AM Best


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


CONTACTS:


Maurice Thomas—P/C
Senior Financial Analyst
(908) 439-2200, ext. 5794
maurice.thomas@ambest.com

Mike Adams—L/H
Senior Financial Analyst
(908) 439-2200, ext. 5133
michael.adams@ambest.com

Jim Peavy
Assistant Vice President, Public Relations
(908) 439-2200, ext. 5644
james.peavy@ambest.com

FOR IMMEDIATE RELEASE

OLDWICK - JUNE 10, 2014 03:47 PM (EDT)
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). A.M. Best also has affirmed the FSR of A- (Excellent) and the 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, 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. 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.

These positive rating factors are partially offset by 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. 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.

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 A.M. Best's expectations and/or significant deterioration in operating results or risk-adjusted capitalization were to occur.

The ratings of Pekin Life acknowledge itsstrong level of risk-adjusted capitalization, diversified product portfolio and steady premium growth within its ordinary life segment. A.M. Best notes 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.

Partially offsetting these positive rating factors is 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 strain 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, A.M. Best believes losses may continue in this line of business in the near to medium term.

Positive rating actions could occur for Pekin Life if A.M. 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.

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.


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