AM Best has revised the outlook to negative from stable for the Long-Term Issuer Credit Rating (Long-Term ICR) and affirmed the Financial Strength Rating of B++ (Good) and the Long-Term ICR of “bbb+” (Good) of PEMCO Mutual Insurance Company (PEMCO) (Seattle, WA). The outlook of the FSR is stable.

The Credit Ratings (ratings) reflect PEMCO’s balance sheet strength, which AM Best assesses as very strong, as well as its marginal operating performance, neutral business profile and appropriate enterprise risk management.

The negative outlook on the Long-Term ICR reflects the company’s limitations in its business profile, which has created capital and operating performance challenges in recent periods leading to declines in its risk-adjusted capitalization. Although risk-adjusted capitalization remains within the strongest range, as measured by Best’s Capital Adequacy Ratio (BCAR), the cushion materially eroded from prior periods and capital erosion also resulted in higher underwriting leverage metrics. Surplus declined in 2021 and 2022, as well as through the first 9 months of 2023, totaling 21% ($75 million) from the five-year high mark in 2020. Underwriting loss severity increased in consecutive periods reflecting pressure brought by the company's concentrated risk profile that focused on personal lines coverage within the state of Washington. Weather and wildfire losses also impacted results in recent periods. Furthermore, material unfavorable loss reserve development was reported in third-quarter 2023, reflecting pressures brought on by the escalation in PEMCO ‘s loss costs amid inflation and supply chain pressures. Management is addressing volatility with material rate increases, more stringent new business qualifications and targeted de-risking; however, these actions have yet to gain material traction.

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