Fitch Affirms Selective Insurance’s Ratings; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- 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 disciplined underwriting culture, 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 2011 were significantly affected by a second straight year of record catastrophe losses, including losses from Hurricane Irene, which represented the largest single catastrophe loss in Selective's history. The impact of these above-average losses was somewhat offset by reserve releases of $39 million by the company in 2011. Fitch notes that Selective's calendar year underwriting results include a lesser impact from favorable loss reserve development than regional peers.

Selective's combined ratio (GAAP) through three-months 2012 improved to 100.4% from 103.6% during the same period in 2011 due to a decline in non-catastrophe losses and premium growth that has outpaced growth in loss costs.

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.

Selective entered into the Excess and Surplus lines (E&S) market in 2011 as it entered into a renewal rights transaction for contract binding authority E&S business from Alterra Capital Holdings, Ltd. Selective also purchased MUSIC (subsequently rebranded Mesa Underwriters Specialty Insurance Company) from Montpelier Re Holdings, Ltd., giving Selective the platform on which to write future E&S business. Fitch continues to monitor Selective's integration of the E&S line, but believes it presents the opportunity for positive diversification within Selective's existing book of business.

Fitch continues to believe that as of March. 31, 2012, Selective's capitalization is adequate, with both stockholder's equity and statutory surplus maintaining strong positions of $1.1 billion, respectively. Operating leverage (annualized net premium written to equity) remains within guidelines for the current rating but has increased recently. At March 31, 2012, operating leverage was 1.55x, versus 1.34x at year-end 2011, with the increase driven primarily by the addition of E&S premium as well as from price increases 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 22.1% at March 31, 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%, down from 33% as recently as 2006.

Key rating triggers that could lead to a downgrade include ongoing 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, net leverage to shift down towards 4.5x from currently levels of nearly 5.0x, 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

--IFS at 'A+'.

Fitch has assigned the following rating with a Stable Outlook:

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 Related Research:

--(Sept. 22, 2011).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651018

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Fitch Ratings
Primary Analyst Christopher A. Grimes, CFA, +1-312-368-3263
Associate Director
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst Gretchen K. Roetzer, +1-312-606-2327
Director
or
Committee Chairperson R. Andrew Davidson, CFA, +1-312-368-3144
Senior Director
or
Media Relations Brian Bertsch, +1-212-908-0549 (New York)
[email protected]

Source: Fitch Ratings