EMC Takes $15.4 Million Reserve Hit

Des Moines, Iowa-based EMC Insurance Group Inc. reported that the company’s statutory combined trade ratio for 2004 was 104.2 percent thanks to adverse development on prior years’ reserves totaling about $15.4 million for the fourth quarter of 2004. This adverse development will reduce fourth quarter earnings by about $10 million on an after-tax basis and represents about 3.8 percent of the total loss and settlement expense reserves carried at Sept. 30, 2004.

The adverse development experienced during the fourth quarter of 2004 occurred primarily in the property/casualty insurance segment, the insurer said in a statement. For many years, the company has required each branch office to perform a complete inventory of its open claim files during the fourth quarter and to review the adequacy of each carried reserve based on current information. This review process has not historically resulted in a significant amount of adverse development during the fourth quarter.

However, heightened emphasis placed on case reserve adequacy resulted in a higher level of scrutiny by the company’s claims staff during the fourth quarter review process, which in turn resulted in the increase in case reserves during the fourth quarter and corresponding increase in settlement expense reserves.

The significant increase in case reserves that occurred during the fourth quarter of 2004 was not anticipated since the branch offices had already reviewed a large number of individual claim exposures for both previously reported and newly reported claims during the year and had implemented substantial increases in their case reserves during the second and third quarters.

The company said it has a conservative reserving philosophy and is dedicated to maintaining a consistent level of reserve adequacy. Internal actuarial evaluations completed in early February 2005 indicate that the loss and settlement expense reserves carried by the property and casualty insurance segment at Dec. 31, 2004 are toward the high end of the range of actuarial indications.