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Why Is Selective Insurance (SIGI) Up 21.6% Since Last Earnings Report?

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It has been about a month since the last earnings report for Selective Insurance (SIGI). Shares have added about 21.6% in that time frame, outperforming 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 drivers.

Selective Insurance Q1 Earnings Miss, Decline Y/Y

Selective Insurance reported first-quarter 2020 operating income of 84 cents per share, missing the Zacks Consensus Estimate by 12.5%. Moreover, the bottom line deteriorated 6.7% from the year-ago period.

The reported quarter witnessed lower premiums written, higher catastrophic losses and expenses, offset by improved net investment income.

Behind the Headlines

Total revenues of $710 million were up 3.5% from the year-ago quarter’s figure. However, the top line missed the Zacks Consensus Estimate by 3.3%.

Net premiums written decreased 4% year over year to $647.3 million attributable to declines in both Commercial Lines and Personal Lines.Net investment income rose 10% year over year to $45.5 million, driven by alternative investment returns that benefited from strong returns from the fourth quarter of 2019 due to the one-quarter lag in reporting.

Total expenses increased 3.7% year over year to $648.8 million primarily due to higher loss and loss expense incurred, amortization of deferred policy acquisition costs and other insurance expenses.

Combined ratio deteriorated 200 basis points (bps) on a year-over-year basis to 96.7%.

Segmental Results

Standard Commercial Lines net premiums written were down 5% year over year to $518.4 million due to the $75 million return audit and mid-term endorsement premium accrual.

Combined ratio deteriorated 190 bps to 96.7% from the prior-year quarter’s level due to catastrophe losses of 4.0 percentage points that were partially offset by 1.9 percentage points of favorable prior-year casualty reserve development in the workers compensation line of business. Combined ratio increased 3.9 percentage points due to the COVID-19-related items.

Standard Personal Lines net premiums written were down 2% year over year to $67.6   million due to a reduction in new business, which reflects an increasingly competitive marketplace. Combined ratio deteriorated 360 bps to 99.5% from the year-ago period’s count due to the increase in the allowance for doubtful accounts due to the COVID-19 pandemic and higher catastrophe losses.

Excess & Surplus Lines net premiums written grew 8% year over year to $61.3 million, driven by a 7% increase in new business. Combined ratio deteriorated 140 bps to 93.5% from the prior-year quarter’s level due to higher non-catastrophe property losses and loss expenses, and an increase in the allowance for doubtful accounts due to the COVID-19 pandemic.

Financial Update

Selective Insurance exited the first quarter with total assets of $8.9 billion, which climbed 2% above the level at the end of December 2019.

As of Mar 31, 2020, book value per share was $35.11, having deteriorated 5% from the level as of 2019 end.

Annualized operating return on equity was 2.8% in the quarter under review, contracting 1040 points year over year.

2020 Guidance

Catastrophe losses of 4.5 points on the combined ratio have been estimated, indicating higher-than-expected cat losses through April combined with lower earned premium.

The company projects an after-tax net investment income of approximately $160 million, down from the previous outlook of $185 million principally due to an expected change in the full-year after-tax net investment income from alternative investments.

The company expects after-tax net investment loss from alternative investments between $10 million and $15 million against the previously mentioned gain of $14 million.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -42.81% due to these changes.

VGM Scores

Currently, Selective Insurance has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. 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.


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