Why Is Selective Insurance (SIGI) Up 6.9{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} Since Last Earnings Report?

frank lamjus

It has been about a month since the last earnings report for Selective Insurance (SIGI). Shares have added about 6.9{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} in that time frame, underperforming the S&P 500. Will the recent positive trend continue leading up to its next earnings release, or is Selective Insurance due for a pullback? Before […]

It has been about a month since the last earnings report for Selective Insurance (SIGI). Shares have added about 6.9{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Selective Insurance due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Selective Insurance’s Q2 Earnings Beat, Plunge Y/Y

Selective Insurance Group, Inc. reported second-quarter 2020 operating income of 40 cents per share, beating the Zacks Consensus Estimate by 8.1{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a}. However, the bottom line declined 65.5{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} from the year-ago period’s number.

Selective Insurance witnessed higher net premium written, offset by higher catastrophe losses and decline in alternative investment income, which is reported on a one-quarter lag.

Behind the Headlines

Total revenues of $670 million were down 4.4{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} from the year-ago quarter’s figure, primarily due to lower premiums earned and net investment income. Moreover, the same missed the Zacks Consensus Estimate by 3.7{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a}.

Net investment income decreased 40{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} year over year to $28.5 million due to alternative investment losses of $16 million pre-tax, or $13 million after-tax, which are reported on a one-quarter lag, and reflected the market decline during the first quarter.

Net premiums written increased 3{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} year over year to $724.8 million attributable to increase in both Commercial Lines and Excess & Surplus Lines.

Total expenses increased 3.5{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} year over year to $639.8 million primarily due to higher loss and loss expense incurred, amortization of deferred policy acquisition costs and interest expenses.

Catastrophe losses increased 182{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} year over year to $83.2 million, primarily due to $43 million of losses related to two April storms and $20 million of losses related to civil unrest claims. Combined ratio deteriorated 530 basis points (bps) on a year-over-year basis to 98.4{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} in the quarter under review, primarily due to COVID-19-related underwriting items of $9.6 million and higher level of catastrophe losses. It is partially offset by the impact of net prior year favorable casualty reserve development, lower non-catastrophe property losses compared to the prior-year quarter and ongoing expense management initiatives.

Segmental Results

Standard Commercial Lines net premiums written were up 5{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} year over year to $583.3 million, attributable to increase in retention and solid renewal pure price rise. Combined ratio deteriorated 400 bps to 96.7{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} from the prior-year quarter’s level due to higher catastrophe losses.

Standard Personal Lines net premiums written declined 5{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} year over year to $78.2 million due to COVID-19-related personal automobile premium credits of $4.3 million, which was partially offset by increase in new business, renewal pure price and higher retention. Combined ratio deteriorated 1470 bps on a year-over-year basis to 108.8{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} in the quarter under review due to higher catastrophe losses, partially offset by a reduction in non-catastrophe property losses.

Excess & Surplus Lines net premiums written grew 3{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} year over year to $63.2 million, primarily attributable to increase in renewal pure price and new business. Combined ratio also deteriorated 590 bps to 100.9{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} due to higher catastrophe losses.

Financial Update

Selective Insurance exited the second quarter with total assets of $9.3 billion, which was 6{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} above the level at December 2019 end. As of Jun 30, 2020, book value per share was $38.43, up 4.1{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} from the level as of 2019 end. Annualized operating return on equity was 6.2{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} in the quarter under review, down 830 basis points year over year.

2020 Guidance

The company estimates GAAP combined ratio, excluding catastrophe losses, in the range of 90{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} to 91{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a}, indicating an improvement from the earlier guidance of 92 provided in the first quarter.

Catastrophe losses of 6.0 points on the combined ratio have been estimated, reflecting higher-than-expected losses through the first half of the year. As COVID-19 has not been designated a catastrophe event by the Insurance Services Office’s Property Claims Services unit, such losses are not included in this ratio.

The company projects an after-tax investment income of $170 million, $10 million higher than first-quarter 2020 guidance of $160 million. It now expects up to $5 million in after-tax net investment income from alternative investments.

Overall effective tax rate is expected to be approximately 18.5{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a}, which includes an effective tax rate of 18.5{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} for net investment income, indicating a tax rate of 5.25{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} for tax-advantaged municipal bonds and a tax rate of 21{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} for all other items.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision flatlined during the past month. The consensus estimate has shifted 7.51{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} due to these changes.

VGM Scores

At this time, Selective Insurance has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40{d05f388fa08f4d675a822acf1486e94712302178bac778b4b99d28e44a90be3a} for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren’t focused on one strategy, this score is the one you should be interested in.

Outlook

Selective Insurance has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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