State Auto Financial Corp. might end up getting a ratings downgrade from Moody’s Investors Service in the wake of news that it strengthened reserves by $72 million pre-tax in the 2014 fourth quarter.

Moody’s explained that it was reviewing the super regional property/casualty insurance holding company and its divisions for a possible downgrade despite State Auto’s various steps it has taken to improve results. Beyond the reserve strengthening, those moves have included rate increases, tighter underwriting standards and the reduction of business in some lines and states. The reason for this action comes down to concerns about profitability.

“Profitability continues to be below Moody’s expectations,” Moody’s assistant vice president Jasper Cooper said in prepared remarks.

Beyond that, Moody’s said it is closely watching State Auto’s “sizeable growth” in its specialty business segment, which it said “carries execution risk.”

Specifically, the A3 insurance financial strength ratings of members of the State Automobile Mutual Group and State Auto Financial Corporation are now in question. State Auto divisions affected by this move: State Auto Property & Casualty Insurance Co., Milbank Insurance Co., State Auto Insurance Company of Ohio, State Automobile Mutual Insurance Company and State Auto Insurance Company of Wisconsin.

On Jan. 21, State Auto Financial Corp. disclosed it strengthened prior year loss and loss expense reserves by $72 million pre-tax, reflected in the 2014 fourth quarter, on program business written through Risk Evaluation & Design LLC, a wholly-owned subsidiary of its State Automobile Mutual Insurance Company arm. The increase stemmed from terminated restaurant and commercial trucking programs, both of which are now in run-off.

Separately, State Auto entered into an adverse development cover, which provides $40 million in coverage to protect against further development on Risk Evaluation & Design’s restaurant program in excess of carried reserves.

Source: Moody’s Investors Service