A.M. Best Co. has affirmed the financial strength rating of A (Excellent) and issuer credit rating of "a" of Farmers' Mutual Group (FMG) and FMG Insurance Limited (FMGIL).

Both companies are domiciled in New Zealand. The outlook for all ratings is stable.

The ratings of FMG and FMGIL (the group) reflect their strong risk-adjusted capitalization, continued operating profitability and strong business profile.

Although the group's risk-adjusted capitalization has declined due to higher underwriting risk, it remains supportive of the group's current ratings. Ongoing profitability helped grow its capital by about 5.8 percent in absolute terms during the year to March 31.

Ongoing marketing campaigns, competitive pricing and the acquisition of an existing livestock and bloodstock book helped the group to strengthen its profile as the country's leading rural insurer. The group experienced customer growth of about 8.5 percent, while gross premiums written grew by around 14 percent in the year ended March 31.

The group's overall underwriting results improved in fiscal year 2012, reflecting an improvement in its loss ratio to around 65 percent from 68 percent in the prior year. However, the group's net income declined by around 15 percent to NZD 8.5 million due to lower investment results.

Offsetting factors include increased net premiums written leverage, lower profitability and unfavorable claims reserve adjustments. The group's net premiums written leverage has increased as net premiums written growth of 17.3 percent outpaced the group's capital growth due to lower overall profitability. Historically, capital growth was significantly supported by investment results. However, a poor investment environment led to lower investment results in 2012. The group's higher catastrophe reinsurance deductible also weighed on profitability. These trends are anticipated to continue into 2013, and net premiums written leverage could further increase. Claims estimates relating to the Christchurch earthquakes have been adjusted upwards in 2012 to reflect the availability of better claims information and the impact of aftershocks. This has led to higher net loss reserve risk and reinsurance recoverable risk on the group's balance sheet.

A significant decrease in the group's risk-adjusted capitalization could result in downward pressure on its ratings. A sustained improvement in the group's profitability could result in upward movement to the ratings.

The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: "Understanding Universal BCAR"; "Rating Members of Insurance Groups"; and "Catastrophe Analysis in A.M. Best Ratings." Best's Credit Rating Methodology can be found at ambest.com/ratings/ methodology.

A.M. Best Company is an insurance rating and information source.

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