Finance & Insurance

Should You Add Selective Insurance (SIGI) to Your Portfolio?

Selective Insurance Group’s SIGI compelling portfolio, high retention ratio, pure renewal price increase, new business growth and sturdy financial position along with growth estimates make it a good investment choice. It has a decent surprise history of delivering earnings surprise in three of the last four reported quarters with an average beat of 35.12%.

Zacks Rank & Price Performance

Selective Insurance currently sports a Zacks Rank #1 (Strong Buy). Year to date, the stock has gained 14.5%, compared with the industry’s increase of 21.7% and the Zacks S&P 500 composite’s rise of 11.7%.

Growth Projections

The Zacks Consensus Estimate for 2021 earnings is pegged at $5.28, up 27.3% on 11.3% higher revenues of $3.3 billion.

Return on Equity (ROE)

The company’s ROE for the trailing 12 months is 12.5%, comparing favorably with the industry’s 5.6%, reflecting the company’s efficiency in utilizing shareholders’ fund.

Estimate Revision

The Zacks Consensus Estimate for 2021 moved 16% and 10.2% higher in the past 30 days, reflecting analyst optimism.

Value Score

The company has a favorable Value Score of B. This style score helps find undervalued stocks with great fundamentals. Back-tested results have shown that stocks with a Value Score of A or B combined with a Zacks Rank #1 or #2 (Buy) are the best investment options.

Business Tailwinds

Premiums should continue to benefit from compelling portfolio, improved pricing, new business growth and high retention ratio. The company stays focused on improving its organic growth, with its Commercial Lines business increasing share of distribution partners’ overall premium to 12%, appointing new distribution partners to achieve a 25% agent market share and expanding it to new states.

Investment income should benefit from higher net investment income from alternatives. Selective Insurance projects an after-tax net investment income of $195 million, up from the previous outlook of $182 million to reflect increased net investment income from alternatives.

Selective Insurance has been witnessing rising expenses over the years, primarily due to increasing loss and loss expense incurred and amortization of deferred policy acquisition costs. Nonetheless, a higher magnitude of revenue rise drives margin expansion.

Though debt has been increasing over the past many years inducing deterioration in debt to capital, times interest earned, a measure to identify a company’s ability to service debt, has been improving.

For 2021, the company estimates combined ratio, excluding catastrophe losses, to be 90, improved from the prior guidance of 91.

Strong Capital Position

Selective Insurance maintains a solid balance sheet with sufficient liquidity and strong cash flows. Banking on its stable cash flow, Selective Insurance has raised dividends at five-year CAGR (2015-2020) of nearly 12.3%. Its current dividend yield of 1.3% is better than the industry average of 0.4%, which makes the stock an attractive pick for yield-seeking investors. The company stated that riding on its sturdy capital position, it is well poised to grow at rates well above 7% to 9% rate going forward.

The company has $96.6 million remaining under its share authorization at first-quarter end.

Other Stocks to Consider

Some other top-ranked stocks from the property and casualty insurance space include HCI Group, Inc. HCI, American Financial Group AFG and Alleghany Corporation Y. While HCI Group sports a Zacks Rank #1, Alleghany and American Financial carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

The bottom line of HCI Group surpassed estimates in three of the last four quarters, the average being 42.91%.

American Financial surpassed estimates in three of the last four quarters and missed in the other one, the average earnings surprise being 32.20%.

Alleghany’s earnings surpassed estimates in each of the last four quarters, the average being 128.63%.

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