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

Pekin Life is a publicly traded, over-the-counter company, although the majority of its shares are owned by Pekin.

The rating affirmations reflect Pekin’s solid risk-adjusted capitalization driven by its conservative investment risk profile, historically favorably loss reserve development and well-established agency relationships. Partially offsetting these positive rating factors is the Pekin’s geographic concentration in Midwestern states, as weather-related events and competitive market conditions have created volatility in the companies’ earnings. While Pekin’s underwriting results lag the private passenger standard automobile and homeowners composites, its overall performance is consistent with other mutual companies in its region as reflected by fairly consistent growth in surplus in most years.

Pekin’s capital position benefits from fairly conservative underwriting leverage derived from consistent net investment income generated by its high-quality fixed-income investment portfolio. The ratings further acknowledge Pekin’s competitive advantages, including its long-term agency relationships and improved technology as reflected by its use of by-peril based rating in the homeowners line of business. This process uses predictive analytics to provide greater risk segmentation that is expected to achieve consistency and more accurate pricing. Also, Pekin has increased its market footprint in Arizona, which historically has been a profitable market for homeowners insurance.

Negative rating pressure may occur if Pekin’s operating performance declines, resulting in a deterioration in operating results and risk-adjusted capitalization.

The rating affirmations of Pekin Life reflect its adequate level of risk-adjusted capitalization and its generally positive contributions to its property/casualty-focused parent. A.M. Best notes that Pekin Life utilizes a large network of independent insurance agencies, along with financial institutions, automobile dealerships and funeral homes to distribute and market a diverse array of life insurance products and to utilize its relationship with its property/casualty counterparts. Additionally, Pekin Life successfully has executed a strategy to grow its ordinary life business while reducing exposure to its health segments. A.M. Best believes continued realization in management’s strategy will be critical to the ongoing success of the organization.

Partially offsetting these positive rating factors is Pekin Life’s continued fluctuating operating results, which have been driven by expense strain associated mainly with sales of individual life and pre-need products combined with weak results in its health segments. Additionally, the company has experienced declining net investment income due to lower investment yields. A.M. Best believes it is likely that Pekin Life will continue to experience some volatility within its core life and health insurance lines of business over the near to midterm due to pressures from the low interest rate environment, regulatory headwinds and statutory strain. A.M. Best believes that Pekin Life may be challenged to grow capital and surplus meaningfully in the near term due to new business strain, continued volatility in its health segments, updates to assumption changes to its pension plan and continued dividends to its parent.

Positive rating action could occur if Pekin Life were to show significant improvement in the company profitability and ability to organically grow capital and surplus through improved operational performance while maintaining adequate risk adjusted capital. A positive rating action also could be taken if Pekin Life were to become more strategically important to The Farmers Automobile Insurance Association and Pekin Insurance Company. Negative rating action could occur if Pekin Life experiences a material decline in risk-adjusted capital, or if operating results show sustained deterioration.