A.M. Best Affirms Financial Strength Ratings and Downgrades Issuer Credit Ratings of The Farmers Automobile Insurance Association and Its Affiliate

OLDWICK, N.J.--(BUSINESS WIRE)-- A.M. Best Co. has downgraded the issuer credit ratings (ICR) to “a” from “a+” and affirmed the financial strength rating (FSR) of A (Excellent) of The Farmers Automobile Insurance Association and its affiliate, Pekin Insurance Company (Companies).The outlook for the ICR has been revised to stable from negative, while the outlook for the FSR is stable.

A.M. Best also has affirmed the FSR of A- (Excellent) and ICR of “a-” of Pekin Life Insurance Company, (Pekin Life) [PKIN.OB]. Pekin Life is a publicly traded company over the counter and is a subsidiary of The Farmers Automobile Insurance Association. The outlook for both ratings is stable. All companies are domiciled in Pekin, IL.

The rating actions are the result of the Companies’ trend of underwriting losses over the past four years despite the steady growth in surplus over the long term, primarily stemming from investment income. Operating results have been adversely impacted by significant weather-related events and above average severity trends in several lines of business, which together contributed to the Companies’ lagging financial performance. Underwriting and pricing strategies have been implemented to improve operating performance; however, improvement in the results will be challenged in the near term due to changing market conditions and the time required for all actions to have the desired impact.

The Companies continue to maintain solid risk-adjusted capitalization, which is derived from its conservative investment portfolio and relatively moderate underwriting leverage. Top-line premium growth and redundant loss reserve development trends continue to be positive factors reflected in the ratings. These strengths are further supported by an experienced management team, broad product offerings and a long-standing regional market presence.

Further negative rating actions could occur if the Companies’ underwriting and operating results continue to decline with significant erosion of risk-adjusted capitalization.

The ratings of Pekin Life reflect its strong risk-adjusted capitalization, conservatively managed investment portfolio and diversified lines of business, which support the company’s varied target markets in its core regional geographic areas. Pekin Life has been a generally positive contributor to its property/casualty-based parent organization. Over the past five years, Pekin Life has recorded consistent new business growth from its ordinary life segment, despite the challenging life insurance environment.

Offsetting rating factors include Pekin Life’s geographical concentration risk and its relatively weak operating results, primarily driven by losses in its individual accident and health line of business. The company began the process of exiting this line during 2011 while offering policyholders an alternative source for coverage.

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 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. Key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies”; “Rating Members of Insurance Groups”; “Catastrophe Analysis in A.M. Best Ratings”; and “Understanding BCAR for Property/Casualty Insurers.” Best’s Credit Rating Methodology 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 © 2012 by A.M. Best Company, Inc.ALL RIGHTS RESERVED.

A.M. Best Co.
Maurice Thomas,908-439-2200, ext. 5794
Senior Financial Analyst
[email protected]
or
Rick Decker, 908-439-2200, ext. 5423
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.