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

June 10, 2014

OLDWICK, N.J.--(BUSINESS WIRE)-- A.M. Besthas affirmed the financial strength rating (FSR) of A (Excellent) and the issuer credit ratings (ICR) of ďaĒ of The Farmers Automobile Insurance Associationand 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 ďa-Ē 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. Pekinís increase in policyholdersí 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 groupís 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 Pekinís 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 groupís 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 managementís 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 Pekinís operating performance does not meet A.M. Bestís 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 Lifeís 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 companyís 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 these lines 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 Bestís Credit Rating Methodology, which provides a comprehensive explanation of A.M. Bestís rating process and contains the different rating criteria employed in the rating process. Bestís Credit Rating Methodology can be found at

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit

Copyright © 2014 by A.M. Best Company, Inc.ALL RIGHTS RESERVED.

A.M. Best Company

Maurice ThomasóP/C, 908-439-2200, ext. 5794

Senior Financial Analyst


Mike AdamsóL/H, 908-439-2200, ext. 5133

Senior Financial Analyst


Jim Peavy, 908-439-2200, ext. 5644

Assistant Vice President, Public Relations

Source: A.M. Best Company

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Source: Business Wire

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