S&P Lowers Ratings on Selective Insurance Group; Outlook Negative

September 2, 2009

Standard & Poor’s Ratings Services has lowered its counterparty credit and financial strength ratings on Selective Insurance Co. of America and its insurance company affiliates (collectively referred to as Selective) to ‘A’ from ‘A+’. S&P also lowered its counterparty credit rating on Selective Insurance Group Inc. to ‘BBB’ from ‘BBB+’, and indicated that its outlook on all of these companies is negative.

“We lowered the ratings because Selective did not meet our prior expectations in terms of both earnings and capital adequacy,” explained credit analyst Siddhartha Ghosh. He explained that Selective’s commercial lines continue to demonstrate good underwriting profitability, while its personal lines have been unprofitable over the past several years, which have negatively affected its overall profitability.

In addition S&P said the company’s recently reported earnings for the first half of 2009 remained challenged, as they show a pretax loss of $8.3 million for the first half of 2009 compared with a pretax profit of $62.7 million for the same period in 2008.

Selective’s consolidated insurance operating company capital adequacy, as determined by S&P’s risk-based capital adequacy model, “has declined significantly in 2008 from the previous year and is presently below what we typically expect for the rating category,” said the bulletin. “We believe Selective’s past capital-management strategy has been somewhat aggressive, as its frequent return of sizable capital to its stockholders through share repurchases and large dividends demonstrate,” Ghosh stated.

“The upstreaming of dividends from the insurance subsidiaries to fund these actions–along with the share-repurchase programs over the past couple of years–led to a significant decline in Selective’s capital adequacy. This remains an area of concern for the company and is the primary driver behind the continued negative outlook. Mitigating some of these concerns is the company’s strong competitive position in its core Mid-Atlantic regional markets, supported by its state of the art predictive modeling capabilities, conservative financial leverage, and strong liquidity.

S&P explained that the negative outlook “reflects our continued concern that Selective’s capital adequacy will not return to a strong level in the near term. We also believe that the company’s operating earnings will not return to historical levels in the near term because of continuing price competition in the commercial lines, underperformance in personal lines, and reduced investment income.

“The group will likely retain its strong competitive position through the current underwriting cycle through strong cycle management, technological efficiencies, and opportunistic growth in personal and commercial lines through rate increases or through higher market share. We expect that Selective’s personal lines premium will grow modestly and that commercial lines’ premium will remain relatively flat in the next couple of years.”

“We could revise the outlook to stable if Selective’s capital adequacy improves to a strong level within the next 12-18 months while its operating earnings remain stable without further deterioration,” Ghosh added.

Source: Standard & Poor’s – www.standardandpoors.com

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