Best Affirms FSR for Farmers’ Mutual Insurance Association, FMIL

September 22, 2005

A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) of Farmers’ Mutual Insurance Association (FMIA) (New Zealand) and its core subsidiary, Farmers’ Mutual Insurance Limited (FMIL) (New Zealand), together, the core companies of Farmers’ Mutual Group (FMG). The rating outlook is stable.

The rating reflects the group’s strong capitalization, strong market presence in rural New Zealand, broad distribution capabilities and improving operating efficiency.

FMG’s risk-adjusted capitalization demonstrated reasonable growth during the year, due mainly to FMIA’s and FMIL’s strong operating performance. FMIA’s combined ratio declined from 80.6% in 2004 to 74.3% in 2005. FMIL’s combined ratio declined from 87.4% in 2004 to 74.4% in 2005. Intra-group transfer of assets contributed to substantial strengthening of FMIL’s capitalization, as measured by Best’s Capital Adequacy Ratio.

FMG has established a strong presence in the rural New Zealand market as a result of its long operating history. The group’s commitment to self distribution of insurance products in these rural communities has resulted in relatively stable business growth. FMIA’s and FMIL’s gross written premium increased by 9.1% and 15.5%, respectively, in 2005.

These positive factors are partially offset by FMG’s exposure to catastrophic risks, intense market competition and limited long-term growth opportunities.

Similar to other general insurers in New Zealand, FMG is exposed to catastrophic perils such as flooding, and being a specialist rural insurer magnifies this risk. However, the company is reasonably well protected by its reinsurance programs.

FMG’s market niche, focusing on rural insurance, limited its long-term growth opportunities. However, the company’s expansion into the provincial commercial sector has broadened its growth potential. Increasing competition in rural insurance markets continues to exert pressure on FMG’s profits.

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