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FOR IMMEDIATE RELEASE
OLDWICK - JUNE 11, 2015 04:47 PM (EDT)
A.M. Best has affirmed the financial strength rating (FSR) of A (Excellent) and the issuer credit ratings (ICR) of "a" of The Farmers Automobile Insurance Association and its wholly owned subsidiary, Pekin Insurance Company (together known as Pekin). A.M. Best has also affirmed the FSR of A- (Excellent) and the ICR of "a-" of Pekin Life Insurance Company (Pekin Life) [PKIN.OTC]. The outlook for all ratings is stable. All companies are domiciled in Pekin, IL.
Pekin Life is a publicly traded, over-the-counter company, although the majority of its shares are owned by Pekin.
The rating affirmations reflect Pekin's solid risk-adjusted capitalization driven by its conservative investment risk profile, favorable loss reserve development trends and well-established agency relationships. Partially offsetting these positive factors is the pool's geographic concentration in Midwestern states, which has created volatility in its earnings and surplus caused by weather-related events and competitive market conditions.
Pekin's capital position benefits from fairly conservative underwriting leverage derived from consistent net investment income generated by its high-quality fixed-income investment portfolio. The ratings further acknowledge Pekin's competitive advantages, including its long-term agency relationships and improved technology as reflected by its use of by-peril based rating in the homeowners line of business. This process uses predictive analytics to provide greater risk segmentation that is expected to achieve consistency and more accurate pricing. Also, Pekin has increased its market footprint to include the state of Arizona, which has historically been a profitable market for homeowners insurance.
These positive rating factors are partially offset by Pekin's business concentration in Midwestern states, which exposes its earnings and surplus to volatility from frequent and severe weather-related events, competitive market conditions and changes in the regulatory and legal environments. In recent years, catastrophes have been significant for Pekin and this has contributed to its below average underwriting and operating performance. While the pool's underwriting results lag the private passenger standard automobile and homeowners composites, its overall performance is consistent with other mutual companies in its region as reflected by fairly consistent growth in surplus in most years.
Through the first quarter 2015 and continuing through May, Pekin's operating results showed significant improvement over the prior year based on recent corrective initiatives in the homeowners line that are starting to gain traction. With the first half of the year nearly completed, it is management's expectation that Pekin's operating results will improve to a level that is commensurate with the rating. However, negative rating actions will occur if Pekin's operating performance does not meet expectations or if significant deterioration in operating results or risk-adjusted capitalization were to occur.
The ratings of Pekin Life acknowledge its strong level of risk-adjusted capitalization and steady premium growth within its ordinary life segment. In addition, A.M. Best notes that Pekin Life utilizes a large network of independent insurance agencies along with financial institutions, automobile dealerships and funeral homes to distribute and market its wide array of life insurance products. While capital and surplus declined modestly over the most recent period due to an increase in Pekin Life's pension liability, capital and surplus has historically grown steadily despite sizeable stockholder dividends. In addition, the company maintains a relatively conservative investment portfolio with effective asset/liability management practices.
Partially offsetting these positive rating factors is Pekin Life's continued fluctuating operating results; these are driven by expense strain associated mainly with sales of individual life and pre-need products. Additionally, the company has experienced declining net investment income due to lower investment yields and high morbidity in its accident and health lines of business. A.M. Best notes that Pekin Life has recently exited its individual major medical line of business and has implemented a number of initiatives to increase product profitability, which has resulted in favorable operating results particularly within its group major medical line. However, A.M. Best believes it is likely that Pekin Life will continue to experience some volatility within its core life and health insurance lines of business over the near to medium-term due to pressures from the low interest rate environment, regulatory headwinds and statutory strain.
Positive rating actions could occur for Pekin Life if, in A.M. Best's view, the company becomes more strategically important to Pekin. Future negative rating actions could occur if Pekin Life experiences a deterioration in operating results, a material decline in capitalization and/or any changes in its strategic value to Pekin.
The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology .
Key insurance criteria reports utilized:
This press release relates to rating(s) that have been published on A.M. Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best's Ratings & Criteria Center.
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