Shares of State Auto Financial Corp. (STFC) declined 2.62% to close at $20.80 per share on Jan 20. This fall came after the company announced that it will add pre-tax reserves worth $72 million to restore the prior-year loss and loss expense reserves to be reflected in the fourth quarter of 2014. The additional reserves will be reflected on program business written through Risk Evaluation & Design LLC (“RED”). RED is a wholly owned subsidiary of State Automobile Mutual Insurance Company. This increase is due to the run-off of restaurant and commercial trucking programs which are the two largest RED programs.
Additionally, the company has inked an Adverse Development Cover reinsurance deal with Munich Reinsurance America, Inc. This transaction offers coverage of $40 million for adverse development in excess of carried reserves for the terminated RED restaurant program. The restaurant program represents 59% of carried RED reserves. State Auto Financial’s loss and loss expense reserves amounted to $127 million for the first nine months of 2014, up 24.4% year over year.
Earlier this month, the company announced a one-year property aggregate excess catastrophe reinsurance agreement. The agreement has been underwritten by the personal insurance and business insurance segments. This will help in risk and volatility reduction and will also free up capital for utilization toward strategic initiatives.
Additionally, management is currently estimating the allowance necessary for State Auto Financial’s net deferred tax assets. The company’s full-year results are likely to be impacted if any portion of the deferred tax asset valuation allowance is reversed.
This RED reserves strengthening came on the back of completion of ground-up analysis of RED reserves by the company. In the third quarter of 2014, State Auto boosted reserves by $13.8 million. In Jan 2014, the company had strengthened the reserves by $15 million for fourth-quarter 2013 due to the ongoing restaurant program and a commercial-auto trucking program.
These reserves are expected to cushion the company in cases of unforeseen events, such as catastrophes, by enabling it to write off claims easily. However, these are likely to lead to a decline in the surplus.
Currently, State Auto Financial holds a Zacks Rank #2 (Buy).
Other Stocks to Consider
Better-ranked stocks from the property and casualty sector include The Allstate Corporation (ALL), The Chubb Corporation (CB) and HCI Group, Inc. (HCI). Each of these stocks sports a Zacks Rank #1 (Strong Buy).
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