A.M. Best Affirms and Assigns Ratings for Farmers' Mutual Insurance Association and Its Subsidiaries.

OLDWICK, N.J. -- A.M. Best Co. has affirmed the financial strength rating (FSR) of A- (Excellent) and has assigned an issuer credit rating (ICR) of 'a-' to Farmers' Mutual Insurance Association (FMIA) (New Zealand) and its core subsidiary, Farmers' Mutual Insurance Limited (FMIL) (New Zealand). A.M. Best Co. has also assigned an FSR of A- (Excellent) and an ICR of 'a-' to FMG Insurance Limited (FMGIL), a newly formed subsidiary of FMIA. The outlooks on all ratings are stable.

The ratings reflect the group's strong and improving capitalization, well established presence in rural New Zealand, good distribution capabilities and stable operating performance. The ratings also consider the business and financial impact of Farmers' Mutual Group's (FMG) re-organization.

Good operating performance by FMIA and FMIL in fiscal year 2006 contributed to an improvement in FMG's risk-adjusted capitalization as measured by the Best Capital Adequacy Ratio. FMIA's combined ratio remained stable over the year while its investment income ratio weakened. This resulted in a slight deterioration in FMIA's operating ratio. FMIL's weaker combined ratio was offset by its improved investment income ratio, resulting in a relatively unchanged operating performance.

FMG's commitment to self distribution of insurance products in rural communities has resulted in relatively stable business growth. Gross premium written by FMIA and FMIL increased by 6.0% and 18.3% respectively in 2006.

The proposed sale of the Australian portfolio will allow FMG's management to focus on its core market in New Zealand. Further, capital released from the divesture will effectively strengthen the absolute and risk-adjusted capitalization of the New Zealand entities.

These positive factors are partially offset by FMG's exposure to catastrophic risks, intense market competition and high cost structure.

FMG is exposed to catastrophic perils such as flooding, earthquakes and bushfires, and being a specialist rural insurer magnifies this risk. However, the company is reasonably well protected by its reinsurance programs.

Although FMG's focus on providing insurance for regional communities has given the company an edge in the past, increasing competition in rural insurance markets continues to exert pressure on FMG's profits.

FMG's cost structure has been slightly higher than that of the market partly as a function of its direct distribution model. As FMG covers approximately 3% of the New Zealand market, achieving greater economies of scale will increase the company's competitiveness going forward.

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