Ratings Recap: Farmers Auto/Pekin, John Deere, Southern Pioneer P&C

June 13, 2014

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). Best also affirmed the FSR of ‘A-‘ (Excellent) and the ICR of “a-” of Pekin Life Insurance Company, a publicly traded, over-the-counter company, although the majority of its shares are owned by Pekin. The outlook for all of the ratings is stable. All companies are domiciled in Pekin, Illinois. Best said the ratings affirmation reflects Pekin’s “solid risk-adjusted capitalization, conservative investment risk profile and consistently favorable loss reserve development over the past several years. Pekin’s increase in policyholders’ surplus over the past five years was derived primarily from pre-tax earnings driven by solid investment income, capital gains and other surplus gains, which were partially offset by underwriting losses mostly attributed to significant weather-related events.” Best indicated that, “considering the group’s experienced management team, broad product offerings and well-established regional market presence, continuation of its trend of steady growth in surplus is expected in the near term.” As a partial offsetting factor Best cited “Pekin’s geographic concentration in Midwestern states, which subjects its operating performance to volatility from frequent and severe weather-related events as observed in recent years amid challenging market conditions;” adding that “while the group’s underwriting performance lags the private passenger standard automobile & homeowners composite, its overall performance is consistent with other mutual companies in its region as reflected by fairly consistent growth in surplus over the past 10 years.” Best also said that “based on recent corrective initiatives, it is management’s expectation that Pekin will be positioned for sustained improvement in operating profitability that is commensurate with its current ratings. However, negative rating actions will occur if Pekin’s operating performance does not meet Best’s expectations and/or significant deterioration in operating results or risk-adjusted capitalization were to occur.” Best’s ratings for Pekin Life “acknowledge its strong level of risk-adjusted capitalization, diversified product portfolio and steady premium growth within its ordinary life segment,” the report said. Best also noted that “capital and surplus has steadily increased over the past five years despite $14 million of stockholder dividends during this time. In addition, the company maintains a relatively conservative investment portfolio with effective asset/liability management practices.” As a partial offsetting factor Best noted “Pekin Life’s continued fluctuating operating results, as evidenced by a statutory net operating loss of $789,000 reported in 2013. Results were driven by expense strains associated mainly with sales of individual life and preneed products, declining net investment income due to lower investment yields and high morbidity in the company’s accident and health lines of business. While Pekin Life has exited its individual major medical line of business in recent periods and has implemented a number of initiatives to increase product profitability. Best added that it “believes losses may continue in these lines of business in the near to medium term. Positive rating actions could occur for Pekin Life,” if Best believes “the company becomes more strategically important to Pekin. Future negative rating actions could occur if Pekin Life experiences further deterioration in its operating results, a material decline in capitalization and/or any changes in its strategic value to Pekin.”

A.M. Best has affirmed the financial strength rating of “A-“ (Excellent) and issuer credit rating of “a-” of John Deere Insurance Company (JDIC), based in Johnston, Iowa, both with stable outlooks. “The ratings reflect JDIC’s strong capitalization, experienced management and the explicit support and benefits associated with being ultimately owned by Deere & Company, a world leader in providing advanced products and services for agriculture, forestry, construction, lawn and turf care,” the report said. “Deere also provides financial services worldwide and manufactures and markets engines used in heavy equipment. Best said it outlook on the ratings is based on its “view that JDIC’s business plans remain reasonable given management’s operating assumptions and the financial support of Deere.” As partial offsetting factors Best cited the “continued execution risk associated with the start-up of a stand-alone insurance company, as well as JDIC’s poor operating performance recorded since operations came to scale in 2011. Such outcomes have been driven by start-up costs and (to a larger degree) significant weather events and changes in commodity prices that have impacted results. Additionally, an offsetting rating factor includes the operational risk associated with the agricultural marketplace, where government program changes and crop prices or weather events could affect business plans. The company also benefits from the strong brand recognition and financial support provided through its association with the Deere organization. As both companies are deeply involved in the agricultural business, JDIC presents an excellent fit for the overall enterprise. JDIC’s outlook could be revised to negative if its operating performance continues to fall short of Best’s expectations,” the report concluded.

A.M. Best has revised the outlook to stable from negative and affirmed the issuer credit rating of “bbb+” of Southern Pioneer Property and Casualty Insurance Company, based in Jonesboro, Arkansas, and has affirmed Southern Pioneer’s financial strength rating of ‘B++’ (Good). The outlook for the FSR is stable. Best said its affirmation of Southern Pioneer’s ratings “reflects its supportive level of risk-adjusted capitalization, demonstrated track record of favorable reserve development and solid liquidity. The ratings also reflect the company’s niche expertise in its chosen markets, utilizing multiple distribution sources, along with recent underwriting actions and improved technology infrastructure. These factors enabled the company to return to profitability in 2012.” Best explained that the “revised outlook reflects the improvement in results over the past two years as a result of management initiatives that include rate increases, technological system upgrades and geographic expansion. In conclusion best said “downward rating movement could result from margin compression, severe weather-related events in key operating territories and management’s inability to lower expenses. Possible upward rating movement is unlikely in the short term as management initiatives to improve underwriting results continue to be implemented. Possible upward rating movement in the medium term can result if management can restore profitability to pre-2008 levels via underwriting, pricing initiatives and expense reductions.”

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