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Selective Insurance (SIGI) Up 1% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Selective Insurance (SIGI). Shares have added about 1% 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 its most recent earnings report in order to get a better handle on the important catalysts.

Selective Insurance Q3 Earnings Miss, Guidance Revised

Selective Insurance Group, Inc. reported third-quarter 2022 operating income of 99 cents per share, which missed the Zacks Consensus Estimate by 14.7%. The bottom line declined 16.9% from the year-ago quarter.

The quarter witnessed average renewal pure price increases, solid retention, higher new business and exposure growth. Lower alternative investment income and escalating costs were offsets.

Behind the Headlines

Total revenues of $920.7 million increased 6.5% from the year-ago quarter’s figure, primarily due to higher premiums earned. The top line outpaced the Zacks Consensus Estimate by 3.3%. On a year-over-year basis, NPW increased 11% to $903.4 million, driven by average renewal pure price increases of 5%, solid retention and exposure growth.

Net investment income declined 31% year over year to $63.9 million due to decreased after-tax alternative investment income, partially offset by higher income from the fixed-income securities portfolio due to higher book yields. Net underwriting income, after-tax, more than doubled to $21.4 million. The combined ratio improved 180 basis points (bps) on a year-over-year basis to 96.8, driven by lower catastrophe losses.

Total expenses increased 9.1% year over year to $842.4 million, primarily due to higher loss and loss expenses incurred, amortization of deferred policy acquisition costs, other insurance expenses and corporate expenses.

Segmental Results

Standard Commercial Lines’ NPW was up 11% year over year to $727.5 million. Average renewal pure price increases of 5.8%, new business growth of 5%, and consistently solid retention of 86% drove the improvement in NPW. The combined ratio improved 40 bps to 96.8.

Standard Personal Lines’ NPW increased 11% year over year to $86.8 million. Average renewal pure price increases of 0.5%, higher retention of 85% and 70% higher new business drove the improvement in NPW. The combined ratio improved 1340 bps on a year-over-year basis to 101.8.

Excess & Surplus Lines’ NPW was up 9% year over year to $89.1 million, driven by average renewal pure price increases of 6.7% and new business growth of 8%. The combined ratio improved 70 bps to 93.3.

Financial Update

Selective Insurance exited third-quarter 2022 with total assets of $10.5 billion, which was 1% higher than the level at December 2021 end. Long-term debt of $505.2 million, flat with the 2021 level. Debt-to-total capitalization deteriorated 270 bps to 17.2% at third-quarter 2022 end. As of Sep 30, 2022, the book value per share was $39.96, down 20% from the level as of 2021 end. Annualized non-GAAP operating return on equity was 10.5% in the third quarter of 2022, down 10 bps year over year.

Capital Deployment

The board approved a 7% increase in the quarterly cash dividend to 30 cents per share, to be paid out on Dec 1, 2022, to holders of record as of Nov 15, 2022. In the first nine months of 2022, Selective Insurance repurchased shares for $12.4 million. It had $84.2 million remaining under authorization as of Jun 30, 2022.

2022 Guidance

Selective Insurance estimates a GAAP combined ratio, excluding net catastrophe losses, of 91.5%, (prior guidance 90.5%). The combined ratio estimate assumes no additional prior-year casualty reserve development.

Selective Insurance estimates net catastrophe losses of 3.5 points (prior guidance was 4.0 points) on the combined ratio. After-tax net investment income is expected to be $215 million, including after-tax net investment income from its alternative investments of $7 million (prior guidance was $15 million).

The overall effective tax rate is expected to be around 20.5%, which assumes an effective tax rate of 19.5% for net investment income and 21% for all other items. Weighted average shares were 61 million on a fully diluted basis.

Selective Insurance looks to achieve 2022 ROE target of 11%, marking the ninth consecutive year of double-digit non-GAAP operating returns on common equity.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

The consensus estimate has shifted -12.54% due to these changes.

VGM Scores

Currently, Selective Insurance has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Selective Insurance has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

Performance of an Industry Player

Selective Insurance belongs to the Zacks Insurance - Property and Casualty industry. Another stock from the same industry, CNA Financial (CNA), has gained 2.7% over the past month. More than a month has passed since the company reported results for the quarter ended September 2022.

CNA Financial reported revenues of $2.65 billion in the last reported quarter, representing a year-over-year change of +2.9%. EPS of $0.78 for the same period compares with $0.87 a year ago.

For the current quarter, CNA Financial is expected to post earnings of $0.85 per share, indicating a change of -12.4% from the year-ago quarter. The Zacks Consensus Estimate remained unchanged over the last 30 days.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for CNA Financial. Also, the stock has a VGM Score of B.

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