OLDWICK, N.J.--(BUSINESS WIRE)--AM Best has downgraded the Financial Strength Rating (FSR) to A- (Excellent) from A (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) to “a-” from “a” of The Farmers Automobile Insurance Association and its wholly owned subsidiary, Pekin Insurance Company (together known as Pekin). The outlook of these Credit Ratings (ratings) has been revised to stable from negative. AM Best also has affirmed the FSR of A- (Excellent) and the Long-Term ICR of “a-” of Pekin Life Insurance Company (Pekin Life). The outlook of these 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 The Farmers Automobile Insurance Association.
The ratings of Pekin reflect its balance sheet strength, which AM Best categorizes as very strong, as well as its marginal operating performance, neutral business profile and appropriate enterprise risk management (ERM). The rating downgrades reflect a revision in AM Best’s assessment of Pekin’s operating performance assessment to marginal from adequate. This change reflects Pekin’s trend of below average underwriting and operating performance driven by catastrophe losses and deterioration in the personal and commercial automobile books of business in prior years. Despite modest improvement from earlier years, catastrophe losses remain a challenge as reflected by Pekin’s increased combined ratio through second quarter of 2019. Management recently has instituted several profitability initiatives, including expanded use of predictive modeling within nearly all major product lines and significant technology upgrades which included a new policy administration system. While these efforts may eventually have a favorable impact on future performance, they have not yet been reflected in current operating results.
Pekin’s balance sheet strength is supported by the strongest level of risk-adjusted capitalization, a high quality investment portfolio with adequate liquidity and historically favorable loss reserve development trends. The neutral business profile reflects a broad range of personal and commercial products offered in several Midwestern states. AM Best considers the ERM program to be appropriate with qualitative and quantitative risk appetite and tolerance statements for key risks that are closely tied to the organization’s strategic planning process. Pekin’s catastrophe exposure is managed through a comprehensive reinsurance program with highly rated reinsurers to limit the impact of severe weather-related events.
The stable outlook is based on AM Best’s expectation of moderate volatility in operating performance that should benefit from ongoing underwriting initiatives while maintaining very strong balance sheet strength.
The ratings of Pekin Life reflect its balance sheet strength, which AM Best categorizes as very strong, as well as its marginal operating performance, neutral business profile and appropriate ERM. The ratings of Pekin Life also reflect its strategic role within the organization, as well as its diversified product offerings and high quality investment portfolio. Partially offsetting these rating factors are the company’s fluctuating operating results and its geographical business concentration risk. The main operating pressures experienced by Pekin Life are its lack of scale to support the diverse product line and its relatively high operating expenses; however, AM Best expects to see increased premiums in the coming years as the company’s core product sales are projected to grow. Pekin Life’s ERM program is structured within the framework of Pekin’s overall organization.
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