A.M. Best Affirms Ratings of The Farmers Automobile Insurance Association and Its Subsidiaries

Fri Jun 7, 2013 3:00pm EDT

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A.M. Best Affirms Ratings of The Farmers Automobile Insurance Association and Its Subsidiaries

A.M. Best Co. has affirmed the financial strength rating (FSR) of A (Excellent) and issuer credit ratings (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 ICR of "a-" of Pekin Life Insurance Company (Pekin Life) [PKIN.OTC]. Pekin Life is a publicly traded, over-the-counter company, although the majority of its shares are owned by Pekin. The outlook for all ratings is stable. All companies are domiciled in Pekin, IL.

The affirmation of the ratings for Pekin reflects its solid risk-adjusted capitalization, long-term positive operating performance and established agency relationships. Partially offsetting these positive rating factors are Pekin’s geographic concentration in the Midwestern states, which leaves it susceptible to severe weather-related events and competitive market conditions.

The positive rating attributes are derived from Pekin’s experienced management team, broad product offerings and long-standing regional market presence. The organization’s solid capital position benefits from its conservative underwriting leverage and consistent net investment income generated by its high-quality fixed-income investment portfolio.

These positive rating factors are partially offset by Pekin’s exposure to frequent and severe weather-related events as observed in recent years. However, these exposures are managed and mitigated through a comprehensive reinsurance program. Despite increased storm activity and challenging market conditions in recent years, Pekin’s capital position remains solid.

Key rating factors that could trigger negative rating actions for Pekin include a prolonged deterioration of its underwriting and operating results or significant erosion of its risk-adjusted capitalization.

The ratings of Pekin Life acknowledge its integral role and generally positive contribution to Pekin, its diversified product portfolio, favorable level of risk-adjusted capitalization and generally high quality investment portfolio. Over the past five years, Pekin Life has recorded strong new business growth from its ordinary life segment, despite the challenging life insurance environment. Pekin Life’s investment portfolio consists primarily of investment grade bonds, with only a modest exposure to common stocks and real estate and no mortgages.

Offsetting these positive rating factors are Pekin Life’s accident and health lines of business net operating losses, its geographical business concentration risk and large exposure to interest-sensitive annuity business. Two years ago, the company implemented a planned exit from the individual major medical line of business, while it provided policyholders an alternative coverage option through another carrier.

A.M. Best believes Pekin Life is well-positioned at its current rating level. Future negative rating actions could occur should Pekin Life experience a material decline in its capitalization, further deterioration in operating results or changes in strategic value to its parent company.

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

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 © 2013 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

A.M. Best Company, Inc.
Maurice Thomas—PC, 908-439-2200, ext. 5794
Senior Financial Analyst
maurice.thomas@ambest.com
or
Andrew Gold—LH, 908-439-2200, ext. 5487
Senior Financial Analyst
andrew.gold@ambest.com
or
Rachelle Morrow, 908-439-2200, ext. 5378
Senior Manager, Public Relations
rachelle.morrow@ambest.com
or
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com

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