Header cover image

Disciplined Underwriting And Tech Investments Set To Propel Profitability And Growth

WA
WarrenAINot Invested
Based on Analyst Price Targets

Published

August 29 2024

Updated

September 02 2024

Narratives are currently in beta

Key Takeaways

  • Investments in technology in the Excess and Surplus segment are set to enhance operational efficiency and scale, targeting top-line growth and profitability.
  • A disciplined growth strategy aiming for a 95% combined ratio across insurance segments is expected to sustain profitability and enhance stock attractiveness.
  • Rising claims costs and social inflation trends, along with significant catastrophe losses and increased reserve needs, signal challenges to profitability and investor confidence.

Catalysts

About Selective Insurance Group
    Provides insurance products and services in the United States.
What are the underlying business or industry changes driving this perspective?
  • The consistent and disciplined approach to underwriting, pricing, and reserving underlies a strong track record of profitability and growth, suggesting potential for improved future earnings as market conditions stabilize. (Impact on Revenue, Net Margins)
  • Actions taken to adjust for social inflationary trends, particularly in the general liability line, through increased assumed loss trends and prior year reserve strengthening, aim at aligning with reality and potentially reducing future adverse development impacts. (Impact on Earnings)
  • Planned increases in general liability pricing and disciplined risk selection indicate a proactive strategy to address underwriting challenges and maintain profitability, which could lead to revenue growth and margin improvement. (Impact on Revenue, Net Margins)
  • Investments in technology, especially in the Excess and Surplus (E&S) segment, improve operational efficiency and scale, enabling the company to capture more market opportunities at attractive pricing. This could drive top-line growth and profitability in a high-growth segment. (Impact on Revenue)
  • The strong focus on balancing growth and profitability with a goal of achieving a 95% combined ratio across insurance segments underscores a disciplined growth strategy that is expected to lead to sustained profitability and potentially make the stock more attractive. (Impact on Earnings, Net Margins)

Assumptions

How have these above catalysts been quantified?
  • Analysts are assuming Selective Insurance Group's revenue will grow by 9.9% annually over the next 3 years.
  • Analysts assume that profit margins will shrink from 4.9% today to 0.1% in 3 years time.
  • Analysts expect earnings to reach $767.7 million (and earnings per share of $9.25) by about August 2027, up from $224.1 million today.
  • In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.0x on those 2027 earnings, down from 24.5x today. This future PE is lower than the current PE for the US Insurance industry at 14.0x.
  • Analysts expect the number of shares outstanding to grow by 0.44% per year for the next 3 years.
  • To value all of this in today's dollars, we will use a discount rate of 5.83%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?
  • The ongoing social inflationary trends exerting upward pressure on general liability severities could lead to higher-than-expected claims costs, impacting net margins and earnings negatively.
  • Significant catastrophe losses and reserve strengthening activities have resulted in a high combined ratio, indicating potential for continued adverse developments in claims, affecting profitability.
  • A revised full-year guidance suggests a return on equity (ROE) below the target, pointing to challenges in achieving desired profitability levels, which may unfavorably impact investor confidence and share price.
  • Increased assumed loss trends in general liability, from 4% in 2020 to 9% for 2024, signal rising claims costs that could outpace premium growth, pressuring net income.
  • The acknowledgment of elevated severity trends in more recent accident years and the decision to increase reserves, particularly in the Commercial Lines segment, reflect potential underestimation of future claim costs, potentially leading to future adverse reserve developments and impacting earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The analysts have a consensus price target of $95.14 for Selective Insurance Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $102.0, and the most bearish reporting a price target of just $85.0.
  • In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $6.0 billion, earnings will come to $767.7 million, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 5.8%.
  • Given the current share price of $90.18, the analyst's price target of $95.14 is 5.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  • We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

How well do narratives help inform your perspective?

Disclaimer

Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.
Fair Value
US$95.1
6.2% undervalued intrinsic discount
WarrenAI's Fair Value
Future estimation in
PastFuture01b2b3b4b5b6b2013201620192022202420252027Revenue US$6.0bEarnings US$767.7m
% p.a.
Decrease
Increase
Current revenue growth rate
9.53%
Insurance revenue growth rate
0.21%
Simply Wall Street Pty Ltd (ACN 600 056 611), is a Corporate Authorised Representative (Authorised Representative Number: 467183) of Sanlam Private Wealth Pty Ltd (AFSL No. 337927). Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situation or needs. You should not rely on any advice and/or information contained in this website and before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice. Please read our Financial Services Guide before deciding whether to obtain financial services from us.