A.M. Best Affirms Ratings of Pekin Insurance Group and Its Members

A.M. Best Co. has affirmed the financial strength rating (FSR) of A (Excellent) and issuer credit ratings (ICR) of “a+” of Pekin Insurance Group (Pekin) and its members. The group includes the two intercompany pool members, The Farmers Automobile Insurance Association and its wholly owned subsidiary, Pekin Insurance Company. The outlook for the FSR is stable, and the outlook for the ICR is negative. The negative outlook for the ICR reflects A.M. Best’s concerns regarding the group’s operating volatility at its current ICR level.

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

The ratings reflect Pekin’s solid risk-adjusted capitalization and conservative operating strategy as evidenced by its consistently favorable loss reserve development over the past several years. Pekin’s capitalization benefits from moderate underwriting leverage and growth in net investment income generated by its high quality fixed income investment portfolio. The ratings further acknowledge the group’s long-term agency relationships, improved technology platform and prudent catastrophe risk mitigation strategies.

Partially offsetting these positive rating factors is Pekin’s susceptibility 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 strong.

The ratings of Pekin Life recognize its integral role within its parent organization, Pekin, its strong risk-adjusted capitalization, conservative 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 new business growth from its ordinary life segment, despite the challenging life insurance environment. Its investment portfolio consists primarily of investment grade bonds, with only a modest exposure to common stocks and real estate and no mortgages.

Somewhat offsetting these positive rating factors are Pekin Life’s geographical concentration risk and the varying operating results from its diverse lines of business. Pekin Life’s net gains from operations improved in 2010, driven by reduced losses in its individual accident and health line of business. The company has begun the process of exiting the individual major medical business during 2011, while offering policyholders an alternative source for coverage. In addition, Pekin Life’s capital and surplus funds increased only slightly in 2010 due to its net operating gain being largely offset by the dividend payment to the parent company.

The principal methodology used in determining these ratings is Best’s Credit Rating Methodology -- Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best’s rating process and highlights the different rating criteria employed. Additional key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies” and “Rating Members of Insurance Groups.” Methodologies 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.

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