned 2013 Premiums earned: Accident and health insurance Property and liability insurance Total premiums earned Direct Amount Assumed From Other Companies Ceded to Other Companies Net Amount % of Amount Assumed To Net $ $ $ 37 2,330,230 2,330,267 44 2,183,214 2,183,258 55 2,048,475 2,048,530 — 23,209 23,209 — 34,653 34,653 — 44,464 44,464 37 363,530 363,567 — 1,989,909 1,989,909 44 365,258 365,302 — 1,852,609 1,852,609 55 356,867 356,922 — 1,736,072 1,736,072 — 1% 1% — 2 % 2 % — 3 % 3 % See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. SELECTIVE INSURANCE GROUP, INC. AND CONSOLIDATED SUBSIDIARIES ALLOWANCE FOR UNCOLLECTIBLE PREMIUMS AND OTHER RECEIVABLES Years ended December 31, 2015, 2014, and 2013 SCHEDULE V ($ in thousands) Balance, January 1 Additions Deductions Balance, December 31 2015 2014 2013 $ $ 11,037 3,604 (4,519 ) 10,122 9,542 4,617 (3,122 ) 11,037 8,706 3,733 (2,897) 9,542 See accompanying Report of Independent Registered Public Accounting Firm in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K. 141 EXHIBIT INDEX Exhibit Number 3.1 3.2 4.1 4.2 4.3 4.4 4.5 4.6 4.7 10.1+ 10.1a+ 10.2+ 10.2a Amended and Restated Certificate of Incorporation of Selective Insurance Group, Inc., filed May 4, 2010 (incorporated by reference herein to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, File No. 001-33067). By-Laws of Selective Insurance Group, Inc., effective July 29, 2015 (incorporated by reference herein to Exhibit 3.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, File No. 001-33067). Indenture, dated as of September 24, 2002, between Selective Insurance Group, Inc. and National City Bank, as Trustee, relating to the Company's 1.6155% Senior Convertible Notes due September 24, 2032 (incorporated by reference herein to Exhibit 4.1 of the Company's Registration Statement on Form S-3 No. 333-101489). Indenture, dated as of November 16, 2004, between Selective Insurance Group, Inc. and Wachovia Bank, National Association, as Trustee, relating to the Company's 7.25% Senior Notes due 2034 (incorporated by reference herein to Exhibit 4.1 of the Company's Current Report on Form 8-K filed November 18, 2004, File No. 000-08641). Indenture, dated as of November 3, 2005, between Selective Insurance Group, Inc. and Wachovia Bank, National Association, as Trustee, relating to the Company’s 6.70% Senior Notes due 2035 (incorporated by reference herein to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed November 9, 2005, File No. 000-08641). Registration Rights Agreement, dated as of November 16, 2004, between Selective Insurance Group, Inc. and Keefe, Bruyette & Woods, Inc. (incorporated by reference herein to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed November 18, 2004, File No. 000-08641). Registration Rights Agreement, dated as of November 3, 2005, between Selective Insurance Group, Inc. and Keefe, Bruyette & Woods, Inc. (incorporated by reference herein to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed November 9, 2005, File No. 000-08641). Indenture, dated as of February 8, 2013, between Selective Insurance Group, Inc. and U.S. Bank National Association, as Trustee (incorporated by reference herein to Exhibit 4.1 of the Company's Current Report on Form 8-K filed February 8, 2013, File No. 001-33067). First Supplemental Indenture, dated as of February 8, 2013, between Selective Insurance Group, Inc. and U.S. Bank National Association, as Trustee, relating to the Company’s 5.875% Senior Notes due 2043 (incorporated by reference herein to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed February 8, 2013, File No. 001-33067). Selective Insurance Supplemental Pension Plan, As Amended and Restated Effective January 1, 2005 (incorporated by reference herein to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, File No. 001-33067). Amendment No. 1 to Selective Insurance Supplemental Pension Plan, As Amended and Restated Effective January 1, 2005 (incorporated by reference herein to Exhibit 10.1 of the Company's Current Report on Form 8- K filed March 25, 2013, File No. 001-33067). Selective Insurance Company of America Deferred Compensation Plan (2005), As Amended and Restated Effective as of January 1, 2010 (incorporated by reference herein to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, File No. 001-33067). Amendment No 1. to Selective Insurance Company of America Deferred Compensation Plan (2005) (incorporated by reference herein to Exhibit 10.2a of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, File No. 001-33067). 142 Exhibit Number 10.2b+ 10.3+ 10.4+ 10.5+ 10.6+ 10.7+ 10.8+ 10.9+ 10.10+ 10.11+ 10.12+ 10.13+ 10.14+ 10.15+ Amendment No. 2 to Selective Insurance Company of America Deferred Compensation Plan (2005), As Amended and Restated Effective as of January 1, 2010 (incorporated by reference herein to Exhibit 10.2 of the Company's Current Report on Form 8-K filed March 25, 2013, File No. 001-33067). Selective Insurance Group, Inc. 2014 Omnibus Stock Plan, effective May 1, 2014 (incorporated by reference herein to Appendix A-1 to the Company’s Definitive Proxy Statement for its 2014 Annual Meeting of Stockholders filed April 3, 2014, File No. 000-08641). Selective Insurance Group, Inc. 2014 Omnibus Stock Plan Director Stock Option Agreement (incorporated by reference herein to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, File No. 000-08641). Selective Insurance Group, Inc. 2014 Omnibus Stock Plan Stock Option Agreement (incorporated by reference herein to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, File No. 000-08641). Selective Insurance Group, Inc. 2014 Omnibus Stock Plan Service-Based Restricted Stock Agreement (incorporated by reference herein to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 File No. 000-08641). Selective Insurance Group, Inc. 2014 Omnibus Stock Plan Performance-Based Restricted Stock Agreement (incorporated by reference herein to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, File No. 000-08641). Selective Insurance Group, Inc. 2014 Omnibus Stock Plan Service-Based Restricted Stock Unit Agreement (incorporated by reference herein to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 File No. 000-08641). Selective Insurance Group, Inc. 2014 Omnibus Stock Plan Performance-Based Restricted Stock Unit Agreement (incorporated by reference herein to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, File No. 000-08641). Selective Insurance Group, Inc. 2014 Omnibus Stock Plan Director Restricted Stock Unit Agreement (incorporated by reference herein to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, File No. 000-08641). Selective Insurance Group, Inc. 2005 Omnibus Stock Plan As Amended and Restated Effective as of May 1, 2010 (incorporated by reference herein to Appendix C of the Company’s Definitive Proxy Statement for its 2010 Annual Meeting of Stockholders filed March 25, 2010, File No. 001-33067). Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Stock Option Agreement (incorporated by reference herein to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 000-08641). Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Director Restricted Stock Unit Agreement (incorporated by reference herein to Exhibit 10.8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, File No. 001-33067). Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Director Stock Option Agreement (incorporated by reference herein to Exhibit 10.9 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, File No. 000-08641). Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Restricted Stock Unit Agreement (incorporated by reference herein to Exhibit 10.12 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, File No. 001-33067). 143 Exhibit Number 10.16+ 10.17+ 10.18+ 10.19+ 10.20+ 10.21+ 10.22+ 10.23+ 10.24+ 10.25+ 10.26 10.27+ 10.28+ 10.29+ 10.30+ Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Restricted Stock Unit Agreement (incorporated by reference herein to Exhibit 10.13 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, File No. 001-33067). Selective Insurance Group, Inc. 2005 Omnibus Stock Plan Automatic Director Stock Option Agreement (incorporated by reference herein to Exhibit 2 of the Company’s Definitive Proxy Statement for its 2005 Annual Meeting of Stockholders filed April 6, 2005, File No. 000-08641). Selective Insurance Group, Inc. Non-Employee Directors’ Compensation and Deferral Plan, As Amended and Restated Effective as of May 1, 2014 (incorporated by reference herein to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, File No. 001-33067). Deferred Compensation Plan for Directors (incorporated by reference herein to Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1993, File No. 000-08641). Selective Insurance Group, Inc. Employee Stock Purchase Plan (2009), amended and restated effective July 1, 2009 (incorporated by reference herein to Appendix A to the Company’s Definitive Proxy Statement for its 2009 Annual Meeting of Stockholders filed March 26, 2009, File No. 001-33067). Selective Insurance Group, Inc. Cash Incentive Plan As Amended and Restated as of May 1, 2014 (incorporated by reference herein to Appendix B to the Company’s Definitive Proxy Statement for its 2014 Annual Meeting of Stockholders filed March 24, 2014, File No. 001-33067). Selective Insurance Group, Inc. Cash Incentive Plan Service-Based Cash Incentive Unit Award Agreement (incorporated by reference herein to Exhibit 10.8 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, File No. 001-33067). Selective Insurance Group, Inc. Cash Incentive Plan Performance-Based Cash Incentive Unit Award Agreement (incorporated by reference herein to Exhibit 10.9 of the Company’s Quarterly Report on Form 10- Q for the quarter ended March 31, 2014, File No. 001-33067). Selective Insurance Group, Inc. Cash Incentive Plan Cash Incentive Unit Award Agreement (incorporated by reference herein to Exhibit 10.14c of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, File No. 001-33067). Selective Insurance Group, Inc. Cash Incentive Plan Cash Incentive Unit Award Agreement (incorporated by reference herein to Exhibit 10.14d of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, File No. 001-33067). Amended and Restated Selective Insurance Group, Inc. Stock Purchase Plan for Independent Insurance Agencies (2010) (incorporated by reference herein to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, File No. 001-33067). Selective Insurance Group, Inc. Stock Option Plan for Directors (incorporated by reference herein to Exhibit B of the Company’s Definitive Proxy Statement for its 2000 Annual Meeting of Stockholders filed March 31, 2000, File No. 000-08641). Amendment to the Selective Insurance Group, Inc. Stock Option Plan for Directors, as amended, effective as of July 26, 2006, (incorporated by reference herein to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, File No. 000-08641). Selective Insurance Group, Inc. Stock Compensation Plan for Nonemployee Directors, (incorporated by reference herein to Exhibit A of the Company’s Definitive Proxy Statement for its 2000 Annual Meeting of Stockholders filed March 31, 2000, File No. 000-08641). Amendment to Selective Insurance Group, Inc. Stock Compensation Plan for Nonemployee Directors, as amended (incorporated by reference herein to Exhibit 10.22a of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 001-33067). 144 Exhibit Number 10.31+ 10.32+ 10.33+ 10.34+ 10.35* 10.36 10.37+ 10.38+ Employment Agreement between Selective Insurance Company of America and Gregory E. Murphy, dated as of December 23, 2008 (incorporated by reference herein to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed December 30, 2008, File No. 001-33067). Employment Agreement between Selective Insurance Company of America and Dale A. Thatcher, dated as of December 23, 2008 (incorporated by reference herein to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed December 30, 2008, File No. 001-33067). Employment Agreement between Selective Insurance Company of America and Michael H. Lanza, dated as of December 23, 2008 (incorporated by reference herein to Exhibit 10.23e of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 001-33067). Employment Agreement between Selective Insurance Company of America and John J. Marchioni, dated as of September 10, 2013 (incorporated by reference herein to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed September 11, 2013, File No. 001-33067). Credit Agreement among Selective Insurance Group, Inc., the Lenders Named Therein and Wells Fargo Bank, National Association, as Administrative Agent, dated as of December 1, 2015. Form of Indemnification Agreement between Selective Insurance Group, Inc. and each of its directors and executive officers, as adopted on May 19, 2005 (incorporated by reference herein to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed May 20, 2005, File No. 000-08641). Selective Insurance Group, Inc. Non-Employee Directors’ Deferred Compensation Plan (incorporated by reference herein to Exhibit 10.27 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, File No. 001-33067). Amendment No. 1 to the Selective Insurance Group, Inc. Non-Employee Directors’ Deferred Compensation Plan (incorporated by reference herein to Exhibit 10.27a of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, File No. 001-33067). 145 Exhibit Number *21 Subsidiaries of Selective Insurance Group, Inc. *23.1 Consent of KPMG LLP. *24.1 Power of Attorney of Paul D. Bauer. *24.2 Power of Attorney of A. David Brown. *24.3 Power of Attorney of John C. Burville. *24.4 Power of Attorney of Robert Kelly Doherty. *24.5 Power of Attorney of Michael J. Morrissey. *24.6 Power of Attorney of Cynthia S. Nicholson. *24.7 Power of Attorney of Ronald L. O'Kelley. *24.8 Power of Attorney of William M. Rue. *24.9 Power of Attorney of John S. Scheid. *24.10 Power of Attorney of J. Brian Thebault. *24.11 Power of Attorney of Philip H. Urban. *31.1 *31.2 **32.1 Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. **32.2 Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. *99.1 Glossary of Terms. XBRL Instance Document. ** 101.INS ** 101.SCH XBRL Taxonomy Extension Schema Document. ** 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. ** 101.LAB XBRL Taxonomy Extension Label Linkbase Document. ** 101.PRE ** 101.DEF XBRL Taxonomy Extension Presentation Linkbase Document. XBRL Taxonomy Extension Definition Linkbase Document. * Filed herewith. ** Furnished and not filed herewith. + Management compensation plan or arrangement. 146 SELECTIVE INSURANCE GROUP, INC. SUBSIDIARIES AS OF DECEMBER 31, 2015 Mesa Underwriters Specialty Insurance Company Name Jurisdiction in which organized New Jersey Parent Selective Insurance Group, Inc. Selective Auto Insurance Company of New Jersey New Jersey Selective Insurance Group, Inc. Selective Casualty Insurance Company New Jersey Selective Insurance Group, Inc. Selective Fire and Casualty Insurance Company New Jersey Selective Insurance Group, Inc. Selective Insurance Company of America New Jersey Selective Insurance Group, Inc. Selective Insurance Company of New England New Jersey Selective Insurance Group, Inc. Selective Insurance Company of New York New York Selective Insurance Group, Inc. Selective Insurance Company of South Carolina Indiana Selective Insurance Group, Inc. Selective Insurance Company of the Southeast Indiana Selective Insurance Group, Inc. Selective Way Insurance Company New Jersey Selective Insurance Group, Inc. SRM Insurance Brokerage, LLC. New Jersey Selective Way Insurance Company Wantage Avenue Holding Company, Inc. New Jersey Selective Insurance Group, Inc. Selective Insurance Company of the Southeast Exhibit 21 Percentage voting securities owned 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 75% 25% 100% 147 Exhibit 23.1 Consent of Independent Registered Public Accounting Firm The Board of Directors Selective Insurance Group, Inc.: We consent to the incorporation by reference in the registration statements of Selective Insurance Group, Inc. (“Selective”) on Form S-8 (Nos. 333-195617, 333-168765, 333-125451, 333-14620, 333-147383, 333-41674, 333-10465, 333-88806, 333- 97799, 333-37501, 333-87832, and 333-31942) and Form S-3 (Nos. 333-204846, 333-136578, 333-136024, 333-110576, 333- 101489, and 333-71953) of our reports dated February 24, 2016, which appear in Selective’s Annual Report on Form 10-K for the year ended December 31, 2015, with respect to the consolidated balance sheets of Selective and its subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flow for each of the years in the three-year period ended December 31, 2015, and all related financial statement schedules, and the effectiveness of internal control over financial reporting as of December 31, 2015. /s/ KPMG LLP New York, New York February 24, 2016 148 Exhibit 31.1 Certification pursuant to Rule 13a–14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, GREGORY E. MURPHY, Chairman of the Board and Chief Executive Officer of Selective Insurance Group, Inc. (the “Company”), certify, that: 1. I have reviewed this annual report on Form 10-K of the Company; 2. Based on my knowledge, this annual report on Form 10-K does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report on Form 10- K, fairly present in all material respects the financial condition, results of operations, comprehensive income and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 24, 2016 By: /s/ Gregory E. Murphy Gregory E. Murphy Chairman of the Board and Chief Executive Officer 149 Exhibit 31.2 Certification pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, DALE A. THATCHER, Executive Vice President and Chief Financial Officer of Selective Insurance Group, Inc. (the “Company”), certify, that: 1. I have reviewed this annual report on Form 10-K of the Company; 2. Based on my knowledge, this annual report on Form 10-K does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report on Form 10- K, fairly present in all material respects the financial condition, results of operations, comprehensive income and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 24, 2016 By: /s/ Dale A. Thatcher Dale A. Thatcher Executive Vice President and Chief Financial Officer 150 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 32.1 I, GREGORY E. MURPHY, the Chairman of the Board and Chief Executive Officer of Selective Insurance Group, Inc. (the “Company”), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, that the annual report on Form 10-K of the Company for the period ended December 31, 2015, which this certification accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 24, 2016 By: /s/ Gregory E. Murphy Gregory E. Murphy Chairman of the Board and Chief Executive Officer 151 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 32.2 I, DALE A. THATCHER, the Executive Vice President and Chief Financial Officer of Selective Insurance Group, Inc. (the “Company”), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the annual report on Form 10-K of the Company for the period ended December 31, 2015, which this certification accompanies, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: February 24, 2016 By: /s/ Dale A. Thatcher Dale A. Thatcher Executive Vice President and Chief Financial Officer 152 Glossary of Terms Accident Year - accident year reporting focuses on the cost of the losses that occurred in a given year regardless of when reported. These losses are calculated by adding all payments that have been made for those losses occurring in a given calendar year (regardless of the year in which they were paid) to any current reserve that remains for losses that occurred in that given calendar year. For example, at December 31, 2015, the losses incurred for the 2004 accident year would be the payments made in years 2004 through 2015 relating to the losses that occurred in 2004 plus the reserve for 2003 occurrences remaining to be paid as of December 31, 2015. Agent (Independent Retail Insurance Agent) - a distribution partner who recommends and markets insurance to individuals and businesses; usually represents several insurance companies. Insurance companies pay agents for business production. Audit Premium - premiums based on data from an insured’s records, such as payroll data. The insured’s records are subject to periodic audit for purposes of verifying premium amounts. Catastrophe Loss - a severe loss, as defined by the Insurance Services Office's Property Claims Service (PCS) unit, either natural or man-made, usually involving, but not limited to, many risks from one occurrence such as fire, hurricane, tornado, earthquake, windstorm, explosion, hail, severe winter weather, and terrorism. Combined Ratio - a measure of underwriting profitability determined by dividing the sum of all GAAP expenses (losses, loss expenses, underwriting expenses, and dividends to policyholders) by GAAP net premiums earned for the period. A ratio over 100% is indicative of an underwriting loss, and a ratio below 100% is indicative of an underwriting profit. Contract Binding Authority - business that is written in accordance with a well-defined underwriting strategy that clearly delineates risk eligibility, rates, and coverages. It is generally distributed through wholesale general agents. Credit Risk - the risk that a financially-obligated party will default on any type of debt by failing to make payment obligations. Examples of credit risk include: (i) a bond issuer does not make a payment on a coupon or principal payment when due; or (ii) a reinsurer does not pay a policy obligation. Customers - another term for policyholders. These are the individuals or entities that purchase our insurance products or services. Diluted Weighted Average Shares Outstanding - represents weighted- average common shares outstanding adjusted for the impact of dilutive common stock equivalents, if any. Distribution Partners - insurance consultants that we partner with in selling our insurance products and services. Independent retail insurance agents are our distribution partners for our standard market business and wholesale general agents are our distribution partners for our E&S market business. Earned Premiums - the portion of a premium that is recognized as income based on the expired portion of the policy period. For example, a one-year policy sold January 1 would produce just three months’ worth of “earned premium” in the first quarter of the year. Frequency - the likelihood that a loss will occur. Expressed as low frequency (meaning the loss event is possible, but the event has rarely happened in the past and is not likely to occur in the future), moderate frequency (meaning the loss event has happened once in a while and can be expected to occur sometime in the future), or high frequency (meaning the loss event happens regularly and can be expected to occur regularly in the future). Generally Accepted Accounting Principles (GAAP) - accounting practices used in the United States of America determined by the Financial Accounting Standards Board. Public companies use GAAP when preparing financial statements to be filed with the United States Securities and Exchange Commission. Incurred But Not Reported (IBNR) Reserves - reserves for estimated losses that have been incurred by insureds but not yet reported to the insurer. Interest Rate Risk - exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates. A rise in interest rates may decrease the fair value of our existing fixed maturity investments and declines in interest rates may result in an increase in the fair value of our existing fixed maturity investments. Invested Assets per Dollar of Stockholders' Equity Ratio - a measure of investment leverage calculated by dividing invested assets by stockholders' equity. Loss Expenses - expenses incurred in the process of evaluating, defending, and paying claims. Loss and Loss Expense Reserves - the amount of money an insurance company expects to pay for claim obligations and related expenses resulting from losses that have occurred and are covered by insurance policies it has sold. Exhibit 99.1 Operating Income - a non-GAAP measure that is comparable to net income with the exclusion of capital gains and losses and the results of discontinued operations. Operating income is used as an important financial measure by us, analysts, and investors, because the realization of investment gains and losses on sales in any given period is largely discretionary as to timing. In addition, these realized investment gains and losses, as well as other-than- temporary impairment charges that are included in earnings, and the results of discontinued operations, could distort the analysis of trends. Operating Return on Average Equity - a measurement of profitability that reveals the amount of operating income that is generated by dividing operating income by the average stockholders’ equity during the period. Reinsurance - an insurance company assuming all or part of a risk undertaken by another insurance company. Reinsurance spreads the risk among insurance companies to reduce the impact of losses on individual companies. Types of reinsurance include proportional, excess of loss, treaty, and facultative. Premiums Written - premiums written refer to premiums for all policies sold during a specific accounting period. Renewal Pure Price - estimated average premium change on renewal policies (excludes exposure changes). Retention - retention ratios measure how well an insurance company retains business by count and is expressed as a ratio of renewed over expired policies. Year on year retention measures retained business based on business issued one year ago. Risk - has the following two distinct and frequently used meanings in insurance: (i) the chance that a claim loss will occur; or (ii) an insured or the property covered by a policy. Severity - the amount of damage that is (or that may be) inflicted by a loss or catastrophe. Statutory Accounting Principles (SAP) - accounting practices prescribed and required by the National Association of Insurance Commissioners (“NAIC”) and state insurance departments that stress evaluation of a company’s solvency. Insurance companies follow these practices when preparing annual statutory statements to be submitted to the NAIC and state insurance departments. Statutory Combined Ratio - a measurement commonly used within the property and casualty insurance industry to measure underwriting profit or loss. It is a combination of the underwriting expense ratio, loss and loss expense ratio, and dividends to policyholders ratio. The loss and loss expense ratio and the dividends to policyholders ratio are calculated by dividing those expenses by statutory net premiums earned while the underwriting expense ratio is calculated by dividing underwriting expenses by net premiums written. Statutory Premiums to Surplus Ratio - a statutory measure of solvency risk that is calculated by dividing the net statutory premiums written for the year by the ending statutory surplus. For example, a ratio of 1.5:1 means that for every dollar of surplus, the company wrote $1.50 in premiums. Statutory Surplus - the amount left after an insurance company’s liabilities are subtracted from its assets. Statutory surplus is not a figure based upon GAAP. Rather, it is based upon SAP prescribed or permitted by state and foreign insurance regulators. Underwriting - the insurer’s process of reviewing applications submitted for insurance coverage, deciding whether to provide all or part of the coverage requested, and determining the applicable premiums and terms and conditions of coverage. Underwriting Result - underwriting income or loss and represents premiums earned less insurance losses and loss expenses, underwriting expenses, and dividends to policyholders (determined on a GAAP or SAP basis). Also referred to as the GAAP underwriting result or the statutory underwriting result. This measure of performance is used by management and analysts to evaluate the profitability of underwriting operations and is not intended to replace GAAP net income. Unearned Premiums - the portion of a premium that a company has written but has yet to earn because a portion of the policy is unexpired. For example, a one-year policy sold January 1 would record nine months of unearned premium as of the end of the first quarter of the year. Wholesale General Agent - a distribution partner authorized to underwrite on behalf of a surplus lines insurer through binding authority agreements. Insurance companies pay wholesale general agents for business production. 153 (This page intentionally left blank) Directors Paul D. Bauer 1998, Lead Independent Director since 2013 Retired, former Executive Vice President and Chief Financial Officer, Tops Markets, Inc. A. David Brown 1996 to April 2015 and since July 2015 Retired, former Executive Vice President and Chief Administrative Officer, Urban Brands, Inc. John C. Burville, Ph.D. 2006 Retired, former Insurance Consultant to the Bermuda Government Robert Kelly Doherty 2015 Managing Partner, Caymen Advisors and Caymen Partners Michael J. Morrissey 2008 President and Chief Executive Officer, International Insurance Society, Inc. Gregory E. Murphy 1997 Chairman and Chief Executive Officer, Selective Insurance Group, Inc. Cynthia (Cie) S. Nicholson 2009 Chief Operating Officer, Forkcast Ronald L. O’Kelley 2005 Chairman and Chief Executive Officer, Atlantic Coast Venture Investments Inc. William M. Rue 1977 Chairman, Chas. E. Rue & Son, Inc., t/a Rue Insurance John S. Scheid 2014 Owner, Scheid Investment Group, LLC J. Brian Thebault 1996 Partner, Thebault Associates Philip H. Urban 2014 Retired, former President and Chief Executive Officer, Grange Insurance Selective 2015 Annual Report Officers Chairman and Chief Executive Officer Gregory E. Murphy 1,2 President and Chief Operating Officer John J. Marchioni 1,2 Executive Vice Presidents Kimberly J. Burnett 2 Chief Human Resources Officer Angelique M. Carbo 2 Chief Human Resources Officer-Designee Gordon J. Gaudet 2 Chief Information Officer Michael H. Lanza 1,2 General Counsel and Chief Compliance Officer George A. Neale 2 Chief Claims Officer Dale A. Thatcher 1,2 Chief Financial Officer and Treasurer Ronald J. Zaleski, Sr. 1,2 Chief Actuary 1 Selective Insurance Group, Inc. 2 Selective Insurance Company of America Senior Vice Presidents Charles C. Adams 2 Regional Manager Mid-Atlantic Region Allen H. Anderson 2 Chief Underwriting Officer Personal Lines/Flood Jeffrey F. Beck 2 Government and Regulatory Affairs John P. Bresney 2 Enterprise Application Delivery Services Sarita G. Chakravarthi 1,2 Tax and Assistant Treasurer Thomas M. Clark 2 Claims General Counsel Edward F. Drag, II 2 Regional Manager New Jersey Region Joseph O. Eppers 1,2 Chief Investment Officer Brenda M. Hall 2 Chief Strategic Operations Officer Anthony D. Harnett 1,2 Corporate Controller Martin Hollander 1,2 Chief Audit Executive Kory Jensen 2 IT Infrastructure and Operations Jeffrey F. Kamrowski 2 Chief Underwriting Officer Commercial Lines Robert J. McKenna, Jr. 2 Enterprise Architecture and Information Security James McLain 2 Chief Field Operations Officer Ryan Miller 2 Regional Manager Southern Region Yanina Montau-Hupka 1,2 Chief Risk Officer Rohit Mull 2 Chief Marketing Officer Charles A. Musilli, III 2 Distribution Strategy Richard R. Nenaber 2 MUSIC Thomas S. Purnell 2 Regional Manager Northeast Region Erik A. Reidenbach 2 Regional Manager Heartland Region Brian C. Sarisky 2 Commercial Lines Underwriting Vincent M. Senia 2 Director of Actuarial Reserving Investor Information Annual Meeting Wednesday, May 4, 2016 Selective Insurance Group, Inc. 40 Wantage Avenue Branchville, New Jersey 07890 Investor Relations (973) 948.3000 investor.relations@selective.com Dividend Reinvestment Plan Selective Insurance Group, Inc. makes available to holders of its common stock an automatic dividend reinvestment and stock purchase plan. For information contact: Wells Fargo Shareowner Services P.O. Box 64854 St. Paul, Minnesota 55164 (866) 877.6351 Registrar and Transfer Agent Wells Fargo Shareowner Services P.O. Box 64854 St. Paul, Minnesota 55164 (866) 877.6351 Auditors KPMG LLP 345 Park Avenue New York, New York 10154 Internal Audit Department Martin Hollander Chief Audit Executive internal.audit@selective.com Executive Office 40 Wantage Avenue Branchville, New Jersey 07890 (973) 948.3000 Shareholder Relations Robyn P. Turner Corporate Secretary (973) 948.1766 shareholder.relations@selective.com Common Stock Information Selective Insurance Group, Inc.’s common stock trades on the NASDAQ Global Select Market under the symbol: SIGI. Form 10-K Selective’s Form 10-K, as filed with the U.S. Securities and Exchange Commission, is provided as part of this 2015 Annual Report. Website Visit us at www.Selective.com for information about Selective, including our latest financial news. Selective Insurance Group, Inc. 40 Wantage Avenue Branchville, New Jersey 07890 www.Selective.com Selective Mobile The Selective App is available at the Apple®and Google™ Play app stores. 

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