OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has revised the outlooks to negative from stable and affirmed the Financial Strength Rating (FSR) of A (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “a” of The Farmers Automobile Insurance Association and its wholly owned subsidiary, Pekin Insurance Company (together known as Pekin). A.M. Best also has affirmed the FSR of A- (Excellent) and the Long-Term ICR of “a-” of Pekin Life Insurance Company (Pekin Life) [PKIN.OTC]. The outlook of these Credit Ratings (rating) 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 actions reflect Pekin’s deterioration in underwriting profitability, increased market competition and recent adverse reserve development. With a significant amount of property business, Pekin is exposed to weather-related events, which has negatively impacted earnings in prior years. However, recent underwriting losses have been driven by trends in the personal and commercial auto lines of business. Challenges in the auto business include increased repair costs, more miles being driven and distracted driving. While rate increases have occurred in recent years, intense price competition among insurers makes it difficult to maintain rate adequacy.
Partially offsetting these negative rating factors are the group’s solid risk-adjusted capitalization, well-established market presence and initiatives implemented to improve profitability. Initiatives include rate increases, targeting growth in profitable lines of business and demographics and utilizing predictive modeling to evaluate and manage exposures. 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.
Negative rating pressure may occur if Pekin’s operating performance declines, resulting in a deterioration in profitability and risk-adjusted capitalization.
The ratings of Pekin Life reflect its integral role and positive contribution to its property/casualty parent organization, diversified product portfolio, its favorable level of risk-adjusted capitalization and high quality investment portfolio.
Partially offsetting these rating factors are the company's fluctuating operating results and its geographical business concentration risk. In general, claims experience has been favorable. Yields and spreads have been low, but remain in line compared with the industry. The company also realized a significant loss impairment in 2016. The top operating issue for Pekin Life is expenses and the company points to them as the main reason for not achieving its pricing targets and bottom-line goals. Re-pricing initiatives are taking place.
Positive rating action could occur if Pekin Life were to show significant improvement in its profitability and ability to organically grow capital and surplus, as well as if Pekin Life were to become more strategically important to The Farmers Automobile Insurance Association and Pekin Insurance Company. Negative rating action could occur if Pekin Life experiences a material decline in risk-adjusted capital or if operating results deteriorate.
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