State Auto Financial Corp. says it will strengthen reserves by approximately $15 million for 2013's fourth quarter, as it continues to deal with program business, now in runoff, written through Risk Evaluation & Design LLC (RED).
The increase, State Auto says, relates primarily to a large restaurant program and a commercial-auto trucking program.
In October 2012, State Auto announced it had to increase reserves in the third quarter that year for prior periods by between $19 million and $21 million due to business written its RED subsidiary. At the time, Bob Restrepo, State Auto president and CEO said, "We began writing business with this unit in 2010 and acted as quickly as possible to address deteriorating results. In the past three months, claim development exceeded expectations requiring us to put aside reserves to address prior accident years and increase our loss estimates for 2012."
State Auto stopped writing new policies in the trucking program in April of 2012 and in the restaurant program in 2013.
The company strengthened reserves mostly for RED's restaurant business in 2012's fourth quarter, noting that it needed a quarter to assess ultimate loss costs.
A State Auto spokesman says the company is unable to further discuss the most recent reserve strengthening until its 2013 fourth-quarter earnings conference call scheduled for Feb. 20, but he pointed to comments made in October 2013 during the conference call discussing third-quarter results.
During that call, Jessica Buss, senior vice president, Specialty, said State Auto's program unit "showed significant improvement in the third quarter as the runoff business previously written by RED had a smaller impact on results and our new specialty programs with more favorable loss ratios continue to earn out."
Steve English, senior vice president and CFO said during that call that State Auto is "getting more and more comfortable and confident in the numbers" for RED as time goes on. He added, "Of course, the trucking losses emerge a little faster and develop quicker than the restaurant losses due to the difference between trucks and liquor liability. So having said that, consistent with some of my commentary earlier in the year, we have been putting up pretty aggressive loss ratios on the current accident year, somewhere near 100%, and the adverse development that we did book this quarter was $2.3 million on the prior business. So that's running through the quarter, and that's $5.4 million year-to-date."
State Auto says it is estimating 2013 fourth-quarter net income of between $0.38 and $0.41 per diluted share, and about $4.1 million in pre-tax net catastrophe losses.
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