Fitch Affirms FM Global's 'AA' Insurer Financial Strength Ratings

Fitch Ratings has affirmed the 'AA' Insurer Financial Strength (IFS) ratings of Factory Mutual Insurance Company (Factory Mutual) and its affiliates (collectively FM Global). The Rating Outlook is Stable.

The ratings continue to reflect FM Global's strong capital and long-term underwriting profitability, competitive advantages derived from the company's engineering expertise and global presence in specialty commercial property insurance markets, as well as benefits drawn from the company's mutual company status. Partially offsetting these positives is the effect of year-to-year capital volatility derived from the company's underwriting activities and long-held common equity investment allocation.

FM Global's 2011 results were severely impacted by record catastrophe losses, internationally and domestically, generating a well-above average combined ratio of 121.0%, with significant losses incurred from the Japan and New Zealand earthquakes, Thailand flooding, as well as Hurricane Irene and numerous inland storm events in the U.S.

Despite the losses incurred in 2011, the company's long-term operating performance continues to be strong and supportive of the current rating level. FM Global's cumulative three- and five-year calendar-year combined ratios on a GAAP basis through 2011 were 91.1% and 89.3%, respectively.

Fitch believes that FM Global's favorable long-term underwriting performance is due in large part to the company's ability to incorporate its engineering expertise into its risk selection and underwriting processes. Fitch views the company's engineering capabilities and loss prevention services as key advantages that are difficult for competitors to replicate and believes this expertise will result in underwriting results that are consistently better than peers.

FM Global's capital position is very strong. While underwriting losses and modest unrealized investment losses promoted a 5.5% decline in policyholders' surplus to $6.9 billion at year-end 2011, the company continues to utilize operating leverage that is within targets for the current rating. As of September 30, 2011, annualized U.S. statutory operating and net leverage for FM Global were 0.49x and 1.37x, which Fitch considers to be conservative and supportive of the current rating level.

FM Global has no outstanding debt, which Fitch regards as a positive credit factor relative to other 'AA' rated companies.

Fitch considers an upgrade of FM Global's ratings unlikely, however, key rating triggers that could, in time, lead to positive pressure include:

--Consistent levels of strong capital associated with higher rating levels over a multi-year period.

--A material decline in common equity investments, reducing volatility in surplus.

Key rating triggers for FM Global's ratings that could lead to a downgrade include:

--Severe deterioration in long-term results, to the point where the historical 10.0 point margin in combined ratio outperformance relative to peers no longer existed.

--Consolidated U.S. operating and net leverage approaching 0.75x and 1.75x, respectively.

--A sustained period of net losses or catastrophe losses out of proportion with market share.

Fitch's ratings on Factory Mutual's subsidiaries, Affiliated FM Insurance Company (Affiliated FM), Appalachian Insurance Company (Appalachian), the U.K. domiciled FM Insurance Company Limited (FM Insurance) and the Mexico domiciled FM Global de Mexico, S.A. de C.V. (FM Global Mexico) reflect explicit and implicit financial support from Factory Mutual.

Fitch affirms the following ratings with a Stable Rating Outlook:

Factory Mutual Insurance Company

--IFS at 'AA'.

Appalachian Insurance Company

--IFS at 'AA'.

Affiliated FM Insurance Company

--IFS at 'AA'.

FM Insurance Company Limited

--IFS at 'AA'.

FM Global de Mexico, S.A. de C.V.

--IFS at 'AA'.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Sept. 22, 2011).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651018

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