S&P Raises Outlook on Selective Insurance (SIGI) to Positive; Notes Organic Growth in Capital Adequacy

Standard & Poor's Ratings Services said that it affirmed its ratings on Selective Insurance Group Inc. (Nasdaq: SIGI) and its insurance operating subsidiaries (collectively Selective), including its 'BBB-' long-term counterparty credit rating on the parent. At the same time, we revised our outlook on the group to positive from stable.

Selective's capital adequacy has strengthened in recent years, principally because of organic growth in surplus. Capital adequacy is currently redundant at the very strong level. Our view is shaped by a modest improvement in Selective's operating performance and the company's stronger natural catastrophe reinsurance program that includes an additional layer of protection added in 2014. Although we view management's strategic plan that incorporates risk/return considerations in capital management, allocation, and underwriting positively, the company needs to show sustained improvement in its operating performance to indicate successful execution of management's strategy.

The ratings reflect our view of the group's strong business risk profile (BRP) and strong financial risk profile (FRP), built on its strong competitive position and very strong capital and earnings. Under our criteria, Selective's strong BRP and strong FRP lead to a possible anchor of either 'a' or 'a-'. We assigned the latter because we view Selective as exposed to potentially volatile operating performance during a heightened natural catastrophe season. The ratings also reflect the structural subordination of Selective Insurance Group Inc. to its insurance subsidiaries.

The positive outlook reflects our expectation that Selective will steadily improve its operating performance and that its capital adequacy will remain redundant at the very strong level.

We might lower our ratings if, contrary to our expectations, earnings weaken to substantially less than our base-case assumptions, capital adequacy deteriorates to less than a strong level for a prolonged period, or weakened fixed-interest coverage consistently falls to less than 4x.

We could raise the ratings in the next 18 months to two years if management's efforts in diversifying the company's geographic concentration in natural-catastrophe prone areas, along with other initiatives, are successful in improving the company's operating performance and we determine that Selective's very strong capital adequacy is sustainable.

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