Fitch Ratings has affirmed Selective Insurance Group, Inc.'s (Selective) operating subsidiaries' Insurer Financial Strength (IFS) ratings at 'A+' (Strong).

The Rating Outlook is Stable. A complete list of ratings follows at the end of the release.

Selective's ratings reflect the company's moderate business profile as a regional commercial lines writer, strong capitalization with stable growth in statutory policyholder's surplus and very strong financial performance with stable underwriting results and return metrics that have remained favorable compared to peers.

Key Rating Drivers

Business Profile: Selective's business profile is considered moderate compared with that of all other U.S. non-life insurance companies. The business profile score considers Selective's favorable general competitive positioning within its core standard lines businesses driven by its strong relationships with its independent agent distribution partners. The company benefits from moderate diversification from its personal lines and excess and surplus business.

Selective's gradual geographic expansion in its standard lines of businesses could provide the company with diversification opportunities and enhancement to its business profile over the long term but carries execution risks and modest amounts of additional catastrophe loss exposure from outside of the company's traditional standard lines footprint.

Strong Financial Performance: Selective's calendar-year combined ratio (GAAP basis) was 92.8% in 2021, compared with 94.9% in the prior year with results benefiting from a more favorable pricing environment in most commercial lines. The company's operating ROAE is driven by improved current accident-year underwriting margins to 14.3% in 2021, up from the company's prior five-year average (2016-2020) of 11.7%.

Capitalization: Selective's strong capital position offsets the underwriting and general business risks the company faces, while still providing capital required to fund growth and manage catastrophe risk. Statutory surplus increased by approximately 13% to nearly $2.4 billion at YE 2021, while GAAP common shareholders' equity increased by 16% in 2021 as a result of strong net earnings, offset modestly by unrealized investment losses. Selective's insurance subsidiary capital adequacy, measured by Fitch's Prism capital model, remains 'Very Strong' based on 2020 data. Prism results for 2021 will be available later in 2022.

A conservative amount of financial leverage is employed, with reported financial leverage at YE 2021 of 15.3%, down from 18.5% at YE 2020. Fitch expects financial leverage will be maintained below 25%. Statutory operating leverage (net premiums written to policyholders' surplus) remains higher than that of peer companies, at 1.3x in 2021. At YE 2021, GAAP operating leverage was down to approximately 1.0x.

Debt Service: Fixed-charge coverage was approximately 13x based on $517 million in GAAP EBIT, excluding realized gains, for 2021. GAAP EBIT was divided by annual interest expense on the debt and tax-adjusted preferred dividends, totaling approximately $41 million. Fitch estimates statutory dividend fixed charge coverage of approximately 8x for full-year 2022 based on the insurance subsidiaries' maximum ordinary dividend capacity of $322 million during the year.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Financial leverage maintained above 25%; prolonged underwriting weakness, demonstrated by a failure to produce an underwriting profit given normal catastrophe losses, material deterioration in capitalization including a failure to remain comfortably within the 'Strong' category on Fitch's Prism capital model; operating leverage as measured by net written premiums/surplus rising above 1.6x, net leverage rising above 4.8x; fixed-charge coverage that fails to remain at 5.0x or better and statutory fixed-charge coverage below 4.5x.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Enhanced business profile associated with higher rating levels; maintains a calendar-year combined ratio in the low-90s; statutory net leverage under 3.5x; financial leverage approximating 15%; fixed-charge coverage maintained at low double digits or better.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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