TEXT-Fitch affirms FM Global's 'AA' IFS ratings

Oct 2 - 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 results through mid-year 2012 were significantly improved over the prior year period as reported catastrophe losses declined from the record levels endured in 2011. The company reported a statutory combined ratio of 88.6% through the first six months of 2012, compared with 140.1% in the first half of 2011.

The company's long-term operating performance continues to be strong and supportive of the current rating level. FM Global's cumulative five- and 10-year calendar-year combined ratios on a statutory basis through mid-year 2012 were 90.7% and 81.5%, respectively.

Fitch believes that FM Global's favorable long-term underwriting performance is due in large part to the company's ability to incorporate engineering expertise into the 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 future underwriting results that are consistently better than peers.

FM Global's capital position is very strong. Underwriting gains and unrealized investment gains led to a 6.5% increase in statutory policyholders' surplus to $6.8 billion through six months 2012. The company continues to utilize operating leverage that is within targets for the current rating. As of June 30, 2012, annualized U.S. statutory operating and net leverage for FM Global were 0.54x and 1.44x, 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.

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 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 considers an upgrade of FM Global's ratings unlikely, however, key rating triggers that could, in time, lead to positive rating movement 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.

Fitch's ratings on Factory Mutual's subsidiaries, Affiliated FM Insurance Company, Appalachian Insurance Company, the U.K. domiciled FM Insurance Company Limited and the Mexico domiciled FM Global de Mexico, S.A. de C.V. 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 '

'. 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' (September 2012).

Applicable Criteria and Related Research: Insurance Rating Methodology (New York Ratings Team)

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