A.M. Best Affirms Ratings of PEMCO Mutual Insurance Company and PEMCO Life Insurance Company

OLDWICK, N.J.--(BUSINESS WIRE)-- A.M. Best Co. has affirmed the financial strength rating (FSR) of A- (Excellent) and issuer credit rating (ICR) of “a-” ofPEMCO Mutual Insurance Company (PEMCO). Concurrently, A.M. Best has withdrawn the FSR of A- (Excellent) and the ICRs of “a-” of thePEMCO Insurance Companies and its member, PEMCO Insurance Company, since the group no longer exists, as PEMCO Insurance Company was merged into PEMCO as of October 1, 2011. However, all of the assets and liabilities that made up the group’s ratings are now a part of the ratings for PEMCO.

A.M. Best also has affirmed the FSR of B+ (Good) and ICR of “bbb-” of PEMCO Life Insurance Company(PLIC). The outlook for all ratings is stable, and all companies are domiciled in Seattle, WA.

The ratings reflect PEMCO’s solid risk-adjusted capitalization, historically favorable operating results and local market knowledge. These positive rating factors are partially offset by PEMCO’s recent fluctuating underwriting results, above average underwriting leverage ratios, an elevated expense ratio and the company’s business concentration in Washington, which exposes it to significant weather-related losses and regulatory and economic risks.

The positive rating attributes are derived from PEMCO’s historical operating gains and surplus growth, which have generated improved total returns on equity, as well as the recent improvements management has made to refocus PEMCO’s efforts wholly on its insurance base. The company also has made a commitment to diversifying its geographical footprint by augmenting its strong market presence in Washington with its entrance into the Oregon market this year. PEMCO maintains a somewhat conservative investment philosophy, which is reflected in its moderate common stock leverage.

Partially offsetting these positive factors are the company’s fluctuating, but improving, underwriting performance, caused not only by PEMCO’s marginally elevated expense ratio, (due to short-term costs associated with operational and administrative consolidation initiatives), but also elevated loss severities and frequencies in the most recent underwriting years; slightly above average underwriting leverage ratios and a business concentration in Washington, which subjects PEMCO to judicial, regulatory and competitive risks.

PLIC’s ratings recognize its adequate risk-adjusted capitalization, conservative investment portfolio and the willingness of PEMCO to provide financial support as needed. PLIC maintains an adequate risk-adjusted capitalization position relative to its insurance and investment risks. Also, PLIC’s investment portfolio is conservatively managed, with most of the investment portfolio in government securities with no holdings in below investment grade securities, mortgages, owned real estate or Schedule BA assets. PEMCO has historically provided financial support to PLIC including over $4.5 million of capital contributions during the 2007-2010 timeframe. A.M. Best believes that PEMCO will continue to provide capital as needed as almost all of PLIC’s customers also are PEMCO policyholders.

Partially offsetting these strengths are PLIC’s recent operating losses and limited product and geographic profile. PLIC has been incurring operating losses for several years driven by new business strain. However, A.M. Best notes that management has taken steps to improve PLIC’s profitability through managed expense reductions, and the company recorded a statutory profit for the month of August. The company is exposed to some product and geographic concentration risk, as it sells predominantly term life insurance in Washington.

A.M. Best will be disclosing for all rated entities, going forward, the potential rating factors that could in the near to mid-term cause rating movement. As a result, while A.M. Best does not expect to downgrade (or place a negative outlook on) the ratings of PEMCO or its life subsidiary in the near to mid term, such actions would ensue if the group were to incur material losses in capitalization; have a further reduction in the profitability of its core book of business; be unable to contain its expenses with the current set of preventative measures that recently have been put in place; or have substantial adverse reserve development relative to its peers, as well as the industry averages. Additionally, downward rating action on PLIC may occur should PEMCO experience a material decline in its financial strength or should there be a change in PEMCO’s willingness or ability to provide financial support to PLIC.

The principal methodology used in determining these ratings is Best’s Credit Rating Methodology -- Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best’s rating process and highlights the different rating criteria employed. Additional key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies”; “Understanding BCAR for Property/Casualty Insurers”; “Understanding BCAR for Life/Health Insurers”; and “Rating Members of Insurance Groups.” Methodologies can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2011 by A.M. Best Company, Inc.ALL RIGHTS RESERVED.

A.M. Best Co.
Joel Silverthorn, 908-439-2200, ext. 5120
Senior Financial Analyst
[email protected]
or
Jeffrey Mango, CPA, 908-439-2200, ext. 5204
Assistant Vice President
[email protected]
or
Rachelle Morrow, 908-439-2200, ext. 5378
Senior Manager, Public Relations
[email protected]
or
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
[email protected]

Source: A.M. Best Co.