TEXT-Fitch affirms Selective Insurance's ratings, outlook stable

Thu Dec 13, 2012 2:28pm EST

Dec 13 - Fitch Ratings has affirmed Selective Insurance Group, Inc.'s
 (Selective) ratings as follows: 

--Issuer Default Rating (IDR) at 'A-';

--Senior debt at 'BBB+'; 

--Junior subordinated debt at 'BBB-'.

Fitch has also affirmed the 'A+' Insurer Financial Strength (IFS) ratings of the
members of the Selective intercompany pool. The Rating Outlook is Stable. A full
rating list is shown below.

The affirmation of Selective's ratings reflects the company's conservative 
balance sheet with solid capitalization and reserve strength as well as 
underwriting performance in line with peers. The ratings continue to reflect 
Selective's strong independent agency relationships, strong loss reserve 
position, and improved diversification through continued efforts to reduce its 
concentration in New Jersey. 

The company's underwriting results in 2012 were significantly impacted by 
Hurricane Sandy, a post-tropical storm that made landfall in New Jersey on Oct. 
30th, representing the second consecutive year in which a storm with hurricane 
force winds appeared in the region within Selective's primary geographic 
footprint, following Hurricane Irene in 2011.

Selective reported that Sandy generated an estimated gross loss of $100 
million-$120 million which more than doubled the company's previous record 
single event catastrophe loss, from Hurricane Irene. However, pre-tax net of 
reinsurance losses related to Sandy were limited to $52 million, reflecting the 
reinsurance program the company has in place to help mitigate its property 
catastrophe exposure.  The impact of this loss was also somewhat offset by flood
claim servicing revenue of $12 million from the National Flood Insurance Program
(NFIP). Selective is the sixth largest writer for the NFIP.   

Selective's combined ratio (GAAP) through nine-months 2012 improved to 102.3% 
versus 107.4% for full year 2011, due to a decline in non-catastrophe losses and
premium growth that has outpaced growth in loss costs. As a result of Sandy, 
fourth quarter 2012 results are expected to modestly deteriorate and the company
anticipates an additional 2.0 point impact on its full year 2012 combined ratio 
relative to previously stated projections. Fitch notes that the company's 
accident-year combined ratio, excluding the impact of catastrophe losses, 
improved by 2.0 points over the prior year period, reflecting a modest 
improvement in run-rate underwriting results. Selective's calendar year 
underwriting results also include a lesser impact from favorable loss reserve 
development than regional peers.

Fitch views Selective's historical profitability as better than peers but 
results have declined in recent years due to cyclical underwriting pressure, 
weaker investment performance and above average catastrophe losses.

Fitch continues to believe that Selective's balance sheet is conservative and 
that, as of Sept. 30, 2012, capitalization is good, with both stockholder's 
equity and statutory surplus maintaining strong positions of approximately $1.1 
billion, respectively. Fitch believes that Selective maintains adequate capital 
and uses a moderate amount of operating leverage (annualized net premium written
to equity). At Sept. 30, 2012, annualized operating leverage was 1.53 times (x),
versus 1.34x at year-end 2011, with the increase driven primarily by the 
addition of excess and surplus lines premium as well as from price improvement 
experienced in the commercial and personal segments. 

Fitch also believes that Selective employs a moderate amount of financial 
leverage, has ample financial flexibility, and limited near-term liquidity 
needs. The company's unadjusted debt-to-total capital ratio is roughly 21.4% at 
Sept. 30, 2012.

Historically, Selective's strong regional presence and small and middle market 
commercial lines focus has allowed for premium rate increases above industry 
experience. Selective conducts a sizable portion of its business in the state of
New Jersey; however, the company has expanded into the Midwest to diversify its 
insurance exposure out of New Jersey and the Northeast U.S. In 2011, the top 
five states accounted for 59% of total net written premium, with New Jersey at 
25%. 

Key rating triggers that could lead to a downgrade include prolonged 
underwriting weakness, demonstrated by a failure to produce an underwriting 
profit given normal catastrophe losses, and a material deterioration in current 
balance sheet strengths. Fitch's rating rationale anticipates operating leverage
as measured by net written premiums to equity to remain below 1.7x, financial 
leverage to remain below 25%, and operating earnings based interest coverage to 
reach 5x-7x or better. 

Fitch considers a rating upgrade to be unlikely in the near term due to 
Selective's current company profile including its regional concentration, 
smaller capital base relative to larger peers, and pressured underwriting 
results. Key rating triggers that could lead to an upgrade over the long term 
include a material and sustained improvement on recent underwriting performance 
that causes Fitch to view Selective as meaningfully better than peers and the 
industry, and material capital growth with all else being equal. 

Fitch has affirmed the following ratings with a Stable Outlook: 

Selective Insurance Group, Inc. 

--IDR at 'A-';

--$100 million senior notes 6.7% due Nov. 1, 2035 at 'BBB+';

--$50 million senior notes 7.25% due Nov. 15, 2034 at 'BBB+';

--$100 million junior subordinated notes 7.5% due Sept. 27, 2066 at 'BBB-'.

Selective Insurance Company of America

Selective Way Insurance Company

Selective Insurance Company of South Carolina

Selective Insurance Company of the Southeast

Selective Insurance Company of New York

Selective Insurance Company of New England

Selective Auto Insurance Company of New Jersey

Mesa Underwriters Specialty Insurance Company

--IFS at 'A+'.


Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been 
compensated for the provision of the ratings.

Applicable Criteria and
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.