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Fitch Ratings has confirmed the Issuer Default Rating (IDR) of “A–” and senior debt ratings at “BBB+” of Selective Insurance Group Inc. (SIGI - Snapshot Report). The rating agency also affirmed the Insurer Financial Strength (IFS) Rating of “A+” of the Selective inter-company pool members. The outlook on all the ratings has been downgraded to negative from stable.

The rating affirmation came on the back of improved underwriting results, sturdy independent agency relationships, solid loss reserve position, and Selective’s consistent efforts to diversify its operations.

The combined ratio of Selective improved during the first quarter of 2013 riding on the back of pricing growth and favorable loss experience. Since the integration of Excess and Surplus line of business into the company’s operations, Selective’s reporting segments generated underwriting profit for the first time during the first quarter of 2013. Fitch’s rating affirmation also takes into account this factor and the rating agency expects that in the long run Selective will operate at break-even or a better level.

The downward revision in the outlook came on the back of high levels of statutory and financial leverage of the company as well as waning levels of NAIC risk-based capital (RBC). It also took into account Selective’s operating earnings-based interest coverage which was lower than the company’s previous performances.   

Fitch has opined that cyclical underwriting pressure, weaker investment performance and above-average catastrophe losses have led to a decline in the company’s profitability. Nevertheless, the rating agency is of the opinion that the company engages a moderate amount of financial leverage, with adequate financial flexibility.

Fitch stated that an upward revision in the outlook to stable can take place if the company shows sustained improvement in underwriting performance by generating underwriting profit. Also if net statutory leverage remains below 5.0x, financial leverage remains below 25%, statutory RBC reaches 225% of the company action level, and operating earnings based interest coverage move towards 5x-7x or better, the outlook might be upgraded.

Fitch also stated that the ratings are liable of a downgrade if the company experiences underwriting weakness for a prolonged period thereby failing to generate underwriting profit under normal catastrophe conditions. Moreover if operating leverage increases above 1.7x, net leverage remains more than 5.0x, financial leverage stays at more than 25%, and operating earnings based interest coverage fails to make up to 5x-7x or better, the ratings might be downgraded.

Rating affirmations from credit rating agencies play an important part in retaining investor confidence in the stock as well as maintaining the creditworthiness in the market. We believe that the company’s present score with the credit rating agencies will help it write more business going forward.

Selective currently carries a Zacks Rank #3 (Hold). Among others in the industry, Montpelier Re Holdings Limited (MRH - Analyst Report), American Safety Insurance Holdings Ltd. and Global Indemnity plc (GBLI) carry a favorable Zacks Rank #1 (Strong Buy) and are worth considering.

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