Fitch Ratings Assigns 'BBB' Debt Ratings to Selective; Outlook Positive

Business Wire, Dec 16, 2002

Business Editors

CHICAGO--(BUSINESS WIRE)--Dec. 16, 2002

Fitch Ratings has assigned a 'BBB' long-term issuer rating to Selective Insurance Group, Inc. (Selective) and a 'BBB' senior debt rating to Selective's recent $115 million offering of senior unsecured convertible notes. Fitch has also assigned an 'A' insurer financial strength rating to the five members of the Selective Insurance Group intercompany pool, listed in the table below. The Rating Outlook for all ratings is Positive.

The rating reflects Selective's favorable commercial lines operating results, strong liquidity, a high quality investment portfolio and sound capitalization. Weighted against these positives are geographic concentration risk, poor operating performance in personal lines and increasing financial and operating leverage.

The Positive Rating Outlook reflects the improved operating results posted thus far in 2002, particularly in the New Jersey private passenger automobile line where the combined ratio improved from 120.4% in 2001 to 108.0% through the first nine months of 2002. It also reflects Selective's continued efforts to diversify its geographic exposure and reduce its concentration in New Jersey, ultimately seeking to have the top state account for no more than 30% of total company premium.

Selective was founded, is headquartered, and conducts a sizable portion of its business in the state of New Jersey. In recent years the company has expanded into the Midwest to diversify its insurance exposure out of New Jersey and the Northeast US. However, in 2001 the top six states still accounted for about 80% of total company net written premium - New Jersey (40.3%), Pennsylvania (13.5%), New York (11.5%), Maryland (7%), Virginia (5.1%), and North Carolina (3.2%).

The company's ongoing strategy is to focus on commercial lines as the core operations, while establishing a smaller personal lines segment. Commercial lines accounts for approximately 80% of the insurance operations with the remaining 20% in personal lines. Operating results in commercial lines have overall been favorable and improving with combined ratios of 102.0% through the first nine months of 2002, following 104.9% in 2001 and 107.4% in 2000. Personal lines results have not been as favorable, with combined ratios of 109.8% through the first nine months of 2002, 113.5% in 2001, and 109.5% in 2000, primarily driven by the difficult New Jersey private passenger automobile line. Selective is taking actions to improve its personal lines results, including premium rate increases and limiting the focus on New Jersey private passenger automobile, focusing instead on a group of other states where the regulatory environment is more favorable.

Liquidity is strong with consistent positive operating cash flows averaging $59 million a year over the most recent five year period (1997-2001) and was $130 million through the first nine months of 2002.

Selective's debt-to-capital ratio increased from 20% as of June 30, 2002 to about 30% currently, as a result of the recent debt offering. However, the increase in leverage is temporary as approximately $72 million of the new proceeds have been used for an irrevocable trust to provide for payment of the company's outstanding senior note obligations. Fitch expects Selective's debt-to-capital ratio to approximate 25% to 28% going forward.

Insurance company operating leverage has increased over the past five years from a net premium written to statutory surplus ratio of 1.5 times (x) in 1997 to 1.8x in 2001. Nevertheless, Fitch still considers Selective's capitalization to be strong for the rating class, and expects operating leverage to be maintained at a level not to exceed 2.0x.

Selective Insurance Group, Inc. is the parent holding company of five property/casualty insurance companies that together make up the 60th largest property/casualty insurance group in the United States based on net premiums written. Selective is a regional insurer offering primary and alternative market insurance products and services for commercial and personal risks to small and medium sized business, light industry, public entities, and individuals through approximately 800 independent agents.

Entity/Issue/Type                  Action        Rating/Outlook
Selective Insurance Group, Inc.
--Long-term issuer                 Assign        'BBB'/Positive;
--Senior convertible notes         Assign        'BBB'/Positive.
Selective Insurance Company of America
--Insurer financial strength       Assign        'A'/Positive.
Selective Way Insurance Company
--Insurer financial strength       Assign        'A'/Positive.
Selective Insurance Company of South Carolina
--Insurer financial strength       Assign        'A'/Positive.
Selective Insurance Company of the Southeast
--Insurer financial strength       Assign        'A'/Positive.
Selective Insurance Company of New York
--Insurer financial strength       Assign        'A'/Positive.

NOTE: These ratings were initiated by Fitch as a service to users of Fitch Ratings. These ratings are based primarily on public information.